Enovis Corporation (NYSE: ENOV), a global medical technology company, reported a strong first quarter in 2024, with significant revenue growth and strategic advancements. The company saw a 27% year-over-year increase in revenue and a 5% rise on a pro forma combined basis. Key highlights included the successful acquisition and integration of Lima, robust growth in the Recon segment, and the launch of Arvis 2.0.
Despite facing softer market growth due to external factors such as storms and illnesses, Enovis raised its full-year revenue guidance, expecting high single-digit growth in Recon and stable growth in PNR. The company anticipates further acceleration of growth in the second half of the year and remains focused on upcoming product launches and cross-selling opportunities.
Key Takeaways
- Enovis achieved a 27% YoY revenue growth and a 5% pro forma combined basis growth in Q1 2024.
- The company completed the acquisition of Lima, with integration efforts underway.
- Recon segment reported 66% global revenue growth and 7% pro forma growth.
- US Recon grew by 4%, with extremities up 8% and Hip & Knees performance flat.
- PR segment saw 3% organic growth with improved adjusted EBITDA margins.
- Enovis raised its revenue guidance for the year, expecting high single-digit growth in Recon and stable growth in PNR.
- Arvis cleared for use in shoulders, with plans to aggressively ramp up products in the second half of the year.
Company Outlook
- Enovis expects to accelerate growth in the second half of 2024, despite short-term impacts from Lima integration.
- The company is optimistic about cross-selling opportunities and shoulder market product launches.
- Enovis anticipates a slight acceleration in gross margins throughout the year, with higher operating margins due to synergies and cost savings.
Bearish Highlights
- Integration efforts and external factors led to softer market growth compared to the previous year.
- Some loss of planned and expected business in the US and other countries impacted the Hip & Knee segments.
- The integration impact is expected to peak in the second quarter before flattening and decreasing later in the year.
Bullish Highlights
- The Foot & Ankle portfolio performed well, driven by key technologies like DynaNail, NovaStep, and arsenal reload.
- Nearly 70% of the channel is fully aligned with Enovis products, contributing to market growth.
- The company has a strong pipeline of upcoming accessories and revisions, with aggressive plans for Arvis product ramp-up.
Misses
- Q1 was a softer growth quarter for the Hip & Knee segment due to strong comparisons, integration effects, and the loss of specific accounts and surgeons.
- Surgical supply was constrained by various factors, including storms and flu, affecting growth.
Q&A Highlights
- CEO Matthew Trerotola expressed confidence in the Hip & Knee segment's return to normal growth as the year progresses.
- There is a backlog of unserved patients in the Hip & Knee market, potentially creating a tailwind.
- The company plans a broader launch of Arvis 2.0, improving software and hardware based on surgeon feedback.
- Enovis expects Arvis to drive knee conversion efforts and generate recurring revenue, with a shoulder launch planned for the second half of the year.
Enovis's first quarter of 2024 sets a positive tone for the year, with the company navigating integration challenges and external market factors. The firm remains committed to delivering value through strategic growth initiatives, product innovation, and market expansion. Enovis will share its second-quarter results in August, with the medical technology community and investors keenly anticipating further developments.
InvestingPro Insights
Enovis Corporation's (NYSE: ENOV) first quarter of 2024 demonstrated robust financial health and strategic momentum, a sentiment echoed in the real-time data and insights from InvestingPro. With a significant 27% year-over-year revenue increase, the company's financial metrics offer a deeper understanding of its market position and future potential.
InvestingPro Data highlights Enovis's market capitalization at 2.87 billion USD, underscoring its substantial presence in the medical technology sector. Despite a negative P/E ratio of -86.20 indicating that the company was not profitable over the last twelve months, analysts on InvestingPro forecast a turnaround with net income expected to grow this year. This is further substantiated by a PEG ratio of 0.38, suggesting that the company's earnings growth could be undervalued relative to its peers.
Revenue growth remains a strong suit for Enovis, with the last twelve months as of Q4 2023 showing a 9.22% increase, and a quarterly growth in Q4 2023 of 11.33%. This aligns with the company's raised full-year revenue guidance and reflects its ability to drive growth even in challenging market conditions.
InvestingPro Tips for Enovis emphasize the company's potential for profitability this year, which is a key consideration for investors looking at future performance. Moreover, the stock's trading pattern is noteworthy; while one InvestingPro Tip points out low price volatility, another mentions that stock price movements can be quite volatile. This dual nature suggests that investors should monitor the stock closely for both stability and potential rapid changes in the market value.
For those interested in further insights and tips, InvestingPro offers additional analysis on Enovis, including more detailed metrics and forecasts. By using the coupon code PRONEWS24, readers can receive an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking a wealth of information to inform their investment decisions. There are 6 more InvestingPro Tips available for Enovis, providing a comprehensive outlook on the company's financial health and market potential.
Full transcript - Enovis Corp (ENOV) Q1 2024:
Operator: Good day and welcome to the Enovis First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. And now I would like to turn the conference over to Kyle Rose, vice president of investor relations. Please go ahead.
Kyle Rose: Thank you, Mayor Elise. Good morning, everyone, and thank you for joining us today on our first quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Trerotola, Chair and Chief Executive Officer, and Ben Berry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, 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 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. The forward looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying Reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on slide three. Matt?
Matthew Trerotola: Thanks Kyle. Hello everyone, and thanks for joining us this morning. We had a strong first quarter, but before I begin to discuss the results, I want to welcome the Lima organization to Enovis and recognize the efforts of our strong global teams who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into one company with a global focus, we're managing the organization on a combined global basis and we use pro forma growth for comparative purposes for year-over-year comparisons. Our prior year financials have been updated to include the acquisitions at Lima and NovaStep. Let's start on slide three and talk about some of the quarter's highlights. We had a transformational start to the year we completed our planned acquisition of Lima, made significant progress on our integration plans and carried forward momentum from 2023. Across our geographies and business units, we delivered reported growth of 27% year-over-year and 5% on a pro forma combined basis versus very strong comps. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mix impact of Recon growth, productivity improvements, stable inflation and pricing trends, and the step change impact from Lima. We closed the Lima acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we've completed in the past few years. Overall, a strong start to the year. In Recon on slide four, we delivered 66% reported global revenue growth. Pro forma Recon grew 7% year-over-year in the first quarter, which includes a 2% to 3% negative impact from integration dis synergies in line with our plan. US Recon grew 4%, including 8% growth in US extremities and flat performance in Hip & Knees against a very strong prior year comparable of 22% growth in our core Enovis business. Outside the US, we grew 10% in a resilient market. We've achieved significant progress integrating the Lima acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short term growth impacts across anatomies and geographies as we work through the integration of our commercial channels. These fall well within our projected estimates and our expectations for the full year remain intact. We look forward to ramping cross selling opportunities as we move into the second half of 2024. I'm excited about the initial traction we're seeing with our market leading empower and ultimate products globally. We continue to expand market access with the clearance of our ultimate small shell in Q1 In Europe. We also have a strong pipeline of innovation as we continue the US rollout of the empower vision knee controls ramp of Arvis 2.0 and selling Lima's 3D printed Trabecular Titanium clip cones for use with our EMPOWR Revision System, one of our first key cross selling opportunities. I'm also very excited to announce that just earlier this week, Arvis received 510(k) clearance for use in shoulders. This timing aligns well with our planned launch of the augmented Glenoid component of our flagship ultimate reverse shoulder system. In the second half of the year, our Foot & Ankle team continue to launch great new differentiated technologies like the arsenal reload that are keeping the vitality high and helping drive very strong double digit growth. These great new technologies, alongside the cross selling potential of the combined portfolios offer significant opportunity to accelerate growth in the second half of 2024 and set us up with great momentum as a billion dollar plus fast growing Recon business entering 2025. In PR on slide five, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan. Recovery sciences led growth, boosted by continued double digit laser growth and global bracing continue to grow above market rates. Our new product pipeline is robust and includes the new OA knee brace called ROAM, additional spine bracing products and the next generation of clinical electrotherapy products for our recovery sciences team. Adjusted EBITDA margins in PNR improved 50 basis points year-over-year as we continue to use EGX tools to drive consistent productivity improvements and sustained traction on price versus cost. Now I'll let Ben take you through the P&L details. Ben?
Phillip Berry: Thanks Matt. Hello everyone, I'll begin on slide six. We are pleased to report first quarter sales of $516 million, up 27% versus the prior year and 5% on a pro forma basis. This compares to strong prior year organic core growth of 9%. Our teams have been working really hard to integrate our global Lima acquisition that closed January 3. We've been extremely pleased so far with the collaboration in our teams and the high quality integration plans that we've begun executing against. Our underlying growth in PNR and Recon continues to be solid and while still early, our integration efforts are slightly ahead of our original plans. First quarter adjusted gross margin was 58.7%, up 70 basis points year-over-year. The growth was driven by leverage from higher sales, favorable segment mix which includes the addition of Lima and cost leverage. Our first quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1 2023. First quarter's effective tax rate was 23%. This is compared to 21% last year. Interest expense was $20 million for the quarter versus $6 million in 2023. Overall, we posted strong adjusted earnings per share of $0.50 [indiscernible] earnings growth versus the prior year. Foreign currency exchange had an unfavorable impact of approximately $0.02 in the quarter. Turning to slide seven, we are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of $2.06 billion to $2.16 billion. This is slightly above our previous guidance range which contemplated 7% pre Lima organic growth, double digit Recon growth and low single digit PNR growth. As we go forward in 2024, we will be reporting on pro forma results. Our updated guidance range increase translates to approximately 5% to 6% pro forma growth and includes acquisition related impacts. In Recon, the pro forma outlook translates to high single digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross selling and new product launches. We continue to expect stable PNR growth in the low to mid single digits as was reflected in our original guidance. We expect adjusted EBITDA in the range of $368 million to $383 million, which includes a modest increase to the range based on our Q1 performance, our guidance for depreciation, interest and other expenses, tax rate and share count remains unchanged from the prior guidance. Taking all this into consideration, and as a result of our strong operational results in the first quarter, we are increasing our adjusted earnings per share range to $2 and $0.52 to $2 and $0.67. To summarize on slide eight, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima. We are excited about our progress in the first quarter and remain focused on successfully executing against our integration plans, creating momentum and delivering strong financial results. Now, I'll hand it back over to Kyle to start Q&A. Kyle?
Kyle Rose: Thanks, Ben. Before we begin the Q&A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question, followed by one follow up question. You're welcome to rejoin the queue if we have time. With that, we'll hand it over to the operator to start the Q&A.
Operator: Thank you very much. We will start the Q&A. [Operator instructions] At this time, we'll start with a question from Vik Chopra from Wells Fargo. Vik, please go ahead.
Vik Chopra: Good morning and thanks so much for taking the question. I'll keep it to one. So, based on our math, Lima came in ahead of our estimates. We estimate about $85 million. Can you just talk about what you're seeing with regard to the integration and what drove the upside? And then you also called out 2% to 3% negative growth impact from the integration. We really appreciate if you can elaborate on that, please. Thank you.
Matthew Trerotola: Vic, I missed the very end of the question there about the 2 to 3%.
Vik Chopra: Oh, sorry, I was saying we saw you called out 2 3% negative growth impact from the integration, just any color on that would be appreciated. Thank you.
Matthew Trerotola: Yes. Yes, absolutely. So, yeah, I mean, we saw, a good, solid start to the year as expected, both in terms of our performance on the integration front as well as, driving good progress in the core business. You know, that we've talked about through the quarter, in various settings. We talked about the market environment, which, really last year there was a super clean market environment and very high utilization rates. You know, I think this year was probably more a more normal market environment with storms and illnesses and different things. And so I think that, that's resulted in a little softer market growth, quite a bit softer than last year. And so that's certainly an impact, but we've continued to drive strong performance against the market. But then we have been working quickly to do the integration as we've talked about all along. And as we work through the channel integration in the US and in certain countries outside the US, there's choices that we've made in some cases, choices that agents have made in other cases, that have led to some loss of business that was planned and expected. And as we've talked about along, we've tried to work through it quickly so that we can have it kind of impact the business here in the first year and then leave it behind. And that's impacted the US significantly, but also it's had some impact in other countries and it's had impact on the hip and the side as well as on the shoulder side. And so we've tried to give you a clear look with the pro forma growth, but also talk a little bit about the impact of the integration so that you can see that the underlying business is certainly in a quarter with a strong comp and a little softer market, but the underlying business is still very strong and we've got a great path to accelerate through the year and exit the year on a very strong growth arc.
Kyle Rose: Thank you. Next question.
Operator: And our next question comes from Jeff Johnson from Baird. Jeff, please proceed.
Jeffrey Johnson: Yes, thank you. Good morning, guys. So, Matt, I don't want to give you a big softball here, but I guess just help me on the math. If you, If you did 7% Recon growth, is it fair to think about those 2 to 3 points of dis synergies? I think you also had one less selling day with Easter at the end of the quarter. You know, Recon, would that have been closer to, 9%-10%, 10%-11%, if not for those dis synergies and the selling days. Is that how we should be conceptually thinking about this?
Matthew Trerotola: Yes, I think that's the right way to think about it, Jeff.
Jeffrey Johnson: Okay. And then just on the extremity side, you called out the 8% growth there. You did point most of that to Foot & Ankle. Obviously, you had the dissynergies, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that's just in the core novus, the ultimate product in that? Obviously, competition is growing in shoulders as well. So just how do you perceive kind of shoulder market and your performance in the shoulder market? Kind of some of this noise from the integration and selling days. Thanks.
Matthew Trerotola: Yes. Excluding some of the integration, in fact, we still see ourselves in a good above market growth range in our shoulder and have a great opportunity as we work through the year here to even strengthen that further. The Glenoid that we launch will launch here probably late in the second quarter and really ramp in the second half of the year are going to give us a great additional, additional weapon in terms of driving more share gain and shoulders. And the cross selling opportunities are terrific and shoulder. And then, as I said in my comments, we've also gotten Arvis cleared in the shoulder. And while that won't have much impact this year in terms of revenue because we'll be in the early launch phase, I think it just, continues to send a very strong message to the market about our, the strength of our leadership in shoulder and our commitment to be continuing to be an innovation leader there.
Operator: Our next question comes from Xuyang Li, from Jefferies. Xuyang, please go ahead.
Xuyang Li: All right, great. Thanks so much for taking our questions. I guess I wanted to hear a little bit more about cross selling opportunities as you get through some of these early integration choppy period. Seems like we'll see more of the benefit in the second half in the US. And US seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross selling?
Matthew Trerotola: Yes, yeah, for sure Xuyang, thanks, thanks for the question there. We're extremely excited about the cross selling opportunity. Actually, I got to join the global sales conference that we had over in London for our Recon teams, and it was really tremendous to see how far the teams have already gotten on creating really specific and aggressive cross selling opportunities. I'll mention a few we talked about here in the US market, a kind of immediate opportunity to bring revision cones into the US market and more aggressively sell the custom probate products that Lima has. And so it's early days on those, but we've already gotten a little bit started there and would expect to see a nice ramp down the back half of the year on those. And we also, our teams are pretty excited about the SMR shoulder, not as a kind of our core shoulder product. The ultimate is really our flagship. But there are, specific, specific situations where the SMR can be quite attractive, and we expect to see some nice cross selling there as well. You know, second, outside the US, we're still early days in terms of driving power and ultimate. And, we had just started to ramp up the Mathis cross selling. And so now across a much broader landscape with Mathis and Lemis channels, we've got a great opportunity for many years to come with empower and ultimate. And as I shared, we just got some additional market access, which is very important and ultimate, a large portion of our cases in the US with ultimate or small shell. And so that market access really helps to give a boost there on those broad cross selling opportunities. And then the third thing that actually is really exciting, I probably kind of underappreciate appreciated until I was at this conference. Sitting in the room with the teams talking about it, is there's a number of actually very interesting cross selling opportunities between Lima and Mathis revision process products on the Lima side that the Mathis team is excited about. Allergy free products on the Mathis side that the Lima team are excited about. And so there's really this kind of organic energy that has come between those teams in terms of some things outside the US, beyond the sort of larger and longer altitude and empower opportunities. So a lot of great opportunities getting them ramped up right now. Did a lot of training in this meeting in March. Now starting to get the instrument sets into the market, get the funnels built. And we'd expect that down the back half of the year. We'll start to see the synergy ramp and start to hit kind of full stride going into next year.
Xuyang Li: Very great. That's very comprehensive. I'll just keep it to one. Thank you.
Kyle Rose: Thank you, operator. Next question.
Operator: The question is coming from Brandon Vazquez from William Blair. Brandon, please go ahead.
Brandon Vazquez: Hi, everyone. Good morning. Thanks for taking the question. I'll ask two upfront here. The first is, just as you guys are integrating Lima here, can you talk to us about logistically what needs to happen still? What are the milestones we should keep an eye out for? Are there any ERP integrations, SAP integrations, things like that. And then maybe the quick follow up as well is just a little bit of, can you give us some color on gross margins, how they trended in the quarter and how you expect those to trend through the rest of the year, especially as you integrate some of the Lima business as well? Thanks.
Matthew Trerotola: Thanks, Brandon. As far as key integration milestones, some of the biggest focus so far has been on the commercial side, working through the different channel decisions and the implementation of them. And we're a good way through those in the US and outside the US. Ramping up the cross selling, as I talked about, has been another key piece of the integration so far. There have been some, quick and thoughtful cost actions that we took in the first quarter in terms of starting to get after the cost opportunities. There's more of that to come. But we did some very quick moves as we put the two teams together outside the US and as we tucked the US team into our team here in the US. So that's been another key thing that we've done so far. As we look forward, there are some things to do in terms of IAT systems, but we're taking a very thoughtful, step-by-step approach on that. So there's. There's no big scary European integration coming. That could be a big issue. More of a kind of step-by-step making the changes in terms of skews and systems and how systems interchange and connect, et cetera. And we will work our way to kind of well aligned systems. But that's not any kind of big giant thing versus a step-by-step, thoughtful approach. We've also got a couple of years of operational synergies to get after over the coming years. That'll be step-by-step movement of things that are getting us cost opportunities, some insourcing, some movement type of things. And then finally, we've done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and making some early choices around that. But it'll be, again, a thoughtful multi-year process of merging the innovation pipelines and product pipeline. So we've got a great managing process, great talent focused on this. So far, things are going very well. We know it's important to stay on top of that. There's certainly a lot more work to come. We feel very good about where we are right now.
Phillip Berry: Yes. And Brandon, on gross margins, we were 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get, get aligned with all the things that we've been talking about here. Both businesses continue to leverage the EGX capabilities that we have, and I would see some decent progression throughout the course of the year there on gross margin.
Kyle Rose: Thank you, operator. Next question.
Operator: Next question comes from George Sellers from Stephens. George, please go ahead.
George Sellers: Hey, thanks for taking the question. Congrats on the quarter. Maybe to shift to the Foot & Ankle portfolio. You called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance and maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio? And then lastly, what are you seeing from a competitive perspective as well?
Matthew Trerotola: Yes, sure. So, footnote, a good strong quarter. I think it was a healthy market environment in Foot & Ankle. Maybe kind of a little less of a, strong comp there and, good healthy market environment to start the year, and that's continuing here as start the second quarter. You know, our team, we've got a number of key technologies that drive the growth there. You know, our DynaNail products or the DynaNail family, based on, nitinol alloy sheet metal alloys, has been, has been very strong, and we continue to bring additional, additional technologies into that family. You know, we've, the NovaStep product that we acquired in last year in the minimally invasive bunion space are driving nice growth as well. And we're excited about that participation now into that large four foot market. We've also, the arsenal reload that I talked about is the next generation of our plating products, which apply across the space. And we've got IP protected technology around the fastening devices on our plating and some really great new plates that leverage that technology that we think are going to bring a real boost as well. And Star has gotten, as we've talked about, star is stabilized and I think ready to grow here now as well with some of the changes that we've made there. So a number of great technologies across Foot & Ankle. But then, very importantly, our channel continues to get more aligned. We've now got almost 70% of our channel fully aligned to our products, and that's something that we did a lot of work over the past few years to get there, and we know that that's going to pay a lot of dividends. A strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we've acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.
George Sellers: Okay, great. Thanks for taking the question.
Kyle Rose: Thank you. Next question operator.
Operator: And the next question is coming from Jason Wittes from ROTH MKM. Jason, please go ahead.
Jason Wittes: Great. Thank you. So just a question about the impact of the integration. I know it was 2% or 3% this quarter. Does that run through the year, or how should we be thinking about what the negative impact is or positive impact is for this year by the quarter?
Matthew Trerotola: So, I think in terms of how much it impacts the year, we shared $20 to $30 million as the expected impact when we did the acquisition. And, that's, 2% to 3% of our, of our Recon is more than 2% to 3% of Lima, of course. But, but I guess I would say, as we've talked about, we've been trying to get at this quickly. And so I think that we're likely to see that go from where it is now probably increase a little bit in the second quarter as we get really in maybe probably the apex of the impact from these integration things. And then I would expect that the back half, it would kind of flatten and drop as we get to the other side of some of the things that even started to impact us late last year or right at the beginning of the year. And also as we have some nice contributions coming through on the cross selling side as well.
Jason Wittes: Okay. That's very helpful. And then just really quickly, in terms of the launches for the shoulder, in terms of the rollout, is that typically a six-to-nine-month process, or what kind of timing should we be thinking about for how quickly you can roll those out and they have an impact on the numbers?
Matthew Trerotola: Yes. So the augmented Glenoids will get into the market very quickly. There's obviously some early, early market participation that then leads to broader. But we would expect the augmented glenoids will be ramping aggressively in the back half of the year. And we've got a lot of, we already kind of, in the process of the stocking of product and instrument sets, to be able to ramp very fast in augmented glenoids. And we really think that's been very important. You got the shoulder.s But more and more surgeons are using augmented glenoids in their procedures. And so we think that not only will that offer us some same store selling opportunities in our existing surgeons, but it's really going to turn the heat up on our surge and capture offense with augmented glenoids. So that'll be a this year impact and a very meaningful one, ARVIS much more of a, kind of next year and beyond impact, it's cleared. We're getting the market start doing cases, and getting feedback. It's new technology and we want to make sure that, we get it, to exactly what's going to make a big difference in shoulder. And so for sure, we'll be iterative in terms of, launching the second half of the year and, that gets us some, some good feedback and then iterating from there in 2025 and bringing more broader functionality. But for sure, our surgeons are going to be able to see crystal clear the vision of taking our great preoperative planning, using predictive analytics, to create a great plan that can be presented inter operatively with augmented reality guidance and then capturing the data inter operatively as the surgeons are being able to use that guidance to do those shoulder procedures, we're convinced that that's really going to be a very exciting next wave in enabling tech for shoulders at a time that the market is ready for it.
Jason Wittes: Great. Thank you very much.
Kyle Rose: Thank you. Next question. Operator.
Operator: Our next question is coming from Vijay Kumar from Evercore ISI. Vijay, please go ahead.
Vijay Kumar: Hey, guys, thanks for taking my question. Matt, apologies if you answered this, but what was the organic performance, excluding Lima? Because I think the original Lima assumption was there would be some acquisition related disruption in Lima would be flat. It feels like Lima came in a bow and the integration related impact was on the base business. Can you just walk us through on why that impact was felt on the base business, not on Lima, and what Lima's performance was in the quarter?
Phillip Berry: Yes, Vijay, I'll take that one, if you don't mind. As we contemplated the guidance for Lima, we knew that the channel integration work was going to be something that we couldn't really predict which business it was going to come from. As we were making portfolio decisions, as we were thinking about how do we really kind of get to the selective alignment of our territories and making sure that we've got good participation in that. So as we think about kind of how we've seen it start to play out, as you've seen some impacts on the legacy Mathis business and the legacy Enovis business, but all of that was contemplated in the guidance that we gave with regards to the amount of revenue coming in as a result of the acquisition so we think it's most fair to really show the pro forma view, to kind of include the all up all in view of what's happening. And then what we provided is our best view of, some of the discontinuations and some of the dis synergies that came within the business, which we've said 2 to 3%. So if you kind of strip out the underlying performance of the core business and kind of look for a traditional organic kind of definition, our view is that our organic business would have been a little over 8% in the quarter for Recon. And then you add a little bit of boost to that if you kind of take into consideration selling days as well. So that's kind of how we're thinking about it. Underlying performance of the core brands are still doing well. But as we think about the channel coming together, in particular in the US and some of the countries that have more overlap, that's where it's a little bit hard to really distinguish the difference between reported product and Lima versus legacy business. So that's why we think it's most appropriate to give the pro forma view, but overall, we still see strong performance in our core technologies.
Vijay Kumar: Understood Ben. And Matt, on this, sorry, just sticking with that Recon, US Hip & Knee, getting some questions here on flattish. I know the comp is tough. Was there any integration impact here on the US Recon side? And Ben, can you just clarify? When you say the underlying Recon was about 8%, was that 8% excluding the integration impact within Recon?
Phillip Berry: Yes, yes. Excluding the integration impacts, we look at like, for like, kind of underlying performance, our view would be, a little over 8% and that would take out those impacts.
Vijay Kumar: Understood. And Matt, sorry, on this.
Matthew Trerotola: Yes, pick up your Hip & Knee question there. Yes, I mean, for sure there are some integration impacts there. Look, our Hip & Knee growth last year was 22%. And so there's an extremely strong comp there. And, if you look over a longer time period, these, the results for this year would be for the legacy business, 50% above 2019. And, by our math, the industry in Hip & Knee is maybe mid single, maybe high single digits above 2019. So, I think that the comp certainly is an effect in terms of the picture on Hip & Knee. And with or without the integration, we would expect Q1 to be a softer growth quarter in Hip & Knee given the strength of the comp. Second, there is an effect here that Lima in the US, while it was primarily a shoulder business, it did have a small Hip & Knee business, and the primaries in the small Hip & Knee business in Lima were not a focus at all. And that was shrinking. And that was shrinking as we exited last year. And so there's a little bit of a tug from that Lima business as well in Hip & Knee. And then for sure, the integration effects are in Hip & Knee and shoulder and there's some, specific accounts and surgeons that we've lost as part of the integration that are having an impact on Hip & Knee as well. Now, if we look forward, through the year, another tough comp there, but then from there forward, the comps get much more normal. We also, we'll start to clear through, the, some of these integration effects, and we expect to, be able to keep ramping the revision even stronger now, as we have the lima cones, we've also got some additional accessories that we have coming through our pipeline on the revision side to give us broader access and revision. We, we've got Arvis to ramp more aggressively as we, as we move through the year as well. And so, we've got plenty of confidence that our Hip & Knee growth will move back to a more normal range as we move through the year.
Vijay Kumar: Fantastic. Thanks, guys.
Kyle Rose: Thank you. Next question. Operator.
Operator: Thank you. We have a question from Mike Matten from Needham. Mike, please go ahead.
Joseph Stringer: Hey, this is Joseph on for Mike. Maybe just follow up on the Hip & Knee. Do you think there's still kind of a backlog there for Hip & Knee procedures? You know, larger than normal backlog I guess?
Matthew Trerotola: Yes. So, again, I think whether you look at the US or you look outside the US, the cumulative growth since 2019 is still, significantly less than five years of growth. And so that does certainly suggest that there are unserved patients there. You know, if you look at early last year, the first, four or five months of last year, things went really hot in the US and some countries outside the US. And I think that was indicative of that backlog that lies there and sort of a high utilization environment that enabled higher rates. And so I think it seems reasonable that there is still backlog to be worked off in Hip & Knee that can create some tailwind maybe later this year in the years to come. But clearly, clearly in the first quarter, looking at, looking at what we understand about our results and looking at the other results that have been posted this was a, kind of a slower growth quarter rich and ease in the US than where things were last year. And so clearly that backlog is not being worked off right now. And, and I think, we saw and understood that working through the quarter that there were just various effects that were constraining kind of surgical supply, like I said, whether it was storms or flu and different things. And that's what used to be pretty normal, that in any given year, there were parts of the year where there were some crimps that were being put on supply. And so better months, better, worse months, better quarters, worse quarters, and we might be back into a more normal environment, and there'll be periods where things can run white hot because that backlog is there and the surgical capacity is very available, and there'll be periods where the capacity is a bit constrained and that sits there.
Joseph Stringer: Okay, great. Yes, that makes sense. And then maybe just another quick one on Arvis, if you do have anything more to add. Appreciate the color so far, but I guess any metrics in terms of adoption or placements would be really helpful. Understand it's still early ramp, but, yeah, anything else would be great.
Matthew Trerotola: Yes. So, as I've shared before on me, we've got a few, sort of a few dozen surgeons using it right now by design. You know, we got it to a number of surgeons, and we're really focusing on, kind of having them use it a lot, and making sure that all of them get ramped up in terms of utilization rates and that we learn things that we need to in terms of how people are using it, to make sure that as we move to, taking it broadly into the marketplace, that it's, it's going to be successful both in terms of helping us to gain business and grow, but also that the surgeons will be using at high rates. You know, if you look at some of the technologies that are out there, some are being used at high rates and some are not. And we want to make sure that Arvis is used at high rates. And so this controlled launch, I think, I think, puts us in a place to be able to make sure that happens as we work through this year, definitely expect it to have a good, positive impact on our knee business as we work through this year and get beyond that first, that first couple of dozen surgeons into a broader marketplace, and then kind of years to come of opportunity to have good, strong impact from Arvis and me. And also, we continue to work on additional technology to add beyond Arvis in terms of making that Hip & Knee value proposition stronger and stronger in the enabling tech workflow area on the shoulder front. Just getting started this year, we've been working on that, obviously, for a little bit here because we just cleared the regulatory with 510(k). But it'll be just a very initial launch here in the second half of the year to get really good feedback on the software and the hardware and the instruments, and then make sure that we make whatever adjustments we need to moving into next year. And there's also kind of multiple waves of technologies that we can bring through Arvis there into the shoulder. I'm going to get a good strong start this year and then build on that in '25 and beyond.
Joseph Stringer: Okay, great. Thanks for taking our questions.
Operator: [Operator instructions] We have a follow up question from Vijay Kumar from Evercore ISI. Vijay, you may proceed.
Vijay Kumar: Hey, guys, thanks for the follow up here.
Matthew Trerotola: You get a bonus, Vijay?
Vijay Kumar: Yes, I do. I wanted to touch on margin performance in the quarter. The gross margins were gross margins in line with your expectations right? Because my understanding is Lima had, somewhere in the seventies gross margin. So sequentially, when I'm looking at this, the mix improved rate, the dollar contribution from Recon improved, but gross margins flattish. But operating margin came in well above. So just talk about the margin performance and how we should think about for the back half? Does this give increased confidence in the back half margin ramp?
Matthew Trerotola: Yes. Vijay, I think that the number that you're thinking about with, with Lima is not a US GAAP number, it's an IFRS number. So, if you really translate Lima historical numbers into US GAAP, there's some shift between gross margin and operating expenses. So, the kind of underlying gross margin and the US GAAP kind of translation is more in the higher sixties than it is kind of into the seventies. So that, plus some of the mix of the business where we're getting some of the sales, I'd say kind of gross margins were kind of largely in line with what our expectations were. As I said earlier, I would expect to see some acceleration of the company's gross margins kind of as we go through the course of the year. And overall, I mean, still excited about the opportunities of kind of potential synergies down the road as we improve our, kind of our Recon, globalization and supply chain, there's lots of opportunity for us to continue to really embed EGX, to look at opportunities to expand our gross margins to continue to shape the mix of the business in the right way that'll help us to accelerate there. So, like we've said, we still see the Recon business right now we're in kind of a high sixties gross margin. We see opportunity to kind of get that well into the seventies, call it, closer to the mid seventies over time. But this year it'd be just kind of, I'd say, relatively steady progress. Looking at where we are in Q1 and maybe seeing a slight acceleration or as we go through the course of the year.
Vijay Kumar: Sorry. At the operating margin, line item, were there any timing impact of OpEx? Are synergies, cost synergies coming in above plan? Because it just feels like execution was slightly above.
Matthew Trerotola: Yes, I mean, we're happy with the start. I mean, we were able, like we've said, we were able to, really identify what the go forward work structure was going to look like if we closed the deal. So we're able to capitalize on some synergies right away, maybe slightly above kind of our kind of initial expectations in the first quarter, but again, still well within kind of our expectations of what we've said for the year is where we're currently thinking. And like I said, there's this shift between, kind of OpEx versus gross margin, which is, kind of again aligned with what our expectations were.
Vijay Kumar: Understood. Matt, maybe one for you. And I saw the Arvis 2.0 within the presentation. Where are we on in terms of adoption of Arvis? Are we at an inflection point? And what does 2.0 do, which is different from 1.0?
Matthew Trerotola: Yes, so 2.0 in the me was, after putting it out in the controlled launch, getting a lot of feedback, we went and made a number of improvements to the software and the hardware that were making it kind of easier to use in many ways, but also making it really very seamless with our empower instrument sets as well. And so the 2.0 was then kind of more of a full launch of Arvis, but we definitely decided to do it in a step-by-step way just to make sure that given that it's a brand new to the world technology, let's get 15 20 docs using it, get some good feedback, help them to ramp up, and then use what we learn there to make sure that as we go to a broader set of doctors, one, we've got great value proposition in terms of being able to help them understand how it's going to be valuable, but also we've got the ability to help them to ramp fast and effectively with it. And so that's what the 2.0 launch was, and we're right on track with that in terms of, as I said, a couple dozen surgeons using Arvis, some using it very heavily, some less heavily. The ones are using less heavily were learning why and how do we ramp them up in terms of how heavily they use it. And there's some good learnings there, both about how to ramp surgeons fast, but also about which surgeons to target more as we do the broader launch. And then we've now got plenty of inventory on hand, ready to do a broader role as we work through this year. A lot of excitement in the field around the ability to bring Arvis to a broader set of knee surgeons, Hip & Knee surgeons, but particularly for the knee at this point, as we work through this year. So we would expect that number to expand and be a good facilitator to our knee conversion efforts, but also start to generate a small but growing and high profit, recurring revenue stream on the knee front. On the shoulder front, as I said, it's just an initial launch. So think of shoulder in the second half of this year being kind of where our knee was a year or so ago in terms of getting that first launch into the marketplace in the second half of this year and getting some good feedback that allows us to keep revenue and improving the product. We've been focused on making sure that by 2025, we are right there in the market with a very strong shoulder service offering to continue to be a strong leader there and shoulder with technology, as we always have been. And we're right on track for that with this announcement about the shoulder clearance for Arvis that just recently happened.
Vijay Kumar: Understood. Thanks, guys.
Kyle Rose: Thank you Operator. Next question.
Operator: Thank you. We conclude our question-and-answer session now, and with that, I would like to turn the conference back over to Matthew Trerotola for any closing remarks. Please go ahead.
Matthew Trerotola: Thank you for joining us this morning. I want to end the call by thanking our team members for a strong start to the year. We have a lot of momentum and excitement across the organization and remain committed to delivering value for our internal and external stakeholders. Thank you for listening in today and we look forward to sharing our second quarter results with you in early August.
Operator: And this concludes the conference. Thank you very much for attending todays presentation. You may now disconnect, have a great great day.
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