Enovis Corporation

Good day and welcome to the ANOVA's third quarter 2024 earnings conference call. All participants will be in a 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 your telephone keypad. 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 Kyle Rose, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today for our third quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Peritola, Chair and Chief Executive Officer, and Ben Berry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the investor section of our website, inovus.com. We will also be using a slide presentation in today's call, which can be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release, and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make 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. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying financial reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, and we'll begin on slide three. Matt? Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. Let's start on slide three. The first nine months of 2024 are in line with our expectations and reflect the commercial trajectory we expected to see. We've made tremendous progress on the integration of Lima and delivered on our plans for sustainable, profitable growth. In the third quarter, we delivered reported growth of 21% year-over-year and 6% on a comparable basis with a little bit of FX tailwind. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mixed impact of recon, the step change impact from LEMA, and overall productivity improvements. Overall, we are pleased with our accomplishments through the first nine months of the year and are confident that we have the new product pipeline and commercial teams in place to close the year strong and set us up for an exciting 2025. On to slide four. In recon, we delivered 57% reported global revenue growth. Recon grew 9% on a comparable basis in the quarter, or about 10% when adjusted for our estimated impacts from planned integration-related disenergies. In the quarter, U.S. recon grew 9%, including 11% growth in U.S. extremities and 8% in hips and knees. Our U.S. business rebounded in the quarter in line with our expectations as our combined commercial organization shifted back to offense, benefiting from the very early stages of our new cross-selling opportunities and key new product launches. In the international market, we grew 8% in a more normalized market environment while we continued to execute our integration plans. As we've previously communicated, we've been intently focused over the first nine months on getting our commercial channels aligned and putting the teams and processes in place to execute on our proven strategy of driving sustainable long-term growth. Our integration plans are progressing nicely. We believe we executed beyond the most material revenue-related integration milestones, and with the progress we've made, we expect to be comfortably within our initial guidance range of $20 to $30 million of negative revenue impact. From a pipeline perspective, we're approaching a very exciting period of new product introductions across our recon business as we lean into the cross-selling opportunities of our combined product portfolio and move into broader commercial launches of our revision cones and knees, augmented glenoid system in shoulders, and fill key portfolio gaps in hips. In the third quarter, we also anniversary our 2023 acquisition of Novistep. I'm incredibly proud of our foot and ankle team. Over the last four years, we've successfully integrated five lower extremity assets into a comprehensive business unit and global commercial channel that's on track to eclipse $100 million in revenues with consistent growth well above market and an innovation pipeline capable of driving double-digit growth for many years to come. Overall, we're excited about our commercial momentum. our product development pipeline, and while the third quarter was a strong step forward, we still have significant acceleration opportunities in the coming quarters. Turning to slide five in P&R, our 3% comparable growth reflects a stable market environment and disciplined execution. We continue to work on improving this portfolio and strengthening our market-leading positions. We're doing this by launching new innovations in bracing and recovery sciences and shifting our investments across both portfolios, towards higher growth, higher margin, higher value segments. We look to continue to leverage EGX tools to drive consistent productivity gains, sustainability, and improved portfolio mix. Overall, I'm pleased with our performance through the first nine months of the year. I'm confident we're positioned for a strong finish to 2024 that sets us up well for 2025 with a renewed focus on growth, fueled by a robust lineup of important new product introductions across the business. Now I'll let Ben take you through the P&L details. Ben? Thanks, Matt. Hello, everyone. I'm Ben on slide six. We are pleased to report second quarter sales of $505 million, up 21% versus the prior year, and up 6% on a comparable basis, which includes approximately 50 basis points of positive currency impact. We were encouraged with the growth acceleration in our recon business across anatomies, especially in the U.S. market as we've seen positive results from our channel integration efforts executed earlier in the year. Overall, our recon business grew 9% with approximately 150 basis points of growth headwinds from integration as we anticipated. Our underlying growth in P&R remained stable, growing at 3%. We continue to realize the benefit from the improving global mix of our business in our margins. Third quarter adjusted gross margin was 58.9%, up 70 basis points year over year. This growth was driven by favorable segment mix that includes the addition of Lima. Lima cost synergies continue to read through positively in our operating expenses as well. As a result of these benefits, our third quarter adjusted EBITDA grew 38%, delivering a margin of 17.9%, up 220 basis points versus the same quarter last year. Third quarter effective tax rate was 21% compared to 24% last year. Interest expense was $11 million for the quarter versus $6 million in 2023. Overall, we posted adjusted earnings per share of 73 cents an increase of 30% versus prior year. Turning to slide seven, we are narrowing our prior guidance to reflect the results through the first nine months of the year. We expect revenues of approximately 2.1 billion. This tightens our previous guidance range. We expect comparable revenue growth of five to five and a half percent, which contemplates impacts from the recent hurricanes and IV shortages that we've seen in our results thus far in the fourth quarter. As a reminder, the comparable growth rate includes approximately 100 basis points of integration headwinds that we outlined earlier in the year. We remain excited about the ongoing momentum we're seeing across the business and continue to expect acceleration in 2025 with the integration headwinds behind us. We are narrowing our expected adjusted EBITDA range to 373 million to 378 million. This will result in 200 basis points or more of margin expansion versus prior year. We expect interest expense and depreciation to come in at the lower end of the prior ranges, which is approximately $60 million and $115 million, respectively. Guidance for tax rate and share count remains unchanged from the prior guidance. Taking all of this into consideration, we are raising our adjusted earnings per share range to $2.75 to $2.80. This will result in strong double-digit earnings growth versus last year. To summarize on slide eight, the third quarter marked a modest acceleration in our growth as our recon commercial channel stabilized and we began to see some early benefits from cross-selling. We continue to be pleased with our improving business mix and are excited about the new product innovations ramping in Q4 and early 2025. Overall, our 2024 performance continues to track within or slightly ahead of the guidance that we set at the beginning of the year, and we are looking forward to taking another solid step forward as we finalize our plans for 2025. Now I'll hand it over to Kyle to start the Q&A. Kyle? Thanks, Ben. In an effort to accommodate everyone in the Q&A session and keep things to a reasonable time, We're going to ask the analysts to keep the questions to one question and one follow-up. You're welcome to rejoin the queue, and we'll fit you in if we have time. With that, operator, can you please open it up for questions?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're 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 2. The first question comes from Vic Chopra from Wells Fargo. Please go ahead.