Ladies and gentlemen, thank you for standing by, and welcome to the Enovis Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to Derek Leckow. Please go ahead, sir.

Thank you, Paula. Good morning, everyone. Thank you for joining us today for our second quarter results conference call. I'm Derek Leckow, Vice President of Investor Relations. Joining me on the call today are Matt Trerotola, CEO; and Chris Hix, Executive Vice President and CFO; and also joining us this morning for a quick introduction before we get to the prepared remarks and Q&A is Ben Berry, who previously announced will serve as Enovis' CFO when Chris retires at the end of the year. Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovis.com. We'll be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio and slide presentation of this call will be archived on the website later today and will be available until the next quarterly conference call. During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results may differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intent to update them except as required by law. With respect to any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our press release and in the appendix of today's slide presentation. You will note that we have provided reconciliation tables for each of the 2021 quarterly historical results on an adjusted stand-alone basis for comparability. With that, let me turn it over to Matt for some opening remarks, and then we will start with the earnings presentation. Matt?

Thank you, Derek. About a month ago, we announced our planned transition for the Enovis CFO role, which will culminate in Chris' retirement at the end of the year and Ben taking on the role. After his retirement, Chris will remain with us in an advisory capacity through 2023 to ensure a smooth transition. Chris was one of my first hires after I joined the Company as CEO back in 2015. His leadership has been pivotal to our operating improvements and to our strategic transformation to a pure-play MedTech company. He also raised the bar for the global finance function and attracted great talent like Ben, which strengthened the capabilities of the team. He had been considering his retirement path for a while, and I know that he's looking forward to spending more time with his family and friends and pursuing other passions. Ben joined us in early 2020 as the CFO of our MedTech segment after many years of finance leadership experience in the sector. We've been impressed with how quickly he's learned the business and immediately rose to the COVID challenges that emerged as he walked in the door. Ben has made a meaningful impact to our operational performance and growth strategy in a short time, and he's a strong leader with high integrity, and I'm confident that he'll build on the strong foundation that Chris has established. I look forward to working with Ben as we establish Enovis as a high-performing MedTech company. You'll get to know Ben more in the coming quarters. I've asked him to briefly introduce himself on this call. Ben?

Thanks, Matt. I'm really excited about the opportunity and the extremely bright future we have in front of us at Enovis. I've spent my entire career in the MedTech space. And prior to joining Enovis, I served in a number of finance leadership roles with Novartis and Alcon and I played a key role in the successful spinout of Alcon in 2019. What attracted me at Enovis is the really great potential this business has like fast growth, expansion capabilities and a great foundation and business system that was established by Colfax. By being part of the organization over the last couple of years has only strengthened my view of the significant growth opportunities we have at the Company. I really look forward to partnering with Chris during this transition and continuing to work with Matt, Brady and the rest of the leadership team to build Enovis into a high-value growth company. Now I'll turn it back over to Matt, who will start on Slide 3. Matt?

Thanks, Ben. Now let's get into the Q2 discussion. We've had strong growth and solid operating performance so far this year, executing in line with our plan. We remain confident in achieving our strategic goals of sustainable, high single-digit organic revenue growth, 20% adjusted EBITDA margins and over $2 billion in annual sales in the coming years. I want to take a moment here to acknowledge the foundation of our success: our global team of talented associates. I thank them for their contributions in the first half of 2022. In June, we had our first leadership conference at Enovis, and it was face to face. It's great to be doing things a lot more face to face these days. It was incredible to see the energy and excitement we have -- that we have created through the launch -- through the separation and the launch of Enovis. We discussed growth plans, how we're applying our EGX toolkit throughout the Company and our purpose, values and behaviors that shape our continuous improvement culture. I am incredibly proud of our team and confident in their ability to continue to build a fantastic growth company. Turning to Slide 4. We're achieving our operational goals in 2022 with double-digit top line growth and organic growth in the solid mid-single digits. Our organic growth of just over 5% for the first half of the year has us on track for our 6% to 9% full year guide and clearly shows our capability to grow high single-digit organic in more normalized markets. On this page, you can see our second quarter highlights, including an 11% increase in sales. Once again, both of our business segments outperformed their markets, leveraging our innovation and commercial muscle to gain share and providing reliable service to customers despite the supply…

Thanks, Matt, and thank you for the kind words earlier. And Ben, it's great, absolutely great to have you as our future CFO. I'm really excited for you and the future of the Company with you as the finance chief for the business. Thank you. We had another quarter of double-digit sales growth in Q2, including strong contributions from our recent acquisitions. Year-over-year currency headwinds step in from one point last quarter to three points in the second quarter. As previously discussed, we had about two points of lower sales from fewer selling days, and our Q2 sales per day growth of 5% was similar to Q1 and about in line with our expectations for the upcoming third quarter. Matt covered other sales details earlier, including the impact from COVID on procedures and staffing and our continued significant outperformance versus the market. Gross margins were down 40 basis points versus the prior year due to the higher levels of inflation that ran through this quarter. As a reminder, the inflation pressures that started with COVID had accumulated to about $30 million by the start of this year, and we have realized about $10 million of pricing increases through our sales channels. This $20 million of net pressure has further increased in the first half of this year. We continue to deploy pricing adjustments and we are seeing signs of inflation stabilization that should lead to margin relief as we get deeper into the second half of the year. Our EBITDA grew in line with revenue and margins were consistent with our previous guidance. Despite inflationary pressures, our existing businesses expanded margins by 70 basis points due to a combination of sales growth and structural cost reductions. This margin expansion would have been greater except for the inflation and currency translation…

[Operator Instructions] Your first question comes from the line of Jeff Johnson of Baird.

Can you hear me okay?

Yes.

All right. So just a couple of questions here. I think you did a good job kind of explaining kind of the pacing here that we should expect on organic growth over the next few quarters. That was going to be my first question. But let me shift instead, I guess. On Recon, I just want to understand, you put up 8% selling day adjusted growth. You did talk about 8% extremities growth in the U.S.; 14%, hip and knee. What -- with hip and knee 14% and U.S. extremities up 8%, what pulled you down then to 8% overall for Recon? I'm assuming maybe that's an OUS of your own business that's being deemphasized as Mathys kind of scales up. But just kind of help us understand the differential there.

Yes. Yes, Jeff, there are two things. One, there's a little bit of effect from the little bit of OUS business that we had that, you're correct, is being -- in a couple of places that are under some pressure and being migrated to -- from Mathys standpoint. But that's a small effect. The other thing is that in the U.S., we have very strong growth in hip and knee and in shoulder. In foot and ankle, we're on a good path on that business. But as we've talked about before, there's a couple of things going on there. We actually have very strong growth in our MedShape business and in some of the key technologies in that business. And overall, the MedShape and Trilliant businesses that we acquired are growing at or above market rates. But the STAR business, we've talked about before, is going through a period of some work that we have to do to get the business on the right course in terms of some regulatory work. And so STAR is not contributing to growth in that business right now. We also, in the first half of the year -- late last year, in the first half of the year, we're working through a channel consolidation to create one aligned strong channel for our foot and ankle business. And with that came some additions and some subtractions in the channel, which resulted in a little bit of short-term churn in the first half of the year, particularly in the second quarter. And so foot and ankle is the single digits part that offsets all those other double-digit parts. And so that puts us very much on track to build this Recon portfolio to be a consistent double-digit performer at this larger scale based on the pieces that are already there. And then the clear path we have in foot and ankle, we expect to be well into the double digits in the back half of the year in foot and ankle. So we're feeling good about the path there.

All right. That's helpful. And then maybe just two clarifying questions. One, you pointed some market pressure on the P&R side. We kind of think about P&R often being driven by travel, trauma that happens, car accident, sports, things like that. And obviously, the world is opening back up. So what's the market pressure there? And you've said you've seen some signs of inflationary pressure stabilizing. I think you'd be one of the first companies to acknowledge that. So any insight on stabilization there that you're seeing would be helpful?

Yes, sure. Yes. So first of all, in terms of P&R market pressure, one, a piece of that business is driven off of elective surgery, and we had a little bit of a delay there. And so even some of the Q1 pressure there was an elective surgery closed into Q2 market pressure for us in that business. And so that's -- particularly in the U.S., there's a little bit of impact on that elective surgery part of that business. And there's some parts of that business that are very clinic-heavy and also serve much older parts. Our foot care business there, really focuses on in diabetics and more -- a higher -- more aging population. And I think there were some drops in clinic visits through the second quarter as well in that business. So those are really the two sources of pressure in P&R, both of which as elective surgery continues to expand and as we get to the other side of COVID, those are fully clear. From -- the second was about inflation. You asked about stabilization of inflation. Yes, if we go back six to nine months, we still would every month find about new inflation, right? We'd have the next supplier coming to us with an increase with all the reasons or another increase in freight rates or a fuel surcharge on freight rate. So we were in a period where things kind of kept going up. And that even lasted into the first quarter of the year. We had expected some stabilization, but we continue to see some more increases coming through. But in the last three months, really there is a different -- kind of different texture to that, and we don't see that kind of week in, week out increases coming through. We're seeing much more flattening of inputs prices and freight rates. And in some cases, we've seen some small reductions like freight rates out of China spiked and then they've come down a little bit. And in some cases, we're starting to get a little bit of a decrease. Maybe we sourced the second supplier and now we're in a position with a little different market and a second supplier, we're in a position to start bringing things back down. So we're not calling it in terms of things coming back down, and we certainly can't be certain that they won't go up again, but we do see a stabilization that we expect should enable us to start to pull back a little bit of price cost in the back half of the year, particularly as we get to in Q4 because we have quite a bit of price through that business and have the opportunity to turn that into some margin reversal at the gross margin level.

Your next question comes from the line of Vik Chopra of Wells Fargo.

Two for me. I just wanted to dig a little bit deeper on the procedure volume trends that you saw. Can you talk about the impact that staffing shortages have had on procedure volumes across both P&R and Recon? And then I had a follow-up.

Yes. Sure, Vik. Volume trends, again, I think it's been talked about a lot out there, and I'll just give our version. But certainly, the year started slow kind of building off of the slow finish to last year. As we kind of headed through into March and even April, there was really good momentum building there, and you heard very little about cancellations and staffing shortages and things like that. But then as we made our way through the second quarter, late in the quarter, kind of late May, early June, we started to hear again about higher cancellation rates related usually to COVID testing, sometimes to staffing issues. And we also have seen isolated areas of, we call it, staffing pressure, but in some cases, it's really longer vacations. I think we've got some people that -- whether it's the surgeons or their staffs, that have been kind of not doing a whole lot of vacation in the last few years. And I think in June and July, we saw, in some cases, kind of more significant vacation downtime than we have in the past in those months. And so those are some of the things that we've seen in the elective surgery area, really speaking about the U.S. And -- but we also have gotten really, really good signals about what's expected to happen in August and September. There's a kind of a better short-term trend in terms of cancellations, and the scheduling is suggesting that there's going to be a nice trend through the quarter in terms of people getting kind of back aggressively into a ramp of elective surgery. And then certainly, there's plenty of pent-up demand that people want to get at as we come down the stretch of the year here. On the P&R side, again, we get the secondary impact of those elective surgery trends on a part of that business. And then I think there's been a smaller effect that you do have some staffing pressure on different clinics out there that it was probably a little bit of a factor in the market in the first couple of quarters of the year as well.

Super helpful. My follow-up question was on M&A. You've closed a number of deals in the past couple of years, two tuck-in acquisitions this quarter as well. But just given the recent pullback in the market, should we expect a larger deal from you guys? Or is the focus going to remain on the tuck-in M&A late-stage technology deals?

Yes. Thanks, Vik. Yes. So I think we've been consistent in saying that the things -- kind of things we've done over the past few years are very representative of the kind of things that we expect to do in the next couple of years. We've done a set of highly strategic deals that, in some cases, bring great technologies, that accelerate the growth of our business and/or open up new applications and segments. In some cases, we've brought new market landscape, whether it's geographic like the Mathys deal or whether it's getting into a new segment like the foot and ankle deals. And so those have all been driven off a strategy, and they've made our company better. They've created a higher organic growth profile, a higher gross margin profile, opportunities to get at synergies and scaling that drive us up the EBITDA margin curve. And so that collection of things that you've seen us do over the past couple of years is very representative of what we'd expect to do in the coming years. And those were deals that range from deals with no revenue to almost $150 million of revenue. And so there's lots of possibilities for us over the next couple of years that would be similar to those. And we've obviously got great balance sheet room in order to do those. Clearly, there are also a little bit larger things that we can think about over time, and we'll always be considering those and how they could accelerate our strategy, move our company forward, create a lot of value for our shareholders. We've got a great capability to do deals and integrate them well. But I'd still say in the short term, we expect to see more of the same because there's a lot of it in our pipeline. Obviously, a little different climate in terms of valuation and opportunity there to maybe get a little more reasonable valuations than in the past. And so we're really excited about the M&A opportunities in the next couple of years here, Vik.

Your next question comes from the line of Matthew Mishan of KeyBanc.

Congratulations, Chris, on retirement. I just wanted to start with EBITDA, in the move down the revision of $10 million distinctly for FX. Is the way to think about it that you are seeing incremental supply chain logistics inflation pressure, but your ability to kind of offset those is keeping the range just to what FX looks like given the organic growth seemingly is coming in, in line with what your expectations are?

Yes, Matt, you've peeled that apart pretty well, I think. There's two separate things that we're dealing with. There is the inflation that we've had, the supply chain challenges in the business that Matt spoke to in his -- and I guess I referred to a bit in my comments as well. And what we've seen on that is that there's a pressure curve that was building all through since COVID initiated. We started some pricing actions late sort of last year and into this year that helped to ameliorate some of that, but we've still been -- we still have that curve that's on us. Now as we see the inflation stabilizing and these price increases are reading through better, we expect that, that pressure in particular, will continue to be contained and maybe moderate. Now there's a question there about exactly how that will play out. But if the stabilization that we see and the price increases that we're working on are all realized, we should get to a better position than we expect to get to a better position on margins. The separate issue is with respect to currency. And that is something that we just don't have as much control over. And we thought it was important to make sure that folks see that we're executing our operating plan in line with what we'd expected. And there is that inflation pressure and the pricing dynamic that keeps us from moving up in our original guidance, but at the same time, we've got to deal with this and address the -- and recognize, acknowledge the currency pressure that's coming through. So the operating plan, operating effectively, our team -- I think our teams are doing a really good job in a difficult environment. But then we do have to adjust the guidance range for the currency impacts.

Yes. I think that's fair. And then just switching over to the M&A you've completed. I just want to make sure that the revenue expected from those two are immaterial to guidance for 2022. And then on ARVIS, is it agnostic to the different implants? Or is this a proprietary surgical platform for your -- Enovis?

Yes, Matt, let me take those. And one thing I do want to put a point on in Chris' comments is that the $10 million of FX pressure is since we set the guidance, right? So we have $10 million of new FX pressure beyond our original guidance, and that's why we're changing the range, just for the avoidance of doubt. So the revenues from the new acquisitions, yes, there will be sort of just a handful of million dollars of impact in this year. And so it's -- and on the ARVIS side, there'll be some costs coming in and so no real profit contribution there in the year. But to your question about ARVIS, well, I will say, but certainly, those will both ramp nicely as we move into next year and beyond both to support the growth in existing parts of the business and also bring some additional revenue as well. But as far as ARVIS, it is a terrific technology that we think is going to -- obviously there's an appetite for these kinds of technologies now that it's very well established in the industry. And ARVIS is designed to be more precise, but very importantly, also designed to be much smaller, more streamlined and particularly for the ASC environment, just a terrific fit. And yes, it is an implant-agnostic solution. But from a business model standpoint, we're certainly looking to use it to serve our existing surgeons and help them and grow in a strong way with them and also get some recurring revenue coming from their use of this product in their processes. But then also, we do definitely see ARVIS as a great opportunity for us to use as part of how we continue to attract competitive surgeons. And as we do that, we'll have a business model that certainly encourages them if they're excited about the technology to be also bringing their implant volume over to us over time and also a great recurring revenue stream on the ARVIS product as well.

Your next question comes from Jason Wittes from Loop Capital.

First off, you mentioned you're implementing price increases. I'm wondering where you think you're going to have success. You've got somewhat of a wide range of orthopedic products in different markets such as hips and knees versus the extremities and obviously the physical therapy business. So could you give us some color in terms of where you think you're seeing success or where you think you can success or where you're seeing success right now?

Yes, Jason. So it's -- our P&R segment is where we had the most inflation come the earliest and where we've done a lot of price and we continue to do more price. And there's different pieces of that segment, but the bracing business is the largest part of that segment. And there, there's a range from Medicare-made price increases. We're working through with the other insurers getting increases that help our reimbursement business there. We've been able to several times now make direct price increases into the clinics and our distributors, and then some of the changes from Medicare and insurers create some relief on that front. And we've made some traction on GPO price increases there. And so it is something we have to do channel by channel and sometimes customer by customer, and so it's been building over time. But that's in the bracing business. Whereas like in our rehab business, that's something we can just put a price increase through because it's a product that's sold into rehabilitation clinics. And so we've got a couple price increases into our rehab business that are just change the price, let's get it through the system as well. And so we had about -- in that billion dollar P&R platform, we had just about 1% percent of price already last year, and we expect to have in the range of 2% of price this year. And that's -- if we get stabilization in our inputs and our freight rates, that's what, as Chris talked about in the back half of the year, gets us to start pulling back some gross margin particularly in Q4 and then we would pull back more next year in that kind of a scenario. And if we get more inflation, we do now have a lot of clear kind of muscle and process and experience to be able to get to the places where we can get it through and get it through. On the Recon side, it's a very different dynamic. There definitely is a different price climate in Recon. And we have seen some specific instances here in the U.S. and some specific countries in Europe, where we've been able to get some positive price. But there also has been a trend in that Recon business that typically have a couple of percent of price down every year. I'd say there's definitely going to be a lot of price dialogue in Recon this year and next year, there was some last year. I think most indications are that, that's probably going to result in more of a flattening or maybe a modest increase for a little bit of time rather than the normal couple of percent a year. And in our business with the high growth we've got, if we get flattening of price with nice operating leverage, I think that would be a good environment to be in, say, next year.

That's very helpful. And then also, in terms of your longer-term EBITDA margin improvements, I think you put a pretty decent goal out there. I think it's 500 basis points by 2024. How does inflation and FX and all those other pressures work into that assumption? Are those sort of pressures that may delay you getting to that level? Or is that already built in when you kind of put out those numbers or that expectation?

Yes. So we shared kind of a very clear plan for how we're going to get those 500 basis points. And I think that plan is still fully intact. I'm very confident that we can get that improvement and get to 20%-plus EBITDA margins. I'm also confident that we'll take a good healthy step forward on that here this year. And that's because the key elements of it are still very much intact. We've taken out some of the structural costs as we did the separation, and we've had some other cost actions underway this year and plans for next year. We are getting the growth and the operating leverage and the productivity that we can get with that growth. And we've got clear plans for how to scale those acquisitions that came in at low margin levels but high gross margin levels. And we've got clear plans for how is starting as we exit this year and into the coming years, how we scale those acquisitions. And so all of that is intact and we're getting price, we're getting a lot of price. And so the opportunity to eventually pull the price cost pressure back in our P&R business is very real. So I still feel very confident in that 500 basis points. I think we've clearly got a short-term challenge in terms of a little bit of delays in getting to stabilization on inflation and a little bit of FX pressure. That's creating a little bit of headwind against that initial start. But the entire plan to get 500 basis points is still very secure.

Got it. That's very helpful. And then I guess one sort of housekeeping type question. Can you give us a little color in terms of what the hip and knee growth breakout was? And any kind of qualitative information in terms of what's driving that growth?

Yes. So we shared -- the hip and knee that we shared on the page there is U.S. hip and knee because we don't yet have masses in our core numbers. And as we shared, we're kind of well into the double digits there. Certainly, the knee part of that is the strongest. It's -- we grow very strongly in knee many times market, and that's partly driven by how successful we're being in the ASC with our tremendous EMPOWR Knee product. But also in hips, we're confident that we grew it at multiple times market. So well into the double digits for our hip and knee, and as we said, double digits as well for shoulder. And in our Mathys business, our hip growth, they're a real leader in hip, and their hip growth was very strong well above market. And we've shared previously that we expect -- that products we'll bring in from the U.S., our AltiVate product and our EMPOWR, to significantly improve their knee and shoulder growth. And so we're feeling very good in math, our math as being 10% pro forma in the quarter on the back of strong hip growth. And then we've got the products needed coming through to get the other parts very strong. So really good, good arc in our Recon business.

At this time, this does conclude today's question-and-answer session for today's call. I will now turn the floor back over to management for any additional or closing remarks.

Well, thank you, everyone. Thanks for joining us. If you have any further questions, please contact Investor Relations. Have a great day.

Thanks, everybody.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.