Good morning, and welcome to the Enovis' Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be opportunity to ask questions. [Operator Instruction] Please note this event is being recorded. And I would now like to turn the conference over to Kyle Rose, Enovis' Vice President of Investor Relations. Please go ahead.

Thank you, Marliese, and good morning, everyone. Thank you for joining us today for our third quarter 2023 results conference call. I'm Kyle Rose, Enovis' Vice President of Investor Relations. With me on the call today are Matt Trerotola, Chairman and CEO; as well as Ben Berry, our Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website in Enovis.com. 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 our 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. 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 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. Hello, everyone, and thanks for joining us today. As we previously announced, we had a very productive third quarter, with continued share gain, solid margin expansion, and we announced the strategic acquisition of Lima that step changes our Recon business. Let's go to Slide 3 and talk about these highlights. We grew organically by 6% in the quarter, with 10% growth in Recon, and 4% growth in P&R. That brings our year-to-date organic growth to 8%. We continued our trend of double-digit growth and share gain on the Recon side versus a strong Q3 compare. We saw a return to more normal third quarter seasonality with some summer volatility in procedure volumes from vacations, which was in line with our expectations. We believe the elective surgery markets we serve remain healthy with higher than normal procedural demand in 2023 overall, a trend we expect will persist through 2024 and likely 2025 as pandemic-related patient backlogs are gradually worked down. In P&R, we had another strong quarter, showing our reestablished leadership in these markets with a bit of share gain in a stable market environment. We expanded our adjusted EBITDA margins by 80 basis points, reflecting strong gross margin expansion from productivity, mix and the scaling of recent acquisitions. In September, we announced a definitive agreement to acquire Lima Corporate, which expands our global reach and Recon, taking that segment to about $1 billion in sales, with close to 50% exposure to the faster-growing extremities market. Overall, we remain on track for a great 2023 with strong momentum versus our strategic goals. Digging a little deeper in Recon on Slide 4. We had double-digit growth in the U.S., led by 18% organic growth in hip and knee. Extremities grew 7% against a tough prior year comp of 17% in…

Thanks, Matt, and hello, everyone. I'll begin my remarks on Slide 8. We're pleased to report third quarter sales of $418 million, up 9% versus prior year, and 6% organic. Our growth was fueled by strong demand for our products and solid commercial execution in both of our business segments. Additionally, our third quarter sales results include a combined 260 basis point positive contribution from foreign currency and recent acquisitions. Third quarter gross margin was 58.2%, up 140 basis points year-over-year. The growth was driven by leverage from higher sales, strong mix and cost discipline. We continue to leverage our EGX business system to stabilize and drive productivity in the supply chain, and the results continue to read through in gross margin. Adjusted EBITDA grew 14%, and adjusted EBITDA margin was 15.7%, up 80 basis points versus prior year. This growth was driven by gross margin expansion and partially offset by growth investments in R&D and dilution from recent acquisitions. Q3 results build on a strong first half, resulting in year-to-date adjusted EBITDA margins up 100 basis points versus the prior year. Third quarter effective tax rate was 19%. This is compared to 6% last year, which included benefits from onetime items that significantly lowered the rate. Interest expense was $6 million for the quarter versus $5 million in 2022. Overall, we produced strong adjusted earnings per share of $0.56 or underlying earnings growth after normalizing for the tax and interest impacts from the prior year. We're extremely pleased with these results and the momentum we've built thus far in 2023. I want to congratulate all the Enovis team worldwide in delivering another strong quarter. Let's move to Slide 9. Considering our Q3 performance, we are raising our organic sales growth outlook for the year to 7.4% to 7.6%, versus…

[Operator Instructions] And our first question comes from Vik Chopra from Wells Fargo.

Congrats on a nice print. Just 2 questions to me. Matt, maybe first one for you, GLP-1s remains front and center for investors, and it will be remiss with me if I didn't ask you about this. So I just want to get your updated thoughts on how you're thinking about the impact of GLP-1s on ortho -- on ortho procedures? And then I had a follow-up question, please.

Thanks for the kind words. Let me address your first question, and let you ask the second. Certainly, we're paying close attention to all the discussion about GLP-1 and the potential impacts as we've taken a look at it so far, really the demonstrated impact from GLP-1 is on obesity and the path of obesity and being able to reduce obesity. And when we look at our portfolio and we look at the portion of the portfolio that might be -- have some headwinds from obesity versus the portion that might have some tailwinds from less obesity, we would see it as somewhere between neutral and potentially a small positive in terms of the kind of impact that GLP-1 can have on obesity. So that's kind of how we view it at this point based on the demonstrated impacts that are out there. We're going to continue to monitor the situation. But in our business, in our Recon business, we get most of our growth from share gain, not from the market growth itself. And so even if there was a little bit of impact on the market growth in Recon, our diversification, as well as our small share position in hip and knee would be a good thing in terms of enabling us to still drive very strong growth.

And then my second question was just on the backlog in orthopedic procedures. We're sort of coming up towards the end of 2023. I'm just curious as to how you think about the backlog heading into 2024? Do you expect to work for that backlog next year? Or do you expect that to be a tailwind for some time?

Yes. I think the way we look at this backlog topic is that if you look at the overall industry growth since 2019, there's still a year or 2 missing, right, in the math. And so growth. And so that really gives an opportunity, even with some of the tailwind this year that came from some backlog, we still see the opportunity for a little bit of tailwind in each of the coming years if people create the capacity and the staffing to be able to work off some of that backlog. And so we're pleased that this year has had a little bit of tailwind in it, particularly in the first half of the year in terms of Recon procedures. And we would expect there's a real possibility to have that tailwind continue for the next couple of years. But obviously, it's going to be kind of a situation on a year-to-year basis. And we'll share the assumptions that we're making when we give our guidance.

Okay. We'll proceed with our next question, which is from Jeff Johnson from Baird. Jeff?

Nice quarter. I appreciate all the commentary. I guess, Matt or Ben, just on the Extremities business up 7%. I know it came up again that very tough 17% comp. Just would like to hear what you're seeing maybe from a competitive standpoint. I know a couple of your competitors have launched some new shoulder products here recently. So what are you seeing out in the field and your confidence in maybe getting that number, I think [indiscernible] is a little bit over the next few quarters, although stay pretty high. Do you think that gets back to a double-digit number? Or are we kind of in this upper single-digit range for the foreseeable future?

Yes, Jeff. Appreciate the question. We continue to be very confident in our leadership in shoulder. We've shown that leadership for a long time and we've been able to outgrow the market based on the great AltiVate shoulder and all the different innovation that we've been bringing through. And certainly, in the quarter, the 7% is more like in the neighborhood of market growth versus the above-market rate growth. It is normal. But then if you stack it on top of 17% last year, then you'd see kind of 2 years of comfortably above market growth. So we continue to be confident in our leadership there, even in a little bit more competitive field. We still have an advantaged product and a tremendous innovation pipeline. Yes, we've got a couple of quarters of strong comps starting this quarter. And at the same time, we've got some really exciting innovations coming through as we work our way through the first half next year. So we feel comfortable that we're going to continue to show consistent above-market growth in shoulder over the medium term here.

And then you mentioned summer seasonality. I think that's pretty consistent, I'm sorry, with everything we've heard from others as well. But I'm sure you don't want to give month-by-month trends, but maybe just any thoughts on -- from that summer seasonality, how September and now into October has trended. Are you seeing kind of some normalization of that seasonality and a recovery in volumes, just kind of your update on recent trendline.

Yes, sure, Jeff. Yes. I mean, again, it's sort of a new kind of summer seasonality setting last year with more vacations than normal as sort of the new normal, and that repeated itself this year, even probably a little bit -- a little bit heavier in July this year than last year. So the first couple of months of the summer, definitely we're slower. September was a good healthy step forward. And October is another good healthy step forward. And so we're expecting sequential acceleration in Q4 versus Q3, and a pretty normal run to the finish for Recon as we head through the coming months that will set things up well for how things roll over into next year.

And we'll take a question from Yang Li from Jefferies.

I guess to start, maybe I wanted to hear a little bit about the early feedback from your European team, Lima customers, Enovis customers on the deal. What do they like about it? Anything that they're cautious of? In general, just how excited are they about the deal?

Yes. Certainly, we've spent a lot of time getting out and getting feedback from customers and the channel in terms of that really important combination in our Recon business, and a lot of very positive feedback. I mean if you look at the Lima customers and channel, for example, here in the U.S., they've had kind of some limitations on how much breadth of product line they've had. They've had some great products, but they've had some limitations on how much breadth of product line they've had. And so that's a great, real positive opportunity. Same goes for outside the U.S., Lima had some tremendous strengths in certain areas of the product line, but also has had some weaker areas that we will fill in very quickly. And so again, the customers outside the U.S. and the channel outside the U.S. are excited about the opportunity. And on Enovis side, there's some technologies that will come with Lima that our customers are quite excited about as well. So I'm very pleased by the feedback we've gotten from the marketplace. I'm really excited about the team, the time I've been able to spend with the Lima team and that other leaders have been spent -- being able to spend with the Lima team. Just a lot of great talent there and a lot of excitement and energy about joining our company.

I guess maybe just to follow up on P&R, don't get enough attention sometimes, but pretty strong growth in the third quarter and year-to-date off of pretty tough comps. It sounds like the market growth drove a lot of that, but just wanted to hear a little bit about some of the other key drivers of growth in the third quarter. Any key products to call out and the sustainability have got a mid-single-digit growth rate going forward, especially against elevated comps? And also maybe on gross margins, if you can comment on it? I mean, pretty strong expansion of 150 bps, driven by a lot of the things you talked about before. Where are you on the P&L gross margin expansion curve?

Yes. Let me talk a little bit about the growth, and I'll let Ben talk a little bit about the gross margin there. We're certainly pleased with the consistent 4% growth. As a leader there, we've consistently said, we don't need to outgrow the market by a lot. Our strategic plan is to outgrow the market by a little bit that gets us into that kind of low to mid-single-digit growth range for P&R. And so certainly pleased with the consistent execution there. And it is above market growth. But it's a healthier market environment than in recent years, and then we've also driven nice above-market growth. And really, some of that, we've had very nice price performance there that is helping in terms of the growth. Second, our supply chain is very strong. A lot of great EGX work in the supply chain, and so the consistency of our delivery to customers there in a demanding market has been very strong. And that's helping us as well. Third, we've come up the curve a little bit on innovation in our P&R businesses, and that's helping the team in terms of giving them some good new products to sell. And then fourth, we continue to demonstrate some growth through MotionMD clinic conversions that is a piece of our share gain in any given year. And so that formula is consistently working and getting us into the kind of growth range that we need from this business. And we're confident that as we go forward, we have more innovation coming through, at the same time as a little bit of that price will start to roll off. And so that should be able to keep us in the low to mid-single-digit growth range for P&R on sustainable board path.

Yes. And Yang, on gross margins, I mean, as Matt indicated, we are taking some ground on price versus cost in terms of our ability and kind of our capabilities now to continue to try to manage through some of the inflationary impacts that we've had. We're seeing some of those pressures roll off a little bit. I mean, we're getting improved freight rates as we kind of work through the supply chain, that's helped us a little bit. The other thing is we've got some positive mix that's happening within the P&R business itself. Some of our fastest-growing parts of that business actually are carrying higher gross margins. So we're getting a benefit of that on top of some of the kind of price cost efforts that we've done to continue to drive improvement. So overall, you put those together with all the EGX work that's constantly in kind of our view. We've seen really strong performance there and kind of feel really good about the progress on gross margin and P&R.

And we will take a question now from Bill Plovanic from Canaccord.

I'm going to focus on strategy. So in terms of M&A, there's a lot of moving parts going on with interest rates up and valuations down. You got a big deal you're closing in front of you. I was wondering if you could help us understand, one, what do you think of M&A going into next year, given those dynamics? Two, will you buy anything with Lima kind of until that gets done? Three, what do you think about valuations in the marketplace? Does that shift whether you go into earlier stage assets or later-stage assets? And then lastly, how much actually post the Lima deal and the recent financings do you have dry powder do you actually have to buy anything?

I think we're certainly very excited about the Lima deal as well as some of the really important foot and ankle and technology deals that we've done this year. And it's definitely been a better environment in terms of being able to get better valuations on acquisitions as you've seen, as we've shared the kind of multiples that we paid for those deals. So we feel like we've taken advantage of this period of time where it's a little more of a buyer's market, and we had the firepower and we've made some great strategic moves for the company. M&A is going to continue to be a part of our strategy. But clearly, for the next year, we're going to be primarily focused on continuing the integration and ramp of the foot and ankle acquisitions that we've made, making sure that the Lima acquisition integration is a tremendous success. And I would expect very likely that any acquisitions that we do in the next 6 to 12 months are smaller strategic acquisitions versus anything of any scale and size. At the same time, we're constantly doing the strategy work to prioritize where else we'd be interested to make acquisitions, whether it's things that strengthen and accelerate strategies in our core markets, or whether it's things that would move us further into attractive other attractive ortho markets, or whether it's things that would move us into attractive adjacencies that would be logical for us. And we have a little bit of firepower over the next year or so as we start to kind of bring back down our leverage, but probably less than around $0.5 billion-ish. And then in the coming years, we'll build that back up and can certainly consider larger and attractive strategic moves at that point in time.

Our next question comes from Mike Matson from Needham & Company.

Yes. So I guess, first, given the number of acquisitions you've done in recent years and the upcoming close of the Lima deal, I imagine you've picked up quite a few implant product lines. Just wanted to ask about if there's any plan to sort of try to rationalize some of those product lines over time and how you go about doing that? I know that these types of things -- products tend to have really long life cycles, and it's sometimes difficult because of the customer loyalty aspect to certain products but

Yes. Yes, for sure, we're taking a look at that. Now to be honest, until the Lima acquisition, the majority of stuff that we've done has not had much product overlap. The Mathys acquisition in our core Recon products was largely complementary, a little bit of product overlap, but largely complementary, and our foot and ankle acquisitions have almost all been kind of new and complementary additions. With the Lima acquisition, we certainly will get into an area where we've got a little bit more of product line overlap. We still like the complementarity of the technologies and product lines and geographic positions. And so there's not a lot of geography and product line overlap, but there certainly will be opportunities to simplify the product line over time. We're going to -- really from a -- we're going to focus on growth first, and really focus on how and where we can cross-sell and how we retain as much as possible the customers and channels. The cost efforts that we'll take at the outset will be more around sort of combinations of the businesses and the back office and the businesses and processes. And then over time, we'll be thoughtful about how and when we might be doing some simplification of the product lines that will scale us and make us -- make our growth more cash efficient over time. But we're going to do that with an eye towards making sure that we deliver very strong growth, first and foremost.

And then as far as the Lima acquisition goes, we've done some modeling. And particularly, with the convertible debt having a bit lower interest rate than we originally kind of expected when you announced the deal. We're coming up with sort of double-digit accretion in '25 and beyond -- EPS accretion, sorry. Does that seem reasonable?

Yes. Very much so, Mike. And we even put, I think, some of that in our materials today. I mean, we expect accretion in year 1, and then meaningful double-digit accretion starting in year 2.

[Operator Instructions] Our next question comes from Jason Wittes from ROTH MKM.

You mentioned pricing. Some of your larger peers are talking about getting better pricing sessions in an inflationary environment. Are you seeing that as well? And also in terms of gross margin, you did see some improvements. How much of that is related to inflation or subsiding of inflation?

Yes. I'd say, Jason, we're seeing on both sides of the business, some, I'd say, favorable pricing momentum. One, on the P&R side, where we're the market leader, and we can put price increases in selective product lines. We've continued to do that over the last couple of years, and we've seen some benefits there. On the Recon side, given we're a smaller player, we generally kind of follow what the market is doing. What we're seeing is some stabilization there in terms of pricing. So we're not seeing as much of the erosion that maybe we've seen in the past, but not a whole lot of increase either. But overall, we would expect that to continue, and like in an inflationary environment, and then probably revert back to more normalized views kind of in more normal times. In terms of gross margins, it really kind of lines up with our kind of our expansion goals that we've really laid out, which is, one, kind of getting the mix improvements of kind of the Recon business becoming a bigger part of our company. It's getting the read-through on the price versus cost, the productivity programs that we can continue to drive the leverage that we're getting from the volume growth. And then the scale of the acquisitions as well. That's a key component of driving our increases in gross margins as well. So all of those are contributing to the 140 basis points of expansion that we saw in the quarter.

And on Lima, if you could maybe just review kind of sort of the key products that we should be focused on? I mean, obviously, the shoulders are important, but -- and distribution is very important. But just curious on kind of how you rank sort of the kind of contributors from Lima, and how we should be thinking about it?

Yes, sure. Yes. First of all, a very strong shoulder position with their SMR shoulder, and that's going to -- that's going to be something that is valuable and extendable. The second would be, they really had a very strong revision position. And that's -- good product in hip and knee, but very strong provision position. And revisions very attractive part of the market. And we've been earlier days in terms of our revision position in hip and knee. And so that's attractive and complementary. And then third, they have just great technologies around 3D printing. They've been a pioneer, really, in designing and manufacturing with metal 3D printing, and have done everything from having custom implants that are 3D-printed printed for very complicated cases, which is a great tip of the spear to be able to bring to surgeons to get them interested in the product line. And at the same time, they've also used those technologies to design some great products, like their revision cones for knees that take advantage of that, trabecular titanium, proprietary metal 3D printing. So the -- that's the kind of hierarchy of some of the great products they've got in technologies that I would share.

At this time, we are done with our question-and-answer session, and we will then finish the conference as well. We thank you very much for attending today's presentation. You may now disconnect.