Enovis Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the Innovus First Quarter 2024 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded. And now I would like to turn the conference over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Marilise. Good morning, everyone, and thank you for joining us today on our Q1 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Caratola, Chair and Chief Executive Officer and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, anovus.com.

Speaker 1

We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the web site 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.

Speaker 1

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 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, who will begin on Slide 3. Matt? Thanks, Kyle.

Speaker 1

Hello, everyone, and thanks for joining us this morning. We had a strong Q1, but before I begin to discuss the results, I want to welcome the MENA organization to Innovus and recognize the efforts of our strong global teams who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into 1 company with a global focus, we're managing the organization on a combined global basis and we use pro form a growth for comparative purposes. For year over year comparisons, our prior year financials have been updated to include the acquisitions of Lima and NovaStep. Let's start on Slide 3 and talk about some of the quarter's highlights.

Speaker 1

We had a transformational start to the year. We completed our planned acquisition of Lima, made significant progress on our integration plans and carried forward momentum from 2023 across our geographies and business units. We delivered reported growth of 27% year over year and 5% on a pro form a combined basis versus very strong comps. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mix impact of recon growth, productivity improvements, stable inflation and pricing trends and the step change impact from Lima. Closed the Lima acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we've completed in the past few years.

Speaker 1

Overall, a strong start to the year. In Recon on Slide 4, we delivered 66% reported global revenue growth. Pro form a recon grew 7% year over year in the Q1, which includes a 2% to 3% negative impact from integration dis synergies, in line with our plan. U. S.

Speaker 1

Retime grew 4%, including 8% growth in U. S. Extremities and flat performance in hips and knees against a very strong prior year comparable of 22% growth in our core Innovus business. Outside the U. S, we grew 10% in a resilient market.

Speaker 1

We have achieved significant progress integrating the LEM acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short term growth impacts across anatomies and geographies as we work through the integration of our commercial channels. These fall well within our projected estimates and our expectations for the full year remain intact. We look forward to remain to ramping cross selling opportunities as we move into the second half of twenty twenty four. I'm excited about the initial traction we're seeing with our market leading Empower and Ultimate products globally.

Speaker 1

We continue to expand market access with the clearance of our Ultimate small shell in Q1 in Europe. We also have a strong pipeline of innovation as we continue the U. S. Rollout of the EMPOWUR Revision knee, controlled ramp of Arviz 2.0 and selling Lima's 3 d printed trabecular titanium cones for use with our EMPOWER Revision system, one of our first key cross selling opportunities. I'm also very excited to announce that just earlier this week, Argus received 510 clearance for use in shoulders.

Speaker 1

This timing aligns well with our planned launch of the augmented Glenoid component of our flagship AltaVate reverse shoulder system in the second half of the year. Our foot and ankle team continue to launch great new differentiated technologies like the arsenal reload that are keeping the vitality high and helping drive very strong double digit growth. These great new technologies alongside the cross selling potential of the combined portfolios offer significant opportunity to accelerate growth in the second half of twenty twenty four and set us up with great momentum as a $1,000,000,000 plus fast growing recon business entering 2025. In PR on Slide 5, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan.

Speaker 1

Recovery Sciences led growth boosted by continued double digit laser growth and global bracing continued to grow above market rates. Our new product pipeline is robust and includes the new OA knee brace called Roam, additional spine bracing products and the next generation of clinical electrotherapy products for our Recovery Sciences team. Adjusted EBITDA margins in P and R improved 50 basis points year over year as we continue to use EGX tools to drive consistent productivity improvements and sustain traction on price versus cost. Now I'll let Ben take you through the P and L details. Ben?

Speaker 1

Thanks, Matt. Hello, everyone. I'll begin on Slide 6. We are pleased to report 1st quarter sales of $516,000,000 up 27% versus the prior year and 5% on a pro form a basis. This compares to strong prior year organic core growth of 9%.

Speaker 1

Our teams have been working really hard to integrate our global Lima acquisition that closed January 3. We've been extremely pleased so far with the collaboration in our teams and the high quality integration plans that we've begun executing against. Our underlying growth in P and R and recon continues to be solid and while still early, our integration efforts are slightly ahead of our original plans. 1st quarter adjusted gross margin was 58.7%, up 70 basis points year over year. The growth was driven by leverage from higher sales, favorable segment mix, which includes the addition of Lima and cost leverage.

Speaker 1

Our 1st quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1 2023. 1st quarter's effective tax rate was 23%. This is compared to 21% last year. Interest expense was $20,000,000 for the quarter versus $6,000,000 in 2023. Overall, we posted strong adjusted earnings per share of $0.50 14% earnings growth versus the prior year.

Speaker 1

Foreign currency exchange had an unfavorable impact of approximately $0.02 in the quarter. Turning to Slide 7. We are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of $2,060,000,000 to $2,160,000,000 This is slightly above our previous guidance range, which contemplated 7% pre Lima organic growth, double digit recon growth and low single digit P and R growth. As we go forward in 2024, we will be reporting on pro form a results.

Speaker 1

Our updated guidance range increase translates to approximately 5% to 6% pro form a growth and includes acquisition related impacts. In recon, the pro form a outlook translates to high single digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross selling and new product launches. We continue to expect stable P and R growth in the low to mid single digits as was reflected in our original guidance. We expect adjusted EBITDA in the range of $368,000,000 to 383,000,000 dollars which includes a modest increase to the range based on our Q1 performance.

Speaker 1

Our guidance for depreciation, interest and other expenses, tax rate and share count remains unchanged from the prior guidance. Taking all this into consideration and as a result of our strong operational results in the Q1, we are increasing our adjusted earnings per share range to $2.52 to $2.67 To summarize on Slide 8, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima. We are excited about our progress in the Q1 and remain focused on successfully executing against our integration plans, creating momentum and delivering strong financial results. Now I'll hand it back over to Kyle to start Q and A. Kyle?

Speaker 1

Thanks, Ben. Before we begin the Q and A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question followed by one follow-up question. You're welcome to rejoin the queue if we have time. With that, we'll hand it over to the operator to start Q and A.

Operator

Thank you very much. We will start the Q and A. At this time, we'll start with a question from Vik Chopra from Wells Fargo. Vik, please go ahead.

Speaker 2

Good morning and thanks so much for taking the question. I'll keep it to 1. So based on our math, Lehman came in ahead of our estimates, we estimate about $85,000,000 Can you just talk about what you're seeing with regard to the integration and what drove the upside? And then you also called out 2% to 3% negative growth impact from the integration. We really appreciate if you can elaborate on that, please.

Speaker 2

Thank you.

Speaker 1

Vic, I missed the very end of the question there about the 2% to 3%.

Speaker 2

Sorry, I was saying we saw you called out 2% to 3% negative growth impact from the integration. Just any color on that would be appreciated. Thank you.

Speaker 1

Yes, Yes, absolutely. So yes, I mean, we saw a good solid start to the year as expected, both in terms of our performance on the integration front, as well as driving good progress in the core business. We've talked about through the quarter in various settings. We talked about the market environment, which really last year there was a super clean market environment and very high utilization rates. I think this year was probably a more normal market environment with storms and illnesses and different things.

Speaker 1

And so I think that that's resulted in a little softer market growth rate, a bit softer than year. And so that's certainly an impact, but we've continued to drive strong performance against the market. But then we have been working quickly to do the integration as we've talked about all along and as we've worked through the channel integration in the U. S. And in certain countries outside the U.

Speaker 1

S. There's choices that we've made in some cases, choices that agents have made in other cases that have led to some loss of business that was planned and expected. And as we've talked about along, we've tried to work through it quickly so that we can have it kind of impact the business here in the 1st year and then leave it behind. And that's impacted the U. S.

Speaker 1

Significantly, but also has had some impact in other countries and it's had impact on the hip and knee side as well as on the shoulder side. And so we've tried to give you a clear look with the pro form a growth, but also talk a little bit about the impact of the integration, so that you can see that the underlying business is certainly in a quarter with a strong comp and a little softer market, but the line business is still very strong and we've got a great path to accelerate through the year and execute exit the year on a very strong growth arc.

Operator

And our next question comes from Jeff Johnson from Baird. Jeff, please proceed.

Speaker 3

Yes. Thank you. Good morning, guys. So, Matt, I don't want to give you a big softball here, but I guess just help me on the math. If you did 7 percent recon growth, is it fair to think about those 2 to 3 points of dis synergies?

Speaker 3

I think you also had one less selling day with Easter at the end of the quarter. Recon, would that have been closer to 9%, 10%, 10%, 11% if not for those dis synergies and the selling days? Is that how we should be conceptually thinking about this?

Speaker 1

Yes. I think that's the right way to think about it, Jeff.

Speaker 3

Okay. And then just on the extremity side, you called out the 8 percent growth there. You did point most of that to foot and ankle. Obviously, you had the dis synergies, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that's just in the core Innovus, the Ultimate product in that?

Speaker 3

Obviously, competition is growing in shoulders as well. So just how do you perceive kind of shoulder market and your performance in the shoulder market ex kind of some of this noise from the integration and selling days? Thanks.

Speaker 1

Yes. Excluding some of the integration in fact, we still see ourselves in a good above market growth range in our shoulder and have a great opportunity to work the year here to even strengthen that further, the augmented glenoids that we launch, we'll launch kind of here probably late in the second quarter and really ramp in the second half of the year are going to give us a great additional weapon in terms of driving more share gain in shoulder. So the cross selling opportunities are terrific in shoulder. And then as I said in my comments, we've also gotten Argus cleared in the shoulder. And while that won't have much impact this year, in terms of revenue, because we'll be in the early launch phase, I think it just continues to send a very strong message to the market about our the strength of our leadership in shoulder and our commitment to be continuing to be an innovation leader there.

Speaker 1

Thank you.

Operator

Our next question comes from Yong Li from Jefferies. Yong, please go ahead.

Speaker 4

All right, great. Thanks so much for taking our questions. I guess, wanted to hear a little bit more about cross selling opportunities as you get through some of these early integration choppy period. It seems like we'll see more of the benefit in the second half in the U. S.

Speaker 4

And OUS seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross selling?

Speaker 1

Yes, yes, for sure, Jan. Thanks for the question there. I mean, we are extremely excited about the cross selling opportunity. Actually, I got to join the global sales conference that we had over in London for our recon teams. And it was really tremendous to see how far the teams had already gotten on creating really specific and aggressive cross selling opportunities.

Speaker 1

I'll mention a few. First, we've talked about here in the U. S. Market kind of immediate opportunity to bring revision cones into the U. S.

Speaker 1

Market and more aggressively sell the custom primate products that Lima has. And so it's early days on those, but we've already gotten a little bit started there and would expect to see a nice ramp down the back half of the year on those. And we also our teams are pretty excited about the SMR shoulder not as a kind of our core shoulder product, the Ultivate is really our flagship, but there are specific situations where the SMR can be quite attractive and we expect to see some nice cross selling there as well. 2nd, outside the U. S, we're still early days in terms of driving and Ultivate again.

Speaker 1

We had just started to ramp up the Mathis cross selling. And so now across a much broader landscape with Mathis and Lima's channels, we've got a great opportunity for many years to come with Empower and Altivate. And as I shared, we just got some additional market access, which is very important in Ultivate. A large portion of our cases in the U. S.

Speaker 1

With Ultivate are small shell. And so that market access really helps to give a boost there on those broad cross selling opportunities. And then the third thing that actually is really exciting, I probably kind of underappreciated it until I was at this conference sitting in the room with the teams talking about it, is there's a number of actually very interesting cross selling opportunities between Lima and Mathis revision products on the Lima side that the Mathis team is excited about, allergy free products on the Mathis side that the Lima team are excited about. And so there's really just kind of organic energy that has come between those teams in terms of some things outside the U. S.

Speaker 1

Beyond the sort of larger and longer AltaVATE and Empower opportunity. So a lot of great opportunities, getting them ramped up now, did a lot of training in this meeting in March, now starting to get the instrument sets into the market, get the funnels built. And we'd expect that down the back half of the year, we'll start to see the synergy ramp and start to hit kind of full stride rolling into next year.

Speaker 4

Very great. That's very comprehensive. I'll just keep it to 1. Thank you.

Speaker 1

Thank you, operator. Next question?

Operator

The question is coming from Brandon Vazquez from William Blair. Brandon, please go ahead.

Speaker 5

Hi, everyone. Good morning. Thanks for taking the question. I'll ask 2 upfront here. The first is just as you guys are integrating Lima here, can you talk to

Speaker 1

us about logistically what needs to happen still? What are the milestones we

Speaker 5

should keep an eye out for? And then maybe the quick follow-up as well is, And then maybe the quick follow-up as well is just a little bit of can you give us some color on gross margins, how they trended in the quarter and how you expect those to trend through the rest of the year, especially as you integrate some of the Lima business as well? Thanks.

Speaker 1

Thanks, Brandon. As far as the key integration milestones, some of the biggest focus so far has been on the commercial side, working through the different channel decisions and the implementation of them and we're a good way through those in the U. S. And outside the U. S.

Speaker 1

Wrapping up the cross selling as I talked about has been another key piece of the integration so far. There have been some quick and thoughtful cost actions that we took in the Q1 in terms of starting to get after the cost opportunities that more of that to come, but we did some very quick moves as we put the 2 teams together outside the U. S. And as we tuck the U. S.

Speaker 1

Team into our team here in the U. S. So that's been another key thing that we've done so far. As we look forward, there are some things to do in terms of IT systems, but we're taking a very thoughtful step by step approach on that. So there's no big scary European integration coming that

Speaker 2

could be a

Speaker 1

big issue, more of a kind of step by step making the changes in terms of kind of SKUs and systems and how systems interchange and connect, etcetera. And we will work our way to kind of well aligned systems, but that's not any kind of big, big giant thing versus step by step thoughtful approach. We've also got a couple of years of operational synergies to get after over the coming years. That'll be step by step movement of things that are getting us cost opportunities, some in sourcing, some movement types of things. And then finally, we've done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and making some early choices around that.

Speaker 1

But it will be again a thoughtful multiyear process of merging the innovation pipelines and product pipeline. So we've got a great managing process, great talent focused on this. So far things going very well. We know it's important to stay on top of that. There's certainly a lot more work to come.

Speaker 1

We feel very good about where we are right now.

Speaker 2

Yes.

Speaker 1

And Brandon, on gross margins, we were 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get aligned with all the things that we've been talking about here. Both businesses continue to leverage the EGX capabilities that we have, and I would see some decent progression throughout the course of the year there on gross margin. Thank you. Operator, next question.

Operator

Next question comes from George Sellers from Stephens. George, please go ahead.

Speaker 6

Hey, thanks for taking the question. Congrats on the quarter. Maybe to shift to the Foot and Ankle portfolio, you called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance? And maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio?

Speaker 6

And then lastly, what are you seeing from a competitive perspective as well?

Speaker 1

Yes, yes, sure. So, yes, Foot and Ankle had a good strong quarter. I think it was a healthy market environment in Foot and Ankle, maybe kind of a little less of a strong comp there and a good healthy market environment to start the year and that's continuing here as we start the Q2. Our team we've got a number of key technologies that drive the growth there. Our DynaNail products or the DynaNail family based on methanol alloy, sheet metal alloys has been very strong and we continue to bring additional technologies into that family.

Speaker 1

We've the NovaStep product that we acquired in last year in the minimally invasive bunion space are driving nice growth as well and we're excited about that participation now into that large 4 foot market. We've also the Arsenal reload that I talked about is the next generation of our plating products, which apply across the space And we've got IP protected technology around the fastening devices on our plating and some really great new plates that deleverage that technology that we think are going to bring a real boost as well. And STAR has gotten as we've talked about STAR has stabilized and I think ready to grow here now as well with some of the changes that we've made there. So a number of great technologies across foot and ankle. But then very importantly, our channel continues to get more aligned.

Speaker 1

We've now got almost 70% of our channel fully aligned to our products. And that's something that we did a lot of work over the past few years to get there. And we know that that's going to pay a lot of dividends, strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we've acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.

Speaker 6

Okay, great. Thanks for taking the question.

Speaker 1

Thank you. Next question, operator?

Operator

And the next question is coming from Jason Witte from Roth MKM. Jason, please go ahead.

Speaker 7

Great. Thank you. So just a question about the impact of integration. I know it was 2% or 3% this quarter. Does that run through the year?

Speaker 7

Or how do we how should we be thinking about what the negative impact is or positive impact is for this year quarter by the quarter?

Speaker 1

Yes. So I think in terms of how much it impacts the year, we shared $20,000,000 $30,000,000 as the expected impact when we did the acquisition and that's 2% to 3% of our reach out is more than 2% to 3% of Lima, of course. But I guess I would say, as we've talked about, we've been trying to get at this quickly. And so, I think that we're likely to see that go from where it is now, probably increase a little bit in the Q2 as we get really in maybe probably the impacts of the impacts from these integration things. And then I would expect that the back half, it would kind of flatten and drop as we get to the other side of some of the things that even started to impact us late last year or right at the beginning of the year, and also as we have some nice contributions coming through on the cross selling side as well.

Speaker 7

Okay. That's very helpful. And then just really quickly on terms of the launches for the shoulder. In terms of the rollout, is that typically a 6 to 9 month process? Or how what kind of timing should we be thinking about for how quickly you can roll those out and they have an impact on the numbers?

Speaker 1

Yes. So the augmented Glenoids will get into market very quickly. There's obviously some early market participation that then leads to broader, but we would expect the augmented glenoids will be ramping aggressively in the back half of the year and we've got a lot of we already kind of in the process of destocking a product and instrument sets to be able to ramp very fast in augmentic glenoids. And we really think that's been very important. We got the shoulder, but more and more surgeons are using augmented glenoids in their procedures.

Speaker 1

And so we think that not only will that offer us some same store selling opportunities in our existing surgeons, but it's really going to turn the heat up on our surge and capture offense with augmented Glenwise. So that'll be a this year impact and a very meaningful one. The harvest, much more of a kind of next year

Speaker 2

and beyond

Speaker 1

impact. It's cleared. We'll get in the market, start doing cases and getting feedback. It's new technology and we want to make sure that we get it to exactly what's going to make a big difference in shoulder. And so for sure, we'll be iterative in terms of launch in the second half of the year and that gets us some good feedback and then iterating from there in 2025 and bringing more broader functionality.

Speaker 1

But for sure, our surgeons are going to be able to see crystal clear the vision of taking our great preoperative planning using predictive analytics to create a great plan that can be presented interoperatively with augmented reality guidance and then capturing the data interoperatively as the surgeons are being able to use that guidance to do those shoulder procedures. That's we're convinced that that's really going to be a very exciting next wave in enabling tech for shoulders at a time that the market is ready for

Speaker 7

it. Great. Thank you very much.

Speaker 1

Thank you. Next question, operator?

Operator

Our next question is coming from Vijay Kumar from Evercore ISI. Vijay, please go ahead.

Speaker 8

Hey, guys. Thanks for taking my question. Matt, apologies if you have answered this, but what was the organic performance excluding Lima, right? Because I think the original Lima assumption was there would be some acquisition related disruption and Lima would be flat. It feels like Lima came in about when the integration related impact was on the base business.

Speaker 8

Can you just walk us through on why that impact was felt on the base business, not on Lima, and what Lima's performance was in the quarter?

Speaker 1

Yes, Vijay, I'll take that one, if you don't mind. As we contemplated the guidance for Lima, we knew that the channel integration work was going to be something that we couldn't really predict which business it was going to come from as we're making portfolio decisions, as we are thinking about how do we really kind of get to the selective alignment of our territories and making sure that we've got good participation in that. So as we think about kind of how we've seen it start to play out, as you've seen some impacts on the legacy Mathis business and the legacy Innovis business, But all of that was contemplated in the guidance that we gave with regards to the amount of revenue coming in as a result of the acquisition. So we think it's most fair to really show the pro form a view to kind of include the all up, all in view of what's happening. And then what we've provided is our best view of some of the discontinuations and some of the dis synergies that came within the business, which we've said 2% to 3%.

Speaker 1

So if you kind of strip out the underlying performance of the core business and kind of look for a traditional organic kind of definition. Our view is that our organic business would have been a little over 8% in the quarter for recon. And then you add a little bit of boost to that if you kind of take into consideration selling days as well. So that's kind of how we're thinking about it. Underlying performance of the core brands are still doing well.

Speaker 1

But as we think about the channel coming together, in particular in the U. S. And some of the countries that have more overlap, that's where it's a little bit hard to really distinguish the difference between reported product and Lima versus legacy business. So that's why we think it's most appropriate to give the pro form a view. But overall, we still see strong performance in our core technologies.

Speaker 8

Understood, Ben. And Matt, on this sorry, just sticking with that recon, U. S. Hip and knee, getting some questions here on flattish. I know the comp is tough.

Speaker 8

Was there any integration impact here on the U. S. Recon side? And Ben, can you just clarify when you say the underlying recon was about 8%, was that 8% excluding the integration impact within recon?

Speaker 1

Yes, yes, excluding the integration impacts. So we look at like for like kind of underlying performance, our view would be a little over 8% and that would take out those impacts.

Speaker 8

Understood. And Matt, sorry, on this Yes.

Speaker 1

Gary, your hip and knee question there. Yes, I mean, for sure, there's some integration impacts there. Look, our hip and knee growth last year was 22%. And so there's an extremely strong comp there. And if you look over a longer And by our math, the industry in hip and knee is maybe And by our math, the industry in hip and knee is maybe mid single, maybe high single digits above 2019.

Speaker 1

So, I think that the comp certainly is an effect in terms of the picture on hip and knee and with or without the integration, we would have expected Q1 to be a softer growth quarter in hip and knee given the strength of the comp. 2nd, there is an effect here that Lima in the U. S, while it was primarily a shoulder business, it did have a small hip and knee business. And the primaries in the small hip and knee business in Lima were not a focus at all and that was shrinking and that was shrinking as we exited last year. And so there's a little bit of a tug from that Lima business as well in hip and knee.

Speaker 1

And then for sure the integration effects are in hip and knee and shoulder and there's some specific accounts and surgeons that we've lost as part of the integration that are having an impact on hip and knee as well. Now if we look forward through the year, Chichu is another tough comp there, but then from there forward, the comps get much more normal. We also will start to clear through some of these integration effects and we expect to be able to keep ramping the revision even stronger now as we have the lima cones. We've also got some additional accessories that we have come into our pipeline on the revision side to give us broader access in revision. We've got to ramp more aggressively as we move through the year as well.

Speaker 1

And so we've got plenty of confidence that our hip and knee growth will move back to a more normal range as we move through the year. Fantastic. Thanks guys. Thank you. Next question operator.

Operator

Thank you. We have a question from Mike Matson from Needham. Mike, please

Speaker 1

go ahead.

Speaker 9

Hey, this is Joseph on for Mike. Maybe just follow-up on the hip and knee. Do you think there's still kind of a backlog there for hip and knee procedures, larger than normal backlog, I guess?

Speaker 1

Yes. So again, I think whether you look at the U. S. Or you look outside the U. S, the cumulative growth since 2019 is still significantly less than 5 years of growth.

Speaker 1

And so that does certainly suggest that there are uncertain patients there. If you look at early last year, the 1st 4 or 5 months of last year, things went really hot in the U. S. And some countries outside the U. S.

Speaker 1

And I think that was indicative of that backlog that lies there and a sort of a high utilization environment that enabled higher rates. And so, I think it seems reasonable that there is still backlog to be worked off in the F and E that can create some tailwind maybe later this year and in the years to come. But clearly in the Q1 looking at what we understand about our results and looking at the other results that have been posted, this was a kind of a slower growth quarter of Ritz and Meats in the U. S. Than where things were last year.

Speaker 1

And so clearly that backlog is not being worked off right now. And I think we saw and understood that working through the quarter and that there were just various effects that were constraining kind of surgical supply, like I said, whether it was storms or flu and different things. And so and that's the answer. It used to be pretty normal that in any given year, there were parts of the year where there were some cramps that were being put on supply. And so, better months, better worse months, better quarters, worse quarters and I think we might be back into a more normal environment and there'll be periods where things can run light hot because that backlog is there and the surgical capacity is very available and there'll be periods where the capacity is a bit constrained and that load just sits there.

Speaker 9

Okay, great. Yes, that makes sense. And then maybe just another quick one on Arvest, if you do have anything more to add, appreciate the color so far. But I guess any metrics in terms of adoption or placements would be really helpful. I understand it's still early ramp, but yes, anything else would

Speaker 1

be great. Yes. So as I've shared before on knee, we've got a few sort of a few dozen surgeons using it right now by design. We got it to a number of surgeons and we're really focusing on kind of having them use it a lot and making sure that all of them get ramped up in terms of utilization rates and that we learn things that we need to in terms of how people are using it to make sure that as we move to taking it broadly into the marketplace that it's going to be successful, both in terms of helping us to gain business and grow, but also that the surgeons will be using at high rates. If you look at some of the technologies that are out there, some of them are being used at high rates and some are not.

Speaker 1

We want to make sure that ARTIS is used at high rates. And so this controlled launch, I think puts us in a place to be able to make sure that happens as we work through this year. Definitely expected to have a good positive impact on our knee business as we work through this year and get beyond that first couple of dozen surgeons into a broader marketplace and then kind of years to come of opportunity to have good strong impact from ARVUS and Knee. And also we continue to work on additional technology to add beyond ARRIVUS in terms of making that hip and knee value proposition stronger and stronger in the enabling tech workflow area. On the shoulder front, just getting started this year, we've been working on that obviously for a little bit here because we just cleared the regulatory with 510, but it'll be just a very initial launch here in the second half of the year to get really good feedback on the software and the hardware and the instruments and then make sure that we make whatever adjustments we need to moving into next year.

Speaker 1

And there's also kind of multiple waves of technologies that we can break through Arvest there and into the shoulder. I'm going to get a good strong start this year and then build on that in 2025 beyond.

Speaker 9

Okay, great. Thanks for taking our questions.

Operator

We have a follow-up question from Vijay Kumar from Evercore ICI. Vijay, you may proceed.

Speaker 8

Hey, guys. Thanks for the follow-up here. On a

Speaker 1

A bonus, you can borrow. A bonus, Vijay.

Speaker 8

Yes, I do. I wanted to touch on margin performance in

Speaker 9

the quarter.

Speaker 8

The gross margins were gross margins in line with your expectations, right? Because my understanding is Lima had somewhere in the 70s gross margins. So sequentially, when I'm looking at this, the mix improved, right? The dollar contribution from recon improved, but gross margin is flattish, but operating margin came in well above. So just talk about the margin performance and how we should think about like for the back half, does this give increased confidence in the back half margin ramp?

Speaker 1

Yes, Vijay, I think the number that you're thinking about with Lima is not a U. S. GAAP number, it's an IFRS number. So if you really translate Lima historical numbers into U. S.

Speaker 1

GAAP, there's some shift between gross margin and operating expenses. So that kind of underlying gross margin in the U. S. GAAP kind of translation is more in the higher 60s than it is kind of into the 70s. So that plus some of the mix of the business where we're getting some of the sales, I'd say kind of gross margins were kind of largely in line with what our expectations were.

Speaker 1

As I said earlier, I would expect to see some acceleration of the company's gross margins kind of as we go through the course of the year. And overall, I mean, still excited about the opportunities of kind of potential synergies down the road as we improve our kind of our recon globalization and supply chain. There's lots of opportunity for us to continue to really embed EDX to look at opportunities to expand our gross margins to continue to shape the mix of the business in the right way that will help us to accelerate there. So like we've said, we still see the well into the 70s, call it, closer to the mid-70s over time. We see opportunity to kind of get that well into the 70s, call it, closer to the mid-70s over time.

Speaker 1

But this year, it'd be just kind of, I'd say, relatively steady progress looking at where we are in Q1 and maybe seeing a slight acceleration or as we go through the course of the year. Sorry,

Speaker 8

on the at the operating margin line item, were there any timing impact of OpEx Are synergies cost synergies coming in above plan? Because it just feels

Speaker 1

like OM execution was slightly above. Yes. I mean, we're happy with the start. I mean, we were able like we've said, we were able to really identify what the go forward org structure was going to look like as we close the deal. So we're able to capitalize on some synergies right away, maybe slightly above kind of our kind of initial expectations in the Q1.

Speaker 1

But again, still well within kind of our expectation of what we've said for the year is what we're currently thinking. And like I said, there's the shift between kind of OpEx versus gross margin, which is kind of again aligned with what our expectations were.

Speaker 8

Understood. Mac, maybe one for you. I saw the Auris 2.0 within the presentation. Where are we on in terms of adoption of Auris? Are we at an inflection point?

Speaker 8

And what does 2.0 do, which is different from 1.0?

Speaker 1

Yes. So 2.0 in the knee was after putting down the controlled launch, getting a lot of feedback, we went and made a number of improvements to really very seamless with our EMPOWUR instrument sets as well. And so the 2.0 was then kind of a more of a full launch of Arvest. But we definitely decided to do it in a step by step way just to make sure that given that it's a brand new to the world technology, let's get 15, 20 docs using it and get some good feedback, help them to ramp up and then use what we learn there to make sure that as we go to a broader set of doctors, one, we've got we've got a great value proposition and be able in terms of being able to help them understand how it's going to be valuable, but also we've got the ability to help them to ramp fast and effectively with it. And so that's where the 2.0 launch was and we're right on track with that in terms of, as I said, a couple dozen surgeons using ARVUS, some using it very heavily, some less heavily, the ones who are using less heavily, we're learning why and how do we ramp them up in terms of how heavily they use it.

Speaker 1

And there's some good learnings there, both about how to ramp surgeons fast, but also about which surgeons to target more as we do the broader launch. And then as we've now got plenty of inventory on hand ready to do a broader rollout as we work through this year, a lot of excitement in the field around the ability to bring ARBIS to a broader set of knee surgeons, hip and knee surgeons, but particularly for the knee at this point as we work through this year. So we would expect that number to expand and be a good facilitator to our knee conversion efforts, but also start to generate a small but growing and high profit recurring revenue stream on the knee front. On the shoulder front, as I said, it's just an initial So think of shoulder in the second half of this year being kind of where our knee was a year or so ago in terms of getting that first launch into the marketplace in the second half of this year and getting some good feedback that allows us to keep grabbing and improving the product. We've been focused on making sure that by 2025, we are right there in the market with a very strong shoulder harvest offering to continue to be a strong leader there in shoulder with technology as we always have been.

Speaker 1

And we're right on track for that with this announcement about the shoulder clearance for ARBIS that just recently happened.

Speaker 8

Understood. Thanks guys.

Speaker 1

Thank you, operator. Next question.

Operator

Thank you. We conclude our question and answer session now. And with that, I would like to turn the conference back over to Matthew Tortola for any closing remarks. Please go ahead.

Speaker 1

Yes. Thank you for joining us this morning. I want to end the call by thanking our team members for a strong start to the year. We have a lot of momentum and excitement across the organization and remain committed to delivering value for our internal and external shareholders stakeholders. Thank you for listening in today and we look forward to sharing our Q2 results with you in early August.

Operator

And this concludes the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day.

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Earnings Conference Call
Enovis Q1 2024
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