Enovis Corporation

Ladies and gentlemen, thank you for standing by and welcome to the ANOVA second quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, simply press star one again. I would now like to turn the call over to Derek Lekow. Please go ahead, sir.

Thank you, Paula. Good morning, everyone. Thank you for joining us today for our second quarter results conference call. I'm Derek Lekow, Vice President of Investor Relations. Joining me on the call today are Matt Trutola, CEO, Chris Hicks, Executive Vice President and CFO. And also joining us this morning for a quick introduction before we get to the prepared remarks and Q&A is Ben Barry, We previously announced we'll serve as Inovus' CFO when Chris retires at the end of the year. Our earnings release was issued earlier this morning and is available in the investor section of our website, inovus.com. We'll be using a slide presentation to walk you through today's call, which can also be found on our website. Both the audio and slide presentation of this call will be archived on the website later today and will be available until the next quarterly conference call. During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the Safe Harbor language in today's earnings release and in our filings with the SEC. Actual results may 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 intent to update them, except as required by law. With respect to any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our press release and in the appendix of today's slide presentation. You will note that we have provided reconciliation tables for each of the 2021 quarterly historical results on an adjusted standalone basis for comparability. With that, let me turn it over to Matt for some opening remarks, and then we will start the earnings presentation. Matt?

Thank you, Derek. About a month ago, we announced our planned transition for the Inovus CFO role, which will culminate in Chris's retirement at the end of the year and Ben taking on the role. After his retirement, Chris will remain with us in an advisory capacity through 2023 to ensure a smooth transition. Chris was one of my first hires after I joined the company as CEO back in 2015. His leadership has been pivotal to our operating improvements and to our strategic transformation to a pure play med tech company. He also raised the bar for the global finance function and attracted great talent like Ben, which strengthened the capabilities of the team. He had been considering his retirement path for a while, and I know that he's looking forward to spending more time with his family and friends and pursuing other passions. Ben joined us in early 2020 as the CFO of our MedTech segment after many years of finance leadership experience in the sector. We've been impressed with how quickly he's learned the business and immediately rose to the COVID challenges that emerged as he walked in the door. Ben has made a meaningful impact to our operational performance and growth strategy in a short time, and he's a strong leader with high integrity, and I'm confident that he'll build on the strong foundation that Chris has established. I look forward to working with Ben as we establish Inovus as a high-performing MedTech company. You'll get to know Ben more in the coming quarters. I've asked him to briefly introduce himself on this call. Ben?

Thanks, Matt. I'm really excited about the opportunity and the extremely bright future we have in front of us at Inovus. I've spent my entire career in the MedTech space, and prior to joining Inovus, I served in a number of finance leadership roles within Novartis and Alcon, and I played a key role in the successful spin-out of Alcon in 2019. What attracted me to Novus is the really great potential this business has with fast growth, expansion capabilities, and a great foundation and business system that was established by Colfax. Being part of the organization over the last couple years has only strengthened my view of significant growth opportunities we have as a company. I really look forward to partnering with Chris during this transition and continuing to work with Matt, Brady, and the rest of the leadership team to build Novus into a high-value growth company. Now I'll turn it back over to Matt, who will start on slide three. Matt?

Thanks, Ben. Now let's get into the Q2 discussion. We've had strong growth and solid operating performance so far this year, executing in line with our plan. We remain confident in achieving our strategic goals of sustainable, high single-digit organic revenue growth, 20% adjusted EBITDA margins, and over $2 billion in annual sales in the coming years. I want to take a moment here to acknowledge the foundation of our success, our global team of talented associates. I want to thank them for their contributions in the first half of 2022. In June, we had our first leadership conference as Inovus, and it was face-to-face. It's great to be doing things a lot more face-to-face these days. It was incredible to see the energy and excitement that we have created through the separation and the launch of Inovus. We discuss growth plans, how we're applying our EGX toolkit throughout the company, and our purpose, values, and behaviors that shape our continuous improvement culture. I am incredibly proud of our team and confident in their ability to continue to build a fantastic growth company. Turning to slide four, we're achieving our operational goals in 2022 with double-digit top-line growth and organic growth in the solid mid-single digits. Our organic growth of just over 5% for the first half of the year has us on track for our 6% to 9% full-year guide and clearly shows our capability to grow high single-digit organic in more normalized markets. On this page, you can see our second quarter highlights, including an 11% increase in sales. Once again, both of our business segments outperformed their markets, leveraging our innovation and commercial muscle to gain share and providing reliable service to customers despite the supply chain challenges. We also achieved 11% growth in EBITDA, and we held the line on EBITDA margins even with the unprecedented inflation and some lingering COVID-related market impacts, such as delayed surgeries and pressure on staffing. We had 30 basis points of margin improvement in the first half and still expect to have strong improvement for the full year. That is a solid step towards our 20% strategic goal. We completed two acquisitions in the quarter, Insight Medical Systems and 360 MedCare. And on slide five, I want to highlight the Arvis technology that we acquired via Insight. ARVIS AR is a key element of our surgical enabling technologies ecosystem. As part of our strategic focus on delivering measurably better outcomes, we are focused on creating technology-enabled workflows for surgeons that are tailored to their procedures and to their operating environment. In shoulder, our match point solution is used broadly by surgeons to digitally plan their surgery and create a 3D printed patient-specific instrument to enable greater efficiency and precision. In hip and knee, there is strong surgeon demand for guidance and positioning to drive repeatable outcomes and for the marketing benefits of having the newest technologies for patients. Existing guidance and robotic platforms improve accuracy, but can be costly and consume quite a bit of time in the procedure and too much space in the operating theater. Our strategic focus has been on delivering even higher accuracy and efficiency at a smaller footprint and at a lower cost. We've partnered with Insight for the past three years to accelerate the development and commercialization of their breakthrough guidance technology. With the acquisition of Insight, we are launching our state-of-the-art augmented reality surgical guidance solution, Arvis, with initial focus on hip and knee. Arvis is a cutting-edge, easy-to-use technology that is highly precise and accessible at a lower cost and footprint than current assisted surgery offerings in the marketplace. The ARVIS headset provides the surgeon with critical real-time data while leaving an unobstructed view so the surgeon never takes their eyes off the patient. With a single instrument set and no need for preoperative scans, ARVIS is a streamlined and efficient part of the overall surgical procedure. The feedback from our first 200 cases has been fantastic, with surgeons at the world's top institutions like the Mayo Clinic already seeing great success using this technology. And even more exciting, the small, lightweight, self-contained nature of Arvis is a perfect solution for the high-growth ASC segment. Arvis is just the fuel our teams need to continue our strong share gain in knee and hip implants in the U.S. and also generate additional high-margin revenue streams. We also see potential for extension into extremities and for globalization. Turning to slide six, we summarize our 47% recon segment growth that includes high single-digit organic growth up against a tough comp. This performance is well above market growth rates again and includes 14% growth in U.S. hips and knees and 8% growth in U.S. extremities with double-digit growth in shoulder. Our year-to-date organic growth overall in U.S. recon is 10%, which we believe is about three times the market. Our Mathis business pro forma organic growth was about 10% in Q2, and we've only just begun to see the synergy benefits we expect as we proceed through the second half. As we commented last quarter, we're seeing some short-term fluctuations at this stage of the COVID recovery, but we remain encouraged by the continued growth in elective surgery volumes around the world. Our prevention and recovery business also demonstrated attractive growth as shown on slide seven. Our 4% sales per day growth was better than underlying markets and in line with our three-year plan to create a consistent mid-single-digit grower in this segment. In this quarter, we grew faster in international P&R markets as U.S. growth moderated a bit due to a strong comp and some short-term market pressure. Our global gracing business also grew mid-single digits, and we have a strong pipeline of new product launches ahead, which will support solid mid-teens vitality index. We saw additional supply chain and wage inflation in Q2 in P&R and are deploying additional price increases to offset it. We remain confident in our ability to pull back the significant price-cost compression we saw in this business over the past few years as inflation stabilizes. With that, I'll turn the call over to Chris, who will unpack our financial results a little further, starting on slide 8. Chris?

Hey, thanks, Matt, and thank you for the kind words earlier. And, Ben, it's great, absolutely great to have you as our future CFO. I'm really excited for you and the future of the company with you as the finance chief for the business. Thank you. We had another quarter of double-digit sales growth in Q2, including strong contributions from our recent acquisitions. Year-over-year currency headwinds stiffened from one point last quarter to three points in the second quarter. As previously discussed, we had about two points of lower sales from fewer selling days, and our Q2 sales per day growth of 5% was similar to Q1 and about in line with our expectations for the upcoming third quarter. Matt covered other sales details earlier, including the impact from COVID on procedures and staffing, and our continued significant outperformance versus the market. Growth margins were down 40 basis points versus the prior year due to the higher levels of inflation that read through this quarter. As a reminder, the inflation pressures that started with COVID had accumulated to about $30 million by the start of this year, and we had realized about $10 million of pricing increases through our sales channels. This $20 million of net pressure has further increased in the first half of this year. We continue to deploy pricing adjustments, and we are seeing signs of inflation stabilization that should lead to margin relief as we get deeper into the second half of the year. Our EBITDA grew in line with revenue, and margins were consistent with our previous guidance. Despite inflationary pressures, our existing businesses expanded margins by 70 basis points due to a combination of sales growth and structural cost reductions. This margin expansion would have been greater except for the inflation and currency translation impacts. As the U.S. dollar strengthened, we incurred a $2 million currency translation reduction in our EBITDA in the second quarter. In the second quarter, we also executed a tax planning project that created a one-time benefit and reduced our Q2 adjusted rate down to 9%. We are expecting the rate to be in the low to mid-20s for the remainder of the year, and in the low 20s for the full year. Our Q2 adjusted EPS includes about 2 cents from the currency translation impact and 10 cents of tax benefit. You put these together, and that would normalize to about 51 cents, which is in line with expectations. So overall, we delivered against our operating forecast for the quarter and dealt with some FX pressures. Let's turn to slide nine and talk about our outlook for the full year and some of the key contributing factors. Our organic growth range remains unchanged at six to nine percent, which allows for a range of outcomes related to the COVID recovery pace. Our current trajectory likely points us toward the middle of that range. As observed throughout the MedTech space, July was a slower month, But we are seeing signals of an acceleration into the remainder of the quarter and are confident of again achieving mid-single-digit organic growth in Q3. We continue to expect further acceleration in the fourth quarter, in part due to easier comps. As commented earlier, we are experiencing an increased level of currency translation pressures and have updated our full-year outlook for this factor with another two to three points of pressure. Overall reported growth is now expected to be 8% to 12%. Acquisitions continue to be on track with earlier expectations. Our currency impacts are affecting both the top line and profitability. I mentioned that we took a $2 million hit to EBITDA in Q2 because of this, and the full year impact is expected to be $10 million. We have been successfully battling the challenges in our operating environment and feel that it's prudent to leave our operating forecasts in place but we are shifting our overall guidance by $10 million to reflect this large currency impact. So we're now targeting $235 to $255 million of EBITDA in 2022. Our full-year EPS range has shifted a nickel to reflect the net effects from currency and the tax benefit discussed earlier. For the third quarter, we expect sequentially lower revenue from Q2 to account for the slower July start and the vacation season. And despite this, we're expecting Q3 EBITDA margins to be in line with the second quarter due to increasing momentum of our cost and pricing actions. Wrapping up on slide 10, we're pleased that our strategy for organic growth outperformance continues to clearly read through in our results. Our businesses are well positioned in their markets with robust innovation pipelines and effective operations that serve our customers well while managing through dynamic business conditions. Our operating execution is complemented by our proven M&A program, and we continue to acquire the right businesses and technologies to further strengthen our growth profile. And with that, Paula, let's go ahead and open up the call for questions.

Thank you. The floor is now open for questions. To ask a question at this time, please press star 1 on your telephone keypad. If at any point you would like to withdraw from the queue, please press star 1 again. Your first question comes from the line of Jeff Johnson of Baird.

Thank you. Good morning, guys. Can you hear me okay? Yeah. Yeah, Jeff. Good morning. Good morning, Jeff. Hey, Matt. Hey, Chris. Derek, how are you?

All right. So just a couple questions here. I think you did a good job kind of explaining kind of the pacing here that we should expect on organic growth over the next few quarters. That was going to be my first question. But let me shift instead, I guess. On recon, I just want to understand you put up 8% selling day adjusted growth. You did talk about 8% extremities growth in the U.S., 14% hip and knee growth. With HIPAA and E14 and U.S. extremities up eight, what pulled you down then to eight overall for recon? I'm assuming maybe that's an OUS of your own business that's being de-emphasized as Mathis kind of scales up, but just kind of help us understand the differential there. Thanks.

Yeah, Jeff, there are two things. One, there's a little bit of effect from the little bit of OUS business that we had that you're correct is being in a couple of places that are under some pressure and is being migrated from a math standpoint. But that's a small effect. The other thing is that in the U.S., we're getting very strong growth in hip, in knee, and in shoulder. In foot and ankle, We're on a good path on that business. But as we've talked about before, there's a couple things going on there. We actually have very strong growth in our MedShape business and in some of the key technologies in that business. And overall, the MedShape and Trillium businesses that we acquired are growing at or above market rates. But the Star business we've talked about before is going through a period of some work that we have to do to get the business on the right course in terms of some regulatory work. And so Star is not contributing to growth in that business right now. And we also in the first half of the year, late last year in the first half of the year, we're working through a channel consolidation to create one aligned strong channel for our foot and ankle business. And with that came some additions and some subtractions in the channel, which resulted in a little bit of short-term churn in the first half of the year, particularly in the second quarter. And so foot and ankle is the single-digits part that offsets all those other double-digit parts. And so that puts us very much on track to build this recon portfolio to be a consistent double-digit performer at this larger scale. scale based on the pieces that are already there. And then the clear path we have in foot and ankle, we expect to be well into the double digits in the back and a half of the year in foot and ankle. So we're feeling good about the path there.

All right, that's helpful. Thank you. And then maybe just two clarifying questions. One, you pointed to the market pressure on the P&R side. You know, we kind of think about P&R often being driven by You know, travel, trauma that happens, car accidents, sports, things like that. And, you know, obviously the world is opening back up. So what's the market pressure there? And you said you've seen some signs of inflationary pressure stabilizing. You know, I think you'd be one of the first companies to acknowledge that. So any insight on stabilization there that you're seeing would be helpful. Thanks.

Yeah, sure. Yeah, so first of all, in terms of P&R market pressure, one, a piece of that business is driven off of elective surgery and with a little bit of a delay there. And so even some of the Q1 pressure there was in elective surgery flows into Q2 market pressure. for us in that business. And so that's, you know, particularly in the U.S., you know, there's a little bit of impact on that elective surgery part of that business. And, you know, there's some parts of that business that are very clinic heavy and And also, you know, serve much older parts. Our foot care business there really focuses in on, you know, diabetics and more, you know, higher, more aging population. And, you know, I think there were some drops in clinic visits, you know, through the second quarter as well in that business. So those are really the two areas. sources of pressure in PNR, both of which, as elective surgery continues to expand, and as we get to the other side of COVID, those should fully clear. Now, the second was about inflation. You asked about stabilization of inflation. Yeah, if we go back six to nine months, we still would every month find about new inflation. We'd have the next supplier coming to us with an increase with all the reasons or another increase in freight rates or a fuel surcharge on free rates. So we were in a period where things kind of kept going up. And that even lasted into the first quarter of the year. We had expected some stabilization, but we continued to see some more increases coming through. But But in the last three months, really, there is a different, you know, kind of different texture to that. And, you know, we don't see the kind of week-in, week-out increases coming through. We're seeing much more flattening of inputs, prices, and freight rates. In some cases, we've seen some small reductions like freight rates out of China spiked, and then they've come down a little bit. And in some cases, we're starting to get a little bit of a decrease. Maybe we sourced a second supplier, and now we're in a position with a little different market. And a second supplier, we're in a position to start bringing things back down. So we're not calling it in terms of things coming back down. And we certainly can't be certain that they won't go up again. But we do see a stabilization that we expect should enable us to start to pull back a little bit of price cost in the back end. as we get to Q4, because we have quite a bit of price through that business and have the opportunity to turn that into some margin reversal at the gross margin level.

All right, very helpful, thank you. Thanks, Jeff.

Your next question, one moment. Your next question comes from Alana Vikchapra of Wells Fargo.

Hey, good morning, and thanks for taking the question, too, for me. I just wanted to dig in a little bit deeper on the procedure volume trends that you saw. Can you talk about the impact that staffing shortages have had on procedure volumes across both P&R and recon? And then I had a follow-up. Thanks.

Yeah, sure, Vic. You know, volume trends, again, I think, you know, it's been talked about a lot out there, and I'll just give our version, but certainly, you know, The year started slow, kind of building off of the slow finish to last year. As we kind of headed through and into March and even April, there was really good momentum building there. And you heard very little about cancellations and staffing shortage and things like that. But then as we made our way through the second quarter, late in the quarter, kind of late May, early June, We started to hear again about higher cancellation rates related usually to COVID testing, sometimes to staffing issues. And we also have seen isolated areas of We call it staffing pressure, but in some cases, it's really longer vacations. I think we've got some people that, you know, whether it's the surgeons or their staffs that, you know, have been kind of not doing a whole lot of vacation in the last few years. And I think in June and July, we saw in some cases, you know, kind of more significant, you know, vacation downtime than we have in the past in those months. And so those are, you know, some of the things that we've seen in the elective surgery area, really speaking about the U.S. But we also have gotten really good signals about what's expected to happen in August and September. You know, there's... you know, kind of a better short-term trend in terms of cancellations. And scheduling is, you know, is suggesting that, you know, there's going to be a nice trend through the quarter in terms of people getting kind of back aggressively into a ramp of of elective surgery, and then certainly there's plenty of pent-up demand that people want to get at as we come down the stretch of the year here. On the PNR side, again, we get the secondary impact of those elective surgery trends on a part of that business, and then I think there's been a smaller effect that You do have some staffing pressure on different clinics out there that was probably a little bit of a factor in the market in the first couple quarters of the year as well.

Thanks for that comprehensive answer. It's super helpful. My follow-up question was on M&A. You've closed a number of deals in the past couple of years to tuck in acquisitions this quarter as well. But just given the recent pullback in the market, should we expect a larger deal from you guys, or is the focus going to remain on these tuck-in M&A late-stage technology deals? Thanks so much.

Yeah, thanks, Vic. Yeah, so I think, you know, we've been consistent in saying that the kind of things we've done over the past, few years are you know very representative of you know the kind of things that we expect to do in in the next couple years we've done uh you know a uh you know, a set of highly strategic deals that in some cases bring great technologies that accelerate the growth of our business and or open up, you know, new applications and segments. In some cases, we've brought new market landscape, whether it's geographic like the Mathis deal or whether it's, you know, getting into a new segment like the foot and ankle deals. And so those have all been driven off a strategy, and they've made our company better. They've created a higher organic growth profile, a higher gross margin profile, opportunities to get at synergies and scaling that drive us up the EBITDA margin curve. And so that collection of things that you've seen us do over the past couple years is very representative of what we'd expect to do in the coming years. And And those were deals that ranged from deals with no revenue to almost $150 million of revenue. And so there's lots of possibilities for us over the next couple years that would be similar to those. And we've obviously got great balance sheet room in order to do those. Clearly, there are also a little bit larger things that we can think about over time. And we'll always be uh considering those and and how they could you know accelerate our strategy move our company forward create a lot of value for our shareholders we've got a great capability to do deals and integrate them integrate them well but but i still say you know in the short term expect to see uh more of the same because there's a lot of it in our pipeline uh obviously a little different climate in terms of valuation uh and opportunity there to maybe get a little more reasonable evaluations than in the past and And so we're really excited about the M&A opportunities in the next couple years here, Vic.

Your next question comes from the line of Matthew Michon of KBank.

Hey, good morning and congratulations, Chris, on retirement. I just want to start with EBITDA. In the move down, the revision, of $10 million, you know, distinctly for FX. It's a way to think about it that you are seeing, you know, incremental supply chain logistics inflation pressure, but your ability to kind of offset those is keeping the range just to what FX looks like, given like organic growth seemingly is coming in, you know, in line with what your expectations are.

Yeah, Matt, you've peeled that apart pretty well, I think. There's two separate things that we're dealing with. There is the inflation that we've had, the supply chain challenges in the business that Matt spoke to, and I guess I referred to a bit in my comments as well. And what we've seen on that is that, you know, there's a pressure curve that was building all through, you know, since COVID initiated. We started some pricing actions late, you know, sort of last year and into this year that's helped to ameliorate some of that. But we've still been, you know, we still have that curve that's on us. Now, as we see the inflation stabilizing, And these price increases are reading through better. We expect that that pressure in particular will continue to be contained and maybe moderate. Now, there's a question there about exactly how that will play out. But if the stabilization that we see and the price increases that we're working on are all realized, we should get to a better position. And we expect to get to a better position on margins. The separate issue is with respect to currency. And that is something that we just don't have as much control over. And we thought it was important to make sure that folks see that we're executing our operating plan. in line with what we'd expected. And there is that inflation pressure and the pricing dynamic that keeps us from moving up in our original guidance. But at the same time, we've got to deal with this and address the, and recognize, acknowledge the currency pressure that's coming through. So the operating plan, operating effectively, I think our teams are doing a really good job in a difficult environment. But then we do have to adjust the guidance range for the currency impacts.

Okay, I think that's fair. And then just switching over to the M&A you've completed, I just want to make sure that the revenue expected from those two are immaterial, the guidance for 2022. And then on Arvis, is it agnostic to the different implants, or is this a proprietary surgical platform for your – I know this –

Yeah, Matt, let me take those. And one thing I do want to put a point on in Chris's comments is that the 10 million of FX pressure is since we set the guidance, right? So we have 10 million of new FX pressure beyond our original guidance, and that's why we're changing the range, just for the avoidance of doubt there. So, you know, the revenues from the new acquisitions, yeah, they'll be, you know, sort of just a handful of million dollars of impact in this year. And so it's, you know, and... On the ARVIS side, you know, there'll be some costs coming in, and so, you know, no real profit contribution there in the year. But, you know, to your question about ARVIS, well, I will say, but certainly those will both ramp nicely as we move into next year and beyond, both support the growth in existing parts of the business and also bring some additional revenue as well. But as far as Arvis, this is a terrific technology that we think is going to hit a real need. Obviously, there's an appetite for these kinds of technologies now that it's very well established in the industry. And Arvis is designed to be more precise, but very importantly, also designed to be much smaller, more streamlined, and particularly for the ASC environment, just a terrific technology. fit. And yeah, it is an implant agnostic solution. But from a business model standpoint, we're certainly looking to use it to serve our existing surgeons and help them and grow in a strong way with them and also get some recurring revenue coming from their use of this product in their processes. But then also, we do definitely see Arvis as a great opportunity for us to use as part of how we continue to attract competitive surgeons. And, you know, as we do that, you know, we'll have a business model that certainly encourages them, you know, if they're excited about the technology, to be also bringing their implant volume over to us over time and also a great recurring revenue stream on the Arbus product as well.

Okay, excellent. Look forward to the demo. Thanks.

Your next question comes from Jason with Subloops Capital.

Hi, thanks for taking the questions. First off, you mentioned you're implementing price increases. I'm wondering where you think you're going to have success. You've got somewhat of a wide range of orthopedic products in different markets, such as hips and knees versus extremities and obviously the physical therapy business. So could you give us some color in terms of where you think you're seeing success or where you think you can get success or where you're seeing success right now?

Yeah, Jason. So our P&R segment is where we had the most inflation come the earliest and where we've done a lot of price and we continue to do more price. And There's different pieces of that segment, but the bracing business is the largest part of that segment. And there, there's a range from Medicare-made price increases. We're working through with the other insurers, getting increases that help our reimbursement business there. We've been able to several times now make direct price increases. increases into the clinics and our distributors. And then some of the changes from Medicare and insurers create some relief on that front. And we've made some traction on GPO price increases there. And so it is something we have to do channel by channel and sometimes customer by customer. And so it's been building over time. But that's, you know, in the bracing business, whereas like in our rehab business, that's something we can just put a price increase through because it's a product that's sold into rehabilitation clinics. And so we've had a couple price increases into our rehab business that are just, you know, change the price list, get it through the system, you know, as well. And so we had, you know, about in that billion dollar P&R platform, we had just about a percent of price you know, already last year, and we expect to have in the range of 2% of price this year. And that, you know, if we get stabilization in our inquest and our freight rate, That's what, as Chris talked about in the back half of the year, gets us to start pulling back some gross margin, particularly in Q4, and then we would pull back more next year in that kind of a scenario. And if we get more inflation, we do now have a lot of clear kind of muscle and process and experience to be able to get to the places where we can get it through and get it through. On the recon side, it's a very different dynamic. There definitely is a difference price climate in recon. And, you know, we have, you know, seen some specific instances here in the U.S. and some specific countries in Europe where, you know, we've been able to get some positive price. But, you know, there also has been a trend in that recon business to typically have a couple percent of price down every year. And I'd say there's definitely going to be a lot of price dialogue in recon this year and next year. There was some last year. I think most indications are that that's probably going to result in more of a flattening or maybe a modest increase for a little bit of time rather than the normal couple percent a year. And in our business with the high growth we've got, if we get flattening of price with nice operating leverage, I think that'd be a good environment to be in, say, next year.

Thanks. It's very helpful. And also, in terms of your longer-term EBITDA margin improvements, I think you've put a pretty decent goal out there. I think it's 500 basis points by 2024. How does inflation and FX and all those other pressures work into that assumption? Are those sort of pressures that may delay you getting to that level, or is that already built in when you kind of put out those numbers or that expectation?

Yeah, so we shared a kind of very clear plan for how we're going to get those 500 basis points, and I think that plan is still fully intact. I'm very confident that we can get that improvement and get to 20% plus EBITDA margins. I'm also confident that we'll take a good, healthy step forward on that here this year. And that's because the key elements of it are still very much intact. We've taken out some of the structural costs as we did the separation, and we've had some other cost actions underway this year and plans for next year. We are getting the growth and the operating leverage right. the productivity that we can get, you know, with that growth. And we've got clear plans for how to scale those acquisitions that came in at low margin levels, but high gross margin levels. And, you know, we've got clear plans for how, starting as we exit this year and into the coming years, how we scale those acquisitions. And so all that's intact. And we're getting price. We're getting a lot of price. And so the opportunity to eventually pull the price cost pressure back in our P&R business is very real. So I still feel very confident in that 500 basis point. I think we've clearly got a short-term challenge in terms of, you know, a little bit of delays in getting a stabilization on inflation and a little bit of FX pressure, you know, that's, you know, creating a little bit of headwind against that initial short start, but the entire plan to get 500 basis points is still very secure.

Thank you. That's very helpful. And then I guess one sort of housekeeping type question. Can you give us a little color in terms of what the hip and knee growth breakout was and any kind of qualitative information in terms of what's driving that growth?

Yeah, so we shared – the hip and knee that we shared on the page there is U.S. hip and knee because we don't yet have masses in our core numbers. And as we shared, we were kind of well into the double digits there. Certainly the – The knee part of that is the strongest. We grow very strongly in knee, many times market, and that's partly driven by how successful we're being in the ASC with our tremendous Empower Knee a tremendous Empower Knee product. But also in hips, we're confident that we grew it at multiple times market. So, you know, well into the double digits for our hip and knee, and as we said, double digits as well for shoulder. And, you know, in our Mathis business, our hip growth, you know, they're a real leader in hip, and their hip growth was very strong there. well above market. And we've shared previously that we expect, you know, that products will bring in from the U.S. our Ultivate product and our Empower to, you know, significantly improve their knee and shoulder growth. And so, you know, we're feeling very good about Mathis being 10% proform in the quarter on the back of strong hip growth. And then we've got, you know, the products needed coming through to get the other parts very strong. So, you know, really good arc in our rebound business.

Very helpful. Thanks. I'll jump back in queue.

At this time, this does conclude today's question and answer session for today's call. I will now turn the floor back over to management for any additional or closing remarks.

Thank you, everyone. Thanks for joining us. If you have any further questions, please contact Investor Relations. Have a great day. Thanks, everybody.

Ladies and gentlemen, this does conclude today's call. Thank you for your participation. You may now disconnect.