Okay, good morning, everyone. My name is Vik Chopra. I work on the Wells Fargo MedTech Equity Research team. Pleased to introduce Ben Berry, CFO, from Enovis for this session. Ben, thank you for joining us.
Thank you for having us.
Maybe just kick it off with a few big picture questions. You know, with the recent concerns around macro weakness and a potential recession on the horizon, have you seen any impact to your end market demand?
You know, through the first half of the year, I would say we've seen what I'd say a more normal post-COVID market within the US with regards to procedural volume. A little bit, I'd say, a tailwind outside the US, to where we're still seeing, you know, pretty good growth of procedures through the first half of the year. As we think about the balance of the year and the planning assumptions that we have, is that it would continue in the US to be a more normal year from a procedural volume, and that you'd start to see maybe a little bit of a slowdown OUS, to where it becomes more of a normalized year there as well.
But overlying, you know, underlying view for us from a market standpoint is that, you know, if you look back to 2019, and you look at all the reported companies and say, What was normal growth versus where are we? you know, in that post-COVID world, you'd say there's still a little bit of pent-up demand, but not a whole lot left, you know, based on our analysis.
So the backlog's being worked through?
It's being worked through, particularly outside the US.
Okay, and just talk about overall view on procedure volumes in ortho, and how you're thinking about the rest of 2024, primarily US?
Yeah, I'd say again, from a US perspective, our view is that procedural volume still seems relatively normal, that we would expect that to continue through the balance of the year. And as we play into 2025, would expect that to stay the same.
Okay. So, you know, we look at the worldwide Recon market on a quarterly basis, and, you know, by our math, it's still running above the historical growth rate. You talked a little bit about the backlog being worked through, but just talk about, you know, once that backlog has been worked through, how you think about the market growth, in the Recon market, and how you expect that to play out over the next few years?
Yeah, I think our view would be that it would get back to more normalized levels in terms of growth. The underlying macro trends are still healthy with regards to the aging population and people that are gonna be coming into the funnel with regards to the needs of having elective surgeries on knees and hips and shoulders. You're seeing growing volume as technology becomes better, as you think about better outcomes in terms of both on the extremity side, on the shoulders and foot and ankle, that you would expect those markets to continue to grow at a pretty healthy level. And what we've really done and focused on at Enovis is to really shape the company towards a better weighted average market growth mix.
So if you think about our business now, we're 50% extremities, 50% large joints, and 50% US, 50% OUS, when it comes to our Recon business. So our weighted average market growth rate, we would expect to settle in that five to six range as we work through some of these tailwinds that we've had with regards to the pent-up demand.
Okay. Do you think the Recon market will grow faster than pre-COVID levels, even after the backlog is exhausted?
It's an interesting question. Yeah, I think our view is that you would have the emerging enabling technology impact that should add a benefit to the overall growth there. From a market dynamic perspective of people coming into the funnel, I wouldn't expect it to be much different than what we had saw, you know, pre-COVID levels. But you do get the benefit of some of the enabling technology growth that would be a supplement to what you had seen traditionally, but that would offset by some of the additional shifts to the ASC as well. So I wouldn't play it in as a material impact to the market, but something that will obviously change as technology comes into play.
Got it. You know, GLP-1s was a pretty hot topic a while ago, but just how do you think about the impact of GLP-1s on ortho procedures? Has there been a benefit for patients who are obese to be operated on prior to GLP-1s? Are you seeing this in your volumes at all?
You know, we haven't seen a meaningful shift in terms of the inflow of patients because, you know, they're now qualifying for elective procedure because they've, you know, been on the drugs and have lost enough weight. I think time will tell in terms of the sustainability of it. I think our view is, healthier patients are good for our end markets, especially on the P&R side, because more active, you know, could potentially drive more people into the workplace injuries and other things that are demand drivers of our P&R business. On the Recon side of the business, if more people can qualify, that's obviously an upside, and the long-term damage to some of the joints has already been done in terms of some of that deterioration and just aging in general.
We don't see GLP being an impact to our business, and if anything, we see it as a slight, you know, upside.
Okay, got it. Let's talk about your guidance for 2024. You saw about 5% comparable growth in Q2. Your guidance of 5%-6% implies about 6% growth in the back half of the year to get to the midpoint. Just help us understand how we should think about the back half cadence?
... Yeah. So I mean, I think our view is that, you know, as we went through the first half of the year, we were extremely focused on integrating Lima, and a lot of the impacts of the integration were playing out through that first half performance. And now that we've gotten a lot of that behind us, we would expect acceleration into the back half of the year. After our Q2 call, we gave more precise guidance around both of our segment expectations for Q3 and Q4, which would show an acceleration with more acceleration in Q4 versus Q3.
We expect that's how it will play out based on, you know, just getting a lot of these headwinds behind us, and then having a cadence of new products that are coming and cross-selling opportunities that play out in the back half of the year.
Is there anything unique from a seasonal perspective this year that we should be aware of, given the Lima acquisition?
It puts more pressure on us from a seasonal pattern perspective, because Lima is a majority of their business is outside the US So as we brought that business in, we saw that it was more of an impact in terms of our sequential patterns across Q3 versus Q3, which is one of the reasons why we were a little bit more prescriptive about what we expected the growth to look like as we looked at Q3 and Q4. But overall, I mean, nothing that would be out of the ordinary versus their normal historical performance before they were owned by us. But overall, just having more of a Recon business that's more international provides some softness in Q3 due to the vacation schedules that happen in Europe.
Got it. What gets you to the high end versus the low end of your top-line guidance for 2024?
Yeah, I'd say the high end would be that we really see nice, you know, flow of volume, both sides, US, international, from a procedural volume standpoint, that you know, we're able to really leverage some of the cross-selling to offset some of the disruption that's played into the system. And then new products really take off, you know, well for us as we're launching them here in Q3 and Q4. So that would... All of those things breaking the right way would put us more on the top side of it.
Lower side would be if, you know, the market, you know, continues to have some choppiness or if there are other things that come into play with regards to as we're settling out some of those channel integrations, and things like that, that could potentially put us more in that zone. So that's how I'd qualify it.
And then from a margin perspective, you know, I know, I know you don't guide. Well, just from a margin perspective, should we expect EBITDA margins to step down again in Q3, just sort of in line with the revenue step down?
Yeah. Again, this is more of a Lima impact on the business in terms of having a softer Q3 from a revenue perspective. I think our view, and we gave pretty prescriptive guidance after our Q2 call, is and expect it to play out that way, is that margins would be, you know, in the range, maybe slightly below where we were in Q2, and then a nice, strong finish to the year, like we traditionally see as a company, given Q4 is our highest revenue quarter. But again, you know, still delivering a nice margin expansion this year by bringing in the accretive margins of Lima on top of getting after some of the synergies that are afforded to us by bringing that deal into the company.
Overall, we would expect a nice step forward in margins in 2024 and continued progression into 2025.
Got it. On pricing, just remind us of your pricing assumptions for 2024, how that compares versus historical patterns, and how you see price trending beyond 2024?
Yeah. It's best to qualify it by our segments. So I'd say if you look at our prevention and recovery segment, we are the market leader in that segment, about a billion-dollar business in a $4 billion-$5 billion market. So over the last couple of years, given all the inflation that's come into the system, we've been more aggressive with regards to our pricing in that segment. So I'd say we've been in the 1%-2% of price benefit that we've been getting in P&R. We're not seeing that as much this year, given some of the competitive pressures that play into that market. So I'd say we're more flattish from a P&R perspective versus getting some benefit like we had traditionally.
From an end market perspective, I'd say, you know, P&R has generally been slightly down, maybe about 1% or so from a traditional pattern standpoint. We would expect it to be that to maybe flattish as we think about, you know, having pricing activity going forward. And then on the recon side of the business, with traditionally about a 3%, I'd say, headwind in terms of market growth from a pricing standpoint, that neutralized a bit through COVID, maybe slightly down this year, but probably in that 1% range versus what we've seen traditional. We'd expect that to continue to maybe not be at traditional levels because you're getting some of the benefits of the enabling technology that's benefiting price and some of the new innovation that's coming into the market.
Over time, will that revert back to normal? Maybe, but we don't really know at this time.
About 100 basis points erosion for Recon and flattish for P&R.
That's right.
Okay.
Yeah.
Let's talk about Lima. You said that dissynergies peaked in Q2, and you expect them to moderate in the back half of the year, starting in Q3. What gives you the confidence that you've seen the bulk of these integration headwinds and the dissynergies will actually start to moderate in the back half of the year?
... Yeah, you know, one of the things that we recognized was really important with regards to this acquisition was integrating the channel quickly, because we've been through a lot of acquisitions over the last few years, and one of the things that's been really important to make sure that we're set up for success is getting through the channel integration as quickly as possible. So, you know, there's really a few aspects to consider as you think about integrating a channel when you have overlap, like we do, and we're bringing in a business like Lima into the legacy Enovis structure.
So in the US market, in particular, you know, the Lima business is a little over $40 million business coming in as a third-party sales force that isn't exclusive to Lima, where they're carrying competitive lines of certain products because they didn't have a full, comprehensive portfolio. So as we bring them into the Enovis structure, which is an exclusive channel for us, we knew it was gonna be really important to bring them in under our structure as quickly as possible. So through the first six months of the year, we were working on, you know, contracting and negotiating with our agencies to bring them under the Enovis structure, which is certain business that we had to walk away from.
On the Lima side, some business that we were splitting and adding territories and changing quota structures and things like that, as well under the legacy Enovis structure, and in some cases, replacing legacy Enovis agency with Lima agencies that were gonna take over the Enovis portfolio. So if you add those things up, that's what contributes to the dissynergies, which was predominantly in the US and peaked in the second quarter. Outside the US, where it's more direct and more complementary, it's a little bit slower paced, because we're trying to protect and strike the right balance with regards to protecting the business and creating opportunity for ourselves to expand and scale, as we now have a bigger business. So that's what we've been working through, you know, a little bit slower on the international side.
Still a little bit room to go there in terms of closing some of those things out. But on the US side, you know, focused really in the first six months of getting those agencies contracted under the Enovis model, which we've done, and which we've been able to essentially telegraph as we've gone through that, you know, through the first six months.
Can you quantify sort of what it was in Q2 and expectations for Q3 and Q4?
Yeah. So what we said through the first half, you know, impacts were about 2%-3% on revenues, you know, on the Recon side, global Recon side, which peaked in Q2, particularly in the US, which we said was about 4%-5% impact in the US market, but 3% overall in the second quarter. We would expect that to step down a little bit, probably in the, you know, 1.5%-2% range impact in Q3, and then even a little bit more muted, in Q4.
Just to clarify, when you talk about these percentages, that's Recon, worldwide Recon impact?
That's right.
Okay.
That's right.
Just talk about how the integration efforts have gone relative to your initial expectations. Any surprises to the upside or the downside?
It's gone really well. I think our view with Lima is it was gonna be a transformational acquisition for Enovis. We felt like we did a lot of heavy due diligence up front. We knew a lot about them, you know, just from evaluating different options to expand our Recon business through all the M&A that we've done over the last several years.
So, you know, one of the things that we were really pleased about was, you know, we were able to have a lot of, you know, upfront discussions before the deal even closed, in terms of how we would bring this into the company and how we would wanna identify key talent to retain, and what some of the key drivers were gonna be from a, you know, both a cost synergy opportunity standpoint, but then also some of the planning around the channel consolidations as well. So all of that, I'd say, is slightly better than what our expectations were going in. The talent that we've been able to retain has really been a great addition to the company.
The culture that was there at Lima is very complementary to the culture that we've been establishing at Enovis. There's a lot of excitement around now having a broader portfolio on the Recon space that makes us more competitive worldwide, diversifies our ability to grow in multiple different areas around the world, and then as we're bringing it in, you know, learning about additional capabilities that we're gonna be able to really leverage from both an innovation standpoint and thinking about how do we create a supply chain that's even stronger, as well, so as we look at that, you know, Lima has impressed us with regards to their manufacturing capabilities. They've got strong manufacturing capabilities.
They've been a bit of a pioneer from a 3D printing standpoint, so getting some of those technologies and thinking about how they play, not only near term, but longer term, has been really excited for us, and then, you know, the integration aspect, it's complicated. It's a lot of work, but it's all going, you know, I'd say, slightly better than planned so far, and we're really pleased with what we've gotten with that acquisition.
Great. You've talked about $40 million in cost synergies from the acquisition. Where do the majority of these come from, and how confident are you in being able to achieve these synergies?
... Yeah. So, I mean, we're very, very confident that we've identified and are actually pacing to execute against all the synergies that we've identified with regards to being on that run rate of $40 million plus. I think what we said is, in year one, there's the low-hanging fruit. So we, we've gotten after where, you know, you're putting structures together, and you're essentially, you know, creating opportunities to, you know, consolidate in a way that there's, you know, costs that can come out just because the structures being combined, and then also duplication of costs, things like, you know, marketing and events that we were both going to, that now only, you know, one company needs to represent.
So there are those types of low-hanging fruit that we're able to get after in year one, about $10 million-$15 million of the synergies there. We'll get a little bit more next year as we continue to integrate some of the structural components as well, and integrate some of the systems and get some of those cut over, and then, you know, in the third year, you get some of the benefits of the operational synergies as well, so thinking about leveraging some of the manufacturing footprint and looking at labor arbitrage opportunities and leveraging, you know, where you're making product, there's opportunity there as well, so clear line of sight to the $40 million plus.
We've already activated, you know, the 10 to 15 in year one, and we expect that to grow, you know, next year and get to that $ 40 million plus by year three.
Great, and lastly, on Lima, just talk about where you see the most opportunity for cross-selling.
Yeah. On cross-selling, it's one of those things where, you know, as I look across the portfolio now, it's just, you know, across our anatomies, we're stronger because we have Lima, especially outside the US, where they were a strong shoulder player. Mathys was more of a stronger hip player. So if you look at the markets in which Lima was strong, Mathys generally wasn't as strong, and vice versa. So I think we have a lot of opportunity to leverage the footprint that we have of now our international business to cross-sell, you know, at the anatomy level within those countries. And then there's an opportunity to take the EMPOWR 3D Knee through all of those markets externally, and then selectively pick and choose where AltiVate can play in some of those markets outside the US as well.
On the US side, I mean, we've already talked about the revision cones that we're able to leverage on a knee side. There's the Prima shoulder system that's being launched. We now just have a more comprehensive portfolio on the shoulder that we can leverage in the US And then the custom 3D printing ProMade product line, which is our US team's excited about as well, is gonna be an opportunity over time to scale that business.
Okay, great. I know you have your hands full with this Lima integration, but just help us understand how we should think about your M&A strategy post Lima.
Yeah. So it's a core part of our toolkit as we think about the business system that we drive at Enovis. We call it Enovis Growth Excellence, or EGX. Like I mentioned earlier, we've done over 20 acquisitions over the last several years. You know, and it's a key part of how we continue to look at making the business better and better through, you know, acquisitions. And so I think our view from a strategy standpoint is, how do we find things that could make the company better to achieve our longer term strategic goals? So each of our businesses, we run through a strategic planning process.
Our M&A is connected to that, and we look at how do we shape the company towards, you know, being stronger, better mix, higher growth, higher gross margins, and at the end of the day, creating that scale to create compounding value. So from an M&A standpoint, we're constantly surveying, you know, opportunities. We're looking at what, you know, could continue to make the business better. Right now, as you mentioned, we're very much focused on integrating Lima, making sure that's a big success, and then, you know, we'll open up the aperture as we clear some of those hurdles with regards to the integration that we're going through. But overall, it will be a part of our strategy, but it won't be M&A just to do M&A.
It'll be how is it connected to our strategic plan of shaping both of our businesses to higher growth, higher gross margin, and making sure that we're competitive in the markets we compete?
Are there any particular areas that you feel you're likely to be more acquisitive than others?
Not in particular. I mean, I think that there are still some opportunities as we talk about the P&R business going from a 3%-4% grower to more of a mid-single-digit grower over time. There's some, you know, bolt-on activities that we could look at to, you know, shape and lean into areas of market that are growing a little bit faster than what our core business is growing. So I'd say there's some opportunity there. On the Recon side, we're more robust now with regards to having Lima. So as I look across that landscape, there are some other verticals that we don't participate in, that we could consider. Then there's, you know, technology, you know, advancements that are being made that could be, you know, attractive targets for us from an M&A standpoint.
So overall, we'll continue to, you know, have a robust funnel that we're evaluating across both of our business segments. And, you know, depending on the time and the economics, you know, we'll continue to look at, you know, the timing of when to bring some of those things in.
... Great. You know, as you start your planning for 2025, just help us understand how you're thinking about the Recon growth performance in 2025. Do you think you can accelerate growth once Lima has sort of anniversaried, and, you know, is high single-digit growth in Recon a reasonable placeholder for next year?
Yeah, I mean, we're not giving guidance on 2025 at this point. But what I would say is that, you know, as we think about the progression of, you know, the disruption that we've had in the first half, seeing the acceleration in the back half, we'll have a lot of the integration headwinds behind us, to where if you think about what we've talked about is, you know, $20 million-$30 million of dissynergies that we wouldn't expect to repeat next year. So on a business our size, that would be, you know, a point of growth at the Enovis level, that we should have a tailwind that comes into 2025.
If you think about the market dynamics, I mean, maybe you see a little bit softer market internationally next year versus what you've seen this year, that could offset that a little bit. But overall, I'd say nothing that would be in place that wouldn't show us accelerating next year, given some of the headwinds that we faced this year. So I think it's reasonable. We've been demonstrating that organically for many years now. So our expectation is that our portfolio is only stronger now than it's ever been. So, you know, and we've got innovation coming. We've got some of these, you know, tailwinds that were or headwinds that we're anniversarying. So all of that should build into a strong 2025 for us.
Okay. Any other potential headwinds and tailwinds to keep an eye out for in 2025 that you're, that you can share now?
No, no. Nothing that I would highlight that's on the horizon other than what I just described.
Okay. I wanna talk about ARVIS. You recently launched a shoulder application. What's the early feedback that you received? And how are you thinking about uptake for shoulder compared to uptake for large joint reconstruction with ARVIS?
Yeah, I'd say it's early days for us there. I mean, it's in our key opinion leaders' hands right now, making sure that we're working out, you know, the key feature set that we're gonna need to make sure that it's a helpful device within surgery. When I say helpful, I mean from an economics and from a procedural time standpoint. So from what we've seen so far, is a lot of excitement about what the potential of ARVIS could be, taking a really strong preoperative plan, putting it on a headset, letting the surgeon still be in control of the visual field as they navigate a little bit more of a complex surgery on the shoulder side. So, you know, all indications are that navigation will be a meaningful help to the surgeon's performance within shoulder surgery.
At that aspect, we're excited about what ARVIS could do. We'll continue to evolve its feature set and make sure that it continues to, you know, get iterated along the way. Because it's more software-based, it can have more rapid, you know, paces of innovation as well. It's gonna be something that we'll build over time, but early signs would be positive in terms of the excitement of what, you know, a good navigation portable device could do.
How do you think about your competitive positioning in the shoulder market after one of your large competitors recently launched a shoulder robot?
Yeah, you know, I think our view, again, as I've mentioned, that with Lima, our portfolio is stronger than it's ever been on shoulder, and we're starting to, you know, supplement that with the enabling tech that we're bringing into the market, with already having strong planning that we have opportunity to make better, and then this augmented reality from a navigation standpoint as well. So we see our shoulder portfolio as very competitive in the market. We see opportunities to expand and grow, especially outside the United States, with our shoulder business. And then within the US, you know, I think the robotic environment will evolve over time.
I don't think you'll see its end state, you know, anytime soon, and it's something that we will continue to work on our own, you know, pipeline with regards to supplementing surgical technique through these types of applications, through product launches into the future as well. So we feel like we're very competitive, and our shoulder business will continue to grow above market, not only, you know, as we get through these integration aspects, but as we continue to drive the business forward post the Lima integration.
Is ARVIS a razor blade model?
It can be. You know, we use it to defend in certain cases. You know, it's a smaller price up front than maybe one of the traditional large robots. So, you know, in terms of that impact, you might not see it read through as much in terms of our results. But in terms of locking up or creating opportunities to solidify, you know, volume or getting a procedural fee or just outright capital sales, we have all those business models at play with regards to ARVIS.
When should we expect to see ARVIS contribute meaningfully to revenues?
You know, it's starting to help already in terms of. If I think about our results, you know, I think it's gonna be one of those that continues to scale over time, and it's again one technology of many that I expect us to continue to bring when it comes to supporting procedures from an enabling technology standpoint. So it continues to evolve in terms of feature set. If you think about the device, it's still relatively new in terms of when we launched it last year, kind of version 2.0, when it was ready to go out more broad. And we still continue to add features to it, to where we expect, you know, will be more attractive for it to penetrate, you know, more into the future.
But again, it's one step for us in terms of helping support the business right now, which we're starting to see a little bit of read-through, but excited about how that will build more over time.
Can you share, or have you shared, how many cases you're up to with ARVIS so far?
We haven't. Again, I think from those that are using it, we're seeing nice momentum. We're seeing more penetration than what we've had in the past. But something that will still continue to evolve over time.
Got it. You know, I don't wanna ignore your P&R business. We touched on it briefly.
Yeah.
But just maybe talk about the trends you're seeing in that market, and how you think about your growth relative to the market, in 2024 and going forward.
Yeah, the market for P&R, our view, is about a 2%-3% grower, and we've been growing 3%-4% over the last, you know, several quarters. I think our view is that we continue to shape that business to more sustainable growth, and like I mentioned earlier, opportunities to expand that over time as we, you know, make moves to make that portfolio healthier, as we bring new product innovation into the market, and as we continue to look at verticals that are growing a little bit faster, and they become a bigger part of that business, over time. So from a P&R perspective, I'd say that we feel like we've gotten that business pretty stable at this point.
It's a really strong business for us with regards to cash flow generation, which helps fund a lot of the growth and the scaling that we're doing on the Recon side. And then opportunities for us to continue to make that business better over time, both through internal organic shaping, through new products and some of the areas that we're in that are growing faster than others, and then also through some small M&A tuck-type opportunities as well.
Any key launches we should be looking out for over the next, you know, 12-18 months?
You know, we, we've mentioned some of the products earlier this year that we've launched with the Roam OA, which is a segment of a category within the bracing segment, which we weren't as competitive, which has some opportunity for us. Some refreshing of some equipment on the rehab side as well. There's more of that that's gonna come down the road, but overall, I think it's one of those where if you look at our vitality of products that have launched within the last three years, that continues to grow, and that's one of the key enablers for us to maintain and even accelerate this growth on the P&R side.
Got it. I wanna talk about the ASC setting. What percentage of orthopedic procedures or I guess, you know, hip and knee specifically, are being done in ASCs, for Enovis as well as for the industry?
So, for Enovis , we're about 20% of hip and knee is in the ASC, and right now, I'd say, you didn't ask, but, but I'll give you shoulders, about 10%. We think 10%-15% is where the industry is, based on what we've heard other people talk about. For us, ASC is a key part of our strategy going forward. One, we think that, you know, we are more competitive there with regards to our ability to contract, and then also, with some of the implant systems, with patients that are more demanding and tend to be more, you know, on the younger side, we have a lot of advantages there.
And then also even with enabling tech, as you think about portability and cost and time, you know, ARVIS really plays into a setting like that, you know, well as well. So I think our view is that ASC is gonna be a continued market mix growth driver and one that we're positioned to take advantage of.
Awesome. I think we're at time, so thank you very much. I'll end it here.
All right, thank you.