Enovis Corporation (NYSE:ENOV) Q4 2023 Earnings Call Transcript

Enovis Corporation (NYSE:ENOV) Q4 2023 Earnings Call Transcript February 22, 2024

Enovis Corporation beats earnings expectations. Reported EPS is $0.79, expectations were $0.76. 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 morning, and welcome to the Enovis Fourth Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Kyle Rose, VP, Investor Relations. Please go ahead.

Kyle Rose: Good morning, everyone. Thank you for joining us today for our fourth quarter 2023 results conference call. I’m Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning 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 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 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. 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. 2023 was a year of significant progress toward our long-term strategic goals, and I’m excited about the future of our high-value med tech growth company. We had a terrific year with continued share gains across geographies and business units, strong execution on new product initiatives, solid margin expansion, and truly transformative acquisitions. We completed the year with total revenue growth of 9%, which included 8% organic growth, right in line with our high single-digit strategic goal. Our talented team continues to develop exciting technologies and solutions that improve patient outcomes and satisfaction around the world. In Recon, we made considerable progress expanding this high-growth and high-margin platform and drove full year organic growth of 14%.

We delivered double-digit organic growth across all major segments, continued to win in the ASC in the U.S., and had strong execution internationally as we continue to ramp our very successful 2021 Mathys acquisition. We also closed the year with the strategic acquisition of Lima that step-changes our Recon business starting in 2024. In P&R, we’ve been reshaping the business for sustained mid-single-digit organic growth. In 2023, we once again outgrew our markets with full year organic growth of nearly 5%. We improved innovation vitality in this business from close to 0 in 2018 to double digits as we exit 2023, and have a strong pipeline for 2024 and beyond. We also made good progress on margins in 2023, improving our EBITDA margins by 70 basis points, more than offsetting growth investments and headwinds from M&A currency inflation.

Our gross margin improvement is a result of our mix-enriching strategy and the powerful impact of our EGX business system driving operational productivity and pricing improvements. And finally, we continue to accelerate our growth through focused M&A. Our acquisitions from the past few years grew double digits and started to scale. We expanded geographically and enhanced our innovation capabilities with Lima and NovaStep, and we continue to follow our proven EGX playbook to make sure each acquisition delivers strong strategic impact, financial contributions and long-term shareholder returns. And they bring great talent into our company. Let’s go to Slide 4 and talk about how we finished the year. We grew organically by 8% in the fourth quarter, with 11% growth in Recon and 6% growth in P&R.

We continued our trend of double-digit growth and share gain in Recon as our markets had normal seasonality. We believe the elective surgery markets we serve remain healthy, with higher-than-normal procedural demand in early 2023 and the potential for above normal demand again in 2024. In P&R, we had another strong quarter, showing our reestablished leadership in these markets with global share gain and a stable market environment, plus a bit of tailwind from the light prior year comp. We expanded our gross margins by 150 basis points, reflecting continued impacts from productivity, mix and the scaling of recent acquisitions. Overall, we exited 2023 with strong momentum in line with our strategic goals and are excited for a great 2024. Digging a little deeper in Recon, on Slide 5, we had double-digit growth in the U.S., led by 11% organic growth in Hip & Knee as well as Extremities.

Outside the U.S., we grew 11% organically in a resilient market. I know there are a lot of 11s on the page, trust me it’s just a coincidence. We have a very strong Recon innovation pipeline that will allow us to continue to gain share. We’re off to a great start on the ramp of our EMPOWR Revision Knee, and we’ve also launched an updated Arvis 2.0 with full EMPOWR capability. Additionally, in Foot & 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 of these great new products. In P&R on Slide 6, our organic growth reflects a healthy market environment and disciplined execution, albeit against the easiest comp of the year.

Overall, this business is performing in line with our strategic plan, with global bracing grew, driving share gains from strong customer service, improved innovation and MotionMD clinic conversions. Here, too, our pipeline is strong and includes a new OA brace called ROAM and the next generation of clinical electrotherapy products for our Recovery Sciences team. Gross margins in this segment expanded by 240 basis points as we continued to sustain traction on price versus cost and roll out additional EGX tools, which are driving consistent productivity improvements. On Slide 7, I want to pause and quickly highlight our significant progress in our first 2 years as a stand-alone med tech player. We continue to execute on our strategic pillars and have quickly built to consistent high single-digit organic revenue growth.

We’ve also delivered operationally with EBITDA expansion ahead of our annual commitment of 50 basis points, even with headwinds from inflation and dilutive strategic acquisitions. 2024 is setting up to be a transformative year for Enovis as we integrate Lima and execute on major new product launches. We are confident in our ability to continue to drive this compounding growth and margin formula. On Slide 8, we highlight several of our key new products for 2024, many of which were on display at last week’s American Association of Orthopedic Surgeons Conference in San Francisco. It was great to see the teamwork at our booths between our Enovis team members and the talented leaders who have joined us with Lima. I’m excited about the lineup of new products for 2024, and our R&D pipeline for the next several years is more robust than ever.

On the Recon side, we continue to make substantial progress with the rollout of our EMPOWR Revision System. This gives us access to almost 20% of the knee market that we could not previously access, an opportunity to sell deeper into existing surgeons and also to continue to drive conversions. The late 2022 launch led to very strong Knee growth in 2023, even with inventory constraints and without cones for more difficult cases. We enter 2024 with healthy inventory and recently received 510(k) clearance for Lima’s 3D printed trabecular titanium clip cones for use with our EMPOWR Revision System, quickly enabling one of our first major cross-selling opportunities. Arvis 2.0 continues to get positive market feedback after the launch in Q4. This breakthrough enabling technology gives our knee and hip surgeons space, time and cost-efficient solution for repeatable procedures and interoperative data capture.

The 2.0 version brings a simplified procedural workflow and registration process to provide the physician with a unique wearable navigation system suited for all operating settings from the ASC to a hospital. This is our first step in interoperative enabling technology. We plan to bring Arvis to additional anatomies shortly and also have an exciting pipeline beyond Arvis. Our Foot & Ankle business also continues to execute well with a powerful boost from the acquisition of NovaStep in mid-2023. We have one of the most compelling product portfolios in the market and are excited about our expansion into the $1 billion, fast-growing 4-foot segment, where we’ve recently launched the Evolve34 and Pecaplasty systems. These products give our teams the most comprehensive suite of technologies for the bunion indication, including MIS approaches.

In P&R, we formally launched the ROAM OA single upgrade brace for patients with osteoarthritis at our sales meeting last month, and the feedback has been very positive. The single upgrade category is a sizable growing segment where we have limited share. The simplicity and comfort offered by ROAM will be meaningful differentiators for patients and clinicians and we expect to capture significant share through our powerful channel and clinic presence. And we continue to build momentum and vitality in our Rehab business with the global launch of our next-generation of electrotherapy products, Intelect Legend and Transport. These bring freshness for our very strong Chattanooga brand in the largest global rehab treatment modality segment. Turning to Slide 9.

I want to take a moment to remind everyone of the powerful strategic and financial impact of our Lima acquisition, which closed the first week in January. The addition of Lima represents the next step in the evolution of Enovis as we execute against our strategic goals as a high-growth med tech innovator with a clear pathway for sustained operating margin expansion. The transaction reshapes our mix to faster-growing, higher-margin recon and increases our exposure to the fastest-growing parts of the recon market and extremities. We took advantage of the opportunity to do significant planning before the acquisition closed and really hit the ground running in January, with the new combined leadership team and a robust integration process in place on day 1.

The feedback from customers has been very positive, and we’re already — we already have strong traction on both cost and growth synergies. It’s been really exciting seeing our teams come together and start to shape global innovation road maps that leverage our combined technologies. We remain confident in our ability to deliver the 2024 financial benefits previously shared and exit the year with strong double-digit organic growth momentum across all of Recon. I look forward to giving you additional updates throughout the year. Moving to Slide 10. Before I hand it over to Ben, I want to reiterate my excitement about the momentum we built in 2023 and the great opportunities we have in 2024 and beyond. We have a diverse global business, a talented and energized team and a powerful business system that we will continue to use to drive our compounding value improvement journey.

Now I’ll let Ben take you through the P&L details and our 2024 guidance. Ben?

Ben Berry : Thanks, Matt. Hello, everyone. And as Matt said, we’ll start on Slide 10. We’re pleased to report fourth quarter sales of $455 million, up 11% versus the prior year, 8% organic growth. The growth was fueled by strong demand for our products and solid commercial execution in both business segments. Fourth quarter adjusted gross margin was 58.6%, up 150 basis points year-over-year. Growth was driven by leverage from higher sales, favorable product mix, and cost discipline. We continue to leverage our EGX business system to drive productivity in the supply chain, and the results continue to read through in our gross margins. Fourth quarter adjusted EBITDA margin of 18% was down 30 basis points versus 2022. The year-over-year decline was driven by onetime cost benefits in 2022 and some dilution from recent acquisitions.

But results came in as expected with a strong sequential step-up to finish the year. The fourth quarter’s effective tax rate was 22%. This is compared to 22% last year. Interest expense was $4 million in the quarter, versus $5 million in 2022. Overall, we posted strong adjusted earnings per share of $0.79, 10% earnings growth versus the prior year. For the full year 2023, we delivered high single-digit organic growth of 8%, expanded our adjusted EBITDA margins by 70 basis points, and produced double-digit underlying earnings growth. We continue to strategically shape our business mix to Recon and utilize our EGX capabilities to scale and drive leverage across our business segments. We’re delighted with these results and the momentum we’ve built in 2023.

I would like to take a moment to thank and congratulate the entire Enovis team for delivering another strong year. Slide 11 lays out our execution in 2023 relative to our guidance over the course of the year. We were able to deliver results consistent with or better than our commitments to stakeholders, and look forward to managing our business for more of the same in 2024. Moving to Slide 12. It details our quarterly progression in 2023. Our 8% revenue growth was highlighted by 14.3% in Recon and 4.6% in P&R. With notably stronger results in the first half of the year driven by strong Recon markets and some softer prior year pandemic-related comparables. Overall, our results reflect underlying share gains in both our businesses. Our adjusted EBITDA margins increased sequentially throughout 2023 as we improved mix and demonstrated operating productivity in our supply chain.

Impacts from recent acquisitions and foreign currency offset our core margin improvement of 130 basis points. However, for the year, we managed to improve margins by 70 basis points while managing external headwinds and investing for future growth. Turning to Slide 13. In 2024, we are projecting another strong year of operating performance and expect revenues in the range of $2.05 billion to $2.15 billion. We expect another year of double-digit growth in Recon against a normalized market backdrop, and stable P&R growth in the low to mid-single digits. Our expectation for Lima remains consistent with prior revenue guidance of $290 million to $300 million. On margins, we are expecting at least 50 basis points of underlying margin improvement in the core business, along with $70 million to $75 million contribution from Lima, resulting in an estimated range of $365 million to $380 million of adjusted EBITDA.

From a phasing perspective, we expect revenue and margins to follow a similar sequential trajectory over the course of the year, like we experienced in 2023. Depreciation is expected to be in the range of $115 million to $120 million, driven by growth investments in our Recon segment and the addition of recent M&A, including NovaStep and Lima. We expect interest and other expenses to be in the range of $70 million to $75 million. Considering the impact of Pillar 2 and the composition of Lima revenues and profits, we expect an adjusted tax rate of approximately 21% in 2024. We note that this represents a $0.03 headwind to adjusted earnings per share. Along with these estimates, we expect a share count of approximately 56 million shares and are forecasting our adjusted earnings per share to be $2.50 to $2.65.

Overall, we are excited about our opportunity to create strong shareholder value in 2024. To summarize, on Slide 14, we had another strong year in 2023 and have been building solid momentum as we turn the page to 2024. We have demonstrated clear focus and execution towards achieving our strategic goals and have shaped the business towards accelerated growth and scale with the acquisition of Lima. Maria, please open the call for questions.

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Q&A Session

Operator: [Operator Instructions] The first question is from Vijay Kumar with Evercore ISI.

Vijay Kumar : Congrats on the nice print here. Matt, maybe my first one on the Q4, double-digit Recon, it’s pretty solid. But then when I look at the market, your peers had a pretty healthy Q4. So while not taking anything away from 11, it just feels like the market accelerated in the relative spread versus market — historically, you guys have been well of a market perhaps. That spread narrowed. So I’m just curious, was there any timing element or when you look at the 11% Recon growth in Q4, was that in line with expectations?

Matt Trerotola: Yes, Vijay, I think we finished in line with our expectations. I think you really have to look at the multiyear numbers to kind of see the picture a little bit clearly. We’ve had kind of strong comp, and even if you go back to the 2019 comps, you can see that the pattern from Q3 to Q4 is a quite normal one and that some of the differences in sequential patterns kind of come out the wash when you look at the multiyear views.

Vijay Kumar : Understood. And Ben, one for you. The margin expansion, I think I heard you 50 basis points for core, maybe 75 for Lima. But I thought Lima was supposed to be 150 basis points accretive to gross margins. So I’m curious, are there any OpEx assumptions that are different, why the gross margin accretion should slow down to operating margins, and cadence of that $40 million cost synergies that’s assumed in the guidance?

Ben Berry: Yes, Vijay, I mean, everything is coming in relatively consistent with what we kind of expected in terms of the overall numbers. There’s a little bit of shifting as you think about translation of U.S. GAAP versus IFRS. So that’s probably kind of 1 area where maybe our assumptions between gross margin and OpEx kind of flipped a little bit. But overall, still fully in line with kind of the thoughts that we had in terms of the profit that we can generate in year 1, which would assume some cost synergies that we get after right away, but still very much confident in the pathway to $40 million by year 3.

Vijay Kumar : Understood. And Matt, if I may, one quick one on the Lima integration. You had some helpful comments out there. But I think in the past, you had mentioned the guide assumes some disruption from integration. I’m curious what the experience — the early experience has been. Are those disruptions in line with expectations or perhaps coming in about plan, would be helpful?

Matt Trerotola: Yes. So as we shared, we’ve added to Lima numbers — as we shared when we announced the deal, we’ve added them on top of the core for our guidance for this year. Certainly, we’ve done a lot of very proactive work on planning for and then starting to execute the integrations in the different markets around the world. And our goal will be to have the minimum amount of leakage in terms of how things come together. We know that it will be a little bit. Our goal would be to have the minimum. We still feel very comfortable with what we’ve guided as to how much there will be. And it’s early days, we’re executing our way through that.

Operator: Next question is from Xuyang Li with Jefferies.

Xuyang Li : I guess to start, I wanted to hear a little bit about just the new product cycle that you mentioned earlier, multiyear cycle. It seems like some attention is being paid on enabling technologies and Foot & Ankle. But I wanted to hear a little bit more about specific areas and what are some of the white spaces you’re looking to fill or improvements made on existing products?

Matt Trerotola: Yes, for sure. Thanks for the question, Yang. As we mentioned, we’re really going through a period now where we’ve got some flow over into this year from some of the launches of the last year or so as they ramp, and then we’ve got other exciting launches coming within this year and next year. And so it’s a very kind of healthy period in terms of our ability to drive vitality across all of the businesses. And in the Recon side, that’s a continued focus on vitality within those businesses, but for sure also now has enabling tech coming through with Arvis in the knee going to the 2.0 launch there late last year in knee end hip, and then opportunities to bring the next enabling tech offerings into other anatomies as we work through this year.

And then with — over on the P&R side, we’ve gone from very little vitality years ago to now be in a period where things are really inflecting and we’ve had some really nice bracing launches across the last year or so that are ramping through this year. And then more launches coming through this year and the following year. New knee segments, refreshments and other knee segments, moving deeper into the attractive spine bracing segment, some extremities braces. So a really nice lineup there that we’re working from the bracing front. And on the Recovery Sciences front, we’ve got our largest modality there, electrotherapy, is one that has not a lot of innovation in a long time. We’ve got some great fresh new products there. And so yes, it’s a nice period of time, and a lot of this is going to build as we go through this year.

It’s contributing nicely right now. But we’ll have even stronger contributions as we move through to the back half of the year.

Xuyang Li : All right. Great. Very helpful. And then I guess a follow-up, just, I guess, more specifically on Arvis 2.0 and AR in general. It’s been getting a lot of the attention from surgeon. A lot of times when we ask them just broadly what are you excited about, AR comes up pretty frequently more often than not. I guess from your perspective, how’s the receptivity been on the surgeon side? And what do you think is needed to make it more of a mass market product?

Matt Trerotola: Yes. So thanks for the comments, and we’re getting some of the same kind of positive feedback that you’re getting. I think the reason people are really excited about AR is because it’s — ultimately, surgeons are looking for things that are going to improve the way that they can take a surgical plan and flow it interoperatively in surgery, make the decision they want to make, capture all that data while they’re doing that, and have that ability to do efficient repeatable surgery and capture all the data. At the same time — and they also want to be able to market that they’ve got the latest and greatest technologies in order to do that. At the same time, they’re not looking to add cost and time into the procedures.

And so AR seems like it’s a perfect solution for that, right? You can get really those benefits of that interoperative guidance while at the same time having really limited cost and time into the procedure. We’ve gotten great feedback from surgeons, which is a combination right now of surgeons that we’ve had in the past as well as new surgeons that have come over because of Arvis. Getting great feedback. The improvements that we made last year after the initial launch are — really have improved the usability. This is a new to the world technology, right, so in this industry. And so it’s something that is coming up the learning curve, and we’re getting really good feedback on the usage of this 2.0 version, and looking forward to rolling it out broader and broader in the knee and hip space, and then certainly actively working on the next anatomy for Arvis because we think it has every bit of opportunity to bring AI into shoulder that there’s been to bring it into knee.

Operator: The next question is from Vik Chopra with Wells Fargo.

Vik Chopra : Sorry, I was on mute. Thanks for taking the questions, I had 2. So maybe the first one is just on the state of the market. How long do you expect above-market growth for Recon? And maybe just talk about your expectations for 2024?

Matt Trerotola: Yes. Thanks for the question there, Vik. Look, I think we’ve consistently said that if you look at the math back to ’19, there’s 1.5 years of growth missing for the market, and maybe we worked off a little bit of that last year with some of the above market growth. But I think there’s definitely a fact base that suggests that there should be some pent-up demand around the world for surgery because the patients continue to need it but there was a period of time when less surgery could be done. So we still believe that there’s more pent-up demand to come. We saw some of it last year. And we really saw last year was that there was periods of the year where capacity utilization was able to go to very high levels.

In the U.S. It was early in the year. There was just a very good period there early in the year where I think surgeons were able to really kind of run at the upper end of their capacity utilization. There are certain countries around the world that consciously opened up capacity utilization early in the year. And when that happened, we ran above normal rates. And so I think that certainly last year had at least a point or 2 of extra growth in the elective surgery, orthopedic surgery area, from a market standpoint. And you can see that extra in our very strong 14% growth for the year. And certainly this year, if we hit periods where you have that extra utilization opportunity in the marketplace, there should be an opportunity for that above normal type of demand as well.

We planned for a normal Recon growth year. And then you can see we’ve guided double-digit growth again in light of a normal Recon growth year. There’s certainly the opportunity for more. And certainly, the shape of the year is going to mirror last year because there’s some very, very tough comps early in the year. And so the growth is going to build through the year just in terms of the market environment, and then for us, we’ll also have the ramp of the innovation pipeline.

Vik Chopra : And just sticking to the same theme maybe, just a follow-up question on GLP-1s. Are you starting to see an impact of patients coming into the funnel?

Matt Trerotola: Yes. I mean certainly, we have heard from the marketplace an expectation that there can be more patients in the funnel due to weight loss that could come from GLP-1. I wouldn’t say that it’s a meaningful effect at this point. But we continue to have the same view that we’ve stated that, for our portfolio overall, likely that’s over time more of a slight positive than a negative. But I wouldn’t say that it’s having any meaningful impact at this point in time.

Operator: The next question is from Brandon Vazquez with William Blair.

Brandon Vazquez : Maybe first, can we focus on Lima for a second? Just wanted to go through, you mentioned a little bit on the revision side, you’ve already started to cross-sell kind of the cone from Lima. But can you remind us maybe what are the biggest products that you can take maybe from your U.S. organization over into the international markets with Lima, and then vice versa? And maybe what are the milestones for these products through 2024?

Matt Trerotola: Yes. I think there’s great cross-selling opportunity with Lima, and even quite a bit left to go with Mathis that we acquired a few years ago. And if we start from the shoulder, our market-leading AltiVate shoulder is the lateralized [indiscernible] design of reverse shoulder, which has become very strong here in the U.S. and is starting to build more and more momentum outside the U.S. And so we see a nice opportunity to sell our AltiVate reverse shoulder in certain markets outside the U.S., while at the same time lima has got a few different shoulder design, one that is a little different design that we reversed, that will set up for surgeons that want to stick with a little bit less lateralized design. But then they also have this SMR, which is convertible platform that really has been something that is very good for some of the more — the toughest indications, and enabling surgeons to make interoperative choices between an anatomic and reverse, or to go back to an anatomic after the fact and convert to reverse.

So really nice complementarity in the shoulder portfolio, taking the AltiVate outside the U.S. and bringing some of those technologies Lima has for some of the toughest revisions in shoulder into the U.S. Kind of a similar picture as we get over into the knee space, our EMPOWR 3D with its dual pivot capability has shown to be a better need that leads to better patient satisfaction. In the U.S. and in the places we’ve taken it outside the U.S., there’s been a lot of excitement about that need. But at the same time, we have not had as much of a focus on revisions. We’ve been just moving into revisions here in the U.S. Lima has not had the strongest primary need, but has been very strong in revisions around the world, including a little bit of traction here in the U.S. And so again, just a perfect opportunity to cross-sell great products from here to there.

Lima is excited to start to bring our enabling technologies with Arvis into the business. And we’re very excited about the 3D printing. Promade is a custom 3D printing capability that at this point is used on some of the very toughest revisions and situations, but over time could have some good broader applicability as well. So a whole set of cross-selling opportunities. And yes, we’ve been able to hit the ground running in terms of having plans in place and, in some cases, already having the market access to start to pursue those cross-selling opportunities and, in other cases, having active initiatives to go ahead and get the additional market access.

Brandon Vazquez : Great. And then on the EBITDA margin guidance for the year, I think if I’m backing out some of the Lima benefits, it’s implying EBITDA margins for legacy and NovaStep increase by about 80 basis points year-over-year. First, am I kind of right on this math? And if so, what’s kind of giving you guys the confidence to deliver another — what seems to be a good, strong year of legacy margin expansion even with what I’ll call maybe some noise from the integration of Lima?

Ben Berry: Yes. Thanks, Brandon. I mean I think the way that we’re thinking about it is we continue to execute our strategy of driving good mix improvement in the business, continuing to scale acquisitions that we’ve done, and then generating operating leverage into the plan. So as we think about it, we remain consistent in terms of feeling our confidence around generating at least 50 basis points or more of core margin improvement while we add on Lima and do the work to integrate that at a high level. So overall, we feel confident with the guidance that we’ve put out there, and we feel that’s a good kind of strong step-up year for us in terms of overall margins with the addition of Lima.