Enovis Corporation (NYSE:ENOV) Q3 2023 Earnings Call Transcript

Enovis Corporation (NYSE:ENOV) Q3 2023 Earnings Call Transcript November 7, 2023

Enovis Corporation beats earnings expectations. Reported EPS is $0.56, expectations were $0.53.

Operator: Good morning, and welcome to the Enovis’ Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction] Please note this event is being recorded. And I would now like to turn the conference over to Kyle Rose, Enovis’ Vice President of Investor Relations. Please go ahead.

Kyle Rose: Thank you, Marliese, and good morning, everyone. Thank you for joining us today for our third quarter 2023 results conference call. I’m Kyle Rose, Enovis’ Vice President of Investor Relations. With me on the call today are Matt Trerotola, Chairman and CEO; as well as Ben Berry, our Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website in 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 our 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 today. 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. With respect to 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 3. Matt?

Matt Trerotola: Thanks, Kyle. Hello, everyone, and thanks for joining us today. As we previously announced, we had a very productive third quarter, with continued share gain, solid margin expansion, and we announced the strategic acquisition of Lima that step changes our Recon business. Let’s go to Slide 3 and talk about these highlights. We grew organically by 6% in the quarter, with 10% growth in Recon, and 4% growth in P&R. That brings our year-to-date organic growth to 8%. We continued our trend of double-digit growth and share gain on the Recon side versus a strong Q3 compare. We saw a return to more normal third quarter seasonality with some summer volatility in procedure volumes from vacations, which was in line with our expectations.

We believe the elective surgery markets we serve remain healthy with higher than normal procedural demand in 2023 overall, a trend we expect will persist through 2024 and likely 2025 as pandemic-related patient backlogs are gradually worked down. In P&R, we had another strong quarter, showing our reestablished leadership in these markets with a bit of share gain in a stable market environment. We expanded our adjusted EBITDA margins by 80 basis points, reflecting strong gross margin expansion from productivity, mix and the scaling of recent acquisitions. In September, we announced a definitive agreement to acquire Lima Corporate, which expands our global reach and Recon, taking that segment to about $1 billion in sales, with close to 50% exposure to the faster-growing extremities market.

Overall, we remain on track for a great 2023 with strong momentum versus our strategic goals. Digging a little deeper in Recon on Slide 4. We had double-digit growth in the U.S., led by 18% organic growth in hip and knee. Extremities grew 7% against a tough prior year comp of 17% in Q3 of ’22. Outside the U.S., we grew almost 12% organically in a resilient market. I’m excited about the international growth opportunity as we expand our market position with good initial traction for our industry-leading AltiVate and EMPOWR products. Importantly, we have a strong pipeline of innovation in Recon that we believe will allow us to continue to take share for many years to come. The ramp of our EMPOWR Revision Knee remains in the early innings, and we also have launched an updated ARVIS 2.0 with full EMPOWR capability.

Additionally, in foot and ankle, we recently launched the Evolve34 Lapidus Correction System for bunions, one of the fastest-growing market segments in the U.S. We’ve had terrific feedback from surgeons on all 3 of these great new products. Turning to Slide 5. I want to take a moment to remind everyone about the exciting opportunity we have to advance our business with the acquisition of Lima. I was recently in Italy and Switzerland, meeting with the Lima and Mathys leaders and teams. We’re making good headway on our integration planning activities, and I came away with increased conviction and excitement by the strength of the talent and the big opportunity that we have ahead. We have a lot of experience and track record doing acquisitions well, and are following our proven EGX playbook to make sure this one gets off to a great start and deliver strong strategic impact, financial contributions and shareholder returns.

The addition of Lima represents the next step in the evolution of Enovis as we execute against our strategic goal to build a high-growth med tech innovator with a clear pathway for sustained operating margin expansion. This transaction, which is expected to close in early 2024, will reshape our mix to faster-growing, higher-margin Recon, and increased our exposure to the fastest-growing parts of the Recon market and extremities. This accelerates our progress against our long-term strategic pillars of sustainable high single-digit organic growth, continuous margin expansion and global scale. In P&R on Slide 6, our 4% organic growth reflects a healthy market environment and disciplined execution. This business is performing in line with our strategic plan.

Global bracing growth is over 4% year-to-date with share gains from strong customer service, improving innovation and MotionMD clinic conversions. We have a strong pipeline of innovation to drive additional growth, including a new OA knee brace called ROAM, and the next generation of clinical electrotherapy products for our Recovery Sciences team. Gross margins in this segment expanded by 150 basis points as we continue to sustain traction on price versus cost and roll out additional EGX business system tools, which are driving notable productivity improvements. Moving to Slide 7. Before I hand it over to Ben, I want to reiterate our confidence in the team’s execution year-to-date. We have a diverse global business. And while 2023 has thankfully been a bit more normal than recent years, it takes a lot of day-to-day execution from our team members around the world to consistently deliver the way we have.

Our execution in 2023 shows our commitment and capability to create compounding shareholder value through high single-digit organic growth and continuous margin expansion. The high single-digit growth comes from our demonstrated ability to consistently grow Recon double digits, along with our stable low to mid-single-digit P&R growth. The margin expansion comes from the structural gross margin expansion as we grow Recon faster, supplemented by EGX productivity and scale, partially offset by growth investments and in-year headwinds. We will provide a more formal update for 2024 guidance on our fourth quarter call, but we are confident in our ability to continue to drive this compounding growth in margin formula and also ramp up the impact of recent acquisitions.

Now I’ll let Ben take you through the P&L details and the guidance increase. Ben?

Ben Berry: Thanks, Matt, and hello, everyone. I’ll begin my remarks on Slide 8. We’re pleased to report third quarter sales of $418 million, up 9% versus prior year, and 6% organic. Our growth was fueled by strong demand for our products and solid commercial execution in both of our business segments. Additionally, our third quarter sales results include a combined 260 basis point positive contribution from foreign currency and recent acquisitions. Third quarter gross margin was 58.2%, up 140 basis points year-over-year. The growth was driven by leverage from higher sales, strong mix and cost discipline. We continue to leverage our EGX business system to stabilize and drive productivity in the supply chain, and the results continue to read through in gross margin.

Adjusted EBITDA grew 14%, and adjusted EBITDA margin was 15.7%, up 80 basis points versus prior year. This growth was driven by gross margin expansion and partially offset by growth investments in R&D and dilution from recent acquisitions. Q3 results build on a strong first half, resulting in year-to-date adjusted EBITDA margins up 100 basis points versus the prior year. Third quarter effective tax rate was 19%. This is compared to 6% last year, which included benefits from onetime items that significantly lowered the rate. Interest expense was $6 million for the quarter versus $5 million in 2022. Overall, we produced strong adjusted earnings per share of $0.56 or underlying earnings growth after normalizing for the tax and interest impacts from the prior year.

We’re extremely pleased with these results and the momentum we’ve built thus far in 2023. I want to congratulate all the Enovis team worldwide in delivering another strong quarter. Let’s move to Slide 9. Considering our Q3 performance, we are raising our organic sales growth outlook for the year to 7.4% to 7.6%, versus the previous guidance of 7% to 7.5%. We are seeing consistent performance in both of our business segments and are excited about the momentum we are creating as we shape the business and build on our commercial execution efforts. We expect full year sales to be roughly $1.7 billion, with approximately 1 point of additional growth from recent acquisitions. For the year, based on the latest rates, we expect foreign currency impact on sales to be relatively flat.

We are raising the bottom end of our adjusted EBITDA range to $264 million to $270 million, reflecting our solid Q3 performance. We are updating our interest outlook to approximately $22 million, and lowering our estimated tax rate range to 19% to 19.5%. Based on our strong performance in the first 9 months and these adjustments, we now expect our adjusted EPS to be in the range of $2.30 to $2.40 versus our previously guided $2.22 and to $2.36. I’d like to spend the next few minutes discussing recent steps we’ve taken to optimize our balance sheet in a challenging capital markets backdrop. On Slide 10, we have solidified and secured our financing for the Lima corporate acquisition. We will maintain our existing revolving credit facility and add a new term loan at our current interest rates.

Additionally, we’ve completed a convertible debt offering at a 3.875% fixed rate. Given the challenging capital market conditions, we believe we have put ourselves in a strong position to drive and create value from this acquisition. Our effective interest rate of the company will be around 5.25% to 5.75% based on current rates. This will allow us to deliver accretive earnings in year 1, with meaningful accretion in year 2 and beyond. We will also have the flexibility to progress our integration plans and quickly position ourselves for more M&A in the future as the business scales. To summarize, on Slide 11, we’ve had another strong quarter, leading us to again raise our full year guidance. We grew 8% sales per day in the first 9 months of the year, and we remain confident in our strategy and our capability to build a sustainable, high single-digit growth company.

We took another step forward in expanding our margins, and we continue to execute on our clear plan for continued margin growth. We continue to accelerate the company through M&A and have demonstrated strong execution of recent deals. We are very excited to welcome the Lima team into the Enovis family in early 2024, and look forward to creating better together. Now I’ll move to Q&A. Marliese, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions] And our first question comes from Vik Chopra from Wells Fargo.

Vik Chopra: Congrats on a nice print. Just 2 questions to me. Matt, maybe first one for you, GLP-1s remains front and center for investors, and it will be remiss with me if I didn’t ask you about this. So I just want to get your updated thoughts on how you’re thinking about the impact of GLP-1s on ortho — on ortho procedures? And then I had a follow-up question, please.

Matt Trerotola: Thanks for the kind words. Let me address your first question, and let you ask the second. Certainly, we’re paying close attention to all the discussion about GLP-1 and the potential impacts as we’ve taken a look at it so far, really the demonstrated impact from GLP-1 is on obesity and the path of obesity and being able to reduce obesity. And when we look at our portfolio and we look at the portion of the portfolio that might be — have some headwinds from obesity versus the portion that might have some tailwinds from less obesity, we would see it as somewhere between neutral and potentially a small positive in terms of the kind of impact that GLP-1 can have on obesity. So that’s kind of how we view it at this point based on the demonstrated impacts that are out there.

We’re going to continue to monitor the situation. But in our business, in our Recon business, we get most of our growth from share gain, not from the market growth itself. And so even if there was a little bit of impact on the market growth in Recon, our diversification, as well as our small share position in hip and knee would be a good thing in terms of enabling us to still drive very strong growth.

Vik Chopra: And then my second question was just on the backlog in orthopedic procedures. We’re sort of coming up towards the end of 2023. I’m just curious as to how you think about the backlog heading into 2024? Do you expect to work for that backlog next year? Or do you expect that to be a tailwind for some time?

Matt Trerotola: Yes. I think the way we look at this backlog topic is that if you look at the overall industry growth since 2019, there’s still a year or 2 missing, right, in the math. And so growth. And so that really gives an opportunity, even with some of the tailwind this year that came from some backlog, we still see the opportunity for a little bit of tailwind in each of the coming years if people create the capacity and the staffing to be able to work off some of that backlog. And so we’re pleased that this year has had a little bit of tailwind in it, particularly in the first half of the year in terms of Recon procedures. And we would expect there’s a real possibility to have that tailwind continue for the next couple of years. But obviously, it’s going to be kind of a situation on a year-to-year basis. And we’ll share the assumptions that we’re making when we give our guidance.

Operator: Okay. We’ll proceed with our next question, which is from Jeff Johnson from Baird. Jeff?

Jeff Johnson: Nice quarter. I appreciate all the commentary. I guess, Matt or Ben, just on the Extremities business up 7%. I know it came up again that very tough 17% comp. Just would like to hear what you’re seeing maybe from a competitive standpoint. I know a couple of your competitors have launched some new shoulder products here recently. So what are you seeing out in the field and your confidence in maybe getting that number, I think [indiscernible] is a little bit over the next few quarters, although stay pretty high. Do you think that gets back to a double-digit number? Or are we kind of in this upper single-digit range for the foreseeable future?