Enovis Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2024

There are 13 speakers on the call.

Operator

Good day, and welcome to the Innovus Second Quarter 20 24 Earnings Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kyle Rose, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good morning, everyone, and thank you for joining us today for our Q2 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Ferritola, Chair and Chief Executive Officer and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website, innovus.com. We will be using a slide presentation in today's call, which can also be found on our website.

Speaker 1

Both the audio and presentation of the 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.

Speaker 1

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

Speaker 2

our earnings press release and

Speaker 1

in the appendix of today's slide presentation. With that, I'll turn it over

Speaker 2

to Matt, who will begin on Slide 3. Matt? Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. Let's start on Slide 3.

Speaker 2

We had an exciting 1st 6 months of 2024. We've made tremendous progress on the integration of Lima and delivered on our plans for sustainable profitable growth. In the second quarter, we delivered reported growth of 23% year over year 5% on a comparable basis. We expanded our adjusted EBITDA margins by 190 basis points, reflecting the mix of recon, productivity improvements and a step change impact from Lima. Overall, we are pleased with our accomplishments in the first half of twenty twenty four and are confident that we've set ourselves up for a strong second half of the year.

Speaker 2

In recon on Slide 4, we delivered 60% reported global revenue growth. Recon grew 7% on a comparable basis in the quarter or about 10% when adjusting for estimated impacts from planned integration related dis synergies. We continue to see the majority integration related impacts in our directly overlapping U. S. Recon business.

Speaker 2

In the quarter, U. S. Recon grew 1%, including 2% growth in U. S. Extremities and 2% in hips and knees.

Speaker 2

While these U. S. Growth numbers are well below our typical growth levels, the causes are well understood and temporary. In the international markets, we grew 14% in a resilient market, while we continue to execute our integration plans. On Slide 5, I want to update you on the progress we've made since closing the Lima acquisition on January 3.

Speaker 2

Since day 1, our integration activities have gotten off to a strong start with no major unforeseen issues. We have achieved significant progress and have developed a detailed multiyear plan that will position us as a premier high growth global orthopedics player. As we've learned from prior acquisitions, we've been laser focused over the 1st 6 months getting our commercial channels aligned. Our goal has always been to move quickly, endure short term disruption and put the teams and processes in place to execute our proven strategy to drive sustainable long term growth. We've made terrific progress here.

Speaker 2

Our U. S. Sales force has been solidified under our legacy Innovus structure and international markets are about 70% complete. Our overall revenue associated with the acquisition continues to track slightly ahead of our original estimates. We believe dis synergies peaked in Q2 as expected and will moderate as we move into the second half and start realizing some of the exciting cross selling opportunities.

Speaker 2

With the progress we've made, we expect to be comfortably within our initial guidance range of 20 $30,000,000 of negative revenue impact. Our value creation plan on the cost side is similarly on track. Our cost synergy targets of $40,000,000 within 3 years represents about 13% of legacy Lima revenues, something we believe is significant, but achievable. This comes from eliminating duplicative support functions, leveraging our manufacturing scale and footprint and improving global business processes. Our teams have diligent plans to attack these opportunities in the near and long term with an eye towards minimizing any commercial impacts and accelerating investment in key R and D programs.

Speaker 2

We'll dig deeper into our U. S. Recon growth performance on Slide 6. We are passing through several slower growth quarters as expected, but have a clear plan and path to accelerate. As we outlined earlier, the U.

Speaker 2

S. Recon business felt most of the integration related dis synergies estimated to be about 3% to 4% of growth impact in the first half across hips, knees and shoulder. Looking at our U. S. Knee and hip business, our year to date growth of 2% is a stark divergence from our historical trend of 17% per year or more.

Speaker 2

That said, we believe growth rates in U. S. Knees remain above market levels despite a very strong prior year comparison and headwinds from the channel consolidation. We have continued to grow our knee surgeon base and expect a nice growth acceleration in the second half as our cones launch enables further penetration into revision and harvest continues to ramp. U.

Speaker 2

S. Hips have been under pressure the last couple of quarters. In addition to the Lima integration impacts, we are between product cycles at a time of shifting market needs. We're addressing this shift with new products that are expected to be launched around year end to drive strong growth in 2025 beyond. These include a surgical impaction system and several new hip stem designs that address the accelerating trend to direct anterior procedures.

Speaker 2

In U. S. Extremities sustained double digit growth in our foot and ankle business has been offset by some temporary headwinds in our shoulder As a reminder, U. S. Shoulder is a segment with the most direct overlap with Lima and thus felt the brunt of the channel disruption we saw through the first half.

Speaker 2

We also have a key technology launching in Q3, the Ultivate Reverse Augmented Glenoid System. This product addresses the growing desire from surgeons to use augments for better outcomes in complex cases and has a significant increase on our revenue per procedure. We're also creating a lot of positive energy with Arvus shoulder, which has already been used for cases and will be in a controlled launch for the balance of the year. Arvest will bring shoulder surgeons the opportunity to seamlessly connect planning with their procedural workflow, creating the opportunity for repeatable procedures without the cost or time limitation of large robotic solutions. These great new products will reestablish our above market growth as a strong innovation driven leader in shoulder.

Speaker 2

Finally, we continue to feed innovation into the strong foot and ankle channel that we've built to sustain our well above market growth. Overall, we're excited about the innovations coming to the market across our anatomy in the second half and with our newly aligned channel, we're confident we can accelerate our growth back to more normal levels as we exit the year. Turning to P and R on Slide 7. Our 3% comparable growth reflects a stable market environment and disciplined execution. We continue to work on improving our portfolio and strengthening our market leading positions.

Speaker 2

We're doing this by launching new innovations in bracing and recovery sciences and shifting both portfolios to higher growth, higher value segments. This is reading through as adjusted EBITDA margins and P and R improved 50 basis points year over year as we continue to leverage EGX tools to drive consistent productivity improvements and improve the portfolio mix. Additionally, as we work to shape the portfolio, we exited and sold off assets of a small unprofitable business, which impacted sales by $4,000,000 in the quarter. Overall, I'm pleased with our first half twenty twenty four performance and I'm confident we're set up to accelerate growth and profitability in the second half. Now I'll let Ben take you through

Speaker 1

the P and L details. Ben? Thanks, Matt. Hello, everyone. I'll begin my remarks on Slide 8.

Speaker 1

We are pleased to report 2nd quarter sales of $525,000,000 which is up 23% versus prior year and 5% on a comparable basis. The 1st 6 months of the year have required diligent execution from all members of our commercial and internal teams, and we've been extremely pleased with the collaboration and high quality integration plans that we've executed against and the bright future that we've created by reshaping our portfolio. Our underlying growth in P and R remains stable, growing at 3% and recon growth of 7 percent includes about 3% of negative headwinds from channel integration efforts as we expected and signaled on our Q1 call. 2nd quarter adjusted gross margin was 59.6%, up 160 basis points year over year. This growth was driven by leverage from scale and favorable segment mix that includes the addition of Lima.

Speaker 1

Our 2nd quarter adjusted EBITDA grew 36%, delivering a margin of 17.2%, up 190 basis points versus Q2 2023. 2nd quarter effective tax rate was 24% compared to 18% last year. Interest expense was $17,000,000 for the quarter versus $4,000,000 in 2023. Overall, we posted adjusted earnings per share of $0.62 Foreign currency exchange translation had unfavorable impacts of about 0.5% on sales and approximately $0.01 per share for the quarter. Turning to Slide 9, we are adjusting our prior guidance to reflect the results through the 1st 6 months of the year.

Speaker 1

We now expect revenues in the range of $2,080,000,000 to 2,130,000,000 dollars This tightens our previous guidance range and the growth expectations remain in line with previous guidance. We expect this growth to accelerate in the second half of the year as we annualize higher prior year comps and begin realizing benefits from cross selling and new product launches, particularly in Q4. We expect adjusted EBITDA in the range of $368,000,000 to $383,000,000 This is also in line with our prior guidance. During the Q2, we put an additional currency swap in place, which reduces our net interest expense by about $10,000,000 So we are updating our full year interest expense range to $60,000,000 to $65,000,000 We are raising our estimated tax rate assumption by 1% for the year to 22% to account for geographic revenue mix. Our guidance for depreciation and share count remains unchanged from prior guidance.

Speaker 1

Taking all of this into consideration, we are raising our adjusted earnings per share range by 0 point to $2.62 to 2 $0.77 I also want to take a moment to provide additional comments regarding phasing into the second half of the year. This will outline on Slide 10. We do not plan to provide quarterly guidance on an ongoing basis, but given the complexity and changes brought on by Lima, we felt it would be helpful in year 1. We expect to see higher seasonality moving forward if Lima brings a slightly different seasonal mix given its higher international revenue profile. As such, we expect to see a higher quarter over quarter step down in revenues in Q3, followed by a bigger step up in the seasonally strong 4th quarter.

Speaker 1

We expect adjusted EBITDA will trend similarly with a step down in Q3 followed by a strong Q4. We still expect a significant step up in our margins for the full year, which is aligned with our prior guidance and highlighted in our full year estimates on Slide 9. To summarize on Slide 11, we had a solid start to 20 24, executing against our strategic goals. We continue to positively shape our business and are building momentum as we advance the integration of Lima. We will continue to leverage our business system and position the business to accelerate through the second half of the year and deliver strong financial results.

Speaker 1

Now I'll hand it over to Kyle to start the Q and A. Kyle? Before we begin, in an effort to accommodate everyone on the call, we ask the analysts keep the questions to one question and one follow-up, and you are welcome to rejoin the queue if we have time. With that, I'll turn it over to the operator to take the first question.

Operator

We will now begin the question and answer session. Our first question comes from Vik Chopra with Wells Fargo. Please go ahead.

Speaker 3

Hey, good morning and thank you for taking the questions. So 2 for me. In your slide deck, you thought about 3% to 4% negative growth impact from the integration efforts. You said Q2 was going to be the apex. I just want to get your thoughts on the back half of the year and what gives you confidence that you've seen the bulk of the integration headwinds?

Speaker 3

And I had a follow-up, please.

Speaker 2

Yes, sure, Vic. Yes, we did as we said quarter, we expect Q2 to be the APEX. And again, there's a couple of different factors there, right? There's the U. S.

Speaker 2

Integration, which we've worked through now. And so we can see the impact and we can see that that's expected to peak in Q2 and then taper off. And then we're a good way through the outside the U. S. Integration and expect that the impact there could increase a little bit as we work through year.

Speaker 2

And then in both regions, we'll have cross selling benefits that are coming in. And so we do expect continue to expect Q2 to be the apex there and for that to come down as we go through the balance of the year and the ultimate number to be within that $20,000,000 to $30,000,000 range that we've talked about comfortably.

Speaker 3

Okay. Thank you. And then the second question I had was on just some hiring trends. What were they like in Q2? And how do you see your recruiting and retention efforts shaking out in 2024 given the Lima deal?

Speaker 3

Thanks for taking the questions.

Speaker 2

Yes, I think did you say hiring trends, Vic?

Speaker 3

Yes, hiring trends. With regards to the deal.

Speaker 2

Yes, yes. Okay. Great. Yes, no, so certainly, I assume that that's an acquisition related comment, but I'll comment broadly as well. 1st and foremost, on the Lehman integration, a top priority there has been around retention of critical talent.

Speaker 2

That's something that worked very hard on in every acquisition and we are really thrilled with the retention. We've had a number of great leaders who have taken leadership positions in our company and we've also had a fantastic retention within the broader organization right through the technology organization into the field organization meaningfully below what we had planned for in terms of the kind of attrition that we could expect there. So very happy with the retention that we've had related to the Lima acquisition. And then more broadly in the company, our attrition levels are running in a normal realm and certainly the places that we have been adding, whether it's commercial resources or resource in our enabling tech organization, we've been able to get great talent and hire great talent.

Operator

And the next question comes from Robbie Marcus with JPMorgan. Please go ahead.

Speaker 4

Good morning. Thanks for taking the questions. 2 for me. First one, I wanted to talk about sort of the quarter and how it played out. I imagine in line wasn't what you had hoped for when you set the guidance range.

Speaker 4

It's certainly not a bad result. But given the track record, I imagine you're looking for a beat. So how do I think about what was the delta versus the original expectation? Was it the market for large joint or extremities was softer than expected? We didn't see upside from really any of the competitors so far Or was it more the execution in the quarter, maybe a little more than what you'd been thinking on the disruption?

Speaker 4

And then I have a second. Thanks.

Speaker 2

Yes. Thanks for the question, Ravi. Yes, so for sure we try to position ourselves to beat every quarter, but we also try to set expectations for the quarter that are in line with our plan and we believe we can execute through our plan. And if you look at the as you commented on, if you look at the Q2 in terms of what's been published out there, whether it's from recon peers or on the P and R front. I think, there's kind of a broad view there that it was sort of a decent market up against a strong market last year.

Speaker 2

And so we're comfortable with the way the market is playing out this year. We're comfortable that it's aligned with our plan that we'll be able to execute and accelerate through the last through the back half of the year in a strong way. For sure, there could have been a more favorable market in the last two quarters than there was.

Speaker 4

Great. I appreciate that. Then maybe just to focus on Q3, I want to make sure the Street is in a right spot here given the helpful guidance you gave. So I think now pro form a roughly half the business is recon, half is P and R. You say P and R is low single digit growth, recon high single, that to me averages out to mid single.

Speaker 4

And I think consensus is closer to 6.5% or so coming into today. So I was coming up something more like $500,000,000 to $510,000,000 dollars below consensus at $512,000,000 Same thing down the P and L on EBITDA, I was coming out below where consensus was, which implies a higher 4th quarter. Is that the right ballpark to be in? Thanks.

Speaker 1

Yes, yes, Robbie. I won't speak to specifics here, but I think what we tried to do, as we put in the presentation, given some of the new seasonal factors of bringing in Lima, it does impact the phasing of how revenue plays out and to the earlier comments that Matt made is while we apex on the dis synergies in Q2, there will still be, I'd say, a progressive decline as we get through the back half of the year, a little more in Q3 and then it moderates even more in Q4. So I think it decelerates there in the back half of the year, but we'll still have some impact in Q3 as we finalize all of the channel integration areas. So we tried to break it down in the components that you have there with Recon and P and R and we've provided some of the supplemental financial information as well that you can use to help with your modeling there. So I think it's lined up very much for you to be able to do the math to get to where we think is a reasonable estimate.

Speaker 1

But on the face of what you've said, it's not too out of the realm. But again, I'd say some of the components are there for you guys to take a deeper look.

Speaker 4

Great. Appreciate it. Thanks a lot.

Operator

And the next question comes from Vijay Kumar with Evercore. Please go ahead.

Speaker 5

Hey, guys. Thanks for taking my question. One on the guidance here. Just when I look at total dollar numbers, the range is tightened. But did your prior guidance include the divestiture impact?

Speaker 2

So I

Speaker 5

think PNR pulled out about $15,000,000 of revenues. So is the updated guidance inclusive of the divestiture impact? And does it mean that without this divestiture impact, guidance is actually based on revenues?

Speaker 1

Yes, exactly, Vijay. So our prior guidance did not include the divestiture of about that $15,000,000 business. Again, we had a quarter of it in our results. So again, it'd be 3 quarters of that business that we're absorbing in our updated guidance range.

Speaker 5

That's helpful then. And Matt, one for you. I think people are trying to, I know you've pivoted the street to a pro form a. I think people still want to understand the underlying sort of legacy Innovus, right? So when you think about the dissynergy impact, and I think there was some helpful detail in Empower, up high singles in that first half.

Speaker 5

When you look at these markets on core, recon, are you still is Innovus still confident about share gains growing up well above markets? Maybe talk about underlying trends and what gives you confidence about share gains?

Speaker 2

Yes. So, Ravi, in the MEE in particular, we continue to have a healthy share gain, both when we look at the all up reported results and as we look at our trends in terms of adding surgeons and things like that. And so not as much as we've had because of some of the integration pressures and we're also up against it really a tremendously high comp from the first half of last year. But when you get under the hood on the knee and the legacy and we try to share enough there to give people confidence that that's still clearly there. We've still got solid performance within our shoulder product, but that's where we're seeing the most of the integration impact.

Speaker 2

So you have 2 different things hitting the shoulder growth ways from the integration. One is that the Lima business did not have a lateralized inferiorized shoulder. And so with declining as we went through the back half of last year that Lima shoulder business here in the U. S, it was growing nicely outside the U. S, but was declining here in the U.

Speaker 2

S. And so we'll fix that quickly as we bring new products and cross selling products into that channel here as we work through the year. But that's certainly a meaningful growth drag. Then we also have synergy or dissynergy impacts from the integration because the amount of overlap in shoulder. And then third, as we talked about the augmented glenoid is a really important product for our shoulder.

Speaker 2

That's become increasingly important piece of the puzzle for shoulder surgeons. And so over the past few quarters, getting ready for that launch has slowed down the rate in which we've added new shoulder surgeons and had an effect on the business there as well. And so shoulder is going to get on a good strong path quickly here as we go through the balance of the year. And then hip, as I talked about in my comments, that's one where for the last couple of quarters or so, our hip growth has been on the lower side. Our knee growth was really very, very strong.

Speaker 2

And that was really based on some trends there versus our portfolio. And now with the integration impacts on top of that in the Q1, certainly in HIF, we would our growth we would certainly not be gaining share and we've got a solution to that coming by the end of the year.

Speaker 5

Understood. And maybe, Ben, maybe one last cleanup, apologies. It's I think there was some product exits on the Vconn side. It's annualizing, I think, close to like $10,000,000 Was that part of the revenue leakage, the dis synergies? Or is this exit incremental to the revenue leakage?

Speaker 1

No. Yes. So Vijay, that would be in the full numbers of what we quote when we talk about the net dissynergy impacts, those product lines would be included in there. Those were essentially we had a couple of third party relationships, both on the Lima side and on the Mathis side with regards that we put the 2 businesses together. We had to essentially exit some of those relationships and agreements.

Speaker 1

So those are included

Speaker 2

in those numbers. Fantastic. Thank you, guys.

Operator

And our next question comes from Jeff Johnson with Baird. Please go ahead.

Speaker 6

Thank you. Good morning, guys. So Ben, maybe just trying to ask one more question here on kind of the phasing of 3Q and 4Q. You had the 400 to 500 basis points headwind on the dis synergies in the U. S.

Speaker 6

Recon business in the second quarter. Should we just assume those fall off kind of by half in the third quarter and then disappear or fall off another half in the Q4? Would that be the right way to phase those out over the next two quarters? Or is it more back end loaded than that? And then maybe the same how quickly do we think maybe the TT cones, the glenoid augments, how quickly do those ramp?

Speaker 6

Is that more of a 4th quarter impact? And then that's where the U. S. Recon could maybe get back to upper single to low double digits as well. Is it conceptually anything off in what I'm saying there on both those points?

Speaker 6

Thanks.

Speaker 2

Yes, Jeff. Yes, Jeff, thanks for the question there. So I mean the nature of the dis synergies, most of it is things that are related to surgeons or agents that are lost as we put things together. And so those impacts wind up starting to hit and then they will hit for a year before we anniversary and then some of them started to hit late last year and have been kind of ramped into an Apex and now we'll start to anniversary those in the 3rd Q4. So in terms of the dis synergies, there's an arc of that that is apexing in the Q3, but then clearly still has a couple more quarters to play out.

Speaker 2

But at the same time, we have the cross selling that will start to kick in. And we do have some that's starting to ramp there, but for sure there'll be more in the Q4 than the Q3 in terms of cross selling impacts and some of the new products like the Innovus cones in addition to the sub cones that we can cross sell and the augmented glenoid. Those are coming through, going to have 3rd quarter impact, but definitely going to have a lot more 4th quarter impact. So as we've tried to lay out there in the guidance, although it's not pulled apart by region, it's more of a kind of a modest improvement in the 3rd quarter and then a return to more normal growth levels for us in the Q4 and as we roll into next year.

Speaker 6

Fair enough. And then

Speaker 1

to comment on your phase, I think you're thinking about it right in terms of the shape. I mean, I think it decelerates, but there's not I would say think about how it plays out in terms of Q2 being the APACs and then decelerating from there, so a little bit more in Q3 versus Q4.

Speaker 6

Understood. And then just last follow-up question. Just on you did mention double digit foot and ankle growth in the quarter. I think that was a U. S.

Speaker 6

Comment, although you can correct me if I'm wrong on that. But just there's been some chatter out there bunionectomy, some of these things can maybe be a little more economically sensitive, a little bit more deferrable. Just what are you seeing in the foot and ankle business at this point? And just remind us of the size now with Lima in there, how much foot and ankle is as a percentage of your recon? Thank you.

Speaker 2

Yes. So I think we've talked about foot and ankle passing through $100,000,000 this year. There wasn't any Lima foot and ankle business that have any consequence that came in, but we did bring NovaStep in last year, which really helped to position us to bust through that $100,000,000 ramp. Our Flipping Banker business for a number of quarters now has been growing very strongly and comfortably above market levels, based on the work we did to put that channel together and the hard work of putting the channel together that we did and now having that strong aligned channel and then just a ton of great innovation that we've been pumping into that business. And that's in the U.

Speaker 2

S. We're also growing couple digits outside the U. S. In that business. I think that I commented on the markets more broadly earlier and I think that would apply to Foot and Ankle as well that we probably have not as good a market situation this year as we did last year.

Speaker 2

But I think our teams are doing a great job of executing share gain in that environment and have done it for a number of quarters now and we're really, really pleased with the engine that we've built there.

Speaker 6

Thank you.

Operator

And the next question comes from Young Lee with Jefferies. Please go ahead.

Speaker 7

All right, great. Thanks so much for taking the question. I'll just keep it to 1. Maybe just a follow-up on the U. S.

Speaker 7

Extremities business a little bit more. I appreciate the comments on the foot and ankle side. But on the U. S. Shoulder side, I guess, I'm curious when do you expect that to return to 1.5 to 2 times market growth?

Speaker 7

And then your thoughts on the sustainability of that just in light of some of the new robotic competitors come into the market?

Speaker 2

Yes, sure, Young. I think that the comments I made earlier generally about U. S. Surgical would apply to the shoulder business. We'd expect that business to improve in Q3, but then improve a lot more in Q4 as we the augmented glenoids came out.

Speaker 2

We're just approved and launched in the last month or so here. Q3 is within the control launch phase. So it's very important, but it has some impact on our growth, but not a substantial impact on our growth. And then in Q4 and beyond, we can really tilt up the regulator on that. And so that's going to be the arc of that.

Speaker 2

Some of the acquisition impacts will go on that same arc that we just talked to in terms of starting to have a little bit of improvement in Q3, then more Q4 and then in Q1, Q2, we start to anniversary some of the impacts. And so we do expect to exit the year with our shoulder business and a strong healthy growth path. And then we expect to also have fundamentals underneath that supporting continuation of that growth path in our shoulder business. Now as far as enabling technology in shoulder, it's clear that that's going to be important to shoulder surgeons going forward. We're confident that ARRIS is going to be a fantastic solution for that.

Speaker 2

The shoulder It's very important to do great planning, use predictive analytics, and then be able to kind of manage your workflow through the procedure and guidance and the right instrumentation solutions give surgeons a tremendous opportunity to do that and the initial reactions we've gotten to Arvest as we've gotten it out there in the market for shoulder have been very positive. And so we're confident that guidance is going to be a tremendous solution for shoulder. When you look at the anatomy, there's some important things about shoulder. One is, it's a ball and socket like a hip versus a knee. And the other is that the average shoulder surgeon does a lot less procedures than the average hip or knee surgeons.

Speaker 2

And we think those are going to be very important factors as it comes to how the market shakes out on enabling technologies that guidance is a tremendous solution when you have that more constrained space that you have in a shoulder or a hip for that matter. And in addition, a low cost solution that is time efficient is going to be a great solution for lower version lower volume shoulders out there. So we feel confident about Arviz and shoulder. We also have plenty of opportunities to partner as well as develop a more automated solution to go along side of that as the market continues to evolve. So we're confident we can sustain our leadership and shoulder going forward.

Operator

And the next question comes from Brendan Vasquez with William Blair. Please go ahead.

Speaker 8

Hi, everyone. Good morning. Thanks for taking the question. Can you talk a little bit about more specifically what you're seeing as you talk about dis synergies? Part of the question what I'm trying to get at is I'm trying to understand better as you look to the back half of the year is reaccelerating growth simply kind of reengaging with surgeons to go deeper into their accounts?

Speaker 8

Or do you need to reengage with surgeons to frankly even just get them back onto Innovus products altogether? Just trying to understand what exactly from an execution standpoint needs to happen in the second half as you reengage and kind of move past the dis synergies?

Speaker 2

Yes, sure. Well, the dis synergies come from a combination of surgeons that we lose based on kind of choices and or competitive dynamics as we're putting together overlapping channels. And then second from some products that the channel needs to move away from us based on different commitments that they might have in different places, etcetera. And then also from some of the just the distraction factor of working on putting together new channel arrangements versus working on adding new surgeons. And so, as we go forward, where we've lost some surgeons, some of we looking to get them back and likely we'll get some of them back, but whether we get them back or not, kind of leave that drag behind us.

Speaker 2

But where we have had some products leak away, that's where the cross selling comes in and we can replace those products with cross selling products. And so there's an opportunity to go ahead and get right at that here as we get down the back half of the year. And then the engine of adding surgeons, that's something that's been dialed back up over the past few quarters in a healthy way. We've got a really nice funnel there and we can see the little bit of slowdown in that that happened down the back half of the year, really starting to build nicely and that will start to benefit us in the back half of the year from the surgeons we had in the first half of the year and then it will benefit even more next year from the ones that we had in the second half.

Speaker 1

Yes. And Brandon, I would just lay in there too. I mean, we learned a lot on the Foot and Ankle acquisitions that we did in terms of how to put the channel together to make sure we're protecting ourselves with regards to exclusivity, but then also allowing ourselves to quickly move and then focus the ability to go on offense once you've gotten that channel solidified. So I think as Matt said exactly in terms of the drivers, but our ability to now go on offense, have new products flow coming in the back half of the year and having now a channel that's focused on getting back to our playbook. And it just shows from our perspective through the good results that we're seeing on the foot and ankle side, one of the strategy that we had as we were putting these channels together to move quickly because we knew the faster that we move, the faster we get behind some of these things and are able to really go on offense.

Speaker 8

Okay, great. And then maybe as a follow-up to that on the dis synergies topic still, 100% done in the U. S. According to the update today, but 70% done internationally of integration. Does that mean that there's still some potential for dis synergies if there really are any meaningful ones internationally?

Speaker 8

Or should we think of despite being only at 70% you're done there? And maybe just talk a little bit about what's left to integrate in the international side of the business? Thanks.

Speaker 2

Yes. The 70% international, we've actually worked through most of the direct markets and certainly all the large direct markets and have had pretty limited impact there. And we can understand that we would understand those and be able to see those at this point in time. And we work through some of the hybrid or indirect markets already in a very successful way. What's remaining to be done is a handful of kind of hybrid or indirect markets in terms of that they're either 2 distributors that we're combining or a combination of direct and distributor that we're combining.

Speaker 2

And I would say that for that 30%, we've got clear line of sight on how things are going to come together. And I think we've been able to kick the tires pretty well in terms of what the risk might be as we do that, and we see them as pretty limited. And so, yes, we do see that in international, there could be a little bit of dissynergy that develops in the back half of the year consistent with the numbers that we put out there. But we also think we've gone far enough there to have made sure that there is nothing large negative looming.

Operator

And the next question comes from Danielle Antalffy with UBS. Please go ahead.

Speaker 9

Hey, good morning guys. Thanks so much for taking the question. Just a question on how to think, I appreciate you guys are not going to provide 25 guidance here. But if we just think about you peaked on the dyssynergy side of things this quarter, you improved through the back half of the year on an underlying basis. And then presumably as we enter next year, I mean, how should we think about this?

Speaker 9

You've got a number of new product launches. You've got now dis synergies behind us, maybe actually moving towards some sales synergies here. Could 2025 potentially with all that in mind being above pre Lima trend growth or pre Lima growth trend a year for you guys? Any comments directionally you can say and I'll just leave it at that one

Speaker 2

question. Yes, I'll just I appreciate the question. We're not going to give guidance for next year, but I would say everything we've been doing this year is to put us in a position to step into next year as a $2,000,000,000 plus innovation driven growth company with over a $1,000,000,000 recon portfolio that is a strong growth driver for our company and a step change in our margin profile that we've executed through and be able to continue to execute against our long term strategic goals of high single digit organic growth and continuously expanding our margins to 20% and beyond. So we've been doing everything possible this year to put us on to create a step change and to be able to continue on that journey on the other side of this.

Speaker 9

Thank you.

Operator

And the next question comes from Caitlin Cronin with Canaccord Genuity. Please go ahead.

Speaker 10

Hey, thanks for taking the questions. Just to start off on cross selling benefits, where are you starting to see early wins in terms of the product portfolio? And where do you think you'll see the most synergies in the second half?

Speaker 2

Yes. No, we definitely have seen some early wins. Honestly, one of the most exciting early wins is just energy. Outside the U. S, I mean, you can see our tremendous growth outside the U.

Speaker 2

S. In recon. Part of that is a good healthy market, but part of it frankly is that our teams are absolutely energized. The combined Lima and Mathis teams that have come together there, it's been fantastic to see how the talent has come together and the positive energy. We've done reviews sort of country by country and hearing the leaders talk about the energy that the acquisition has created in their company in their country is tremendous.

Speaker 2

So even before there's a lot of synergy products being sold, I think we've just been benefiting from the fact that people feel like a part of a bigger, more powerful company and they're going out and represent that in the market and it's helping with our momentum. Definitely in terms of early wins here in the U. S. Both in the LIMACONES and the REVISION knee area, the PROMADE in terms of custom implants across Anatomy has been some nice early wins. Outside the U.

Speaker 2

S, we continue to march forward on Empower and Altivate in key countries outside the U. S, not just in the Lima channel, but we have just scratched the surface in the Mathis customer base as we move through last year. And then there's some really interesting early wins just that are just by the Lima and Mathis team getting together and seeing opportunities to where one portfolio can help the other. Mathis' knee was quite weak and the Physica and Zuke coming out of Lima that's already got full approvals has been quite helpful in some countries there. Lima didn't have more ceramic based product at some, but there's some key anatomies that They didn't have products that would address some key customer needs around patient friendly products and LIMA has already pulling those into the channel.

Speaker 2

Massive selling primate. So some great early wins. They're pretty limited in terms of growth impact just given the nature of how long it takes to get sets out there and get things ramped, etcetera. But they're quite positive in terms of the energy that's being created around the world.

Speaker 10

Great. Thanks for the color. And then just one more on P and R, 2%, 3% comp growth. When do you think you can start ramping this business to more mid single digits on a consistent basis?

Speaker 2

Yes. So we've been consistent to say that PNR is a 3% to 4% grower that we're working on shaping to be a 4 plus grower over time. And we were well above 4% last year and we tried to be clear that it was there was some extra market strength and some extra pricing last year. And so running at 3 for the first half of this year in a market that's a little bit more muted, I think is right in line with our strategic plan. But for sure, we are working hard on the innovation content in key parts of that business that will ramp in the balance of this year and into the coming years, as well as some of the shaping like the small divestiture that I talked about today.

Speaker 2

We've also been doing some SKU trimming that shapes that business a little bit as well. And so B and R is still a healthy 3% to 4% grower that got nice end use market diversification. There is a very strong cash generator, which fuels the great growth on the recon side. And we do see the opportunity to shape it over time into more of a maybe more of a 4% grower than a 3% to 4% grower and then try to work from there to see if we can go further. But we continue to have 3% to 4% as the strategic growth focus for P and R and we're within that range this year.

Speaker 10

Thanks so much.

Operator

The next question comes from Mike Matson with Needham and Company. Please go ahead.

Speaker 11

Yes, thanks. I just wanted to follow-up on Caitlin's question on P and R. So the growth is a little slower now. There's concerns about the potential recession happening again. Does that P and R business have a little more economic sensitivity than maybe the recon side of the business?

Speaker 11

What have you seen there in prior recessions with P and R?

Speaker 2

Yes. I mean, look, I think our industry broadly, if you study prior recessions, has had a little bit of impact, but not a lot of impact. And I think that would apply to both sides of the business. On the P and R side, on the positive side, there's a smaller percentage that is related to elective surgery. And so you might argue that there is less kind of recession related impact.

Speaker 2

But then there's also things like products that we sell in our rehab business that are small capital purchases for rehab clinics and things like that, that obviously you might have a little bit of economic sensitivity in those. And so, I don't think there's a meaningful difference between the recon side and the P and R side in terms of economic sensitivity. I think both are very positive and that they have a limited band of economic sensitivity, but both are not fundamentally immune from a little bit of economic sensitivity.

Speaker 11

Okay, got it. Thanks. And then just on ARVIS 2.0, wondering if you could give us an update on the launch and I don't know if there's any sort of metrics you can share in terms of how it's doing, but that would be helpful. Thanks.

Speaker 2

Yes. So again, and this is Arbus in hip and knee. There as we've talked about before, we've got a couple of dozen surgeons that are using the product and ramping the usage there, some using it very heavily, some using it on specific procedures. And we're working with a surgeon to continue to get feedback and learn so that we can turn around and educate other surgeons the best way to use ARRIV is how to get the most benefit from it. Last time I looked that number was creeping up some from that couple of dozen.

Speaker 2

So I do feel like as we work through this year that's going to start to ramp and be an important part of our knee offense there. And so we're excited about that. Now we also have found that there are some surgeons that might prefer in the knee, that's something that's a little more robotic and we've got a partnership with SYNC there that allows us to bring the T Mini and we've got kind of a handful of cases, where the T Mini has been the right answer for a surgeon for whatever reason. And so we're super excited about ARVUS, but we're also being very thoughtful about how to make sure that in each of the anatomies, we've got all of the enabling technologies that are needed to serve multiple segments out there as the market continues to evolve and develop.

Speaker 11

Okay, got it. Thank you.

Operator

And the last question comes from George sellers with Stephens Inc. Please go ahead.

Speaker 12

Hey, good morning. Thanks for taking the question. And I just wanted to follow-up on the cross selling discussion. Could you provide some additional color on the breakdown geographically in those cross selling opportunities? You gave some great color on what some of those devices are.

Speaker 12

But just as we think about the magnitude of that tailwind and how significant that cross selling opportunity could be in terms of offsetting dis synergies? What's that breakdown geographically? And then how should we also think about that tailwind in the back half of this year and the tail of that into 2025 beyond? Thanks again for taking the question.

Speaker 2

Yes. I'll make some comments on that. I do think I think that probably in the short term, there's a little bit more cross selling opportunity in the U. S. Than outside the U.

Speaker 2

S. As things ramp out there. But over a number of years, the opportunity outside the U. S. Is extraordinary.

Speaker 2

And I think what you're going to see is that the cross selling in the U. S. Is going to start to offset some of the headwinds this year and then really going to start to help particularly the Lima business in the U. S. That had not been as strong a grower to be a good strong grower up against our legacy Innovus business next year and in the following years.

Speaker 2

Outside the U. S, there's a strong market out there that is supporting the double digit growth. And we're also executing very well. I think what's going to happen outside the U. S.

Speaker 2

Is that as the synergies ramp year by year by year as well as we make other improvements and investments, we're going to be able to support continued very strong growth there in a much more normal market environment and that those will come together nicely in terms of our kind of long term double digit recon growth path and our high single digit company growth path. Yes, George, and

Speaker 1

I'd just weigh in there too to say the depth and strength of our portfolio is just so much more robust now as you think about leveraging the scale and now the channel that we've put together across the globe. But some of that takes time as you're building inventory, as you're working through making sure that we're able to feed those channels with the products in the right place. So as Matt described, this will develop over time and then there's also the benefit of now leveraging the capabilities that we have, with legacy Mathis, with Lima, with legacy Innovus to drive innovation cadence into the future to just continue to support that development of the bags that we have across these anatomies. So I think our view is it's going to help to start moderate some of those net impacts as we've described here in 2024 in the back half of the year. But as we've also said, this is one of the things that we believe that will help us to continue to grow above the market outside the United States longer term as we're putting these things together and now you're leveraging your sales call with a much more robust portfolio.

Speaker 12

Okay. That's really helpful color. I appreciate all that. And then maybe to follow-up on the P and R segment. Obviously, you've been investing a little bit there and have some new devices and updated devices that you've been rolling out.

Speaker 12

How should we think about the impact of that with pricing and your ability to take some price with rolling out some new devices there? And how should we think about the growth specifically coming from pricing in that segment going forward? Yes.

Speaker 2

So in P and R, there had been a more historical a little bit negative price environment in a time where we really weren't innovating. And then more recently, there's been a positive price environment that's been kind of a lot passing through the inflation. We're now running at about flattish price in P and R. And I think that's flat to a little positive is sort of the right price range for a P and R business where we've got the right amount of innovation coming through the business and we kind of get a place where we can, but then there's areas where there's going to be some pressure. And we've also been really having an eye towards mix and whether it's kind of product line by product line mix and growing things like our technology based rehab products faster than the rest or whether it's new products and making sure that the new products that we bring out have higher margins than the existing product line.

Speaker 2

I think those are things that factor into that kind of price and gross margin equation as well. So I think that we expect our forward assumption would be that from a growth standpoint, price is neutral in the P and R kind of markets kind of like this year, but also that our innovation continues to ramp and grow and is helping us to grow the upmarket, but also helping us to have continuous margin expansion.

Speaker 12

Got it. Okay. Really helpful. Thank you all again for the time this morning.

Operator

That concludes our question and answer session. I would like to turn the conference back over to Matt Taratola for any closing remarks.

Speaker 2

Thank you for joining us this morning.

Speaker 1

I want to end

Speaker 2

the call by thanking our team members for their commitment to excellence day in and day out. We have a lot of momentum and excitement across the organization and remain committed to delivering value for all of our internal and external stakeholders. Thank you for listening today and we look forward to sharing our Q3 results with you in October.

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Earnings Conference Call
Enovis Q2 2024
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