Enovis Corporation

Good day and welcome to the Innovis second quarter 2023 earnings call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Derek Lecao, Vice President of Investor Relations. Please go ahead.

Thank you, Darwin. Good morning, everyone. Thank you for joining us today for our second quarter 2023 results conference call. I'm Derek Lecao, Vice President, Investor Relations. Joining me on the call today are Matt Truertola, Chief Executive Officer, and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the investor section of our website, eNovus.com. We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and slide presentation of this call will be archived on the website later today. During this 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 may differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. With respect to the non-GAAP financial measures referenced during the call today, the accompanying reconciliation information related 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 the call over to Matt, who will begin on slide three. Matt?

Thanks, Derek. Hello, everyone, and thanks for joining us today. We had a strong second quarter with high single-digit organic growth, margin expansion, and good progress against our strategic goals. Before I get into the results, I'm going to congratulate our team for being recognized by Newsweek as one of the best places to work in America. We have positive energy and momentum in our company and a talent and cohesive global team that gets stronger every day. Let's go to slide three and talk about some of the Q2 highlights. We grew organically by 8% with 17% growth in recon and 4% growth in P&R. That gives us 9% daily sales growth for the first half of the year. We continue to see some market tailwinds. on the recon side, and we continued to outperform the market by quite a bit. We had another strong P&R 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 at foot and ankle, And we're also delivering strong growth while scaling the full set of acquisitions we completed in the last few years. Overall, we remain on track for a great 2023 with strong momentum toward our strategic objectives. In recon, on slide four, we had high double-digit growth in the U.S., led by over 22% organic growth in 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 begin to cross-sell our market leading in power and alternate products in some large markets. And we have a strong pipeline of innovation. as we continue the U.S. rollout of the Empower Revision knee and have some key new products launching in shoulder, hip, and our foot and ankle franchise. Turning to slide five, I want to take a moment to discuss the impact from the key recon acquisitions we completed in the past few years. We closed Mathis to globalize our 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 growth synergies ramp, and we continue to scale the business. There are also a number of other attractive global bolt-on opportunities. In extremities, we built a leading position in foot and ankle that is now growing organically well into double-digits, and has scaled from no profit to double digits EBITDA margin. With the recent acquisitions, we expect to exit the year at $100 million global run rate with a clear path for double digit revenue growth and strong margin improvement as we continue to scale. In P&R on page six, our 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 that should support continued growth in this range. We also expect P&R to generate 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've built with our EGX business system. Now I'll let Ben take you through the P&L details and our positive guidance update.

Ben? Thanks, 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, and stable market conditions. Additionally, our second quarter sales results include a 70 basis point selling day headwind and a 50 basis point positive contribution combined from foreign currency and recent acquisitions. Second quarter gross margin was 58%, up 200 basis points. The growth was driven by leverage from higher sales and strong recon mix. We continue to leverage our EGX business system to capture efficiencies in the supply chain, and take ground on price versus cost, which we did again this quarter. Adjusted EBITDA margin was 15.3 percent, up 110 basis points. This growth was driven by growth margin expansion and partially offset by growth investments in 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% compared to 9% last year, primarily due to a one-time discrete benefit lowering the rate in 2022. In April, we executed a cross-currency swap, effectively lowering our interest rates. This resulted in interest expense of $4 million for the quarter. Overall, we posted strong adjusted earnings per share of 61 cents, or 22% underlying growth after normalizing tax and interest impacts from the prior year. We're very pleased with these results and the momentum we've built through the first half of the year. I'd like to thank everyone at Inovus and all the team members for another quarter of outstanding results. Well done, team. Moving to slide eight, considering our Q2 performance, we are raising our organic sales growth outlook for the year to 7% to 7.5%. As Matt said, the recon markets continue to be stable, and our P&R 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 Q2 results will lift the overall growth performance for the year. Full-year sales outlook has been updated to include recently announced foot and ankle acquisitions and the current foreign currency rates. We expect acquisitions to contribute roughly 1% growth for the year, which is 2% in the second half. Based on current FX rates, we expect about 1% to 2% sales benefit in the balance of the year as well. We are raising the full year adjusted EBITDA and EPS ranges to reflect our second quarter performance. Our new outlook for adjusted EBITDA is 262 to 270 million, with adjusted EPS of $2.22 to $2.36. We expect to hold the strong margin gains from the first half, while the second half will have some temporary pressure from recent foot and ankle acquisitions and strong Q4 comps. To summarize on slide 9, we had another strong quarter, leading us to, again, raise our full-year guidance. We 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 in expanding our margins and have a clear plan in place for continued margin growth. We continue 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 in line with our strategic goals. Now we'll move on to Q&A.

Dorwin, please open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Vic Chopra from Wells Fargo. Please go ahead.

Hey, good morning, and thank you for taking my questions. Congrats on a good quarter. I had two questions. First one, one of your competitors said last week that they're seeing an impact on the price increases that they've put through in their bracing business. Can you just provide an update on what you're seeing on the customer price increases that you've put through to help battle inflation? And then I have one more follow-up.

Yeah, Vic, thanks for the question. Yeah, I mean, as we've shared, you know, previously, you know, we've had, you know, multiple waves of price increases on the P&R side, including in bracing. And that's, you know, part of what's helping us 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 clinics and the channel. And then there's also been some reimbursement increases that have 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 in recall. I'm just wondering if you can talk about how much benefit you got from backlog recapture in the quarter and perhaps talk about your expectations for the rest of this year. Thank you very much.

Yeah, thanks, Vic. Yeah, we're certainly pleased with our performance and confident that it'll be, you know, very strong share gain within the industry. You know, definitely the whole first half of the year, you know, has been very healthy in recon. So, you know, there seems to be, you know, more capacity for surgery that's enabling surgeons to work through You know, some of the backlog and show, you know, I think oversized market growth here this year. They're also, you know, the comps were a little bit softer in the first quarter. But even in that second quarter 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, you know, plenty more opportunity for that, you know, kind of backlog-related tailwind to continue, you know, in the coming years. But, you know, I think this year, you know, like last year, you know, in the third quarter here, we're seeing a pretty heavy amount of vacations 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 of 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 Misson with KeyBank. Please go ahead.

Hey, guys. Thanks so much for taking the questions. This is Brett Fishpin on Today for Matt. I just wanted to ask a question on P&R. Pretty good trends there, but just curious on, you know, just given how strong really the recon segment has been over the past few quarters and the market, if you might start to see a little bit of a lag benefit incremental to the current trend over the next several quarters, and if that could present some upside to the guidance range.

Yeah, thanks for the question. Yeah, we're certainly very pleased with the P&R results, and, you know, that's in a healthy environment. If you remember, the P&R segment we've shared before has A number of different drivers and, you know, while elective surgery is a portion of what drives the business, you know, it's also, you know, driven by trauma and sports injuries and other elements. And so, you know, for sure, at the first part of the year, we're getting the benefit of some extra support. you know, some extra elective surgery volume in that P&R business. You know, as far as whether there's a lag, you know, I think that, you know, that this year inventory is a little tighter. And so probably, you know, the extra tailwind there is being realized, you know, kind of in the quarter versus with a lag there. And that's why I said, you know, the P&R markets were healthy here in the second quarter. And, you know, we feel comfortable that we can continue to grow our P&R business within that, you know, within that three to four percent range for the year, as we've talked about, likely closer to four than 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 P&R markets.

I appreciate the caller. And then just a quick second question here. The international trends remained really positive as well with 16% organic performance in recon and 2Q. I'm just curious if you could bifurcate internationally how much of that performance is attributable to underlying market dynamics versus some of Anubis' efforts around a grand expansion and cross-selling efforts in Europe. Thanks so much for taking the questions.

Yeah, yeah, you bet. Now, we're really pleased with the international results, but, you know, I think it's certainly very common knowledge out there in the industry that there are some tailwinds and, you know, some countries like Germany where there's quite a bit of tailwind. You know, I would say, you know, we shared that, you know, Mathis was, you know, about a mid-single-digit business historically, and our plan was to accelerate that business to at least high single digits and and really work to push into double digits. And, you know, I think that, you know, we've seen substantial acceleration of the Mathis business, you know, without the market tailwind, certainly into 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 high teens. And so the opportunity for us in the coming years is, you know, as the market tailwind subsides, we have a chance to ramp that synergy and still remain competitive Very confident we can grow that business in the high single digits, and certainly the potential to grow in the double digits is becoming more promising as we're getting to see more of the kind of reception we're getting around the world and the capabilities and energy of that team.

Thank you.

The next question comes from Kyle Rose with 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 historical and then the opportunity moving forward. Obviously, you put a lot of focus on the recon side. Help us understand just how we should think about the focus of M&A, recon versus P&R, and then also just the overall appetite for the org for smaller organizations tuck-in deals versus larger, you know, math-sized transformative deals, just particularly given, you know, we're seeing, you know, a persistent higher rate environment here. Just any help there would be great. And then number two is just empower revision. Can you remind us where we're at in the rollout there and just, you know, the overall contribution you've seen through the first half of the year? Thank you.

Yeah, thanks a lot, Kyle. M&A, you know, certainly we're, you know, really pleased with what we've been able to do as we kind of shared some of the highlights here on the call. You know, over the past handful of years, you know, the vast majority of our M&A has been done in the recon space, you know, expanding into attractive adjacent markets and bringing great technologies into the business. But we have done some smaller things on the P&R side that have been very, very constructive shaping deals. You know, the laser acquisition that we made is driving some very, you know, very nice growth within our P&R segment. And our deals have been mostly small bolt-ons, you know, with, you know, Mathis sprinkled in as a larger strategic bolt-on. You know, the opportunities that we see in the funnel are, you know, similar to the kind of profile of what we've been doing in the in the past years, certainly more on the recon side than the P&R side, but certainly some good small opportunities on the P&R side that can help us to shape that portfolio in a constructive way, and certainly more small bulk-ons But, you know, some larger bolt-ons that are good and attractive possibilities as well. And, you know, certainly it is a more constructive environment than it was, you know, several years ago for M&A. So, I mean, very encouraging for us that the deals that we talked about here today on the call were done in a really challenging M&A environment in terms of, you know, kind of the strength of sellers. And now it's a better M&A environment. And so we're definitely excited about the capital we have to deploy and the possibilities for what we can do with it. To your second question about Empower, we're extremely excited to have the Empower revision that gets us into a substantial portion of me, 15% to 20% of that market that we've had really limited participation in historically. It's a great product. It's been well-received in the market. And the ramp is going to 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 step by step getting instrument sets out into the market. And it'll add a little bit more in the back half and will be a very strong contributor to growth next year.

Thank you for taking the questions.

Thank you. The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Hey guys, thanks for taking my question and congrats on a good execution here. Maybe my first question here on the guidance, Matt, you know, first half organic was pretty solid, 9%. I think the annual guide update implies maybe a moderation to maybe six and change for the second half. You know, similarly on EPS, You know, you beat the quarter, I think, versus a street by 10 cents, but the EPS raised by 4 cents. Maybe just talk about the assumptions for back half. Any macro assumptions, or is this just a consumerism?

Yeah, thanks for the question. I'll hit the growth part of it and then let Ben talk about the rest. You know, from the start of the year, our guide has implied a you know, stronger first half than second half based on the comps. And then, you know, as you've seen, you know, we've had some significant tailwinds in the first half, like others have as well, you know, kind of, you know, an extra growth recon market around the world. And so our update to the guide reflects that strong first half. I think, you know, preserves a, you know, a perspective that we're going to have, you know, very tough Q3 comp and, you know, kind of a, you know, probably a little more vacations in the summer and things and then be able to kind of accelerate through the final quarter of the year. And certainly the overall growth of the year will be in a, you know, very strong range and will put us in great shape versus our, you know, strategic objective there on the growth front. Ben? Yep.

Hey, Vijay. Thanks for the question. As we think about EPS, really what we've done is we've slowed through the operating beat into the back half of the year. If you look at where we kind of came in in Q2, we had some benefit from the interest rate swaps that I mentioned in my prepared remarks, and also we executed and completed the foot and ankle acquisition deal to increase our debt levels for the back half of the year. So that'll be a bit of an offset to the benefit that we're getting from the interest rate that we saw in the second quarter. So you factor that into the back half of the year, then that's what the EPS gets a bit normalized.

Understood. Matt, maybe one on the augmented reality product that you guys, I think it's soft launch in first half. Where are we on the launch? Any updates on how we should think about RAMP?

Yeah, we've been, as we've 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 a limited launch to get feedback about things that could be tweaked a little bit to make it even better. And so, you know, we've collected a lot of great feedback. We've been working through implementing those into the product and, you know, expecting to go to a broader launch, you know, as we work through the balance of the year here. And, you know, certainly, you know, we've got very strong knee growth you know, today, you know, without it. And certainly it'll, you know, it'll provide, you know, something that can be applied to hip and knee, but we think it's really going to help to fuel our knee growth. And so we've got very strong knee growth without it. And as we bring that product in, you know, that's going to support continued very strong knee growth 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, very high margin recurring revenue stream as well.

Understood. Thanks, guys.

Thank you. The next question comes from Joseph Conway with Needham. Please go ahead.

Hi, guys. This is Joseph. On from Mike. Maybe the first one, could you give us any updates that you may have from the FDA on the bone growth stimulator reclassification?

Yeah, there's no new information on the bone growth stimulator. And, you know, we continue to, you know, to view it, you know, as, you know, unlikely that it gets reclassed. But, you know, should it get reclassed, there's, you know, while there might be some... While there might be some price pressure, there would also be a lot of market opportunity that would open up in terms of the ability to innovate and get new indications in that product. So, you know, we're constantly prepared for the possibility, but there's no change in the status at this point.

Okay. Okay, thanks. And then I guess one more. Could you give us an update on, you know, maybe your ASC presence and the strategy with that in the recon business?

Yeah, sure. You know, ASC continues to be a great part of our recon growth story. You know, I think as we've shared previously, we're around 20% of our needs are done in the U.S. in an ASC environment, which, you know, based on our best info is probably about two times the percent of the market that's done in that setting. And sort of that's been a high growth setting. We also have, you know, continue to shape our offering to be very attractive to that ASC environment between our Empower Knee that's a great fit for the active patient that's being selected in there, our simplified instrument set, and Arvis being a, you know, kind of cost-efficient, space-efficient, time-efficient, enabling technology that is a great fit for the ASC environment as well. And so we expect to be able to continue to have good, strong success in that setting.

Okay, great. That's all from us. Thanks for taking our questions. Yep, thank you.

Thank you. Again, ladies and gentlemen, if you have questions, please press star, then one. The next question comes from Dane Reinhart with BED. Please go ahead.

Hey, good morning, guys. Just wanted to ask one here a little bit on the margin front. You know, you talked about kind of 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 are kind of the tailwinds next year as we think about probably gross and operating margin, especially if you're keeping R&D a bit elevated? Is it really just kind of a mixed story at this point?

Well, definitely get the benefit of the continued shaping that we've done on the mix. That's one driver. And it'll be another year, and Matt shared in the prepared remarks around the progress that we've made on, you know, some of the recent acquisitions scaling. That continues to, you know, scale as we get into next year as well. And then, you know, if I think about kind of where we are, with regards to the price-cost aspect. We've built a capability in our P&R business now to be able to more consistently, you know, execute price increases. So we'll still evaluate our options there to continue to reclaim some of the pressure that came into the system over the last couple years. So definitely working hard, leveraging our EGX business system to drive productivity in our raw materials and our supply chain and both kind of the freight in and the freight 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, and 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 year over year, which is The mix of recon, the scaling of acquisitions, and then the operating leverage and scale and productivity of the business system. So those are really the building blocks, and they still very much remain intact.

Gotcha. Very helpful. Okay. And then one kind of follow-up on Vijay's question regarding the first half, second half phasing. I mean, is there a chance that given the tougher comps, you think recon 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 selling day impacts in the back half of the year? Thanks.

Yeah, no, I think, you know, we feel confident we can continue to grow our recon business in that double digits range, even, you know, getting into a little bit of a comp, you know, tougher comp range.

Yeah, no selling day impact in the second half. And just another just comment to add is, you know, as we've brought in or will be bringing in the foot and ankle acquisitions that we've announced, there'll be a little bit of pressure in the back half of the year for those as we work to drive the synergies and integrate those businesses into Inovus. So that adds a little bit of back half pressure on the margins as well. As well as Matt said, we've got the comp, a stronger comp in Q3 that we'll be dealing with as well.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Derek LaCalle 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 in Investor Relations. Have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. so so © transcript Emily Beynon Thank you. Thank you. Thank you. Thank you. Thank you. you Thank you. Thank you.

Good day and welcome to the Innovis second quarter 2023 earnings call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, Please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Derek Lecao, Vice President of Investor Relations. Please go ahead.

Thank you, Darwin. Good morning, everyone. Thank you for joining us today for our second quarter 2023 results conference call. I'm Derek Lecao, Vice President, Investor Relations. Joining me on the call today are Matt Truertola, Chief Executive Officer, and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the investor section of our website, eNovus.com. We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and slide presentation of this call will be archived on the website later today. During this 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 may differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. With respect to the non-GAAP financial measures referenced during the call today, the accompanying reconciliation information related 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 the call over to Matt, who will begin on slide three. Matt?

Thanks, Derek. Hello, everyone, and thanks for joining us today. We had a strong second quarter with high single-digit organic growth, margin expansion, and good progress against our strategic goals. Before I get into the results, I'm going to congratulate our team for being recognized by Newsweek as one of the best places to work in America. We have positive energy and momentum in our company and a talent and cohesive global team that gets stronger every day. Let's go to slide three and talk about some of the Q2 highlights. We grew organically by 8% with 17% growth in recon and 4% growth in P&R. That gives us 9% daily sales growth for the first half of the year. We continue to see some market tailwinds. on the recon side, and we continued to outperform the market by quite a bit. We had another strong P&R 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 at foot and ankle, And we're also delivering strong growth while scaling the full set of acquisitions we completed in the last few years. Overall, we remain on track for a great 2023 with strong momentum toward our strategic objectives. In recon, on slide four, we had high double-digit growth in the U.S., led by over 22% organic growth in 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 begin to cross-sell our market leading in power and alternate products in some large markets. And we have a strong pipeline of innovation. as we continue the U.S. rollout of the Empower Revision knee and have some key new products launching in shoulder, hip, and our foot and ankle franchise. Turning to slide five, I want to take a moment to discuss the impact from the key recon acquisitions we completed in the past few years. We closed Mathis to globalize our 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 growth synergies ramp, and we continue to scale the business. There are also a number of other attractive global bolt-on opportunities. In extremities, we built a leading position in foot and ankle that is now growing organically well into double-digits, and has scaled from no profit to double digits EBITDA margin. With the recent acquisitions, we expect to exit the year at $100 million global run rate with a clear path for double digit revenue growth and strong margin improvement as we continue to scale. In P&R on page six, our 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 that should support continued growth in this range. We also expect P&R to generate 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've built with our EGX business system. Now I'll let Ben take you through the P&L details and our positive guidance update.

Ben? Thanks, 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, and stable market conditions. Additionally, our second quarter sales results include a 70 basis point selling day headwind and a 50 basis point positive contribution combined from foreign currency and recent acquisitions. Second quarter gross margin was 58%, up 200 basis points. The growth was driven by leverage from higher sales and strong recon mix. We continue to leverage our EGX business system to capture efficiencies in the supply chain, and take ground on price versus cost, which we did again this quarter. Adjusted EBITDA margin was 15.3 percent, up 110 basis points. This growth was driven by growth margin expansion and partially offset by growth investments in 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% compared to 9% last year, primarily due to a one-time discrete benefit lowering the rate in 2022. In April, we executed a cross-currency swap, effectively lowering our interest rates. This resulted in interest expense of $4 million for the quarter. Overall, we posted strong adjusted earnings per share of 61 cents, or 22% underlying growth after normalizing tax and interest impacts from the prior year. We're very pleased with these results and the momentum we've built through the first half of the year. I'd like to thank everyone at Inovus and all the team members for another quarter of outstanding results. Well done, team. Moving to slide eight, considering our Q2 performance, we are raising our organic sales growth outlook for the year to 7% to 7.5%. As Matt said, the recon markets continue to be stable, and our P&R 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 Q2 results will lift the overall growth performance for the year. Full-year sales outlook has been updated to include recently announced foot and ankle acquisitions and the current foreign currency rates. We expect acquisitions to contribute roughly 1% growth for the year, which is 2% in the second half. Based on current FX rates, we expect about 1% to 2% sales benefit in the balance of the year as well. We are raising the full year adjusted EBITDA and EPS ranges to reflect our second quarter performance. Our new outlook for adjusted EBITDA is 262 to 270 million, with adjusted EPS of $2.22 to $2.36. We expect to hold the strong margin gains from the first half, while the second half will have some temporary pressure from recent foot and ankle acquisitions and strong Q4 comps. To summarize on slide nine, we have another strong quarter, leading us to, again, raise our full-year guidance. We 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 in expanding our margins and have a clear plan in place for continued margin growth. We continue 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 in line with our strategic goals. Now we'll move on to Q&A. Dorwin, please open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Vic Chopra from Wells Fargo. Please go ahead.

Hey, good morning, and thank you for taking my questions. Congrats on a quarter. On a good quarter, I had two questions. First one, one of your competitors said last week that they're seeing an impact on the price increases that they've put through in their bracing business. Can you just provide an update on what you're seeing on the customer price increases that you've put through to help battle inflation? And then I have one more follow-up.

Yeah, Vic, thanks for the question. Yeah, I mean, as we've shared, you know, previously, you know, we've had, you know, multiple waves of price increases on the P&R side, including in bracing. And that's, you know, part of what's helping us 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 clinics and the channel. And then there's also been some reimbursement increases that have 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 in recall. I'm just wondering if you can talk about how much benefit you got from backlog recapture in the quarter and perhaps talk about your expectations for the rest of this year. Thank you very much.

Yeah, thanks, Vic. Yeah, we're certainly pleased with our performance and confident that it'll be, you know, very strong share gain within the industry. You know, definitely the whole first half of the year, you know, has been very healthy in recon. So, you know, there seems to be more capacity for surgery that's enabling surgeons to work through some of the backlog and show, I think, oversized market growth here this year. The comps were a little bit softer in the first quarter, but even in that second quarter with healthier comps, there was some nice tailwind from the very healthy year this year. It seems like there's certainly plenty more opportunity for that kind of backlog-related tailwind to continue in the coming years. But, you know, I think this year, you know, like last year, you know, in the second or the third quarter here, we're seeing a pretty heavy amount of vacations 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 of 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 Misson with KeyBank. Please go ahead.

Hey, guys. Thanks so much for taking the questions. This is Brett Fishpin on Today for Matt. I just wanted to ask a question on P&R. Pretty good trends there, but just curious on, you know, just given how strong really the recon segment has been over the past few quarters and the market, if you might start to see a little bit of a lag benefit incremental to the current trend over the next several quarters, and if that could present some upside to the guidance range.

Yeah, thanks for the question. Yeah, we're certainly very pleased with the PNR results, and that's in a healthy environment. If you remember, the PNR segment we've shared before has a number of different drivers, and while elective surgery is a portion of what drives the business, it's also driven by trauma and sports injuries and other elements. And And so, you know, for sure, a year in the first part of the year, we're getting the benefit of some extra, you know, some extra elective surgery volume in that PNR business. You know, as far as whether there's a lag, you know, I think that, you know, that this year inventory is a little tighter. And so probably, you know, the extra tailwind there is being realized, you know, kind of in the quarter versus with a lag there. And that's why I said, you know, the P&R markets were healthy here in the second quarter. And, you know, we feel comfortable that we can continue to grow our P&R business within that, you know, within that three to four percent range for the year, as we've talked about, likely closer to four than three. But, you know, the four plus rings that we've been in for the past few quarters is, you know, on the strong side for the P&R markets.

I appreciate the caller. And then just a quick second question here. The international trends remained really positive as well with 16% organic performance in recon and 2Q. I'm just curious if you could bifurcate internationally how much of that performance is attributable to underlying market dynamics versus some of Anubis' efforts around a grand expansion and cross-selling efforts in Europe. Thanks so much for taking the questions.

Yeah, yeah, you bet. Now, we're really pleased with the international results, but, you know, I think it's certainly very common knowledge out there in the industry that there are some tailwinds and, you know, some countries like Germany where there's quite a bit of tailwind. You know, I would say, you know, we shared that, you know, Mathis was, you know, about a mid-single-digit business historically, and our plan was to accelerate that business to at least high single digits and and really work to push into double digits. And, you know, I think that, you know, we've seen substantial acceleration of the Mathis business, you know, without the market tailwind, certainly into 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 high teens. And so the opportunity for us in the coming years is, you know, as the market tailwind subsides, we have a Very confident we can grow that business in the high single digits, and certainly the potential to grow in the double digits is becoming more promising as we're getting to see more of the kind of reception we're getting around the world and the capabilities and energy of that team.

Thank you.

The next question comes from Kyle Rose with 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 historical and then the opportunity moving forward. Obviously, you put a lot of focus on the recon side. Help us understand just how we should think about the focus of M&A, recon versus P&R, and then also just the overall appetite for the org for smaller organizations tuck-in deals versus larger, you know, math-sized transformative deals, just particularly given, you know, we're seeing, you know, a persistent higher rate environment here. Just any help there would be great. And then number two is just empower revision. Can you remind us where we're at in the rollout there and just, you know, the overall contribution you've seen through the first half of the year? Thank you.

Yeah, thanks a lot, Kyle. M&A, you know, certainly we're, you know, really pleased with what we've been able to do as we kind of shared some of the highlights here on the call. You know, over the past handful of years, you know, the vast majority of our M&A has been done in the recon space, you know, expanding into attractive adjacent markets and bringing great technologies into the business. But we have done... some smaller things on the P&R side that have been very constructive shaping deals. The laser acquisition that we made is driving some very nice growth within our P&R segment. And our deals have been mostly small bolt-ons with Mathis sprinkled in as a larger strategic bolt-on. The opportunities that we see in the funnel are similar to the kind of profile of what we've been doing in the in the past years, certainly more on the recon side than the P&R side, but certainly some good small opportunities on the P&R side that can help us to shape that portfolio in a constructive way, and certainly more small bulk-ons But, you know, some larger bolt-ons that are good and attractive possibilities as well. And, you know, certainly it is a more constructive environment than it was, you know, several years ago for M&A. So, I mean, very encouraging for us that the deals that we talked about here today on the call were done in a really challenging M&A environment in terms of, you know, kind of the strength of sellers. And now it's a better M&A environment. And so we're definitely excited about the capital we have to deploy and the possibilities for what we can do with it. To your second question about Empower, we're extremely excited to have the Empower revision that gets us into a substantial portion of me, 15% to 20% of that market that we've had really limited participation in historically. It's a great product. It's been well-received in the market. And the ramp is going to 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 step by step getting instrument sets out into the market. And it'll add a little bit more in the back half and will be a very strong contributor to growth next year.

Thank you for taking the questions.

Thank you. The next question comes from Vijay Kumar with Evercore ISI. Please go ahead.

Hey guys, thanks for taking my question and congrats on a good execution here. Maybe my first question here on the guidance, Matt, you know, first half organic was pretty solid, 9%. I think the annual guide update implies maybe a moderation to maybe six and change for the second half. You know, similarly on EPS, You know, you beat the quarter, I think, versus a street by 10 cents, but the EPS raised by 4 cents. Maybe just talk about the assumptions for back half. Any macro assumptions, or is this just a consumerism?

Yeah, thanks for the question. I'll hit the growth part of it and then let Ben talk about the rest. You know, from the start of the year, our guide has implied a you know, stronger first half than second half based on the comps. And then, you know, as you've seen, you know, we've had some significant tailwinds in the first half, like others have as well, you know, kind of, you know, an extra growth recon market around the world. And so, our update to the guide reflects that strong first half. I think, you know, preserves a, you know, a perspective that we're going to have, you know, very tough Q3 comp and, you know, kind of a, you know, probably a little more vacations in the summer and things and then be able to kind of accelerate through the final quarter of the year. And certainly the overall growth of the year will be in a, you know, very strong range and will put us in great shape versus our, you know, strategic objectives there on the growth front. Ben?

Yep. Hey, Vijay. Thanks for the question. As we think about EPS, really what we've done is we've slowed through the operating beat into the back half of the year. If you look at where we kind of came in in Q2, we had some benefit from the interest rate swaps that I mentioned in my prepared remarks, and also we executed and completed the foot and ankle acquisition deal to increase our debt levels for the back half of the year. So that'll be a bit of an offset to the benefit that we're getting from the interest rate that we saw in the second quarter. So you factor that into the back half of the year, then that's what the EPS gets a bit normalized.

Understood. Matt, maybe one on the augmented reality product that you guys, I think it's soft launch in first half. Where are we on the launch? Any updates on how we should think about FRAMP?

Yeah, we've been, as we've talked about, we've been in a limited launch, getting some great feedback on the product. You know, certainly a lot of great positive feedback. about the product, but also you use a limited launch to get feedback about things that could be tweaked a little bit to make it even better. And so we've collected a lot of great feedback. We've been working through implementing those into the product and expecting to go to a broader launch as we work through the balance of the year here. And certainly we've got very strong knee growth you know, today, you know, without it. And certainly it'll, you know, it'll provide, you know, it's something that can be applied to hip and knee, but we think it's really going to help to fuel our knee growth. And so we've got very strong knee growth without it. And as we bring that product in, you know, that's going to support continued very strong knee growth 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, very high margin recurring revenue stream as well.

Understood. Thanks, guys.

Thank you.

The next question comes from Joseph Conway with Needham. Please go ahead.

Hi, guys. This is Joseph. On from Mike. Maybe the first one, could you give us any updates that you may have from the FDA on the bone growth stimulator reclassification?

Yeah, there's no new information on the bone growth stimulator. And, you know, we continue to, you know, to view it, you know, as, you know, unlikely that it gets reclassed. But, you know, should it get reclassed, there's, you know, while there might be some... While there might be some price pressure, there would also be a lot of market opportunity that would open up in terms of the ability to innovate and get new indications in that product. So, you know, we're constantly prepared for the possibility, but there's no change in the status at this point.

Okay. Okay, thanks. And then I guess one more. Could you give us an update on, you know, maybe your ASC presence and the strategy with that in the recon business?

Yeah, sure. You know, ASC continues to be a great part of our recon growth story. You know, I think as we've shared previously, we're around 20% of our needs are done in the U.S. in an ASC environment, which, you know, based on our best info is probably about two times the percent of the market that's done in that setting. And sort of that's been a high growth setting. We also have, you know, continue to shape our offering to be very attractive to that ASC environment between our Empower Knee that's a great fit for the active patient that's being selected in there, our simplified instrument sets, and Arvis being a, you know, kind of cost-efficient, space-efficient, time-efficient, enabling technology that is a great fit for the ASC environment as well. And so we expect to be able to continue to have good, strong success in that setting.

Okay, great. That's all from us. Thanks for taking our questions.

Yep, thank you.

Thank you. Again, ladies and gentlemen, if you have questions, please press star, then one. The next question comes from Dan Reinhart with BED. Please go ahead.

Hey, good morning, guys. Just wanted to ask one here a little bit on the margin front. You know, you talked about kind of 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 are kind of the tailwinds next year as we think about probably gross and operating margin, especially if you're keeping R&D a bit elevated? Is it really just kind of a mixed story at this point?

Well, definitely get the benefit of the continued shaping that we've done on the mix. That's one driver. And it'll be another year, and Matt shared in the prepared remarks around the progress that we've made on, you know, some of the recent acquisitions scaling. That continues to, you know, scale as we get into next year as well. And then, you know, if I think about kind of where we are, with regards to the price-cost aspect. We've built a capability in our P&R business now to be able to more consistently, you know, execute price increases. So we'll still evaluate our options there to continue to reclaim some of the pressure that came into the system over the last couple years. So definitely working hard, leveraging our EGX business system to drive productivity in our raw materials and our supply chain and both kind of the freight in and the freight 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, and 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 year over year, which is The mix of recon, the scaling of acquisitions, and then the operating leverage and scale and productivity of the business system. So those are really the building blocks, and they still very much remain intact.

Gotcha. Very helpful. Okay, and then one kind of follow-up on Vijay's question regarding the first half, second half phasing. I mean, is there a chance that given the tougher comps, you think recon 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 selling day impacts in the back half of the year? Thanks.

Yeah, no, I think, you know, we feel confident we can continue to grow our recon business in that double digits range, even, you know, getting into a little bit of a comp, you know, tougher comp range.

Yeah, no selling day impact in the second half. And just another just comment to add is, you know, as we've brought in or will be bringing in the foot and ankle acquisitions that we've announced, there'll be a little bit of pressure in the back half of the year for those as we work to drive the synergies and integrate those businesses into Inovus. So that adds a little bit of back half pressure on the margins as well. As well as Matt said, we've got a stronger comp in Q3 that we'll be dealing with as well.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Derek LaCalle 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 in Investor Relations. Have a great day.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.