Good afternoon. Thanks for joining us at the 24th Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the MedTech and Diagnostics Equity Research team at Needham & Company. I'm pleased to introduce Enovis. Speaking on behalf of Enovis, we have CFO Ben Berry. Instead of a standard presentation, we are going to do a Q&A session.
If you do have any questions you'd like to ask, you can submit them electronically through the conference website, or feel free to email them to me at mmatson@needhamco.com, and I'll do my best to fit them in. With that, we're going to move on into the Q&A here. I guess, Ben, I just wanted to start out with the news that Matt Trerotola, CEO, has announced that he's retiring. He announced this back on February 26th. I guess, why was this the right time for this decision? Can you give us an update on where the board is in terms of searching for a new CEO?
Yeah, thanks, Mike. Thanks for having us and hosting us again at your conference. Yeah, we go through an annual process with regards to a talent review with the board, where we talk about what potential succession plans look like, and as leaders have different ideas around their trajectory and timeline. Matt had been discussing with the board for a little while with regards to his intentions as he was getting down the road in terms of his time serving as the CEO here at both Colfax and Enovis, and starting to work with the board on what that succession timing might look like.
As he got to a point in his career where he's been now the CEO of the company through two major transformations, Colfax becoming Enovis, and then Enovis with regards to reshaping the company towards Lima over a 10-year period, along with some of the personal aspects of his life with his daughter graduating and going to college, and him now being an empty nester, he was ready to start to move on to the next phase of his career to do more board work and create more free time to travel and experience more things with his wife. He was working with the board to figure out when the appropriate time to transition was.
As we took the company, got Lima mostly integrated with regards to the heavy work with regards to commercial integration last year, got to a point where the company is really well positioned to continue our growth against our LRP. He felt it was the right time, be close to 60 by the time he steps down, to move on to the next phase of his career. The board has been going through a process since they knew that that was going to play out. We just announced a couple of weeks ago that Damien McDonald is going to join the company to be our new CEO effective in the middle of May. Damien comes from a really strong background, career in med tech, spent some time together with Matt, actually, at Danaher. Good, robust experience across various different aspects of med tech.
He was also the public company CEO of LivaNova for five years before he moved on there. Overall, we're excited about the quality of talent that Damien brings to the organization. Matt's going to stay on to make sure that there's an appropriate transition and that there's a good handoff in place, and that he'll be around in an advisory capacity over the next year or so. Overall, I think we'll be very well planned in terms of our transition plan and make sure that the company is set up to continue on the strong momentum and trajectory that we're on.
Yeah, thanks, Ben. Sorry, I guess the news around Damien was announced subsequent to my writing of these questions. I apologize for not mentioning that when I asked the question, but I'm glad you commented on his hiring as well. I want to move on and just talk about some of the different businesses at Enovis.
Starting with the reconstructive business, Enovis has been gaining share for years in this business. Can you maybe just talk about what's allowed that to occur and what you've been doing right to kind of capture share from some of these much bigger companies like Zimmer Biomet, Smith & Nephew, and Johnson & Johnson?
Yeah, you know I think it starts with product innovation. We really made our name for ourselves launching the AltiVate Reverse Shoulder. That gained a lot of momentum. It's still a relatively young implant. It's about 10 years old, but really started to change a bit of the preference from a philosophy standpoint in terms of shoulder design within the U.S. market about a decade ago, and shifted really a lot more procedures to where now I think about 60% of procedures are done in a style that's more similar to what AltiVate is. We really created momentum for the company with that product several years ago.
We launched a product called the EMPOWR 3D Knee, which also created a lot of momentum, product designed to be more kinematically designed and mimic more how the natural knee operates, and created a really strong performance around patient satisfaction, which was a differentiator for us. We were really driving growth in a relatively small recon business, really driven behind both the AltiVate and the EMPOWR platform, but we were still very much a U.S.-based business at that point in time. Over the past several years, we've been building out the portfolio, both through a series of acquisitions that allowed us to have foot and ankle products, as well as acquisitions that were creating global and geographic scale for the company with an acquisition that we did with Mathys back in 2021, and then Lima last year.
We have really built out our recon portfolio with two strong products that were growing in the U.S. market to now a billion-dollar player that is more diversified and globalized within a $23 billion-plus addressable market. We are still relatively small share position, but we have got a lot of momentum within each of our anatomies that are helping us chip away at share gains to allow us to grow above the market pretty much in each anatomy that we have. Overall, we have created momentum through product innovation, but then also through building out a portfolio through both organic and inorganic means.
Okay. It sounds like you think that you've kind of been those four kind of recon categories: knees, hips, shoulder, and foot and ankle, you've probably been gaining share in all four of those. Maybe not in any given quarter, but kind of over the longer term.
Yeah, over the last 10-plus years, I'd say we've outperformed the market pretty much across the anatomies in which we've participated in. I'd say we're gaining share across the board.
Okay, got it. All right. Moving on to just the hip and knee category within reconstructive. The EMPOWR knee has been proven to be differentiating and sort of allow for market share gains, as you noted previously. Can you maybe just provide a little more detail on EMPOWR and kind of what sets it apart and why it's been able to help you capture share?
Yeah. Within the knee, there's a lot of products that have been on the market for a long time. I think what you had seen over time was good survivorship, but a gap in patient satisfaction. Only about 80% of patients that got a total knee replacement were satisfied, which means it didn't quite feel like their normal knee.
The EMPOWR 3D Knee is really designed around the kinematic alignment and motion of how a natural knee moves. When you walk, your knee pivots laterally, and when you squat, your knee pivots medially. Our implant is designed to pivot in both of those ways, depending on if you're walking or squatting. What it's done for us is created really strong patient satisfaction levels. I mentioned about 80% of patients satisfied in the broader market.
With our EMPOWR 3D Knee, we're getting over 90% of patients satisfied with our knee. It feels more like a natural knee. It's good for a younger, more active patient, which is a good patient candidate for outpatient settings. We've really spent a lot of work with regards to trying to drive more education into the market around the benefits of this type of design. It's really created good momentum for us in terms of our knee growth over the last several years.
Okay. I know more recently you launched your first revision knee, so the revision version of the EMPOWR knee. Maybe you can just tell us about the revision knee segment, kind of how big is that relative to primary knees, and how has your revision specifically done? Is it fully launched at this point, or are you still putting more sets out there?
Yeah, I'd say that we're continuing to expand. It's been an area where, as I talked a little bit about our journey of becoming a small U.S.-based recon player to now a larger, more globalized player. Over that period of time, we had to fill out our product portfolio in terms of having broader offerings to compete in emerging market segments.
That's true to the revision knee. About 20% of knee procedures are done as revisions. We didn't have a product there for several years. Just over the last couple of years, we've launched the revision platform of Empower. We've been building out additional capabilities with regards to offerings there as well. We've just become much more competitive in a broader portfolio offering.
It allows us to continue on our aggressive surge and conversion strategy with regards to having a full product offering and allowing us to be more competitive when we're going head-to-head against some of the competitive offerings out there. So far, it's done really well.
We were able to leverage some of the Lima products, synergies that came in as well with regards to their augments to help with the revision. Their cones that we were able to leverage right away within our revision system. We also launched the Enovis version of those as well last year. We've built out our product offering on the revision side. I'd say we're much more competitive and robust with regards to our portfolio offering in knee because of that.
Okay. All right. And then moving on to hip, I think you're launching collared hip stem later this year. Maybe you can just give us an update on that and kind of why it's important to that part of the business.
Yeah, our hip business has performed well, especially outside the U.S. In the U.S., we were performing pretty well for a long period of time. Over the past 12 months or so, there's been a trend in the market to move to a new approach when it comes to the direct anterior procedure.
To get confidence with regards to placement of the implant, stems with collars have become much more popular, and assistance to get those in with an impactor device. That was a product portfolio gap that we had in our U.S. market, not so much an impact in our product line outside the U.S., where we've performed well and we have a more robust product offering with the acquisitions that we did with Lima and Mathys.
We needed to remediate within the U.S. portfolio to bring those types of products and devices into the market. We are ramping those up now. We just recently got FDA approval of our new stem. We are building inventory now with the impactor to be able to ramp that up in the second part of the year. What that provides for us is just a more competitive portfolio in the U.S. hip.
It allows us to go to surgeons that have converted to our knee, but maybe not our hip, and really try to drive conversion to both their knee and hip portfolio. It allows us to just be more competitive as we look for share-gaining opportunities. We are excited about the prospects of these products coming into the market.
We're continuing to look at opportunities to more globalize the portfolio as well with some of the products that are performing well in other parts of the world. Overall, I think we're making good progress, and we're really excited about the hip stem and the impactor launch here in the second half of the year.
Okay. I think I heard that you had some plans to bring some of the Mathys hip products into the U.S. Can you maybe talk a little bit about that?
Yeah. Again, I think it goes to how do we maximize the portfolio strength that we have now that we've put all of these businesses together. And Mathys has some really strong performing hip products, and we think that there are components and products that we can leverage as we bring those into the U.S. market.
I'd say this is a consistent view for us now as we're globalizing our portfolio, focusing on key driving product lines within each of those portfolios and figuring out the best way to maximize those. As you can imagine, we're looking across the landscape, both of what Lima had outside the U.S. and what Mathys had outside the U.S. with both stem designs, material components.
You've got 3D printing capabilities that we've brought over now with Lima. We're looking at how do we maximize all of those portfolios, but within that can come some specific product lines that were being sold outside the U.S.
Okay. We've seen hips and knees for a few years now moving more into the ASC setting. From Enovis's perspective, I don't know if you have a feel for how much of the market's transitioned into ASCs right as of now.
That'd be my first question. My second question would just be, I think that this is sort of, I guess, Enovis has been a beneficiary of this trend. Can you maybe talk about that? Is that correct? If that is true, then why has it helped Enovis maybe more so than some of your competitors?
I haven't seen a whole lot of information lately from our competition with regards to the view on how much of the product is done in the ASC. I can tell you the last that our view was around 10-15% of market knees were going through an ASC setting, and we are a little north of 20%. Last year, I didn't hear a whole lot from competitors around how many shoulders were done, but we went from about 5% to 10% last year with regards to the percentage of our shoulder procedures moving into the ASC. The ASC, we believe, will be a continued growing trend in terms of market shift of procedures into those types of more outpatient environments and clinic-based settings.
One of the things that is a benefit to us is those contracting environments are generally a little bit easier to work with with regards to getting aligned with a contract versus some of the big hospital systems. From a contracting environment, it's a little bit easier to maneuver generally in ASC-type settings. Also, if you think about those types of settings, they're generally around driving good volume in primary procedures where our portfolio originally was set up to really be successful.
We're building that out now with regards to our portfolio breadth. If you think about efficiency, repeatability into those types of settings, we have products and really good towards younger, active patients. We've streamlined instrument sets as well to be cost-conscious with regards to what's needed to perform those procedures.
Like I said, from a contracting perspective, it is set up to be a little bit more advantageous for us as well to go and operate. You put all those together, and we have benefited, and we are a little bit above the market, we believe, in terms of our penetration within ASCs. I would expect that to continue as we go forward.
Okay. Great. Just moving on to shoulders. You already kind of called out the AltiVate shoulder. It's been wildly successful for Enovis. I was just wondering if you could, for kind of more of the laypeople on this call, maybe explain what it is about it that's different and why it kind of captured share.
Yeah. You know, it really was set up in a way that is a design that was put together to really address mobility and impingement in a way that was different from how traditional procedures were being done. It's got a lateralized center of rotation. It's got an inlay stem, and it's got an angle of the neck shaft that's a little bit more unique. Y
ou put all that together with really strong base plate repeatability, and it's created a really strong performing product line for us over a many-year period. At 10 years post-launch, it's shown no decline in patient outcomes and continues to perform really well. Like I said, from a patient outcome standpoint, it gets really strong scores for mobility and repeatability, and then also just not as much impingement as what you've seen in some traditional shoulder designs.
Overall, AltiVate continues to perform well. We expect a good opportunity for us to continue to expand AltiVate outside the U.S. as well, as we would expect the market to shift more like what we've seen happen in the U.S. over time as well. We feel like AltiVate will continue to be a growth driver for us.
Okay. I think earlier you also mentioned, though, that some of the competitors have kind of moved more toward the similar kind of design philosophy of AltiVate? I mean, is there any risk here that if the competitors, I don't want to say copy, but sort of approximate, I guess, what you guys have with AltiVate? Did it kind of lose your competitive edge there to some degree or?
I’d say that we still have the strong performance data with regards to AltiVate in the market for as long as it’s been now. What I would say is it’s validated the design in a sense with regards to some of the similar type of designs. One of the things that has allowed us to become the global number three player in shoulder is on the backs of the performance of AltiVate. I’d say the market is shifting to more designs like the AltiVate.
By having the product and at the right time of those markets shifting, we were able to continue to grow above the market and gain share in the broad market and establish ourselves as the number three global player. We feel like AltiVate still has some runway in front of it. We’re continuing to build out on that platform.
We just recently launched augmented glenoids, which a little over 10% of shoulder procedures have some sort of bone deformity or complication that these products will then address. We are continuing to build out even the supplemental offerings within AltiVate to help establish good momentum going forward. I think enabling technology is also going to play more in shoulder down the road as well. We will have some offerings that are going to come to support that that you will marry together with things like AltiVate to create good momentum of growth for the future as well.
Okay. Got it. The data is an important point, I think. I guess what you're saying is that if you have 10-year data and the competitors launched their product three years ago, I mean, they're never going to be able to catch up in terms of by the time they get to 10-year data, you'll have 18-year data or 17-year data or something like that. You're always going to have better long-term data, I guess.
Hopefully, it continues to perform. Okay. Let's see. Just a couple more on shoulders. There's been a lot of discussion about the robotic launches in shoulder from Stryker and Zimmer Biomet. I know that they're kind of in limited releases still at this point.
I know I ask you this question every year, but I think it's something that there's a decent amount of investor concern about. I just wanted to get your latest take on kind of what, if any, threat that those things pose to Enovis and whether or not you're—I know you don't have a robot, at least right now, but you do have navigation and ARVIS and things like that. How you're kind of trying to compete with that, with what those companies are bringing to the table.
Yeah. I mean, I think that the enabling technology products and capabilities are going to continue to be something that are important in our field. If you think about what we've been focused on so far, it's really been around how do we get really good planning and really good navigation to essentially create the brains of a workflow that will then expand into broader areas over time.
As we think about robotics, we think about it in a way of, let's think about that workflow of the patient journey around enabling tech to how that original plan gets designed and developed, how that gets brought into the procedure intraoperatively, and then how does that go from a patient-reported outcome standpoint to create that cycle of a patient journey.
From our standpoint, we want to build off of a really strong planning system that we have in Match Point, improve that, and then also really build out our capabilities around navigation and guidance so we create the brain to then add additional feature sets to down the road. That could be robotic application, or it could be some sort of assistance for the surgeon from a repeatability and efficiency standpoint. As I was saying, we have now a product line in ARVIS, which is continuing to be built out from both a feature standpoint and from a hardware standpoint that will allow us to address the navigation and guidance component, take your preoperative plan, overlay that as you're performing the procedure.
I would say the early feedback that we're getting from our KOL surgeons that are right now working on the soft launch of ARVIS in the shoulder has been extremely positive. It's been an area where our education events have continued to show high demand with regards to people interested in learning more about it. I think from the benefit standpoint of what ARVIS brings in the shoulder could be even more advantageous than what it could offer in the knee.
We are launching more features and hardware updates throughout the course of 2025. We are going to be launching that product line outside the U.S. in 2025 as well. We think that once we get the planning navigation guidance working really well, then we can start to think about things like robotic application as those things continue to evolve and develop over time. Right now, we're happy with what we've got with ARVIS in the shoulder.
Okay. Great. Just moving on, just want to briefly touch on foot and ankles. You have built this business through a series of acquisitions. I just know you have kind of a pretty wide range of products at this point. Are there any kind of obvious gaps in that product offering that you have looked to fill either internally or externally?
We've done a pretty good job, I believe, of building out the portfolio depth within foot and ankle to be competitive and have some differentiators that are pulling other parts of that portfolio along. If I think about our offering, we've got the DynaNail platform, which has been a big differentiator for us.
That's a super elastic nickel titanium nitinol product that really drives good fusion and outcomes in very complicated cases. That's been a product that's been performing extremely well for us, as well as our minimally invasive product line that we brought in from Novastep on the bunion side. Those two have been really dynamic for us in terms of helping pull the rest of the plates and screws portfolio along as we've gone.
I think there are some slices within foot and ankle, given it's a more diverse set of procedures to where there could be some things that we would look at. We are very much in the situation where it's more of a make-buy type analysis for us now to where we have the capabilities to organically develop what we need. If there are better things that we could get quicker through small acquisitions, then we'll contemplate those as well. I don't see any glaring gaps with regard to the portfolio that we've built in foot and ankle and really some flagship products that are helping pull through the broader portfolio.
Okay. Got it. I want to ask a few on prevention and recovery. I guess maybe just from a high level, sometimes I think talking to investors, there's maybe some misconceptions about this business and people thinking it's just like a super commoditized, low-margin, slow-growth business. I think you have some strong brands there, and the margins aren't maybe as bad as people think. I just wanted to kind of get your overview of the business and maybe why that isn't completely accurate.
Yeah. Our P&R business is a global market leader. We're the global market leader in bracing and supports. We're the global leader in recovery sciences. If I look at the business of P&R, we've really been able to take that business and stabilize its growth through a focus on really strong operations, but then also increasing our innovation cadence and cycles within our P&R business.
We've been improving our ability to lean into categories within P&R that are growing faster than the broader P&R market that come with higher gross margins as well. That's been one of the reasons why you've seen us get into this more stabilized growth pattern with PNR. There's more to do there.
As we talk about our strategy to shape PNR, it's investing in areas that are going to grow faster, that come with higher gross margins, and then looking at areas where we can prune or potentially divest some things that maybe are slower growing or less attractive. We did some of that last year with regards to divesting a small part of that business that was less or not profitable at all.
W e are in the process of looking at how do we shape PNR towards higher growth, higher gross margin. What I would say is PNR for us, as the market leader, gives us the ability to drive some of the market performance, but it's also a really strong cash generator for the company.
One of the things that makes us a little bit more unique as a mid-cap player on the large joint recon side, which requires heavy capital investment to support the growth. The PNR side of the business is less capital intensive, so we can really drive that cash to invest in the growth of recon and then continue to look at opportunities to drive the right mix within PNR itself. We have made a lot of progress there.
We continue to see PNR as a business that we can shape towards more mid-single-digit growth over time, go from a low 50s gross margin closer to 60% over time, and really maintain that strong cash profile that will help us in terms of creating deleverage opportunities and more M&A opportunities into the future.
Okay. Got it. Just want to move on to the Lima acquisition. It's been well over a year now since you closed the deal. You guided to $40 million of cost synergies by year three. Are you still confident in that number? How much of that did you capture in 2024, and how much do you expect in 2025? I don't remember if you gave an update for 2025 or not.
Yeah. Yeah. I'd say that Lima has gone extremely well. It's slightly ahead of our original planning assumptions in terms of its performance pretty much across the board. We're really pleased with what we've got with Lima, not just from the underlying portfolio and product performance, but the talent and the capabilities as well from both an R&D and a manufacturing standpoint.
All of that's going extremely well. Year one, as I said, was slightly ahead of our financial expectations. What we talked about from a synergy standpoint was $10 million-$15 million of cost synergies in year one on our way to $40 million plus by year three. We were north of that $15 million, so probably closer to $20 million, not quite, in year one.
As we talked about our guidance outlook for 2025, we talked about 60-70 basis points of improvement, where 10-20 of that would be coming from additional year two Lima synergies. The next large tranche of Lima synergies will come with the manufacturing operations and shifting some of that to Lima's facilities. We have still got a clear line of sight to that $40 million plus. We will get a little more here in 2025, and then we will complete the journey as we get into 2026 and beyond.
Okay. There were some sales to synergies in 2024, which you had expected, and I think they ended up being kind of where you thought they would be. Are we completely past that now as we enter 2025? I mean, I think it's even at a point where maybe it starts to go from being a headwind to actually being a tailwind.
Yeah. That's our view. We did the hard work upfront in 2024 to make sure that the channel got integrated quickly. We knew that that was going to be some heavy lifting, and that's where most of the disruption would come. We're largely complete there. There are some markets in the international space where Lima would be direct and Mathys would be indirect, and we're putting those together.
We do not expect any major disruption, anything of materiality that would come through at this point. To your point, I think what we see is acceleration coming. As we get through Q1 and into Q2, all of that will be behind us with regards to the comp. I think our view is we're in a good spot.
Okay. Great. I want to move on to some financial questions. I have to start with one on the T word, unfortunately, for tariffs. I know we've talked about this before, but you do have some plants in Mexico. Maybe start with that. What we've heard from some other medtech companies is that it sounds like USMCA compliant manufacturing is not going to be tariffed.
How much of your business falls under that? If you could follow that up with any additional exposure outside of Mexico with the new tariffs that were announced on April 2nd.
Yeah. We talked on our Q4 call that our exposure at the current contemplated tariffs at that time, it was 25% Mexico, 25% Canada, and an additional 10% of China. At that point in time, unmitigated gross exposure was $3 million-$4 million a month. Since then, USMCA exemption was put in place and now extended.
Hopefully, that's for a nice long period. TBD on some of this as the situation continues to be somewhat dynamic and fluid. Yes, about 90% of our products manufactured in Mexico are compliant with USMCA, and we've done the work to make sure that they're all qualified and registered there. That mitigates a lot of that risk that we had talked about on our Q4 call.
Now, the new tariffs in place to Europe and some of the other APEC countries will give us some additional exposure that will be more than offset by not having the Mexico exposure. Our view is that we're probably slightly favorable to what we provided on our Q4 call in terms of what the exposure looks like before we get after mitigation activities. There still are some uncertainties as we think about how the global supply chain reacts to some of these tariffs and reciprocals and things like that.
Right now, I would say some exposure that's new from that previous outlook would be products coming in from Europe, like the Lima products to support the U.S. Lima business that we acquired, and some of the raw materials that are going into our U.S. factories, and then some small amount of finished goods that are coming from APEC countries in which we had built resiliency in the supply chain that are now under tariff. We are working through all of that, but I'd say our view is the situation's gotten slightly better, not worse, but still working through what that means for us in terms of how do we mitigate that going forward.
View right now is our first half is likely going to be clean, and then we'll have to work through what the impact potential looks like as we get into the second half of the year.
Okay. And just to be clear, the European exposure, I mean, you acquired Mathys as well, but is it just the case that Mathys is mostly selling into Europe or other international regions as opposed to being, I guess, exported back into the U.S. or something?
That's right. We are very much a regionalized supply chain, selling in region for region, but there are some complexities there, especially with some of the acquisitions. Mathys wasn't selling anything in the United States, but Lima was making all of their product in Italy that was being sold into the U.S. That's the only impact that we have right now on the major recon side from Europe.
Okay. Got it. I think we're basically out of time, so we're going to have to wrap up there. Thanks again, Ben, for coming, and hope you have some good news at the conference.
All right. Thanks, Mike. Appreciate it.