Q4 2022 Enovis Corp Earnings Call
Good morning, and welcome to the fourth quarter and full year 2022 earnings conference call a.
Participants will be in a listen only mode should you need assistance, please and I'll call for specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question. He might press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note. This event is being recorded I would now like to turn the conference over to Derek Licko, Vice President of Investor Relations. Please go ahead.
Thank you Daniel Good morning, everyone and thank you for joining us today for our fourth quarter and full year 2022 results conference call I'm, Derek Wacko enjoying me today on the call or not for your total a chief Executive Officer.
Then Barry Chief Financial Officer.
Earnings release was issued earlier this morning, and is available and the Investor section of our website <unk> Dot com.
You'll be using a slide presentation in today's call, which can also be found on our website. Both the audio on the slide presentation up the call will be archived on the website later today.
This call will 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.
And those set forth in the Safe Harbor language and today's earnings release and in our filings with the F. C C.
Actual results may differ materially from any forward looking statements that we make today.
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 company reconciliation information related to those measures can be found in our earnings press release, and then the appendix something a slide presentation [laughter] with that let me turn the call over to Matt who will begin on slide three map.
[noise], thanks to Oregon.
2022 was the year significant progress toward our longer term strategic goals and I'm excited about the future of our focus Med Tech company.
We successfully launched a notice with a talented global team are proven E. G X business system driving continuous improvement.
Hoping innovation engine and a strong capital structure to support our growth.
We completed the year with total revenue growth of 10%, which included 6% organic growth.
This is well on its way towards sustainability high single digit organic grip we.
We made great progress in 2022, despite the choppiness related to macro challenges and residual effects from COVID-19.
We had the double digit organic growth and recon in over 3% organic growth in PNR fueled by investments we've been making it our innovation that you are.
Chat with the team continues to develop exciting new technologies and solutions.
Bruce patient outcomes and satisfaction around the world.
And PNR were reshaping the business for sustained mid single digits organic growth.
In 2022, we once again outgrew our markets, we've improved innovation vitality in this business from close to zero and 2018 to double digits as we exit 2022, and we have a strong pipeline for 2023 and beyond.
And <unk> and we made significant progress expanding this high growth and high margin platform.
Deliver a double digit growth continued to winning the AFC and expanded globally through Mathis.
We made good progress on margins in 2022, improving our EBITDA margins by 70 basis point, despite headwinds from FX and inflation.
Gross margin improvements showed the power of our <unk> enriching strategy and E G extraction, driving operational and pricing improvements.
We delivered 25 million in fixed cost reductions, which is more than originally expected, making room to invest in our growth and absorb wage inflation.
[laughter].
The accelerated our growth through our M&A strategy, enhancing our innovation capabilities and expanding geographically.
Our acquisitions from the past few years group double digits and it started to scale.
2022, we added rvs surgical navigation and also deepen our presence in the attractive Australian market with 360 Medicare.
We exit the year with a healthy pipeline of acquisition opportunities and a strong balance sheet.
On slide for our fourth quarter organic growth was 5% fueled by double digit growth in recon once again, well above market levels.
We add low single digit growth and PNR, which was impacted by some temporary market softness we're seeing a return towards more normal PNR growth rates, so far in the first quarter.
We expanded adjusted EBITDA margins, almost 300 basis points in a quarter and are starting to see inflation and currency stabilised.
You can see the power of our motto with mixed improvement and operating leverage clearly displayed in this higher volume period.
We are continuing to build momentum with <unk> and we drove improvements in safety service levels and productivity.
We've made significant progress on our supply chain initiatives and invest it in some extra inventory, which helped us to achieve a multi year low past due level at PNR.
As you can see on slide five we grew our recon business, 14% organically and that growth was broad based with USA and needs up 14% and extremities up 13% led by our powerful shoulder franchise.
Innovation momentum continues to build there is very high interest in our artifice, enabling technology and we're excited about the launch of the empower revision knee, which opens up a whole new market category for us.
And in <unk>, we started a new phase of growth for the star ankle with F. D. A clearance of our patient specific instrumentation to improve surgical efficiency.
We made great progress on our geographic expansion strategy with math is business up 16% and I look forward to the opportunity ahead as we continue driving some of our strongest and high gross margin use products into the math is channel.
Turning to slide six I'm excited about the progress we've made reshaping our PNR business to set it up for sustainable mid single digits organic growth.
Organic growth in the quarter was lower than the rest of the year as we experienced some temporary market softness that carried over from elective surgery slowdowns in the third quarter.
Even with this finish we had 3.5% full year sales per day growth and share gain against across most markets and products.
Are bracing business grew over 4% in the year and is now re established as a strong global leader with great customer service and a healthy pipeline of additional new products coming.
We also delivered strong growth in our motion M. D clinic workflow solution, a 30% increase in active active clinics.
This market, leading solution drives clinic conversions and set us up well for future growth.
Before I turn it over to ban to take you through our queue for financial results and outlook for 2023, I want to say that I'm. So proud of our talented team and Wanna. Thank our teammates around the world for their hard work and many contributions this year as we continue to build a high value Medtech growth company Ben.
Thanks, Matt I'll start my prepared remarks on slide seven.
We had a strong operating quarter in queue for which was highlighted by our double digit recon growth and 290 basis points of margin expansion.
Gross margins grew 190 basis points versa prior year, reflecting are faster growing and higher margin recon segment.
As mentioned in our queue three call our supply chain stabilized in the back half of the year, and we're able to largely offset persistent inflation pressure.
R Q4, EBITDA margins of 18.3% a result of our strong operating performance productivity and cost management.
We also benefited from roughly 50 basis points of favorable expenses from lower than anticipated medical benefit charges.
Normalizing from one time tax benefits in 2021 are strong Q for operating performance resulted in greater than 20 per cent underlying EPS growth.
For the full year, we expanded gross margins by 90 basis points, driven by strategically tilting our business mixed <unk> leveraging R E G X capabilities and making progress on the price cost equation in our PNR business.
Commented earlier, we increased our EBIT margins by 70 basis points, we continued to invest for growth and our $25 million of cost actions, mostly offset headwinds from inflation negative foreign currency and acquisitions, we deliver double digit EBITDA and EPS.
Growth and a challenging market environment and I'm extremely proud of the way our teams battled and put us in strong position entering 2023.
Slide eight details or quarterly progression in 2022, or six <unk>, 6% sales per day growth was highlighted by 12 per cent growth in our <unk> segment with notably strong performance in the second half of the year, while overall recon markets grew a little bit better than pre COVID-19 levels.
Cancellations staffing pressure in other markets disruptions were obstacles throughout the course of the year.
In prevention and recovery overall market demand began to turn the corner versus pre COVID-19 levels and as Matt mentioned, we experienced a temporary slowdown in queue for with lower than normal clinic volumes.
Are strong business segments demonstrated resiliency during the course of 2022, and we continue to outpace our competition and both segments.
Our EBITDA margins increased sequentially throughout 2022, as we improved mix and reduced the net inflation impacts as the year progressed.
Our core margin improvement of 160 basis points was offset by impacts from recent acquisitions. These carry initial less than company average margins. However, they are expected to continue to scale from rapid growth in the coming years.
We also had about 20 basis points of negative currency pressure that impacted us primarily in the back half of the year.
Overall, we are pleased with our results and we continue to execute against our strategic goals.
Turning the slide nine and 2023, we are projecting another year of strong operating performance, including 5% to 6% organic growth, we expect another double digit growth year, and recon and a normalised market environment and moderate improvements and global PNR markets.
We are expecting at least 50 basis points of margin improvement, resulting in an estimated $255 million to $265 million of adjusted EBITDA.
Orderly phasing of margins is expected to be similar to the progression. We saw in 2022 with Q1 organic growth rates consistent with full year guidance offset by one to two points of negative currency impact, we anticipate that this currency impact along with investments and critical industry.
Meetings and events will result in modest margin improvement in Q1 versus prior year.
Depreciation is estimated to be roughly 85 million driven by growth investments and our <unk> segment. We expect interest to remain similar to our second half of 2022 run rate with slight increases from higher interest rates, resulting in approximately $23 million of interest expense.
In 2023.
While 2022 included one time tax benefits from the separation, we expect our effective tax rate in 2023 to settle into a more sustainable rate of around 20%.
We are forecasting are adjusted earnings per share to be $2.15 to $2.30 a.
Adjusting for the year over year impacts from tax and interest this results in 6% to 10% of operational EPS growth.
To summarize on slide 10, we have a strong first year as a med tech growth company.
We have created a company with a clear strategy and the building blocks for sustainable market outperformance and both growth and margins.
Our business system continues to create value as demonstrated in 2022, and we have an exciting pipeline of M&A targets and ample capacity to execute.
That concludes our prepared remarks, Danielle please open up the call for questions.
We will now be getting my question and answer session to ask a question you May press, sorry that one on your telephone keypad.
I think a speaker phone please pick up their handset before pressing the keys.
So let's try a question please press <unk>.
The first question comes from that Chopper, Oh Wells Fargo. Please go ahead.
Okay.
Thanks for taking the questions.
Just to for me one on your guidance E. P. S guidance was below <unk> expectations.
<unk> could you maybe talk about some of the headwinds that you're facing besides the tax rate and then he puts and takes we should be considering for the coming year.
Yeah, Hey, Vic out I'll take that one as we looked at and I think one of the things that we wanted to make sure that we're clear about where some of the building blocks components because as we looked at the at the Street <unk> estimates and the consensus there were you know variations in terms of what was being modeled for depreciation.
Interest <unk>.
Primarily which is why we wanted to be you know more more prescriptive about how those are playing into 2023, but overall from underlying EPS perspective, we are pretty much in line with where consensus was.
Got it thanks for the color and then my follow up I think you mentioned a couple of times that you have a pretty active pipeline for M&A. So just curious whether we should expect a larger deal with you or if the focus is still on talking M&A, maybe highlight some of the areas you're more likely to be inquisitive, and then others and just one more on <unk>.
<unk> any any color on free cashflow expectations for 2023.
For taking the questions.
If anyone has the free cash flow first yeah, yeah, well, we plan to take a good step forward and free cash flow in 2023.
After making significant investments around protecting supply chain of 2022.
With with inventory, we expect free cash flow conversion to be 40% to 50%.
In 2023, and we have a strong.
Pace that we see of improvement there over the coming years to get into the 80 per cent plus that we've talked about in prior calls so for the year 2023, B 40 to 50 per cent free cashflow conversion.
Okay, and then may be Vega. Thanks for the question commenting on <unk>, Yeah, we do have a healthy healthy pipeline and certainly plenty of balance sheet capability to to invest in the business. You know we've had some really good success with you know sort of small to medium sized strategic bolt onto the ones that we've done in the past three years or re.
Contributing in a tremendous way.
The growth and margin improvement and momentum in our business and I think you know soap so most of what we're working on is more of those kinds of of opportunities.
Going deeper into some of the attractive segments that ran and looking at other attractive geographic expansion. We certainly do have the capacity for larger acquisitions that as well and will.
Would be looking at those in the coming years, but most of our focus is on small to medium sized attractive strategic Bulldogs.
Alright, and quite a cup later next question was thank you. The next question comes from Kyle Rattus Afghan According to anybody. Please go ahead.
Hey, this is Kyle on for Caitlin, Thanks for taking my questions.
Just looking to <unk> Caitlin good morning, how are you doing.
Yeah I'm just looking at 2023 can you provide a little more color on the progression is happening <unk> Cathie N kinda puts and takes a revenue guidance you know what really drive you to the low end of the mid single digit range versus the higher end and also you know kind of how do you think about the cadence of operating loss.
<unk> 2020, and beyond 2023, as well and and just any color on the Nixon U S U S and <unk> well.
Yeah. Thanks. Thanks for the question I think from from revenue growth standpoint, we're we're confident in our ability to keep growing a recon business double digit says we've showed that sustainable capability to keep growing the recon business double digits, and we're expecting you know kind of a pretty normal recon industry environment.
And you know.
Able to continue the strong momentum that we've had there based on that you know I think the the range is more created by waiting to see how the how the P. In our markets start the year here and trying to make sure that we.
Got a range that contemplates that things could be a little chop, you're at the start or it could be strong and PNR.
And we're seeing a good start that in terms of working our way through the first quarter, how the P. In our markets are going but you know we've learned for the last couple of years that.
Be cautious at the beginning of the year about what might come during the year and so I'd say, if if we wind up.
Lower end of that range it would likely be based on a little softer PNR markets or based on a different recon market. Then we and others are plain are planning for right now.
Yeah, and Caitlin in terms of the phasing.
As I said in the in the remarks.
The way I would think about it is think about you know kind of similar phasing to what we saw in 2022, we have some seasonal benefits in terms of how the revenue paces throughout the course of the year in the mix of the business as well, we do have some currency pressure in the beginning of the year as well so that.
That'll put a little bit of pressure I'd say Q1, and a little bit on cue too, but overall the progression of the margins I would think about you know thinking about 2022 and I'm thinking about how that was face.
Great. Thanks, and just a quick one on Europe , How's the cross selling into the mattress channel going in any kind of new products clearances or launches in Europe .
Between three call.
Yeah, Yeah. So yeah first obviously as we talked about math has had a great great growth year markets, where strong over there and Mathis, there's a core business. The madness has done very well.
We've also got great momentum in terms of the in terms of the cross selling opportunities. There have had a lot of outreach over there in terms of connecting connecting with surgeons connecting them with our kols from the U S.
Getting instruments, that's over there getting people started trying both the all debate and the power.
And so we're very excited about how much we prime the pump and got some initial revenue down down the back half of last year, and we expect the the synergies to be a nice contributor here this year to the growth of the master's business.
So both both in power and all debate.
Are off to a good start in terms of that cross selling.
The next question comes from gain Reinhardt I'm sorry. Please go ahead.
Hey, good morning, guys. So just on the PNR business I guess it seemed like last corner.
Expectations are a little bit or it came in a little bit below expectations UN talked about seeing a recovery kind of an recon to help grow that in four Q as.
And along with some price increases so I know you talked about some of the temporary kind of pressures in that market, but is there anything else that we should be thinking about there that kind of pressure that and then what your confidence is in that kind of returning to 3% to 5% growth over the longer term.
Yeah. Thanks. Thanks for the question one of the things that we've seen clearly in the PNR business over the past few years is is that any market impact too elective surgery gets felt with a lag in our PNR businesses, you know because the the majority of the PNR activity comes poster.
<unk> not not pre surgery, and so we talked a little on the on the Q3 call about starting to feel a little bit of pressure in that business. As we came out of it came out of the summer and and what played out in queue for was you know somebody that elective pressure that.
We saw back in the summer time on the <unk> side in the industry flowed.
Flowed into the breaking business in particular, but also some of the other businesses there.
In Q4 and.
And led to some some softness there in queue for as we said earlier.
We've we've seen.
Recovery would expect as we've been working through the first quarter here.
Which is consistent with the fact that elective surgery got strong there it down the stretch of the year remains strong.
So we feel comfortable that it was.
Temporary pressure point on the industry on the business as.
As far as three to five yeah, Yeah, I mean, we're very comfortable that the P. In our business can grow in that 3% to 5% range, where it's shaping it to be able to consistently grow into 4% to 5% range, but I think it's appropriate to think of it right now is more being in the in the 3% to 5% range. You can see the first three quarters of last year, we were sort of comfortably in that in that range.
And we didn't expect that.
We work through this year will be able to demonstrate that kind of performance as well.
Gotcha. Okay. Thank you and then the second question just maybe more of a modeling question, but and I may have missed this did you guys end up exchanging your aesop equity stake for that and it looks like on the balance sheet that kind of came down around $200 million or so and then what's interest expense going up a little bit this year with the <unk>.
That you have it almost implies like an upper single digit interest rate is there anything else in that line item that we should be contemplating.
No you've got it Dane we did sell the retain steak and we're carrying about $250 million of that right now, but we expect to.
Expect some interest rate increases throughout the course of the year and overall you know relatively modest levels of of new that kind of added to that as.
As well.
Thank you.
The next question comes from Matthew Sean Keybanc. Please go ahead.
Hey, guys hope you're doing well this is better spent on today for Matt and thanks for taking my questions. Just wanted to start off on some of the near term revenue dynamics Uhm I think.
In our side has definitely been covered well, but just curious you know based on some of the trends. We saw this quarter from from your peers on the reconstructive side.
The 13.5% organic growth was it looked like a decent number but maybe.
Maybe more in line with expectations. So just curious maybe why you.
You didn't see more upset that could've potentially offset some of the headwinds and pinard this quarter.
Yes. Thanks, Thanks for the question.
We just talk when we talked about these four we talked about the fact that we were planning for our.
A healthy seasonal finish.
And that's what that's what we saw I think they look at our fourth quarter growth I think a helpful thing to do is not just look at the compare to last year, but look at the compared to 2019, because I think if you. If you look at that you'll see that our growth versus 19 is dramatically better.
Than others and there you can I think you can see that more of a more of a kicker there I think that you know we had a little little stronger comp.
21, and so that helps to explain the story there, but we did see a nice strong finish and recon.
We're encouraged about to start that we've seen here this year as well.
Alright, perfect and then just on margins, taking a bit of a step back and thinking about you know your longterm ramp to call at like 20 per cent. Adjusted EBITDA margins you guys. Previously spoke about just just curious how you're now thinking about the progression toward that level based on the starting point for 2023 gardens.
Yeah. Thank thanks bread, I mean would still very committed and expect to seek continuous margin improvements as we go across the next several years are the building blocks still remain in place I mean, if you think about are mixing the business towards.
Growth in gross margin <unk> business as you think about scaling some of the recent acquisitions that we've done and then generating leverage on our fixed costs all of that you know.
Allows for us to have continuous margin improvement.
As we go forward into the coming years. So we're very much committed to continue that pace as we as we've said we expect at least 50.
<unk> 50 basis points or more of gross margin improvement a year and.
And we expect that to continue.
Alright, Awesome and then just the last one from me I thought it was interesting in the slide deck and some of the prepared remarks, calling out 30% growth in clinics using motion M. D. I was just curious how you think that's translated into revenue growth and also if you expect continued robust level of new Senator additions.
Or a new clinic and assurance at that at a similar level into this into this year as well. Thank you very much for taking the questions.
Yeah, there's a couple a couple of different ways that that supports are bracing revenue growth you know the the first is is you know, sometimes we get entire clinic conversions.
We get a meaningful amount of revenue converted over to our brands. If we had actually had a couple of really nice large clinic conversions in the fourth quarter of last year.
<unk> gonna be helping us this year. The second is in the clinics that are using our solutions, we tend to have deeper penetration into their into their overall wallets of products that they they use of overtime and that is a contributor to our growth as well and then third the clinics where we.
Sell the software as a service we do we do get a.
Sure.
Software fee, there SaaS fee and that's B as you know, it's a small amount of revenue for us, but it's been growing nicely and as we continue to add clinics that that SaaS software revenue will grow as well.
Alright, Thanks again.
Our next question comes from Vijay Kumar from Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question.
Just sign up this <unk> queue for organic Trenton the guidance here.
You guys had a thesis of a hyphen grilled with a company and we had 5% organic guidance for five to six.
When I look at your order peers.
All of them are sorry to get improved hospital staffing situation procedures coming in about.
I'm curious has anything changed here from from your longer term aspirations of that high single digits <unk> now what is driving this.
Below L. R P performance.
Yeah. Thanks, VJ now I think we've consistently said that we would have a high single digit growth business by 2024.
We had some some work to do work on our way towards that in terms of expanding the <unk> part of our portfolio that goes a lot faster.
Shaping the PNR portfolio to be a consistent mid single digit grower and I think we've made tremendous progress on that flight path and we're sort of pretty darn pretty darn close in terms of the performance last year and the guy that were given for this year.
But.
Trying to be kind of cautious about the market environment. This year I think the last few years have taught us that it's important to be cautious as we step into the year about what might play out in the year.
And so yeah. We've tried to have a plan that is based on a.
Cautious view of the market environment, and I think <unk>.
Delivering this plan would give us a very clear view of how to go from there to to that high single digit organic in 2024.
As a more favorable market environment, then maybe we can we can get there faster you know as far as the commentary in the market environment I think that if you look at the data that's out there it's clear that last year. The recon markets were a little higher growth than than a normal year, just on a year over year basis.
And and I think we're expecting the growth this year to be more normal and I know there are views out there that essentially there is that your pent up backlog that could could push the recon growth to be higher market levels et cetera, and certainly if that opportunity presents itself will be.
<unk>.
For sure, but we're planning for a more normal market market environment for weekend.
Understood. Max then one quick follow up on that the guidance as options here.
The 50 basis points of Martin expansion is that coming from gross margins or is that an operating margin expansion and what are you using a <unk> stock comp expense and <unk>. Thanks.
Yeah. So so we're expecting to see the leverage from the mix of the business and and really you know kind of ride that benefit from from gross margins as we think about driving most of the leverage of of the margin improvement there'll be some.
Fixed cost leveraged as well it'll be offset by some investments that we put into the business, but I'd say, primarily driven by continued shaping of.
The mix of the business in some productivity as.
As well.
Margin side in terms of share count and in stock comp expense. We can follow up with you later on that Vijay in terms of getting getting more specific.
Thanks Bye.
Okay. The next.
Next question comes from young Lee Some Jeffries. Please go ahead.
Alright, Thank you very much maybe as two products a specific question Oh it.
I was wondering if you can share some color on your expectations for all of us So.
And brands and 23, and some of our survey working channel checks.
You're pretty positive feedback on technology and opportunity in general.
Can harvest to mid single or double digit millionaire in 2023.
Yeah. Thanks for the question young yet so we're super excited about August the reception from the market has been very positive.
The about the technology and as we put put it into the market there last year.
In some of our existing surgeons. It was just what they were looking for and.
A great strengthener of our relationships with them and we also were able to use it to already drive some surgeon conversions last year. So.
Great New technology, and I think a really positive market reception to that and as we work through this year, we expect to broaden it into the marketplace use it to drive conversions.
And also start to see the purpose read your free fee.
<unk> you know for a low level, initially, but but it'll start to become larger overtime definitely the first purpose he'd your fee, which would be more in the in the low single digits.
A million dollars this year starting out at a at a low level, but it will be a contributor to our overall implants growth in terms of the convergent that we can drive with it as we work through work through this year. Yeah. The final thing I'll say is or does the new technology right at the new to the World technology. So we've tried to be.
Careful and have a more kind of manage launched last year. So if we get some great great feedback and have people learn how to use this new technology.
And you know that gives us the opportunity given it's mostly software base that gives us the opportunity to.
Rev and improve it quickly as we take to a broader market.
Alright, great very helpful I guess.
Seems like a foot and ankle growth is road into extremities.
Hello, 13%.
Was just wondering you know if you can't share the growth rate in queue for and what's your level of confidence in that business growing two to three on the market rates in 23 as well as your expectations.
Expectations for the growth around for Star in 2023.
Yeah. So we we talked openly about putting that it'll be in double digits.
The second half of last year and in each of the quarters of the second half of last year and.
And we had that double digit growth in our foot and ankle business down the back half of last year and both both quarters.
And we have a clear plan for the business to grow double digits this year as well with the.
The the channel being.
Kind of more stabilized now than where it was in the first half of last year and some some some good innovation coming through the pipeline there.
Star is gonna start to contribute here this year, but but.
As we've talked about we need to get the cutting guy that we did now to make his way in in the marketplace.
We're working through the you know the poly changes as we were.
We're in the first half of this year.
Still working through the approvals on on those and so this'll year. This will be a year when we get to start to go on offense in star where it's been.
The tractor from growth last year.
But you know I.
I think it'll be the back half of the year and moving into next year that we really get strong momentum and that product line.
Alright, thank you so much.
This concludes that question and answer session.
I live in now like to turn the conference back over to Jack for closing remarks.
Thank you everyone for joining us today on the call. We appreciate your interest in it <unk> I Hope you have any further questions. Please contact me at Investor Relations. Thanks, a lot.
The conflict has now concluded. Thank you for attending today's presentation you may now disconnect.
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