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

Thank you, Marliese, and good morning, everyone. Thank you for joining us today for our third quarter 2023 results conference call. I'm Kyle Rose, Enovis' Vice President of Investor Relations. With me on the call today are Matt Trerotola, Chairman and CEO; as well as Ben Berry, our Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website at Enovis.com. We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on our website later today. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. With respect to any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on Slide 3.

Thanks, Kyle. Hello, everyone, and thanks for joining us today. As we previously announced, we had a very productive third quarter, with continued share gain, solid margin expansion, and we announced the strategic acquisition of Lima that step changes our Recon business. Let's go to Slide 3 and talk about these highlights. We grew organically by 6% in the quarter, with 10% growth in Recon, and 4% growth in P&R. That brings our year-to-date organic growth to 8%. We continued our trend of double-digit growth and share gain on the Recon side versus a strong Q3 compare. We saw a return to more normal third quarter seasonality with some summer volatility in procedure volumes from vacations, which was in line with our expectations. We believe the elective surgery markets we serve remain healthy with higher than normal procedural demand in 2023 overall, a trend we expect will persist through 2024 and likely 2025 as pandemic-related patient backlogs are gradually worked down. In P&R, we had another strong quarter, showing our reestablished leadership in these markets with a bit of share gain in a stable market environment. We expanded our adjusted EBITDA margins by 80 basis points, reflecting strong gross margin expansion from productivity, mix and the scaling of recent acquisitions. In September, we announced a definitive agreement to acquire Lima Corporate, which expands our global reach and Recon, taking that segment to about $1 billion in sales, with close to 50% exposure to the faster-growing extremities market. Overall, we remain on track for a great 2023 with strong momentum versus our strategic goals. Digging a little deeper in Recon on Slide 4. We had double-digit growth in the U.S., led by 18% organic growth in hip and knee. Extremities grew 7% against a tough prior year comp of 17% in Q3 of '22. Outside the U.S., we grew almost 12% organically in a resilient market. I'm excited about the international growth opportunity as we expand our market position with good initial traction for our industry-leading AltiVate and EMPOWR products. Importantly, we have a strong pipeline of innovation in Recon that we believe will allow us to continue to take share for many years to come. The ramp of our EMPOWR Revision Knee remains in the early innings, and we also have launched an updated ARVIS 2.0 with full EMPOWR capability. Additionally, in foot and ankle, we recently launched the Evolve34 Lapidus Correction System for bunions, one of the fastest-growing market segments in the U.S. We've had terrific feedback from surgeons on all three of these great new products. Turning to Slide 5. I want to take a moment to remind everyone about the exciting opportunity we have to advance our business with the acquisition of Lima. I was recently in Italy and Switzerland, meeting with the Lima and Mathys leaders and teams. We're making good headway on our integration planning activities, and I came away with increased conviction and excitement from the strength of the talent and the big opportunity that we have ahead. We have a lot of experience and a track record of doing acquisitions well, and are following our proven EGX playbook to make sure this one gets off to a great start and delivers strong strategic impact, financial contributions, and shareholder returns. The addition of Lima represents the next step in the evolution of Enovis as we execute against our strategic goal to build a high-growth med tech innovator with a clear pathway for sustained operating margin expansion. This transaction, which is expected to close in early 2024, will reshape our mix to faster-growing, higher-margin Recon, and increase our exposure to the fastest-growing parts of the Recon market and extremities. This accelerates our progress against our long-term strategic pillars of sustainable high single-digit organic growth, continuous margin expansion and global scale. In P&R on Slide 6, our 4% organic growth reflects a healthy market environment and disciplined execution. This business is performing in line with our strategic plan. Global bracing growth is over 4% year-to-date with share gains from strong customer service, improving innovation, and MotionMD clinic conversions. We have a strong pipeline of innovation to drive additional growth, including a new OA knee brace called ROAM, and the next generation of clinical electrotherapy products for our Recovery Sciences team. Gross margins in this segment expanded by 150 basis points as we continue to sustain traction on price versus cost and roll out additional EGX business system tools, which are driving notable productivity improvements. Moving to Slide 7. Before I hand it over to Ben, I want to reiterate our confidence in the team's execution year-to-date. We have a diverse global business. And while 2023 has thankfully been a bit more normal than recent years, it takes a lot of day-to-day execution from our team members around the world to consistently deliver the way we have. Our execution in 2023 shows our commitment and capability to create compounding shareholder value through high single-digit organic growth and continuous margin expansion. The high single-digit growth comes from our demonstrated ability to consistently grow Recon double digits, along with our stable low to mid-single-digit P&R growth. The margin expansion comes from structural gross margin expansion as we grow Recon faster, supplemented by EGX productivity and scale, partially offset by growth investments and in-year headwinds. We will provide a more formal update for 2024 guidance on our fourth quarter call, but we are confident in our ability to continue to drive this compounding growth in margin formula and also ramp up the impact of recent acquisitions.

Thanks, Matt, and hello, everyone. I'll begin my remarks on Slide 8. We're pleased to report third quarter sales of $418 million, up 9% versus prior year, and 6% organic. Our growth was fueled by strong demand for our products and solid commercial execution in both of our business segments. Additionally, our third quarter sales results include a combined 260 basis point positive contribution from foreign currency and recent acquisitions. Third quarter gross margin was 58.2%, up 140 basis points year-over-year. The growth was driven by leverage from higher sales, strong mix, and cost discipline. We continue to leverage our EGX business system to stabilize and drive productivity in the supply chain, and the results continue to read through in gross margin. Adjusted EBITDA grew 14%, and adjusted EBITDA margin was 15.7%, up 80 basis points versus prior year. This growth was driven by gross margin expansion and partially offset by growth investments in R&D and dilution from recent acquisitions. Q3 results build on a strong first half, resulting in year-to-date adjusted EBITDA margins up 100 basis points versus the prior year. Third quarter effective tax rate was 19%. This is compared to 6% last year, which included benefits from one-time items that significantly lowered the rate. Interest expense was $6 million for the quarter versus $5 million in 2022. Overall, we produced strong adjusted earnings per share of $0.56 or underlying earnings growth after normalizing for the tax and interest impacts from the prior year. We're extremely pleased with these results and the momentum we've built thus far in 2023. Let's move to Slide 9. Considering our Q3 performance, we are raising our organic sales growth outlook for the year to 7.4% to 7.6%, versus the previous guidance of 7% to 7.5%. We are seeing consistent performance in both of our business segments and are excited about the momentum we are creating as we shape the business and build on our commercial execution efforts. We expect full year sales to be roughly $1.7 billion, with approximately 1 point of additional growth from recent acquisitions. For the year, based on the latest rates, we expect foreign currency impact on sales to be relatively flat. We are raising the bottom end of our adjusted EBITDA range to $264 million to $270 million, reflecting our solid Q3 performance. We are updating our interest outlook to approximately $22 million, and lowering our estimated tax rate range to 19% to 19.5%. Based on our strong performance in the first 9 months and these adjustments, we now expect our adjusted EPS to be in the range of $2.30 to $2.40 versus our previously guided $2.22 to $2.36. I'd like to spend the next few minutes discussing recent steps we've taken to optimize our balance sheet in a challenging capital markets backdrop. On Slide 10, we have solidified and secured our financing for the Lima corporate acquisition. We will maintain our existing revolving credit facility and add a new term loan at our current interest rates. Additionally, we've completed a convertible debt offering at a 3.875% fixed rate. Given the challenging capital market conditions, we believe we have put ourselves in a strong position to drive and create value from this acquisition. Our effective interest rate of the company will be around 5.25% to 5.75% based on current rates. This will allow us to deliver accretive earnings in year one, with meaningful accretion in year two and beyond. We will also have the flexibility to progress our integration plans and quickly position ourselves for more M&A in the future as the business scales. To summarize, on Slide 11, we've had another strong quarter, leading us to again raise our full year guidance. We grew 8% sales per day in the first 9 months of the year, and we remain confident in our strategy and our capability to build a sustainable, high single-digit growth company. We took another step forward in expanding our margins, and we continue to execute on our clear plan for continued margin growth. We continue to accelerate the company through M&A and have demonstrated strong execution of recent deals. We are very excited to welcome the Lima team into the Enovis family in early 2024 and look forward to creating better together.

We will now open up the call for questions. Our first question comes from Vik Chopra from Wells Fargo.

Congrats on a nice print. Just two questions for me. Matt, maybe the first one for you, GLP-1s remain front and center for investors, and it would be remiss of me if I didn't ask you about this. So I just want to get your updated thoughts on how you're thinking about the impact of GLP-1s on orthopedic procedures? And then I had a follow-up question, please.

Thanks for the kind words. Let me address your first question, and then you can ask the second. Certainly, we're paying close attention to all the discussion about GLP-1 and the potential impacts as we've taken a look at it so far. The demonstrated impact from GLP-1 is on obesity and the path of obesity and being able to reduce obesity. When we look at our portfolio and we look at the portion of the portfolio that might experience some headwinds from obesity versus the portion that might have some tailwinds from less obesity, we would see it as somewhere between neutral and potentially a small positive in terms of the impact that GLP-1 can have on obesity. So that's how we view it at this point based on the demonstrated impacts that are out there. We're going to continue to monitor the situation. But in our Recon business, we get most of our growth from share gain, not from market growth itself. Even if there was a little bit of impact on the market growth in Recon, our diversification, as well as our small share position in hip and knee, would be beneficial in terms of enabling us to still drive very strong growth.

And then my second question was just on the backlog in orthopedic procedures. As we are coming up towards the end of 2023, I'm just curious how you think about that backlog heading into 2024? Do you expect to work off that backlog next year? Or do you expect it to be a tailwind for some time?

Yes. The way we look at this backlog topic is that if you examine the overall industry growth since 2019, there are still one or two years missing in the calculations. That really gives an opportunity, even with some of the tailwinds this year that came from the backlog. We still see the opportunity for continued tailwind in the coming years if people create the capacity and staffing to address some of that backlog. This year has had a bit of tailwind, especially in the first half in terms of Recon procedures, and we would expect there is a real possibility for that tailwind to continue for the next couple of years. However, it will be a situation that we’ll evaluate on a year-to-year basis. We'll share our assumptions when we provide our guidance.

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

It was a strong quarter, and I appreciate all the insights shared. Matt or Ben, regarding the Extremities business which grew by 7%, I know the previous year's comparison was quite challenging at a 17% increase. I'm curious to hear about your perspective on the competitive landscape, especially since some competitors have recently introduced new shoulder products. What are you observing in the market, and how confident are you in potentially achieving that number? It seems like the forecast might suggest maintaining a high number over the next few quarters. Do you believe we could return to a double-digit growth rate, or are we likely to remain in the upper single-digit range for the foreseeable future?

Yes, Jeff. I appreciate the question. We continue to be very confident in our leadership in shoulder. We've shown that leadership for a long time, and we've been able to outgrow the market based on the great AltiVate shoulder and all the different innovations we have been bringing through. And certainly, in the quarter, the 7% aligns more with market growth versus the above-market rate growth. It is normal. If you stack it on top of last year's 17% growth, then you'd see two years of comfortably above-market growth. We have confidence in our leadership there, even in a more competitive field. We still have an advantaged product and a tremendous innovation pipeline. Yes, we have a couple of quarters of strong comps beginning this quarter. At the same time, we have some exciting innovations on the way as we navigate through the first half of next year. So we feel comfortable that we’ll continue to demonstrate consistent above-market growth in shoulder over the medium term here.

You mentioned summer seasonality, which aligns with what we’ve heard from others. While I understand you’re not looking to provide month-by-month trends, could you share your thoughts on summer seasonality? How have September and October been performing? Are you observing a normalization of that seasonality and a recovery in volumes? Please provide an update on recent trends.

Yes, sure, Jeff. The summer seasonality we experienced last year with increased vacations compared to the new normal is reflected in this year as well, probably a bit heavier in July than last year. The first couple of months of summer were definitely slower. However, September was a healthy step forward, and October is showing another encouraging uplift. We're expecting sequential acceleration in Q4 compared to Q3, and a pretty normal run to the finish for Recon as we proceed through the coming months, setting things up well for next year.

And we'll take a question from Yang Li from Jefferies.

To start, maybe I wanted to hear a little bit about the early feedback from your European team, Lima customers, and Enovis customers on the deal. What do they like about it? Is there anything that they're cautious of? In general, how excited are they about the deal?

Yes. Certainly, we've spent a lot of time gathering feedback from customers and the channel regarding this important combination in our Recon business, and there has been a lot of very positive feedback. For example, Lima customers in the U.S. have had some limitations on the breadth of their product line. They've produced some great products but faced challenges in terms of how much they can offer. This presents a real positive opportunity. The same holds true outside the U.S.; while Lima has had tremendous strengths in some product areas, it also has weaker areas that we will fill in quickly. Therefore, customers outside the U.S. and channels are excited about this opportunity. From the Enovis side, some technologies coming with Lima have generated excitement among our customers as well. I'm very pleased with the feedback we've received from the marketplace and excited about the talent and energy from the Lima team joining our company.

To follow up on P&R, it doesn’t receive enough attention sometimes, but there was pretty strong growth in the third quarter and year-to-date despite tough comps. It sounds like market growth drove a lot of that, but I wanted to hear more about some of the other key drivers of growth in the third quarter. Any key products to call out, and do you see sustainability of that mid-single-digit growth rate going forward, especially against elevated comps? Also, regarding gross margins, can you provide comments on it? I mean, there was pretty strong expansion of 150 basis points, driven by many of the things you mentioned.

Yes. Let me address the growth, and I'll let Ben discuss the gross margin. We're pleased with the consistent 4% growth. As a leader in P&R, we've consistently stated we don't need to significantly outgrow the market. Our strategic plan is to slightly outpace the market, achieving that low to mid-single-digit growth range for P&R. We’re pleased with this consistent execution. It has been above-market growth, and overall, there is a healthier market environment than in recent years. We've also experienced considerable price performance in this segment that contributed to our growth. Our supply chain is also highly efficient due to EGX work, ensuring we meet customer demands. We've come up the curve in innovation in our P&R businesses, which is enabling us to introduce new products. Additionally, we witness continued growth through MotionMD clinic conversions, contributing to our share gain. This formula is working consistently, positioning us in the growth range we need from this business. We are confident that as we move forward, we have more innovations on the horizon, and although some price traction may roll off, we expect to sustain low to mid-single-digit growth for P&R.

Yes. And Yang, on gross margins, as Matt indicated, we are making gains on price versus cost and managing through the inflationary impacts we've experienced. Some pressures have begun to ease. We're seeing improved freight rates as we navigate the supply chain, which has positively impacted us. Additionally, there are positive mix changes occurring within the P&R business itself. Some of our fastest-growing segments in that business carry higher gross margins, contributing to our performance overall. When combined with the EGX work, we've seen very strong progress and feel confident about the gross margin advancements in P&R.

We will take a question now from Bill Plovanic from Canaccord.

I'm going to concentrate on strategy. Regarding M&A, there are many dynamics at play with rising interest rates and lower valuations. You've got a significant deal nearing completion. I was wondering if you could help us understand, one, what do you think of M&A as we approach next year given those dynamics? Two, will you pursue additional acquisitions while the Lima deal is still pending? Three, how do you perceive valuations in the marketplace? Does that shift your focus toward either earlier stage or later-stage assets? Finally, how much dry powder do you actually have for acquisitions post the Lima deal and following recent financings?

We're very excited about the Lima deal, along with the strategic foot and ankle technology acquisitions we've made this year. This environment has indeed created opportunities for better valuations on acquisitions. As such, we believe we've taken advantage of this time being more of a buyer's market, and we have the resources to support significant strategic moves for the company. M&A remains a part of our strategy, but for the next year, our focus will primarily be on ensuring the effective integration and ramp-up of our foot and ankle acquisitions and ensuring success with the Lima acquisition. I would anticipate that any acquisitions in the next six to twelve months are likely to be smaller strategic acquisitions instead of large-scale transactions. Still, we conduct ongoing strategic work to prioritize potential acquisitions that strengthen our strategies in our core markets or expand into attractive adjacencies. Currently, we have a little bit of capacity for acquisitions over the next year or so, as we work to gradually lower our leverage, likely less than $0.5 billion.

Our next question comes from Mike Matson from Needham & Company.

Yes. So I guess, first, given the number of acquisitions you've done in recent years and the upcoming close of the Lima deal, I imagine you've picked up quite a few implant product lines. I wanted to know if there are any plans to rationalize some of those product lines over time, and how do you go about doing that? I know these types of products tend to have really long life cycles, and it's sometimes difficult because of customer loyalty aspects to certain products.

Yes. We're definitely considering that. However, until the Lima acquisition, the majority of actions taken have had minimal product overlap. The Mathys acquisition was primarily complementary with only minor overlaps, while our foot and ankle acquisitions were almost entirely new and complementary additions. With the Lima acquisition, some degree of product line overlap is expected. However, we still appreciate the complementarity in technologies and product lines between regions. While there will be opportunities to simplify the product line in the future, our primary goal is growth. Thus, we'll focus on how best to cross-sell and retain customers while integrating operations. Cost efficiency efforts at the outset will focus more on business processes rather than product line simplification. We will adopt a thoughtful approach towards potential product line simplification that could enhance our growth over time.

And regarding the Lima acquisition, we've done some modeling. Specifically, with the convertible debt having a bit lower interest rate than we originally expected when you announced the deal, we're projecting something like double-digit EPS accretion in 2025 and beyond. Does that seem reasonable?

Yes. Very much so, Mike. We even included some of that in our materials today. We expect accretion in Year 1, with meaningful double-digit accretion beginning in Year 2.

We will now move to our last question from Jason Wittes from ROTH MKM.

You mentioned pricing. Some of your larger peers are indicating better pricing sessions in an inflationary environment. Are you seeing that as well? Also, in terms of gross margin, you did experience improvements. How much of that is related to inflation or a subsiding of inflation?

Yes. I'd say, Jason, we're observing favorable pricing momentum on both sides of the business. On the P&R side, being the market leader, we have successfully implemented targeted price increases across select product lines and seen positive results from this. On the Recon side, as a smaller player, we generally align with the market. We have observed stabilization in pricing lately, meaning we are not experiencing the same erosion we saw previously, but we’re not witnessing significant increases either. Overall, we expect this trend to continue, especially during inflationary periods, before reverting to normalized conditions over time. Regarding gross margins, they align with the expansion goals we've outlined: firstly, through improvements driven by the growth of the Recon segment in our company. We're also seeing favorable implications from price versus cost dynamics, productivity initiatives, and the scale of recent acquisitions contributing to our gross margin increases this quarter. As for Lima, some key products to focus on include a solid position in shoulders, particularly the SMR shoulder, which stands out as valuable and extensible. Additionally, Lima has a strong revision position for hip and knee products, representing an attractive segment of the market. Their pioneering technologies around 3D printing are noteworthy as well; they've made strides in designing and manufacturing custom implants for complex cases, which allows them to engage surgeons effectively. They also offer excellent revision cones for knees designed with proprietary 3D printing materials. This overview captures some major product highlights from Lima.

At this time, we are done with our question-and-answer session, and we will conclude the conference. We thank you very much for attending today's presentation. You may now disconnect.