Enovis Corporation

and welcome to the Inovus first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. And now I would like to turn the conference over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Thank you, Marylise. Good morning, everyone, and thank you for joining us today on our first quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Caratola, Chair and Chief Executive Officer, and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, Inovus.com. We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on slide three. Matt? Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. We had a strong first quarter, but before I begin to discuss the results, I want to welcome the MEMA organization to ANOVUS and recognize the efforts of our strong global teams who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into one company with a global focus, we're managing the organization on a combined global basis, and we use pro forma growth for comparative purposes. For year-over-year comparisons, our prior year financials have been updated to include the acquisitions at Lima and Novistep. Let's start on slide three and talk about some of the quarter's highlights. We had a transformational start to the year. We completed our planned acquisition of Lima, made significant progress on our integration plans, and carried forward momentum from 2023 across our geographies and business units. We delivered reported growth of 27% year over year and 5% on a pro forma combined basis versus very strong comps. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mixed impact of recon growth, productivity improvements, stable inflation and pricing trends, and the step change impact from Lima. We closed the Lima acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we've completed in the past few years. Overall, a strong start to the year. In recon, on slide four, we delivered 66% reported global revenue growth. Pro forma recon grew 7% year-on-year in the first quarter, which includes a 2% to 3% negative impact from integration dis-synergies in line with our plan. U.S. recon grew 4%, including 8% growth in U.S. extremities and flat performance in hips and knees against a very strong prior year comparable of 22% growth in our core Novus business. Outside of the U.S., we grew 10% in a resilient market. We've achieved significant progress integrating the LEEM acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short-term growth impacts across anatomies and geographies as we've worked through the integration of our commercial channels. These fall well within our projected estimates, and our expectations for the full year remain intact. We look forward to ramping cross-selling opportunities as we move into the second half of 2024. I'm excited about the initial traction we're seeing with our market-leading Power and Ultimate products globally. We continue to expand market access with the clearance of our Ultimate small shell in Q1 in Europe. We also have a strong pipeline of innovation as we continue the U.S. rollout of the Empower Revision Me, controlled ramp of Argus 2.0, and selling Lima's 3D printed trabecular titanium cones for use with our Empower Revision System, one of our first key cross-selling opportunities. I'm also very excited to announce that just earlier this week, Argus received 510K clearance for use in shoulders. This timing aligns well with our planned launch of the augmented glenoid component of our flagship Altivate reverse shoulder system in the second half of the year. Our foot and ankle team continue to launch great new differentiated technologies like the Arsenal Reload that are keeping the vitality high and helping drive very strong double-digit growth. These great new technologies, alongside the cross-selling potential of the combined portfolios, offer a significant opportunity to accelerate growth in the second half of 2024 and set us up with great momentum as a billion-dollar-plus, fast-growing recon business entering 2025. In PR, on slide 5, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plans. Recovery Sciences led growth, boosted by continued double-digit laser growth, and global bracing continued to grow above market rates. Our new product pipeline is robust and includes the new OA knee brace called Roam, additional spine bracing products, and the next generation of clinical electrotherapy products for our Recovery Sciences teams. Adjusted EBITDA margins in P&R improved 50 basis points year over year as we continue to use EGX tools to drive consistent productivity improvements and sustained traction on price versus cost. Now, I'll let Ben take you through the P&L details. Ben? Thanks, Matt. Hello, everyone. I'll begin on slide six. We are pleased to report first quarter sales of $516 million, up 27% versus the prior year. and 5% on a pro forma basis. This compares to strong prior year organic core growth of 9%. Our teams have been working really hard to integrate our global Lima acquisition that closed January 3rd.

We've been extremely pleased so far with the collaboration in our teams and the high quality integration plans that we've begun executing against. Our underlying growth in P&R and recon continues to be solid, and while still early, our integration efforts are slightly ahead of our original plans.

First quarter adjusted gross margin was 58.7%, up 70 basis points year over year.

The growth was driven by leverage from higher sales, favorable segment mix, which includes the addition of LEMA, and cost leverage. Our first quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1 2023. First quarter's effective tax rate was 23%. This is compared to 21% last year. Interest expense was 20 million for the quarter versus 6 million in 2023. Overall, we posted strong adjusted earnings per share of 50 cents.

Fourteen percent earnings growth versus the prior year. Foreign currency exchange had an unfavorable impact of approximately two cents in the quarter. Turning to slide seven, we are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of 2.06 billion to 2.16 billion. This is slightly above our previous guidance range, which contemplated 7% pre-LIMA organic growth, double-digit recon growth, and low single-digit P&R growth. As we go forward in 2024, we will be reporting on pro forma results. Our updated guidance range increase translates to approximately 5% to 6% pro forma growth and includes acquisition-related impacts.

In recon, the pro forma outlook translates to high single-digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross-selling and new product launches.

We continue to expect stable P&R growth in the low to mid-single digits as was reflected in our original guidance.

We expect adjusted EBITDA in the range of $368 million to $383 million, which includes a modest increase to the range based on our Q1 performance.

Our guidance for depreciation, interest and other expenses, tax rate and share count remains unchanged from the prior guidance.

Taking all this into consideration and as a result of our strong operational results in the first quarter,

we are increasing our adjusted earnings per share range to $2.52 to $2.67.

To summarize on slide eight, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima.

We are excited about our progress in the first quarter and remain focused on successfully executing against our integration plans

creating momentum, and delivering strong financial results. Now I'll hand it back over to Kyle to start Q&A.

Kyle? Thanks, Ben. Before we begin the Q&A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question followed by one follow-up question. You're welcome to rejoin the queue if we have time. With that, we'll hand it over to the operator to start the Q&A.

Thank you very much. We will start the Q&A. You may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. Again, star, one to enter the queue. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we'll start with a question from Vic Chopra from Wells Fargo. Vic, please go ahead.

Good morning, and thanks so much for taking the question. I'll keep it to one. So, you know, based on our math, Lima came in ahead of our estimates. We estimate about $85 million. Can you just talk about what you're seeing with regards to the integration and what drove the upside? And then you also called out 2% to 3% negative growth impact from the integration. We'd really appreciate it if you could elaborate on that, please. Thank you.

Vic, I missed the very end of the question there about the 2% to 3%. Oh, sorry.

I was saying we saw you called out 2% to 3% negative growth impact from the integration. Just any color of that would be appreciated. Thank you.

Yes, yes. Yeah, absolutely. So, yeah, I mean, we saw, you know, a good solid start to the year as expected, you know, both in terms of our performance on the integration front, you know, as well as, you know, driving good progress in the core business. You know, we've talked about through the quarter, you know, in various settings. We talked about the market environment, which, you know, really last year there was a super clean market environment and very high utilization rates, you know, You know, I think this year was probably a more normal market environment with storms and illnesses and different things. And so I think that, you know, that's resulted in, you know, a little softer market growth point, a bit softer than last year. And so that's, you know, certainly an impact. But we've continued to, you know, drive strong performance growth. you know, against the market. But then we have been working quickly to do the integration as we've talked about all along and as we've worked through the channel integration, you know, in the U.S. and in certain countries outside the U.S. There's choices that we've made in some cases, choices that agents have made in other cases that have led to some, you know, some loss of business that was planned and expected. And, you know, as we've talked about all along, we've tried to work through it quickly so that we can – have it kind of impact the business here in the first year and then leave it behind. And that's impacted the U.S. significantly, but also it's had some impact in other countries, and it's had impact on the hip and knee side as well as on the shoulder side. And so we've tried to give you a clear look with the pro forma growth, but also talk a little bit about the impact of the integration so that you can see that the underlying business is certainly growing you know, in a quarter with a strong comp and a little softer market, but the underlying business is still, you know, very strong and we've got a great path to accelerate through the year and execute the, you know, exit the year on a very strong growth arc.

Thank you. Next question.

And our next question comes from Jeff Johnson from Baird. Jeff. Please proceed.

Yeah, thank you. Good morning, guys. So, Matt, I don't want to give you a big softball here, but I guess just help me on the math. If you did 7% recon growth, is it fair to think about those two to three points of disenergies? I think you also had one less selling day with Easter at the end of the quarter. Recon, would that have been closer to 9%, 10%, 10%, 11% if not for those disenergies and the selling days? Is that how we should be conceptually thinking about this?

Yeah, yeah, I think that's the right way to think about it, Jeff.

Okay, and then just on the extremity side, you know, you called out the 8% growth there. You did point most of that to foot and ankle. Obviously, you had the disenergies, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that's just in the core and Novus, the Altivate product in that? Obviously, competition is growing in shoulders as well. So just, you know, how do you perceive kind of shoulder market? and your performance in the shoulder market, X, kind of some of this noise from the integration and selling days. Thanks.

Yeah, excluding some of the integration, in fact, we still see ourselves in a good above-market growth range in our in our shoulder and, you know, have a great opportunity to work through the year here to, you know, even strengthen that further. The augmented glenoids that we launch, we'll launch, you know, kind of here probably late in the second quarter and really ramp in the second half of the year are going to give us a great additional weapon in terms of driving more share gain and shoulders. Some of the cross-selling opportunities are terrific in shoulder. And then, as I said in my comments, we've also gotten Argus cleared in the shoulder. And, you know, while that won't have much impact this year in terms of revenue because we'll be in the early launch phase, I think it just, you know, continues to send a very strong message to the market about the strength of our leadership and shoulder and our commitment to continue to be an innovation leader there.

Thank you.

Our next question comes from Young Lee from Jefferies. Yong, please go ahead.

All right, great. Thanks so much for taking our questions. I guess I wanted to hear a little bit more about cross-selling opportunities as you get through some of these early integration choppy periods. Seems like, you know, we'll see more of the benefit in the second half in the U.S. And, you know, OUS seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross-selling.

Yeah, yeah, for sure, Jan. Thanks for the question there. You know, I mean, we are extremely excited about the cross-selling opportunity. Actually, I got to join the global sales conference that we had over in London for our recon teams. And it was really tremendous to see how far the teams had already gotten on creating cross-selling really specific and aggressive cross-selling opportunities. I'll mention a few. First, we've talked about here in the U.S. market a kind of immediate opportunity to bring revision cones into the U.S. market and more aggressively sell the custom pro-made products that Lima has. And so it's early days on those, but we've already gotten a little bit started there and would expect to see a nice nice ramp down the back half of the year on those. And we also, our teams are pretty excited about the SMR shoulder, not as a Kind of our core shoulder product, the Altivate, is really our flagship, but there are specific situations where the SMR can be quite attractive, and we expect to see some nice cross-selling there as well. Second, outside the U.S., we're still early days in terms of driving power in Altivate, and we have just started to ramp up the math as cross-selling. And so now across a much broader landscape with Mathis and Lemus channels, we've got a great opportunity for many years to come with Empower and AltaVate. And as I shared, we just got some additional market access, which is very important in AltaVita. You know, a large portion of our cases in the U.S. with AltaVita are small shell. And so that market access really helps give a boost there on those broad cross-selling opportunities. And then the third thing that actually is, you know, is really exciting. I probably kind of underappreciated it until I was at this conference sitting in the room with the teams talking about it. There's a number of actually very interesting cross-selling opportunities between Lima and Mathis, revision products on the Lima side that the Mathis team is excited about, allergy-free products on the Mathis side that the Lima team are excited about, and And so there's really this kind of organic energy that has come between those teams in terms of some, you know, some things outside the U.S. beyond the, you know, the sort of larger and longer alternate and empower opportunities. So a lot of great opportunities, you know, getting them ramped up right now. Did a lot of training in this meeting in March. Now starting to get the instrument sets into March to get the funnels built and getting And we'd expect that, you know, down the back half of the year, we'll start to see this energy ramp and start to hit kind of full stride going into next year.

Very great. That's very comprehensive. I'll just keep it to one. Thank you.

Thank you, operator. Next question.

The question is coming from Brandon Vasquez from William Blair. Brandon, please go ahead.

Hi, everyone. Good morning. Thanks for taking the question. I'll ask two up front here. The first is just as you guys are integrating Lima here, can you talk to us about logistically what needs to happen still? What are the milestones we should keep an eye out for? Are there any ERP integrations, SAP integrations, things like that? And then maybe the quick follow-up as well is just a little bit of can you give us some color on gross margins, how they trended in the quarter, and how you expect those to trend through the rest of the year, especially as you integrate some of the Lima business as well. Thanks.

Thanks, Brandon. As far as the key integration milestones, some of the biggest focus so far has been on the commercial side. working through the different channel decisions and the implementation of them, and we're a good way through those in the U.S. and outside the U.S. Wrapping up the crop selling, as I talked about, has been another key piece of the integration so far. There have been some quick and thoughtful cost actions that we took in the first quarter in terms of starting to get after the costs opportunities that more of that to come but we did some you know some very quick moves as we put the two teams together outside the US and as we tuck the US team into our team here in the US so that's that's been another key key thing that we've done so far you know as we look forward there are some things to do in terms of IT systems but we're taking a very thoughtful step-by-step approach on that so there's there's there's no big scary European integration coming uh, that, that, that, you know, could, could be a big issue, more of a kind of step-by-step, uh, making, making the changes in terms of, you know, kind of skews and systems and how systems interchange and connect, et cetera. And we will, you know, work our way into, uh, kind of well-aligned systems, uh, but, uh, that that's not, you know, any kind of, uh, you know, big, big giant thing versus a step-by-step thoughtful approach. We've also got, you know, a couple years of operational synergies to get after over the coming years. That'll be, you know, step-by-step movement of things that are getting us cost opportunities, you know, some insourcing, some movement type of things. And then finally, we've done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and and making some early choices around that. But it will be, again, a thoughtful multiyear process of merging the innovation pipelines and product pipelines. So we've got a great managing process, great talent focused on this. So far things are going very well. We know it's important to stay on top of that. There's certainly a lot more work to come, but we feel very good about where we are right now. Yeah, and Brandon, on gross margins, we were, you know, 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get aligned with all the things that we've been talking about here. Both businesses, you know, continue to leverage the EGX capabilities that we have, and I would see some, you know, decent progression throughout the course of the year there on gross margins.

Thank you. Operator, next question.

Next question comes from George Sellers from Stevens. George, please go ahead.

Hey, thanks for taking the question. Congrats on the quarter. Maybe to shift to the foot and ankle portfolio, you called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance and maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio. And then lastly, what are you seeing from a competitive perspective as well? Yeah, sure.

So, yeah, Foot & Ankle had a good strong quarter. I think it was a healthy market environment in Foot & Ankle. Maybe kind of a little less of a, you know, strong comp there and, you know, good healthy market environment to start the year. And that's continuing here as we start the second quarter. You know, our team, you know, we've got a number of key technologies that drive the growth there. You know, our, you know, Dynanail products or the Dynanail family based on, you know, nitrile alloy, sheet metal alloys. has been very strong and we continue to bring additional technologies into that family. You know, the Novastep product that we acquired in last year in the minimally invasive bunion space, you know, are driving nice growth as well, and we're excited about that participation now into that large four-foot market. We've also, the Arsenal Reload that I talked about is the next generation of our plating products, which, you know, are applied across the space. And, you know, we've got IP-protected technology, around the fastening devices on our plating and some really great new plates that leverage that technology. that we think are going to bring a real boost as well. And Star has gotten, as we've talked about, Star is stabilized and ready to grow here now as well with some of the changes that we've made there. So a number of great technologies across foot and ankle. But then very importantly, our channel continues to get more aligned. We've now got almost 70% of our channel fully aligned to our products. And that's something that we did a lot of work over the past few years to get there. And we know that that's going to pay a lot of dividends. A strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we've acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.

Okay, great.

Thanks for taking the question. Thank you. Next question, operator.

And the next question is coming from Jason Wittes from Roth MKM. Jason, please go ahead.

Great. Thank you. So just a question about the impact of integration. I know it's 2% to 3% this quarter. Does that run through the year, or how should we be thinking about what the negative impact is or positive impact is for this year?

Yeah, so, you know, I think in terms of how much it impacts the year, you know, we shared $20 million, $30 million as the expected impact when we did the acquisition and, you know, that's, you know, 2% to 3% of our recon is more than 2% to 3% of Lima, of course. But, you know, but I guess I would say, you know, as we've talked about, we've been trying to get at this quickly. And so, you know, I think that we're likely to see that go from where it is now, you know, probably increase a little bit in the second quarter as we get really in maybe probably the apex of, you know, the impact from these integration things. And then I would expect that, you know, the back cap, it would kind of flatten and drop as we get, you know, to the other side of some of the things that even started to impact us, you know, late last year or right at the beginning of the year. And also as we have some nice contributions coming through on the cross-selling side as well.

Okay, that's very helpful. And then just really quickly on terms of the launches for the shoulder, in terms of the rollout, is that typically a six to nine month process or what kind of timing should we be thinking about for how quickly you can roll those out and they have an impact on the numbers?

Yeah, so the augmented glenoids will get into the market very quickly. You know, there's obviously some early market participation that then leads to broader, but we would expect the augmented glenoids, you know, will be ramping aggressively in the back half of the year, and we've got a lot of, you know, we already, you know, kind of, you know, in the process of the stocking of product and instrument sets to be able to ramp very fast in augmenting glenoids. And we really think that's been very important. We've got that shoulder, but more and more surgeons are using augmenting glenoids in their procedures. And so, you know, we think that not only will that, you know, offer us some same sort of selling opportunities than our existing surgeons, but it's really going to turn the heat up on our patients surge capture offense with augmented glenoids. So that'll be a this year impact and a very meaningful one. Arvis, you know, much more of a, you know, kind of next year and beyond impact. You know, it's cleared. We're getting the market start doing cases, you know, and getting, you know, feedback. It's new technology, and we want to make sure that we get it to exactly what's going to make a big difference in shoulder. And so for sure we'll be iterative in terms of launching the second half of the year that gets us some good feedback and then iterating from there in 2025 and bringing it bringing more broader functionality. But for sure, our surgeons are going to be able to see crystal clear the vision of taking our great preoperative planning using predictive analytics to create a great plan that can be presented interoperatively with augmented reality guidance and then capturing the data interoperatively as the surgeons are being able to use that guidance to do those shoulder procedures. We're convinced that that's really going to be a very exciting next wave in enabling tech for shoulders at a time that the market is ready for.

Great. Thank you very much.

Thank you. Next question, Operator?

Our next question is coming from Vijay Kumar from Evercore ISI. Vijay, please go ahead.

Hey, guys. Thanks for taking my question. Matt, apologies if you've answered this, but what was the organic performance excluding Lima, right? Because I think the original Lima assumption was there would be some acquisition-related disruption and Lima would be flat. It feels like Lima came in a bow and the integration-related impact was on the base business. Can you just walk us through why that impact was felt on the base business, not on Lima, and what Lima's performance was in the quarter?

Yeah, Vijay, I'll take that one if you don't mind. As we contemplated the guidance for We knew that the channel integration work was going to be something that we couldn't really predict which business it was going to come from as we were making portfolio decisions, as we were thinking about how do we really kind of get to the selective alignment of our territories and making sure that we've got good participation in that. So as we think about kind of how we've seen it start to play out, as you've seen some impacts on the legacy Mathis business and the legacy Inovus business, but all of that was contemplated in the guidance that we gave with regards to the amount of revenue coming in as a result of the acquisition. So we think it's most fair to really show the pro forma view to kind of include the all up, all in view of what's happening. And then what we've provided is our best view of you know, some of the discontinuations and some of the dis-synergies that came within the business, which we've said 2% to 3%. So if you kind of strip out the underlying performance of the core business and kind of look for a traditional organic kind of definition, our view is that our organic business would have been a little over 8% in the quarter for recon. And then you add a little bit of boost to that if you kind of take into consideration selling days as well. So that's kind of how we're thinking about it. Underlying performance of the core brands are still doing well, but as we think about the channel coming together in particular in the U.S. and some of the countries that have more overlap, that's where it's a little bit hard to really distinguish the difference between reported product and Lima versus legacy business. So that's why we think it's most appropriate to give the pro forma view. But overall, we still see strong performance in our core technologies.

Understood, Ben. And Matt, on this, sorry, just sticking with that recon, U.S. hip and knee, getting some questions here in Fladish. I know the comp is tough. Was there any integration impact here on the U.S. recon side? And Ben, can you just clarify when you say the underlying technology recon was about 8%. Was that 8% excluding the integration impact within recon?

Yes, yes, excluding the integration impacts. If we look at like-for-like, you know, kind of underlying performance, our view would be, you know, a little over 8%, and that would take out those impacts.

Understood.

Matt, sorry, on this.

Yeah, just to pick up your hip and knee question there. Yeah, I mean, for sure there's some integration impacts there. Look, you know, our hip and knee growth last year was 22%, and so there's an extremely strong comp there. And, you know, if you look over a longer time period, you know, the results for this year would be, for the legacy business, 50, 5-0% above 2019. And, you know, by our math, the industry in HIPAA is... maybe mid-single, maybe high single digits above 2019. So, you know, I think that the comp certainly is an effect in terms of the picture on hip and knee. And with or without the integration, we would have expected Q1 to be a softer growth quarter in hip and knee, given the strength of the comp. You know, second, there is an effect here that NEMA in the U.S., while it was primarily a shoulder business, it did have a small hip and knee business, and the primaries in the small hip and knee business in Lima were not a focus at all, and, you know, that was shrinking, and that was shrinking, you know, as we exited last year, and so there's a little bit of a tug from that Lima business as well in hip and knee, and then, you know, for sure the integration effects are in hip and knee and shoulder, and there's, you know, some you know, specific accounts and surgeons that we've lost as part of the integration that are having an impact on hip and knee as well. Now, if we look forward, you know, through the year, you know, Chitou's another tough comp there, but then from there forward, the comps get much more normal. We also, you know, we'll start to clear through, you know, some of these integration effects And we expect to be able to keep ramping the revision even stronger now as we have the Lima cones. We've also got some additional accessories that we have coming through our pipeline on the revision side to give us broader access in revision. We've got Arvis to ramp more aggressively as we move through the year as well. And so we've got... plenty of confidence that our hip and knee growth will move back to a more normal range as we move through the year.

Fantastic.

Thanks, guys. Thank you. Next question, operator.

Thank you. We have a question from Mike Madsen from Needham. Mike, please go ahead.

Hey, this is Joseph for Mike. Maybe just follow up on the hip and knee issue. Do you think there's still kind of a backlog there for hip and knee procedures? You know, larger than normal backlog, I guess?

Yeah, so again, you know, I think whether you look at the U.S. or you look outside the U.S., the cumulative growth since 2019 is still, you know, significantly less than five years of growth. And so that does certainly suggest that there are unserved patients there. You know, if you look at early last year, the first, you know, four or five months of last year, things went really hot in the U.S., you know, and some countries outside the U.S. And I think that was, you know, indicative of that backlog that lies there and a, you know, sort of a high utilization environment that enabled, you know, higher rates. And so, you know, I think it seems reasonable that there is still backlog to be worked off in Tiffany that can create some tailwind, you know, maybe later this year and in the years to come. But, you know, clearly in the first quarter, you know, looking at what we understand about our results and looking at, the other results that have been been posted you know this was a uh you know kind of a slower growth quarter rates indeed in the us than where things were last year and so clearly that backlog is not being worked off right now and and and i think you know we we saw and understood that working through the quarter that there were just various effects that were constraining um you know you know kind of surgical supply with like i said whether whether it was storms or or, you know, flu and different things. And that's what used to be pretty normal that in any given year there were parts of the year where there were some crimps that were being put on supply. And so, you know, better months, better, worse months, better quarters, worse quarters. And I think we might be back into a more normal environment and there'll be periods where things can run white hot because that backlog is there and the surgical, you know, capacity is very available and there'll be periods where the capacity is a bit constrained and that backlog just sits there.

Okay, great. Yeah, that makes sense. And then maybe just another quick one on Arvis. If you do have, you know, anything more to add, I'd appreciate the color so far, but I guess any metrics in terms of adoption or placements would be really helpful. I understand it's still, you know, early ramp, but yeah, anything else would be great.

Yeah, so as I've shared before on me, we've got sort of a few dozen surgeons using it right now. By design, we got it to a number of surgeons and we're really focusing on having them use it a lot and making sure that all of them get ramped up in terms of utilization rates and that we learn things that we need to in terms of how people are using it to make sure that as we move to taking it broadly into the marketplace that it's going to be successful. both in terms of helping us to gain business and grow, but also that the surgeons will be using it at high rates. You know, if you look at some of the technologies that are out there, some of them are being used at high rates and some are not. And we want to make sure that our business is used at high rates. And so this controlled launch, I think, puts us in a place to be able to make sure that happens as we work through this year. Definitely expect it to have a good positive impact on our knee business as we work through this year and get beyond that first stage. you know, that first couple of dozen surgeons into a broader marketplace. And then, you know, kind of, you know, years to come of opportunity to have good, strong impact from Argus and me. And also, you know, we continue to work on additional technology to add beyond Arvis in terms of making that hip and knee value proposition stronger and stronger in the enabling tech workflow area. On the shoulder front, just getting started this year, we've been working on that, obviously, for a little bit here because we just cleared the regulatory issues But, you know, it'll be just the very initial launch here in the second half of the year to get really good feedback on the software and the hardware and the instruments and then, you know, make sure that we make whatever adjustments we need to moving into next year. And there's also kind of multiple waves of technology that we can bring through Arbus there into the shoulder. I'm going to get a good, strong start this year and then build on that in 2025 and beyond.

Okay, great. Thanks for taking our questions.

And as a reminder, if you would like to pose a question and enter the queue, press star one. We have a follow-up question from Vijay Kumar from Evercore ICI. Vijay, you may proceed.

Hey, guys. Thanks for the follow-up here. A bonus. You get a bonus, Vijay. Yes, I do. I wanted to touch on margin performance in the quarter. The gross margins, were gross margins in line with your expectations, right? Because my understanding is Lima had somewhere in the 70s gross margins. So sequentially when I'm looking at this, the mix improved, right? The dollar contribution from Recon improved, but gross margins flattish, but operating margins came in well above. So just talk about the margin performance. and how we should think about the gap for the back half. Does this give increased confidence in the back half margin ramp?

Yeah, Vijay, I think that the number that you're thinking about with Lima is not a U.S. GAAP number. It's an IFRS number. So if you really translate Lima historical numbers into U.S. GAAP, there's some shift between gross margin and operating expenses. So they're kind of underlying gross margin and the U S gap kind of translation is more in the, uh, higher, higher sixties than it is kind of into the seventies. Uh, so that, plus some of the mix of the business where we're getting some of the sales, uh, I'd say, you know, kind of gross margins or kind of largely in line with what our expectations were. Um, as I said earlier, I would expect to see some acceleration of the company's gross margins, um, kind of, as we go through the course of the year. and overall, I mean, still excited about the opportunities of, you know, kind of potential synergies down the road as we improve our, you know, kind of our recon globalization and supply chain. There's lots of opportunity for us to continue to really embed EGX, to look at opportunities to expand our gross margins, to continue to shape the mix of the business in the right way that'll help us to accelerate there. So, Like we've said, we still see the recon business right now. We're in kind of a high 60s gross margin. We see opportunity to kind of get that well into the 70s, call it, you know, closer to the mid-70s over time. But this year it'd be just kind of, I'd say, relatively steady progress looking at where we are in Q1 and maybe seeing a slight acceleration or, you know, as we go through the course of the year.

Sorry, on...

at the operating margin line item, were there any timing impact of OPEX? Are synergies, cost synergies coming in about plan? Because it just feels like OEM execution was slightly about.

Yeah, I mean, we're happy with the start. I mean, we were able, like we've said, we were able to, you know, really identify what the, you know, go forward org structure was going to look like if we closed the deal early.

So we're able to capitalize on some synergies right away, you know, maybe slightly above kind of our kind of initial expectations in the first quarter. But again, still well within kind of our expectation of what we've said for the year is what we're currently thinking. And like I said, there's the shift between, you know, kind of OpEx versus gross margin, which is, you know, kind of, again, aligned with what our expectations were.

Understood. Matt, maybe one for you. I saw the ROS 2.0 within the presentation. Where are we in terms of adoption of ROS? Are we at an inflection point? And what does 2.0 do, which is different from 1.0?

Yeah, so 2.0 in the me was, you know, after putting it out in the controlled launch, getting a lot of feedback, we went and made a number of improvements to the software and the hardware that, you know, were making it kind of easier to use in many ways, but also making it really very seamless with our Empower instrument sets as well. And so... The 2.0 was then kind of more of a full launch of Argus, but we definitely decided to do it in a step-by-step way just to make sure that, given that it's a brand-new-to-the-world technology, 15, 20 docs using it and get some good feedback, help them to ramp up and then use what we learned there to make sure that as we go to a broader set of doctors, uh, one, we've got, you know, uh, we've got a great value proposition and be able in terms of being able to help them understand how it's going to, you know, going to be valuable, but, but also, uh, we, we've got the ability to help them to ramp up fast and effectively with it. Uh, and so that's what the 2.0 launch was. And we're right on track with that in terms of, as I said, a couple, a couple dozen, uh, surgeons using ARVIS, some using it very heavily, some less heavily. The ones that are using less heavily, we're learning why and how do we ramp them up in terms of how heavily they use it. And there's some good learnings there, both about how to ramp surgeons fast, but also about which surgeons to target more as we do the broader launch. And then we've now got plenty of inventory on hand ready to do a broader rollout as we work through this year. A lot of excitement in the field around the ability to bring Arvis to a broader set of knee surgeons, hip and knee surgeons, but particularly for the knee at this point as we work through this year. So we would expect that number to expand and be a good facilitator to our knee conversion efforts. but also start to generate a small but growing and high profit recurring revenue stream on the knee front. On the shoulder front, as I said, it's just an initial launch. So think of shoulder in the second half of this year being kind of where our knee was a year or so ago in terms of getting that first launch into the marketplace in the second half of this year and getting some good feedback that allows us to keep revenue and improving the product. You know, we've been focused on making sure that by 2025, we are right there in the market with a very strong shoulder Arbus offering to continue to, you know, to be a strong leader there and shoulder with technology as we always have been. And we're right on track for that with this announcement about the shoulder clearance for Arbus that just recently happened.

Understood. Thanks, guys. Thank you, Operator. Next question.

Thank you. We conclude our question and answer session now. And with that, I would like to turn the conference back over to Matthew Taratola for any closing remarks. Please go ahead.

Thank you for joining us this morning. I want to end the call by thanking our team members for a strong start to the year. We have a lot of momentum and excitement across the organization and remain committed to delivering value for our internal and external stakeholders. Thank you for listening in today, and we look forward to sharing our second quarter results with you in early August.

And this concludes the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day. you Thank you. Thank you. music music you Good day and welcome to the Inovus first quarter 2024 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. And now, I would like to turn the conference over to Kyle Rose, Vice President of Investor Relations. Please, go ahead.

Thank you, Marylise. Good morning, everyone. And thank you for joining us today on our first quarter 2024 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Matt Taratola, Chair and Chief Executive Officer, and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investor Relations section of our website, endovus.com. We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. During the call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information relating to those measures can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Matt, who will begin on slide three. Matt? Thanks, Kyle. Hello, everyone, and thanks for joining us this morning. We had a strong first quarter, but before I begin to discuss the results, I want to welcome the Lima organization to Anovus and recognize the efforts of our strong global teams who work hard every day to execute our strategies and help our patients live more active and fulfilling lives. Please note that as we fully integrate into one company with a global focus, we're managing the organization on a combined global basis, and we use pro forma growth for comparative purposes. For year-over-year comparisons, Our prior year financials have been updated to include the acquisitions at Lima and Novistep. Let's start on slide three and talk about some of the quarter's highlights. We had a transformational start to the year. We completed our planned acquisition of Lima, made significant progress on our integration plans, and carried forward momentum from 2023 across our geographies and business units. We delivered reported growth of 27% year-over-year and 5% on a pro forma combined basis versus very strong comps. We expanded our adjusted EBITDA margins by 220 basis points, reflecting the mixed impact of recon growth, productivity improvements, stable inflation and pricing trends, and the step change impact from Lima. We closed the acquisition in early January and are seeing strong momentum and healthy scaling of the broader set of acquisitions we've completed in the past few years. Overall, a strong start to the year. In recon on slide four, we delivered 66% reported global revenue growth. Pro forma recon grew 7% year-on-year in the first quarter. which includes a 2% to 3% negative impact from integration dis-synergies in line with our plan. U.S. recon grew 4%, including 8% growth in U.S. extremities and flat performance in hips and knees against a very strong prior year comparable of 22% growth in our core Novus business. Outside of the U.S., we grew 10% in a resilient market. We've achieved significant progress integrating the lean acquisition and are encouraged by the early execution of our combined teams. To date, we have seen some short-term growth impacts across anatomy and geography as we've worked through the integration of our commercial channels. These fall well within our projected estimates, and our expectations for the full year remain intact. We look forward to ramping cross-selling opportunities as we move into the second half of 2024. I'm excited about the initial traction we're seeing with our market-leading Empower and Altivate products globally. We continue to expand market access with the clearance of our Altivate small shell in Q1 in Europe. We also have a strong pipeline of innovation as we continue the U.S. rollout of the Empower Revision Me, controlled ramp of ARVIS 2.0, and selling Lima's 3D-printed trabecular titanium cones for use with our Empower Revision system. one of our first key cross-selling opportunities. I'm also very excited to announce that just earlier this week, Argus received 510K clearance for use in shoulders. This timing aligns well with our planned launch of the augmented glenoid component of our flagship Altivate reverse shoulder system in the second half of the year. Our foot and ankle team continue to launch great new differentiated technologies like the Arsenal Reload, that are keeping the vitality high and helping drive very strong double-digit growth. These great new technologies, alongside the cross-selling potential of the combined portfolios, offer significant opportunity to accelerate growth in the second half of 2024 and set us up with great momentum as a billion-dollar-plus, fast-growing recon business entering 2025. In PR, on slide five, our 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan. Recovery Sciences led growth, boosted by continued double-digit laser growth, and global bracing continued to grow above market rates. Our new product pipeline is robust and includes the new OA knee brace called Roam, additional spine bracing products, and the next generation of clinical electrotherapy products for our recovery sciences team. Adjusted EBITDA margins in PNR improved 50 basis points year over year as we continue to use EGX tools to drive consistent productivity improvements and sustained traction on price versus cost. Now, I'll let Ben take you through the PNL details. Ben? Thanks, Matt. Hello, everyone. I'll begin on slide six. We are pleased to report first quarter sales of $516 million, up 27% versus the prior year, and 5% on a pro forma basis. This compares to strong prior year organic core growth of 9%. Our teams have been working really hard to integrate our global Lima acquisition that closed January 3rd.

We've been extremely pleased so far with the collaboration in our teams, and the high-quality integration plans that we've begun executing against.

Our underlying growth in P&R and recon continues to be solid, and while still early, our integration efforts are slightly ahead of our original plans. First quarter adjusted gross margin was 58.7%, up 70 basis points year over year.

The growth was driven by leverage from higher sales, favorable segment mix, which includes the addition of Lima, and cost leverage. Our first quarter adjusted EBITDA margin of 16.1% was up 220 basis points versus Q1, 2023. First quarter's effective tax rate was 23%. This is compared to 21% last year. Interest expense was 20 million for the quarter versus 6 million in 2023. Overall, we posted strong adjusted earnings per share of 50 cents.

Fourteen percent earnings growth versus the prior year. Foreign currency exchange had an unfavorable impact of approximately two cents in the quarter. Turning to slide seven, we are raising our prior guidance to reflect the strong start to the year. We now expect revenues in the range of 2.06 billion to 2.16 billion. This is slightly above our previous guidance range, which contemplated 7% pre-LIMA organic growth, double-digit recon growth, and low single-digit P&R growth. As we go forward in 2024, we will be reporting on pro forma results. Our updated guidance range increase translates to approximately 5% to 6% pro forma growth and includes acquisition-related impacts.

In recon, the pro forma outlook translates to high single-digit growth for the year. We expect this growth to accelerate in the second half as we annualize higher prior year comps and begin realizing benefits from cross-selling and new product launches.

We continue to expect stable P&R growth in the low to mid-single digits as was reflected in our original guidance.

We expect adjusted EBITDA in the range of $368 million to $383 million, which includes a modest increase to the range based on our Q1 performance.

Our guidance for depreciation, interest and other expenses, tax rate, and share count remains unchanged from the prior guidance.

Taking all this into consideration and as a result of our strong operational results in the first quarter, we are increasing our adjusted earnings per share range to $2.52 to $2.67. To summarize on slide eight, we had a solid start to 2024 and continue to shape the business towards accelerated growth and scale with the acquisition of Lima. We are excited about our progress in the first quarter and remain focused on successfully executing against our integration plans

creating momentum, and delivering strong financial results. Now I'll hand it back over to Kyle to start Q&A. Kyle? Thanks, Ben. Before we begin the Q&A session, in an effort to accommodate everyone on the call, we ask that analysts please keep the questions to one question followed by one follow-up question. You're welcome to rejoin the queue if we have time. With that, we'll hand it over to the operator to start the Q&A.

Thank you very much. We will start the Q&A. You may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. Again, star, one to enter the queue. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we'll start. with a question from Vic Chopra from Wells Fargo. Vic, please go ahead.

Good morning, and thanks so much for taking the question. I'll keep it to one. So, you know, based on our math, Lima came in ahead of our estimates. We estimate about $85 million. Can you just talk about what you're seeing with regards to the integration and what drove the upside? And then you also called out 2% to 3% negative growth impact from the integration. We'd really appreciate it if you could elaborate on that, please. Thank you.

Vic, I missed the very end of the question there about the 2% to 3%. Oh, sorry.

I was saying we saw you called out 2% to 3% negative growth impact from the integration. Just any color of that would be appreciated. Thank you.

Yes, yes. Yeah, absolutely. So, yeah, I mean, we saw, you know, a good solid start to the year as expected, you know, both in terms of our performance on the integration front, you know, as well as, you know, driving good progress in the core business. You know, we've talked about through the quarter, you know, in various settings. We talked about the market environment, which, you know, really last year there was a super clean market environment and very high utilization rates, you know, You know, I think this year was probably a more normal market environment with storms and illnesses and different things. And so I think that, you know, that's resulted in, you know, a little softer market growth point, a bit softer than last year. And so that's, you know, certainly an impact. But we've continued to, you know, drive strong performance growth. you know, against the market. Uh, but then we have been working quickly to do the integration as we've talked about, uh, all along. And as we've worked through the channel integration, uh, you know, in the U S and in certain countries outside the U S there, there's choices that we've made in some cases, choices that agents have made in other cases, uh, that led to some, you know, some loss of business that was planned and expected. Uh, and, um, you know, as we've talked about along, we've tried to work through it quickly, uh, so that we can, uh, have it, you know, kind of impact the business here in the first year and then leave it behind. And that's impacted the U.S. significantly, but also it's had some, you know, impact in other countries. And it's had impact, you know, on the hip and knee side as well as on the on the shoulder side. And so we've tried to give you a clear look with the pro forma growth, but also talk a little bit about the impact of the integration so that you can see that, you know, the underlying business is certainly, you know, in accord with a strong comp and a little softer market, but the underlying business is still, you know, very strong, and we've got a great path to accelerate through the year and execute the year on a very strong growth arc.

Thank you. Next question.

And our next question comes from Jeff Johnson from Baird. Jeff, please proceed.

Yeah, thank you. Good morning, guys. So, Matt, I don't want to give you a big softball here, but I guess just help me on the math. If you did 7% recon growth, is it fair to think about those two to three points of dis-energies? I think you also had one less selling day with Easter at the end of the quarter. You know, recon, would that have been closer to, you know, 9%, 10%, 10%, 11% if not for those disenergies in the selling days? Is that how we should be conceptually thinking about this?

Yeah, yeah, I think that's the right way to think about it, Jeff.

Okay, and then just on the extremity side, you know, you called out the 8% growth there. You did point most of that to foot and ankle. Obviously, you had the disenergies, the selling days that impacted there as well. But just can you talk about your core underlying kind of shoulder growth, whether that's just in the core and Novus, the ultimate product in that? Obviously, competition is growing in shoulders as well. So just, you know, how do you perceive kind of shoulder market and your performance in the shoulder market X kind of some of this noise from the integration and selling days? Thanks.

Yeah, excluding some of the integration, in fact, we still see ourselves in a good above-market growth range in our shoulder and have a great opportunity to work through the year here to even strengthen that further. The augmented glenoids that we launch, we'll launch here probably late in the second quarter and really ramp in the second half of the year. are going to give us a great additional weapon in terms of driving more share gain in shoulder. Some of the cross-selling opportunities are terrific in shoulder. And then, as I said in my comments, we've also gotten Argus cleared in the shoulder. And, you know, while that won't have much impact this year in terms of revenue, because we'll be in the early launch phase, I think it just, you know, continues to send a very strong message to the market about the strength of our leadership and shoulder and our commitment to continue to be an innovation leader there.

Thank you.

Our next question comes from Young Lee from Jefferies. Yong, please go ahead.

All right, great. Thanks so much for taking our questions. I guess I wanted to hear a little bit more about cross-selling opportunities as you get through some of these early integration choppy periods. Seems like, you know, we'll see more of the benefit in the second half in the U.S. And, you know, OUS seems pretty solid. Maybe you can talk a little bit about timing as well as key products within categories on cross-selling.

Yeah, yeah, for sure, Jan. Thanks for the question there. You know, I mean, we are extremely excited about the cross-selling opportunity. Actually, I got to join the global sales conference that we had over in London for our recon teams. And it was really tremendous to see how far the teams had already gotten on creating cross-selling. really specific and aggressive cross-selling opportunities. I'll mention a few. First, we've talked about here in the U.S. market a kind of immediate opportunity to bring revision cones into the U.S. market and more aggressively sell the custom pro-made products that Lima has. And so it's early days on those, but we've already gotten a little bit started there and would expect to see a nice nice ramp down the back half of the year on those. And we also, our teams are pretty excited about the SMR shoulder, not as a, Kind of our core shoulder product, the AltaVade, is really our flagship, but there are specific situations where the SMR can be quite attractive, and we expect to see some nice cross-selling there as well. Second, outside the U.S., we're still early days in terms of driving power in AltaVade, and we have just started to ramp up the math as cross-selling. And so now across a much broader landscape with Mathis and Lemus channels, we've got a great opportunity for many years to come with Empower and Altevate. And as I shared, we just got some additional market access, which is very important in Altevate. A large portion of our cases in the U.S. with Altevate are small shell. And so that market access really helps give a boost there on those broad cross-selling opportunities. And then the third thing that actually is really exciting, I probably kind of underappreciated it until I was at this conference sitting in the room with the teams talking about it, is there's a number of actually very interesting cross-selling opportunities between Lima and Mathis, revision products on the Lima side that the Mathis team is excited about, allergy-free products on the Mathis side that the Lima team are excited about, and And so there's really this kind of organic energy that has come between those teams in terms of some, you know, some things outside the U.S. beyond the, you know, the sort of larger and longer alternate and empower opportunities. So a lot of great opportunities, you know, getting them ramped up right now, did a lot of training in this meeting in March, and now starting to get the instrument sets into the market, get the funnels built. And we'd expect that, you know, down the back half of the year, we'll start to see the synergy ramp and start to hit kind of full stride going into next year.

Very great. That's very comprehensive. I'll just keep it to one. Thank you.

Thank you, operator. Next question.

The question is coming from Brandon Vasquez from William Blair. Brandon, please go ahead.

Hi, everyone. Good morning. Thanks for taking the question. I'll ask two up front here. The first is just as you guys are integrating Lima here, can you talk to us about logistically what needs to happen still? What are the milestones we should keep an eye out for? Are there any ERP integrations, SAP integrations, things like that? And then maybe the quick follow-up as well is just a little bit of can you give us some color on gross margins, how they trended in the quarter, and how you expect those to trend through the rest of the year, especially as you integrate some of the Lima business as well. Thanks.

Thanks, Brandon. As far as key integration milestones, some of the biggest focus so far has been on the commercial side. working through the different channel decisions and the implementation of them, and we're a good way through those in the U.S. and outside the U.S. Ramping up the cross-selling, as I talked about, has been another key piece of the integration so far. There have been some quick and thoughtful cost actions that we took in the first quarter in terms of starting to get after the costs opportunities, more of that to come, but we did some very quick moves as we put the two teams together outside the U.S. and as we tucked the U.S. team into our team here in the U.S., so that's been another key thing that we've done so far. As we look forward, there are some things to do in terms of IT systems, but we're taking a very thoughtful step-by-step approach on that, so there's no big, scary European integration coming that that you know could could be a big issue more of a kind of step-by-step making making the changes in terms of you know kind of skews and systems and how systems interchange and connect etc and we will you know work our way into kind of well aligned systems but that's not you know any kind of you know big big giant thing versus a step-by-step thoughtful approach we've also got you know a couple years of operational synergies to get after over the coming years that'll be you know, step-by-step movement of things that are getting us cost opportunities, you know, some insourcing, some movement type of things. And then finally, we've done a lot of good work on just thinking about how the innovation pipelines and the product lines are going to come together and and making some early choices around that. But it will be, again, a thoughtful multi-year process of merging the innovation pipelines and product pipelines. So we've got a great managing process, great talent focused on this. So far things are going very well. We know it's important to stay on top of that. There's certainly a lot more work to come, but we feel very good about where we are right now. Yeah, and Brandon, on gross margins, we were 70 basis points ahead of last year in the quarter. We would expect that to slightly accelerate through the course of the year, especially as we kind of get aligned with all the things that we've been talking about here. Both businesses continue to leverage the EGX capabilities that we have, and I would see some decent progression throughout the course of the year there on gross margins.

Thank you. Operator, next question.

Next question comes from George Sellers from Stevens. George, please go ahead.

Hey, thanks for taking the question. Congrats on the quarter. Maybe to shift to the foot and ankle portfolio, you called out that as a nice bright spot. Could you just give some additional color on maybe some of the specific devices that are driving such strong performance and maybe how we should think about the macro environment and the health of the consumer on that portfolio versus some of the other devices in your portfolio. And then lastly, what are you seeing from a competitive perspective as well? Yeah, sure.

So, yeah, Foot & Ankle had a good strong quarter. I think it was a healthy market environment in Foot & Ankle. Maybe kind of a little less of a, you know, strong comp there and, you know, good healthy market environment to start the year, and that's continuing here as we start the second quarter. You know, our team, you know, we've got a number of key technologies that drive the growth there. You know, our, you know, Dynanail products or the Dynanail family based on, you know, nitrile alloy, sheet metal alloys has been very strong and we continue to bring additional uh additional technologies into that family um you know we've uh the novastep product that we acquired in last year uh in in the uh minimally invasive bunion space uh you know our our driving nice growth uh as well and we're excited about that participation now into that large four-foot uh market um we've also the the arsenal or reload that uh that i talked about is uh is the next generation of our plating products which uh you know are applied across the space We've got IP-protected technology around the fastening devices on our plating and some really great new plates that leverage that technology. that we think are going to bring a real boost as well. And Star has gotten, as we've talked about, Star is stabilized and ready to grow here now as well with some of the changes that we've made there. So a number of great technologies across foot and ankle. But then very importantly, our channel continues to get more aligned. We've now got almost 70% of our channel fully aligned to our products. And that's something that we did a lot of work over the past few years to get there. And we know that that's going to pay a lot of dividends. A strong aligned channel that has taken us deeper and broader into the market with these great technologies is going to continue to fuel our growth going forward. And the products that we've acquired and developed over the past few years have really played a key role in exciting all these agents and distributors to become a part of our team.

Okay, great.

Thanks for taking the question. Thank you. Next question, operator.

And the next question is coming from Jason Wittes from Roth MKM. Jason, please go ahead.

Great. Thank you. So just a question about the impact of integration. I know it's 2% to 3% this quarter. Does that run through the year, or how should we be thinking about what the negative impact is or positive impact is for this year?

Yeah, so, you know, I think in terms of how much it impacts the year, you know, we shared $20 million, $30 million as the expected impact when we did the acquisition and, you know, that's, you know, 2% to 3% of our recon is more than 2% to 3% of Lima, of course. But, you know, but I guess I would say, you know, as we've talked about, we've been trying to get at this quickly. And so, you know, I think that we're likely to see that go from where it is now, you know, probably increase a little bit in the second quarter as we get really in maybe probably the apex of, you know, the impact from these integration things. And then I would expect that, you know, the back cap, it would kind of flatten and drop as we get, you know, to the other side of some of the things that even started to impact us, you know, late last year or right at the beginning of the year. And also as we have some nice contributions coming through on the cross-selling side as well.

Okay, that's very helpful. And then just really quickly on terms of the launches for the shoulder, in terms of the rollout, is that typically a six to nine month process or what kind of timing should we be thinking about for how quickly you can roll those out and they have an impact on the numbers?

Yeah, so the augmented glenoids will get into the market very quickly. You know, there's obviously some early market participation that then leads to broader, but we would expect the augmented glenoids, you know, will be ramping aggressively in the back half of the year, and we've got a lot of, you know, we're already kind of, you know, in the process of the stocking of product and instrument sets to be able to ramp very fast in augmented glenoids, and And, uh, and we really think that's been very important. We got that shoulder, uh, but more and more surgeons are using augmented glenoids in their, in their procedures. Uh, and, and so, uh, you know, we think that, uh, not only will that, uh, you know, offer us some, some same store selling opportunities in our existing surgeons, but, but it's really going to turn the, turn the heat up on our, our, uh, surge capture offense with augmented glenoids. So that'll be a this year impact and a very meaningful one. The harvest, you know, much more of a, you know, kind of next year and beyond impact. You'll be, you know, it's cleared. We'll get in the market, start doing cases, you know, and getting, you know, feedback. It's new technology, and we want to make sure that we get it to exactly what's going to make a big difference in shoulder. And so for sure we'll be iterative in terms of launching the second half of the year that gets us some good feedback and then iterating from there in 2025 and bringing it bringing more broader functionality. But for sure, our surgeons are going to be able to see crystal clear the vision of taking our great preoperative planning using predictive analytics to create a great plan that can be presented interoperatively with augmented reality guidance and then capturing the data interoperatively as the surgeons are being able to use that guidance to do those shoulder procedures. We're convinced that that's really going to be a very exciting next wave in enabling tech for shoulders at a time that the market is ready for.

Great. Thank you very much.

Thank you.

Next question, Operator?

Our next question is coming from Vijay Kumar from Evercore ISI. Vijay, please go ahead.

Hey, guys. Thanks for taking my question. Matt, apologies if you've answered this, but what was the organic performance excluding Lima, right? Because I think the original Lima assumption was there would be some acquisition-related disruption and Lima would be flat. It feels like Lima came in a bow and the integration-related impact was on the base business. Can you just walk us through why that impact was felt on the base business, not on Lima, and what Lima's performance was in the quarter?

Yeah, Vijay, I'll take that one if you don't mind. As we contemplated the guidance for We knew that the channel integration work was going to be something that we couldn't really predict which business it was going to come from as we were making portfolio decisions, as we were thinking about how do we really kind of get to the selective alignment of our territories and making sure that we've got good participation in that. So as we think about kind of how we've seen it start to play out, as you've seen some impacts on the legacy Mathis business and the legacy Inovus business, but all of that was contemplated in the guidance that we gave with regards to the amount of revenue coming in as a result of the acquisition. So we think it's most fair to really show the pro forma view to kind of include the all up, all in view of what's happening. And then what we've provided is our best view of, some of the discontinuations and some of the dis-synergies that came within the business, which we've said 2% to 3%. So if you kind of strip out the underlying performance of the core business and kind of look for a traditional organic kind of definition, our view is that our organic business would have been a little over 8% in the quarter for recon. And then you add a little bit of boost to that if you kind of take into consideration selling days as well. So that's kind of how we're thinking about it. Underlying performance of the core brands are still doing well, but as we think about the channel coming together in particular in the U.S. and some of the countries that have more overlap, that's where it's a little bit hard to really distinguish the difference between reported product and Lima versus legacy business. So that's why we think it's most appropriate to give the pro forma view. But overall, we still see strong performance in our core technologies.

Understood, Ben. And Matt, on this – sorry, just sticking with that recon, U.S. hip and knee, getting some questions here on Flattish. I know the comp is tough. Was there any integration impact here on the U.S. recon side? And Ben, can you just clarify when you say the underlying – recon was about 8%. Was that 8% excluding the integration impact within recon?

Yes, yes, excluding the integration impact. So we look at like for like, you know, kind of underlying performance, our view would be, you know, a little over 8% and that would take out those impacts.

Understood. And, Matt, sorry on this.

Yeah, just to pick up your hip and knee question there. Yeah, I mean, for sure there's some integration impacts there. Look, you know, our hip and knee growth last year was 22%, and so there's an extremely strong comp there. And, you know, if you look over a longer time period, you know, the results for this year would be for the legacy business, 50% above 2019. And, you know, by our math, the industry in hip and knee is maybe mid-single, maybe high single digits above 2019. So, you know, I think that the comp certainly is an effect in terms of the picture on hip and knee. And with or without the integration, we would have expected Q1 to be a softer growth quarter in hip and knee given the strength of the comp. You know, second, there is an effect here that NEMA in the U.S. while it was primarily a shoulder business, it did have a small hip and knee business, and the primaries in the small hip and knee business in Lima were not a focus at all, and that was shrinking, and that was shrinking as we exited last year. And so there's a little bit of a tug from that Lima business as well in hip and knee. And then, you know, for sure the integration effects are in hip and knee and shoulder, and there's, you know, some you know, specific accounts and surgeons that we've lost as part of the integration that are having an impact on hip and knee as well. Now, if we look forward, you know, through the year, you know, to do another tough comp there, but then from there forward, the comps get much more normal. We also, you know, we'll start to clear through, you know, some of these integration effects And we expect to, you know, be able to keep ramping the revision even stronger now as we have the Lima cones. We've also got some additional accessories that we have coming through our pipeline on the revision side to give us broader access in revision. We, you know, we've got Arvis to ramp more aggressively as we move through the year as well. And so, you know, we've got... plenty of confidence that our hip and knee growth will move back to a more normal range as we move through the year.

Fantastic. Thanks, guys. Thank you. Next question, operator.

Thank you. We have a question from Mike Madsen from Needham. Mike, please go ahead.

Hey, this is Joseph for Mike. Maybe just follow up on the hip and knee issue. Do you think there's still kind of a backlog there for hip and knee procedures, you know, larger than normal backlog, I guess?

Yeah, so again, you know, I think whether you look at the U.S. or you look outside the U.S., the cumulative growth since 2019 is still, you know, significantly less than five years of growth. And so that does certainly suggest that there are uncertain patients there. You know, if you look at early last year, the first, you know, four or five months of last year, things went really hot in the U.S., you know, and some countries outside the U.S. And I think that was, you know, indicative of that backlog that lies there and a, you know, sort of a high utilization environment that enabled, you know, higher rates. And so, you know, I think it seems reasonable that there is still backlog to be worked off in Tiffany that can create some tailwind, you know, maybe later this year and in the years to come. But, you know, clearly in the first quarter, you know, looking at what we understand about our results and looking at, the other results that have been posted, you know, this was a, you know, kind of a slower growth quarter rates in the U.S. than where things were last year. And so clearly that backlog is not being worked off right now. And I think, you know, we saw and understood that working through the quarter, that there were just various effects that were constraining, you know, kind of surgical supply, like I said, whether it was storms or uh, or, or, you know, flu and different things. And so, uh, and that's, you know, that's what used to be, used to be pretty normal that in any given year, there were parts of the year where there were some crimps that were being put on supply. And so, you know, better months, better, worse months, better quarters, worse quarters. And I think we might be back into a more normal environment and there'll be periods where things can run white hot because that backlog is there and, and the, uh, you know, surgical, uh, you know, capacity is, is very available and there'll be periods, where the capacity is a bit constrained and that fat load just sits there.

Okay, great. Yeah, that makes sense. And then maybe just another quick one on Arvis. If you do have, you know, anything more to add, I'd appreciate the color so far. But I guess any metrics in terms of adoption or placements would be really helpful. I understand it's still, you know, early ramp. But, yeah, anything else would be great.

Yeah, so as I've shared before on me, we've got a few dozen surgeons using it right now. By design, we got it to a number of surgeons and we're really focusing on having them use it a lot and making sure that all of them get ramped up in terms of utilization rates and that we learn things that we need to in terms of how people are using it to make sure that as we move to taking it broadly into the marketplace that it's going to be successful. both in terms of helping us to gain business and grow, but also that the surgeons will be using it at high rates. You know, if you look at some of the technologies that are out there, some of them are being used at high rates and some are not, and we want to make sure that ours is used at high rates. And so this controlled launch, I think, puts us in a place to be able to make sure that happens as we work through this year. Definitely expect it to have a good positive impact on our knee business as we work through this year and get beyond that first couple of dozen surgeons into a broader marketplace. and then, you know, kind of, you know, years to come of opportunity to have good, strong impact from Argus and me. And also, you know, we continue to work on additional technology to add beyond Arvis in terms of making that hip and knee value proposition stronger and stronger in the enabling tech workflow area. On the shoulder front, just getting started this year, we've been working on that, obviously, for a little bit here because we just cleared the regulatory issues But, you know, it'll be just the very initial launch here in the second half of the year to get really good feedback on the software and the hardware and the instruments and then, you know, make sure that we make whatever adjustments we need to moving into next year. And there's also kind of multiple waves of technology that we can bring through Arbus there into the shoulder. I'm going to get a good, strong start this year and then build on that in 2025 and beyond.

Okay, great. Thanks for taking our questions.

And as a reminder, if you would like to pose a question and enter the queue, press star one. We have a follow-up question from Vijay Kumar from Evercore ICI. Vijay, you may proceed.

Hey, guys. Thanks for the follow-up here.

A bonus.

You get a bonus, Vijay. Yes, I do. I wanted to touch on margin performance in the quarter. The gross margins, were gross margins in line with your expectations, right? Because my understanding is Lima had, you know, somewhere in the 70s gross margins. So sequentially when I'm looking at this, the mix improved, right? The dollar contribution from Recon improved, but gross margins flattish, but operating margins came in well above. So just talk about the margin performance. and how we should think about the gap for the back half. Does this give increased confidence in the back half margin ramp?

Yeah, Vijay, I think that the number that you're thinking about with Lima is not a U.S. GAAP number. It's an IFRS number. So if you really translate Lima historical numbers into U.S. GAAP, there's some shift between gross margin and operating expenses. So they're kind of underlying gross margin and the U S gap kind of translation is more in the, uh, higher, higher sixties than it is kind of into the seventies. Uh, so that, plus some of the mix of the business where we're getting some of the sales, uh, I'd say, you know, kind of gross margins were kind of largely in line with what our expectations were. Um, as I said earlier, I would expect to see some acceleration of the company's gross margins, um, kind of, as we go through the course of the year. and overall, I mean, still excited about the opportunities of, you know, kind of potential synergies down the road as we improve our, you know, kind of our recon globalization and supply chain. There's lots of opportunity for us to continue to really embed EGX, to look at opportunities to expand our gross margins, to continue to shape the mix of the business in the right way that'll help us to accelerate there. So, Like we've said, we still see the recon business right now. We're in kind of a high 60s gross margin. We see opportunity to kind of get that well into the 70s, call it, you know, closer to the mid-70s over time. But this year it'd be just kind of, I'd say, relatively steady progress looking at where we are in Q1 and maybe seeing a slight acceleration or, you know, as we go through the course of the year.

Sorry, on... at the operating margin line item, were there any timing impact of OPEX? Are synergies, cost synergies coming in about plan? Because it just feels like OEM execution was slightly about.

Yeah, I mean, we're happy with the start. I mean, we were able, like we've said, we were able to, you know, really identify what the, you know, go forward org structure was going to look like as we closed the deal.

Uh, so we're able to capitalize on some synergies right away. Um, you know, maybe slightly above kind of our, our kind of initial expectations in the first quarter. Uh, but again, still look well within kind of our expectation of what we've said for the year, uh, is where we're currently thinking. Um, and, and like I said, there's the shifts between, you know, kind of optics versus gross margin, which is, you know, kind of, again, aligned with what our expectations were.

Understood. Matt, maybe one for you. I saw the ROS 2.0 within the presentation. Where are we in terms of adoption of ROS? Are we at an inflection point? And what does 2.0 do, which is different from 1.0?

Yeah, so 2.0 in the me was, you know, after putting it out in a controlled launch, getting a lot of feedback, we went and made a number of improvements to the software and the hardware that, you know, were making it kind of easier to use in many ways, but also making it really very seamless with our Empower instrument sets as well. And so... The 2.0 was then kind of more of a full launch of Argus, but we definitely decided to do it in a step-by-step way just to make sure that given that it's a brand-new-to-the-world technology, let's get 15, 20 docs using it, get some good feedback, help them to ramp up, and then use what we learned there to make sure that as we go to a broader set of doctors, one, we've got a great value proposition in terms of being able to help them understand how it's going to be valuable, but also we've got the ability to help them to ramp up fast and effectively with it. And so that's what the 2.0 launch was, and we're right on track with that in terms of, as I said, a couple dozen people surgeons using ARVIS, some using it very heavily, you know, some less heavily. The ones that are using less heavily, we're learning, you know, why and how do we ramp them up in terms of how heavily they use it. And there's some good learnings there, both about how to ramp surgeons fast, but also about which surgeons to target more as we do the broader launch. And then, you know, we've now got, you know, plenty of inventory on hand ready to do a broader rollout as we work through this year. A lot of excitement in the field. around the ability to bring Arbus to a broader set of knee surgeons, hip and knee surgeons, but particularly for the knee at this point as we work through this year. So we would expect that number to expand and be a good facilitator to our knee conversion efforts. but also start to generate a small but growing and high profit recurring revenue stream on the knee front. On the shoulder front, as I said, it's just an initial launch. So think of shoulder in the second half of this year being kind of where our knee was a year or so ago in terms of getting that first launch into the marketplace in the second half of this year and getting some good feedback that allows us to keep revenue and improving the product. You know, we've been focused on making sure that by 2025, we are right there in the market with a very strong shoulder Arbus offering to continue to, you know, to be a strong leader there and shoulder with technology as we always have been. And we're right on track for that with this announcement about the shoulder clearance for Arbus that just recently happened.

Understood. Thanks, guys. Thank you, operator. Next question.

Thank you. We conclude our question and answer session now. And with that, I would like to turn the conference back over to Matthew Teretola for any closing remarks. Please go ahead.

Thank you for joining us this morning. I want to end the call by thanking our team members for a strong start to the year. We have a lot of momentum and excitement across the organization and remain committed to delivering value for our internal and external stakeholders. Thank you for listening in today, and we look forward to sharing our second quarter results with you in early August.

And this concludes the conference. Thank you very much for attending today's presentation. You may now disconnect. Have a great day.