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    Enovis Corp (ENOV)

    Q1 2024 Earnings Summary

    Reported on Jan 15, 2025 (Before Market Open)
    Pre-Earnings Price$55.40Last close (May 1, 2024)
    Post-Earnings Price$53.46Open (May 2, 2024)
    Price Change
    $-1.94(-3.50%)

    What went well

    • Integration of the Lima acquisition is ahead of schedule, leading to better-than-expected cost synergies and margin improvements. Enovis reported that they "were able to really identify what the go-forward org structure was going to look like as we closed the deal, we want to capitalize on some synergies right away, maybe slightly above kind of our initial expectations in the first quarter". This positions the company for accelerated growth in the second half of 2024 and beyond.
    • Strong cross-selling opportunities between Enovis, Lima, and Mathys products are expected to drive revenue growth. The company is extremely excited about the cross-selling opportunity, with immediate initiatives such as bringing revision cones into the U.S. market and aggressively selling custom pre-made products from Lima. They expect to see the synergy ramp in the back half of the year and hit full stride going into next year.
    • The Foot & Ankle segment is experiencing robust growth due to innovative products and an aligned sales channel. Enovis reported very strong double-digit growth in Foot & Ankle, driven by key technologies like the DynaNail family, Novastep products, and the new Arsenal reload plating system. With almost 70% of the channel fully aligned, the company expects this to continue to fuel growth going forward.

    What went wrong

    • Integration of the Lima acquisition is causing increased dissynergies, negatively impacting growth. The company expects these negative impacts to increase in the second quarter before improving in the second half, indicating that short-term growth may be hindered by integration challenges. For example, they anticipate the negative impact to go from the current 2% to 3% to a higher level in Q2.
    • Gross margin improvement may be less than expected due to differences in accounting methods between IFRS and U.S. GAAP for the acquired Lima business. The underlying gross margin, when translated to U.S. GAAP, is in the higher 60s rather than the expected 70s, which may limit overall margin expansion.
    • Flat growth in the U.S. hip and knee business is a concern, as the company acknowledges losing specific accounts and surgeons due to integration issues. This loss is impacting hip and knee sales and suggests that customer attrition in key segments could affect future growth.

    Q&A Summary

    1. Integration Impact and Guidance
      Q: Can you elaborate on the integration impact and guidance?
      A: The integration of Lima led to a 2% to 3% negative growth impact due to channel integration choices and some loss of business, which was planned and expected. The company anticipates this impact to peak in the second quarter and flatten in the back half as integration effects diminish and cross-selling ramps up.

    2. Margin Performance and Outlook
      Q: How did margins perform, and what's the outlook?
      A: Gross margins were 70 basis points ahead of last year and are expected to slightly accelerate throughout the year. Operating margins benefited from cost synergies coming in slightly above initial expectations, and the company anticipates continued margin expansion as they leverage EGX capabilities and improve mix.

    3. Recon Growth Adjusted for Integration
      Q: What was recon growth excluding integration impact?
      A: Excluding integration dissynergies and selling day impacts, underlying recon growth would have been around 9% to 11% instead of the reported 7%. The underlying performance of core brands remains strong, with organic growth a little over 8% after removing integration impacts.

    4. Cross-Selling Opportunities and Timing
      Q: Can you discuss cross-selling opportunities post-integration?
      A: The company is excited about cross-selling opportunities between Enovis and Lima, with key products like revision hips and knees in the U.S., and shoulder products like SMR shoulder abroad. They expect to see a nice ramp in cross-selling benefits in the second half of the year, contributing to growth accelerating into next year.

    5. New Product Launches and Impact
      Q: When will new shoulder products impact numbers?
      A: Augmented Glenoids will be launched late in the second quarter and are expected to ramp aggressively in the back half of the year, boosting share gains in shoulders. The clearance of Arvis in shoulder sends a strong message about their leadership, though it won't have much revenue impact this year.

    6. Foot and Ankle Performance Drivers
      Q: What drove strong foot and ankle performance?
      A: Foot & Ankle had a strong quarter driven by key technologies like the DynaNail family and Novastep products in minimally invasive bunion space. A healthy market environment and a strongly aligned channel, with nearly 70% alignment, contributed to the growth.

    7. U.S. Hip and Knee Performance
      Q: Was there integration impact on U.S. hip and knee?
      A: Yes, integration effects impacted U.S. hip and knee growth, with some loss of accounts and surgeons. Additionally, there was an extremely strong comp from last year’s 22% growth, making this quarter's growth appear softer.

    8. Backlog of Hip and Knee Procedures
      Q: Is there still a backlog in hip and knee procedures?
      A: Yes, cumulative growth since 2019 is significantly less than five years of growth, suggesting unserved patients and a backlog that could create tailwinds later this year and beyond.

    9. Adoption of Arvis and ROS 2.0
      Q: What's the status of Arvis and ROS 2.0 adoption?
      A: Arvis is currently used by a few dozen surgeons, with plans for broader rollout this year to aid knee conversion efforts. ROS 2.0 includes improvements in software and hardware, making it easier to use and seamless with EMPOWR instruments, positioning it for broader adoption.

    10. Operating Margin Synergies
      Q: Were cost synergies ahead of plan?
      A: Yes, the company capitalized on synergies right away, slightly above initial expectations in the first quarter, contributing positively to operating margins.

    11. Remaining Integration Milestones
      Q: What integration milestones remain?
      A: The focus is on step-by-step IT system alignments without big ERP integrations, and operational synergies through thoughtful multiyear processes of merging innovation pipelines and product lines.

    12. Shoulder Market Performance
      Q: How is the company performing in the shoulder market?
      A: Excluding integration impacts, they see themselves in a good above-market growth range in shoulder, with opportunities to strengthen further through new product launches and cross-selling.

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