Enovis Corporation (NYSE:ENOV) Q1 2024 Earnings Call Transcript

Enovis Corporation (NYSE:ENOV) Q1 2024 Earnings Call Transcript May 2, 2024

Enovis Corporation reports earnings inline with expectations. Reported EPS is $0.5 EPS, expectations were $0.5. Enovis Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Enovis First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. And now I would like to turn the conference over to Kyle Rose, vice president of investor relations. Please go ahead.

Kyle Rose: Thank you, Mayor Elise. Good morning, everyone, and thank you for joining us today on our first quarter 2024 results conference call. I’m Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Trerotola, Chair and Chief Executive Officer, and Ben Berry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, enovis.com. We will be using a slide presentation in today’s call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. 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 relating to those measures 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 Matt, who will begin on slide three.

Matt?

Matthew Trerotola: Thanks Kyle. Hello everyone, and thanks for joining us this morning. We had a strong first quarter, but before I begin to discuss the results, I want to welcome the Lima organization to Enovis and recognize the efforts of our strong global teams who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into one company with a global focus, we’re managing the organization on a combined global basis and we use pro forma growth for comparative purposes for year-over-year comparisons. Our prior year financials have been updated to include the acquisitions at Lima and NovaStep. Let’s start on slide three and talk about some of the quarter’s highlights.

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Q&A Session

We had a transformational start to the year we completed our planned acquisition of Lima, made significant progress on our integration plans and carried forward momentum from 2023. Across our geographies and business units, we delivered reported growth of 27% year-over-year and 5% on a pro forma combined basis versus very strong comps. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mix impact of Recon growth, productivity improvements, stable inflation and pricing trends, and the step change impact from Lima. We closed the Lima acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we’ve completed in the past few years. Overall, a strong start to the year.

In Recon on slide four, we delivered 66% reported global revenue growth. Pro forma Recon grew 7% year-over-year in the first quarter, which includes a 2% to 3% negative impact from integration dis synergies in line with our plan. US Recon grew 4%, including 8% growth in US extremities and flat performance in Hip & Knees against a very strong prior year comparable of 22% growth in our core Enovis business. Outside the US, we grew 10% in a resilient market. We’ve achieved significant progress integrating the Lima acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short term growth impacts across anatomies and geographies as we work through the integration of our commercial channels. These fall well within our projected estimates and our expectations for the full year remain intact.

We look forward to ramping cross selling opportunities as we move into the second half of 2024. I’m excited about the initial traction we’re seeing with our market leading empower and ultimate products globally. We continue to expand market access with the clearance of our ultimate small shell in Q1 In Europe. We also have a strong pipeline of innovation as we continue the US rollout of the empower vision knee controls ramp of Arvis 2.0 and selling Lima’s 3D printed Trabecular Titanium clip cones for use with our EMPOWR Revision System, one of our first key cross selling opportunities. I’m also very excited to announce that just earlier this week, Arvis received 510(k) clearance for use in shoulders. This timing aligns well with our planned launch of the augmented Glenoid component of our flagship ultimate reverse shoulder system.

In the second half of the year, our Foot & Ankle team continue to launch great new differentiated technologies like the arsenal reload that are keeping the vitality high and helping drive very strong double digit growth. These great new technologies, alongside the cross selling potential of the combined portfolios offer significant opportunity to accelerate growth in the second half of 2024 and set us up with great momentum as a billion dollar plus fast growing Recon business entering 2025. In PR on slide five, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan. Recovery sciences led growth, boosted by continued double digit laser growth and global bracing continue to grow above market rates.

Our new product pipeline is robust and includes the new OA knee brace called ROAM, additional spine bracing products and the next generation of clinical electrotherapy products for our recovery sciences team. Adjusted EBITDA margins in PNR improved 50 basis points year-over-year as we continue to use EGX tools to drive consistent productivity improvements and sustained traction on price versus cost. Now I’ll let Ben take you through the P&L details. Ben?

Phillip Berry: Thanks Matt. Hello everyone, I’ll begin on slide six. We are pleased to report first quarter sales of $516 million, up 27% versus the prior year and 5% on a pro forma basis. This compares to strong prior year organic core growth of 9%. Our teams have been working really hard to integrate our global Lima acquisition that closed January 3. We’ve been extremely pleased so far with the collaboration in our teams and the high quality integration plans that we’ve begun executing against. Our underlying growth in PNR and Recon continues to be solid and while still early, our integration efforts are slightly ahead of our original plans. First quarter adjusted gross margin was 58.7%, up 70 basis points year-over-year. The growth was driven by leverage from higher sales, favorable segment mix which includes the addition of Lima and cost leverage.

Our first quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1 2023. First quarter’s effective tax rate was 23%. This is compared to 21% last year. Interest expense was $20 million for the quarter versus $6 million in 2023. Overall, we posted strong adjusted earnings per share of $0.50 [indiscernible] earnings growth versus the prior year. Foreign currency exchange had an unfavorable impact of approximately $0.02 in the quarter. Turning to slide seven, we are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of $2.06 billion to $2.16 billion. This is slightly above our previous guidance range which contemplated 7% pre Lima organic growth, double digit Recon growth and low single digit PNR growth.

As we go forward in 2024, we will be reporting on pro forma results. Our updated guidance range increase translates to approximately 5% to 6% pro forma growth and includes acquisition related impacts. In Recon, the pro forma outlook translates to high single digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross selling and new product launches. We continue to expect stable PNR growth in the low to mid single digits as was reflected in our original guidance. We expect adjusted EBITDA in the range of $368 million to $383 million, which includes a modest increase to the range based on our Q1 performance, our guidance for depreciation, interest and other expenses, tax rate and share count remains unchanged from the prior guidance.

Taking all this into consideration, and as a result of our strong operational results in the first quarter, we are increasing our adjusted earnings per share range to $2 and $0.52 to $2 and $0.67. To summarize on slide eight, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima. We are excited about our progress in the first quarter and remain focused on successfully executing against our integration plans, creating momentum and delivering strong financial results. Now, I’ll hand it back over to Kyle to start Q&A. Kyle?

Kyle Rose: Thanks, Ben. Before we begin the Q&A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question, followed by one follow up question. You’re welcome to rejoin the queue if we have time. With that, we’ll hand it over to the operator to start the Q&A.

Operator: Thank you very much. We will start the Q&A. [Operator instructions] At this time, we’ll start with a question from Vik Chopra from Wells Fargo. Vik, please go ahead.

Vik Chopra: Good morning and thanks so much for taking the question. I’ll keep it to one. So, based on our math, Lima came in ahead of our estimates. We estimate about $85 million. Can you just talk about what you’re seeing with regard to the integration and what drove the upside? And then you also called out 2% to 3% negative growth impact from the integration. We really appreciate if you can elaborate on that, please. Thank you.

Matthew Trerotola: Vic, I missed the very end of the question there about the 2 to 3%.

Vik Chopra: Oh, sorry, I was saying we saw you called out 2 3% negative growth impact from the integration, just any color on that would be appreciated. Thank you.

Matthew Trerotola: Yes. Yes, absolutely. So, yeah, I mean, we saw, a good, solid start to the year as expected, both in terms of our performance on the integration front as well as, driving good progress in the core business. You know, that we’ve talked about through the quarter, in various settings. We talked about the market environment, which, really last year there was a super clean market environment and very high utilization rates. You know, I think this year was probably more a more normal market environment with storms and illnesses and different things. And so I think that, that’s resulted in a little softer market growth, quite a bit softer than last year. And so that’s certainly an impact, but we’ve continued to drive strong performance against the market.

But then we have been working quickly to do the integration as we’ve talked about all along. And as we work through the channel integration in the US and in certain countries outside the US, there’s choices that we’ve made in some cases, choices that agents have made in other cases, that have led to some loss of business that was planned and expected. And as we’ve talked about along, we’ve tried to work through it quickly so that we can have it kind of impact the business here in the first year and then leave it behind. And that’s impacted the US significantly, but also it’s had some impact in other countries and it’s had impact on the hip and the side as well as on the shoulder side. And so we’ve tried to give you a clear look with the pro forma growth, but also talk a little bit about the impact of the integration so that you can see that the underlying business is certainly in a quarter with a strong comp and a little softer market, but the underlying business is still very strong and we’ve got a great path to accelerate through the year and exit the year on a very strong growth arc.

Kyle Rose: Thank you. Next question.

Operator: And our next question comes from Jeff Johnson from Baird. Jeff, please proceed.

Jeffrey Johnson: Yes, thank you. Good morning, guys. So, Matt, I don’t want to give you a big softball here, but I guess just help me on the math. If you, If you did 7% Recon growth, is it fair to think about those 2 to 3 points of dis synergies? I think you also had one less selling day with Easter at the end of the quarter. You know, Recon, would that have been closer to, 9%-10%, 10%-11%, if not for those dis synergies and the selling days. Is that how we should be conceptually thinking about this?

Matthew Trerotola: Yes, I think that’s the right way to think about it, Jeff.

Jeffrey Johnson: Okay. And then just on the extremity side, you called out the 8% growth there. You did point most of that to Foot & Ankle. Obviously, you had the dissynergies, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that’s just in the core novus, the ultimate product in that? Obviously, competition is growing in shoulders as well. So just how do you perceive kind of shoulder market and your performance in the shoulder market? Kind of some of this noise from the integration and selling days. Thanks.

Matthew Trerotola: Yes. Excluding some of the integration, in fact, we still see ourselves in a good above market growth range in our shoulder and have a great opportunity as we work through the year here to even strengthen that further. The Glenoid that we launch will launch here probably late in the second quarter and really ramp in the second half of the year are going to give us a great additional, additional weapon in terms of driving more share gain and shoulders. And the cross selling opportunities are terrific and shoulder. And then, as I said in my comments, we’ve also gotten Arvis cleared in the shoulder. And while that won’t have much impact this year in terms of revenue because we’ll be in the early launch phase, I think it just, continues to send a very strong message to the market about our, the strength of our leadership in shoulder and our commitment to be continuing to be an innovation leader there.

Operator: Our next question comes from Xuyang Li, from Jefferies. Xuyang, please go ahead.

Xuyang Li: All right, great. Thanks so much for taking our questions. I guess I wanted to hear a little bit more about cross selling opportunities as you get through some of these early integration choppy period. Seems like we’ll see more of the benefit in the second half in the US. And US seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross selling?

Matthew Trerotola: Yes, yeah, for sure Xuyang, thanks, thanks for the question there. We’re extremely excited about the cross selling opportunity. Actually, I got to join the global sales conference that we had over in London for our Recon teams, and it was really tremendous to see how far the teams have already gotten on creating really specific and aggressive cross selling opportunities. I’ll mention a few we talked about here in the US market, a kind of immediate opportunity to bring revision cones into the US market and more aggressively sell the custom probate products that Lima has. And so it’s early days on those, but we’ve already gotten a little bit started there and would expect to see a nice ramp down the back half of the year on those.

And we also, our teams are pretty excited about the SMR shoulder, not as a kind of our core shoulder product. The ultimate is really our flagship. But there are, specific, specific situations where the SMR can be quite attractive, and we expect to see some nice cross selling there as well. You know, second, outside the US, we’re still early days in terms of driving power and ultimate. And, we had just started to ramp up the Mathis cross selling. And so now across a much broader landscape with Mathis and Lemis channels, we’ve got a great opportunity for many years to come with empower and ultimate. And as I shared, we just got some additional market access, which is very important and ultimate, a large portion of our cases in the US with ultimate or small shell.

And so that market access really helps to give a boost there on those broad cross selling opportunities. And then the third thing that actually is really exciting, I probably kind of underappreciate appreciated until I was at this conference. Sitting in the room with the teams talking about it, is there’s a number of actually very interesting cross selling opportunities between Lima and Mathis revision process products on the Lima side that the Mathis team is excited about. Allergy free products on the Mathis side that the Lima team are excited about. And so there’s really this kind of organic energy that has come between those teams in terms of some things outside the US, beyond the sort of larger and longer altitude and empower opportunities.

So a lot of great opportunities getting them ramped up right now. Did a lot of training in this meeting in March. Now starting to get the instrument sets into the market, get the funnels built. And we’d expect that down the back half of the year. We’ll start to see the synergy ramp and start to hit kind of full stride going into next year.

Xuyang Li: Very great. That’s very comprehensive. I’ll just keep it to one. Thank you.

Kyle Rose: Thank you, operator. Next question.

Operator: The question is coming from Brandon Vazquez from William Blair. Brandon, please go ahead.

Brandon Vazquez: Hi, everyone. Good morning. Thanks for taking the question. I’ll ask two upfront here. The first is, just as you guys are integrating Lima here, can you talk to us about logistically what needs to happen still? What are the milestones we should keep an eye out for? Are there any ERP integrations, SAP integrations, things like that. And then maybe the quick follow up as well is just a little bit of, can you give us some color on gross margins, how they trended in the quarter and how you expect those to trend through the rest of the year, especially as you integrate some of the Lima business as well? Thanks.

Matthew Trerotola: Thanks, Brandon. As far as key integration milestones, some of the biggest focus so far has been on the commercial side, working through the different channel decisions and the implementation of them. And we’re a good way through those in the US and outside the US. Ramping up the cross selling, as I talked about, has been another key piece of the integration so far. There have been some, quick and thoughtful cost actions that we took in the first quarter in terms of starting to get after the cost opportunities. There’s more of that to come. But we did some very quick moves as we put the two teams together outside the US and as we tucked the US team into our team here in the US. So that’s been another key thing that we’ve done so far.

As we look forward, there are some things to do in terms of IAT systems, but we’re taking a very thoughtful, step-by-step approach on that. So there’s. There’s no big scary European integration coming. That could be a big issue. More of a kind of step-by-step making the changes in terms of skews and systems and how systems interchange and connect, et cetera. And we will work our way to kind of well aligned systems. But that’s not any kind of big giant thing versus a step-by-step, thoughtful approach. We’ve also got a couple of years of operational synergies to get after over the coming years. That’ll be step-by-step movement of things that are getting us cost opportunities, some insourcing, some movement type of things. And then finally, we’ve done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and making some early choices around that.

But it’ll be, again, a thoughtful multi-year process of merging the innovation pipelines and product pipeline. So we’ve got a great managing process, great talent focused on this. So far, things are going very well. We know it’s important to stay on top of that. There’s certainly a lot more work to come. We feel very good about where we are right now.

Phillip Berry: Yes. And Brandon, on gross margins, we were 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get, get aligned with all the things that we’ve been talking about here. Both businesses continue to leverage the EGX capabilities that we have, and I would see some decent progression throughout the course of the year there on gross margin.

Kyle Rose: Thank you, operator. Next question.

Operator: Next question comes from George Sellers from Stephens. George, please go ahead.

George Sellers: Hey, thanks for taking the question. Congrats on the quarter. Maybe to shift to the Foot & Ankle portfolio. You called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance and maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio? And then lastly, what are you seeing from a competitive perspective as well?

Matthew Trerotola: Yes, sure. So, footnote, a good strong quarter. I think it was a healthy market environment in Foot & Ankle. Maybe kind of a little less of a, strong comp there and, good healthy market environment to start the year, and that’s continuing here as start the second quarter. You know, our team, we’ve got a number of key technologies that drive the growth there. You know, our DynaNail products or the DynaNail family, based on, nitinol alloy sheet metal alloys, has been, has been very strong, and we continue to bring additional, additional technologies into that family. You know, we’ve, the NovaStep product that we acquired in last year in the minimally invasive bunion space are driving nice growth as well. And we’re excited about that participation now into that large four foot market.

We’ve also, the arsenal reload that I talked about is the next generation of our plating products, which apply across the space. And we’ve got IP protected technology around the fastening devices on our plating and some really great new plates that leverage that technology that we think are going to bring a real boost as well. And Star has gotten, as we’ve talked about, star is stabilized and I think ready to grow here now as well with some of the changes that we’ve made there. So a number of great technologies across Foot & Ankle. But then, very importantly, our channel continues to get more aligned. We’ve now got almost 70% of our channel fully aligned to our products, and that’s something that we did a lot of work over the past few years to get there, and we know that that’s going to pay a lot of dividends.

A strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we’ve acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.

George Sellers: Okay, great. Thanks for taking the question.

Kyle Rose: Thank you. Next question operator.

Operator: And the next question is coming from Jason Wittes from ROTH MKM. Jason, please go ahead.

Jason Wittes: Great. Thank you. So just a question about the impact of the integration. I know it was 2% or 3% this quarter. Does that run through the year, or how should we be thinking about what the negative impact is or positive impact is for this year by the quarter?

Matthew Trerotola: So, I think in terms of how much it impacts the year, we shared $20 to $30 million as the expected impact when we did the acquisition. And, that’s, 2% to 3% of our, of our Recon is more than 2% to 3% of Lima, of course. But, but I guess I would say, as we’ve talked about, we’ve been trying to get at this quickly. And so I think that we’re likely to see that go from where it is now probably increase a little bit in the second quarter as we get really in maybe probably the apex of the impact from these integration things. And then I would expect that the back half, it would kind of flatten and drop as we get to the other side of some of the things that even started to impact us late last year or right at the beginning of the year. And also as we have some nice contributions coming through on the cross selling side as well.

Jason Wittes: Okay. That’s very helpful. And then just really quickly, in terms of the launches for the shoulder, in terms of the rollout, is that typically a six-to-nine-month process, or what kind of timing should we be thinking about for how quickly you can roll those out and they have an impact on the numbers?

Matthew Trerotola: Yes. So the augmented Glenoids will get into the market very quickly. There’s obviously some early, early market participation that then leads to broader. But we would expect the augmented glenoids will be ramping aggressively in the back half of the year. And we’ve got a lot of, we already kind of, in the process of the stocking of product and instrument sets, to be able to ramp very fast in augmented glenoids. And we really think that’s been very important. You got the shoulder.s But more and more surgeons are using augmented glenoids in their procedures. And so we think that not only will that offer us some same store selling opportunities in our existing surgeons, but it’s really going to turn the heat up on our surge and capture offense with augmented glenoids.