Good day, and welcome to the Enovis First Quarter 2024 Earnings Conference Call. Please note, this event is being recorded.

Thank you, Marliese. Good morning, everyone, and thank you for joining us today on our first quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Trerotola, Chair and Chief Executive Officer; and Ben Berry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, enovis.com. We will be using a slide presentation on today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on Slide 3. Matt?

Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. We had a strong first quarter, but before I begin to discuss the results, I want to welcome the Lima organization to Enovis and recognize the efforts of our strong global teams, who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into one company with a global focus, we're managing the organization on a combined global basis, and we'll use pro forma rates for comparative purposes. For year-over-year comparisons, our prior year financials have been updated to include the acquisitions of Lima and Novastep. Let's start on Slide 3 and talk about some of the quarter's highlights. We had a transformational start to the year. We completed our planned acquisition of Lima, made significant progress on our integration plans, and carried forward momentum from 2023 across our geographies and business units. We delivered reported growth of 27% year-over-year and 5% on a pro forma combined basis versus very strong comps. We expanded our adjusted EBITDA margin by 220 basis points, reflecting the mix impact of Recon growth, productivity improvements, stable inflation and pricing trends, and the step change impact from Lima. We closed the Lima acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we've completed in the past few years. Overall, a strong start to the year. In Recon, on Slide 4, we delivered 66% reported global revenue growth. Pro forma Recon grew 7% year-over-year in the first quarter, which includes a 2% to 3% negative impact from integration dissynergies in line with our plan. U.S. Recon grew 4%, including 8% growth in U.S. extremities and flat performance in hips and knees against a very strong prior year comparable of 22% growth in our core Enovis business. Outside the U.S., we grew 10% in a resilient market. We've achieved significant progress integrating the Lima acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short-term growth impacts across anatomies and geographies as we've worked through the integration of our commercial channels. These fall well within our projected estimates, and our expectations for the full year remain intact. We look forward to ramping cross-selling opportunities as we move into the second half of 2024. I'm excited about the initial traction we're seeing with our market-leading Power and AltiVate products globally. We continue to expand market access with the clearance of our AltiVate Small Shell in Q1 in Europe. We also have a strong pipeline of innovation, as we continue the U.S. rollout of the EMPOWR Revision Knee, controlled ramp of ARVIS 2.0, and selling Lima's 3D printed trabecular titanium clip cones for use with our EMPOWR Revision system, one of our first key cross-selling opportunities. I'm also very excited to announce that just earlier this week, ARVIS received 510(k) clearance for use in shoulders. This timing aligns well with our planned launch of the Augmented Glenoid component of our flagship AltiVate Reverse Shoulder system in the second half of the year. Our Foot & Ankle team continued to launch great new differentiated technologies like the Arsenal Reload that are keeping the vitality high and helping drive very strong double-digit growth. These great new technologies alongside the cross-selling potential of the combined portfolios offer significant opportunity to accelerate growth in the second half of 2024 and set us up with great momentum as a $1 billion-plus fast-growing Recon business entering 2025. In P&R, on Slide 5, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan. Recovery Sciences led growth boosted by continued double-digit laser growth, and Global Bracing continued to grow above market rates. Our new product pipeline is robust and includes the new OA knee brace called ROAM, additional spine bracing products, and the next generation of clinical electrotherapy products for our Recovery Sciences team. Adjusted EBITDA margins in P&R improved 50 basis points year-over-year, as we continued to use EGX tools to drive consistent productivity improvements and sustained traction on price versus cost. Now I'll let Ben take you through the P&L details. Ben?

Thanks, Matt. Hello, everyone. I'll begin on Slide 6. We are pleased to report first-quarter sales of $516 million, up 27% versus the prior year and 5% on a pro forma basis. This compares to a strong prior year organic core growth of 9%. Our teams have been working really hard to integrate our global Lima acquisition that closed January 3. We've been extremely pleased so far with the collaboration and our teams and the high-quality integration plans that we've begun executing against. Our underlying growth in P&R and Recon continues to be solid, and while still early, our integration efforts are slightly ahead of our original plans. First-quarter adjusted gross margin was 58.7%, up 70 basis points year-over-year. The growth was driven by leverage from higher sales, favorable segment mix, which includes the addition of Lima and cost leverage. Our first-quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1 2023. First quarter's effective tax rate was 23%. This is compared to 21% last year. Interest expense was $20 million for the quarter versus $6 million in 2023. Overall, we posted strong adjusted earnings per share of $0.50, 14% earnings growth versus the prior year. Foreign currency exchange had an unfavorable impact of approximately $0.02 in the quarter. Turning to Slide 7. We are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of $2.06 billion to $2.16 billion. This is slightly above our previous guidance range, which contemplated 7% pre-Lima organic growth, double-digit Recon growth, and low single-digit P&R growth. As we go forward in 2024, we will be reporting our pro forma results. Our updating guidance range increase translates to approximately 5% to 6% pro forma growth and includes acquisition-related impacts. In Recon, the pro forma outlook translates to high single-digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross-selling and new product launches. We continue to expect stable P&R growth in the low to mid-single digits, as was reflected in our original guidance. We expect adjusted EBITDA in the range of $368 million to $383 million, which includes a modest increase to the range based on our Q1 performance. Our guidance for depreciation, interest and other expenses, tax rate and share count remains unchanged from the prior guidance. Taking all this into consideration, and as a result of our strong operational results in the first quarter, we are increasing our adjusted earnings per share range to $2.52 to $2.67. To summarize, on Slide 8, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima. We are excited about our progress in the first quarter and remain focused on successfully executing against our integration plans, creating momentum, and delivering strong financial results. Now I'll hand it back over to Kyle to start Q&A. Kyle?

Thanks, Ben. Before we begin the Q&A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question followed by one follow-up question. You're welcome to rejoin the queue if we have time. With that, we'll hand it over to the operator to start Q&A.

At this time, we'll start with a question from Vik Chopra from Wells Fargo.

I'll keep it to one. So based on our math, Lima came in ahead of our estimates. We estimated about $85 million. Can you just talk about what you're seeing with regards to the integration, and what drove the upside? And then you also called out a 2% to 3% negative growth impact from the integration. Would really appreciate if you can elaborate on that, please.

I missed the very end of the question there about the 2% to 3%.

Sorry, I was saying we thought you called out 2%, 3% negative growth impact from the integration. Just any color on that would be appreciated.

Yes, absolutely. So yes, I mean, we saw a good solid start to the year as expected, both in terms of our performance on the integration front as well as driving good progress in the core business that we've talked about through the quarter in various settings. We talked about the market environment, which really, last year, there was a super clean market environment and very high utilization rates. I think this year was probably a more normal market environment with storms and illnesses and different things. And so I think that that's resulted in a little softer market growth, quite a bit softer than last year. And so that's certainly an impact, but we've continued to drive strong performance against the market. But then we have been working quickly to do the integration, as we've talked about all along, and as we've worked through the channel integration in the U.S. and in certain countries outside the U.S., there's choices that we've made in some cases, choices that agents have made in other cases that have led to some loss of business that was planned and expected. And as we've talked about all along, we've tried to work through it quickly, so that we can have kind of impact the business here in the first year and then leave it behind. And that's impacted the U.S. significantly, but also has had some impact in other countries. And It's that impact on the hip and knee side as well as on the shoulder side. And so we've tried to give you a clear look with the pro forma growth, but also talk a little bit about the impact of the integration so that you can see that the underlying business is certainly in a quarter with a strong comp and a little softer market, but the underlying business is still very strong, and we've got a great path to accelerate through the year and exit the year on a very strong growth arc.

And our next question comes from Jeff Johnson from Baird.

So Matt, I don't want to make this too easy for you, but can you help me understand the numbers? If you experienced a 7% Recon growth, is it reasonable to consider those 2 to 3 points of dissynergies? I believe you also had one fewer selling day due to Easter at the end of the quarter. Without those dissynergies and the missing selling days, Recon might have been closer to 9% or even 10% to 11%. Should we be thinking about this conceptually in that way?

Yes. Yes, I think that's the right way to think about it, Jeff.

Okay. And then just on the extremities side, you called out the 8% growth there. You did point most of that to foot and ankle. Obviously, you had the dissynergy, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that's just in the core Enovis, the AltiVate product in that? Obviously, competition is growing in shoulders as well. So just how do you perceive kind of shoulder market and your performance in the shoulder market ex kind of some of this noise from the integration and selling days?

Yes. Excluding some of the integration impacts, we still see ourselves in a good above-market growth range in our shoulder, and have a great opportunity as we work through the year here to even strengthen that further. The Augmented Glenoid that we'll launch kind of here probably late in the second quarter and really ramp in the second half of the year are going to give us a great additional weapon in terms of driving more share gain in shoulders and the cross-selling opportunities are terrific in shoulder. And then as I said in my comments, we've also gotten ARVIS cleared in the shoulder. And while that won't have much impact this year in terms of revenue, because we'll be in the early launch phase, I think it just continues to send a very strong message to the market about the strength of our leadership in shoulder and our commitment to continue to be an innovation leader there.

Our next question comes from Young Li from Jefferies.

All right. Great. I guess I wanted to hear a little bit more about cross-selling opportunities as you get through some of these early integration choppy period. It seems like we'll see more of the benefit in the second half in the U.S., and OUS seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross-selling.

Yes. Yes, for sure, Young. Thanks for the question there. I mean we're extremely excited about the cross-selling opportunity. Actually, I got to join the global sales conference that we had over in London for our Recon teams. And it was really tremendous to see how far the team had already gotten on creating really specific and aggressive cross-selling opportunities. I'll mention a few. First, we talked about here in the U.S. market kind of immediate opportunity to bring revision cones into the U.S. market and then more aggressively sell the custom Promade products that Lima has. And so it's early days on those, but we've already gotten a little bit started there, and we expect to see a nice ramp down the back half of the year on those. And our teams are pretty excited about the SMR shoulder, not as a kind of our core shoulder product. The AltiVate is really our flagship, but there are specific situations where the SMR can be quite attractive, and we expect to see some nice cross-selling there as well. Second, outside the U.S., we're still early days in terms of driving down AltiVate. We have just started to ramp up the Mathys cross-selling. And so now across a much broader landscape with Mathys and Lima's channels, we've got a great opportunity for many years to come with EMPOWR and AltiVate. And as I shared, we just got some additional market access, which is very important on AltiVate. A large portion of our cases in the U.S. with AltiVate are Small Shell, and so that market access really helps to give a boost there on those broad cross-selling opportunities. And then the third thing that actually is really exciting, and I probably kind of underappreciated until I was at this conference in the room where the team was talking about it. There's a number of actually very interesting cross-selling opportunities between Lima and Mathys. Revision products on the Lima side that the Mathys team is excited about. Allergy-free products on the Mathys side that the Lima team are excited about. And so there's really just kind of organic energy that has come between those teams in terms of some things outside the U.S. beyond the sort of larger and longer AltiVate and EMPOWR opportunities. So a lot of great opportunities. Get them ramped up right now. We did a lot of training in this meeting in March, and now starting to get the instrument sets into the market, get the funnels built. And we'd expect that down the back half of the year, we'll start to see the synergy ramp and start to hit kind of full stride going into next year.

The question is coming from Brandon Vazquez from William Blair.

I have two questions to start with. First, as you integrate Lima, can you discuss what logistical steps remain? What milestones should we watch for? Are there any ERP or SAP integrations involved? Secondly, could you provide some insight into gross margins? How did they perform in the last quarter, and what are your expectations for the remainder of the year, particularly as you integrate the Lima business?

Brandon, as far as key integration milestones, the biggest focus so far has been on the commercial side, working through the different channel decisions and the implementation of them, and we're a good way through those in the U.S. and outside the U.S. Ramping up the cross-selling, as I talked about, has been another key piece of the integration so far. There have been some quick and thoughtful cost actions that we took in the first quarter in terms of starting to get after the cost opportunities, but more of that to come, but we did some very quick moves as we put the 2 teams together outside the U.S. and as we tucked the U.S. team into our team here in the U.S. So that's been another key thing that we've done so far. As we look forward, there are some things to do in terms of IT systems, but we're taking a very thoughtful step-by-step approach on that. So there's no big scary ERP integration coming that could be a big issue. More of a kind of step-by-step making the changes in terms of kind of SKUs and systems and how systems interchange and connect, etc. And we will work our way into kind of well-aligned systems, but that's not any kind of big, big giant thing versus a step-by-step thoughtful approach. We've also got a couple of years of operational synergies to get after over the coming years that will be step-by-step movement of things that are getting us cost opportunities, some in sourcing, some movement type of things. And then finally, we've done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and making some early choices around that. But it will be, again, a thoughtful multiyear process of merging the innovation pipelines and product pipelines. So we've got a great managing process, great talent focused on this. So far, things are going very well. We know it's important to stay on top of that. So there's certainly a lot more work to come, but we feel very good about where we are right now.

Yes. And Brandon, on gross margins, we were 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get aligned with all the things that we've been talking about here. Both businesses continue to leverage the EGX capabilities that we have, and I would see some decent progression throughout the course of the year there on gross margin.

Next question comes from George Sellers from Stephens.

Congrats on the quarter. Maybe to shift to the foot and ankle portfolio. You called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance? And maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio? And then lastly, what are you seeing from a competitive perspective as well?

Yes, sure. So foot and ankle had a good strong quarter. I think it was a healthy market environment in foot and ankle, maybe kind of a little less of a strong comp there and a good healthy market environment to start the year and that's continuing here as we start the second quarter. We've got a number of key technologies that drive the growth there. Our DynaNail products or the DynaNail family based on nickel sheet metal alloys has been very strong, and we continue to bring additional technologies into that family. The Novastep product that we acquired last year in the minimally invasive bunion space is driving nice growth as well, and we're excited about that participation now into that large forefoot market. The Arsenal Reload that I talked about is the next generation of our plating products, which apply across the space. And we've got IP protected technology around the fascinating devices on our plating and some really great new plates that leverage that technology that we think are going to bring a real boost as well. And as we talked about, Star has been stabilized and I think ready to grow here now as well with some of the changes that we've made there. So a number of great technologies across foot and ankle. But then very importantly, our channel continues to get more aligned. We've now got almost 70% of our channel fully aligned to our products. And that's something that we did a lot of work over the past few years to get there. And we know that that's going to pay a lot of dividends. A strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we've acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.

The next question is coming from Jason Wittes from ROTH MKM.

I have a question about the impact of the integration. I understand it contributed 2% to 3% this quarter. Will this continue throughout the year? How should we consider the negative or positive impact on a quarterly basis for this year?

Yes, so I think in terms of how much it impacts the year, we shared $20 million, $30 million as the expected impact when we did the acquisition. And that said, 2% to 3% of our Recon is more than 2% to 3% of Lima, of course. But I guess I would say, as we've talked about, we've been trying to get at this quickly. And so I think that we're likely to see that go from where it is now, probably increase a little bit in the second quarter as we get really in maybe probably the apex of the impacts from these integration things. And then I would expect that the back half, it would kind of flatten and drop as we get to the other side of some of the things that even started to impact us late last year or right at the beginning of the year. And also as we have some nice contributions coming through on the cross-selling side as well.

We have a question from Mike Matson from Needham.

This is Joseph on for Mike. Maybe just a follow-up on the hip and knee. Do you think there's still kind of a backlog there for hip and knee procedures, larger than normal backlog, I guess?

Yes. So again, I think whether you look at the U.S. or you look outside the U.S., the cumulative growth since 2019 is still significantly less than 5 years of growth. And so that does certainly suggest that there are unserved patients there. If you look at early last year, the first 4 or 5 months of last year, things went really hot in the U.S. and some countries outside the U.S. And I think that was indicative of that backlog that lies there and sort of a high utilization environment that enabled higher rates. And so I think it seems reasonable that there is still backlog to be worked off F&A that can create some tailwind maybe later this year and in the years to come. But clearly, in the first quarter, looking at what we understand about our results and looking at the other results that have been posted, this was a kind of a slower growth quarter in the U.S. than where things were last year. And so clearly, that backlog is not being worked off right now. And I think we saw and understood that working through the quarter, that there were just various effects that were constraining kind of surgical supply with, like I said, whether it was storms or flu and different things. And that used to be pretty normal that in any given year, there were parts of the year where there were some crimps that were being put on supply. And so you have better months, worse months, better quarters, worse quarters, and you might be back into a more normal environment and there'll be periods where we think can run like hot because that backlog is there and the surgical capacity is very available and there'll be periods where the capacity is a bit constrained and that backlog just sits there.

Okay. Great. Yes, that makes sense. And then maybe just another quick one on ARVIS. If you do have anything more to add? I appreciate the color so far. But yes, anything else would be great.

Yes. So as I've shared before on knee, we've got sort of a few dozen surgeons using it right now by design. We got it to a number of surgeons, and we're really focusing on kind of having them use it a lot and making sure that all of them get ramped up in terms of utilization rates, and that we learn things that we need to in terms of how people are using it to make sure that as we move to taking it broadly into the marketplace, that it's going to be successful, both in terms of helping us to gain business and grow, but also that the surgeons will be using at high rates. If you look at some of the technologies that are out there, some of them are being used at high rates and some are not, and we want to make sure that ARVIS is used at high rates. And so this controlled launch I think puts us in a place to be able to make sure that happens as we work through this year. Definitely expect it to have a good positive impact on our knee business as we work through this year and get beyond that first couple of dozen surgeons into a broader marketplace. And then kind of years to come of opportunity to have good strong impact from ARVIS and knee. And also, we continue to work on additional technology pad beyond ARVIS in terms of making that hip and knee value proposition stronger and stronger in the enabling tech workflow area. On the shoulder front, just getting started this year. We've been working on that, obviously, for a little bit here, because we just cleared the regulatory with 510(k), but it will be just a very initial launch here in the second half of the year to get really good feedback on the software and the hardware and the instruments and then make sure that we make whatever adjustments we need to moving into next year. And there's also kind of multiple ways of technologies that we can bring through ARVIS there into the shareholder and we're going to get a good strong start this year and then build on that in '25 and beyond.

We have a follow-up question from Vijay Kumar from Evercore ISI.

Thanks for the follow-up here.

You get a bonus, Vijay.

I wanted to touch on margin performance in the quarter. Were gross margins in line with your expectations? Because my understanding is Lima had somewhere in the 70s gross margin. So sequentially, when I'm looking at this, the mix improved rate, the dollar contribution from Recon improved, but gross margin was flattish, but operating margins came in well above. So just talk about the margin performance and how we should think about like for the back half? Does this give increased confidence in the back half margin ramp?

Yes, Vijay, the number you're referring to with Lima is an IFRS number, not a U.S. GAAP number. When we convert Lima's historical figures to U.S. GAAP, there is a shift between gross margin and operating expenses. The underlying gross margin in the U.S. GAAP translation is more in the high 60s rather than the 70s. Considering the mix of the business and our sales, the gross margins align with our expectations. I anticipate some acceleration in the company's gross margins as the year progresses. Overall, I remain optimistic about the potential synergies as we enhance our Recon globalization and supply chain. There are plenty of opportunities to better integrate EGX and explore ways to increase our gross margin while refining our business mix for better growth. Currently, we see the Recon business with gross margins in the high 60s, but we believe there is a chance to move that into the mid-70s over time. For this year, we expect steady progress, especially looking at our Q1 performance, with a potential slight acceleration as we advance through the year.

Sorry, on the operating margin line item, was there any timing impact of OpEx or cost synergies coming in above plan? Because it just feels like execution was slightly above?

Yes. I mean we're happy with the start. I mean, like we said, we were able to really identify what the go-forward org structure was going to look like as we closed the deal. So we were able to capitalize on some synergies right away, maybe slightly above our kind of initial expectations in the first quarter. But again, still well within kind of our expectations of what we've said for the year is where we're currently thinking. And like I said, there's the shift between kind of OpEx versus gross margin, which is kind of again aligned with what our expectations were.

Understood. Matt, maybe one for you. I saw the ARVIS 2.0 within the presentation. Where are we in terms of adoption of ARVIS? Are we at an inflection point? And what does 2.0 do, which is different from 1.0?

Yes. So 2.0 in the knee was after putting it down the controlled launch, getting a lot of feedback, we made a number of improvements on software and hardware that we're making it kind of easier to use in many ways, but also making it really very seamless with our EMPOWR instrument sets as well. And so the 2.0 was then kind of more of a full launch of ARVIS, but we definitely decided to do it in a step-by-step way just to make sure that given that it's brand new to the world of technology, let's get 15, 20 docs using it, get some good feedback, help them to ramp up, and then use what we learn there to make sure that as we go to a broader set of doctors, one, we've got a great value proposition in terms of being able to help them understand how it's going to be valuable, but also we've got the ability to help them to ramp up fast and effectively with it. And so that's what the 2.0 launch was, and we're right on track with that in terms of, as I said, a couple of dozen surgeons using ARVIS, some using it very heavily and some less heavily. The ones that are using it less heavily, we're learning why and how do we ramp them up in terms of how heavily they use it, and there's some good learnings there, both about how to ramp surgeons fast, but also about which surgeons to target more as we do the broader launch. And then we've now got plenty of inventory on hand ready to do a broader rollout as we work through this year, a lot of excitement in the field around the ability to bring ARVIS to a broader set of hip and knee surgeons, but particularly for the knee at this point as we work through this year. So we would expect that number to expand and be a good facilitator to our knee conversion efforts. But also start to generate a small but growing and high profit recurring revenue stream on the knee front. On the shoulder front, as I said, it's just an initial launch. Think of shoulder in the second half of this year being kind of where our knee was a year or so ago in terms of getting that first launch into the marketplace in the second half of this year and getting some good feedback that allows us to keep revenue and improving the product. We've been focused on making sure that by 2025, we are right there in the market with a very strong shoulder ARVIS offering to continue to be a strong leader there in shoulder with technology, as we always have been. And we're right on track for that with this announcement about the shoulder clearance for ARVIS that just recently happened.

We conclude our question-and-answer session now. And with that, I would like to turn the conference back over to Matthew Trerotola for any closing remarks. Please go ahead.

Yes. Thank you for joining us this morning. I want to end the call by thanking our team members for a strong start to the year. We have a lot of momentum and excitement across the organization and remain committed to delivering value for our internal and external stakeholders. Thank you for listening in today, and we look forward to sharing our second quarter results with you in early August.

And this concludes the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day.