Enovis CORP Q4 FY2024 Earnings Call

Good day, and welcome to the Innovus Fourth Quarter 2024 Earnings Conference Call. 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.

Thank you, Danielle. Good morning, everyone, and thank you for joining us today for our fourth quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning are Matthew 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 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 provisions in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. 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 over to Matt, who will begin on Slide 3.

Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. Let's start on Slide 3. 2024 was a transformational year for Enovis with significant progress toward our long-term strategic goals, and I'm excited about the future of our high-value medtech growth company. In the fourth quarter, we reported growth of 23% and 7% on a constant currency comparable basis. We made tremendous progress on the integration of Lima, exceeding all of our year 1 goals, and we exited 2024 on a strong commercial and operational trajectory. We expanded our adjusted EBITDA margins by 210 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 have the exit trajectory, new product pipeline, and commercial teams in place to deliver healthy acceleration in 2025. On to Slide 4. 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 Extremities segments. In the quarter, U.S. Recon grew 7%, including 10% growth in U.S. Extremities and 8% in Hip Knees. 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. 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 and knees, augmented Glenoid systems, and shoulders, and the complete shoulder. We also have key launches planned in hip implants and in enabling technology, including the next generation of Argus in knees, and the initial rollout of Arves in the shoulder. These new product launches will be complemented by an aggressive ramp of cross-selling opportunities. Turning to Slide 5. The Lima acquisition has been a key part of building our great Recon business. 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. We remain confident in our 3-year financial goals and have robust plans to deliver substantial long-term strategic value. I got to join the team's annual sales kickoff in Prague a few weeks ago. It was incredible to see and feel the positive growth energy and excitement in our combined commercial team. 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 6. In P&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. 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 priority gains and improved portfolio mix. Overall, I'm pleased with our performance and the momentum we built in 2024. 2025 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 the P&L details and our 2025 guidance. Ben?

Thanks, Matt. Hello, everyone. I'll begin on Slide 7. We are pleased to report fourth quarter sales of $561 million, up 23% versus the prior year and up 7% on a comparable constant currency basis. The quarter included approximately 20 basis points of negative currency headwinds. We are encouraged with the growth accelerating in our Recon business across anatomies 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, Knee and Extremities. Our underlying growth in P&R remained stable, growing 3%. We continue to realize the benefit of our improving global business mix and 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, which includes the addition of Lima. We made great progress on our Lima cost initiatives coming in above the high end of our year 1 goals of $10 million to $15 million. As a result of these benefits, our fourth quarter adjusted EBITDA grew 38%, delivering a margin of 20.1%, up 210 basis points versus the same quarter last year. Fourth quarter effective tax rate was 21% compared to 22% last year. Interest expense was $9 million for the quarter versus $4 million in 2023. Overall, we posted adjusted earnings per share of $0.98, an increase of 24% versus prior year. Slide 8 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. 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 million was triggered. This impairment does not have any impact on Enovis' 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 9 details our quarterly progression in 2024. Our 5.5% comparable revenue growth was highlighted by 8.2% in Recon and 3% in P&R with notably stronger results in the second half of the year, driven by strong execution in our global Recon business. 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 210 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 $2.19 billion to $2.22 billion. This includes constant currency organic revenue growth of 6% to 6.5%, with high single-digit growth in Recon and stable P&R growth in the low single digits. We expect negative currency headwinds of approximately 1% to 2%. On margins, we are expecting adjusted EBITDA in the range of $405 million to $415 million. This includes 50 basis points of underlying margin improvement, along with 10 to 20 basis points of cost synergies from our year 2 integration efforts of Lima. Depreciation is expected to be in the range of $125 million to $130 million, driven by growth investments in the Recon segment and the addition of recent M&A. We expect interest and other expenses to be in the range of $42 million to $46 million and an adjusted tax rate of approximately 23% in 2025. Along with these estimates, we expect a share count of approximately $57 million and are forecasting an adjusted earnings per share range of $3.10 to $3.25. Additionally, we expect positive free cash flow in 2025 while supporting another year of investments to integrate Lima and fuel growth. 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 million to $563 million and adjusted EBITDA in the range of $97 million to $100 million. 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%. Lastly, I'd like to give some perspective 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&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. For the sake of clarity, we estimate that a 25% tariff applied to the value of all goods crossing the border into the United States would represent a $3 million to $4 million exposure per month once it works 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 18 to 24 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. We will provide updates as appropriate as we gain further visibility into the outcomes of the situation. To summarize, on Slide 11, we had a transformational year in 2024 and continue to see solid momentum in the first 2 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.

Thanks, Ben. I want to finish with a few personal comments. After almost 10 years leading Colfax and now Enovis, 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 30 years of demanding travel and responsibilities. It's time to move on to the 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 2 powerful, focused public companies. I believe this is a great time for a leadership transition here at Enovis. The Lima acquisition is on track to be a great success. There's growth momentum building across our businesses. Our company has scaled to our initial strategic goal of over $2 billion in 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 Enovis into a distinctive medtech growth company. At this point, I am confident that we will be able to secure a talented and seasoned medtech 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 it over to Kyle to start the Q&A. Kyle?

Thanks, Matt. With that, operator, let's start the Q&A.

The first question comes from Vik Chopra from Wells Fargo.

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

Yes, Vik, first, thanks for the kind comments and for the support. From an M&A standpoint, we've gotten a lot done in the past 10 years, including the big Lima acquisition that has had a dramatic impact on our portfolio and our momentum here, and Lima is off to a really great start as I shared. 2025 is going to be more of a year of small bolt-ons. We certainly have some attractive technology and channel bolt-ons in the funnel that will be helpful to accelerate the path forward for the businesses, but we're still focused on completing the Lima acquisition in a great way and starting to deleverage the company. We will also be doing work on other ideas about where to go in terms of adds and things over time, but the focus in 2025 is going to be on small bolt-ons.

Great. 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?

Yes. Thanks, Vik. When we look at our positions in Recon, the technologies that we've got and 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. 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 room for the positives and negatives that might come along quarter-to-quarter in any given anatomy at any given point in the year. If you look at the exit of the year, we built some healthy momentum down the stretch, and the business outside the U.S. had a double-digit year last year. While the markets might normalize a little bit, we also have a chance to ramp the cross-selling into that business. Within the U.S., we were bumping back up against high single digits or 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 double digits at certain points within the year, and we will be aggressively executing against that.

The next question comes from Vijay Kumar from Evercore ISI.

Matt, wishing you the best as you transition. I had a couple of questions. One, maybe on this Q1 phasing 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 Q4, U.S. Recon was a little light; maybe talk about the dynamics there.

Yes, Vijay, I'll take that one. If you look at the way that we run the company, we'll have extra days in the first quarter that will be offset in the fourth quarter. So we'll realize 2 to 3 extra days in the first quarter. As we think about the early part of this year, that will come back in the second part of the year. Overall, we feel like we will get off to a really strong start. Some of that will be day-related. Otherwise, I'd say, as Matt said, we've got some nice momentum that's building in the business as well.

On the U.S. recon front, we had a strong finish to the year. We talked about on the last call that October had some headwinds from some of the storms in the U.S. and the IV shortage and things like that, and we expected November and December to accelerate to a strong finish to the year. So when you look at that U.S. Recon number, remember that there's still some integration headwinds we experienced in the first quarter last year. We're still kind of lapping through those integration headwinds. Additionally, there was a slow start to the quarter and a strong finish, but it was a slow start. We feel very comfortable with the exit rate of the quarter and that it is at least in line with the guidance that we've given.

And maybe my follow-up on the margin guidance. Ben, I think when my math looks like maybe we're looking at 25, 30 basis points of margin expansion for fiscal '25. Is that right? And I thought the LRP assumed 50 basis points of margin expansion; what synergies shouldn't that be about 50? Maybe walk through the margin assumptions.

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 2024. So that's our normal 50 basis points from core operating leverage and mix and then also getting about 20 to 30 basis points of better as year 2 synergies on the Lima side. We expect another strong year of margin improvement for the company as we look to 2025.

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

EBITDA margin, yes.

The next question comes from Robbie Marcus from JPMorgan.

And I'll echo the congratulations on the retirement, Matt. It's 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 could you just take U.S., OUS, large joint vs. extremities and talk about what you're seeing in the market, how it ended '24 versus started? And how you're expecting it to play out and what's in the guide in 2025 for those different subsegments?

Yes. Thanks for the comments, Rob. Let me start with 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.S. We felt that in Q3 there was a little bit of normalization starting to happen that really wasn't surprising given the strong comps. But then Q4 had a strong finish and we had beat Q4 on the Recon side, driven by that strong finish outside the U.S. There continues to be strong demand out there. 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 hasn't been worked down. At the same time, we have a ramp in our synergies, so there's an opportunity for us to have a gap to the market than we had last year due to the synergies and still deliver very strong growth outside the U.S. It's been a good healthy start of the year outside of there. In the U.S. market, the year started a little softer last year. We felt like it was a normal year up against a much cleaner year the previous year. So there was a little bit of a slower start to the year in terms of market growth. We also saw our position improve. We started to execute more and gain share versus the market in the second half of the year, and we outgrew the market for the back half of the year comfortably despite some headwinds. We feel good about the arc that the business has taken as we bring new shoulder products in with the ARG; we've ramped up our cones and revisions in the knee. We are lagging a bit in Hip, but have some key products coming in the first half of the year here in Hip. So we feel confident in our ability to gain share across all anatomies here in 2025 as we had for many years before 2024 based on the key new products and the strength of the commercial team. We're focused on being back on offense after the integration and lapping some of those integration headwinds.

Great. Maybe just a quick follow-up on free cash flow and debt. It ended up about $65 million to $70 million 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 '25 and thinking about exiting '25 in terms of debt?

Yes. Thanks, Rob. I mean, we still see a very clear pathway to 70% to 80% free cash flow conversion over time as we get behind some of the heavy investments we're making across integration-related items of Lima, EU, MDR investments that will start to subside here as we get through 2025, as well as some of the growth CapEx investments as we're putting the business together. So we'll make a strong step in the positive direction here in 2025. When looking to 2026, you'll see a big step down in expenses regarding integration-related costs and EU MDR. That will help us drive acceleration towards that long-term goal of 70% to 80% conversion. However, in 2025, we're not providing specific guidance on what the conversion levels will be other than to say that it will build over the course of the quarter and will be positive. Regarding leverage, we're at about 3.5x now, and I’d say by the end of the year, we'll be down in the low 3s as we get into 2026.

The next question comes from Jeff Johnson from Baird.

Matt, congratulations on a great career. I guess I'm a little more jealous than I am happy, but 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 the topic, you've been assuming kind of a reversion back to maybe down 2-ish percent or something. 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 a pricing environment is a little more stable than that right now, but just would love your updated thoughts there.

Yes, Jeff. So yes, on the Recon side, we do expect to get back to some amount of downward price each year, similar to how things have been in the past. We have created a plan that assumes sort of a point or two of downward price pressure on the recon side. We're doing everything we can to look for opportunities to get new price on new products and find a way to better performance than that, but we think that that's the appropriate planning assumption. On the P&R side, as we've talked about consistently, we think that overall, that business is more of a flat price business. There are places where we can continue to get positive price, and then there are areas where there might be a bit of a negative price. We've built good muscle coming out of the back side of COVID that we think can keep us in a flat price zone in a normal environment. If inflation or other things drive costs up, we would look to work that price through the system on the P&R side.

All right. Fair enough. And then just hearing your comments on the Hip business, Matt, can you just remind me, has the 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. this year? Should that business accelerate? And is that the colored stem more about empowering surgeons on the Knee side now to be able to do a Hip procedure using your product as well? Or do you go out and win new surgeons with that product?

Yes. Our new colored stem in Hip will be launching in the first half of the year. So the performance from the stretch last year does not include the benefit of the new Hip products. That’s the one anatomy where we didn't see a good healthy acceleration because of those products. We expect that as we roll out these products in the first half of 2025, we'll both recapture some of the procedures and surgeons we lost and go on offense in Hip and Knee alongside of each other. We have many knee surgeons who don't use our Hip and would hold back until we have that product. We also have Hip surgeons that don’t use our Knee. There are fruitful opportunities to fill out this segment. And we expect our Hip performance to bounce back into a position of above marketplace performance. Outside the U.S., we do very well in Hip. We have fantastic products outside the U.S. that perform well with that direct anterior procedure. So there are certainly opportunities to do even better outside the U.S. with cross-selling.

Next question comes from Brandon Vazquez from William Blair.

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. What is left here? What are the last milestones that you need to hit for this to be fully complete? And how long will that take? 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 started to come through on the results. Is this about opening new accounts? Or is it more about going deeper into the existing accounts with more products?

The Lima integration has been fantastic. There are many pieces that are complete, especially the key channel integration, which carried a certain amount of risk that comes with it. We've completed that in the U.S. and in the majority of countries outside the U.S., especially the large countries outside the U.S. The channel integration is completed along with the combination of the product road maps, which was important in the first year to have clarity of what's coming in etc. We've combined the leadership teams, and we are largely complete. When we say largely complete, we mean that there were significant year 1 things that were crucial to get right that we executed with excellence. We now transition to a period of opportunity for ramping cross-selling, making operational transfers, and improvement projects; while the risk profile for these tasks is different since they're plant product projects with clear leaders executing in a disciplined company. We're confident that we can execute through those and maximize the long-term value. Regarding cross-selling, we have a significant opportunity with our AltiVate shoulder, Power Knee, and Arvis technology, selling those in areas worldwide. This opportunity expanded as we transitioned after the Mathys acquisition, and we have more runway after the Lima acquisition. This will play out over time due to country-by-country decisions and approvals. Additionally, we have product line and country-specific opportunities between Lima and Mathys outside the U.S. There are areas where we're selling great ceramic Mathys hip into Lima customers and vice versa. We expect to expand cross-selling opportunities within the U.S. as well. We already had a point or so of growth impact from cross-selling as we exited the year, which is expected to increase over time.

Okay, and maybe one quick follow-up. In terms of the tariffs, 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 for clarification?

In the short term, there are some supply chain actions like inventory management and positioning. More strategically, we have been preparing for possible tariffs for several years by diversifying our suppliers outside of China while still actively sourcing from China for materials. In our P&R network, we’ve identified multiple plants to shift more sourcing without impacting our production capabilities. After COVID, we handled inflation through price adjustments and contracted deals. We are transparent about needing time to adjust but believe we can effectively mitigate any tariff impact without harming our business's long-term health.

The next question comes from Danielle Antalffy from UBS.

Matt, congrats on your retirement. I echo Jeff's sentiment that I am jealous, but I am also very happy for you. It's been nice working with you. Just a question, if I could, on the 2025 guidance. You mentioned the sales synergies starting to ramp. Can you provide a bit more color on what's reflected for that? Is that ramp already included in the 2025 guidance, or is that a source of upside? And the same question regarding the new product launches, how much is reflected in that high single-digit Recon growth?

Thanks for the question, Danielle. From our perspective, we feel pretty confident with the momentum and trajectory we have within the overarching business. We're setting up a guide that's thoughtful and maybe tends to be a little more conservative as we think about some of the opportunities in front of us. You can't plan everything to hit exactly right, but overall, we have a lot of momentum that we can build on through the cross-selling opportunities and port developments. Some of which takes time to have the inventory and regulatory approvals in place. Our guide contemplates the new products in our pipeline, allowing us to launch those and beginning to capture more cross-selling opportunities compared to 2024. But we still see opportunities to drive above that over time.

Okay. That's helpful. I appreciate you already answered the question regarding acquisition strategy for the next 12 months, but thinking longer term over the next 3 to 5 years, Lima was a very significant acquisition for you. Any changes in your approach to capital deployment over the medium term versus the next 12 months, especially with the stock lower than it was 12 months ago? Any comments you could provide would be great.

Thanks for your comments. I will be leaving, but not immediately, and I'll be working hard with my successor to ensure strong continuity and provide advice throughout the transition. Our expectation as a Board is to find someone who will build on and accelerate the path we're on as a company and the compounding value creation strategy that we've been executing. We have demonstrated our ability to succeed with acquisitions in this industry and in the medtech space, both through smaller acquisitions that have added considerable value and larger acquisitions that have produced significant returns. We expect acquisitions to be a key driver for our growth moving forward. For the next year or two, we anticipate those will be more moderate based on our bandwidth and balance sheet, focusing on starting to deleverage. However, we see great opportunities in the Ortho space and other adjacent medtech applications that align with our capabilities to continue building and compounding value for our shareholders.

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

I want to ask one on the synergies. I didn't hear you mention the synergy impact in the fourth quarter, so if you could provide that it would be helpful. Additionally, do you assume any dis-synergies in 2025? Or are they largely over at this point?

The dissynergy impact was about 1% in the fourth quarter, but we also experienced progress on positive synergies as well. The peak of dissynergies was Q2 last year. So I think we'll have a little gross dissynergy in Q1, but we have enough positive synergy that we'd expect those to about net out as we've been discussing. As we work through the year, we expect to build a net synergy position.

Okay. Got it. And then just about selling days, you mentioned 2 to 3 extra days in Q1. Can you provide selling day differences each quarter this year for modeling? Is it basically the same for the next 3 quarters as last year, or are there any other differences in Q2 through Q4 on a year-over-year basis?

Yes. Mike, it's mostly a tradebetween Q1 and Q4, but we can provide a detailed view regarding quarterly comparisons. Most of the impacts are Q1 and Q4.

The next question comes from Caitlin Cronin from Canaccord.

Congrats on a great finish to the year. Matt, again, sorry to see you go, but congrats on your transition. You have touched on this earlier, but the 3-year goal for the Lima integration, could you talk about the phasing to reach these goals in years 2 and 3?

Yes, thanks, Caitlin. As you heard from my comments, we were above our $10 million to $15 million cost synergies in year 1, and for the year 2, we are looking to capture above $40 million plus. We are also focusing on project-based work for operational improvements and combining equipment to scale up our growth opportunities. Those are more year 3 projects. However, we expect another 10 to 20 basis points of impact in 2025, with the remaining coming in 2026. We have an excellent sight of opportunities here to drive value, and we see significant potential from cross-selling as we leverage our broader global product portfolio.

That's great. And on the 10% extremities growth in the quarter, what really led the growth? Was it shoulder or foot and ankle? Can you provide any more insights on Foot and Ankle business during the quarter and your outlook for that moving forward?

In shoulder, our growth was back at or above market. Our AltiVate performance was back in a healthy double-digit range in Q4. We feel good about what's going on there with the ARG launch improving our performance. Additionally, Foot and Ankle continued to show strong growth. Our Q3 in Foot and Ankle was very strong, and Q4 was comfortable above market double-digit growth. We are optimistic about the growth trajectory in Foot and Ankle this year. The team has a history of strong double-digit growth above market and is very aggressive about driving share gain with continuous innovation.

The next question comes from Jason Wittes from Roth.

Matt, congrats on the transition as well. Firstly, can you touch on currency in terms of how it flows through the P&L? Additionally, it seems like the most sensitivity is towards the euro given your business mix. Can you share how you're set up for natural and financial hedges on the P&L?

As a global business, we're more Euro-dominated in terms of revenue and costs, so there's a degree of natural hedge we have in place. We have manufacturing in Switzerland and Italy as well as currency exposure there. We're more hedged naturally for our European and OUS businesses overall. We’ve also put hedges in place for manufacturing in Mexico. Regarding current rates, I said the impact ranges should be around 1% to 2%. It’s likely to hit mid-level based on full-year impacts, depending on how it plays out.

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

It wouldn't have a major impact on our percent margin on EBITDA. Consider it more of a flow-through at the company level margin.

Understood. Just to clarify earlier questions about synergies versus dissynergies. Did I hear correctly that there were about 1% dissynergies but those were offset by synergies? And moving forward, there may be some continued dissynergies but overall they will be offset by positive synergies in future projections?

Yes, that's the right interpretation. We had about a 1% net dissynergy impact on our Recon business in Q4, as expected. However, we also had some cross-selling benefits starting to ramp up. As we talked about that progression, we saw improvements in dissynergies over the year, with Q4 being the best. While some dissynergies will carry into Q1, we expect to reach a neutralized position as we ramp the cross-selling forward.

We have a follow-up question from Vijay Kumar.

One on the free cash flow related to the Mexico tariff question, right. The $3 million to $4 million monthly impact seems to be delayed. Is there a lag on the tariff implementation impact, and are you planning on increasing inventory levels to mitigate some of the impacts that don't hurt free cash flows for fiscal '25? Also, I didn't hear a free cash conversion number for fiscal '25.

From our perspective, we're doing what we can in the supply chain to ensure inventory is positioned correctly. However, I don't think we need to increase inventory significantly to impact free cash flow. As I laid out, we have a pathway to free cash flow progression in 2025 with improvements. Regarding tariffs, we're taking aggressive measures to manage them. However, we estimate a 4-6 month inventory turnover, which would indicate some lag; but we’re confident it won’t materially impact our goals for free cash flow.

Understood. Matt, one for you on the Lima revenue projections; the initial expectation was $290 million to $300 million for Lima, and we ended the year north of $320 million. It seems Lima is tracking well above plan, perhaps due to better cross-selling opportunities. Is my read correct on the $322 million components that drove that?

Yes, the $320 million number includes a minor currency contribution, but overall it's a beat driven largely outside the U.S. Remarkably, we successfully merged two significant businesses. The outside U.S. performance outperformed our expectations last year as a fantastic start. Within the U.S., performance was within expected ranges, but we faced integration challenges that impacted visibility on growth within our performance.

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

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

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.

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