Enovis Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 26, 2025

There are 13 speakers on the call.

Operator

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

Speaker 1

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

Speaker 1

We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. 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 might differ materially from any forward looking statements that we make today.

Speaker 1

The forward looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on Slide three.

Speaker 2

Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. Let's start on Slide three. 20 20 four was a transformational a transformational year for Innovus with significant progress toward our long term strategic goals and I'm excited about the future of our high value med tech growth company. In the fourth quarter, we reported growth of twenty three percent and seven percent on a constant currency comparable basis.

Speaker 2

We made tremendous progress on the integration of Lima, exceeding all of our year one goals and we exited 2024 on a strong commercial and operational trajectory. We expanded our adjusted EBITDA margins by two ten basis points, reflecting the mix impact of Recon, the step change impact from Lima and EGX driven productivity improvements. Overall, we're pleased with our execution in 2024 and are confident that we'll have the exit trajectory we have the exit trajectory, new product pipeline and commercial teams in place to deliver healthy acceleration in 2025. On to Slide four, in Recon, we delivered 59% reported global revenue growth. Recon grew 10% on a comparable basis in the quarter with double digit global growth in both our hip knee and extremity segments.

Speaker 2

In the quarter, U. S. Recon grew 7%, including 10% growth in U. S. Extremities and 8% in hips and knees.

Speaker 2

Our U. S. Business accelerated through the quarter in line with our expectations. In international, we grew 13%, while we continue to execute our integration plans. We exited the fourth quarter with healthy momentum from recent new product launches across Recon and a growing impact from cross selling.

Speaker 2

We're approaching a very exciting period of new product impact across our Recon business as we leverage the power of a broader product and technology portfolio. We're ramping our commercial launches of revision cones in knees, augmented glenoid systems in shoulders and the Prima shoulder. We also have key launches planned in hip implants and in enabling technology, including the next generation of ARVUS in knee and the initial rollout of ARVUS in the shoulder. These new product launches will be complemented by an aggressive ramp of cross selling opportunities. Turning to Slide five, the Lima acquisition has been a key part of building our great Recon business.

Speaker 2

The first year of the acquisition has been a huge success. We exceeded our revenue and profit goals and have successfully executed on the channel and organizational integrations. Prague a few weeks ago. It was incredible to see and feel the Prague a few weeks ago. It was incredible to see and feel the positive growth energy and excitement in our combined commercial team.

Speaker 2

I was also so impressed with the cohesiveness of the teams and the clarity of the growth plans. This is a tribute to the well executed integration process as well as the cultural fit and talent of the leaders. Turning to Slide six. In P and R, our 3% growth reflects a stable market environment and disciplined execution. We continue to strengthen our market leading positions by driving operational improvements, new innovations and strategic shaping.

Speaker 2

EBITDA margins in this segment expanded by 130 basis points year over year, securing a full year improvement of 40 basis points as we continue to leverage EGX tools to drive consistent productivity gains and improve portfolio mix. Overall, I'm pleased with our performance and the momentum we built in 2024. '20 '20 '5 is off to a great start. We have a robust lineup of important new innovations across our business and our commercial teams are poised to deliver another year of above market growth. Now I'll let Ben take you through

Speaker 3

the P and L details and our 2025 guidance. Ben? Thanks, Matt. Hello, everyone. I'll begin on Slide seven.

Speaker 3

We are pleased to report fourth quarter sales of $561,000,000 up 23% versus the prior year and up 7% on a comparable constant currency basis. Quarter included approximately 20 basis points of negative currency headwinds. We are encouraged with the growth acceleration in our Recon business across Anatomy as we've seen positive results from our channel integration efforts executed earlier in the year. Overall, our Recon business grew 10% with double digit growth globally across our main segments in hip and knee and extremities. Our underlying growth in P and R remains stable, growing at 3%.

Speaker 3

We continue to realize the benefit of our improving global business mix in our margins. Fourth quarter adjusted gross margin was 60.1%, up 150 basis points year over year. This growth was driven by favorable segment mix that includes the addition of Lima. We made great progress on our Lima cost initiatives coming in above the high end of our year one goals of $10,000,000 to $15,000,000 As a result of these benefits, our fourth quarter adjusted EBITDA grew 38% delivering a margin of 20.1%, up two ten basis points versus the same quarter last year. Fourth quarter effective tax rate was 21% compared to 22% last year.

Speaker 3

Interest expense was $9,000,000 for the quarter versus $4,000,000 in 2023. Overall, we posted adjusted earnings per share of $0.98 an increase of 24% versus prior year. Slide eight lays out our execution in 2024 relative to our guidance over the course of the year. We delivered results in line with or better than our commitments. Additionally, while we have consistently delivered against our financial commitments, we recorded a non cash technical impairment of goodwill at the end of the year.

Speaker 3

While our fair value calculation passed during our annual test at the beginning of the fourth quarter due to a sustained decrease in our share price and market capitalization, a goodwill impairment of $645,000,000 was triggered. This impairment does not have any impact to Innovus' liquidity, cash flows, debt covenants nor does it have any impact on future operations. We are still very confident and optimistic in the long range plans we've communicated and believe our execution against yearly financial commitments since the spin has demonstrated a strong track record of operational performance. Slide nine details our quarterly progression in 2024. Our 5.5% comparable revenue growth was highlighted by 8.2% in recon and 3% in P and R, with notably stronger results in the second half of the year driven by strong execution in our global recon business.

Speaker 3

Overall, our results reflect underlying share gains in both of our business segments. Our adjusted EBITDA margins increased sequentially throughout 2024 as we benefited from improved mix and demonstrated operating productivity in our supply chain. For the year, we managed to improve margins by two ten basis points while managing external headwinds and investing for future growth. Turning to Slide 10. We expect 2025 to be another year of strong execution and expect revenues in the range of 2,190,000,000 to $2,220,000,000 This includes constant currency organic revenue growth of 6% to 6.5% with high single digit growth in recon and stable P and R growth in the low single digits.

Speaker 3

We expect negative currency headwinds of approximately one percent to 2%. On margins, we are expecting adjusted EBITDA in the range of $4.00 $5,000,000 to $415,000,000 This includes 50 basis points of underlying margin improvement along with 10 to 20 basis points of cost synergies from our year two integration efforts of Lima. Depreciation is expected to be in the range of $125,000,000 to $130,000,000 driven by growth investments in our Recon segment and the addition of recent M and A. We expect interest and other expenses to be in the range of $42,000,000 to $46,000,000 and an adjusted tax rate of approximately 23% in 2025. Along with these estimates, we expect a share count of approximately $57,000,000 and are forecasting an adjusted earnings per share range of $3.1 to $3.25 Additionally, we expect positive free cash flow in 2025, while supporting another year of investments to integrate Lima and fuel growth.

Speaker 3

From a phasing perspective, 2025 will be a unique year due to our accounting calendar, leading to a variability in selling days. To assist with phasing of the year, we expect Q1 revenues in the range of $555,000,000 to $563,000,000 and adjusted EBITDA in the range of $97,000,000 to $100,000,000 We expect revenues to be evenly weighted across the first half and the second half as fewer days in the fourth quarter offset the impact of normal seasonality. We expect a similar dynamic to play out with margins. Historically, EBITDA margins have been weighted to the second half of the year slightly ahead of revenue seasonality with approximately 54% to 55% of full year EBITDA coming in the second half of the year. In 2025, we expect that to moderate to a range closer to 52% to 53%.

Speaker 3

Lastly, I'd like to give some perspectives on tariffs. Regarding China, we have been working for several years to reinforce our supply chain with alternative suppliers and redundancies to mitigate ongoing tariff concerns for the small number of products and materials that we currently source from China. Our 2025 guidance contemplates the impacts from the current tariffs placed on China. For Mexico, our P and R business has a significant manufacturing footprint in Tijuana. Our facility falls under a Maquiladora trade structure and historically has been largely exempt from tariffs.

Speaker 3

For the sake of transparency, we estimate that a 25% tariff applied to the value of all goods crossing the border into The United States would represent a $3,000,000 to $4,000,000 exposure per month once it worked its way through inventory. This is not included in our 2025 guidance. Based on our experience dealing with the post COVID inflationary period, we believe our teams would be able to fully offset any potential tariff impact within eighteen to twenty four months as we would immediately implement actions to start offsetting the increased costs. The U. S./Mexico tariff situation remains fluid and we are monitoring the events closely.

Speaker 3

We will provide updates as appropriate as we gain further visibility into the outcome of the situation. To summarize on Slide 11, we had a transformational year in 2024 and continue to see solid momentum in the first two months of 2025. We continue to be pleased with our improving business mix and are excited about the new product innovations that should ramp over 2025. Overall, we have established a powerful foundation for profitable growth and expect 2025 to be another year of progress against our long term goals. Now I'll pass it back over to Matt.

Speaker 3

Matt? Thanks, Ben.

Speaker 2

I want to finish with a few personal comments. After almost ten years leading Colfax and now Innovus, I've decided to retire later this year to spend more time with my family and friends. My wife has supported me and kept our family whole for over thirty years of demanding travel and responsibilities. It's time to move on to a next career phase focused on board work and trips where I actually get to see the tourist sites. I am very grateful for the opportunity that I've had and very proud of what we have accomplished, transforming a cyclical diversified industrial into two powerful focused public companies.

Speaker 2

I believe this is a great time for a leadership transition here at Innovus. The LEAM acquisition is on track to be a great success. There's growth momentum building across our businesses. Our company is scaled to our initial strategic goal of $2,000,000,000 plus of revenue and we have a strong and deep team of leaders who share our EGX values. The Board has an active search to find the right next CEO who will carry forward our powerful culture and business model and continue to build Innovus into a distinctive medtech growth company.

Speaker 2

At this point, I am confident that we will be able to secure a talented and seasoned med tech executive who shares our passion for continuous improvement and innovation for patient outcomes. I'm still completely committed to our success and will continue to lead the company until my successor is in place and then we will have a smooth transition process. Now I'll hand

Speaker 1

it over to Kyle to start the Q and A. Kyle? Thanks, Matt. Before we begin the Q and A session, in an effort to accommodate everyone on the call, we ask that analysts keep their questions to one question and one follow-up. You're welcome to rejoin the queue thereafter.

Speaker 1

With that, operator, let's start the Q and A.

Operator

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

Speaker 4

Good morning and thanks for taking the question. Matt, congratulations on a successful career. You'll definitely be missed. Two questions for me, please. I guess the first one is just wondering about your M and A strategy post Lima.

Speaker 4

We saw successful integration in 2024. How should we think about M and A in 2025? And then I had a follow-up, please.

Speaker 2

Yes. First, thank you for the kind comments and for the support. From an M and A standpoint, we've gotten a lot done in the past handful of years, including the big it's had dramatic impact on our portfolio and our momentum here. And Lima is off to really a great start as I shared. '25 is going to be more of a year of small bolt ons.

Speaker 2

We certainly have some attractive technology and channel bolt ons in the funnel that will be helpful in terms of accelerating the path forward of the businesses. But we're still focused on making sure we complete the Lima acquisition in a great way, start to delever the company a little bit. And certainly, we'll be doing work on kind of other ideas about where to go in terms of the JCCCs and things over time, but the focus in 2025 is going to be on small bolt ons.

Speaker 4

Great. Thank you for that. And then my follow-up question, you guided to high single digit recon growth in 2025. I know it's early in the year, but is there a pathway to get to double digit recon growth this year? What are some of the variables that could get you there?

Speaker 4

Thanks.

Speaker 2

Yes. Thanks, Vik. When we look at our market positions in recon, the technologies that we've got, the historical growth that we've been able to demonstrate, we certainly have multiple paths in any given quarter or year to drive double digit growth in our recon business. We've decided that we think the right strategic goal for the business is high single digits and we're going to always be driving to deliver that or more. And we believe that puts us in a position to be able to consistently deliver the high single digit growth of our company that is our long range strategic goal, but at the same time it gives rooms for the positives and negatives that might come along quarter to quarter in any given anatomy and any given point in the year.

Speaker 2

Now if you look at the exit of the year, we built some good healthy momentum down the stretch. The business outside The U. S. Had a double digit year last year and while the markets might normalize a little bit, we also have a chance to ramp the cross selling in that business. And within the business, in The U.

Speaker 2

S, we were just bumping back up against high single digits or bumping back up against double digits as we exited the year. So for sure, there's the opportunity to have strong high single digit growth and even to push into the double digits at certain points within the year and we'll be excited aggressively executing against that.

Operator

The next question comes from Vijay Kumar from Evercore ISI. Please go ahead.

Speaker 5

Hi guys. Thanks for taking my question. And Matt, wishing you the best as you transition. I had a couple of questions. One maybe on this Q1 phasing.

Speaker 5

I think the guide implies almost 10% organic. Why is it so strong? What is Day's contribution? Did it have any catch up from Q4? It looks like Q4, U.

Speaker 5

S. Recon was a little light, maybe talk about the dynamics there?

Speaker 3

Yes, Vijay, I'll take that one. So if you look at the way that we run the company on a four forty five schedule, we'll have extra days in the first quarter that will be offset realize two to three extra days in the first quarter, or we expect to, as we think about the early part of this year that will come back in the second part of the year, which is what I tried to describe in my comments earlier. So overall, we feel like we'll get off to a really strong start. Some of that will be days related, but otherwise, I'd say as Matt said that we've got some nice momentum that's building in the business as well.

Speaker 2

Yes, on The U. S. Recon front, yes, we had a good strong finish to the year. We talked about on the last call that October had some headwinds in it from some of the storms in The U. S.

Speaker 2

And the IV shortage and things like that, and that we expected November and December to accelerate to a strong finish to the year. And so when you look at that U. S. Recon number for The U. S.

Speaker 2

One, remember that there's still some integration headwinds that's something that hit in the first quarter last year. And so we're still kind of lapping through those integration headwinds. And then secondly, there was a slow start to the quarter, strong finish to the quarter, but a slow start. And so we feel very comfortable with the exit rate of the quarter and that is at least in line with the guidance that we've given.

Speaker 5

That's helpful, Matt. And maybe my follow-up on the margin guidance. Ben, I think by my math, it looks like maybe we're looking at 25, 30 basis points of margin expansion for fiscal twenty twenty five. Is that right? And I thought the LRP is in 50 basis points of margin expansion.

Speaker 5

With synergies, shouldn't that be above 50 basis points? Maybe walk through the margin assumptions?

Speaker 3

Yes. We'll have to look at that in terms of the math, Vijay, but I think the margin expansion guidance that we've given here is 60 to 70 basis points of improvement versus twenty twenty four. So that's our normal 50 basis points from core operating leverage and mix and then also getting about 20 to call it 30 basis points of better year two synergies on the Lima side. So we expect another strong year of margin improvement for the company as we look to 2025.

Speaker 5

Sorry, that margin, Ben, that's the EBITDA margin, adjusted EBITDA that you speak about?

Speaker 3

Yes. EBITDA margin, yes.

Speaker 5

All right. Thanks guys.

Operator

The next question comes from Robbie Marcus from JPMorgan. Please go ahead.

Speaker 6

Great. Thanks for taking the questions and I'll echo the congratulations on the retirement. Sad to see you go, but hopefully it makes your life a lot more enjoyable moving away. First question for me, you touched on this briefly in the last question, but maybe you could just take sort of U. S, OUS large joint versus extremities and talk about what you're seeing in the market, how it ended 2024 versus started and how you're expecting it to play out and what's in the guide in 2025 for those different subsegments?

Speaker 2

Yes. Thanks for the comments, Ravi. I appreciate that. Let me start OUS and just maybe with a broad comment about OUS, which is that through the front half of last year, we saw strong market growth. We grew above market, but we saw strong market growth outside The U.

Speaker 2

S. We felt like in Q3, there was a little bit of normalization starting to happen that really wasn't surprising given the strong comps. But then Q4 was a strong finish and we had we beat Q4 on the recon side and that was really driven off of that strong finish outside The U. S. And so it seems like there continues to be strong demand out there.

Speaker 2

We've got a when we set up our plan for this year, we did assume some normalization of those OUS markets based on the strong comps and a lot of that backlog haven't been worked down. But at the same time, we have a ramp in our synergies. And so there's an opportunity for us to have a little bit more of a gap to the market than we had last year because of the synergies and still deliver very strong growth outside of The U. S. It's been a good healthy start of the year outside of there, but again, we're still planning for that to normalize a little bit based on the strong comps.

Speaker 2

When you look at The U. S. Market, certainly the year started a little bit softer last year. We felt like maybe sort of a normal year up against a much cleaner year the previous year. And so there was a little bit of a slower start to the year in terms of the market growth and then we had some integration breakage that was planned that was hitting us, as well as working we were working through a few key product innovation transitions there.

Speaker 2

As we work through the year, we saw the markets improve and we also saw our position our strength of our growth versus the markets improve. We still had the integration drag through the year, but we started to execute more and more share gain versus the market in the second half of the year and outgrew the market for the back half of the year pretty comfortably even with some of those headwinds. So we really feel good about the arc that that business has taken as we brought new shoulder products in with the ARG. We've really ramped up our cones and revision in knee. And we're lagging a bit still there in hip, but have some key products coming in the first half of the year here in hip.

Speaker 2

So, we feel confident in our ability to share gain, gain share across all anatomies here in 2025 as we had for many years before 2024 based on the key new products, the strength of the commercial team and their focus on being back on offense after the integration and then obviously lapping some of those integration headwinds.

Speaker 6

Great. Maybe just quick follow-up on free cash flow and debt. It ended up about $65,000,000 70 million dollars negative for 2024. I see you're expecting positive free cash flow in 2025. If you could speak to the degree and the progress of that over the course of 2025 and how you're thinking about exiting $2,025,000,000 dollars in terms of debt?

Speaker 6

Thanks.

Speaker 3

Yes. Thanks, Ravi. I mean, we still see very clear pathway to 70% to 80% free cash flow conversion over time as we get behind some of the heavy investments that we're making across integration related items of Lima, EU MDR investments that will start to subside here as we get through 2025 and then some of the growth CapEx investments as well as we're putting the business together. So we'll make a strong step in the positive direction here in 2025. And then next year in 2026, you'll see a big step down in expenses with regards to integration related cost and EU MDR.

Speaker 3

So that will help us really start to drive acceleration towards that longer term goal of 70% to 80% conversion. So 2025, not giving clear specific guidance around what the conversion levels are other than to say it will build over the course of the quarter and will be positive. And in terms of leverage, we're at about 3.5 times now. I'd say by the end of the year, we'll be down in the low three times as we get into 2026, we'd be able to get under three times.

Speaker 6

Great. Thanks a lot.

Operator

The next question comes from Jeff Johnson from Baird. Please go ahead.

Speaker 2

Thank you. Good morning, guys. Matt, congratulations. I'm happy for you. I'm probably a

Speaker 7

little more jealous than I am happy even. So good luck in the future. I've been jumping between calls here, but just help me out. Did you guys mention pricing assumptions for 2025? I think the last couple of times we've spoken on that topic, you've been assuming kind of a reversion back to maybe down two ish percent or something.

Speaker 7

Is that still what's embedded in the guidance, number one? And number two, is there any reason to think we're actually going to see that? It feels like to me pricing environment a little more stable than that right now, but just would love your updated thoughts there. Thanks.

Speaker 2

Yes, Jeff, sure. So yes, on the recon side, we do expect to get back to some amount of downward price each year, similar to how things had been in the past. And so, yes, we have created a plan that assumes sort of a point or two of downward price pressure on the recon side. And certainly, we're doing everything we can to look for opportunities to get new price on new products and to find a way to better performance than that. But we think that that's the appropriate planning assumption.

Speaker 2

On the P and R side, as we've talked about consistently, we think that overall that business is more of a sort of a flat price business. There's places where we can continue to get positive price and then there's areas where there might be a little bit of negative price and we've got some really good muscle there that we built coming out the backside of COVID that we think can keep us in a flat price zone in kind of normal environment and then in an inflationary environment or if there are other things that are driving costs up, then we'd be looking to work that price through the system on the

Speaker 7

colored stem launched in The U. S. I thought it had? And is the expectation there just what are your hip expectations specifically in The U. S.

Speaker 7

This year? Should that business accelerate? And is that the colored stem more about kind of your EMPOWUR surgeons on the knee side now being able to do a hip procedure using your product as well? Or do you go out and win new surgeons with that product? Thank you.

Speaker 2

Yes, thanks. Yes, our new colored stem and hip impactor will be launching in the first half of the year here. So the performance down the stretch of last year does not include the benefit of the new hip products. And so that is that's the one anatomy where second half of last year, we didn't see that good healthy acceleration because of those products. We expect that as we bring out those products here in the first half of twenty twenty five that we'll be able to both recapture some of the procedures and surgeons that we lost and also we'll be able to go on offense in hip and knee alongside of each other.

Speaker 2

We've got still got a fair amount of knee surgeons that don't use our hip and would be holding back at this point until we have that product. And we actually have hip surgeons that don't use our knee. So we still have kind of fruitful opportunities to fill out the opportunity there. And we expect that as we work through this year that our hip performance will kind of move back into a well above marketplace in The U. S.

Speaker 2

Outside The U. S, we do very well in hip. We've got fantastic hip products outside The U. S. That do very well with that direct anterior procedure.

Speaker 2

And so there's certainly opportunities over time to do even better outside The U. S. With cross selling, but our performance there is still strong and healthy.

Speaker 7

Understood. Thank you.

Operator

The next question comes from Brandon Vazquez from William Blair. Please go ahead.

Speaker 8

Good morning, everyone. Thanks for the question. First on Lima integration, not to nitpick wording too much here, but it sounds like the wording you guys are using is that integration is largely complete. So what is there anything left here? What are the last kind of milestones that you guys need to hit here for this to be fully complete and how long that takes?

Speaker 8

And then also on that, just talk a little bit about where you're seeing the best cross selling opportunities at this point. It seems like it's starting to come through on the results. Is this about opening new accounts or is it more about going deeper into existing accounts with more products?

Speaker 2

Yes, thanks. So fantastic first year of the Lima integration and I think there's a lot of pieces of that that are complete. The key channel integration, which has a certain amount of risk that comes with it, is something that we've worked through completely in The U. S, we worked through in the vast majority of the countries outside of The U. S, all the large countries outside The U.

Speaker 2

S. And so that channel integration, we've worked through the combination of the product roadmaps, which is a very important thing to do in that first year to have clarity of what's coming when etcetera, that's been done. The combination of the leadership team and the teams underneath them has been done, the sales team. So when we say largely complete, there's a whole lot of year one things that are super important to get right and that create a certain amount of risk and we've done those with excellence and had a great first year. We now transition to a period of combined development projects.

Speaker 2

And those combined development projects. And those are very important to get the full long term value. They're important to get at the rest of the cost opportunity. They're important to get at the ramp of the cross selling. But the risk profile of those is dramatically different because they're planned products with projects with clear leaders just executing and we're a very disciplined company.

Speaker 2

And so we're confident that we can execute through those and get at the balance of the big opportunity that exists here. In terms of cross selling, we've got there's a sort of a big macro cross selling opportunity around our great ALTAVATE shoulder and our great EMPOWUR Knee and now our great ARVUS technology. Selling those other places around the world before beyond The U. S. Is a big opportunity that we'd even started a little bit after the Mathis acquisition and now we have more runway after the Lima acquisition.

Speaker 2

And that's something that's going to play out over time because there's some country by country decisions and approvals and things that will kind of pace how that plays out. At the same time, underneath that, there are sort of product line and country specific opportunities between Lima and Mathis outside The U. S, some places where we're selling the great ceramic Mathis hip into Lima customers, some places where some of the revisions that came with Lima are sold into Mathis customers, some Mathis customers that had great positions in anatomic and now we can't yet get to them with Altivate because of approvals, but we can get to them with Prima shoulder that Lima has launched. So there are a lot of different opportunities that we're ramping outside The U. S.

Speaker 2

And also within The U. S. We already had outside The U. S. A point or so of growth impact from cross selling as we exited the year, that will ramp over time to a handful of points of growth impact and enable us in a normal market environment to still be growing high single digits, pushing double digits outside The U.

Speaker 2

S. And then there's also opportunities within The U. S.

Speaker 8

Okay, thanks. And maybe one quick follow-up, just in terms of the tariffs, historically with tariffs, do you guys what are the mechanisms of action here for you guys to offset these? Is it simply moving manufacturers to other locations? Do you have any pricing power that you can push through with tariffs? Anything you can share on that just for a little color?

Speaker 8

Thank you.

Speaker 2

Yes, sure. Well, I mean, obviously, in the short term, there's some supply chain things around just inventory management, positioning inventory and things like that to try to create some time and space. So that's sort of a short term thing. More strategically, there are supply chain things. We have, as Ben mentioned, with our China supply, the last few years, there's been more and more kind of possibilities of China tariffs.

Speaker 2

We've done quite a bit of multiple sourcing to create opportunities outside of China to complement our China opportunities for supply. And so shifting where we source things from is an opportunity. We also have multiple plants within our P and R network and so looking to source more out of other plants within the P and R network is an additional internal opportunity from a supply chain standpoint. And then ultimately, after COVID, when we had a lot of inflation through our system, there was less about tariffs and more some exogenous shocks from kind of big inflation coming through on our costs, we worked our way through kind of price and reimbursement changes. And there are price changes we can make quickly within P and R and then there are reimbursement changes that take longer needing to provide the information to Medicare, for example, so they can see and understand the inflation and then make adjustments providing information to the other insurers and working through some of the contracting and things.

Speaker 2

So we've got a good playbook here. We got quite a bit of experience from what we had to do a few years back. And we're trying to be transparent that it takes some time. We'd be mitigating as quickly as possible, but it would take some time, but ultimately would not impact the long term health of our business based on the things that we believe that we could do.

Operator

The next question comes from Danielle Antalffy from UBS. Please go ahead.

Speaker 9

Hey, good morning guys. Thanks so much for taking the question. Matt, congrats on your retirement. I echo Jeff's sentiment that I am jealous, but also very happy for you. And it's been nice working with you.

Speaker 9

Just a question on, if I could, on the 2025 guidance and sort of if you so you mentioned that the sales synergy starting to ramp. I don't know if you can give a little bit more color on what's reflected for that. Is that ramp continuing reflected already in the 2025 guide or is that a source of upside? And same question as it relates to the new product launches, sort of how much if you can even qualitatively kind of quantify what's reflected in that high single digit recon growth? Thank you so much.

Speaker 3

Yes. Thanks for the question, Danielle. I think from our perspective, like we said, we feel pretty confident with the momentum and trajectory that we have within the overarching business. We're trying to set up a guide that's thoughtful, but also I'd say maybe tends to be a little more on the conservative side as we think about some of the opportunity that's out in front of us. Obviously, you can't plan everything to hit exactly right, but overall we feel like we have a lot of momentum that we can build on through the cross selling opportunities, through the sequencing of new product launches.

Speaker 3

Some of that takes a little bit of time making sure you've got the inventory in place to be able to capitalize on it and the regulatory approvals in place to be able to really execute behind it. But I'd say our guide contemplates having the new products in our bag, allowing us to launch those, starting to capture more cross selling opportunities than we had in 2024. But overall, we would say that we still see some opportunity here to try to drive above that as well over time.

Speaker 9

Okay. That's helpful. And then I appreciate that you already answered the question for how to think about the acquisition strategy over the next twelve months here. But just thinking about how you guys look out over the next, call it, three to five years and Lima was a very big acquisition for you. And how you think about capital deployment maybe more over the medium term versus the next twelve months?

Speaker 9

And has anything changed for you guys there, particularly with the stock a lot lower than it was twelve months ago when anything you can comment. Matt, I appreciate you're leaving, but anything you could say there would be great. Thank you so much.

Speaker 2

Yes. Thanks for your comments. And yes, I will be leaving, but not immediately. And I'm going to be working hard with my successor to have strong continuity and be helpful advising on the backside of the transition. And so, our spec as a board was to find someone that was going to build on and accelerate the path that we're on as a company and the compounding value creation strategy that we've been executing.

Speaker 2

And so, we've shown that we can do acquisitions very successfully in this industry and in the med tech space and we've done a lot of smaller ones that have added a lot of value to the company. We've also done larger ones that have been more step change and that have added significant value to the company. And so we do expect acquisition to be a key part of what we do on a go forward basis to build and grow in compound value for our shareholders. Certainly, the next year or two, we're in a period, as I said earlier, where those will be more moderate based on our bandwidth with the kind of the things that we're working on, but also based on our balance sheet and wanting to make sure that we're responsible and starting to delever there. But then over time, there are great opportunities, right?

Speaker 2

We still have within Ortho great opportunities in terms of going deeper into the segments we're in and other attractive growth and innovation segments within the Ortho space. And we also have a capability set that certainly could apply and drive value in adjacencies in MedTech that would be logical in terms of moving from the orthospace, whether it's other surgical areas or other applications of some of the technologies that we've got within the company. And so, we expect to continue to build the company organically in terms of strong growth and strong margin improvement. We expect to ramp up the cash flow curve over time and use that to delever and start with continued small acquisitions, but then also some little bit larger ones over time that continue to shape and improve the trajectory of the company.

Speaker 9

Thank you and good luck.

Speaker 2

Yes. Thank you very much.

Operator

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

Speaker 10

Yes. Thanks for taking my questions. I want to ask one on the synergies. I didn't hear you call out the synergy impact in the fourth quarter. So if you could give us that would be helpful.

Speaker 10

And then do you assume any dis synergies in 2025 or are they largely over at this point?

Speaker 2

So the dissynergy impact was about one percent in the fourth quarter, but we also had some progress on positive synergies as well. The reality is the peak of dissynergy was Q2 last year, but we also so I think we'll have a little bit of gross dissynergy in Q1, but we have enough positive synergy that we'd expect those to about net out as we've been talking about all along. And then as we work through the balance of the year, we'll be kind of building on that net synergy position. Nothing has changed from that. There's no kind of new wave of dissynergy that we're seeing a lot of questions about that through last year and nothing has changed.

Speaker 2

The U. S. Channel integration that we did in the first half of the year has taken hold and our teams are I got to their sales conference as well and super excited about the momentum down the end of the year and the momentum starting this year. And so we're confident that The U. S.

Speaker 2

Business is on a good healthy trajectory. We mentioned in our comments that the year has started out with a healthy start in our businesses and that includes our U. S. Surgical business. And so you should expect to see the net synergy position start to expand as we work through this year, both outside The U.

Speaker 2

S. And in The U. S.

Speaker 10

Okay, got it. And then just on the selling day topic, you said two to three extra days in the first quarter. I think it'd be helpful if you could just give it to can you just give us selling day difference for each quarter of this year in terms of modeling? I mean, is it basically two to three extra days in the first quarter and then the same for the next three quarters, same as last year? Or is it, are there any other differences in Q2 through Q4 on a year over year basis?

Speaker 3

Yes. Mike, it's mostly a trade between Q1 and Q4, but we can provide to you all with regards to the what the quarterly view looks like. But most of the impacts are Q1 and Q4. Okay. All right.

Speaker 3

Got it. Thank you.

Operator

The next question comes from Caitlin Cronin from Canaccord. Please go ahead.

Speaker 11

Hi. Thanks for taking the questions and congrats on a great finish to the year. And Matt, again, sorry to see you go, but congrats on your transition. So you guys have touched briefly on this earlier, but of the three year goals for the Lima integration, could you talk about the phasing to reach the rest of these goals in years two and three?

Speaker 3

Yes. Thanks, Caitlin. Again, I think as you heard from my comments, one, we were a little bit on the over the top end of our $10,000,000 to $15,000,000 cost synergies in year one. As we think about seeing that clear path to $40,000,000 plus, it's very much still in our line of sight. What Matt also mentioned with regards to now project based work that we're doing with regards to looking at operational type opportunities, So making some investments to move equipment into different facilities, so we can scale up and capture some opportunity there.

Speaker 3

That's more of a year three execution in terms of realization of those synergies. But I think if you heard from my comments, we expect another 10 to 20 basis points of impact in 2025 and then the remaining piece coming in 2026. But clear line of sight, we see a lot of good opportunities here to drive value. And then on the cross selling side, I think Matt made several comments around, we see good opportunities for us to continue to leverage now a broader and more strong global portfolio of products to help to secure and potentially drive upside on our high single digit recon growth performance.

Speaker 11

That's great. Thanks. And then on the 10% extremities growth in the quarter, what really led the growth or was it shoulder or foot and ankle? And then any more color on the foot and ankle business during the quarter and your outlook for that going forward?

Speaker 2

Yes. So in shoulder, our growth guide back sort of at or above market overall, the best we can tell. And if you really try to kind of click through that and see the UltaVate performance, it's back in sort of a healthy double digit range there in the fourth quarter. And so we feel good about what's going on there with the ARG launch coming through and getting some of the integration impacts behind us and are expecting to have a very strong year in shoulder this year. Foot and Ankle continued to deliver strong growth above market.

Speaker 2

Our Q3 in Foot and Ankle was very strong And then Q4 was strong and comfortably above market double digit growth in Foot and Ankle. And we are very excited about the continued path in Foot and Ankle this year. We've had many quarters now of strong double digit growth above market, continuous innovation through that. It's just a great team that has formed there that is very aggressive about driving share gain and growth with innovation, a great aligned channel. We've now got a large portion of that channel aligned and using all of our products that they can and that's going to keep building and growing.

Speaker 11

Thanks so much.

Operator

The next question comes from Jason Witte from Roth. Please go ahead.

Speaker 12

Hi, thanks for taking the questions and Matt congrats on the transition as well. First off, maybe if we could just touch on currency in terms of how it flows through the P and L. And in addition to that, it seems like the most sensitivity here is going to be towards the euro given your business mix. But I'm just curious in terms of how you're set up in terms of natural hedges and potentially financial hedges on the P and L?

Speaker 3

Yes. Thanks, Jason. If you look at where we are now as a globalized business, we are more euro dominated with regards to the Lima and Mathis where the revenue and the cost falls for the most part. So it is more of a natural hedge that we have in place. Now we do have manufacturing in Switzerland and Italy.

Speaker 3

So you've got Swiss based currencies and the euro there with regards to Italy. So overall, we'd say we're more naturally hedged in most cases with regards to how we're set up operationally with our European and OUS businesses. On the other side of the coin with P and R, you've got some manufacturing in Mexico that we've talked about. We've got some hedges in place to protect us there. So as you think about currency impact, what we're seeing right now based on current rates, I said 1% to 2% range, but if rates are what they are today, it's probably in that right in the middle of that zone with regards to the full year impact and to be determined on how things play out over the course of the year, but that's how the outlook looks.

Speaker 12

That's helpful. And that 1% to 2% impact on top line, how does that flow through to the bottom line in terms of what the impact is on EPS or EBITDA?

Speaker 3

Yes, it wouldn't have a major impact with regards to our percent margins on EBITDA. So think about it as a flow through at the company level margin. Okay. Thank you for that clarification. And then maybe just one quick follow-up, earlier question about synergies versus dis synergies.

Speaker 3

I don't know if I fully heard it correctly.

Speaker 12

I know that you mentioned there were just synergies. Was the message that there were just synergies that they were off about, I think you said about 1%, but those were offset by synergies. Is that the right way to think about it? And then going forward, the expectation is there may be some continued dis synergies, but they're going to be well offset by the synergies, if we just think

Speaker 4

about Yes.

Speaker 3

So to clarify there, Jason, we had about a 1% net impact on our recon business of dis synergies in the fourth quarter as we had expected, but that is offset by some of the cross selling that started to ramp up. So as we talked about that progression of dis synergies got better over the course of the year with the fourth quarter being the best of the year, but still a net number of minus 1% for the recon business. As Matt described in the first quarter of twenty twenty five, that's going to be more neutralized because, yes, we went through some of that channel consolidation, but as we're continuing to ramp the cross selling, that's netting out that impact to where we wouldn't expect any impact in Q1. And then as you clear Q1, you start to see some positive impact of the cross selling start to read through in the back half

Speaker 12

of the year. Great. Thanks for the clarification.

Speaker 10

Yes.

Operator

We have a follow-up question from Vijay Kumar. Please go ahead.

Speaker 5

Hey, thanks for squeezing me in again. One on Ben, I guess, back on free cash flow, related to the Mexico tariff question, right, the $3,000,000 to $4,000,000 monthly impact, I think given your inventory, days inventory is like is

Speaker 7

the

Speaker 5

impact, the delayed impact and what is the lag on if the tariff implementation were to go through and relates to that is, are you planning on increasing inventory levels just to be mitigate some of the impact and does it impact free cash flows for fiscal twenty twenty five? I didn't hear a free cash conversion number for fiscal twenty twenty five.

Speaker 3

Yes, Vijay, I think from our perspective, we're doing what we can in the supply chain to make sure that inventory is in the right place, but I don't think that we need to increase in a material way that's going to impact how I laid out our free cash flow progression here in 2025 and beyond. As Matt described with regards to tariffs, I mean, we're going to be very aggressive with regards to how we manage them. Hopefully, we'll be able to be in an exemption position like we were in the previous regime here, but if not, we'll be going aggressively after our mitigation actions to offset. Yes, there'll be probably a five four to six months our inventory turns on P and R, so there would be some delayed reaction. But I don't think we're going to have to increase our inventory or working capital levels in a material way that's going to impact our overarching views on free cash flow in the outlook there.

Speaker 5

Understood. And Mac, one for you on, I think when Lima was announced, I think the initial expectations was $290,000,000 to $300,000,000 of revenues for Lima. We ended the year north of 03/22. Some of this obviously was where the dis synergies came from, right, Lima versus the legacy Innovus side. But Exter, it does feel like Lima is tracking well above plan, perhaps cross selling opportunities coming in better.

Speaker 5

Is my read correct on the 03/22, the components of what's driving that 03/22?

Speaker 2

Yes, the 03/22, there's just a little bit of currency, but not much and the rest is a beat. It's a beat that was driven outside The U. S. And which is remarkable because we put two big businesses together outside The U. S.

Speaker 2

And it's not just a swap between Lima and legacy math, it's our business outside The U. S. Outperformed our expectations last year. So really a fantastic start there. And I think it's I think within The U.

Speaker 2

S, the performance was within the range of what we had expected, because obviously the total number adds up to meaningfully more than we had guided. And it's just that I think there were some visible growth impacts in The U. S. Because that's where we felt the brunt of the integration and I think that's unfortunate. Because frankly, I think it created a lot of discussion about Lima integration challenges when the reality is the Lima integration has gone fantastically well.

Speaker 5

Fantastic. Thanks guys.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Kyle Rose for closing remarks.

Speaker 1

I think Matt is actually going to say the final words here and set us off.

Speaker 2

Thanks, Kyle. Thank you for joining us this morning. I want to end the call by thanking our team members for their commitment to excellence day in and day out. We have a lot of momentum and excitement across the organization and remain committed to delivering value for all of our internal and external stakeholders. Thank you for listening today and I look forward to sharing our first quarter results with you in early May.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Enovis Q4 2024
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