Q2 2023 Enovis Corporation Earnings Call
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This event is being recorded.
I would now like on the conference over to Derek Litho.
Vice President of Investor Relations.
Please go ahead.
Thank you Dorwan. Good morning, everyone. Thank you for joining us today for our second quarter 3.3 results conference call.
My wife's brother that Investor Relations joining me on the call today are Metro Chief Executive Officer, and Ben Barry Chief Financial Officer.
Earnings release of issue earlier. This morning, it was available in the investors section of our website <unk> Dot com.
I'll be using a slide presentation today's call, which can also be found on our website both.
Both the audio and slide presentation that this call will be archived on the website later today.
During 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, including those set forth in the <unk>.
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.
Forward looking statements speak only adds up today, and we do not assume any obligation or intend to update them, except as required by law with.
With respect to the non-GAAP financial measures reference during the call today. The accompanying reconciliation information related to those measures can be found in our earnings press release, and then the appendix out today slide presentation.
With that let me turn the call over to Matt will begin on slide three map.
Hello, everyone and thanks for joining us today.
A strong second quarter with high single digit organic gross margin expansion and good progress against our strategic goals.
Before I get into the resolved somebody congratulated our team for being recognized by Newsweek is one of the best places to work in America.
We are positive energy and momentum in our company and a talented cohesive global team that gets stronger every day.
Let's go to slide three and talk about some of the cute too highlights.
We grow organically by 8% with 17 per cent growth and recon and 4% growth in P. N R.
That gives us 9% daily sales growth for the first half of the year.
We continue to see some market tailwinds on the.
<unk> and we continued to outperform the market by quite a bit.
We add another strong PNR quarter as well in a healthy market environment.
We expanded our adjusted EBITDA margins by 110 basis points, reflecting the mixed impact of strong recon growth.
Gross margin expansion from our price and productivity progress and continued moderation of inflation.
We recently closed two acquisitions and foot and ankle.
We're also delivering strong growth while scaling the full set of acquisition to be completed in the past few last few years.
Overall, we remain on track for a great 20, twenty-three was strong momentum toward our strategic objectives.
And recon on slide four we had high double digit growth.
Are you in the U S led by over 22% organic growth and knees and hips extremities grew 15% with well above market growth in both shoulder and foot and ankle.
Outside the U S. We grew over 16% organically in a resilient market. It's still early days, but I'm excited about the international growth opportunity as we leverage our market position and began to cross sell our market leading in power and all debate products and some large markets.
And we have a strong pipeline of innovation.
As we continue the U S roll out of the empower the knee and have some new products launching in shoulder hip and our foot and ankle franchise.
Turning to slide five I Wanna take a moment to discuss the impact from the key recon acquisitions, we completed in the past few years.
We close Mathis to globalize or surgical business in July of 2021, and two years in things are going very well.
We're exceeding our plan and seeing very strong double digit growth meaningful EBITDA margin expansion and good traction on synergies.
We see great opportunities ahead, as grudge synergies Ram and we continue to scale the business.
There are also a number of other attractive.
Global bolt on opportunities.
And extremities, we built the leading position in foot and ankle there is now growing organically well into double digits.
Scale from no profit to double digits EBIT margin.
With the recent acquisitions, we expect to exit the year at 100 million dollar global run rate with a clear path for double digit revenue growth and strong margin improvement as we continue to scale.
And piano are on page six or 4% organic growth reflects a healthy market environment and solid execution.
The business is performing in line with our strategic plan with the average growth for the past six quarters a bit under 4%.
We have a strong pipeline of innovation for the balance of the year and next year.
Could support continued growth in this range.
We also expect PNR degenerating solid cash flow in the second half of the year as we right size inventory and continue to get the benefits of the productivity muscle, we built with our eject business system.
Now.
Take you through the P&L details and are positive guidance update Ben.
Matt Hello, everyone I'll start my remarks on slide seven.
We are pleased to report second quarter sales of 429 million up 8% versus prior year.
Our growth was fueled by strong demand for our products solid commercial execution in both of our business segments.
Stable market conditions.
Surely our second quarter sales results include a 70 basis point selling day headwind and a 50 basis point positive contribution combine from foreign currency in recent acquisitions.
Second quarter gross margin was 58 per cent of 200 basis points, but.
The growth was driven by leverage from higher sales and strong recon mix.
We continue to leverage R. E G X business system to capture efficiencies in the supply chain and take ground on price versus costs, which we did again this quarter.
Adjusted EBITDA margin was 15.3 per cent up 110 basis points.
Was driven by gross margin expansion and partially offset by growth investments and R&D and other expenses. This builds on a really strong first quarter, resulting in the first half adjusted EBITDA margins up 110 basis points versus the prior year.
Second quarter effective tax rate was 18 per cent compared to 9% last year, primarily due to a one time discreet benefit lowering the rate in 2022.
In April we executed across currency swap effectively effectively lowering our interest rates. This resulted in interest expense of $4 million fourth quarter.
Overall, we posted strong adjusted earnings per share of 61 cents or 22 per cent underlying growth after normalizing tax and interest impacts from the prior year.
We're very pleased with these results then the momentum we fell through the first half of the year I'd like to thank everyone at another verse and all the team members for another quarter of an outstanding results well done team.
Moving to slide eight considering R. Q2 performance, we are raising our organic sales growth outlook for the year to seven to seven and a half per cent.
As Matt said, the recon markets continue to be stable and R. P. In our business has grown in line with our expected levels.
We expect a slightly more difficult prior year comparison in the coming quarters, especially in Q3, but we are confident that our queue to results will lift the overall growth performance for the year.
Full year sales outlook could've been updated to include recently announced foot and ankle acquisitions and the current foreign currency rates.
Fact acquisitions to contribute roughly 1% growth for the year, which is two per cent in the second half.
Based on current F X rates, we expect about one to two per cent sale benefit and the balance of the year as well.
We're raising the full year adjusted EBITDA in EPS range is to reflect our second quarter performance.
Look for adjusted EBITDA is 262 to 270 million with adjusted E. P. S $2.22 to $2.36. We expect the hold a strong margin gains from the first half while the second half will have some temporary pressure from reset foot and ankle acquisitions and.
Strong Q for comps.
To summarize on slide nine we had another strong corridor, leading asked to again raise our full year guidance.
Grew 9% sales per day in the first half and we remain confident in our strategy and our capability to build a sustainable high single digit growth company.
We took another step forward and expanding our margins and have a clear plan in place for continued margin growth.
Send you to accelerate the company through M&A and have demonstrated strong execution of recent deals we have a robust funnel and will continue to look for opportunities to further shape the organization.
Line with our strategic goals.
Now will move onto Q&A Dorwin. Please open the call for questions.
Even now thinking the question and answer session.
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The first question comes from the Big Chill from from Wells Fargo. Please.
Please go ahead.
Hey, good morning, and thank you for doing my question Congrats on a quota.
On a on a good corner I had two questions first one you don't want it to be competitive already said last week that they're seeing an impact with the price increases it they put through in their breaking business.
Can you just provide an update on what you're seeing them on the customer price you've reached that you put food to help battle inflation, and then I had one more follow up.
Yeah. Thanks, Thanks for the question, Yeah, I mean I as as we've shared you know previously you know we've had you know multiple waves of price increases on the b in our sighting, including an embracing ER and ER. That's part of what's helped me not to have some of the good gross margin traction that we've got.
And you know that's you know been some pricing directly into the clinic. The channel and then and then there's also been some reimbursement increases that are provided some relief as well. So we've been working hard to start to pull back some of that inflationary pressure and stay ahead of further inflation.
Great and then you know you had another strong quarter and recall.
Wondering if you can talk about how much of a benefit you got Prof backlog, we capture.
And perhaps talk about your expectations for the rest of this year. Thank you very much.
Yeah. Thanks, Yeah, we were certainly pleased with our performance and confident that it'll it'll be you know be very shows very strong share game within the industry. You know definitely the the whole first half of the year. You know has has been a very healthy in in recon Ah. So you know they seem to be more capacity.
Deeper surgery, that's enabling surgeons to to work through you know some of the backlog in and show you know what I think Oh oversize market growth here. This year. They're also you know the the cops were a little bit softer in in the first quarter, but even in the second quarter with with healthier comps. There was you know some nice tailwind from the very healthy.
Year. This year you know it seems like there's certainly plenty more opportunity for that.
Backlog related tailwind to continue you know in in the coming years, but yeah. I think this year like last year, you know in the second or the third quarter here, where we're seeing it you know pretty heavy amount of vacations in in the elective surgery area. That's something we're certainly hearing about publicly out there and so you know I think you'll probably see some.
The backlog clear pause for a little bit as we go through the summer months and then you know opportunity then accelerate through the back of the year.
Thank you.
The next question comes from Matthew <unk> with Keybanc.
[noise] class.
Hey, guys. Thanks, so much for taking my questions. This is better spent on today for Matt.
To ask a question on PNR pretty pretty good friends, there, but just curious on you know.
Given how how strong really there'll be contact man has been over the past few quarters and in the market. If you might start to see a little bit of a lack benefits incremental to the current trend over the next several quarters and if that could prove that some upside to the garden.
Yeah. Thanks. Thanks for the question Yeah, we were you're we're certainly very pleased with the P. In our results and you know that's going to help the environment. If you remember the the piano or saying we've shared before has a number of different drivers and you know while electric surgery is a is a portion of what what <unk>.
<unk>.
Business you know, it's also you know driven by by trauma and sports injuries, and and and other elements in and so you know for sure a year here in the first first part of the year, we're getting to the benefit of some some extra.
You know some extra elective surgery volume.
P. In our business you know as far as whether there is a lag I you know I I think that you know that this your inventory a little tighter and probably you know the extra the extra tailwind there is being realized you know kind of in the quarter versus with a with a lag and that's why I said you know the the P. In our markets were held.
Here and in the second quarter and you know, we we feel comfortable that we can continue to grow R. R. P in our business within that.
[noise] within 3% to 4% range for the year as we've talked about like like closer to four then three but you know the four plus range that we've been in for the past few quarters is you know on the strong side for the for the P. In our markets.
Alright, I appreciate the color and then just a quick second question here. The international trends remained really really positive as well with 16% organic performance and recon and two Q I'm. Just curious if you could bifurcate like internationally, how much of that performance is attributable to like underlying market dynamics versus.
The notices efforts around a grand expansion in cross selling efforts and in Europe . Thanks, So much for taking my questions.
Yeah, Yeah, you bet now, we're really pleased with the international results, but yeah. I think it's certainly yeah very common knowledge out there in the industry that there there's some tailwinds in some countries.
Like in Germany, where there's quite a bit of a tailwind you know what I would say you know we shared that that you know <unk> was that you know about a mid single digits business historically and our our plan was to accelerate that business to at least high single digits, and and really work to push into into double digits and you know I I think that.
We've seen substantial acceleration of the math is business you know without the market tailwind certainly end of the high single digits, you know maybe low double digits and then there's you know market tailwind on top of that that's taken it well into the into the high teens and so the opportunity for us in the coming years it.
Mark a tailwind subsides, we have a chance to the ramp that that synergy and still remain very confident that you can grow that business you know in the high single digits and certainly the potential to grow in the double digits is is becoming a more promising is where you know getting to see more of the of the kind of reception, we're getting around the world and and the you know.
E as in energy back.
Thank you.
The next question comes from kind rose.
Canaccord Genuity. Please go ahead.
Great. Thank you for taking the questions and congrats on a strong quarter just wanted to talk a little bit about M&A, both you'll historical and then the opportunity moving forward I mean, obviously you you put a lot of focus on the recon side help us understand just how we should think about your the focus of M&A.
Recon versus PNR and and then also you know just the overall appetite for the org for smaller tucking deals versus larger map the size transformative deals just particularly given you know we're seeing a persistent higher rate environment here just.
Help there would be would be great in the number two is just empower revision can you remind us where we're at in the roll out there and just you know the overall contribution you've seen through the first half of the year. Thank you.
Yeah. Thanks, a lot guile Uhm M&A. It certainly were you know really pleased we've been able to do as as we kind of shared some of the highlights here on the call you know over the past a handful of years. The you know the vast majority.
You already have our M&A has been done in the recon space expanding into attractive Jason markets and bring a great technologies into.
The end of the business that but we have done you know some smaller things on the piano our side that have been very very constructive shaping our deals you know they'll delays or acquisition that we made it is driving some very you know very nice growth within our R. P. In our segment and Ardiles had been mostly small bolt ons you know with you know.
You know Mathis sprinkled Dan as a large or a strategic both on you know the opportunities that we see in the final or you know similar did it kind of profile of what we've been doing in in in the past did yours, certainly you know more on the recon side than the pinard side, but certainly some you know good you know a small.
Opportunities on the PNR side that can that can help us to shape that portfolio in a constructive way and certainly more you know small bolt ons, but you know some larger bolt ons that are that are good and attractive possibilities as well and and you know certainly it is a more constructive environment than it was you know several years ago for M&A. So.
Encouraging for us at the deals that we talked about today on the call were done in a really challenging environment in terms of.
Kind of the the strength of sellers and now it's a better M&A environment and and so you know work would definitely excited about the capital you haven't to deploy and the possibilities for what we can do with it.
To your second question about empower you were extremely excited to have the power revision that they get the <unk> to you know you know a substantial portion of need 15 to 20 per cent of that market that we've had really limited participation. In historically is a great product has been well received in the market you know.
And the ramp is you know gotta be accelerating here in the back half of this year and into next year. So the contribution to growth from that at this point is is limited as we've been you know step by step getting instruments steps and instrument sets out into the market and it'll it'll add a little bit more in the back app and will be a very strong contributor to growth next year.
Thank you for taking the questions.
Yep.
Thank you.
The next question comes from a Vijaiy Kumar with Evercore ISI. Please go ahead.
Hey, guys. Thanks for taking my question and and.
Congrats on a good execution here.
Maybe my first question is do you run the guidance Matt.
You know first half organic was pretty solid 9% I think the annual guide updated implies maybe a moderate or something maybe six six and change for the second half.
<unk> E P S.
I think we're <unk> speed on my 10 cents, but the E. P. S raised by four cents and you can just talk about the assumptions for back have any macros options for <unk> conservatism.
Yeah. Thanks for the question I'll I'll hit the growth part of it then <unk> talk about.
<unk> <unk> you know from the you know from the start of the year. Our guide has implied a straw.
Stronger and stronger first half then second half based on based on the cops and then.
You know as you've seen you know we've had some significant tailwind in the first act like like others have as well you know you know kind of you know.
An extra gross the recon market around the world and and so are our update to the guy reflect that strong first half I think you know preserves a a you know a perspective that we're gonna have you know very tough Q3, com and and you know kind of a little more vacations in the summer and things and.
Be able to kind of accelerate through the through the final quarter of of the year and certainly the overall growth of the year will be and you know very strong range and that will put us in great shape purchase our strategic objective, they're going to grow up front.
Yep.
V J. Thanks for the question as we think about EPS really what we've done is we've slipped through the upgrading date into the back half of the year. If you look at where we kind of came in and you too we had some benefit from the interest rate swaps that I mentioned in my prepared remarks, and also we executed and completed the the foot.
In April acquisition deal to increase our debt levels for the back half of the year, so that'll be a bit of an upset to the benefit that we're getting from the interest rate that we saw in the second quarter. So the factor that in to the back half of the year. Then that's what the a P. S gets a bit normal lives.
Understood.
Give me one on the the augmented reality product. The two guys I think that it soft launch in first half where are we on the launch any updates on how we should think about crap.
Yeah, we we've been as as we talked about we've been in a limited launch getting some great feedback on the product certainly a lot of great positive feedback about the product, but also you use the unlimited long to get feedback about things that that can be tweak a little bit make it even better and so you know we would like to <unk>.
Right a lot of great feedback and we've been working through implementing those in into the product and you expect me to go to a broader lunch you know as we work through the balance of the year here and you know certainly yeah. We've got a very strong the growth and you know it today you know without it is there.
It'll it'll you know it'll provide.
Something that can be applied to hip and knee, but we think it's really going to help the fuel our <expletive> since we got very strong need growth without it and as we bring that product and you know that's gonna support continued very strong negroes and also create a recurring revenue stream that'll you know start to build from you know from a small start but over time become a nice I'm very high margin.
<unk> revenue stream as well.
<unk> thanks, guys.
Thank you.
The next question comes from Joseph Conrad with need them. Please go ahead.
Hi, guys. This is Joseph on from Mike maybe the first one you give us any updates that you may have from the F. D. A on the bone growth stimulated reclassification.
Yeah, there's there's no new information on on the Bum Bum gross stimulator and you know we continue to you know to view it you know as.
Unlikely to get it get it gets the reclass, but you know it should it get reclass, there's yeah, there while there might be some well there might be some price pressure. They would also be a lot of market Oprah opportunity that would open up in terms of the ability to innovate and get new indications in that in that product. So yeah, we're constantly prepared for the possibility.
He but there's there's no change in the status at this point.
Okay. Okay. Thanks.
Then I guess I'm more could you give us an update on you know maybe you're a S C President's and <unk>.
Strategy with that in the <unk> business.
Yeah sure you know a a C continues to be you have a great part of our recon growth story, you know I I think as we shared previously were <unk> around 20 per cent of our knees are done in the U S. A N D. S C environment with which you know based on our best Info is probably about two times a day.
Per cent of the market that's done <unk>, that's setting and.
That's been a high I wrote setting. We also have you know continue to shape are offering it'd be very attractive dirty C environment between her empower knee that's a great fit for the active patient that's being selected in there are simplified instruments, yet and are vis being a you know.
<unk> cost efficient space sufficient time efficient, enabling technology that is a great fit for the environment as well and so we expect to be able to continue to have good strong success in that city.
Okay, Great. That's all from US thanks, Thanks for taking our questions Yep.
Yep. Thank you though.
Thank you.
Again, ladies and gentlemen, if you have questions. Please <unk>.
The next question comes from Dean Reinhardt, but said please go ahead.
Good morning does just wanted to ask one here a little bit on the margin <unk>. You know you talked about the supply chain stabilizing you've got price, helping you a little bit but as we think about next year I assume price you know won't be as much of a benefactor. So what kind of a tailwind next year as we think about.
Probably gross an operating margin, especially if you're if you're keeping R&D a bit elevated is it really just kind of a mixed story at this point.
Well that could definitely get the benefit of the continued shaping that we've done on on the mix.
One driver and it'll be another year.
Chaired and and the prepared remarks around the progress that we've made you know some of the recent acquisition scaling that continues to you know scale as we get into next year as well and then you know if if I think about kind of where we are with regards to the the price cost aspect we built the.
<unk> and R. P. In our business now to be able to more consistently you know execute price increases so will still evaluate our options there to continue to reclaim some of the pressure that came into the system over the last couple of years. So so definitely working hard leveraging R. E G X business system to drive productivity.
Tiffany and our raw materials, and our supply chain and and both kind of the freight N N Amber Frey out capabilities as well. So overall I would say you know we have a lot of levers that we continue to pull to drive our margin expansion in in our building blocks are still very much intact in terms of what we've shared.
With regards to our you know greater than 50 basis points expansion your over a year, which is the <unk> the scaling of acquisitions, and then the operating leverage and and and scale and productivity of the business system. So those are really the the building blocks and they still very much remain intact.
Gotcha very helpful. Okay, and then one kind of follow up on <unk> question regarding the first half second half amazing I mean is there chance that given the tougher comps using <unk> could you know maybe slow into the upper single digits as opposed to double digits and then could you also remind us are there any swelling day impacts in the back half of the year. Thanks.
Yeah, No I I think you know, we we feel confident we can continue to grow our retail business in that.
That double digits range, even even you know getting into a little bit of a of a calm but tougher comp range.
<unk> noticed no selling day impact and.
In the second half and just another just comment to add as you know as we brought in our will be bringing in the foot ankle acquisitions that we've announced there'll be a little bit of pressure in the back half of the year for those if we work to drive the synergies and integrate those businesses into into <unk>. So that.
Add a little bit of backup pressure on the margins as well as well as as Matt said, we've got the <unk> Ah stronger cough in Q3, we deal with as well.
Thank you.
This concludes our question and answer session.
I would like to turn the conference back over to Debbie can account for any closing remarks.
Thank you and thank you everyone for joining us today on the call. We appreciate your interest and if you have any further questions. Please contact me an investor relations have a great day.
Thank you. The conference has now concluded thank you for attending today's presentation.
I now need to disconnect.
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Mmm.
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