Enovis Corporation (ENOV) Q3 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the Enovis Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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.

Good morning, everyone, and thank you for joining us today for our third quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining on the call today are Matt Trerotola, Chair and Chief Executive Officer; and Ben Berry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovis.com. We will also be using a slide presentation on 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're making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. 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, who will begin on Slide 3. Matt?

Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. Let's start on Slide 3. For 9 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. In the third quarter, we delivered reported growth of 21% year-over-year and 6% on a comparable basis with a little bit of FX tailwind. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mix impact of Recon, the step change impact from Lima and overall productivity improvements. Overall, we are pleased with our accomplishments through the first 9 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. On to Slide 4. In Recon, we delivered 57% reported global revenue growth. Recon grew 9% on a comparable basis in the quarter or about 10% when adjusted for our estimated impacts from band integration-related dis-synergies. In the quarter, U.S. Recon grew 9%, including 11% growth in U.S. Extremities and 8% in Hips and Knees. 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. In the international market, we grew 8% in a more normalized market environment, while we continue to execute our integration plans. As we've previously communicated, we've been intently focused over the first 9 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. 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 million to $30 million of negative revenue impact. From a pipeline perspective, we are 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 of our revision cones and knees, augmented glenoid system and shoulders and fill key portfolio gaps in hips. In the third quarter, we also anniversaried our 2023 acquisition of Novastep. I'm incredibly proud of our Foot and Ankle team. Over the last 4 years, we've successfully integrated 5 lower extremity assets into a comprehensive business unit and global commercial channel that's on track to eclipse $100 million in revenues with consistent both well above market and an innovation pipeline capable of driving double-digit growth for many years to come. 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. Turning to Slide 5 and P&R. Our 3% comparable growth reflects a stable market environment and disciplined execution. We continue to work on improving this portfolio and strengthening our market-leading positions. We're doing this by launching new innovations in bracing and recovery sciences and shifting our investments across both portfolios towards higher growth high-margin, higher-value segments. We look to continue to leverage EGX tools to drive consistent productivity gains, sustainability and improved portfolio mix. Overall, I'm pleased with our performance through the first 9 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. Now I'll let Ben take you through the P&L details. Ben?

Thanks, Matt. Hello, everyone. I begin on Slide 6. 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 positive currency impact. 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. Overall, our Recon business grew 9% with approximately 150 basis points of growth headwinds from integration as we anticipated. Our underlying growth in P&R remained stable, growing at 3%. We continue to realize the benefit from the improving global mix of our business and our margins. Third quarter adjusted gross margin was 58.9%, up 70 basis points year-over-year. This growth was driven by favorable segment mix that includes the addition of Lima. Lima cost synergies continue to read through positively in our operating expenses as well. 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. Third quarter effective tax rate was 21% compared to 24% last year. Interest expense was $11 million for the quarter versus $6 million in 2023. Overall, we posted adjusted earnings per share of $0.73, an increase of 30% versus prior year. Turning to Slide 7. We are narrowing our prior guidance to reflect the results through the first 9 months of the year. We expect revenues of approximately $2.1 billion. This tightens our guidance range, we expect comparable revenue growth of 5% to 5.5%, which contemplates impacts from the recent hurricanes and IV shortages that we've seen in our results thus far in the fourth quarter. As a reminder, the comparable growth rate includes approximately 100 basis points of integration headwinds that we outlined earlier in the year. 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. We are narrowing our expected adjusted EBITDA range to $373 million to $378 million. 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 range which is approximately $60 million and $115 million, respectively. 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. To summarize on Slide 8, the third quarter marked a modest acceleration in our growth as our Recon commercial channel stabilized and we began to see some early benefits from cross-selling. We continue to be pleased with our improving business mix, and are excited about the new product innovations ramping in Q4 and early 2025. 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?

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 keep the questions to one question and one follow-up. We'll 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.

[Operator Instructions] The first question comes from Vik Chopra from Wells Fargo. Please go ahead.

Two questions from me. So first was on the synergies. It was nice to see the dissynergy step down in Q3 compared to Q2, maybe just talk about what we should expect for Q4 and if you expect any of dissynergies in 2025?

Yes. 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.

And then my follow-up question is, 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?

Yes. From an overall standpoint, again, we've consistently talked about this year having that point or so of negative drag from the integration. As Ben just said, that clears as we step into next year. And then as we put together our guidance for next year, we'll consider the rest of the considerations around market growth rate assumptions, execution, new products, et cetera, to set our plans and the guidance range around those plans, but we remain consistent on the fact that this year, it's got some headwind on it that's going to clear as we step into next year.

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

Matt or Ben, maybe on this fourth quarter guidance here. Could you go a little bit granular on what are we assuming for the segments? I think you had some extra days -- our math, it should be at least a couple of hundred basis points of tailwind. Is that all being offset by IV fluid shortages and hurricane? Have you already seen impact from fluid shortage? Or is more of a modeling assumption for Q4?

Yes, sure. So as we mentioned in the comments there, as we stepped into Q4, certainly a lot of things going well, but on the market front in the U.S., there definitely were some disruptions in 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 quarter and be conservative about that impact not coming back as we work through the quarter. And then certainly as we came through the end of October and into November, we're seeing a much more normal and healthy market environment, and we're optimistic about where things go from here through the end of the year. We expect a good healthy run to the finish in the U.S. markets here. And we've consistently said we want to be pretty conservative about the extra day, 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, we've tried to make sure that we step into Q4 with the guy that is servative and sets us have to build great momentum into next year.

And the -- I guess, on the margins here, maybe Ben for you, are we running above plan, the operating margin execution was pretty impressive despite the tightening of revenues here. Is -- of the $40 million, is that $40 million still relevant? Is that range now, perhaps higher? 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?

Yes. 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 our margin picture, especially in the quarter from some of the actions that we took there. I think as we said earlier in the year, we expected $10 million to $15 million of benefit in this year's synergies, I'd say we're seeing at least that, maybe a little bit more in the year. How much of that plays out into 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, very confident that we've identified all of that. If anything, we're working to make that better as we go along here.

Next question comes from Robbie Marcus from JPMorgan. Please go ahead.

Maybe to ask this a different way, kind of tie off some of the questions asked already. I guess, how are you thinking about the integration and your process and your success there so far 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 top and bottom line for fourth quarter. So is there something kind of changing in the underlying growth? Is there any sort of reset? And what gives you the confidence that you'll accelerate into next year when we've seen kind of the forward course move down a touch?

Yes. Thanks for the question, Robbie. Yes. So the first -- for sure, the integration efforts are very much on track, going very well, and we've very importantly, gotten all the channel integration in the U.S. behind us, which we set out to do quickly and put it behind us. And we've gotten about 90% of the channel integration outside the U.S. done. And so that kind of larger risk of channel integration is something that we've worked most of the way through, and we've done it within the range of impact 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. Now what's going on in the market, I would say, outside the U.S., the recon markets have normalized through Q3 into Q4. They were very strong in the first 2 quarters of the year and then there's been more of a normalization that took place, and that's continuing here. And we expect that to that to be what turns into next year. And so that's part of what has affected our trajectory through the year for sure. I think the U.S. markets this year have been fine, but they certainly haven't been great. And so some of the sequential progress through this year from the market standpoint. It 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 that. And we feel very good about how we're executing through the year.

Yes. And I would add to that, Robbie, that we have seen some slowness in the start of the quarter, just given the hurricane impacts and the cancellations of elective 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 there. But overall, I mean, there is some near-term market conditions that we are facing, which we had to contemplate.

Maybe just a follow-up, given Extremities growth is so important to the forward progress of the company. I was wondering if you could give us a little more detail on what you're seeing there, broken out by shoulder and ankle, especially within the ASA.

The strong extremities growth, as you can see, the Foot and Ankle performance there is extremely strong. 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 -- some of the integration headwinds that are particularly hitting on the Shoulder front, and we've got our ARG reverse product, just starting to ramp. We had a little bit of impact in Q3 from that, and it will 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 ASC environment. So we're definitely participating in that trend.

The next question comes from Xuyang Lee from Jefferies. Please go ahead.

I guess maybe to follow up on and put an echo a little bit, it's $100-plus million NAV growing double digits. I think last year, the business has been around double-digit EBITDA. You recently bought some new products at conferences and made some updates to start. So wanted this year a little bit about your Foot and Ankle portfolio, where do you think it stands versus the competition and then how sort of is that expansion going in that business? Any thoughts on time lines to get it to the mid-20s range?

I didn't hear the very end of that question, Young.

Yes. I guess just on the EBITDA expansion for Foot and Ankle....

So look, we're definitely very pleased with what our teams have been able to do in the Foot and Ankle space. We're doing very well there for a couple of reasons. First is, we have -- between the things 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 Bunyan. So a good number of flagship products that are real game changers to our customers there. And then also a nice high-quality broad range of products and things like plates and screws. They are very important in terms of certain having the channel be able to serve the surgeons there completely. So first, tremendous product line and a product line that we have a constant pace of innovation, great team there driving a constant pace of innovation. Second, strong aligned channel. We've done hard work in the first couple of years of that integration to create a strong aligned channel that we have assembled that the majority of the channel now is fully dedicated to our products for the offerings that we have, and that creates a degree of teamwork and alignment and focus that is enabling us to succeed significantly in the marketplace. And we've got -- third, we've got some great KOL partners there that are helping us with the design. So just 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 as make buy opportunities. And in some cases, 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 at the upper end of our 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.

I guess just in terms of growth next year, I mean it will be fueled by cross-selling the channel integration but you also highlighted a robust lineup of new products in pretty much all the segments. Which of the new products would you highlight as being more meaningful for next year and how's the [Arvis] vendor launch going? And what should we expect for [Arvis] in 2025?

Yes. Thanks. So first, for Shoulder, the ARG is extremely important, already have an impact that we can see kind of meaningful impact they'll have in Q4 and then big impact in the first half of next year. So the ARG is big and Shoulder, we've gotten great feedback on it. And so we're very excited about that rolling out there. Second, there are some really nice cross-selling opportunities in shoulder that we'll be pursuing, like the custom Promat product there that's attractive for specific cases. And then Arvis in shoulder is something that people are excited about, the surgeons that have gotten their hands on it have given us great feedback on it. And I think it's certainly something that is going to be a piece of next year as we continue to rev on that product and start to have it ramp some in shoulder and add alongside of our great planning is going to continue to sustain our strong innovation leadership there in the shoulder segment. Second, revision is still contributing nicely and still has nice opportunity. And Arvis in Knee, we've got a next version of that coming out of the early part of next year that is going to be -- enable us to get to 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 knee is going to become an important piece of the puzzle as we go through next year as well. And then there are some nice cross-selling opportunities in me as well on a global basis. And then finally, in hip, that's where we really have not had the full portfolio that we've needed to have in hip in the U.S. 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 running room in hip. We're 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 fill out the rest of that hip portfolio with a couple of great offerings. And so we're definitely excited about the lineup of products. And then on the P&R side, we've got some nice additional knee braces and additional spine braces coming through continuing. We've got some next generations in things like lasers and chocolate therapy between this year and next year. We've also done some nice clinical and regulatory work in some of our Recovery Sciences products that are going to give us an opportunity to expand indications and market space there. So very excited about the product lineup that is part of what's going to help us accelerate from this year into next year and through next year on top of clearing through the cross-selling synergies and maybe kind of a little bit more market environment.

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

Ben, maybe if I could start with 2 just model clarification questions, then I have a maybe bigger picture question that I wanted to ask as well. But just on model clarification, dissynergies this quarter, I think, around $3 million, if I put them in absolute dollar numbers. Is that about right? And I have you had about $18 million year-to-date. And did you say about 100 basis points in the fourth quarter, so that would be another like maybe $3 million to $4 and put you in kind of the lower end of that 20% to 30%. Just -- are my numbers close to accurate there on the dissynergy side?

Yes, definitely thinking about it, right.

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, not historically, I guess, just conceptually you guys have guided longer term to upper single to low double digit on Recon, 3% 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 to hear. As I put kind of all 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?

Yes. And we're not quantifying at this point, the absolute dollars of impact that we've seen. I'd say that it has impacted 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 impact for future storms or future problems. What we've updated our guidance to include is primarily just the -- what we have seen tangibly in terms of cases that have been canceled or volume that's been impacted because of the start of the quarter.

Yes. And then, Jeff, to your questions about our growth, I think the way you described our LRP is very consistent with how we continue to think about things as the combination that gets us that high single-digit organic growth. And so we do expect to guide something consistent with what we've been saying over time, which -- and with all that we've talked about in terms of some of the headwinds this year, certainly expecting to accelerate forward from this year. But last year was a year that had some pretty healthy market tailwind on it. And so it's probably going to take a little bit of time for us to keep shaping the portfolio to where we can deliver the kind of growth that we had in the year like last year.

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

Maybe first one to follow up on a short-term trend, we've got a couple of questions about already. As you look into Q4, it sounds like you're baking in these kind of IV shortage and hurricane impacts, maybe that the delta a little bit of the Recon growth expectations coming down slightly. I guess, just to push on it and make sure we're understanding it correctly. Typically, we see an impact like this. Typically, we see ortho cases get rescheduled pretty quickly, I think if you look back historically within the ortho space. So one, just kind of curious am I understanding this correctly that you're not assuming they're coming back in the quarter? Is there any reason there wouldn't or is this simply just some conservatism as you wait to see when they come back?

Yes. So first, it's important to mention that many of our businesses were impacted, not just our ortho businesses. And so when you have things like bracing clinics that are down because of the storm, that piece of the impact is something that would take a lot longer to come back as the patients aren't rescheduled for surgery at another time. They might differ for a while versus if you have a surgery that's canceled maybe gets fit into the schedule later or not. And so we've seen in situations like this that when surgeries are pushed back or when there's some kind of a disruption like this, some of it comes back quickly. Some of it takes more time to come back and maybe a little of it doesn't come back. And so we're remaining to see how that plays out. It's also the end of the year, which is very full time at the end of the year and a year when I think people took some healthy vacations through the summer, et cetera, and they're looking to run like crazy through the end of the year. So I think schedules were pretty backed in terms of what people are planning to do through the end of the year. And so we think some surgeons will be able to move those cases later in the year, some just may not have the room and they need to roll them over into the early part of next year. So we still feel very good about how we're going to finish the year there and acceleration in the back half of the year that gives us some momentum into next year. Yes, there's some unique effects early in the quarter. We're trying to be transparent about those as we 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.

Okay. And then maybe bigger picture as the businesses are becoming integrated now, and it seems like things are rebounding a little bit. You're moving past the trough of dissynergies 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?

Yes. So we see great opportunity both in adding new surgeons around the world as well as still nice specific opportunities to sell into the installed base like the hip opportunity that I talked about earlier and some of the cross-selling opportunities. So we see our growth is going to come from both new surgeons and installed 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.

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

Just starting with Foot and Ankle, you guys are obviously doing well and growing above the market. But what do you see in terms of end market dynamics and procedural demand in that segment?

Yes. I think the question was about Foot and Ankle end market dynamics. Look, we really like the fact that Foot and Ankle is a high single-digit growth end market and also an end market where there's still plenty of unsolved things in terms of better solutions indications, it's more fragmented, and there's plenty of unsolved problems or partially solved problems to work on solving. And so that creates a nice market growth dynamic as well as an innovation cadence opportunity, and that's really what we like about the segment. I think there -- it seems to me there's a practical reality that on a month-to-month or quarter-to-quarter basis, there's a little more variability in Foot and Ankle than maybe in some of the traditional large joints segments 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 strong growth right through some of those dynamics.

Okay. And given you are launching your improved Hip portfolio of products this quarter and into 2025, how long do you expect the recovery to take in that segment?

Yes. In Hip, again, our Hip outside the U.S. does very well, just to be clear, because we got some great products that have come from the acquisitions out there. Hip in the U.S. as we got some key products that we'll be launching, again, right around the end of the year and into the first quarter. And so 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, they're having a more substantial impact. So 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 Hip will be an additive contributor as we as we get into the back half of the year with the constant ramp of the cross-selling coming across all of that.

The next question comes from Danielle Antalffy from UBS.

Congrats on a good quarter here. I guess 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 on a different time, is you're now getting through the integration of Limor. That was one of the biggest acquisitions -- or the biggest acquisition you guys have ever done as a company. It feels like 2020 is a year of accelerating growth but I guess just at a higher level, as we look at where the company goes, where you from here, once we -- I appreciate this is more a long-term question. But when you think about capital deployment priorities and where you envision the company going from a product portfolio perspective? It's a pretty high-level question, but...

Thank you for the question. And yes, it's an exciting arc that we've been on from a Medtech business that was a little over $1 billion back in 2018-2019 time period and had a very strong small Recon growth business, but a P&R business that really was not strong at that point in time in terms of the performance. And then here, about 5 years later, we've almost doubled the size of the business into a dedicated company in Nova, $2 billion plus in revenue. We're now more than 50%, comfortably more than 50% Recon in that higher growth, higher gross margin Recon side. We're accelerating that Recon business now through the backside of the integration back to well above market growth rates. And we built a very strong P&R business that consistently grows with 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, we -- from a core execution standpoint, the fundamentals really haven't changed. We've now got 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 into a stronger and stronger low single-digit business and looking for ways that, that could turn over into something that's more of a mid-single-digit business through portfolio work on that side and having that business continue to be a very strong cash generator. We expect to continue to do thought bolt-ons within the ortho space that are things that can accelerate our growth, access new markets bring key technologies and talent 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 but 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 to $1 billion to $2 billion been an exciting one. We see the path from $2 billion to $3 billion being another exciting one, that's going to get a lot of value for our shareholders as we drive compounding value from organic growth, inorganic growth, margin expansion and climbing up the cash flow curve over time.

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

I just wanted to ask one on the international side. So the Lima integration there, is that sort of lagging where you are in the U.S. a little bit? And do you see any risk of dissynergies there carrying into next year?

No, it's not lagging the U.S. The difference is there. So we did all the direct channels quickly and really got them behind us by the middle of the year, started them 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, indirect and the other. And we've had to 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, 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 U.S., we've already been through the channel integration, but there are a few hybrid markets that the right thing to do is to take a little bit more time to find the right time to get through the integration. We don't see that carrying any meaningful amount of breakage risk into next year. We're just trying to be transparent about the fact that there are a few more markets that will still be worked through.

And then just on the Knee side, I know several of your bigger competitors have seen a pretty big mix benefit from cementless knees. So do you have any plans to enter that segment of the market?

Yes. We have cementless knee offerings and have had -- I've also had very good healthy growth in our cement with offerings.

[Operator Instructions] We have a follow-up question from Vijay Kumar.

Ben, maybe one on free cash flow here. The year-to-date trends, is that just due to deal timing when you look at free cash performance what is the bill underlying free cash performance if you ex out the noise? And what's the right way to think about free cash flow resin? Should there still be 80% free cash run rate business?

Yes. Yes. Thanks, Vijay. Like I've said, I think we're focused heavily this year on making sure that we're doing the right investments to set ourselves up to integrate Lima well set ourselves up to lean into the growth opportunities as we bring this transformative acquisition into the company. 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 as we start to get a lot of these heavy investments behind us. 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 investing for some of the growth as well. But I'd say, as we think about 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% more steady-state cash flow conversion.

Sorry. Is that -- so free cash will be positive in fiscal '25? Is that a fair statement?

Yes, that's a fair statement.

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

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. 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 for participating, and we look forward to sharing our third quarter -- fourth quarter results with you in the new year.

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