Q3 2024 Enovis Corp Earnings Call
The End
Speaker Change: Good day and welcome to the Enovest Third Quarter 2024 earnings conference call. Our participants will be in a listen and we mode. Should you need assistance? Please signal a conference specialist by pressing the star key followed by the arrow.
Speaker Change: After today's presentation, there will be an opportunity to ask questions to ask a question you may press star than you want on your telephone keypad. To withdraw your question, please press star then too.
Please note this event is being recorded. Have a now-licy-term call for it to call Rose, Vice President of Investor Relations. Please go ahead.
Speaker Change: Good morning everyone and thank you for joining us today for our third quarter 2024 results conference call.
Speaker Change: On Kyle Rose, Vice President of Investor Relations. Join me on the call today, our Matt Paretola, Chair and Chief Executive Officer, and Ben Berry, Chief Financial Officer.
Speaker Change: Our earnings release was issued earlier this morning and is available in the investor section of our website, thenovus.com. We will also be using a slide presentation in today's call, which can be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today.
During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the Safe Harbor language in today's earnings release and in our filings with the SEC.
Speaker Change: 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.
Speaker Change: For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying financial 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, and we'll begin on slide three. Matt?
Matt: Thanks, Kyle. Hello, everyone, and thanks for joining us this morning.
Matt Paretola: Let's start on slide three. The first nine months of 2024 are in line with our expectations and reflect the commercial trajectory we expected to see. We've made tremendous progress on the integration of Lima and delivered on our plans for sustainable, profitable growth.
with a little bit of FX tailwind.
Matt: We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mixed impact of recon, the step change impact from Lima, and overall productivity improvements.
Matt: Overall, we are pleased with our accomplishments through the first nine months of the year and are confident that we have the new product pipeline and commercial teams in place to close the year strong and set us up for an exciting 2025.
Matt: Our U.S. business rebounded in the quarter in line with our expectations as our combined commercial organization shifted back to offense, benefiting from the very early stages of our new cross-selling opportunities and key new product launches.
Matt: In the international market, we grew 8% in a more normalized market environment while we continued to execute our integration plans.
Matt: As we previously communicated, we've been intently focused over the first nine months on getting our commercial channels aligned and putting the teams and processes in place to execute on our proven strategy of driving sustainable long-term growth.
Matt: Our integration plans are progressing nicely. We believe we executed beyond the most material revenue-related integration milestones, and with the progress we've made, we expect to be comfortably within our initial guidance range of $20 to $30 million of negative revenue impact.
Matt: From a pipeline perspective, we're approaching a very exciting period of new product introductions across our recon business as we lean into the cross-selling opportunities of our combined product portfolio and move into broader commercial launches.
Matt: of our revision cones and knees, augmented glenoid system in shoulders, and fill key portfolio gaps in hips.
Matt: In the third quarter, we also anniversaried our 2023 acquisition of NovaStep. I'm incredibly proud of our foot and ankle team.
Matt: Over the last four years, we've successfully integrated five lower extremity assets.
Matt: into a comprehensive business unit and global commercial channel that's on track to eclipse $100 million in revenues with consistent growth well above market and an innovation pipeline capable of driving double-digit growth for many years to come.
Matt: Overall, we're excited about our commercial momentum, our product development pipeline, and while the third quarter was a strong step forward, we still have significant acceleration opportunities in the coming quarters.
Matt: Overall I'm pleased with our performance through the first nine months of the year. I'm confident we're positioned for a strong finish to 2024 that sets us up well for 2025 with a renewed focus on growth fueled by a robust lineup of important new product introductions across the business.
Matt: Now I'll let Ben take you through the P&L details. Ben? Thanks, Matt. Hello, everyone. I'm again on slide 6.
Ben Berry: We are pleased to report second quarter sales of 505 million, up 21% versus the prior year and up 6% on a comparable basis, which includes approximately 50 basis points of positive currency impacts.
Matt: We are encouraged with the growth acceleration in our recon business across anatomies, especially in the U.S. market as we've seen positive results from our channel integration efforts executed earlier in the year.
Matt: Our underlying growth in P&R remains stable, growing at 3%. We continue to realize the benefit from the improving global mix of our business in our margins.
Matt: Third quarter adjusted gross margin of 58.9%, up 70 basis points year over year. This growth was driven by favorable segment mix that includes the addition of Lima.
Matt: Lima Cost Synergies continue to read through positively in our operating expenses as well.
Matt: As a result of these benefits, our third quarter adjusted EBITDA grew 38%, delivering a margin of 17.9%, up 220 basis points versus the same quarter last year.
Matt: Third quarter effective tax rate was 21% compared to 24% last year.
Matt: Turning to slide 7, we are narrowing our prior guidance to reflect the results through the first nine months of the year.
Matt: We expect comparable revenue growth of five to five and a half percent, which contemplates impacts from the recent hurricanes and IV shortages that we've seen in our results thus far in the fourth quarter.
Matt: As a reminder, the comparable growth rate includes approximately 100 basic points of integration headwinds that we outlined earlier in the year.
Matt: We remain excited about the ongoing momentum we're seeing across the business and continue to expect acceleration in 2025 with the integration headwinds behind us.
Matt: We are narrowing our expected adjusted EBITDA range to $373 million to $378 million.
Matt: This will result in 200 basis points or more of margin expansion versus prior year. We expect interest expense and depreciation to come in at the lower end of the prior ranges, which is approximately $60 million and $115 million respectively.
Matt: Guidance for tax rate and share count remains unchanged from the prior guidance. Taking all of this into consideration, we are raising our adjusted earnings per share range to $2.75 to $2.80. This will result in strong double-digit earnings growth versus last year.
Matt: We continue to be pleased with our improving business mix and are excited about the new product innovations ramping in Q4 and early 2025.
Matt: Overall, our 2024 performance continues to track within or slightly ahead of the guidance that we set at the beginning of the year, and we are looking forward to taking another solid step forward as we finalize our plans for 2025. Now I'll hand it over to Kyle to start the Q&A. Kyle.
Kyle Rose: Thanks, Ben. In an effort to accommodate everyone in the Q&A session and keep things to a reasonable time, we're going to ask the analysts to keep the questions to one question and one follow-up. You're welcome to rejoin the queue, and we'll fit you in if we have time. With that, operator, can you please open it up for questions?
Speaker Change: Unknown Speaker 00.10.01
Speaker Change: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.
Speaker Change: The first question comes from Vic Chopra from Wells Fargo. Please go ahead.
Vic Chopra: Hey, good morning, and thank you for taking the questions and congrats on the quarter. Two questions to me. So first was on the synergies. It was nice to see the synergy step down in Q3 compared to Q2. Maybe just talk about what we should expect for Q4 and if you expect any of the synergies in 2025.
Speaker Change: Yeah, thanks for the question, Vic. I think what I've said in the past, what continues to be true, is that we continue to see a stabilization of the peak of Q2 now being offset by some of the cross selling that's coming into play. So what we expect to be another step down in terms of impact in Q4, but still a little bit of impact, and then clear it in 2025 to start off the year clean as we go into 2025.
Vic: Got it. Thank you. And then my follow up question is, you know, as we look at our models for next year for 2025, maybe just talk about how you're thinking about recon growth next year and any other potential headwinds or tailwinds to call out in 2025. Thank you.
Vic: Unknown Executive, Matthew Trerotola, Phillip Berry
Vic: Unknown Executive, Matthew Trerotola, Phillip Berry
Vic: around those plans. But, you know, we remain consistent on the fact that this year has got, you know, some some headwind on it that's going to clear as we step into next year.
Vic: Unknown Executive, Matthew Trerotola, Phillip Berry
Vic: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: The next question comes from Vijay Kumar from Evercore ISI. Please go ahead.
Vijay Kumar: Hi guys, good morning and thanks for taking my question. Matt or Ben, maybe on this fourth quarter guidance here, could you go a little bit more granular on what to be assuming for the segments? I think you had some extra days.
Vijay Kumar: In our math, it should be at least a couple of hundred basis points of Kelvin. Is that all being offset by IV fluid shortages and hurricane? Have we already seen impact from fluid shortage or is this more of a modeling assumption?
Vic: FOQ 4.
Vic: Unknown Executive, Matthew Trerotola, Phillip Berry
Vic: and the early part of September from both the storms impacting as well as some systems that slowed down a bit because of the IV shortage. So we've tried to reflect that in our core and be conservative about that impact not coming back.
Vic: Go from here through the end of the year, we expect a good healthy run to the finish in the US markets here, and we've consistently said we want to be pretty conservative about the extra days. They come at a bit of a unique time in the year where we'll know at the time how much we get from those days, but there's a decent amount of uncertainty around how much comes from those. And so again, you know, we've tried to make sure that we step into Q4 with a guy that is conservative and sets us up to build great momentum in the next year.
Vic: Understood.
Speaker Change: is of the 40 million is that 40 million still still relevant is that range now perhaps a higher
Speaker Change: and how much of that was recognized here in Fiscal 24, as you think about Fiscal 25, I'm thinking how much upside is there from synergies. Thank you.
Speaker Change: Thanks, Vijay. I think what we're seeing is really good, consistent execution against our integration plans, which have identified a lot of great opportunities for us and ability to really execute against those. So we're definitely seeing that play out in terms of helping
Speaker Change: Our margin picture, especially in the quarter from some of the actions that we took there, I think, as we said, you know, earlier in the year, we expected 10 to 15 million of benefit.
Speaker Change: and this year's Synergy, I'd say we're seeing at least that, maybe a little bit more.
Vic: in the year. How much of that plays out in the next year? We'll see and we'll give you updated information on that as we get into 2025. But as I think about the $40 million, they're very confident that we've identified all of that. If anything, we're working to make that better as we go along here.
Speaker Change: Thanks, guys.
Vic: The next question comes from Robbie Marcus from J.P. Morgan. Please go ahead.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Robbie Marcus: Asked this a different way, kind of,
Robbie Marcus: tie off, you know, some of the questions asked already.
Speaker Change: versus the health of the end markets. And I ask because this is now the second quarter in a row where you've had a good quarter, but lowered the forward quarter guide and fourth quarter is coming in below the consensus on fourth on a top and bottom line for fourth quarter. So is there something
Vic: kind of changing in the underlying
Speaker Change: Yeah, thanks for the question, Robby. Yeah, so first...
Speaker Change: For sure, the integration efforts are very much on track, going very well.
Speaker Change: Channel Integration is.
Speaker Change: is something that we've worked most of the way through and we've done it within the range of impacts that we had signaled from the start. But we also always talked about those impacts, the net impact of them being more in the earlier part of the year and less in the later part of the year. And so for sure, as we turn the corner into next year, there is an acceleration opportunity.
Speaker Change: Now what's going on in the markets? I would say outside the U.S., the recon markets have normalized through Q3 into Q4. They were, you know, very strong in the first two quarters of the
Speaker Change: has been a little bit of an issue as well. Not anything that is changing our ability to execute and deliver within our guidance for the year and very strong profit performance up against that. But we just try to be as transparent as possible as we step through the year about what our plans are and how we're executing them. And we feel very good about how we're executing through the year.
Speaker Change: Yeah, and I would add to that, Robbie, that we have seen some slowness in the start of the quarter, just given.
Speaker Change: the hurricane impacts and the cancellations of electives due to IV shortages. So we don't expect that to be recovered in the quarter in our latest guide. But if it does, and then I'd say there's some upside.
Speaker Change: there. But overall, I mean, there is some near term market conditions that we are facing, which we had to contemplate.
Speaker Change: Great.
Speaker Change: Maybe just a follow up, given extremities growth is so important to
Speaker Change: the forward progress of the company, was wondering if you could give us a little more detail on what you're seeing there broken out by a shoulder and ankle, especially within the ASA. Thanks a lot.
Speaker Change: Yeah, sure. So,
Speaker Change: really strong extremities growth. As you can see, the foot and ankle performance there is extremely strong. You know, we've been driving very strong above market growth for quite a number of quarters here, and we expect that to be able to continue. The shoulder growth has been improving towards market growth when you adjust for the, you know, some of the integration headwinds, you know, that are particularly hitting on the shoulder front.
Speaker Change: and we've got our
Speaker Change: ARG reverse product just starting to ramp. We had a little bit of impact in Q3 from that, and it'll really start to ramp in Q4 and into next year. And so we're confident that with that ARG product in the marketplace, getting beyond the integration headwinds and some nice synergy from some other shoulder products cross selling, we've got great opportunity to get shoulder quickly back above market growth rates and hold it there. And we do see very healthy shoulder growth in the ASC. We see a meaningful part of our shoulder starting to come into the
Speaker Change: The ASC environments were definitely participating in that in that trend.
Speaker Change: Thanks so much.
Speaker Change: The next question comes from Young Lee from Jeffries. Please go ahead.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Young Lee: All right, great. Thanks for taking our question. I guess maybe to follow up on what Annette said a little bit, you know, it's a hundred plus million now, going double digits.
Speaker Change: I think last year the business was doing around double digits EBITDA.
Speaker Change: You know, you recently launched some new products at conferences, made some updates to Star. So I wanted to hear a little bit about, you know, your foot and ankle portfolio. Where do you think it stands versus the competition?
Speaker Change: and then, you know, how's the expansion going in that business? Any thoughts on timeline to get it to the mid-20s range?
Speaker Change: I didn't hear the very end of that question, Young.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Yeah, I guess to some, the extension for foot and ankle.
Speaker Change: One each frame.
Speaker Change: Yeah, okay, yeah, great, thank you. So look, we're definitely very pleased with what our team's been able to do in the foot and ankle space. Yeah, we're doing very well there for a couple reasons. First is we have, between the things that we've acquired and the innovation that the team has done, we've got a tremendous product line there. It's got a number of real, very strong flagship products like our DynaNail, for example, and like the minimally invasive products that we got with Novastep for Bunion. So a good number of flagship products that are real game changers to our customers there. And then also a nice high quality, a broad range of.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: and we've got, you know, we've got some great KOL partners there, they're helping us.
Speaker Change: with the designs. So just, you know, really pleased with the path that we're on there and as we go forward, we have a really nice pipeline of innovations. But we also see most of our innovations there is made by opportunities and, you know, in some cases,
Speaker Change: There are acquisition opportunities to consider versus developing things ourselves. We don't need to buy anything else to succeed in foot and ankle, but I'm sure we will find nice bolt-on opportunities that accelerate the path of filling in some of the other opportunities that we've got there. And then finally, the margins of that business have been improving. The gross margins are very strong, you know, it's at the upper end of our portfolio and the EBITDA margins have started to climb over the past couple of years as we had talked about and still some nice room to go there in terms of scaling that business.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: All right, great. Very helpful. I guess in terms of growth next year, I mean, it'll be fueled by, you know, cross-selling, the channel integration, but you also highlighted a robust lineup of new products in pretty much all the segments.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Yeah, thanks. Yeah. So, first.
Speaker Change: and I think it's certainly something that is going to be an important piece of next year as we continue to grab on that product and start to have it ramp some in shoulder and that alongside of our great planning is going to continue to sustain our strong innovation leadership there in the shoulder segment. Second in need revision is still contributing nicely and still has nice nice opportunity and Arvis in need. We've got a
Speaker Change: Next version that coming out in the early part of next year that is going to be enable us to get to a broader market. With that, we've been expanding the amount of people using it through this year. And so we think that our nav platform there in me is going to become, you know, important piece of the puzzle as we go through next year as well. And then there are some some nice cross selling opportunities in me as well on a global basis. And then finally, in hip, that's where, you know, we really have, you know, not had the full portfolio that we've needed to have in hip in the US. And as we roll into next year, we will fill out some key parts of that portfolio. And that's going to create some nice.
Speaker Change: running room in hip. You know, only about half our knee doctors use our hip right now, which is still a tremendous opportunity for us to get after that as we
Speaker Change: So out there, the rest of that hip portfolio with a couple great offerings. And so we're definitely excited about the lineup of products. And then on the PNR side, we've got some nice additional knee brace is additional. So, um...
Speaker Change: and maybe kind of a little bit more normal market environment.
Speaker Change: All right. Thank you very much.
Speaker Change: The next question comes from Jeff Johnson from Baird. Please go ahead.
Jeff Johnson: Thank you. Good morning guys. Then maybe if I could start with two just model clarification questions Then I have a maybe bigger picture question. I wanted to ask as well, but just on model clarification Yeah, just synergies this quarter. I think around three million dollars if I put them in absolute dollar Numbers is that about right and I have yet about 18 million year to date
Speaker Change: And did you say about 100 basis points in the fourth quarter? So that'd be another like maybe three to four and put you in kind of the lower end of that 20 to 30 just or my numbers close to accurate there on the dysenergy side. Thanks.
Speaker Change: Yeah, Jeff, you're thinking about it right.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Okay, and did you at all quantify the headwinds you're expecting in 4Q from the storms and the IV fluid? That's the other clarification question, but then from a higher level, I guess for Matt,
Speaker Change: you know, historically, not historically, I guess just conceptually, you guys can kind of guided longer term to upper singles, a low double digit on recon three to 4% in P&R. We're talking about all these new products for next year, but markets maybe weren't quite as strong as you were hoping this year. You know, as I put kind of all the the puts and pulls together, the pushes and the pulls together. Should next year just kind of be conceptually within that kind of LRP kind of longer term range you've talked about before. Thanks.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Yeah, Jeff, we're not quantifying at this point that's the dollars of impact that we've seen I'd say that it has impacted
Speaker Change: and it's considered in our guidance and updated guidance that we've given here. So overall, I'd say we don't expect it to return right now in the quarter. We don't expect any additional impacts for future storms or future problems.
Speaker Change: What we've updated our guidance to include is primarily what we have seen tangibly in terms of cases that have been cancelled or volume that's been impacted because of the start of the quarter.
Speaker Change: Yeah, man, just to your questions about growth, I think the way you described our LRP is very consistent, you know, with, with how we continue to think about things as
Speaker Change: The combination that gets us that high single-digit organic growth.
Speaker Change: And so, you know, we do expect.
Speaker Change: to guide you know something consistent with what we've been saying over time which and and you know with all that we've talked about in terms of some of the headwinds.
Speaker Change: this year, certainly, you know, expecting to accelerate forward from from this year. But, you know, last year was a year that had some some pretty healthy market.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: The next question comes from Brandon Vasquez from William Blair. Please go ahead.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Brandon Vasquez: Good morning, everyone. Thanks for taking the question. Maybe first one to follow up on a short-term trend that you got a couple of questions about already. As you look into Q4, it sounds like you're baking in these
Brandon Vasquez: Unknown Executive, Matthew Trerotola, Phillip Berry
Brandon Vasquez: So one's just kind of curious, am I understanding this correctly that you're not assuming they're back, they're coming back in the corner? Is there any reason they're wouldn't or is this simply just some conservatism as you wait to see when they come back?
Brandon Vasquez: Unknown Executive, Matthew Trerotola, Phillip Berry
Brandon Vasquez: Yeah, so first, it's important to mention that.
Brandon Vasquez: Many of our businesses were impacted, not just our ortho businesses. And so when, you know, when you have things like, you know, bracing clinics that are down because of the storm, you know, that piece of the impact is something that.
Brandon Vasquez: in terms of what people are planning to do through the end of the year. And so, you know, we think some some surgeons will be able to move those cases.
Brandon Vasquez: Later in the year, some people just may not have the room and may need to roll them over into the early part of
Brandon Vasquez: of next year. So, you know, we still feel very good about how we're going to finish the year there and the nice, you know, an acceleration in the back half of the year that gives us some momentum into next year. Yeah, there's some unique effects early in the quarter. We're trying to, you know, be transparent about those as we, you know, kind of discuss how the quarter is going to go, but still very confident on how we'll finish this year and the kind of momentum we'll build next year and beyond.
Brandon Vasquez: Okay.
Speaker Change: Thanks and maybe bigger picture as the businesses are becoming integrated now.
Speaker Change: And it seems like things are rebounding a little bit. You're moving past the trough of synergies. Where are you guys kind of seeing the most strength in terms of new surgeons signing on versus just going deeper into the current surgeon installed base? And how should that trend as we go through 2025? Thanks.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: So, you know, we see our growth is going to come from both.
Speaker Change: New Surgeons and Install Base Penetration as well as market growth as well and we can see a clear path for how our recon growth in the U.S. can continue to accelerate as we step into next year as well as how we can grow above markets outside the U.S. on a consistent basis.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: The next question comes from.
Speaker Change: Kaitlyn Cronin from Canaccord Genuity. Please go ahead.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: segments that is noticeable. But for us, we like the growth fundamentals of the business, we like the innovation opportunity and we've got a diversified enough portfolio and a strong footprint to where we're able to drive.
Speaker Change: drive strong growth, you know, right through some of those dynamics.
Speaker Change: Great. Given you're launching your improved portfolio products this quarter and into 2025, how long do you expect, you know, the recovery to take in that segment?
Speaker Change: Yeah, in HIPP, again, our HIPP outside the U.S. does very well, just to be clear, because we've got some strong, some great products that have come from the acquisitions out there. HIPP in the U.S., as we've got some key products that we'll be launching, again, right around the end of the year and into the first quarter, and so, you know, we'd expect that by the time we get into the second quarter, we start to see a meaningful impact from those, and the back half of the year, you know, they're having a, you know, more substantial impact. So, you know, some of the knee acceleration and then the shoulder acceleration that's going to come with ARG will be what gives us some acceleration through Q1, Q2, and then I would say the
Speaker Change: at HIP will be a, you know, an additive contributor as we, as we get into the back half of the year with, you know, the constant ramp of the cross selling coming across all of that.
Speaker Change: Awesome. Thanks.
Speaker Change: The next question comes from Danielle Antalfi from UBS. Please go ahead.
Danielle Antalfi: Hey, good morning, guys. Thanks so much for taking the question. Congrats on a good quarter here.
Danielle Antalfi: I guess, you know, my initial question was going to be about underlying market growth and all that. But I guess maybe a better way to ask the question is, since I feel like that question has been asked at different times.
Speaker Change: is, you know, you're you're now getting through the integration of Lehman Corp. That was one of the biggest acquisition or the biggest acquisition you guys have ever done as a company feels like 2025 is a year of accelerating growth. But I guess just at a higher level, as we look at where the company goes, where to from from here, you know, once we I appreciate this is more a long term question, but
Speaker Change: When you think about capital deployment priorities and where you, Matt, envision the company going from a product portfolio perspective? Sorry, it's a pretty high-level question.
Speaker Change: Higher Growth, Higher Gross Margin Recon side.
Speaker Change: And we built a very strong P&R business that consistently grows low single digits and is a very strong cash generator. And we've step-changed the margins of the whole company in that period with plenty more to go in terms of improving margins over time. So a lot of tremendous progress over time. As we look to the future,
Speaker Change: You know, we, you know, from a
Speaker Change: core execution standpoint, the fundamentals really haven't changed. We now get a much bigger recon segment that we're focused on growing well above market through innovation and having that be a driver of our growth, but also something that systematically expands our gross margin because it has higher gross margins. And if it grows faster than P&R, we get that expansion. We're focused on also continuing to improve and shape our P&R business.
Speaker Change: that are things that can accelerate our growth, access new markets, bring key technologies and talents into the business. And over time, we'll certainly look at other segments that we could access, other segments in the ortho space that are attractive in terms of growth and margin fundamentals, or other adjacent segments that would be logical for us given the capability set that we have that might be a little bit outside of ortho and medtech but still somewhere that we're confident we can step in and add a lot of value. So the path from $1 to $2 billion has been an exciting one. We see the path from $2 to $3 billion being another exciting one that's going to generate a lot of value for our shareholders as we drive compounding value from organic growth, inorganic growth, margin.
Speaker Change: Awesome. Thanks for that response, Matt. That was helpful.
Speaker Change: Thank you.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: The next question comes from Mike Matheson from Needham and Company. Please go ahead.
Mike Matheson: Yeah, thanks. I just wanted to ask one on the international side. So, you know, the Lima integration there, is that sort of lagging where you are in the U.S. a little bit? And, you know, do you see any risk of disenergies there carrying into next year?
Speaker Change: Yeah, no, it's not lagging the US. The difference is there. So we did all the direct channels quickly and really got them behind us by the, you know, by the middle of the year started them, you know, really planning for them the latter part of last year, even before the close. The difference out there is that there are some hybrid markets where we were direct in one business and indirect in the other. And we've had to step, you know, step through market by market in terms of what's the best solution there and what's the right timing to move from a hybrid market solution to either a fully direct or a fully indirect solution. And we've been through most of those as well. As I said, we're through about 90% of the revenue outside the US. We've already been through the channel integrations, but there are.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Okay, got it. And then just on the on the knee side, you know, I know several of your bigger competitors have seen a pretty big mixed benefit from cementless knees. So do you have any plans to enter that segment of the market?
Speaker Change: Yeah, we have, we have cementless knee offerings and I've had, you know, I've also had, you know, very good healthy growth in our cementless knee offerings.
Speaker Change: Okay, got it. Thanks.
Speaker Change: Thank you.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: As a reminder, if you have a question, please press star 1. This is a follow-up question from Vijay Kumar. Please go ahead.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Vijay Kumar: Hey guys, thanks for excusing me back in. Ben, maybe one on free cash flows here. The year-to-date trends, is that just due to deal timing when you look at free cash performance? What is the real underlying…
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Yeah, yeah. Thanks, BJ. Like I've said, I think we're focused heavily this year on
Speaker Change: Making sure that we're doing the right investments to set ourselves up to integrate Lima well.
Speaker Change: Set ourselves up to lean into the growth opportunities as we bring this transformative acquisition into the company.
Speaker Change: And you've seen us progress, I'd say, throughout the course of this year to where we're getting better, we'll get even better in Q4.
Speaker Change: as we start to, you know, get a lot of these heavy investments behind us.
Speaker Change: We still very much see a pathway to 70 to 80% plus free cash flow conversion over time. Again, next year we'll still be spending on integration related items and, you know, investing for some of the growth as well. But I'd say, you know, as we think about, you know, seeing that progress, you're going to see us take a step forward next year and then another step forward a year after that as we work towards that 70 to 80%, you know, more steady state cash flow conversion.
Speaker Change: Understood. Sorry. Is that so free cash will be positive in fiscal 25? Is that a fair statement?
Speaker Change: Yeah, that's a fair statement.
Speaker Change: Fantastic. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Kyle Rose for closing remarks.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Matt Paretola: I want to end the call. This is Matt here. I want to end the call by thanking our team members for their commitment to excellence day in and day out.
Speaker Change: We have a lot of momentum and excitement across the organization to remain committed to delivering value for all of our internal and external.
Speaker Change: Thank you for listening today and for participating, and we look forward to sharing our third quarter, fourth quarter results with you in the new year.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry
Speaker Change: Unknown Executive, Matthew Trerotola, Phillip Berry