My name is Craig Bijou. I'm one of the medical device analysts here at BofA. It's a pleasure to have Enovis with us and from the company, Ben Berry, CFO. Thank you for coming, Ben.
Thanks for the invite.
So maybe I guess I want to start with a high-level overview of the company. You guys spun out relatively recently, so maybe investors are not as familiar with what you guys do. But you do have a long history in bracing in orthopedics. So, you know, maybe just kind of start there and give a high-level overview.
Yeah, sure. So we are really well known for the bracing side of the business, where we've been the market leader for some time, really off the base of some really strong brands like DonJoy, Aircast, and Chattanooga. We're about a billion-dollar business on the what we call prevention and recovery side. And people know of us from that history because we had some publicly traded debt that we were reporting on. But really, over the last five years, we've really transformed the company through a lot of acquisitions to build now a more balanced portfolio, where we're about $1 billion on the P&R side in about a $4 billion-$5 billion market.
And we're a fast-growing billion-dollar player on the recon side, where we've built a more diversified portfolio with building a foot and ankle business, having a strong shoulder position where we're the number three shoulder player, and then having large joints with hip and knee, where we've recently expanded our coverage geographically with the acquisitions of both Lima and Mathys. So really creating good growth momentum for the company. And what we're really trying to do is shape and build the company to a good, strong, sustainable high single-digit growth momentum that can create margin expansion and cash flow expansion that allows us to create compounding value to where we can run an offense that continues to build and shape the company towards those financial goals.
That's great. Thank you. And, you know, we're not too far from Q1 earnings, so maybe if you just give a recap of your Q1 and, you know, maybe some of the highlights that, you know, from the quarter.
Yeah. Good, good solid start for us in Q1. We were ahead of consensus in the quarter. We were able to get confident with the performance to where we shifted our guidance range by the over delivery in the quarter. Really, if you think about our first quarter, a lot going on for us as a company. We closed a Lima acquisition, which is one of the biggest acquisitions that we've done in our company's history on the beginning of January. So we've been very focused on integrating that business into the company. But really it's going well, and overall, I think our view of the quarter is really, you know, off to a good start. Gave us confidence to think that the year guidance could come up based on that performance.
Got it. And maybe just touch on the margin side as well and, you know, how you feel about the, you know, your ability to hit your goals for the year.
Yeah, absolutely. So, again, one of the things that we've talked about in terms of our margin goals is that we'll, we'll commit to where we're gonna have a long runway of margin expansion over the course of the next, many years to come. And, and really, that's driven by, strong performance of mixing the business towards recon, which comes with higher margins, scaling some of these acquisitions, that, that we've done, and then generating operating leverage from, the growth that, that we're getting. So in Q1, we improved our EBITDA margins by 220 basis points. A lot of that because we're getting accretive value by bringing in Lima, to the organization. If you look at the guidance that we've given for the year, I would say a nice step forward in terms of our margin performance.
Given that we shifted our range by the Q1 performance, we still feel confident for a good, strong, expansion in margins this year.
Got it. So before kind of digging into some of the segments, let's talk about the Lima acquisition. You talked about it, a couple of times. Even people that are familiar with the orthopedic space may not exactly know what, what Lima does. You know, a lot of it's international. So maybe, maybe give a little bit of overview on Lima, specifically, how it fits into your strategy and kind of, you know, the rationale for doing the deal.
Yeah, sure. So Lima comes with a good history of being an innovator, Italian company, where they're strong in Europe. About 40% of their portfolio is on the shoulder side. One of the things that we found attractive is their mix of business, and really strong players there. Good, strong innovation cycle and cadence of new products being launched. And then they also have a hip and knee business, as well. We felt that they were a nice complement to what we've been building at Enovis. Because we have been continuing to expand geographically, and where we acquired Mathys in late 2021... where Mathys is strong, Lima is not as strong, and vice versa.
So we felt that that Lima was a nice complement to our portfolio, not from just a product capability standpoint and a portfolio capability, but also from a geographic presence and reach standpoint. So we feel like now with with Lima in the fold, which was about a $300 million business, from a top-line perspective, about 40% of that in shoulders, a broader portfolio that we can really leverage now to cross-sell across the best of Enovis, Lima, and Mathys. So, so far it's going well. We were able to announce the leadership team in mid-December, even before we closed the deal.
So we really hit the ground running when it came to integration planning, making sure that we're thinking about how does the channel get integrated quickly so we can get through some of the near-term disruption and then focus on growth into the future. So I'd say it's slightly better than what we expected so far through the first quarter. Going really well. One of the things that I'm impressed by, too, is the talent that we've been able to acquire within Lima. Really strong organization. Culture really fit with what we were doing at Enovis, and it's really been a really good marriage so far.
Got it. No, that's great. And, on the integration going better than expected, you know, ortho deals, you know, not always the best integration, you know, with some of the overlap. So maybe, you know, maybe frame kinda how the businesses overlap, and we'll get into some of the cross-selling synergies, but maybe frame how the business, you know, Enovis and Lima overlap or, or the lack of overlap, and, and then kind of what you are expecting from a disruption perspective, and it sounds like it's going better than expected.
Yeah.
So I mean, anything that, you know, any milestones that you've hit or, you know, hurdles that may come, like, you know, if there could be any risk to that?
Yeah, sure. So one of the things that we've learned by being highly acquisitive as a company, and since I've been here over, you know, the four years in which I've been here, we've acquired over 20 businesses. One of the things that we recognize as really important upfront is to make sure that we're very focused on getting the sales force and what I call the channel aligned quickly. And where we make sure that we're making quick calls to make sure, one, we get the organization aligned and under the contract, and then making sure that we're focused on trying to get the business moving forward from a growth pattern once we've gotten the channel solidified.
So we've been focused in the very first few months to make sure that we're doing that, and doing it swiftly, because there are. While I said it was complementary in a large aspect, both product and geography, there are some areas that are directly overlapping, the U.S. being one of those markets. You know, France, Australia, there's a few other select markets where there's more overlap of product and sales channel. So what we've been trying to do in those cases is really make sure that we get the structure in place so we can be on offense, going forward, through the balance of the year. So we're about 80%-90% complete in terms of getting that channel fully aligned. We had about two-three points of disruption in the first quarter.
Like I said, Lima is about a $300 million business. If you look at the guidance that we gave coming into the year, we said $290 million-$300 million of revenue. They've been growing at about 10%. So if you do the math, you would say that our plan included about $30 million of dis-synergy, and two-three points in the first quarter is about $6 million. So, what we said is, we're getting through all of the contracting, then we'll be, seeing the apex of the impact here in the second quarter.
Once you get past the second quarter, it'll be more moderated because you'll start to be able to capitalize on the cross-selling opportunities once you get inventory in place and you're able to have all of the disruption of the sales force alignment behind you.
Got it. And the $30 million, is that a net dis-synergy number for-
Yes.
Okay.
Yes.
So that includes some expected contribution from the cross-selling synergies?
That's right.
Got it. Okay. Those will show up... Is that more in the second half?
Yeah, that's right. So cross-selling would be, you know, more second half loaded because that's where you get the inventory in place. And one of the reasons why we shifted our guidance range on the top line by $10 million was because we're doing a little bit better on that dis-synergy than what we had expected. So that's really the result of why we raised the guidance.
Yeah. Maybe if you can go into a little bit of detail on what those cross-selling synergies are. I know you've talked about revision knees and taking, I guess, the cones from Lima and-
Yeah.
... and your revision knees. So maybe just talk about, you know, the broader opportunities, and then maybe more specifically, some of the, you know, some of what you're capturing right now.
Yeah, sure. So, one of the things that I'm most excited about is we can take the best of the portfolios across the Enovis, Lima, and Mathys, and really think about how do we innovate for the future. But in the near term, there are things that we can take advantage of. And if I think about Lima, let's just start with the U.S. business. They have a 3D printing capability that's really interesting, but also produces good products and augments that we're able to leverage right away. So very quickly, we're able to get FDA approval to use their products with our revision knee, our EMPOWR 3D Knee, their cones. And we're able to capitalize on that, which was a gap that we had in our revision system.
Also, they have a ProMade product line, which is a 3D printed custom product line that's used for very complex cases. We're able to leverage that with some of our surgeons on the Enovis side. And then also they have a shoulder portfolio called the SMR system, which is a more modular-based system, which you can do both anatomic procedures, reverse procedures, revision procedures, and it's a complement to what we offer with the AltiVate. So it feels like it opens up access for us in terms of surgeons that we can target for conversion and market share in the U.S. But those would be the three I would highlight in the near term in terms of what we're focused on.
Outside the U.S., it's really around how do we leverage the channel to maximize the portfolio that we have. So I think AltiVate can play into certain markets in which Lima was strong. Same with the EMPOWR 3D Knee, which we had started to do in the Mathys channels. But now it just gives us more access to more geographies to where we can drive those product lines into those markets. And then vice versa, within Lima, leverage some of the Mathys hip products, and then in the Mathys portfolio, leverage some of the Lima shoulder products, as well. So there's a lot of opportunity for us to really think about how do we maximize the portfolio here, and that's a lot of the work that we're doing on top of aligning the channel to make sure that we get it right.
Got it. And maybe the last one on Lima. You know, I think you've said that you expected more than $40 million in cost synergies. I believe you're on track for that. So I guess, you know, again, you know, your confidence level in getting that, you know, how is that progressing? And maybe where, where are some of those cost synergies coming from?
Yeah, I'm very bullish on it. I think we've gotten off to a really good start. Like I said, we were able to announce the leadership structure going into the year, so really get after some of the choices of where there was management layer overlap and get after some of that synergy where Mathys and Lima and Enovis were all going to various trade shows and, you know, not needing to use multiple booths and things like that, or things that we're able to leverage insurance to where they're under now, the Enovis umbrella for insurance. So there are some near-term overlap, duplication, things that we could get after right away, which we've done and feel like we've gotten off to a really good start there.
I think what I had said previously was about $10 million-$15 million in year one that would ramp up to $40 million+ over time. I feel very bullish about our pathway there and feel very confident that we'll be able to deliver that.
Got it. Great. Now let's kind of move into the, some of the businesses. So P&R, obviously, you know, well-known brand. It's kind of been a steady, mid-single-digit growth business. And maybe just talk about some of the growth opportunities within that business. Is, is it always gonna kind of be in that mid-single- digit, or is there an opportunity to accelerate that, you know, even a couple of points, which would make a big, big difference?
We're, we're definitely working on it. One of the things what happened when Colfax acquired DJO is recognizing that the innovation pipeline and cadence of new product launches had been underinvested in. So one of the things that we've been doing over the last few years is to really refill the pipeline within P&R. Some of that through acquisitions, so we acquired a small laser business on the rehab side. That's really doing well for us. It's been growing double digits for the last several years. It comes with higher gross margins, so it really mixes the business in a more meaningful way. And then really trying to get the product vitality up the curve in terms of new products that are coming out more consistently.
Because being the market leader, it's on us to really innovate and make sure that the market is growing based on that innovation. So we're starting to see a more, I'd say, rapid case of innovation within our P&R business to where new products are flowing more consistently now. One of the most recent ones we launched, which was a ROAM OA brace, where we've been the market leader in a lot of the categories in bracing in which we compete. But this OA bracing category is one where we didn't have the same share position where we had in most of our other categories because we didn't have a product to really offer there.
So this product launching there, you know, in about a $50 million category, gives us ability to really kinda take market share and get our entitlement there. So I think our view is that we've continued to improve the cadence of innovation on P&R. We've done some small shaping moves that will help it. And then there's some opportunities for us to prune some of the portfolio as well, and think about other options there to make sure it's a very focused portfolio. So our view is to continue to shape it towards a more mid-single-digit growth business. But one of the things that we really like about P&R is it's a low capital-intensive business.
One of the things that it does for us is it creates a lot of cash flow to help us fund a lot of the growth in the recon businesses.
Mm-hmm.
That, that's required. So we've been leveraging it for that as well.
Got it. And maybe just following up on that, I mean, how do you think about that cash flow piece versus investing in some new products? I mean, it, it's certainly a balance. The markets are probably more mid-single- digit growth, so, you know, it's not the fastest growing markets. But how do you balance, you know, how much do you actually invest in the P&R business?
Yeah, it's a good question. I mean, our focus is prioritized investment, so what we're trying to do is free up investment from other areas to rebalance where we're putting that investment so it can go into places like R&D. So one of the things that you've seen from us is, you've seen scaling of the business and improvement of margins. Last year, we improved margins in P&R, gross margins, by a decent amount, and that allows us to think about how do you rebalance some of the investment. But we see a runway there in terms of continuing to scale up our gross margins, leveraging our business system to really drive good productivity. If you recall, that business has been under a lot of inflationary pressure over the last couple of years.
So one of the things that we've done is really focus on how do we get on the right side of that price-cost equation on the P&R side of the business, and we've been more aggressive there. But over time, I think you'll see us continue to expand gross margins to try to both expand the cash flows of P&R, but then also free up some of the rebalancing of investment as well.
Got it. Helpful. All right, switching over to recon, and it's interesting, you guys, you know, obviously a large—a lot of large players in the space. You guys have competed very effectively in shoulder, hips, and knees for a number of years, outgrowing the market in general. So maybe what are some of the things—I mean, how are you doing that? You know, what does Enovis do that helps them compete against the bigger guys?
Yeah, I mean, it's a, it's a playbook for sure, but one of the things that it's, it's based on is really making sure that we have good products that are delivering good outcomes. And if you think about the success that we've been able to use to leverage the growth that we've had in recon over the last many years, where we've been outpacing the market, is it starts with innovation and, and new product cadence of, of building out our bag and our, our product offering with, with meaningful innovation. Started with the reverse shoulder that we launched, AltiVate, back several years ago, to where that's really taken the market and shifted the, the U.S., shoulder market towards more revision, or not revision, but reverse shoulders. And, and that really helped catapult us as a pretty well, no-name player in recon.
Like, we were known for P&R-
Mm-hmm.
But allowed us to, to gain a foothold to where we became the number three share player in shoulder. We did something similar with regards to innovation on the knee. We had a, a design around the knee that, that needed to be modernized a little bit, but it's a, a design that's really focused around the natural kinematic motion of how a knee moves, and it's the only product like it on the market. So it's a knee that pivots in, in two ways, depending on if you're walking or squatting, and it, and it mimics the natural motion of, of how the knee moves. And what we're seeing there is with, based on now several years of data, that we're solving a, a bit of a patient satisfaction gap with that product line.
So, it's getting about 93% of patients coming back and saying, "Hey, it feels like my normal knee." Really good satisfaction, good outcome, whereas the market itself is probably about 80% satisfied. So we feel like differentiated technologies that are focused on strong patient outcomes is one critical factor, but then also making sure we're supporting it through KOL advisory teams, making sure that we're finding surgeons that really care about innovation, to really help present and publish research around the product performance, to be on the podium talking about the benefits of our products. And then the diversifying our product lines with some of the acquisitions that we've done. And when we do acquisitions, trying to make sure that it's focused on some of those core principles around innovation.
So the foot and ankle businesses that we've acquired, we made sure that there were some clear product lines that were differentiated that we could leverage. And then make sure that we create a sales channel that's aligned and motivated to be a growth business, and that's the other thing that we've made sure that we've done. And then, you know, building out our presence with acquisition is kind of the third component.
Got it. I wanna talk about, you know, you're fighting the fight against robots now-
Yeah.
Right? In hips and knees, and all the big guys have them. You guys do not. So how does that impact your strategy towards, you know, to compete?
Yeah, you know, robots have been on the market for a while, and we've still been able to outpace the market in hip and knee growth, in the face of it. We definitely see it as a threat because you can't deny what some of the larger competitors in the space are doing to promote it, in the marketplace. So I think our view is that don't be blind to the threat, but think about what we're trying to accomplish with robotics or enabling tech in general... So what we're trying to do is create products that are really helping to enable the implant, the optimal implant performance. So our first step into that has been through augmented reality and navigation through our ARVIS device.
So we're focused on taking a strong preoperative plan, putting that intraoperatively into a navigation device, let the surgeon still be at the center of the surgery, and have the flexibility to have their eyes on the surgical field at all times, but then also to have the flexibility to navigate as they're intraoperatively in the procedure. We think there's opportunity for mechanical intervention that can help offload some of the pressure on the surgeon over time, from a precision repeatability standpoint, and just taking some of the wear and tear off of the procedure. But our first step has been through navigation, but we're continuing to innovate across what we'd say that continuum of computer-assisted surgery.
And maybe ask, specifically on shoulder, and there's a lot of enabling tech. I believe you have enabling tech for shoulder. Robots are here coming for shoulder specifically. So does the dynamic within shoulder—you know, it's probably—it's still much earlier than it is in hips and knees.
Mm-hmm.
Kinda, how do you see the enabling tech robotic evolution within shoulder, you know, given that it's very, very early?
Yeah, you know, I think that's one of the things where we launched ARVIS with the intent that it could cross both the hip and knee and on the shoulder side. And we thought that on the shoulder, in particular, navigation would be really important because it can be a little bit more of a creative and complex procedure. So having a device that's really taking a really strong preoperative plan tech that we have with our Match Point solution, and taking that and bringing it into a device that's a headset, that's mobile. And one of the things that you realize within shoulder surgeons is the volumes are a lot smaller. A lot of shoulder surgeons out there do less than, you know, 20, 30 cases a year. So think about the economics of trying to afford a really expensive robot system.
We think that a device like ARVIS really could play well there in terms of shoulder enabling tech. And then also, as you think about shift to ASCs at the same time, one of the things that we're trying to make sure that we do with enabling tech is make it accessible across various types of points of care, like ASC settings. So one of the things that we're doing is making sure that we can provide things that will help not add time and, you know, extra cost to the procedure.
Mm-hmm.
When you're in pressured situations, like an ASC environment that's focused on volume and efficiency, that we have products that can support that shift, as the market moves more towards those settings.
Got it. Maybe shifting to foot and ankle, it's a much smaller piece of your business. You mentioned Mathys and a couple of other, you know, foot and ankle acquisitions over the last couple of years. So just talk about the strategy there. You know, how do you allocate resources to some of the innovation that you're looking for on the shoulder and hip and knee side versus foot and ankle?
Yeah, you know, one of the things that we do, and one of the things that we think is really important in terms of our strategy to win in the marketplace, is we run more of a business unit structure within our company. So we have a dedicated team that's focused on foot and ankle, and that's all they're focused on, is driving foot and ankle. The sales channel is foot and ankle specialists. You know, the R&D and the general management and all of the support is really isolated to focus on how do we continue to drive growth in that business. And what we've seen is we've acquired five companies and put that together to make sure that we have a really nice, broad portfolio offering that's anchored around a few different pieces of innovation.
One being the MedShape acquisition that we did, which gave us a DynaNail product, which is a fusion technology that really drives better outcomes in terms of things that were used to be done with plates and screws. And then we acquired a Novastep business, which brought us minimally invasive bunions. So we've got products that span the forefoot, the midfoot, the hindfoot, and the total ankle. And what we feel like is, you know, putting those five businesses together. I mean, I talked a little bit earlier on about some of the channel dynamics of putting Lima into Enovis. We had that, you know, twofold with putting five sales forces together with the foot and ankle businesses that we've acquired.
So, but we've gotten behind that now to where we're more on offense, and what we're seeing is really good momentum in the foot and ankle business, growing double digits, and we see a lot of good opportunity for growth there.
Got it. About a minute and a half left, maybe just to end on M&A. You know, as you've talked about, you've been a very acquisitive company over the last several years. Lima is, I think one of the bigger acquisitions that you, you've done, if not the biggest. Then, just how do you think about M&A now, and do you, do you have to get Lima integration behind you before you do any more?
Yeah. So M&A is really a core part of our business system. So we're always thinking about how do we use M&A connected to our strategy to make our business stronger. But in order to do that, it has to be successful M&A, so we have to make sure that we're integrating and executing well. So what we've been very focused on in 2024 is we've got to get the Lima integration on the right pace and on the right track. So it's gonna take a lot of organizational focus and effort to do that, to where if we did a lot more M&A in 2024, it would be too distracting, and I think it would put the execution of the Lima integration at risk.
Our focus right now in 2024 would be some small bolt-on type things, maybe on the P&R side, maybe some portfolio shaping that we could do there. But if anything, it's gonna be small and minor while we make sure we're focused on Lima execution in 2024. I think the aperture opens up a little bit more in 2025, but it has to be, you know, aligned with our strategic intent to continue to grow, you know, high single digit, expand margins, and create some of that compounding value.
Great. With that, I think we're out of time.
All right.
Thanks, man.
Appreciate it.