Enovis Corporation (ENOV) Earnings Call Transcript & Summary

Thank you. Thank you for standing by. Ladies and gentlemen, welcome to Innova's second quarter 2026 earnings call. Please note that this call is being recorded. At this time, all participants are in listen-only mode. There will be some opening remarks followed by a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. Thank you. I'd now like to turn the call over to Kyle Rose, Vice President, Investor Relations. Please go ahead. Kyle Rose, Investor Relations.

Good morning everyone and thank you for joining us today for our second quarter 2026 earnings conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning are Damian McDonald, Chief Executive Officer and Ben Barry, our Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the investor section of our website, inovus.com. We also posted a slide presentation to accompany today's call on our website. Both the audio and the slide presentation of this call will be archived on the website later this afternoon. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the Safe Harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me...

turn it over to Damian. Damian? Hey, thanks, Kyle. And good morning, everyone, and thank you for joining us today. On today's call, I'll start with an overview of our second quarter results. discuss performance across our two operating segments, Recon and P&R. And Ben will then walk you through our financial results and outlook for Q3 in 2026. After that, I'll come back and highlight a few quick themes before we open the call for Our second quarter results demonstrated the strength and stability of our diversified product portfolio, improving execution from our global teams, and the ongoing adoption of the one-a-novus mindset. We delivered organic growth of 5%, driven by 6% organic growth in recon and 3% organic growth in P&R. In US recon, we grew 6% organically in the second quarter, led by 8% organic growth in hips and knees. Our focus products of Nebula, ARG and Arvis continue to gain traction and we're excited about the momentum we're carrying into the second half of the year. In hips and knees, we continue to execute our commercial plans across the hospital and ASC settings, and Nebula continues to be a driver of growth, with over 80% of new instrumentation sets going to competitive users in Q2. Internationally, we grew 6% in recon on an organic basis, including double-digit growth in shoulders. continue to strengthen our global portfolio and remain positioned to take market share. Innovation is a core pillar of our growth strategy at Anovus. We have a robust pipeline of new product introductions planned across our key markets and geographies. Arvus moved into full commercial launch in the US in the second quarter, and I'm excited about the early feedback from surgeons and the commercial teams. Using this launch is an opportunity to strategically target new customers, and we expect to see continued adoption in shoulders as we move through the second half of 2026. Now, moving to P&R, this segment grew 3% on an organic basis year over year. Global bracing grew 4% with mid-single-digit growth in the U.S. driven by revenue cycle management and spine bracing. Recovery Sciences and Bone Stim were another source of strength for the quarter, delivering mid-to-high single-digit growth, and new products are expected to start contributing more as we get into the later part of the year. So we continue to execute across our businesses, and I'll pass it over to Ben to walk through the financial details.

Thanks, Damien. Hello, everyone. We reported second quarter sales of 583 million up 3% versus prior year on a reported basis, and up 5% on an organic basis. Reported growth included a 100 basis point tailwind from foreign currency, a 90 basis point tailwind from selling days, and a 260 basis point headwind related to the divestiture of Dr. Comfort. For the quarter, days adjusted organic growth was 4% at the enterprise level, 5% in recon, and 3% in P&R, which was in line with our guidance. Second quarter results for our international businesses were negatively impacted by the ongoing conflict in the Middle East, resulting in a 100 basis point growth headwind. This represents about a 40 basis point headwind to total ANOVUS growth in the quarter. For the first half, Anovus grew 4% organically, 5% days adjusted, with recon at 7% and P&R at 3%. This growth is highlighted by strong performance in U.S. recon with both extremities and hip and knee growing at 8%, driven by strong commercial commercial execution and new products. We delivered adjusted gross margins of 62 percent, an underlying improvement of 120 basis points, driven by an $8 million benefit from two 2025 tariff refunds and operational productivity. It was partially offset by $4 million of ongoing tariff impact and $2 million of unplanned inflationary pressure as a result of higher raw material and freight and distribution costs stemming from the Middle East conflict. Adjusted EBITDA margin was 17.9%, an improvement of 70 basis points on an underlying basis, and up 20 basis points through the first half. Our second quarter effective tax rate was 24%. Interest expense was $8 million for the quarter versus $9 million in the prior year. Overall, we posted adjusted earnings per share of 90 cents, representing 14% underlying growth in the quarter and 12% earnings growth through the first half. We remain focused on disciplined capital allocation. Free cash flow in the quarter was $31 million, an improvement of $27 million versus prior year, which gets us the slightly positive free cash flow generation in the first half, a significant improvement. We expect to continue our positive momentum in cash flow and will continue pursuing opportunities to make investments to support growth. Turning to guidance, we are reaffirming our 2026 guidance. Commercial execution remains critical to delivering our 2026 commitments. We continue to focus the organization's attention on increasing commercial agility and targeted share gain opportunities. On the profit side, we expect the $8 million benefit from the partial tariff refund to be offset by $10 million of full year impact from the increased inflationary environment. we are currently facing. Additionally, we expect free cash flow conversion of greater than 25% in 2026, as laid out in our prior calls. In terms of quarterly phasing for the second half, we expect the third quarter to have a heavier impact by seasonality than in prior years due to market conditions in Western Europe and the continued disruption from the conflicts in the Middle East. We expect sales acceleration across both segments in the fourth quarter as we continue to scale and launch new products against the backdrop of improving market volumes as we close out the year. To summarize, second quarter was in line with our expectations given the dynamic market environment. We remain confident in the strength of our company, the diversified portfolio we've built, and the continued execution leading to consistent market share gains.

I'll turn it back over to Damian for closing comments. Damian? DAMIAN LYNCHMANN- Hey, thanks, Ben. Before we get into Q&A, I just want to take a few minutes to reflect on my first year. A year ago this week, I led my first earnings call at Anovus. I'd been here about 90 days and found a company that had assembled a compelling portfolio, yet was early in its journey of value creation. When I spoke to you then, I outlined three priorities, commercial execution innovation, operational excellence and financial discipline. These priorities are driving meaningful change in how we operate and remain the foundation for how we will deliver sustainable, profitable, capital-efficient growth. Most of what we did in the first year was foundational. We changed the operating cadence and attracted new talent to the senior leadership team. We put real rigor around daily management and revised our incentive plans to align with our strategic priorities. We pushed EGX deeper into the business and and we shaped the portfolio most visibly with the divestiture of Dr. Comfort. We also put a focus around fostering a one and novice mindset, working together across teams to drive growth and execution. With regard to commercial execution innovation, it was clear that our teams had been stretched by complex integrations and rapid product launches, and we needed to create space for our teams to bring their A-game to every customer-facing activity. We continue to grow above market in both of our business segments and still see potential for further acceleration. Innovation is a key area for our future growth and we continue to invest in people, process, and product to remain a nimble innovator. It's clear that innovation and enabling tech will be foundational to our long-term growth strategy. This means investing in the technologies, the teams, and the capabilities that will improve clinical outcomes, optimize surgical efficiency, respond to customer preferences, and ultimately define the next generation of orthopedic surgery. On operational excellence, I said last August that high-teens EBITDA margins were not sufficient for this company's ambition, and I still believe that. We held our margins through tariffs and unexpected inflationary headwinds while stepping up our investment in R&D. And our gross margins have expanded on the back of mix and productivity. Over the next year, the emphasis moves from embedding our foundational business system to optimizing our operating model. On financial discipline, for the past year, our response to every capital allocation question has been debt reduction, and it needed to be. We've since moved from negative free cash flow to positive, bought leverage down to 3.1 times, and refinanced our balance sheet to improve terms and capacity. And this is also the last year. of heavy investment in the Lima integration. As the balance sheet strengthens, we're beginning to evaluate how we can advance that portfolio for durable long-term growth without losing our focus on cash generation and debt reduction. I'm more optimistic now than I was 12 months ago and it isn't because of any single product or quarter. It's because this organization has embraced change faster than I anticipated and I've seen what we can do when everyone is pointed in the same direction. This is the one and over mindset and it's driving engagement across the organization. So before we go to Q&A, I want to thank the Anovus team for their dedication and execution over this past year. The efforts have been instrumental in delivering meaningful changes that we've discussed and positioning Anovus for long-term success.

So, Carl, why don't we open it up for Q&A? Thanks, Damian. In an effort to accommodate everyone in the Q&A session, we ask that analysts limit questions to one question and one follow-up. You are welcome to rejoin the queue, and we will fit you in if we have more time. With that, we'd like to now open it up to take questions. Operator?.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. At this time, I would like everyone to know that in order to ask a question, please star 1, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ryan Zimmerman with US Bancorp BTIG. Please go ahead.

And thanks for taking our questions. I appreciate your thoughts, Damian, one year post the position. Maybe to begin, I'd like to drill into US Recon for a moment here. you saw really nice growth, particularly in the hips and knees business. Extremities was a little softer than maybe I would have expected, given where the shoulder market's going. So maybe, Damian, you could spend a minute on kind of parsing some of that out, kind of what the dynamics are, particularly in U.S. extremities.

as you think about the balance of the year. Sure, hey, good morning, Ryan. Thanks for the question and joining us. Yes, look, I'm really proud with how that team have executed in both spaces, hips and knees and shoulder. If you look through the first half, hips and knees are up 8%, extremities are up 8%. The Q2, yes, we had some challenges there with a few things. One is we're lapping the ARG launch from last year. So it was a pretty tough comp. But I think importantly, we had a lot of med ed events in Q2 that took a lot of our high volume KOLs and surgeons out of the space for a few weeks. The first half performance, I think, is the thing to look at. I mean, look at our scale. We move a couple of weeks of people here one week or another and it materially affects us. So I think the first half is the way to look at it. And so as we think about the back half of the year, we've got more work coming with ARG, we've got the ARVIS rollout expanding. And so that's why we're confident about the back half of the year.

year. Understood. Maybe turning to Ben, growth Gross margins, if you look over the last six quarters, have been trending favorably or so. Ben, can you talk about your gross margin progression, where you think that can go, and what levers you have, particularly against the backdrop of some of these inflationary pressures that you're experiencing? Sure.

Yes, thanks Ryan for the question. I mean, it's one of the things that we're proud of in terms of how we built the portfolio with regards to how the product mix flows through the P&L with the way that we've established the segments and what's growing the fastest is generally coming with higher standard margins. You layer that on top with continuing to get added benefits as we get further downstream with regards to all the integration work that we've been doing within the recon business, being able to start to capitalize now on some of the synergies from the Lima deal as We're consolidating and expanding production facilities in lower cost locations. And then also you've got just deeper embedded continuous improvement that we've been able to drive into both segments on PNR and Recon with regards to productivity and maintenance making sure that we're working through, you know, how do we get the most out of our manufacturing and operations supply chain. So, overall, I would say it's a multi-levered effort and we got a few tailwinds that help organically, but then it's about, you know, making sure We're offsetting some of the surprises that come our way, like the inflationary pressure that we've been continuing to face. And then we did in the quarter get the benefit of a partial tariff refund as well. That helped in the quarter. But overall, I think as we look at it, we see a multi-year cadence of margin expansion and a lot of that driven by gross margins.

Thank you. Thank you. Your next question comes from the line of Yong Lee of Jefferies. Please go ahead.

All right, great. Thanks for taking the questions. I guess maybe starting with cash flows. You know, good to see the progress in 2Q, and it seems like you're on track for the 25-plus percent converter for the year. You know, some of the UMDR costs and integration costs goes away. soon or next yearish. I wanted to hear a little bit more on the key drivers that gets you to 40 to 50% and then 70 to 80% after that.

Hey, Jan, thanks for the question. Yes, I mean, I think you're really starting to see adjusted costs start to step down like we've talked about. You know, we're in year three of a pretty complex integration of a European asset in Lima, and we'll expect that to continue to step down even as we enter into next year. and beyond. I think you're starting to see some productivity in our working capital as well. I mean, I think Damien made in his prepared remarks that we've realigned incentives around cash flow for the company. And that's an area where we're bringing more discipline and more of the EGX toolkit into making sure that the company is doing its job. there's the right organizational focus around cash flow. And it's starting to read through. So it was nice to see the first half as positive free cash flow. And generally, you've seen us seasonally have a stronger second half when it comes to cash generation.

All right, great, very helpful. I guess the PowerPoint comments mentioned increasing market dynamics, including in the second half as well as in Western Europe. Can you maybe unpack that a little bit for us? are more impacted, which geographies are more impacted.

Yes, Jan, look, so let's, apart from the Middle East, right, which we've characterized well before, I think we saw some softer markets in Western Europe, inside international Western Europe. And predominantly, I would say, you know, France, Spain, Italy. Again, it's no surprise that there are a lot of environmental things going on in those countries. And so we just see a slightly softer market in the OUS markets, but particularly Western Europe.

All right, great. Thank you. Thank you. Your next question comes from the line of Bichai Kumar of Evercore. Please go ahead.

Hi, Damian. Good morning, and thank you for taking my question. I guess my first question is on this back half guidance, right? There's a helpful slide in the deck. you talk about your days adjusted growth by segments and correct me if I'm wrong, 3Q, I don't think like there's any days differentials. So your days adjusted and report organic should be in line-ish. That would sort of imply an acceleration from second quarter, right? On a days adjusted basis. I'm curious, 3Q is, you know, seasonally it's softer. What is.

driving this optimism and now am I thinking about the right way? Yes. Hey, hey, VJ, it's Ben. Thanks for the question. I mean, I think as, as we made comment, I mean, we're, we're starting to see some of the benefits of the hard work that we've been doing around really, you know, put putting muscle behind commercial execution, uh, and scaling the new product. So, I mean, I think as we see our. the demand for that and the excitement for that starting to pick up here. We would expect that will be a contributor for us in the second half of the year, as well as continued penetration of Nebula and ARG. And we have opportunities there. to just continue the acceleration. I think on the P&R side, you're also seeing some new products and some good discipline around commercial execution that's starting to read through in customer conversions. So those will start to read through in the second half as I did say in my prepared remarks that we do expect a more seasonally soft Q3 than what we've seen in the past, so that will be a bit of a headwind that will have to offset with some of these things that I just mentioned. But overall, I think the way that you characterized it is correct. And then just a reminder that we do have, you know, a couple of.

one day in Q4 in terms of selling day impact, but Q3, as you mentioned, is zero impact year over year. Yes, just to go on the new product things, I mean, Nebula we talked about, I mean, that's continuing its rollout. It's still early days, but we're getting a lot of great customer conversions there. You talked a little bit about P&R. I think what the team have done in Regen is really great. I mean, now the proxies are out. We are meaningfully taking share in that Regen business. And I think that's a good sign about the commercial execution from that team. And then the recovery sciences team are going to be launching Revital of treatment in the companion market. I mean, that's an exciting aspect and a big conversion funnel there too. So again, a lot of good things that are coming the way on both sides of the house.

I understand. And then maybe Ben, one on sort of a fiscal 27 question. your guidance for 26 now includes a tariff-free fund benefit, right? And that's being offset by higher inflation. But when you think about 27, you lose the tariff tailwind, but inflation stays, right? I guess, is the margin algorithm for 27 changing?.

No, we don't expect the algorithm for 27 to change, Vijay. I think we will continue to mitigate the the inflation that's coming our way, sometimes that takes a little bit of time. As I mentioned, there's productivity opportunities for us to continue to drive. And as I think about stepping into next year, you also see continued step down in an adjusted cost. So as I think about our margins and cash algorithm for 2027, I would say that those are still intact.

Thank you. Thank you. Your next question comes from the line of Robby Marcus of JP Morgan. Please go ahead.

Hi, everyone. This is Lily on for Robbie. Thanks for taking the question. Following up on the question around macro trends, on the general market and procedure backdrop, we've heard some different commentary from some of your peers around the health of the ortho market in the second quarter. So I'm curious what you've been seeing on your end and if there's been any disruption from declining ACA. and Medicaid enrollments? And to what extent is that a contributor to the macro disruption you called out?.

Why don't I start off and why don't you jump in? I think let's talk about US. I don't think we're seeing any change in the underlying dynamics, but there's sort of week to week and month to month volatility that's crept in. But I would say, if you look at our first half, we're pleased with how the mark evolved and where we landed with both hips and knees and in extremities. I think there's a lot of noise. The physician payment proposal that's been put out has created some noise. I think the CJRX has created some noise. some noise but on average we see the markets is pretty stable.

Yes. Hi, Lily. This is Kyle. Yes, I think we agree with Damian there. I think we're encouraged with, you know, the growth that the recon team put up in the first half of the year and in the second quarter in particular. I mean, if you look at, you know, six percent growth. growth in total US recon. And if you zoom out a little bit and look at the second half, is 7%. That looks to be above the broader peer group when we look at some of the main market segments we play in. So I think we're really excited about the progress thus far, and we'll see how the rest of the year plays out.

Got it. That's helpful. And then just as a follow-up, a lot of your major competitors have been experiencing some form of disruption this year, whether it be Salesforce reorganization or preparing to separate their orthopedics business. So I'm curious the impact that that's had on the competitive landscape. Have you seen any material change in dynamics over the last few months, and do you think this has opened up a window for you to capture share in a sustainable way? Thanks.

Yes, that's a great question. I would say, I talked about being a nimble innovator and what we've been doing in product introductions, I think has created some noise on the commercial side and it's made us, I think, a more attractive venue and the fact that we are stable and growing, We use the word talent magnet. I'm excited about what we're creating, and I really hope that people who want to grow businesses are interested in coming to join us. So I can't comment about what's going on inside each of those other competitors that you're talking about. What we're doing is trying to create a really great environment for people to come and grow businesses, and that's been really great. reading through and how we've attracted talent over the last six or 12 months. Hi Robbie, is your line muted? I'm all set. Thank you. Thank you. Thanks, Lilia.

Your next question comes from the line of Lawrence B. Jolson of Wells Fargo. Please go ahead.

Good morning, this is Ross Osborne for Larry. Thanks for taking our questions. So maybe looking at Arvis, with the full commercial launch underway, can you discuss how conversations are evolving beyond the initial KOL and high volume surgeon base? You know, what aspects of the platform are resonating most strongly? Where are you encountering the most skepticism or pushback? And what education is still required to help surgeons fully appreciate the benefits?.

Yes, thanks for that Rob. I think one of the things that we're really hearing about is just how versatile the system is. It's mobile, it's small, it really deals with, in shoulder in particular, the anatomy that's quite complex. For knee, the new gap balancing technology that we put into 2.0 is reading through. So the feedback has been very positive in both the med ed settings and the clinical settings. The demand funnel is tremendous. In the back half, we're going to be rolling it out more in shoulder and then starting into the international market. So we're really encouraged by the early feedback, both from the clinicians and the commercial team. Their access has been improved as well by having something like this to talk about.

Then as a follow-up, how do you feel about your rep headcount? Do you feel you have enough and the right people in place? How should we think about the incremental spend coming to the model in 27?.

Yes, I think we have got plenty of opportunity to, A, attract talent, given what we're doing with new product launches, but B, with what we're doing in terms of products like Arvis, the productivity per rep is improving as well. So I don't see us needing to do massive headcount hiring. to achieve our goals. Like I said, if we can attract talent and use that as an opportunity for account conversion, tremendous. But that's not the predication of our model. Thank you. Thanks, Rob. Thank you.

The next question comes from the line of Keith Hinton of Freedom Capital Markets. Please go ahead.

Great. Yes, a couple of P&L cash flow questions here, starting off with the inflation figure that you put out. I think you said about a $10 million impact. I don't recall whether you've put out a number like that before. So I'm curious, is that sort of all incremental in the last 90 days or is that just over the course of the year? And is that $10 million impact net of sort of any price increases you can take on the P&R side or anything else you can do to protect margins or is that kind of a gross.