For joining us at this year's Canaccord Genuity Musculoskeletal Conference. My name is Caitlin Cronin. I'm one of the medical device analysts here at Canaccord Genuity. I'm pleased to be joined this morning by Enovis, a medical device company focused on products spanning the orthopedic care continuum. We'll begin with a fireside chat with the Enovis team, and I'll try to leave a couple of minutes at the end for any questions. With me today is Ben Berry, CFO, and Louis Vogt, Group President of Recon. Before we begin, I want to remind everyone of any relevant disclosures, which can be found on our conference and our firm website. With that, we'll begin.
I think it would be great if we could just start out with a brief intro from both you and to Enovis and what really makes the company differentiated in the ortho space.
Yeah, thanks for having me, and Louis here. Caitlin, nice to see everybody here in the room. You know, we at Enovis, our strategic focus is to really aggressively grow our reconstructive business, which we've done over the last several years, going from about a $300 million business to a billion dollar business last year through aggressive moves from both organic innovation and through acquisitions. We've been working really hard to continue to build that business into a sustained above-market grower. At the same time, we've been really working to shape and improve our market-leading prevention and recovery business. We're about a billion dollar player in a $4 billion-$5 billion market.
We do this through our EGX business system, which is really focused on embedding strong process around commercial execution, innovation, acquisitions, and talent, and all of this with the goal of creating an above-market grower on the top line, continuous margin expansion, and continued growth through acquisitions so we can become a compounder in terms of value creation for our shareholders and potential investors. Overall, we've done a lot of work in the last several years to go from just, you know, about a $1.2 billion company to now an over $2 billion company, continuing to grow and shape our margins up, and we continue to build the company and shape it through both organic and inorganic means.
That's great. You released earnings recently. What do you want investors to understand coming out of the Q4 results?
Yeah, I mean, 2024 was a year for us of transformation. I mean, we acquired Lima at the beginning of the year, and we spent the first six months really integrating the commercial channels, which, you know, as we did that, we had some disruption as we were putting things together. As you saw our progress over the course of 2024, we really accelerated, you know, throughout the course of the year, both on the top line and from a margin perspective to where, you know, as we exited the year, we had nice good momentum. We were back to double-digit growth in our recon business in Q4. Our prevention and recovery business was continuing to grow in that 3% range, and then we improved our profit margins by 210 basis points at the same time.
We created a lot of good exit momentum from 2024, and that's really continued as we've stepped here into 2025.
Can you just briefly talk about your 2025 guidance and just the assumptions built into that and if there's room for upside?
Yeah, we tried to set a margin or our guidance for 2025 with the thought of, okay, where are we coming from and what does the exit momentum look like based on what we did in 2024? Because we won't have a lot of the disruption in front of us here as we step into 2025, you'll see our growth accelerate at the corporate level. We've improved our growth outlook versus what we finished in 2024. We've also shown that we've continued to improve our margins both from a mix standpoint and getting after another year of synergies from the deal that we did with Lima. We've guided that as well in terms of, you know, accelerated growth, margin improvement this year.
What we've also talked about is we've continued to get up the curve on free cash flow generation, which will take a positive step in that direction here in 2025 as well. We've tried to set the guidance with a view of conservatism as well, just trying to make sure that we're thoughtful about the end market environments. Overall, we're excited about the trajectory we're on and what we're seeing so far in 2025.
Matt Trerotola, CEO, announced his retirement also on the call. I mean, just any more color on his plans for when he will transition and your progress on the search for a new CEO?
Yeah, you know, Matt's been the CEO for over 10 years. He led Colfax through a major transformation from a diversified industrial company to then, you know, a two-thirds FabTech, one-third MedTech company back in 2019, and then has led the, you know, the spin-out of ESAB and then the creation of Enovis and through the acquisitions that I described, with the most recent one being Lima, and really put us on a good trajectory as an organization. He's at a time in his life where he's been the CEO for over 10 years and done a lot of good things. His youngest daughter just went to college, so he's an empty nester at the same time, and he's going to be close to 60 by the time that he finally retires.
He is in a position of life where he wants to pull back a little bit and spend a little bit more time doing personal goals and some more board work versus being full-time a road warrior. Overall, I think he feels like the company is in a really good position to continue on the legacy that he has built. In terms of the search, it is going well. I mean, we are trying to move at pace. Obviously, cannot comment on timing or anything like that, but I think our view is that we have got a lot of interest and that we will be able to get a nice, strong dynamic leader to come in and take the reins and really lead us into the next phase of the journey.
You also touched on the potential impact from Mexican tariffs on your earnings call. I mean, just remind everyone in the room kind of what you said on the earnings call and how quickly you could maybe, you know, divert manufacturing to, you know, avoid costs in the future, et cetera.
Yeah, I mean, I think one of the things that's still a bit of a fluid situation right now with tariffs, I think if you look at our business, we're half and half, you know, PNR and Recon. Our Recon business is really not exposed right now with the current tariff environment. Really where we have some exposure is on the PNR side of the business where we have a factory in Tijuana, Mexico. What I said on the earnings call was our exposure with regards to the goods flow from between the U.S. and Mexico is about $3 million-$4 million a month before we mitigate any of the potential impact. Now, we've had two months of exemptions so far. The first month was just an exemption while they continued to negotiate between the U.S., Mexico, and Canada.
There is a most recent exception that's been put in place with regards to a trade agreement, the USMCA. A lot of our products qualify for that USMCA. We are in the process of hoping that that framework provides an ongoing delay or extension or exemption with regards to these tariffs, but we are fully prepared to continue to mitigate any of the potential impacts that come in. What you saw from us through that post-COVID inflationary period was we were very aggressive in being, you know, sourcing and driving productivity in our supply chain and then using price in our PNR business to offset and mitigate some of the impacts. We were able to do that over the course of a couple-year period to fight all of that inflation back.
We would expect the same thing to happen here if these tariffs go into place and they stay there, you know, into perpetuity. Hopefully, like I said, this USMCA or some of the negotiations that are happening will provide, you know, some framework for this continued exemption. You know, our view is right now that based on where they are and based on kind of the threat of these tariffs, that the first quarter is likely unimpacted. Depending on what happens here, we would still expect the second quarter to have very marginal or minimal impacts as well. It would really be about a second half of the year thing that we'd be fighting this back from a mitigation standpoint if the exemptions don't hold.
Got it. Maybe let's turn to Lima. You guys spent a good amount of time last year integrating Lima into your commercial channel. Can you remind everyone just the rationale for purchasing Lima and then where you stand today from an integration perspective?
You know, we looked at Lima before we acquired a company called Mathys back in 2022. Our view was we really liked what Lima was doing. Our entry at that point in time into the European markets we felt would be better with Mathys as a little bit smaller scale and gave us the opportunity to really lean in with our business system to drive improvements because they were a little bit lower on the margin perspective. They also, you know, were a little less, you know, kind of from an entry point from a price acquiring standpoint. We acquired Mathys and then did some really good things with regards to driving good top-line momentum, getting after strong gross margin improvement over the course of a couple of years.
As we looked at the business and we saw that Lima was going to be available, we saw that it would be a very natural fit. As we did our diligence, we saw, one, we really liked that about 40% of their business was in extremities or shoulder. We really liked that in markets where they were strong, Mathys was not as strong. It was highly complementary in nature. You know, as we got to know them more through the process, we really found a set of dynamic leaders within that business that we were able to, you know, think about coming into our organization and playing a bigger role as well.
It was a very, you know, exciting time for us to see how that was able to come together and do it in a way where we maintained good growth momentum last year outside the U.S. as we grew double-digit. While we were integrating the businesses, we were able to announce what the combined leadership team looked like, right, even before we closed the deal at the beginning of the year. We were able to get after, you know, cost synergies right away where there were duplicate costs in terms of management or things where we, you know, spent money that were duplicate that we were able to take out of the system right away.
Getting after our synergies in year one where we've talked about finishing on the top end of the guidance that we gave of the $10 million-$15 million there, and then seeing nice runway for both, I'd say, cross-selling momentum and continued synergy opportunity, we're really excited about the value creation and the transformation that Lima has been able to bring to our company. Now we're 50/50 mix between Recon and PNR. We're 50/50 extremities versus large joints, and we're 50/50 U.S., OUS on the Recon business. Very, very much more diversified in terms of our growth opportunities as well.
You ended the year with about $322 million of contribution from Lima, which was, you know, ahead of your expectations. I think you noted on the call that mostly occurred OUS. You know, what really drove the OUS outperformance? In the U.S., I know that that business you've noted has been challenged in the past. I mean, how are you able to perform with Lima in the U.S. as well?
Yeah, you know, I think it really built upon the good momentum that both Lima had independently and that we had on the Mathys side with the things that we were doing in several markets. I think from our perspective, one, doing a lot of acquisitions, we knew that we had to get the leadership team in place early. By doing that, we could really hit the ground running in terms of making sure that we were focused on what the channel was going to do, both outside and the U.S., frankly. Outside the U.S., it was less disruptive because, like I said, it was more complementary of putting those together where, you know, Lima was stronger in some markets and shoulder, and we were able to leverage that sales force to continue just doing what they were doing.
In certain cases, combining territories or expanding our footprint in the scale just gave us more momentum and excitement in the outside the U.S. markets. In the inside the U.S. market, it was more challenging because we had to integrate and essentially the sales force was overlapping, and we had to consolidate that quickly because we've done lots of acquisitions that says that channel can be choppy unless you move fast. We had to move fast, and we did that within the first six months of last year.
Again, the momentum that we accelerated through the course of the year, the excitement that we have, not only just from the feet on the street, but just, you know, going and seeing the teams excited about what we can do from an innovation and portfolio standpoint has been really positive in terms of the contribution that Lima has brought on our company. I'm sure Louie will talk more when you get into specific products.
That's great. You know, what's left from a cost synergy perspective and how do you expect these to really hit in years two and three of the merger?
Yeah, so the things that we're doing now are very much more project-based execution from an integration standpoint. Like I said, the unknown was making sure that the channel got solidified there quickly. Now it's about executing against the things that we've identified, both where there are entities that are going to be rationalized or systems that are going to be consolidated or manufacturing that's going to be leveraged. There are opportunities for us to continue to move down that path of accelerating our synergies. I'd say that the biggest tranche of remaining synergy is on the operational standpoint where Lima was manufacturing product in northeastern Italy, and we're moving production from Switzerland to Italy to take advantage of the cost advantages there. That is going to be the next step in terms of, you know, stepping up into synergies, and that's going to come in that 2026 time period.
That's great. Maybe let's turn to Recon and give Louie some airtime and start with shoulder. Can you give the audience just a background of, you know, the more muted shoulder growth in 2024 and what you guys have done from a launch perspective to really mitigate that in 2025?
Sure. Thanks, Caitlin. You know, when we say muted, I mean a lot of that is connected to what Ben was just talking about with the big Lima integration. Naturally in the U.S., our sales force being an independent channel, there's the synergies that come with that. There's a lot of territory duplication, and you have to make tough calls about, you know, who do you want to lead where and what dirt are you going to assign to which player. You know, in the course of that, there's disruption, there's relationship disruption, account disruption, et cetera. You know, we made the strategic decision with Lima in the U.S. market and really globally, but in the U.S. market where it's very difficult with those indirect players, you know, that we're going to rip the Band-Aid off in the beginning.
We're going to make the right calls about people and talent. You know, we were going to integrate them well and get them up to speed quickly. We did all of that, and we set ourselves up for a big year too. You know, I think 2024 in the U.S., shoulder or otherwise, was really, you know, sort of a year of, you know, getting the backends to work, getting our systems to talk to one another, getting trained up on product, getting the channel footprint in place the right way. 2025 is really a year of going out and executing on the cross-selling capabilities and opportunities there.
That's great.
You know, in terms of, Kaylyn, in terms of what's got it all fired up again, you know, we've always had a very differentiated shoulder solution. I got to sit through Rob Ball, I don't know if Rob's in the room, but I got to sit through Rob Ball's talk on shoulder innovations. He talked about the inlay reverse total shoulder and how it's dramatically changed shoulder arthroplasty. You could see the mixed trend that went that's going away from anatomic towards reverse. What made Enovis famous or at the time DJO was we were the original inlay shoulder arthroplasty. We still have a pretty unique identity in terms of how we do it in our mechanics. We think it's very advantageous for the patient and provides more range of motion with, you know, scapular impingement-free range of motion.
We have seen a lot of our competitors sort of go in that direction more recently. We still have a very differentiated position that is not quite what our portfolio has. You know, building upon that was one of the things that we wanted to do. You know, we have launched some new solutions in the glenoid for bone loss, which is really important. That market is really, really growing fast. We are the beneficiaries of getting that out the door kind of in Q4. A lot of surgeons that had to use different solutions for these anatomies and these pathologies have come back. Of course, new surgeons interested in, as you know, just like Rob was talking about, interested in the inlay philosophy and how they can optimize their implant design have also come to the table.
You know, I think it's a combination of a little bit of a disruption last year, but good disruption. We're stronger because of it. Now some new products are throwing fire on what is a solidified channel.
Great. Let's move to just total joints. You've also seen a little bit more muted hip growth recently, but have been working to fill the portfolio gaps and return the segment to more robust growth. I mean, maybe just talk a little bit about where you had holes, what you're planning on launching, and just the expectations of the cadence of that growth kind of returning in that segment.
Sure. Sure. You know, one of the beauties of our business is that, you know, what we've been able to create with so little, frankly. Hips, like some other parts of our business, have a lot of room for portfolio expansion and depth. You know, about 80% of our hip sales are done with two stems. I know there are a lot of my colleagues and peers in here that are in the industry that are jealous of that. I'll let you know that it only took us two stems. The downside, and by the way, that gives us a lot of runway for future growth and innovation and expansion, which we need to do. Frankly, with Mathys and Lima, we've done. We just do not have the ability to sell them in the U.S. yet.
You know, in that vein, you know, a big trend in the U.S. market had been towards direct anterior procedures and collared hip stems. It's something that we simply didn't have. You know, we have a short, a medium, and a long-term outlook on how we want to address that segment, that very rapidly growing segment of direct anterior hips. You know, we have, you know, the first solution coming out in the back half of this year. We're excited about that. You know, the medium term is getting some of the products that we sell very successfully outside the United States into the United States, which we, you know, have a very differentiated position. In fact, you know, in the hip stem we acquired from Mathys, the Optimys Stem has the lowest risk of revision after 10 years of any hip stem.
That includes the collared stem. We are excited about bringing that over into the United States. That is a very unique and durable differentiated product. In the long term, we have some goals there as well that I have to, you know, be careful about what I am sharing. I think one of the things about a big trend like that when we have such a relatively small portfolio is you are vulnerable, right? We felt that last year. I think help is on the way there. We are already seeing our hip business really take off. It really was not an acetabular problem. It is just more of a portfolio breadth problem. That should be shored up here pretty quick.
Just to turn briefly to Foot and Ankle, you guys have really grown this business about $100 million plus run rate by acquiring a number of companies over the last few years. I mean, talk about the outlook for you guys in that segment. I mean, particularly with the Zimmer proposed transaction for a Paragon in the space. I mean, how do you feel like your place to continue to do well?
Yeah, Foot and Ankle is a wonderful market. It's, you know, it's Foot and Ankle and shoulder are both growing, you know, high single digit. Foot and Ankle may be a little bit, a little bit even more than that. We've outpaced the market every year since we've gotten into the space. We did do a string of pearls approach to building that business. You know, that's hard to pull off. One of the things that we really pride ourselves on is being an M&A accelerator, right? That's sort of that Colfax DNA. Matt, our CEO, is as good as anyone in this business or almost any industry at M&A. You know, we know how to do it. We know what to find, and we know how to do it once we find it.
I think Foot and Ankle is a great example of our capability there. You know, that market's growing fast, but we also have so much runway left for that portfolio expansion and build out. You know, it's really, it's a fun time for the Foot and Ankle business. They have market-leading growth quarter after quarter. You know, our office location in the U.S. for Recon is primarily the Texas Triangle. You know, so it's Dallas, Austin, and Houston. Those guys in Houston have a lot of fun when they, you know, they double or sometimes triple the market. It is a fun time to be in that space.
I think as you think about, you know, long-term prospects of that, I mean, you know, we got a lot of work to do on, you know, building out our channel to have the footprint across the entire United States and, you know, a whole world of expansion internationally that we've barely broached. I think, you know, in terms of Paragon, I think they're a great company. I tip my hat to them. They've had a lot of wonderful innovation. I think, you know, what they've been able to pull off is really remarkable. I think, you know, for Zimmer, that's a fast-going category to get into. There's a very established, you know, way to monetize these businesses. I, you know, I'm not going to talk about product comparables, but, you know, I think it's a good addition to them.
You know, all these acquisitions bring a lot of disruption. Foot and Ankle, Foot and Ankle is the most embryonic of all of them. If you know the space and you know how the channel network is built out there, it's a little bit of the Wild West of all the businesses, I will say. You know, that disruption is difficult to manage and we'll be opportunistic where we can. Overall, you know, I think for the Foot and Ankle market itself, I don't think innovation is going to stop anytime soon. My guess is Zimmer Biomet is going to try to put the pedal to the metal as well. Good space to be in.
We're really comfortable with our portfolio and in particular our innovation engine and how quickly they're able to pump out new products that really change the game and building on that foundation we have with some really differentiated Nitinol-based products or memory metal-based products. We got a good runway ahead of us.
Maybe the last minute or so we can touch on enabling tech with ARVIS, and then you also recently launched your 360 Nav system. Maybe just give a little more color on that latter system and then also your expectations for innovation and launches in ARVIS this year.
Yeah. We've spent the last few years really building out sort of, you know, the foundational elements across the continuum as we call it. You know, sort of looking at the workflow from pre-operative, inter-operative, post-operative and kind of where do we want to be and what do we need to do and how can we make no regret decisions, you know, because there's still a lot of change in the air with how these things are going to work, how their economic models are going to be established. Is it going to work primarily in the U.S.? How are we going to do it OUS? What are you going to do in the ASC, et cetera? You know, we made a lot of no regret decisions. You know, one of those was Arvis.
We think that augmented reality will play a significant role in the future. You know, with 360 Nav System, it's more of a traditional navigation system. It's an optical tower. It gives us the freedom and flexibility to get into any execution tool that we want. When we talk about execution tools, we're talking about things that literally facilitate the execution of the surgery, i.e., robotics, things along these lines. You know, guidance and navigation, we got that covered. We also have a foundation to go where we want to go with execution support. You know, I think we're, you know, I don't want to reveal too much about what we want to do beyond that right now. You know, as Arvis has matured, particularly in the shoulder, our surgeons are getting a lot of value out of it.
We've done our best to try to keep it quiet and to keep it in a, you know, we're very focused on patient care and being, you know, patient-centric with what we do with innovation, responsible innovation, really focused on getting the accuracy and the quality of the outcome right. You know, and then of course you move on to usability and, you know, things along these lines, industrial design. We're sort of at that phase right now where we're trying to work out how to make it smooth, efficient so that we can onboard new customers and with a very small learning curve and they can get better at what they do. That's kind of where we are in the process right now.
I, you know, I think you're going to see us want to get a little more aggressive with it in the back half of the year. We definitely have a leadership position there. It's definitely the most capital light approach to navigation and guidance in the shoulder. We think that the clinical outcome improvements are going to be.