Enovis CORP (ENOV) September 2026 Conference Transcript

Good afternoon. My name is Ross Osborne. I'm on the MedTech team at Wells Fargo.

This afternoon we're joined by Inovus. We have the company's CEO, Damien MacDonald, and CFO, Ben Barry. Thanks for being here.

You're welcome. Thanks, Ross, for having us.

Of course. Before we dive into your recent acquisition, maybe we'll start with an overview of the market. How you guys are seeing the ortho space since you last reported earnings?

Six weeks ago. Look, nothing's changed for us. I mean, again, we recently reported six weeks ago. So the way we're seeing the U.S. normal seasonality, it's sort of back to a pre-COVID normal. And we always see a bit of slowdown in the summer, which we've seen. It's bouncing. I think we just had Friday, I think was one of our best Fridays that we've had in months. So that's great news. And we've been saying international, and by the way, we skew Europe when we talk international. We've been saying that the market, since Q1, that the European markets have been slowing. We've been demonstrably taking share in those markets and growing above the market. So nothing's changed for us. I know there's a bit of swirl today about that, but for us, nothing's changed in terms of the way we've seen the market and our normal seasonality.

Great. And then, you know, any signs of an impact from ACA?

We've heard kind of mixed reviews there. not for us i mean again we we hear that there's noise around uh clinic to surgical uh we hear noise around prior auth delays um and maybe that's affecting other people's mix because of the way they have community hospitals in their in their numbers but um for us the way our markets are structured and the way our customers are structured we're not seeing that okay and then maybe it's impacting you guys last but in terms of strikes you know government budgets going towards defense versus health care are you seeing anything in europe to go out there well that's where we talk about europe we you know when we've talked about what's been going on again since q1 we've been visible you know had visibility to that we for sure have seen the impact of strikes for sure the impact of let's call it financing policy decision making but nothing's changed for us in our numbers And we just talked about those recently as we did the acquisition.

And assuming those headwinds continue into next year, what's a good normalized growth rate to think about for the worth of business?

Well, I would refer everyone to the presentation that we did the other day about where we think Recon and P&R are growing. Again, we laid it out pretty clearly in terms of the mid to high single digit for Recon and mid single digit for the P&R business.

Yeah, I'll just add, Russ, I think the market dynamics in terms of procedural volume and thinking about the health of the macro with regards to the aging population and the need for surgery is going to continue. So for the long-term durability of Ortho, we still see a large runway of a population that's going to need these products. And while there might be some, you know, iteration from quarter to quarter, we think the market will continue to grow at the rate that it's been growing and continue from now into the future.

Okay, perfect. So as alluded to earlier, you guys recently announced an acquisition. You know, why was now the right time?

What attracted you to Essential? you know we've been looking for how to build on our platform and we've been very conscious about this we had a planning and navigation we've been in the market now for you know five or six months with with the arvis ar and we were looking at how the markets were evolving and and what was going to be important and and particularly the way shoulder i mean i think knee is well characterized right there's a way that knee surgery has been evolving and and the application of assistance particularly a robotic assistance in knee what's new for us is how shoulder was evolving and what became imperative for us is how to think about how to continue to grow above the market and by the way shape the market now we're knocking on the door of number two position globally in shoulder and what we understood as we talked to a lot of customers over the last six months is that the form factor that's being offered in shoulder as a potential solution in robotics is not where patients and surgeons want to go. And we saw a real opportunity partnering with Essential to be able to shape that debate. Now, as a result of that, we get a proven team with a proven technology, with capabilities in Grenoble that we can apply to the knee space right now because they've literally just developed a new robot but applying that and and really steering where shoulder goes we believe gives us a position to continue to grow above the market great and so what does that integrated system look like between harvest and essential well again we've got an ai powered platform for planning and navigation and some of the other offerings when you switch from planning to navigation to assistance it's not a seamless ecosystem our plan is to have a backward integrated system because we've already got the planning and navigation put the robot back into that platform and that foundation and so that we'll meet the customer where they are if they're in a hospital if they're in an asc i mean our typical sort of persona is a clinician who's to be doing surgery in the hospital in the morning and then one or two ASCs in the afternoon they're going to be able to have a robot in both or they'll be able to have the robot in the hospital and the Arvis in the ASCs but the planning and navigation and the whole ecosystem will be the same thing.

Great and so the U.S. new launch is planned for 2028 yeah what does the integration roadmap look like between now and then?

We haven't outlined that yet and I'd say look first let's close the deal which we hope is going to happen in Q4 and then when we get into early in the new year I think we'll outline you know here are the milestones and again not getting into false precision but being able to give directionally valid information that people can look at us so we don't just go dark for two years but let's get into the new year.

Fair enough maybe at a high level just any regulatory hurdle or hurdles you have to go over manufacturing wise.

Well So again, I think this is what's great about partnering with Essential and we did a lot of work as we were thinking about the arrangement with them and we looked at partnership. One of the things we did was a technical risk reduction and that whole process led us to believe again, proven technology, proven team, right? They already have technology that they've developed, you know, the Vellis spine robot for J&J, the Amplitude Andy Nii robot, we're pretty confident we know what the regulatory pathway is.

And then in conjunction with the announcement, you laid out some financial targets. Can you walk through EBITDA margin next year, the blitz intakes there? I believe you guided down 100 BIPs with underlying improvement up 50.

Yeah. I mean, I'll say first and foremost, we wanted to be clear that we're not coming off of any of the the top line guidance that we've given in terms of the near-term growth for for recon and P&R will maintain over the course of the next couple years and accelerate this is an unlock for us in terms of growth we think for the future and also progress around around free cash flow so we'll continue to make progress on free cash flow conversion generating cash up to 100 million dollars next year on our way to the journey of the 70 to 80 percent free cash flow conversion goals that we had previously laid out. So the one change to our near-term guidance is the investment on the profit side. We really want to make sure we set this investment with essential up for success. So we'll take on that team of engineers in France and then also continue to invest to be ready to commercialize the product in 28 and 29. So we'll take a one year step back in terms of margin performance next year as we invest in that technology and those capabilities and then we'll get back on our margin expansion goals in 2028 and beyond.

I think it's an important thing to stop on for a second. When I first came I've been here a little over a year and I spoke to a lot of investors face to face. We did a very deep survey with a broad number in at least 80% of the survey respondents were buy side investors. And what was important to them? One was cash flow. Can you improve and start generating cash? Second was debt reduction. Third was M&A and reducing programmatic M&A and fourth was sulfur robot. So what Ben just laid out in the in the last 18 months we've gone from negative free cash flow conversion to plus 10 percent last year to plus 25 percent conversion this year plus 50 percent next year and in case any of you said oh but you changed the denominator we said okay and a hundred million dollars of absolute correct so cash flow i would say check debt reduction we went from 3.8 to 3.1 we're saying for a period of next year, we're gonna go back up to about 3.5, but we're committing to get back down to 3.1. I would say debt reduction, check. Programmatic M&A, we've stopped the serial M&A. And in fact, we sold an asset last year. So, and I would say that there's more views of the whole portfolio that we're considering. So check. And then so fourth was sold for robot. And I would argue we've taken a proven team with proven capabilities and technology and solved the robot question. So I would argue that what we've done in the last week is round out what the report card was from all of you.

Absolutely. Maybe just put a finer point on free cash flow. So 50% conversion next year going to 70% in 29. Along the way, you are launching a robot. So it's obviously a bit capital intensive. Can you help us bridge the gap there?

Yeah, I mean, this has been a journey that we've been on. I think we laid out when we did the Lima deal about three years ago was that we were going to have a heavy amount of integration work to do over a three-year period. That is now completing as we're stepping out of this year. So our integration costs will significantly step down as we enter next year. The other thing we said with the Lima deal is that we've become more capital inefficient because we've been investing in moving technology around from higher cost locations to lower cost locations and investing for all of the cross selling and growth that came from those acquisitions. So we'll see some efficiency in capital as well as we step into next year and beyond. And one of the benefits of having the robotic solutions and the enabling tech is you can be more efficient with working capital. So while the units themselves are now more capital intense, you can offset that through productivity and inventory and field inventory and working capital. So overall, we see this as a relatively net neutral from a capital efficiency standpoint, but also gives us ability over time to think about productivity in broader working capital across RECON. So overall, we feel like we're on a good pace. We've shown progress. And as Damien said, we're marching towards that goal of 70% plus in 2029. Great.

I realize it's far out and I won't ask you to, you know, establish launch targets today, but how should we think about what having a robot does for your dollar opportunity post-launch?

Well, I think you touched on it. It's accelerating our plans. I think it's an unlock for us in the knee market. And I think, again, I position ourselves as knocking on the door of number two in shoulder. This is really going to give us an opportunity to shape the direction of shoulder market and accelerate our program now. We've shown an ability to take market share. We've got great technology, great teachers who are part of our faculty, and you've seen us disproportionately grow above market in that space. So I think for us, this is an unlock and an acceleration.

Great. Amy, moving back to the near term, looking at the rest of 26, your guidance implies 6.4% in the second half of this year, so a decent step up from first half growth. What gives you confidence in those numbers?

Yeah, the team is increasingly executing well. Look, there's puts and takes. It's never linear, but we've seen on the recon side, as I said, meaningfully growing above the market in Europe, where, as I said, we over-index internationally. We're continuing to hire great talent in the U.S. sales organization and enroll and engage. We just had a shoulder surgery symposium that might be the biggest symposium that we've ever had for MedEd. And that, for us, signals that people want to engage. On the P&R side, the RCM business is continuing to grow strongly. the whole overhang on bone stem got removed, and again, we're continuing to grow on the bone stem program. We just launched a spine brace. Again, small market, but it's growing well early in days. And then in recovery sciences, we've just launched the companion version of a new laser. Again, And it's a small business, but it's going to be a high growth opportunity for us. So the P&R side has got growth opportunities that are reading through on four or five major businesses. And at the recon side, we're continuing to grow above market. And as you said, through the first half, we're up 8%.

Anything we should think about on comp side or potential headwinds in the second half of this year when they get more challenging?

We get an extra day in Q4, so that should provide about 120 basis points or so tailwind to growth, but nothing other than that.

And then looking at Arvis, you know, as you're expanding outside of early adopters in KOL, how would you express incremental feedback?

Yeah, I've been really, honestly, really thrilled with how. But we took a very deliberate limited market release approach to this so that we learned how to train and enrol and engage physicians as we rolled this out. We also wanted to make sure that our clinical team was really well developed in this space. But we've had tremendous feedback as we've rolled this out. I saw a procedure early on in the 2.0 launch at the Mayo Clinic. and just, you know, the way that it enhances the ability to do the procedure is tremendous. And I think we're starting to see that read through and the clinician feedback now. Great.

And then I guess, what's the game plan for Arvis for the balance of this year in 27? You throw incremental dollars behind it?

Double the number of placements. So pretty aggressive, but we really want to push the team to get this out there. again this is an enabler for physicians it enables them when they talk to to patients because patients are demanding enabling tech you know often they say the word robot but really they're looking for enabling tech it gives the clinician a chance to say here's how i approach enabling tech and and particularly in shoulder and and for us i think that also sets us up for the long term as we as we talk about the robot you know now we can train you on the ecosystem so that when the robot does come out you you're not learning the whole ecosystem you're just learning the assistance part so i think it's really exciting and maybe while we're here can you talk about the training um time it takes for someone to ramp up on arvis yeah it's about five to ten procedures um we are hand-holding the whole way we do outside the or training we are there in the OR with you, we troubleshoot, we've got very rapid customer service response times. So again, it's not unusual to MedTech to have this sort of system, but we think we've done a really good job with this.

And then in terms of handholding, how are you feeling about your Salesforce?

Oh, I love our Salesforce. I think one of the surprises, a lot of people ask me, what's the surprise since you got here the level of talent in our organization is I think definitively higher than we're punching above our weight for who we are and and one of the things I love about our sales force is that focus on customer intimacy and engagement and responsiveness and I think we're really lucky to have attracted that talent and I have to say some of the dislocation that's been happening in the market has given us a chance to bring on more talent and and that's been terrific And then just in terms of headcount, you're bringing on more people.

Should we expect, you know, incremental hiring next year, or just kind of add on to...

I think we should always be hiring talent, but you know, not outside what we're trying to do in terms of our financial responsibilities, but you should grab talent when you see it.

And then maybe switching Lima integration, just how you guys feel that has progressed, what cross-selling opportunities are still left?

Yeah, I think it's gone really well. I mean, if you think about what we're trying to do and collapse two international businesses together with the Lima integration. We went very quick upfront with regards to making sure leadership and management teams were in place. Phase two of that was to start to get legal entity and system rationalization executed while starting to move manufacturing, like I said earlier, from higher cost locations to lower cost locations. So all of those programs have proceeded as we have planned through the integration. I'd say have gone a little bit better than what we had expected, and we still fully expect to finish that heavy lift at the end of this year. On the cross-selling, I'd say it's still a work in progress. I think the analogy we use is still early innings. I think we have a great product portfolio offering now that can be more customized depending on which philosophy or which market condition you're participating in. So overall, I think we still see lots of opportunity to drive above market growth on the international side, driven by the products that we're putting together with both Lima and the Mathis acquisition, as well as taking some of the legacy Inovus products and making sure that they're available in some of those markets. So, overall, we see a lot of benefit to that acquisition. It's got some capabilities that we're still taking advantage of as well with regards to 3D printing and captive ceramic capability. So, overall, we see this as a very positive acquisition for ourselves and the integration plan has been executed in good condition. Great.

And then, when thinking about your geographic representation, you know, what markets remain attractive outside of the United States? should we expect any to come on this year and what about next year yeah we've got a core focus of a number of countries i'm not going to declare them here because i don't want to tell everyone our strategy but there's there's a core market group outside of the us that we're very focused on um and and i would say we're still underrepresented in in asia and south america again as i we started out we we skew western europe so um there's still a lot of opportunity for us to continue to expand and I'm excited about that again because some of the talent that we've been able to attract in the last you know eight to twelve months has really given us a way of viewing those markets with a different lens and we're excited about that.

Great and then looking at P&R I think you guys grew three percent organic selling days adjusted during the quarter where are the areas for improvement to get that number out?

Well look I love that team because they've done a great job not only shaping the portfolio, something like 50% of the portfolio now grows mid-single digital better, but they've also been disciplined around how they've thought about gross margin expansion. Notwithstanding the tariff issues and the headwinds, they've still done a really good job on doubling down on how the group operationally runs. And let's be clear, from a strategic point of view, what P&R does is not only have great brands, but it also generates a lot of cash. And it's 90 plus percent cash conversion. And it's a really powerful business in terms of being able to support and grow the rest of the business. And as I said, we've got an RCM business, revenue cycle management business that's very exciting in the US. We've just done a bunch of work to insource that capability that supports that business in India so that now we can drive productivity improvement inside that capability that we have. We're just launching a cycle of new lasers in the recovery sciences. We're showing demonstrably that we're taking share in the bone stem business and in the US. So I think there's a lot to really like about that business and the brand recognition of DonJoy and Aircast is really powerful.

I think lasers come up every once in a while, but maybe an overlooked part of the story. You brought it up a couple of times today. Could you walk us through the opportunity there and where you're excited?

Again, these are small businesses with a lot of brand loyalty, but we just launched the companion animal laser just this quarter. there's a large installed base and we know where that installed base is and the cycle of the product life cycle here has been about six years so we've got a lot of installed base that are greater than six years old and so classic funnel management tool is let's go after those that installed base which the team is doing and again that's just on the companion animal side the the human version of that is launched next year and that'll give us another growth spurt on that product portfolio so exciting exciting times.

And then in terms of capital allocation you obviously you know have the goal of paying down debt but as we think about the acquisition closing hopefully in the fourth quarter this year how should we think about the mix between cash and debt?

Yeah I mean I think we're going to continue to make progress through the balance of the year on cash generation and all that cash can be used to help fund this acquisition and then we have about 900 million or so of capacity on our revolver so we'll use a combination of what cash we generate through the balance of the year and the revolver to take out essential.

Great, great.

Is there any questions from the audience?

Alright. If not, I'll leave the rest of the time with you guys for some closing remarks and key takeaways for today.

Well we appreciate you coming to spend some time with us. I would point you to the things that we said early on, which is about we need to grow above market, which I think we're doing. We need to improve gross margins. We're doing that. And we're meaningfully contributing to our free cash flow, free cash flow conversion and debt reduction. We're trying to be visible. We're trying to be accessible. And we just welcome any engagement as you build out your models and get conviction. But we think we've got a long runway ahead of us. We've got great technologies, great customer relationships, great brands, and we'd love you to become part of the story. So thank you.

Thanks for being here.

Thanks, Russ.