Colfax Corporation Stock

Hello, everyone. Thank you for joining us, and welcome to the Enovis call regarding the binding offer to acquire eCential Robotics. [Operator Instructions] I will now hand the call over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for our conference call to discuss our binding offer to acquire eCential Robotics.

I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning is Damien McDonald, Chief Executive Officer; Ben Berry, our Chief Financial Officer; and Louie Vogt, our Group President of Recon.

Our press release was issued earlier this morning and is available in the Investors section of our website. We also posted a slide presentation to accompany today's call 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 press release, the related slide presentation and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, please refer to today's press release and the related slide presentation.

With that, I will turn the call over to Damien. Damien?

Thanks, Kyle, and good morning, everyone, and thank you for joining us on short notice. This morning, we announced that we've entered into a binding offer to acquire eCential Robotics.

Today, I'd like to discuss the rationale for the strategically important acquisition, explain a little bit about the technology and our timeline for commercial development. Ben will then take you through the structure and the financials, and we'll have plenty of time for Q&A.

Now let's talk about eCential Robotics and how this meaningfully scales our commitment to enabling technology.

On the second quarter call last month, I said that innovation and enabling technology will be foundational to our long-term growth strategy. And that -- this means investing in technologies, the teams and the capabilities that will define the next generation of orthopedic surgery. Today's announcement is a step forward for Enovis in advancing that strategy.

As the market and customer demands continue to evolve, it has become clear that providing surgeons with optionality across the enabling technology spectrum is important. Supplementing our existing platform by providing a robotic solution will only accelerate our position in the market and broaden our strategic options as we innovate in this space in the future. In eCential, we found a company that complements our existing ecosystem and has demonstrated a track record of successful innovation.

With this capability in-house, we'll have an incredible opportunity to partner with surgeons who want planning, navigation and robotic capabilities. The surgeon who works across a hospital, an outpatient clinic and a couple of ASCs and wants the flexibility to utilize technologies across a connected ecosystem with a single intuitive user experience.

We built a strong foundation with planning and navigation and more recently, via the launch of the next-generation ASTRA Arvis. The demand funnel has been strong and while still early, we continue to see increased adoption and utilization, and now acquiring a leader in surgical robotics with a proven track record of developing robotic platforms makes sense for our enabling technology journey and eCential supplements our existing ASTRA ecosystem.

But the eCential transaction is more than just a robot, it's a deliberate strategy to reinforce Enovis' growth trajectory with a credible long-term position in robotics and advanced enabling tech. We're accelerating our pathway to bring a robotic platform to market by acquiring talent, intellectual property and advanced capabilities, which gives us strategic flexibility as we plan for the next innovation horizons in Orthopedics. eCential also brings an exceptional team of over 50 employees with a robust track record of designing, developing and facilitating the launch of three robotic platforms across orthopedics and spine.

Our partnership with eCential has grown over time and we've worked closely with them to develop a technical risk reduction and planning process to identify the most efficient pathway to market. This will enable us to bring a differentiated robotic solution to market while also supporting a durable cadence of continuous innovation across enabling technology, robotics, implant design and surgical technique.

So what does this mean for the near term? It means we'll bring the next-generation robot to market within 2 years, first in the knee, where the form factor and product requirements are well understood by the market and eCential already has a validated technology. Soon thereafter, we'll follow in the shoulder. And this is an exciting opportunity for us. We hold a significant market share globally in shoulder TSA. Currently, the form factor and robotic offering in shoulder is suboptimal. We believe developing a robot with eCential Robotics that carries advantages such as a robotic arm with 7 degrees of Freedom will differentiate our offering in the market. eCential's proprietary ownership of the robotic control layer will also enable greater precision, flexibility and automation readiness.

The last point matters more than it may sound. It means the robotic software will integrate seamlessly into the ASTRA ecosystem, allowing our foundation of AI-enabled planning and navigation to drive both the robot and ARVIS. Through one integrated workflow, a surgeon does not have to choose between two user experiences, and it means our commercial teams are not selling, training and servicing two technologies. It is one enabling technology ecosystem where they focus on optionality and usability. And this translates into quicker speed to market by leveraging the existing platform capabilities that are architected for the future.

And how does this impact our previously stated commitments? We believe this highly strategic acquisition will accelerate our long-term above-market growth opportunities in Recon. We've made significant progress in the last 12 months on our leverage targets and are ahead of plan on our free cash flow commitments. With this investment, we're meaningfully enhancing our long-term growth potential, while continuing to focus on improving free cash flow.

Now I'll let Ben take you through the structure and the financials. Ben?

Thanks, Damien. Hello, everyone. Let me walk through the structure, the financial impact and how this impacts our outlook over the next few years. The initial upfront consideration is based on an enterprise value of EUR 155 million, which equates to approximately EUR 176 million of cash consideration to be paid to eCential shareholders at closing. Additionally, this deal includes milestones of up to EUR 35 million contingent on the success of certain regulatory and commercial deliverables.

We expect the transaction to close by year-end 2026, subject to customary regulatory approvals. We will finance this transaction with a combination of cash on hand and with existing debt capacity under our revolving credit facility. In terms of leverage, we have reduced from 3.8x to roughly 3.1x over the past 12 months. This transaction initially increases leverage about 0.5 turn. However, we expect to be back to approximately 3x by the end of 2027.

We believe this is a critical strategic investment to build on our demonstrated innovation engine in Recon. This investment will support our growth and pace of innovation across Recon for the medium and long term. We expect to continue growing above market in the near term with our existing portfolio and internal pipeline and believe this investment will provide upside to growth as we begin introducing products in late 2028.

With regards to adjusted EBITDA margins, we expect approximately 150 basis points of deal-related dilution to adjusted EBITDA margin in 2027. And offset by approximately 50 basis points of underlying improvement. This equates to about a 100 basis points headwind in 2027. We expect to return to 50 basis points of underlying improvement year-over-year in 2028 and looking forward, we expect initial commercial traction to offset operational costs starting in mid-2028 leading to 100 basis points of margin improvement in 2029.

Despite these incremental investments, we expect our free cash flow conversion ratio to increase to approximately 50% in 2027, and we are committed to absolute free cash flow generation of at least $100 million next year. Free cash flow conversion will continue to improve in scale, and we expect to be around 70% free cash flow conversion in 2029.

To summarize, this investment provides us the ability to accelerate our time to market in robotics, enhance our development capabilities and build a robotic center of excellence. It's highly strategic and a good fit. We believe eCential provides the right foundation for securing our ability to deliver above-market growth in Recon.

While this investment puts near-term pressure on margins, we remain committed to increasing free cash flow and setting up the company for a future of sustainable, profitable, capital-efficient growth. Damien?

Thanks, Ben. In summary, we're excited about this opportunity for Enovis, eCential, our surgeon customers and our shareholders. This acquisition is a significant milestone and reflects our disciplined approach to bringing externally developed innovation into Enovis. eCential Robotics team brings exceptional engineering talent, intellectual property and a proven track record. And as part of Enovis, we'll be able to grow through a shared mission to support surgeons with greater operating room efficiency and help patients live more full active lives.

And with that, I'll turn it over to Vern for Q&A.

[Operator Instructions] The first question is from the line of Ryan Zimmerman with U.S. Bancorp BTIG.

This is Izzy on for Ryan. I was going to start with just some of the terms that you guys laid out for the acquisition and the EUR 35 million in milestone payments. Can you spend some time talking about the time frame that you expect those to be triggered over?

Yes, the contingent consideration are going to be tied to development milestones on both the knee and the shoulder introductions into the market. So based on the timelines that we put in the materials, you can think about them that way.

Understood. And could you help me with the margin outlook and the 150 basis points of the dilution? Just what visibility do you have into driving that 150 basis points? Is it coming from R&D? Is it headcount? Is it infrastructure? Any thoughts there?

Yes. Thanks. So the majority of it is the ongoing operating expenses that are coming along with the infrastructure that we're acquiring with eCential.

On top of that, we're also going to continue to heavily invest in these programs in the near term as we look to accelerate the launch of these products as we've laid out. So overall, I'd say it's mostly the burn that we're acquiring on top of some additional incremental investment that we're putting into this program.

Your next question is from the line of Vik Chopra with BMO Capital Markets.

It's Anton Heldmann on for Vik. Two for me. I guess, first on eCential, kind of revenue contributions and guidance is unchanged for '26 and implying no contribution this year. And if I'm hearing you correctly, it sounds like initial revenue contribution should begin in 2028. And I guess what run rate revenue contribution should we be expecting for that time frame? And how do we think about kind of the revenue inflection once the knee and shoulder robotic applications are introduced.

Yes. So I think -- we remain committed to growing the business above market like we've demonstrated over the last several years. We don't expect that to change. We think this helps secure our future as the market continues to evolve. So as we laid out in our prepared remarks, we think this is an accelerator to allow us to really capitalize and maximize our full potential here in the market given this technology that we're going to continue to develop.

So overall, I think we have what we need to continue to grow above market in the near term. and this will help us to really accelerate and sustain that growth into the future.

Okay. Great. And maybe just talk a bit more about the expected commercial strategy for the eCential business. Will robotics be sold directly by the existing recon sales force through a dedicated enabling tech team or through a hybrid model? Do you have all the people you need today? And if not, I guess, what changes are required to the commercial organization.

Louie, why don't you take that?

Sure. Yes, it's a bit of a hybrid approach to what we envision. And so we do have the ability -- we have the benefit of hindsight here, and we've kind of seen some of the things that have worked and some of the things that haven't worked for other companies who introduced robotic technologies and have had different degrees of success. So yes, we will be augmenting our channel with corporate resources at various different levels from enterprise solutions at the top, down to clinical success managers at the bottom and a few things in between.

But we remain committed to our distributor model, and I think we have the right blend of what we need to be successful. This is a couple of years away before big impacts. So we're building out some of those muscles now. We've been building them out with the ARVIS ecosystem that we've been rolling out this year. But we'll continue to do that here in the next couple of years.

Your next question is from the line of Robert Marcus with JPMorgan.

This is Henry on for Robbie. First one, could you talk a little bit more about why you believe acquiring eCential is the right strategy at this point versus the existing partnership? Said another way, like what changed to make full ownership the better path at this point versus continuing the collaboration? And then just a quick follow-up.

We really weighed that up. And I think the single most important thing for us was about agility and being able to respond to the way clinicians want to engage in terms of developing the next generation of technology. Partnership is great and works in a lot of instances. But by having the team come on board, we really think we're adding capabilities around the way they execute with a proven team with proven execution rather than having a series of one-off partnership agreements, first the knee, separate contract, then the shoulder, separate contract, then the evolution. And we just think that the speed and agility is really enhanced by having the team part of our family.

And then also maybe a little bit of additional color on why you think hospitals, ASCs, other centers would purchase or adopt this platform specifically, maybe just why you believe this platform is meaningfully different from the other robotics platforms already on the market today?

Louie, do you want to talk a little bit about why we have feedback from our surgeons around wanting to be part of an integrated solution across various offerings and how we view planning, navigation and assistance?

Sure. There are subtle nuances with features on the knee side. There's quite a bit of bigger differences on the shoulder vision that we have in place right now. We think we're able to take what is the latest generation robot, 7 degrees of Freedom that can give us a few different capabilities for how we want to do surgical techniques in the future and how that will build into personalized implants in the future as well.

So -- this puts us really in the driver's seat to give us the strategic optionality to go where we want to go with our Horizon 1, 2 and 3 in the space. In terms of the platform itself, we think it's very important to meet the customer where they are, both economically and from their preference with automation. So this blends very well with ASTRA Arvis, we don't want to forget about that. And that's a different customer segment with some different needs, and it's a very scalable and deployable technology. And of course, the robot here is going to be for the people who prefer more automation. And we think we have the capabilities with this new system to go wherever we want to go or some of the other systems may be a little more limited.

Your next question is from the line of Lawrence Biegelsen with Wells Fargo.

This is Ross Osborn on for Larry. So starting off, I believe eCential is currently on market with a spine indication. How should we think about that installed base and revenue run rate? Is the plan to further commercialize spine or pull back ahead of your knee launch?

Yes, that's right. They do have a spine solution. And our plan is -- look, they've also developed J&J's VELYS Spine robot. So -- again, this is part of why we like them because they've developed technologies and they have things in play. Our focus is on the total knee and then the total shoulder. And we don't have any intention to expand into the surgical spine space, but we'll support the agreements and the way that eCential has been building relationships across the spine universe in their open platform. But that -- our intention is not to enter the spine space specifically.

Got it. Then looking at the 50-person plus for Grenoble team, is that purely R&D and engineering or does it include manufacturing and what capacity exist today to support launch in '28?

Louie, do you want to talk about that?

Yes, I'll take that one, too. So yes, it's a little over 50 people. It is primarily engineering, primarily software and hardware development. It also includes some small quality team regulatory as well. So we like -- we call that basically, it's a product engine group.

It does have a small manufacturing and assembly team. There is a -- there are two buildings that we operate out of there that they operate out of there. The second one is for manufacturing and assembly. Right now, their output per year in that assembly, they believe is between 75 and 100 robots.

Your next question is from the line of Jeff Johnson with Baird.

Maybe a few follow-ups here, if I could kick off a few. But Louie, I don't know if or Damien for you. But just what has to be done from here? When I met with eCential in the past, they obviously have a robot. Louie, you mentioned the 7 degrees of Freedom on the arm itself. So is there more hardware development to go here? Is there more software development? Is it just designing a knee and a shoulder kind of software application on the current hardware platform? Just what are you going to be working on over the next couple of years, I guess, is the first question.

Great question. So the -- it's a little different in the hip and the knee. So the way that this has come together and the way that Damien has articulated it is it really is sort of a puzzle piece that comes and accelerates the strategy that we already have. So the core foundation and what I call the brain of our AI-based planning and our navigation, we, Enovis is going to bring that to the table for this robotic application and of course, the implants.

So on the knee side, we have some development to do on the planning front, taking a CT image and turning it into a virtual surgery application and creating the brain of what will actually drive the robot. So importantly, we have that to develop on the knee side.

And the second thing is we have a unique approach to innovation. We're incredibly surgeon-centric and we want to make sure that our surgeons and our KOLs really have a meaningful input into what we bring to market. And so instead of taking something off the shelf, we really want to tailor it as much as we possibly can, and we think that's going to be a difference maker in the market.

On the shoulder side, we've given ourselves a bit more time. We already have the planning application in place. That was an investment we made some time ago. It's been going very, very well and continues to develop along a nice curve. We have the navigation as well.

But shoulders is in its infancy. It's nascent right now. It's a bit of a blue ocean where we want to go with it is unique. So we've given ourselves some time for active discovery and true innovation process there. And that's why we have a little more time built into the schedule.

And Louie, when you say unique on the surgical approach itself robotically and getting to pin placement and beyond, I'm assuming?

Yes, yes, yes. We see a future with robotics that really enables things that the surgeon can't do without a robot. And that's sort of the next horizon unlike kind of where we are right now in the knee. And so as we think through that, there's new discoveries that we have to do together with our surgeon key opinion leaders. We've been working on some of these concepts for quite some time. The robot is really a facilitator. It's an enabler to help us get there and to be able to drive reproducibility with the masses.

All right. That's helpful. And sorry, I'm going to ask Ben maybe if I could just sneak in a couple financial questions. Just on the 2029 margin guidance. I know we're a long way away from that. But as you're going into full launch mode there, we've seen robots go in kind of placement strategies, obviously, some leasing strategies, a lot of different financial models, for robotics nowadays, and I'm sure those will evolve over the next couple of years as well.

But how do you get back to 100 basis points of margin improvement when you may be placing robots or having even mix shift to probably, I would assume, lower margin capital as you start to sell robots in 2029 and beyond?

Yes. Thanks, Jeff. I mean, actually, as Recon will continue to accelerate as part of Enovis, we'll continue to reap those benefits. So I think there is leverage as we get through some of the initial investment hurdles here to bring the products to market. And then we'll be able to capitalize on some efficiency as we step into 2029 on top of just Recon mix continuing to be a total benefit for the company.

So overall, we see opportunity here to get back on track of margin improvements. And like we said in the prepared remarks, continue to make progress on cash flow even here in the near term with bringing on this investment.

Your next question is from the line of Mike Matson with Needham & Company.

Yes. Just curious how you think this would fit in sort of the ASC setting. It does seem like we're seeing a lot of procedures moving to that setting. It seems like that's only going to accelerate with some of these potential inpatient reimbursement cuts and the comprehensive care for joint replacement model. So do you think this is something that is appropriate size and price point that will work well in the ASC setting?

Louie?

So every ASC is different, right? And the volume that they produce is different. Our research suggests that if you don't do 100 knees per year, the account doesn't do 100 per year. It may not be best suited for a large-format robot.

That's not exclusively that way, but that's generally what our research indicates. So importantly, with our strategy is we want to be able to meet the customer where they are economically and help them with their goals. And that's why we don't have a single-pronged approach here. And we think ARVIS is going to play a critical role in those accounts.

So it's a tailored approach that we want to bring to people to help them accomplish their goals and solve their problems, but not everybody is the same.

And then just in terms of ARVIS and the robot, it's the intention here to have sort of like a single software platform across all our enabling technology offerings. In other words, surgeon starts with ARVIS and gets comfortable with the software, the navigation software that they can then more easily move to the robot if they chose to do so.

Yes. In fact, you said that very, very well. You stole my thunder. So yes, the -- we want the customer experience to be the same. So we have what we call a unified portal planning and analytics portal. We have a unified navigation core that has a tech stack that will be similar or the same between the two outputs, the ARVIS -- the ASTRA Arvis, system and what is now the eCential Robotics system. So camera tracking our codebase, our workflow, our user interface, all of that will be the same throughout. It's helpful for the surgeon customer. It's helpful for the sales representative. It's also helpful for us from an innovation standpoint that we can innovate on sort of one platform instead of two or multiple.

Okay. So I think that's it from the Q&A. Everyone, thank you for the thoughtful questions. Again, short notice. We very much appreciate you joining us. We'll be at the Wells Fargo conference next week and look forward to providing an additional update and answering any Q&A or the third quarter results in early November. But thanks for joining, and have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Thank you. Thank you for standing by. Ladies and gentlemen, welcome to Innova's second quarter 2026 earnings call. Please note that this call is being recorded. At this time, all participants are in listen-only mode. There will be some opening remarks followed by a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. Thank you. I'd now like to turn the call over to Kyle Rose, Vice President, Investor Relations.

Please go ahead. Kyle Rose, Investor Relations.

Good morning everyone and thank you for joining us today for our second quarter 2026 earnings conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning are Damian McDonald, Chief Executive Officer and Ben Barry, our Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the investor section of our website, inovus.com. We also posted a slide presentation to accompany today's call on our website. Both the audio and the slide presentation of this call will be archived on the website later this afternoon. 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 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 Damian. Damian? Hey, thanks, Kyle. And good morning, everyone, and thank you for joining us today. On today's call, I'll start with an overview of our second quarter results. discuss performance across our two operating segments, Recon and P&R. And Ben will then walk you through our financial results and outlook for Q3 in 2026. After that, I'll come back and highlight a few quick themes before we open the call for Our second quarter results demonstrated the strength and stability of our diversified product portfolio, improving execution from our global teams, and the ongoing adoption of the one-a-novus mindset. We delivered organic growth of 5%, driven by 6% organic growth in recon and 3% organic growth in P&R. In US recon, we grew 6% organically in the second quarter, led by 8% organic growth in hips and knees.

Our focus products of Nebula, ARG and Arvis continue to gain traction and we're excited about the momentum we're carrying into the second half of the year. In hips and knees, we continue to execute our commercial plans across the hospital and ASC settings, and Nebula continues to be a driver of growth, with over 80% of new instrumentation sets going to competitive users in Q2. Internationally, we grew 6% in recon on an organic basis, including double-digit growth in shoulders. continue to strengthen our global portfolio and remain positioned to take market share. Innovation is a core pillar of our growth strategy at Anovus. We have a robust pipeline of new product introductions planned across our key markets and geographies. Arvus moved into full commercial launch in the US in the second quarter, and I'm excited about the early feedback from surgeons and the commercial teams. Using this launch is an opportunity to strategically target new customers, and we expect to see continued adoption in shoulders as we move through the second half of 2026.

Now, moving to P&R, this segment grew 3% on an organic basis year over year. Global bracing grew 4% with mid-single-digit growth in the U.S. driven by revenue cycle management and spine bracing. Recovery Sciences and Bone Stim were another source of strength for the quarter, delivering mid-to-high single-digit growth, and new products are expected to start contributing more as we get into the later part of the year. So we continue to execute across our businesses, and I'll pass it over to Ben to walk through the financial details.

Thanks, Damien. Hello, everyone. We reported second quarter sales of 583 million up 3% versus prior year on a reported basis, and up 5% on an organic basis. Reported growth included a 100 basis point tailwind from foreign currency, a 90 basis point tailwind from selling days, and a 260 basis point headwind related to the divestiture of Dr. Comfort. For the quarter, days adjusted organic growth was 4% at the enterprise level, 5% in recon, and 3% in P&R, which was in line with our guidance. Second quarter results for our international businesses were negatively impacted by the ongoing conflict in the Middle East, resulting in a 100 basis point growth headwind. This represents about a 40 basis point headwind to total ANOVUS growth in the quarter. For the first half, Anovus grew 4% organically, 5% days adjusted, with recon at 7% and P&R at 3%. This growth is highlighted by strong performance in U.S. recon with both extremities and hip and knee growing at 8%, driven by strong commercial commercial execution and new products.

We delivered adjusted gross margins of 62 percent, an underlying improvement of 120 basis points, driven by an $8 million benefit from two 2025 tariff refunds and operational productivity. It was partially offset by $4 million of ongoing tariff impact and $2 million of unplanned inflationary pressure as a result of higher raw material and freight and distribution costs stemming from the Middle East conflict. Adjusted EBITDA margin was 17.9%, an improvement of 70 basis points on an underlying basis, and up 20 basis points through the first half. Our second quarter effective tax rate was 24%. Interest expense was $8 million for the quarter versus $9 million in the prior year. Overall, we posted adjusted earnings per share of 90 cents, representing 14% underlying growth in the quarter and 12% earnings growth through the first half. We remain focused on disciplined capital allocation.

Free cash flow in the quarter was $31 million, an improvement of $27 million versus prior year, which gets us the slightly positive free cash flow generation in the first half, a significant improvement. We expect to continue our positive momentum in cash flow and will continue pursuing opportunities to make investments to support growth. Turning to guidance, we are reaffirming our 2026 guidance. Commercial execution remains critical to delivering our 2026 commitments. We continue to focus the organization's attention on increasing commercial agility and targeted share gain opportunities. On the profit side, we expect the $8 million benefit from the partial tariff refund to be offset by $10 million of full year impact from the increased inflationary environment. we are currently facing. Additionally, we expect free cash flow conversion of greater than 25% in 2026, as laid out in our prior calls.

In terms of quarterly phasing for the second half, we expect the third quarter to have a heavier impact by seasonality than in prior years due to market conditions in Western Europe and the continued disruption from the conflicts in the Middle East. We expect sales acceleration across both segments in the fourth quarter as we continue to scale and launch new products against the backdrop of improving market volumes as we close out the year. To summarize, second quarter was in line with our expectations given the dynamic market environment. We remain confident in the strength of our company, the diversified portfolio we've built, and the continued execution leading to consistent market share gains.

I'll turn it back over to Damian for closing comments. Damian? DAMIAN LYNCHMANN- Hey, thanks, Ben. Before we get into Q&A, I just want to take a few minutes to reflect on my first year. A year ago this week, I led my first earnings call at Anovus. I'd been here about 90 days and found a company that had assembled a compelling portfolio, yet was early in its journey of value creation. When I spoke to you then, I outlined three priorities, commercial execution innovation, operational excellence and financial discipline. These priorities are driving meaningful change in how we operate and remain the foundation for how we will deliver sustainable, profitable, capital-efficient growth.

Most of what we did in the first year was foundational. We changed the operating cadence and attracted new talent to the senior leadership team. We put real rigor around daily management and revised our incentive plans to align with our strategic priorities. We pushed EGX deeper into the business and and we shaped the portfolio most visibly with the divestiture of Dr. Comfort. We also put a focus around fostering a one and novice mindset, working together across teams to drive growth and execution. With regard to commercial execution innovation, it was clear that our teams had been stretched by complex integrations and rapid product launches, and we needed to create space for our teams to bring their A-game to every customer-facing activity. We continue to grow above market in both of our business segments and still see potential for further acceleration.

Innovation is a key area for our future growth and we continue to invest in people, process, and product to remain a nimble innovator. It's clear that innovation and enabling tech will be foundational to our long-term growth strategy. This means investing in the technologies, the teams, and the capabilities that will improve clinical outcomes, optimize surgical efficiency, respond to customer preferences, and ultimately define the next generation of orthopedic surgery. On operational excellence, I said last August that high-teens EBITDA margins were not sufficient for this company's ambition, and I still believe that. We held our margins through tariffs and unexpected inflationary headwinds while stepping up our investment in R&D. And our gross margins have expanded on the back of mix and productivity. Over the next year, the emphasis moves from embedding our foundational business system to optimizing our operating model.

On financial discipline, for the past year, our response to every capital allocation question has been debt reduction, and it needed to be. We've since moved from negative free cash flow to positive, bought leverage down to 3.1 times, and refinanced our balance sheet to improve terms and capacity. And this is also the last year. of heavy investment in the Lima integration. As the balance sheet strengthens, we're beginning to evaluate how we can advance that portfolio for durable long-term growth without losing our focus on cash generation and debt reduction. I'm more optimistic now than I was 12 months ago and it isn't because of any single product or quarter. It's because this organization has embraced change faster than I anticipated and I've seen what we can do when everyone is pointed in the same direction. This is the one and over mindset and it's driving engagement across the organization.

So before we go to Q&A, I want to thank the Anovus team for their dedication and execution over this past year. The efforts have been instrumental in delivering meaningful changes that we've discussed and positioning Anovus for long-term success.

So, Carl, why don't we open it up for Q&A? Thanks, Damian. In an effort to accommodate everyone in the Q&A session, we ask that analysts limit questions to one question and one follow-up. You are welcome to rejoin the queue, and we will fit you in if we have more time. With that, we'd like to now open it up to take questions. Operator?.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. At this time, I would like everyone to know that in order to ask a question, please star 1, then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ryan Zimmerman with US Bancorp BTIG. Please go ahead.

And thanks for taking our questions. I appreciate your thoughts, Damian, one year post the position. Maybe to begin, I'd like to drill into US Recon for a moment here. you saw really nice growth, particularly in the hips and knees business. Extremities was a little softer than maybe I would have expected, given where the shoulder market's going. So maybe, Damian, you could spend a minute on kind of parsing some of that out, kind of what the dynamics are, particularly in U.S. extremities.

as you think about the balance of the year. Sure, hey, good morning, Ryan. Thanks for the question and joining us. Yes, look, I'm really proud with how that team have executed in both spaces, hips and knees and shoulder. If you look through the first half, hips and knees are up 8%, extremities are up 8%. The Q2, yes, we had some challenges there with a few things. One is we're lapping the ARG launch from last year. So it was a pretty tough comp.

But I think importantly, we had a lot of med ed events in Q2 that took a lot of our high volume KOLs and surgeons out of the space for a few weeks. The first half performance, I think, is the thing to look at. I mean, look at our scale. We move a couple of weeks of people here one week or another and it materially affects us. So I think the first half is the way to look at it. And so as we think about the back half of the year, we've got more work coming with ARG, we've got the ARVIS rollout expanding. And so that's why we're confident about the back half of the year.

year. Understood. Maybe turning to Ben, growth Gross margins, if you look over the last six quarters, have been trending favorably or so. Ben, can you talk about your gross margin progression, where you think that can go, and what levers you have, particularly against the backdrop of some of these inflationary pressures that you're experiencing? Sure.

Yes, thanks Ryan for the question. I mean, it's one of the things that we're proud of in terms of how we built the portfolio with regards to how the product mix flows through the P&L with the way that we've established the segments and what's growing the fastest is generally coming with higher standard margins. You layer that on top with continuing to get added benefits as we get further downstream with regards to all the integration work that we've been doing within the recon business, being able to start to capitalize now on some of the synergies from the Lima deal as We're consolidating and expanding production facilities in lower cost locations. And then also you've got just deeper embedded continuous improvement that we've been able to drive into both segments on PNR and Recon with regards to productivity and maintenance making sure that we're working through, you know, how do we get the most out of our manufacturing and operations supply chain. So, overall, I would say it's a multi-levered effort and we got a few tailwinds that help organically, but then it's about, you know, making sure We're offsetting some of the surprises that come our way, like the inflationary pressure that we've been continuing to face. And then we did in the quarter get the benefit of a partial tariff refund as well. That helped in the quarter. But overall, I think as we look at it, we see a multi-year cadence of margin expansion and a lot of that driven by gross margins.

Thank you. Thank you. Your next question comes from the line of Yong Lee of Jefferies. Please go ahead.

All right, great. Thanks for taking the questions. I guess maybe starting with cash flows. You know, good to see the progress in 2Q, and it seems like you're on track for the 25-plus percent converter for the year. You know, some of the UMDR costs and integration costs goes away. soon or next yearish. I wanted to hear a little bit more on the key drivers that gets you to 40 to 50% and then 70 to 80% after that.

Hey, Jan, thanks for the question. Yes, I mean, I think you're really starting to see adjusted costs start to step down like we've talked about. You know, we're in year three of a pretty complex integration of a European asset in Lima, and we'll expect that to continue to step down even as we enter into next year. and beyond. I think you're starting to see some productivity in our working capital as well. I mean, I think Damien made in his prepared remarks that we've realigned incentives around cash flow for the company. And that's an area where we're bringing more discipline and more of the EGX toolkit into making sure that the company is doing its job. there's the right organizational focus around cash flow. And it's starting to read through.

So it was nice to see the first half as positive free cash flow. And generally, you've seen us seasonally have a stronger second half when it comes to cash generation.

All right, great, very helpful. I guess the PowerPoint comments mentioned increasing market dynamics, including in the second half as well as in Western Europe. Can you maybe unpack that a little bit for us? are more impacted, which geographies are more impacted.

Yes, Jan, look, so let's, apart from the Middle East, right, which we've characterized well before, I think we saw some softer markets in Western Europe, inside international Western Europe. And predominantly, I would say, you know, France, Spain, Italy. Again, it's no surprise that there are a lot of environmental things going on in those countries. And so we just see a slightly softer market in the OUS markets, but particularly Western Europe.

All right, great. Thank you. Thank you. Your next question comes from the line of Bichai Kumar of Evercore. Please go ahead.

Hi, Damian. Good morning, and thank you for taking my question. I guess my first question is on this back half guidance, right? There's a helpful slide in the deck. you talk about your days adjusted growth by segments and correct me if I'm wrong, 3Q, I don't think like there's any days differentials. So your days adjusted and report organic should be in line-ish. That would sort of imply an acceleration from second quarter, right? On a days adjusted basis. I'm curious, 3Q is, you know, seasonally it's softer. What is.

driving this optimism and now am I thinking about the right way? Yes. Hey, hey, VJ, it's Ben. Thanks for the question. I mean, I think as, as we made comment, I mean, we're, we're starting to see some of the benefits of the hard work that we've been doing around really, you know, put putting muscle behind commercial execution, uh, and scaling the new product. So, I mean, I think as we see our. the demand for that and the excitement for that starting to pick up here. We would expect that will be a contributor for us in the second half of the year, as well as continued penetration of Nebula and ARG. And we have opportunities there. to just continue the acceleration. I think on the P&R side, you're also seeing some new products and some good discipline around commercial execution that's starting to read through in customer conversions.

So those will start to read through in the second half as I did say in my prepared remarks that we do expect a more seasonally soft Q3 than what we've seen in the past, so that will be a bit of a headwind that will have to offset with some of these things that I just mentioned. But overall, I think the way that you characterized it is correct. And then just a reminder that we do have, you know, a couple of.

one day in Q4 in terms of selling day impact, but Q3, as you mentioned, is zero impact year over year. Yes, just to go on the new product things, I mean, Nebula we talked about, I mean, that's continuing its rollout. It's still early days, but we're getting a lot of great customer conversions there. You talked a little bit about P&R. I think what the team have done in Regen is really great. I mean, now the proxies are out. We are meaningfully taking share in that Regen business.

And I think that's a good sign about the commercial execution from that team. And then the recovery sciences team are going to be launching Revital of treatment in the companion market. I mean, that's an exciting aspect and a big conversion funnel there too. So again, a lot of good things that are coming the way on both sides of the house.

I understand. And then maybe Ben, one on sort of a fiscal 27 question. your guidance for 26 now includes a tariff-free fund benefit, right? And that's being offset by higher inflation. But when you think about 27, you lose the tariff tailwind, but inflation stays, right? I guess, is the margin algorithm for 27 changing?.

No, we don't expect the algorithm for 27 to change, Vijay. I think we will continue to mitigate the the inflation that's coming our way, sometimes that takes a little bit of time. As I mentioned, there's productivity opportunities for us to continue to drive. And as I think about stepping into next year, you also see continued step down in an adjusted cost. So as I think about our margins and cash algorithm for 2027, I would say that those are still intact.

Thank you. Thank you. Your next question comes from the line of Robby Marcus of JP Morgan. Please go ahead.

Hi, everyone. This is Lily on for Robbie. Thanks for taking the question. Following up on the question around macro trends, on the general market and procedure backdrop, we've heard some different commentary from some of your peers around the health of the ortho market in the second quarter. So I'm curious what you've been seeing on your end and if there's been any disruption from declining ACA. and Medicaid enrollments? And to what extent is that a contributor to the macro disruption you called out?.

Why don't I start off and why don't you jump in? I think let's talk about US. I don't think we're seeing any change in the underlying dynamics, but there's sort of week to week and month to month volatility that's crept in. But I would say, if you look at our first half, we're pleased with how the mark evolved and where we landed with both hips and knees and in extremities. I think there's a lot of noise. The physician payment proposal that's been put out has created some noise. I think the CJRX has created some noise. some noise but on average we see the markets is pretty stable.

Yes. Hi, Lily. This is Kyle. Yes, I think we agree with Damian there. I think we're encouraged with, you know, the growth that the recon team put up in the first half of the year and in the second quarter in particular. I mean, if you look at, you know, six percent growth. growth in total US recon. And if you zoom out a little bit and look at the second half, is 7%. That looks to be above the broader peer group when we look at some of the main market segments we play in. So I think we're really excited about the progress thus far, and we'll see how the rest of the year plays out.

Got it. That's helpful. And then just as a follow-up, a lot of your major competitors have been experiencing some form of disruption this year, whether it be Salesforce reorganization or preparing to separate their orthopedics business. So I'm curious the impact that that's had on the competitive landscape. Have you seen any material change in dynamics over the last few months, and do you think this has opened up a window for you to capture share in a sustainable way? Thanks.

Yes, that's a great question. I would say, I talked about being a nimble innovator and what we've been doing in product introductions, I think has created some noise on the commercial side and it's made us, I think, a more attractive venue and the fact that we are stable and growing, We use the word talent magnet. I'm excited about what we're creating, and I really hope that people who want to grow businesses are interested in coming to join us. So I can't comment about what's going on inside each of those other competitors that you're talking about. What we're doing is trying to create a really great environment for people to come and grow businesses, and that's been really great. reading through and how we've attracted talent over the last six or 12 months. Hi Robbie, is your line muted? I'm all set. Thank you. Thank you. Thanks, Lilia.

Your next question comes from the line of Lawrence B. Jolson of Wells Fargo. Please go ahead.

Good morning, this is Ross Osborne for Larry. Thanks for taking our questions. So maybe looking at Arvis, with the full commercial launch underway, can you discuss how conversations are evolving beyond the initial KOL and high volume surgeon base? You know, what aspects of the platform are resonating most strongly? Where are you encountering the most skepticism or pushback? And what education is still required to help surgeons fully appreciate the benefits?.

Yes, thanks for that Rob. I think one of the things that we're really hearing about is just how versatile the system is. It's mobile, it's small, it really deals with, in shoulder in particular, the anatomy that's quite complex. For knee, the new gap balancing technology that we put into 2.0 is reading through. So the feedback has been very positive in both the med ed settings and the clinical settings. The demand funnel is tremendous. In the back half, we're going to be rolling it out more in shoulder and then starting into the international market. So we're really encouraged by the early feedback, both from the clinicians and the commercial team. Their access has been improved as well by having something like this to talk about.

Then as a follow-up, how do you feel about your rep headcount? Do you feel you have enough and the right people in place? How should we think about the incremental spend coming to the model in 27?.

Yes, I think we have got plenty of opportunity to, A, attract talent, given what we're doing with new product launches, but B, with what we're doing in terms of products like Arvis, the productivity per rep is improving as well. So I don't see us needing to do massive headcount hiring. to achieve our goals. Like I said, if we can attract talent and use that as an opportunity for account conversion, tremendous. But that's not the predication of our model. Thank you. Thanks, Rob. Thank you.

The next question comes from the line of Keith Hinton of Freedom Capital Markets. Please go ahead.

Great. Yes, a couple of P&L cash flow questions here, starting off with the inflation figure that you put out. I think you said about a $10 million impact. I don't recall whether you've put out a number like that before. So I'm curious, is that sort of all incremental in the last 90 days or is that just over the course of the year? And is that $10 million impact net of sort of any price increases you can take on the P&R side or anything else you can do to protect margins or is that kind of a gross.

number that then gets netted down through those other things. Yes, thanks, Keith. I think we started to see it really materialize at the beginning of the second quarter here and kind of starting to read through there near the end of the quarter. So I mentioned in my remarks we had a $2 million impact in Q2, so the balance of that 8 will in the second half of the year, probably a little bit more weighted to Q3 than Q4 as we start to build in some of the mitigation efforts. So that is a net number. And yes, we will try to continue to pass through as much of it as we can. We've struggled with that a little bit, frankly. given some of the market dynamics and some of the competitive dynamics that we have at play. Particularly, this impacts the P&R business the most.

And so we're continuing to try to balance that because we've been under a pretty heavy inflationary environment, be it tariffs or now this Middle East conflict for a while now. And we can only do so much when it comes to, you know, passing some of that on before we start to put some of the revenue at risk. So we're trying to balance it. going to try to really get after it hard in the second half, but we do think it is a bit of a challenge a detriment to the second half here in terms of how that's going to play through. Now, we did get a partial benefit of tariffs in Q2. It's not the full benefit. We don't really know how that's going to play out. Ideally, there would be some offset that could come from that, but we're not planning on that to happen at this point.

this point. Great. And then just on free cash flow, you know, obviously a pretty strong quarter here. So just wanted to ask, you know, anything to call out there? It doesn't look like, you know, it looks like there were some working capital moves, but they were, they mostly netted out. So just anything to call out, any upside to that 25% or higher guide for this year? And I know you guys don't break out free cash by segment, but can you speak to that at all on a high level? Is the recon segment free cash? positive on a standalone basis or is most of this free cash coming from PNR?.

Yes, most of the cash continues to come from P&R. I mean, we are seeing improvement year over year on the recon side. We still see more opportunity there, as I mentioned earlier, with regards to continuing to embed. the business system and be now past a lot of the heavy integration work and capitalizing on some of the synergies in that business. So I think there's more opportunity there, frankly. I think the... the quarter was a good sign. I mean, it was maybe a little bit better than our expectations in terms of our performance. And given our second half hitter, history in terms of cash generation, we feel pretty confident that we're on a pretty good trajectory here.

I'm not going to change guidance at this point, but overall, I like the trend that we're on.

Okay, great. And just to be clear, nothing, you know, no kind of one-timers or anything to call out in terms of the strong results?.

No, no. I mean, other than the tariff refund, but I also mentioned there were some offsets to that. So, you know, from our standpoint, it was a pretty strong read through of execution.

Great, thank you so much. Thanks, Casey. Thank you. Your next question comes from the line of Jeff Johnson of Baird. Please go ahead.

Thank you. Good morning, guys. Damian, I just wanted to follow up. We can all debate, I guess, ACA and Medicaid and some of those issues on the U.S. market, but your European comments, France, Spain, Italy, we have picked up a few stories here and there, some transient strikes, maybe ahead of some austerity concerns or potential issues. in Europe. So I guess your comments on those markets, are those due to just kind of transient strikes that, you know, maybe disrupted a little bit in the second quarter, not sure if that'll continue, or is it more you see in a slowing demand trend there or something that concerns you more on the patient or surgical volume side? Thanks.

Yes, I would say it's more weighted to the transient. So, you know, again, strikes, fires, heat waves, you know, all of those things we believe are transient and ultimately, you know, you keep the patient in the funnel, it's just you delay the procedure. I think the only thing for me is sentiment as the war in the Middle East continues, and what does that do as people reorient funding towards military spend versus healthcare? We haven't seen any of that read through, but that's the watch out. line with that, we're very focused on commercial execution and what do we have to do to double down on account conversions and market share gains to get ahead of anything like that.

All right, that's helpful. Thanks. And then just to follow up on PNR, it's a simple one, but I think you had been accruing for some of the proposed changes on the bone stem side. Obviously, those got reversed. I'm assuming you just reversed those accruals during the period and no real impact in the period or expected going forward on that bone stem stuff now that's been rolled back. Thanks.

That's right, Jeff. Yes, I don't know if you got that, but that's correct. And as I said in my comments earlier, I'm really pleased with how that team is executing and we're meaningfully taking share in that space.

Perfect. Thank you. Thank you. Your next question comes from the line of Caitlin Roberts of Canaccord Genuity.

Please go ahead. Hi, thanks for taking the questions. Just a quick one on foot and ankle. I think one of your competitors called out strong growth there this quarter. How was performance for you guys? And just generally, is that market continuing to rebound? Yes.

Yes, we're very pleased with that team, actually. They had a great quarter, and we think the WAMGA there is like 4% to 6%, and we were meaningfully above that. So I think good commercial execution, we've had some great account conversions, and the innovation pipeline there is really strong.

I'm really pleased with how that team's performing this year. Awesome. And then just thinking about another one of your competitors has a shoulder roll-up going on for their robotic system. a smaller format robotic system. How were you thinking about that versus Arvis and have you heard kind of any comparison from surgeons in the marketplace or not really hearing that?.

Yes, I think that's an interesting one. Look, we really believe that there's an opportunity, actually a big opportunity for enabling tech in the shoulder. We think Arbus right now is a real and validated option. It deals with the anatomical differences that a large format robot I think is going to find tricky, but I really think the market's going to continue to evolve. So I think we've got a great offering now. We've got to continue to innovate to respond to that, but this is an exciting opportunity for Arbus.

Great, thanks so much. Thanks, Caitlin. Thank you. Your next question comes from the line of Steve Lickman of William Blair. Please go ahead.

Thank you. Good morning. Damian, I appreciate your comments now one year in. You mentioned evaluating opportunities without losing focus on cash flow. You think about portfolio management. Thank you. and again, without losing focus on cash flow, which is, of course, important, are you still evaluating the portfolio the other way in terms of potential more divestitures and or skew reductions on either side of the business?.

Great question, and you're right, I didn't specifically call that activity out, but yes, that's definitely a way we're thinking about the portfolio evolution of what else makes sense to keep or not, and SKU reduction for me is one of the great parts of EGX. So, yes, I would say it's. convex and concave on that respect with capital allocation.

Got it. Great. And then what trends are you seeing in your ASC business? I think you talked in the past about having P&R and recon under one roof is a competitive advantage there. So it's obviously an important channel. Just your latest thoughts on what's happening in ASCs for you guys. Thanks.

Yes, we really like the ASC setting for a number of reasons. I think there's a lot of patient preference for it. I think there's an increasing physician preference for it. Some of the reimbursement dynamics that we talked about earlier, I think are going to drive it even more towards ASCs. and people talk about this, the downside is the pricing. The upside for us is the market share gain and the fact that contracting isn't so fixed and players like us, I think, have a more dynamic opportunity to take market share and account acquisition in the ASCs large format systems where contracts can be locked up for multiple years. So we think the trajectory in the near term is positive, but then the longer term tailwind there is definitely a benefit for us.

Got it. Thanks, Damien. Cheers, Dave.

Thank you. Your next question comes from the line of Vic Chopra of BMO Capital. Please go ahead.

Hey, good morning, and thanks for taking the question, too, from me. It's nice to see the progress on the free cash flow. I'm just curious, at what leverage level do you expect your capital allocation to shift more towards M&A? And then I had a quick follow-up, please.

Hey, Vic, thanks for the question. Yes, I think we've said that we've been continuing to drive our leverage ratios down with the goal to get that down below three here this year. So I think that's kind of concurrently still in play as we think about the full year outlook. So overall, I think we're pleased with that progress. As we start to step below three, that gives us more freedom to think about other things. But, you know, our focus has been really driving that down and we've seen good progress to get where we are at this point.

All right. Thank you. You know, as you look ahead to next year, I'm just curious if you expect the value creation from the company to be driven more by improving revenue growth, margin expansion, or free cash flow conversion, or a combination of the three. Thanks.

That's a great question. The answer is yes. We think it's all three. I mean, we clearly heard from investors as I came on board that free cash flow, generating cash, debt reduction was key. And you can see that we focused heavily on that capital allocation and it's reading through. Growth, growth, growth. And we've done a great job, I think, of driving growth in key markets and continuing to innovate. The more we do that, the more we read through into margin accretion. But this is why I talked about EGX and the business system, because we've got work to do still that I think is meaningful. in terms of margin accretion by the way we operate. We, for example, have set up two facilities now.

We call it global business systems and the service application of cost centers being aggregated. So we have one in Portugal, one in Hydroponica, bad in India. We're opening up a third in the Americas. And we expect that to continue to meaningfully contribute to our margin accretion by putting global business services into shared service facilities. So we want to continue to focus on the capital allocation because we know that's important to investors. We believe. growth is essential to value creation. The more we do that, the more margin we accrete, but we need to change our business systems.

And we're doing that meaningfully and all three are reading through.

Is your line muted on Zik? I'm good. Thank you. Thanks, Vic. All right. Thank you. Your next question comes from the line of Mike Madsen of NEDAM. Please go ahead.

Hey everybody, this is Joseph on for Mike. They may maybe follow up just on margins a little bit or gross margins. you know, great to see significant expansion in the last two quarters. But just looking at the second half of the year, I'm wondering a bit just maybe about the sustainability or the cadence of margin expansion from here. Should we be looking at second half as similar to first half or, just with tariffs and the initiatives you talked around EGX, are there some different levers that could move that materially up or down from where you guys landed in the first half?.

Yes, Joseph, I think as we think about gross margin, again, I think the mix of the businesses is playing a role to help us here. Now it's being offset a little bit by some of this added inflation that we're seeing that we'll read through in the second half. So again, I'm not given specific H2 guidance on this, but I would say that we'll continue to make progress year over year in growth margins. And it's a critical lever for us as we think about our profit expansion goals here over the next several years. So we'll continue to focus on driving as much productivity as we can there and offsetting some of these new headwinds that are coming into fruition. But overall, I think we're pretty pleased with the progress we've made so far.

Okay, great. And then, you know, it's good to see some of the early feedback. on ARVIS, maybe just wondering how those conversations are looking at in the ASC setting, which you guys have really thought about, you know, the ARVIS launch in 2026 guidance. And then maybe just generally for ASC market,.

Where do you think your market share sits at currently? Well, we don't disclose where we think about market share. We know we're definitely skewed more towards ASCs than some of our competitors. And again, I think that's a net advantage for us. The Arvis, I think, is a perfect, perfect. offering for the ASCs. Again, it's mobile, you can move it between rooms easily. A clinician can take it from account to account. I think that's a big deal.

And I think the economics work for ASCs very much in favor of an offering like Arvis. So for three different reasons, the feedback so far has been very positive.

Great. Thanks very much and congrats on the strong quarter.

Thanks, John. Cheers. Thank you. That concludes our question and answer session. I would now like to turn the call back over to Damian McDonald, CEO, for closing remarks. Please go ahead.

Thanks everyone for joining us today. This was an encouraging first half for 2026 and we've a lot of opportunity ahead of us. Against this complex external backdrop it's more important that we remain focused on what we can control and it's disciplined execution through the second half of the year. So we really appreciate your continued interest and the support and we look forward to updating you again on our third quarter in early November. Thanks a lot.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Ladies and gentlemen, thank you for standing by. Hello, and welcome to Enovis First Quarter 2025 Earnings Call. [Operator Instructions] Thank you.

I would like to turn the conference over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today for our first quarter 2026 earnings conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning are Damien McDonald, Chief Executive Officer; and Ben Berry, our Chief Financial Officer.

Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovis.com. We also posted a slide presentation to accompany today's call on our website. Both the audio and the slide presentation will be archived on the website later today.

During this call, we'll be making some forward-looking statements about our beliefs and estimates regarding future events and results. These forward-looking estimates are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.

For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying reconciliation information can be found in our earnings press release and in the appendix of today's slides presentation.

With that, let me turn it over to Damien. Damien?

Thanks, Kyle. Hello, Everyone. We're encouraged by our start to 2026 with the first quarter results reflecting solid execution and continued progress advancing our innovation-led strategy. Our priorities, commercial execution and innovation, operational excellence, and financial discipline continue to guide our actions.

Since I joined 12 months ago, we have made meaningful changes to our operating model and senior leadership teams, implemented more rigor around daily management and changed company incentive plans to align with our strategic objectives. We still have more work to do to fully capture the opportunities in front of us. However, I'm energized by how the team has embraced these changes and the One Enovis mindset.

Turning to the first quarter results. I'm pleased with our continued share gains in both our business segments. Our innovation pipeline continues to advance while we benefit from the contributions of new product launches. In the first quarter, we delivered organic revenue growth of 3% with 6% organic growth in Recon and 1% organic growth in Prevention & Recovery.

These results include the impact of fewer selling days in the quarter, which represented an approximate 240 basis point headwind to growth. On a days adjusted basis, organic growth was 6% at the company level with 8% growth in Recon and 3% growth in P&R.

In U.S. Recon, we grew 8% organically in the first quarter, led by 10% organic growth in extremities. Our augmented reverse glenoid system, ARG, continued to gain traction and was key to driving double-digit growth in shoulders.

In Hips and Knees, we grew 6% organically, and we continue to reinforce our portfolio to compete across hospital and ASC settings.

Nebula continues to be a driver of growth in the majority of new instrumentation sets going to competitive users. We're still in the early rollout of Nebula, which unlocks a meaningful segment of the U.S. hip market for our sales teams.

Internationally, we grew 3% in Recon on an organic basis, including double-digit growth in Extremities. We continue to strengthen our global portfolio with cross-compatibility of implant systems and are positioned for sustained above-market growth rates in 2026 and beyond.

Innovation remains key to our strategy. We have a robust pipeline of new product introductions planned for the next 24 months. We showcased many of these, including Arvis at the AAOS conference in New Orleans in March. We've started to deploy Arvis through a flexible business model with the primary goal of driving implant utilization.

Arvis shoulder cases have started and are encouraged by the early feedback. Our commercial teams are using this launch as an opportunity to strategically target new customers, and we expect to see continued adoption in the shoulders as we move through 2026. I'm also excited to note, we recently had our first OUS shoulder case in South Africa and remain -- and we see demand for this technology continue to build.

Now moving to P&R. This segment grew 1% year-over-year on an organic basis and 3% on a days adjusted basis. Global bracing grew 3% on a days adjusted basis, driven by revenue cycle management and upper extremity bracing. Bone stim was another source of strength for the quarter, delivering high single-digit growth.

So a lot to be excited about across the whole business, and I'll turn it over to Ben to walk through the financial details.

Thanks, Damien, hello, everyone. We reported first quarter sales of $589 million, up 5% versus the prior year on a reported basis. Reported growth includes a 420 basis point tailwind from foreign currency, a 240 basis point headwind from selling days and a 210 basis point headwind, primarily related to the divestiture of Dr. Comfort. Days adjusted organic growth was 6% at the company level, 8% Recon, 3% in P&R, with both segments growing above the market.

As part of the conclusion of our previously disclosed SEC comment letter process, we revised our definition of adjusted EBITDA beginning in Q1 2026 to no longer adjust inventory step-up charges associated with acquired businesses. While we continue to believe that our prior non-GAAP presentation was appropriate under the guidelines and provided meaningful comparability for investors, we updated our presentation to align with the SEC staff position on this adjustment. For reference, we have provided a table in the appendix of our Q1 slide presentation that outlines the impact of this change.

We had positive business mix in the first quarter, leading to adjusted gross margins of 62%, an underlying improvement of 40 basis points, driven by favorable mix, ongoing productivity, and realized synergies in our manufacturing and supply chain operations. This was slightly diluted by tariff impacts as we absorbed, mitigated, and continued to offset a portion of the roughly $4 million in tariffs we paid in the quarter.

Adjusted EBITDA margin was 17.6%, down 10 basis points year-over-year on an underlying basis, mostly driven by increased R&D investments and phasing of expenses.

Our first quarter effective tax rate was 21%. Interest expense was $9 million for the quarter, flat versus prior year. Overall, we posted adjusted earnings per share of $0.89, representing 10% underlying growth versus prior year.

We remain focused on disciplined capital allocation. Free cash flow improved $16 million year-over-year in the first quarter. We continue to expect free cash flow conversion of greater than 25% in 2026 as we've laid out in our prior calls.

Turning to guidance. We are reaffirming our 2026 guidance. We expect 2026 revenues to be split evenly between the first and second half of the year. Commercial execution is critical to delivering our 2026 results, and we are seeing some early benefits across both of our business segments.

In Recon, our new products remain a bright spot, and we have a healthy pipeline of account conversion targets. In P&R, growth remained stable and slightly ahead of market.

For the company, international market volumes have experienced some volatility in the first part of the year, but we expect them to recover to normal levels in the balance of the year. Our Middle East revenue exposure is about $1 million to $2 million a month. We expect to absorb this new headwind as well as the resulting inflation in the supply chain with no change to our original guidance.

To summarize, the first quarter was a solid start to the year, and we remain confident in the power of our diversified portfolio and the continued progress we're making towards sustainable, profitable, capital-efficient growth. Kyle?

Thanks, Ben. In an effort to accommodate everyone in the Q&A session and keep things to a reasonable time, we ask our analysts to limit questions to one question and one follow-up. You are welcome to rejoin the queue and we will fit you in if we have time.

With that, operator, we'd now like to open it up to questions.

[Operator Instructions] We will now take our first question from Ryan Zimmerman of BTIG.

Good start to the year here. U.S. Recon was really a nice standout in the quarter, particularly when you look at it in the context of some of the larger companies that reported their Hip and Knee numbers. And so, Damien, I'm wondering if you could kind of talk to us about how you see the durability of U.S. Recon. If I look at the comps, they get actually easier over the balance of the year. And so, what's holding you back from maybe taking that guidance up at this point given those dynamics? And then I have a follow-up.

First of all, good morning Ryan, I'll jump in first, and I'll let the guys also contribute. Look, great question. And I have to say, first of all, I'm really proud of how the team are executing. There's a lot of good that's happening in that organization. The way they're approaching customer segmenting and targeting, account acquisition and penetration. I think the way they're thinking about pricing discipline is really working for them. So I think that team is doing a great job, and you see that in both Hips and Knees and the Extremities numbers.

Why not take up guidance? I think our big issue is it's a very dynamic macro environment. We're working to execute our plans. But as you might suspect, there's a lot of noise in the markets, and we just want to make sure we keep the team focused on executing what we committed to for the full year.

And then as a follow-up, Ben, you did call out the improvement in free cash flow. I think that's been one of the things maybe holding investors back is that enhancement of free cash flow for the year. And so again, I appreciate your sticking to the guidance here. But talk to us about kind of the next few quarters in terms of free cash flow generation. How you see things kind of playing out? What's on the horizon from a capital expenditure standpoint or lack thereof? And what gives you confidence that you can continue to kind of target 25% plus for the year?

Yes. Thanks, Ryan. Thanks for the question. Free cash flow for us builds over the course of the year. I think you've seen that pattern from us where we traditionally have negative free cash flow in Q1, given that's when we pay out bonuses. That's also when we have some phasing of expenses like sales meetings and the AAOS that always fall in Q1. So generally, we start off a little bit soft in cash and then we build over the course of the year. We would expect that to continue here in 2026. I think you saw in first quarter, some of the step down in some of the onetime costs that we've called out that will continue to decline over the course of this year, over the course of the years and coming.

And overall, I think we are -- from a CapEx investment, actually, continuing to invest heavily in CapEx to support the growth of the Recon business. So CapEx as a percentage of sales, as I've told people in the past, this year will be about in line with what we saw last year, maybe a little bit below. But overall, we feel good about where we're starting here, year-over-year improvement of $16 million and still feel confident in the guidance that we set out at the beginning of the year.

Next question comes from the line of Vijay Kumar from Evercore ISI.

I just want to dive a little bit on the Q1 performance. I know there was some noise around weather. One of your competitors had some disruptions. Q1 also had fewer days, right? Despite all of that, U.S. Recon did 9%, high singles organic. How -- when you -- put that 9% into context for us, right? When you look at the back half, is this sustainable? And what could get better in the back half, right, when you look at first half versus back half?

I think what we're excited about is the release of Arvis. We just released that at AAOS. And I think the demand that we're seeing for that is really terrific. And I think people are looking for a portable, scalable, cost-effective solution, especially as things move to the ASCs in the U.S. And so, I think for us, what gives us a lot of confidence about the year is as Arvis continues to roll out and we onboard and certify surgeons, that gives us support in the Extremities market, particularly around shoulder. I think the way that the Foot and Ankle business performed in the quarter was really solid, too, a big shout out to them for the way they performed. And I think -- so Extremities for us continues to be an opportunity that is growing and being a highlight for us for quite some quarters now.

The other thing is, I think Nebula is really continuing to do great things in the hip area. I mean that's a market that we were locked out of. And I think someone reported the other day that something like 40% of their business now is in triple taper, colored stem hips, and we're not anywhere near that sort of penetration yet. And as I mentioned before, something like 50% of our knee surgeons don't use our hip because we haven't had an offering. So we've got a funnel of opportunity to convert those people over to our hip in a market that's been largely dominated by J&J and Zimmer.

Yes. And I'd just jump in, hello, Vijay, the markets are dynamic. The supply chain is dynamic right now. We have momentum building across the anatomies with the launches that we have, with the cross-compatibility that we've done now on the shoulder with putting all of these assets together with the M&A that we've done over the last several years. So we're encouraged by the start. We see opportunity, as Damien mentioned, through commercial execution, they continue to build muscle here. It's going to take a little bit of time, but we're excited marrying the innovation pipeline that we have with the opportunities that are in front of us with regards to still having low market share. So overall, we're confident in the direction that this business is heading and look forward to see how it continues to perform throughout the course of the year.

And maybe, Ben, one for you on the margin performance in the quarter. I know you spoke about the reclassification on EBITDA. Just to clarify, that doesn't have any free cash flow impact, right? No changes to free cash and how we think of margin cadence given the Q1 performance?

Yes. Thanks, Vijay. There's a good slide in the appendix of the presentation materials that we put that lay out the inventory step-up that would have occurred in the prior year. Again, this is acquisition related as we brought Lima on, it's the difference between the acquired inventory and the fair market value assessment. So it's really just accounting change that's onetime in nature. So we feel it's appropriate to look at it both ways, and you have all the information there. But underlying performance, as I said in my prepared remarks, of 40 bps of gross margin improvement and slightly backwards on EBITDA, but that was partially because we had a really strong start last year with the extra days.

And sorry, margin cadence, how to think of margin cadence for back half?

Yes. Margin cadence for the back half, I think, will continue to improve.

The next question comes from Jeff Johnson from Baird.

Just wanted to stick on the Arvis questions. Damien, it sounds like placements here in the first quarter got off to a good start. I guess as you're thinking more about that placement model, should we think about that being a long-term benefit maybe to pricing in your Recon business, you can lock these guys in at more consistent pricing. Does it maybe bring some more stability to your Hip and Knees business and maybe the Extremities business? Again, if you can lock these guys in, you don't have to worry about any kind of customer attrition or anything like that. Just what are the benefits besides just having a good technology out there that is appealing to these surgeons? What are some other benefits we should be thinking about with Arvis over the next year or 2?

Yes. Thanks, Jeff. So our focus out of the gate is on shoulder and then knee. I think if you think about what this offers competitively is a chance to have conversations with competitive surgeons and bring them over to our portfolio. So there's a competitive conversion opportunities and market share gain and, obviously, volume attached with that.

And I think, again, what we're offering is a very flexible model. You can -- capital purchase, you can lease, you can fee per case with a volume commitment. So we also believe that we're offering a scalable, portable model that allows people to work between multiple venues. And as you know, a lot of our customers work in multiple venues and can take this technology with them. So we think that ease of use, portability, scalability is an opportunity for us to lock in people that are current customers, but also importantly, competitive conversions.

Yes. And Jeff, I'd just jump in there. I mean we didn't really see, I'd say, any material revenue from Arvis in the first quarter. So we would expect this to continue to build as we gain momentum with the launch.

And then, Ben, maybe just one clarifying question because I am getting a couple of questions from investors. I just want to make sure I understand. On the reclass that you talked about today on the EBITDA side, was that driven by a change in your own philosophy? It sounds like you mentioned on the prepared remarks that maybe it was in conjunction with the SEC. Is that a new recommendation from the SEC more broadly for the market? Just want to understand, just given that this kind of makes last year's margins or the margin performance this year look better. Just want to understand the timing on what drove this decision.

Yes, Jeff, I mean, as we had put in our 10-K last year, we had a couple of open questions from the SEC through the comment letter process. So we had some good robust dialogues with the staff. So like we had good alignment on most things. This one for us, we still feel that the onetime nature of inventory step-up, especially when you acquire a Recon business that has lots of inventory really does distort the numbers. So we felt it was responsible for us to show comparability. SEC staff had a difference of opinion here, and we had to conform -- we chose to conform to their dialogue here. So we would expect that to continue across the market based on our dialogue with them, but I can't speak for other companies in their dialogues.

The next question comes from the line of Xuyang Li from Jefferies.

I guess to start, maybe just on OUS Recon a little bit. It doesn't get as much attention, but I would say pretty solid strength of double-digit growth recently. And then this quarter, there's some Middle East noise, maybe some OUS market softness. Can you maybe just expand a little bit on the market softness comment and the pathway forward for sustained above-market growth for the rest of the year?

Yes. So we were just with that team last week and talking through a lot of the dynamics there. Look, it was definitely a slower start to the year compared with our Q4 momentum. And that's a challenge. But I would say, and you alluded to this, there's a lot of market volatility. There's doctor strikes, nurses strikes, pharmacy strikes, waiting list increases. And still with all of that, we outgrew the market. And that's with third-party market data.

And I'd say the team executed really well in a very dynamic market situation. So we still believe, based on our modeling that we're going to outgrow the market through the next 3 quarters for the full year. But we do recognize it's pretty challenging, and Ben outlined what we think the impact of the Middle East is on our quarterly run rate.

And I guess I was wondering if you can maybe give us an update on your ASC market share currently, where you are versus the industry? It seems like momentum there continues for the industry?

Yes, I'll take that one, Xuyang. We continue to see our penetration in ASCs increase. So I think if you look at where we are at on the knee side, primary knees over 25% now in the ASC, shoulders continue to climb now closer to the teens. And I'd say in between the 2 is where we're at in hip. So again, I don't know what's being published out there with competition. I don't see good data on this, but we believe that we're slightly ahead of the market in terms of the mix of ASC of our business versus where some of the competitors are.

The next question comes from the line of Robbie Marcus from JP Morgan.

Maybe to start, you do your best to answer given the market share. But given all the disruption in the first quarter and a lot of investor fears around weather and ACA subsidies and Medicaid. How do you feel about your end market growth? And I don't know if you're willing to put what you think growth rates are on the different ortho and bracing markets where you participate now? And how do you feel about some of these headwinds that investors are concerned about? And are you see them materializing? Because I'd venture to say the answer is no, not really. But I would love to hear your take on end market growth and some of the headwinds. And I'll leave it at that.

Hello, Robbie, this is Kyle. Yes, I mean, I think the way we've seen the year start, I mean, look, there's obviously some weather. There's been disruptions with things like cyberattacks on some competitors. We've got salesforce restructuring with another competitor. I think overall, we think underlying market demand and procedure volumes are stable and healthy as we've seen over the last several years.

We don't think that there's as much of a pent-up demand with respect to what we saw coming out of COVID. I think that's broadly been worked through. But when we think about the overall market growth, and this is more of a U.S. comment, we think about U.S. hips in the 3% to 4% range, U.S. knees in the 4% to 5%. We think about shoulders, 5% to 7%. But when you think about the shoulder market, we've got more exposure to the reverse side of that market, which we think is growing at the higher end of that prior range.

And in the international markets as a whole, we think that, that's from a recon perspective, growing in the 4% to 6% in the last several years. As Damien outlined, a little bit slower start to the international market to start the year. But there's nothing that we're seeing in our end markets that suggests that we've seen any material changes in the fundamentals from a demand perspective.

Yes. And I'd just jump in there, too, a little bit, Robbie. I mean I think procedural demand trends are still very robust. So we believe the need to have products like ours for the macro needs of patients are going to continue to drive growth in the market from now into the future. So we feel pretty good about that. I mean, of course, we went through all of the similar things with some of the weather and some of the other things that Kyle talked about. But overall, I think we think the end markets are still robust from a demand standpoint.

Pricing for us is a little bit back to norm on the Recon side, so a little bit down. We think that continues. We also think the shift to ASCs puts a little bit of pressure there on pricing. But overall, we think in terms of demand drivers, those are still pretty robust.

Our next question comes from the line of Priya Sachdeva from UBS.

I'd love to just go back to guidance really quickly and specifically thinking about some of the macro dynamics that are going on, and how you're thinking about low end versus high end of guidance, and what you're baking in for either side of the range? I guess maybe we're just trying to understand how derisked 2026 guide is from some of these dynamics. And then just one follow-up.

Hello, Priya, thanks for the question. I think the way we think about guidance is generally point people towards the midpoint. So good start to the year for us. Again, Damien laid it out, there's still a lot of uncertainty. So we're trying to be prudent with regards to seeing how more of the year plays out before we make any changes there. So overall, I think we feel like we got off to a good start. We do think Q2 will have some impacts on it from the war-related impacts. But overall, we still feel comfortable that we can perform within the ranges that we set at the beginning of the year.

And then maybe just one quickly on P&R. You did call out some of these tailwinds that are on the horizon for this segment. So if you could just maybe walk us through some of these potential drivers of growth and where you could really see this business is growing sustainably once those are fully realized.

Yes. I really like how the teams are starting to execute here. And we've reshaped the portfolio. I think they've got a great competitive offering. We've been taking market share and growing above market for multiple quarters, both in the U.S. and internationally. I like the Swagger of the BaaS team in the U.S. I think they're doing a great job there, selling our differentiated portfolio. We've got new products coming in that segment as well. So the opportunity, I think, is really for us to take. These tailwinds that we alluded to with cold therapy and the NOPAIN Act. That's an education opportunity for us, and the team is taking advantage of that account-by-account.

The OA opportunity, I think, is another thing for us. We know OA is an increasingly complex disease state with a lot of pain associated with it, where we think we've got good competitive offerings to support it. So I like how that team is executing in the U.S. And internationally, there's a lot going on. The French team, I think, are really killing it, which is tremendous to see. And we've still got opportunities to improve our performance in several geographies and the leadership over there is very focused on that.

Our next questions come from the line of Keith Hinton from Freedom Capital Markets.

I just have a question on P&R on the gross margin side. So it looks like it was up about 100 bps year-over-year. Can you just talk about sort of the tariff impact for P&R in the quarter? How much of that you were able to offset with price or other mitigation efforts? And kind of how we should think about going forward, the ability to expand gross margins in P&R in a more stable tariff environment or how much the exposure is to continued volatility in tariffs? And then I have a follow-up.

Yes. Thanks. We're excited about the progress that we continue to make in P&R. I think what we've talked about in terms of now having over 50% of the portfolio growing mid-single digits. A lot of those products that are growing faster come with higher gross margins. So we're getting some mix benefit on the P&R side. We also have been longer at driving the business system within P&R to really start to see the fruits of that read out with regards to some productivity that are offsetting some of these tariff headwinds that I mentioned. I mentioned in my prepared remarks that we paid another $4 million of tariffs in the quarter. That is mostly all in the P&R side of the business.

So we're overcoming that, and we see a long runway here of gross margin improvement opportunities within P&R as we continue to shape that portfolio. So we're going to continue to work at it. We're continuing to mitigate as much as we can some of these inflation headwinds that are coming our way. We have increased prices in some cases to drive offsets. We continue to drive the shifting of production to lower cost areas to offset some of the price changes as well from the supplier side. So overall, we have a pretty robust offense to drive productivity to offset inflation that we see every year.

And then just in terms of the conflict in the Middle East, can you talk about that less from a revenue perspective and more from a cost perspective in terms of volatility in the price of oil, just how much of COGS is oil exposed either from freight or petroleum derivatives involved in packaging? And have you seen any issues with traveling based on disruptions to flights and just how any of these things are sort of baked into guidance?

Yes. We're seeing a little bit of that in all aspects of what you described. I think the most impact we see in our direct results is with the freight inflation. Overall, we feel pretty well that our supply chain as a company is diverse and somewhat protected to where we can drive alternative measures to offset some of these challenges, but there is some inflation that's hitting us that we're having to offset. But all -- as I mentioned in my prepared remarks, we believe that we'll be able to offset or absorb within the guidance that we've provided.

And just very quickly, clarifying. In terms of the inventory turn for the different businesses, when might we start to see more of an impact from a quarterly basis on P&R versus Recon in terms of higher freight?

Well, on the P&R side of the business, we turn inventories in, call it, 4 to 6 months. So that generally reads through relatively quickly. P&R side -- or on the Recon side, it's longer. It's a little over a year. But overall, a lot of our freight runs through the period costs as well. So I'd say it's a little bit of a blend of what gets amortized versus what rolls through on a period standpoint.

The next question comes from the line of Caitlin Roberts from Canaccord Genuity.

It's [ Michaela ] on for Caitlin. Maybe just going back to Arvis, you talked a little bit about this, but can you maybe give some more color on what the surgeon and hospital reception has been like? And maybe if you can talk to shoulder specifically?

Yes. I think this has been one of the really encouraging things for us. The early limited market release where we were working with in friends and family was very positive. The case numbers were filled very rapidly in multiple centers. I had a chance to see some of our partners working on it at the Mayo Clinic right at the end of the year. So just the form factor is considerably different with the Gen2, which I think makes a big difference. The software improvements have been really tremendous in terms of anatomy registration and the acuity of the visualization. So we're very encouraged by what we're hearing from the initial limited market release and now the demand for application in the field. So I think this is exciting for us.

The next question comes from the line of Mike Matson from Needham & Co.

I have a follow-up question on cash flow -- free cash flow. So it looks like your operating cash flow improved significantly year-over-year, which is great. But when I look at the CapEx or purchase of property, plant, equipment and intangibles, that was about $10 million larger than last year. So negative $53 million. So can you maybe just talk about what's in that number? I mean, how much of that is kind of like instrument sets and things like that versus integration expenses or other components?

Mike, thanks for the question. It's mostly instrumentation. As you know, we're investing to grow the Recon business and a little over half or about half of our CapEx is instrumentation driven. And I'd say this year is a little bit more front half loaded there. So I'd say that's the major drivers that we're just investing for growth. We do have, as I've laid out in the past, some investment that's happening with regards to manufacturing integration. So those costs are reading through as well, which are driving some of the increase. But overall, I'd say it's Recon driven, primarily instrumentation with a little bit of ops for manufacturing integration.

And then just want to ask one on the foot and ankle part of your Extremities business. I didn't hear any comments there, but I know that market has been kind of challenged. So maybe just comment on your business and what you're seeing in the market.

Yes. I gave a bit of a shout out in one of my earlier answers on this. I think the -- we saw a slight rebound in the market in the U.S. We've talked about the challenges in that space and so are some of the competitors, particularly in the elective procedures. I think, again, what matters here is a focus on innovation and a focus on being very responsive to customers, and that's reading through. And I think that's why the team had a really solid quarter.

[Operator Instructions] Our next question comes from the line of Steve Lichtman from William Blair.

I guess first, just going back to the ASC opportunity. In what ways are you able to leverage the Arvis relaunch and, of course, the product offerings you can provide across both Recon and P&R to continue to expand in what's obviously an important growing market.

Yes. I think one of the things for us, Steven, good morning, is the opportunity there at the continuum of care. Often, patients aren't seen as a whole patient. They're seen as episodic in one particular implant or [ BES ] or recovery sciences portfolio. I think one of our key opportunities is to expand that aperture so that people do think about the whole patient. And that's certainly a conversation we're having.

I think Arvis is a great accelerator for that. It makes us very visible. It gives us every reason to be a partner with the ASCs, whether it's a corporate ASC or an owner-operated ASC. And one of our focus areas for the team is how to materially change the trajectory of our full offering in those facilities. It's a strategic question for us. We're seeing the early parts of that read through. We've got a number of interesting opportunities that are already starting to materialize. But for us, thinking about how to really action this over the next 3 to 5 years is a key opportunity.

And then just going back to cash, good to see some of the costs coming down as you talked about heading into the year. What is your outlook for the strategic transactions cost line as you look out over the next few quarters?

Yes, I would expect them to improve year-over-year, Steve. And again, this -- like I've mentioned before, this is the third year of really a heavy -- year 3 of a heavy integration of the Lima business that we acquired. So I would see those costs to continue to step down pretty significantly as we enter next year and beyond. But overall, we're still making some investments to finish the integration there.

Our next question comes from the line of Ryan Zimmerman from BTIG.

Sorry, I just didn't get enough. I had to ask a follow-up. Just 2 quick ones for me. I didn't hear, Ben, do you get those selling days back? I think the annual is a net neutral. And when do you get those selling days back? And then 2, I didn't hear anything on tax refund or tariff refunds. And so what are you assuming -- and again, I apologize if I missed that, but what are you assuming for tariff refunds at this point or not assuming?

Yes. No problem, Ryan. So we get 1 day back in Q2 and 1 day back in Q4. So that's really how it plays out. That's more like half a day actually in Q2. And so, from a tariff refund standpoint, we've submitted all our claims with regards to tariffs paid, but our assumption is that we will not get any refunds for tariffs that we've paid and that we'll continue to pay tariffs at the rate that we're currently seeing. That's what's embedded in our current outlook.

Thank you. We have reached the end of the Q&A session. I will now turn the call back over to Damien, CEO, for closing remarks. Please go ahead.

Thanks, everyone, for joining us today. With a solid start to the year, but we cannot lose sight of continuous improvement and winning each day. We're operating in an increasingly dynamic macroeconomic and geopolitical environment, and it's more important than ever that we remain focused on disciplined execution. Next week marks my 1-year anniversary at Enovis, and I'm inspired, very inspired by the opportunities ahead of us and the strength of our team.

I'd like to thank all of our employees for their ongoing commitment, focus, and dedication to supporting our customers and improving patients' lives. We really appreciate your continued interest, and we support your forward-looking updating models and look forward to the progress throughout the year.

Thank you so much, ladies and gentlemen. This concludes today's call. Thank you all for joining. You may now disconnect.

Good day, and welcome to the Enovis Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us today for our fourth quarter 2025 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Dami McDonald, Chief Executive Officer, and Ben Berry, Chief Financial Officer.

Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovis.com. We also posted a slide presentation in relation to 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.

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 today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law.

For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying 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 Damien. Damien?

Hey, thanks, Kyle. Good morning, everyone, and thank you for joining us today for our fourth quarter and full year 2025 earnings call. Our results reflect strong performance across our global organization. It was a year of meaningful change and progress for the Enovis family, and I'm encouraged by our increasingly focused execution and the opportunities in front of us.

We've transformed and reshaped our portfolio in a short amount of time, and 2025 was a pivotal year in moving from integration to execution. Since I joined in May, we've leaned into 3 key priorities: commercial execution, operational excellence and financial discipline. They have guided our strategy and remain the foundation of how we are building a more profitable, capital-efficient growth engine. As part of this work, we are embracing a One Enovis operating mindset, working collaboratively across the company to improve performance, standardize commercial processes and embed our EGX business system more deeply into our daily work.

This shift is foundational to both our growth trajectory and margin expansion. Our highlights for the year include organic revenue growth of 6%, with 8% organic growth in Recon, reflecting above-market performance across anatomies. Prevention and Recovery accelerated to 4% organic growth in a market we believe is growing closer to 2%. We also had a solid year operationally. We maintained adjusted EBITDA margins at 18% despite the dynamic global operating environment and the impact of tariffs.

As planned, we returned to positive free cash flow of $20 million in 2025, which places us firmly on our path towards our long-term free cash flow conversion targets. Fourth quarter revenue grew 3% on a reported basis and 2% organically. Recon grew 3% and Prevention and Recovery was flat. It's also important to note our fourth quarter had 4 fewer selling days than the prior year, which represented a headwind of 400 basis points to organic growth. In U.S. Recon, we grew 6% on an organic basis in 2025, led by double-digit growth in extremities.

Our augmented reverse glenoid system, ARG, continued to gain traction and was key to driving double-digit growth in shoulders. What's exciting here is we have a robust pipeline to support a multiyear cadence of innovation and extremities, and we expect sustained growth in this area.

In Hips and Knees, we grew 6% in implants, adjusting for the prior year sales of enabling technology, and we continue to reinforce our portfolio to compete across hospital and ASC settings. In 2025, we launched the Nebula Stent and the OrthoDrive Impactor, and they are performing well early in the adoption cycle. Over 60% of Nebula sales in 2025 were to competitive users, and we expect to more than double the installed base of OrthoDrive in 2026.

Internationally, we grew 10% in Recon on an organic basis, including high single-digit growth in hips and knees and double-digit growth in extremities. We're executing across the cross-selling synergies we targeted in each anatomy and are positioned for sustained above-market growth rates in 2026 and beyond. Innovation remains key to our strategy. In 2025, we had 50% more 510(k) clearances than our best prior year.

Looking ahead, we have a robust pipeline of new product introductions planned for the next 24 months. We'll showcase many of these innovations, including Arvis at the AAOS conference next week in New Orleans. We plan to deploy Arvis through a flexible business model, purchase, lease per procedure or implant commitment with the primary goal of driving implant utilization.

Now moving to P&R, which on an organic basis grew 4% year-over-year in 2025. Global Bracing grew 3%, driven by revenue cycle management, upper extremity and spine bracing. BoneStim was another source of strength for the year, delivering double-digit growth. With the sale of Dr. Comfort in the fourth quarter, 50% of our revenues in P&R are growing higher than mid-single digits.

So there's a lot to be excited about across the portfolio, and I'll now turn it over to Ben to walk through the financial details.

Thanks, Damien. Hello, everyone. We reported fourth quarter sales of $576 million, up 3% versus the prior year on a reported basis and 2% organic growth. As Damien highlighted and as we outlined at the beginning of the year, growth in the fourth quarter was artificially low given the trade-off of 4 selling days between Q1 and Q4. With this dynamic in mind, I'll focus the majority of my comments on the full year results.

For the year, we generated $2.2 billion of sales, which represents 7% reported growth, including a 140 basis point tailwind from foreign currency and an 80 basis point headwind from divestments. Organic growth for the year was 6%, led by above-market growth in Recon at 8% and solid mid-single-digit growth from P&R at 4%.

Adjusted gross margins increased to 61%, an improvement of 170 basis points, driven by favorable mix, ongoing productivity and realized synergies in our manufacturing and supply chain operations. This was slightly diluted by tariff impacts as we absorbed, mitigated and offset a portion of the roughly $15 million of tariffs we paid in the year.

Adjusted EBITDA margin was 17.9%, flat year-over-year as we increased R&D investments, particularly in Recon enabling tech and were unable to fully mitigate the impacts from tariffs. Tax rate for the year was 23.5%. Interest expense was $35 million, down from $57 million last year. As a result, adjusted earnings per share was $3.30, up 16%, driven by gross margin expansion and reduced interest expenses.

In the quarter, we recorded a noncash technical impairment of goodwill of $501 million after evaluating the company's stock price and market capitalization relative to the carrying value of our operating units. As stated last quarter, these impairments do not have any impact on Enovis' liquidity, cash flows, debt covenants nor does it have any impact on future operations. We remain confident and optimistic in the long-range plans and positive trajectory of the company.

In 2025, we delivered higher sales and earnings than our original guidance. While it was a dynamic operating environment with tariffs, currency fluctuations, abnormal quarterly selling days, we believe the company demonstrated resilience as we continue to make progress towards our long-term goals.

From a growth perspective, we were very pleased to see accelerated growth in our P&R segment. Positive portfolio mix and shaping moves that we've executed over the last several years are reading through to top line results. In Recon, we delivered double-digit growth in U.S. Extremities and International Recon. We've been deliberately diversifying and constructing this segment to be a robust growth driver for Enovis with a weighted average market growth rate above the industry norm. In U.S. hip and knee, we've been rejuvenating the portfolio to fill product gaps in hip and enabling technology. Implant growth for the year was 6%, slightly above market, and we're encouraged by the early results from the launch of Nebula and OrthoDrive.

As detailed on prior calls, we were delayed in the rollout of Arvisin 2025 and are eager to begin ramping the enhanced product over the course of 2026. Our adjusted EBITDA remained at 17.9% for the year with strong underlying operating performance from positive product and segment mix executed productivity projects and Lima synergy capture. These improvements were offset by increased investments in R&D to support future growth as well as negative impacts from tariffs in the year. We continue to see a clear pathway to 20% plus EBITDA margins driven by positive business mix, productivity and leverage as the business continues to scale.

We generated 10% free cash flow conversion in 2025 after a negative 43% in the prior year, as integration efforts are continuing to step down. Leverage has dropped to 3.1x. And in Q4, we were able to successfully refinance our TLA, upsize our revolver and maintain low interest rates on our debt. We will continue to focus on disciplined capital allocation as we climb the cash flow conversion curve and bring leverage levels below 3.

Turning to guidance. We expect 2026 to be another year of strong execution and expect revenues in the range of $2.31 billion to $2.37 billion. This includes mid-single-digit organic revenue growth of 4% to 6% year-over-year, inclusive of high single-digit growth in Recon and low single-digit growth in P&R. We expect positive currency tailwinds of 0.5% to 1.5%. And as a reminder, we will have a $41 million headwind in revenues from the divestiture of Dr. Comfort in October of 2025.

On margins, we are expecting adjusted EBITDA in the range of $425 million to $435 million, 50 basis points of margin improvement versus prior year. Depreciation is expected to be in the range of $118 million to $122 million. We expect interest and other expenses to be in the range of $30 million to $32 million and an adjusted tax rate of approximately 23% in 2026. Along with these estimates, we expect a share count of approximately 59 million and are forecasting our adjusted earnings per share range to $3.52 to $3.73. Additionally, we expect free cash flow conversion as a percentage of adjusted net income to be 25% plus in 2026, while supporting the final year of substantial investments to integrate Lima and fuel growth.

To summarize, 2025 was a dynamic year for Enovis, and our results highlight the power of our diversified portfolio and the continued progress we're making towards sustainable, profitable, capital-efficient growth. Kyle?

Thanks, Ben. In an effort to accommodate everyone in the Q&A session and keep things to a reasonable time. We ask that analysts keep the questions to one question and one follow-up. You're welcome to rejoin the queue and we will fit you in if we've got time.

With that, we'd like to now open the call up to questions. Operator?

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

First one, great to see the progress on the free cash flow conversion in 2025. You're now targeting 25% plus for 2026. Can you maybe talk about the specific operational improvements or working capital initiatives that are expected to drive the significant step-up? And then I had a quick follow-up, please.

Vik, thanks for the question. As you can imagine, we have leveraging our business system, we always have productivity projects in place trying to drive efficiencies and improvements across the board. One of the main drivers of improvement this year, as I mentioned, is we'll continue to step down integration-related costs. Last year, 2025 was the last material year of investments for European medical device regulation remediation. So those costs are stepping down as well.

We'll continue to drive efficiencies where we can in working capital. There's some headwind there as the business shifts more towards Recon as it carries higher working capital and CapEx investments, but we can offset that with productivity across the board and across the other business segments. So we still see a clear pathway to the 70% to 80% free cash flow conversion targets that we've laid out, and we believe 2026 is a critical step in the right direction towards those goals.

A quick follow-up on Arvis. Can you talk about what's your view on how quickly Arvis can grow in 2026? And are you on track for the next-gen Arvis launch in 2026?

Yes. Thanks, Vik. So actually, we're excited about starting the rollout of this at AAOS next week. And you think about it in phases, rolling out domestically in 1H, rolling out internationally in 2H. There's -- as we said in the script, there's a model flexibility here. So it's not just going to be straight capital sales. What we're really looking to do is drive implant utilization. So there's not a line of capital sales that we're really targeting. It's a flexible model. We know that one of the key advantages of the product is that it's mobile, it's capital efficient. And so we want to make it as easy as possible for people to use more of our implants. So watch this space. I think we're seeing you next week at AAOS, and the team, we're excited about showcasing this.

The next question comes from Jeff Johnson from Baird.

Maybe almost staying on the same focal points there, the 2 same focal points. U.S. hip and knee business, you guys have a nice slide in your deck this quarter that shows kind of all the adjustments on selling days and some of the Arvis headwinds. You were very consistently in that 5% to 7% range on U.S. hip and knees if we make those adjustments every quarter of '25. Is that roughly the area you're thinking this year? And would there be any opportunity for Arvis to push that a little above that? Or would you expect that multi-pronged Arvis strategy to fit more with some placements and maybe implant commitments?

Yes. I'm excited about what I think we can do here. Firstly, the hip and knee expansion, we talked about this with the Nebula and OrthoDrive. Hip is exciting for us. And I think we've said before, 50% of our knee surgeons don't use our hip. So having that portfolio gap filled, I think, is important just for our existing customers. And as I mentioned, 60% of our placements were conversions from competitive hip users. So I think hip of itself has some runway. And then with Arvis, we're expecting the knee focus and then ultimately, the shoulder focus to really lift that whole -- that whole U.S. group.

And maybe one follow-up, Ben, just on the cash flow question. You did talk in prepared remarks around 510(k) numbers where filings were up quite a bit in 2025. Obviously, this multi-pronged Arvis could cost maybe some cash upfront depending, I guess, on how placements look versus actual outright sales. And Ben, as you take that 25% free cash flow conversion to 70% to 80% over time, are we still set up where we should iteratively over the next few years, continue to see improvements? Or do we hit kind of a ceiling for a couple of years as you work through a couple of these heavy launch years and the initial Arvis strategy?

Yes. Thanks for the question, Jeff. We see it as continuing to drive incremental improvements in our conversion over the next several years. So we would expect it to continue to accelerate as we get closer to that 70% to 80% goal. Now it's going to take us a couple of years to get there. But overall, I think you'll see us continue to take steps towards that direction year-over-year.

Like I said in my prepared remarks is that we still have one more, I'd say, substantial year of investment to integrate Lima, especially as we continue to finish a lot of the executed projects that we had identified across the supply chain to make our supply chain more efficient on the Recon international side. So we'll see continued improvements on free cash flow conversion, and we'll be able to absorb all of those impacts that you described with regards to Arvis and some of the investments that we need to make. One of the great things about Arvis is its very capital light. So one of the opportunities for us is to really be aggressive with this to drive penetration.

The next question comes from Vijay Kumar from Evercore ISI.

Congrats on a nice execution on the margins here. Damien, maybe my first question is, was there any cadence issues in the Q4 and any impacts on utilization in -- when you think about Q1, you did mention days impact. I know weather has been a topic. So I'm curious on how we're thinking about Q1 kind of issues impacting organic.

I'll take a bit of this, and then you can jump on in, Ben. By the way, good morning. Thanks, Vijay, for being on. So Q4, look, there was no underlying change in markets. We performed seasonably lower than our historical data. And if you look at the range shift that we announced back in January, it was basically 1 trading day impact. And the impact was segment, geography and product agnostic. So we didn't see any change in the dynamics at all. It was entirely related to just the way the days fell as we finished the year.

Do you want to talk about?

Yes, Q1 in 2026, Vijay has 2 less days. Q2 has 1 more day and Q4 has 1 more day. So no selling day impacts for us for the full year, but there will be a little bit of a softer impact given the 2 less days in Q1 and the super high comp that we have from 2025. Yes, we, like everyone else, are experiencing some of the weather dynamics that are happening that are putting elective procedures on hold. We think most of that gets recovered in the quarter. And overall, what we've seen so far in terms of the business performance is in line with our expectations. So overall, we think it's going to be another solid year for market performance. And I laid out the day's impact for you there as well.

And then maybe, Ben, one on the margins. Gross margins came in nicely in Q4, beat Street estimates. Was this just a mix impact? Or can you talk about sustainability? Do you expect gross margins to expand in fiscal '26?

Absolutely, Vijay. I think from our perspective; this is really starting to read through a lot of the shaping moves that we've been making as a company over the last several years because the things that Damien mentioned with regards to P&R growth where about half of our portfolio is now mid-single-digit growth. A lot of that comes with products that carry higher than fleet average gross margins in the P&R segment.

We're several years into embedding our EGX business system now in the P&R side of the business. You're seeing productivity start to read through. I also mentioned in my prepared remarks that we got synergy capture from Lima that we still see opportunities to drive margin improvements on the Recon side through further activities there. And the mix of extremities growing faster than hip and knee as well as it carried higher gross margins. So the business is really set up to drive positive mix, but that doesn't mean that we won't also be driving productivity and other opportunities to drive gross margins higher over time. That's part of our formula to get to the margin expansion that we lay out from an expectation standpoint every year. So overall, yes, we expect gross margins to go higher, and there's a lot of tailwinds that are supporting that while we're having some headwinds like tariffs that we're having to absorb.

The next question comes from Robbie Marcus from JPMorgan.

Two for me. First, can I follow up on the fourth quarter comments, and I just want to flush this out a little bit. You say that it boiled down to the miss essentially 1 selling day. We didn't see that happen to any of the other orthopedics peers. So do you think it was simply a selling day misforecast on your end versus what you thought you could do? Or was it due to some products coming in below expectations and that in the end amounted to 1 fewer selling day?

Yes. Look, it's really simple. We just didn't execute. We missed it by a day as the way the days were falling with where Christmas was. Look, all of that is -- we just didn't execute. And we've got work to do there. I'm new into the gig, and we're working on our disciplined execution. And the first thing I've talked about is commercial execution. And so that's why I say it was segment, geography and product diagnostic. We've just got to get a bit better in how we execute.

Great. So maybe on that, 2025 ended up at the low end of the initial guidance range. As you set the guidance range for 2026, how are you thinking about the conservatism of this guide? And what are some of the puts and takes that get you to the high end and the low end?

Well, look, there's a -- pretty dynamic environment. So we've tried to be conservative in our guidance. I mean we know there's a lot of moving parts for everyone. So our approach has been to be conservative. But to the upside, again, we'll point to where we're going with hips and what we're doing with the Nebula opportunity. We're very early in that release. The shoulder compatibility, we now have an implant system that's got basically 3 very great systems, the Prima, the SMR, AltiVate are all completely compatible, and we've only just started that rollout across our shoulder surgeon base. And towards the end of this year, the OUS hip, the Optimus Stem and the RM Cup, we'll be bringing that to the U.S. and that's a great product portfolio given that it's got phenomenal 10-year data.

So on the Recon side, we think we've got a lot of runway. On the P&R side, there's reimbursement tailwinds on cold therapy and OA that we're liking. We're really excited about what the team is doing with Manafuse for BoneStim. So again, to the upside. To the downside, we all watch the socials and let's see what happens. But we're doing what we can do to and the things we can control, which is to drive the upside. And as I said, focus on commercial execution.

The next question comes from Danielle Antalffy from UBS.

Damien, I wanted to ask a high-level question of you that has, to some extent, to do with capital deployment. But -- you're now almost a year into this. At a high level, as you take a look at the portfolio and where you sit today from a product breadth of portfolio perspective as well as your competitive positioning, where do you see the most need for whether it's improving execution, continuing to fill out product gaps? And how do you expect -- how do you plan to address that organically, inorganically, what have you? And then I did have one follow-up.

Sure. Well, look, again, on commercial execution, I think it's in each of the business units, we've got an opportunity to improve where we're going with commercial execution. Now it could be about how we target and segment. It could be about how we do account acquisition and account penetration, two of my favorite metrics to track. And it could be just how we think about positioning and the way we go about putting the various new products into the market and being very specific about our messaging.

So there's a lot of opportunity across the board. And each business unit, as we're working into the new year and doing our reviews, we're very focused on that commercial execution. The NPI, the new product introductions are really looking good for us, and we talked about the 510(k)s last year. We've got a really rich pipeline that we're excited about with this cadence of new product launch. A lot of the way I see the orthopedics market is you don't have to do home runs. You have to be good at singles and doubles, and we are working hard to get the cadence and the prioritization of those singles and doubles so that when you walk into a clinician and they say, "hey, what's new," we can talk about that. And I'm very excited about that.

Now are we looking for things that tuck in? Yes. But as we've said very emphatically, our capital allocation priority is to reduce debt. So it will be unlikely we do anything unless it's a generational opportunity. And like if we miss it, it will pass us by. But our focus is for capital allocation is debt reduction. And we like the way we can fill in the portfolio with our organic pipeline.

Okay. Got you. And then P&R, you mentioned 50% of the portfolio. I think you said growing mid to-high single-digits. How sustainable is that? And should we -- because I think of this business more as sort of low to mid-single-digit growth so that's faster than what I was thinking. And can more of the portfolio get there? Or how are you thinking about that?

Yes. Look, I think we've used the word shaping the portfolio. And I think this is where we're going to continue to work not only on product rationalization and SKU rationalization to keep moving up the gross margin curve. But the growth here is important. And now, as we said, 50% of the portfolio is mid-single digit or greater. There's a lot of opportunity for us to continue that. And it comes with our geographic expansion. We have a new leader in Europe who is really bringing a lot of thoughtful and exciting new ways of thinking about the markets. So I like our chances here just in the base portfolio. And as we said, we've launched some recent new things like Manafuse and BoneStim, which is growing very nicely double-digit, and I think has a lot of runway.

Yes. I would just jump in there, Danielle. I mean it's one of the critical aspects as we think about continuing to construct a portfolio that can get to consistent high single-digit growth capability. The more P&R is growing, the more it helps us to get to that equation given that the Recon business is already growing high single-digits plus. So overall, we've built the portfolio with that in mind to get to high single-digit consistent growth opportunity and continue to shape the organization towards that end.

The next question comes from Mike Matson from Needham.

This is Joseph on for Mike. Just a couple of product-related questions. I guess, BoneStim, and the laser product, I believe both at least you called out growing at double-digits. I'm just wondering how that growth compares to the market growth rate for those 2 products, respectively.

Yes. Thanks, Joseph, for the question. We think we're slightly ahead of market in both categories there. With the introduction of Manafuse on the bone growth side, we have a more comprehensive portfolio to really address market opportunities, but this market also has a great opportunity in terms of penetration as well.

So overall, we're excited about the future of that portfolio. LiteCure has been a good story from us. We acquired this back in 2022, I believe, or maybe even before that, and it continues to be a really strong performer for us. And we still see lots of opportunity there, not only from the current product line, but as we continue to refresh it with innovation as well, we'll continue to see higher growth rates than the fleet average driven by that product line.

Okay. Great. And then maybe just on the Optimus launch, how are you guys looking at that in terms of hip growth? Does this kind of keep Enovis at that above-market growth rate? I think around double the market growth rate; I think you called out. Is this an acceleration opportunity? Yes, just wondering how you're thinking about that launch at the end of the year.

Joe, this is Kyle. Yes, look, we've got a long runway with Nebula. Last year was the first year where we put Nebula and OrthoDrive into the market. So we've got significant plans to continue pushing there. From a longer-term perspective, at the end of this year, we'll bring the first component of Optimus and the RM Cup to the United States market. So it's more of just highlighting the strength in the longer-term pipeline we have. So a lot to be excited about on the hip side.

The next question comes from Keith Hinton from Freedom Capital Markets.

So I have 2 questions. One is kind of high-level strategic and the next one is more financial. So starting with the strategic question. With regards to the One Enovis initiative, can you just talk about how you're planning to exploit synergies between the two segments between Recon and P&R, both on the revenue side and the cost side, and if you want to differentiate U.S. versus OUS as well?

Yes, thanks. I really appreciate the question. One of the things that I noticed very early as I joined the group was the 7 business units, which is a valid operating model, didn't share a lot of information, and we didn't optimize how we were investing in either commercial execution or new product development. So one of the things that I think is really important is taking a view across the entire entity. That's the first thing. So how do we optimize where we invest. That's the first part of One Enovis.

The second part is how do we collaborate and that's in the field as well. The fact is we've got a number of distributor partners in the U.S. who have great relationships on the P&R side, and we don't share a lot of that information across the group. So one of the things we're working much more on is how do the various commercial organization components talk to each other and share contacts and so that's on the commercial execution.

On the operating excellence, there's a lot of work we can do to simplify the organization and how processes run in finance, in HR, in procurement, direct or indirect. So we're really looking right through the P&L at how we can do it. A classic example and something that we had started the journey on was shared services. We had a shared service group in Portugal that was working predominantly in P&R. Putting more effort into using that for the Recon Group internationally is important.

We had an outsourced shared service with a provider in India that worked on our revenue cycle management. We're insourcing that, which, by the way, brings a lot of savings, but then we can make productivity improvements in that with AI to get to really driving our RCM processes better. So we're excited about this One Enovis mindset, and we've been campaigning this, firstly, with the key leadership starting in Q4 and now more broadly as we head into Q1 with the organization.

And then on the financial side of things, so the 50 bps margin improvement this year, and you've kind of guided to 50 bps going forward, obviously, sort of 4 ways to get there. You could improve P&R margins, improve Recon margins, the mix shift towards Recon and then just leveraging corporate costs. So in those kind of buckets, can you help us think about where the 50 bps mostly comes from in 2026 and then going forward, where the 50 bps can come from in '27 and beyond?

Yes. Thanks for the question, Keith. We continue to focus on really all of those aspects to be clear. But right now, I'd say the focus is really to continue to drive improvements in gross margins that can help fuel some of the investments required on R&D as we continue to tick up in terms of investments to support future innovation and growth of the business there. Damien just outlined several ideas and executed projects that we continue to advance around driving leverage of the cost structure of the enterprise. So that can happen in both business segments and in the SG&A line of the business.

So we see opportunities across the board. The near-term focus is to continue to drive the positive mix and gross margin productivity projects that we have in flight as well as getting the synergies out of Lima that we expect. That will help us as we continue to work these other projects that can help us drive improvements in the overall cost structure.

[Operator Instructions] The next question comes from Caitlin Roberts from Canaccord Genuity.

Maybe just focusing on extremities. With the foot and ankle business, where did you end the year? And how are you thinking about the foot and ankle market as we go into 2026?

Yes. That was a really fascinating year to watch with that foot and ankle. And we've talked about this before. The front end, what we're seeing with clinicians in terms of their bookings and consultations really remained pretty strong. At the back end, we really saw a softness in the market. Now we believe -- again, there's not a lot of market data, but we believe we're significantly outgrowing the market and the competitors in this space. And I think it's because we've got a balanced portfolio that's not just about the bunion market. And that really carried us through with the DynaNail, for example. So extremities for us is a point of real focus for the Recon team. We believe there's a long runway. I'm convinced we've got great clinician partners. I think we've got a great focus and pulse on the whole portfolio. The market for us is something that we're very much watching, particularly on the elective side. But we, as I said, outgrew the market pretty significantly.

Understood. And then just for extremities more broadly, I think you pointed to a multiyear pipeline earlier in the call. Any more color on these opportunities?

Yes, we really haven't talked about that publicly. As the year progresses, I'm going to be more explicit about those things. You'll see some of it at AAOS. You'll see it at the specific shoulder events. But our focus really here is the fact that we've got a 3 system compatibility now, and we really want to make sure that we're getting to basically every procedure that's valid being a target for us. We've also got an opportunity to expand more into the sports medicine side of the arthroplasty application. Most of our customers are fellowship trained. So we're more on one side of the family than the other. And I think we've got opportunity to expand our go-to-market there.

We have a follow-up question from Keith Hinton.

Yes. I just wanted to ask strategically on the P&R side. So you said 50% is growing mid-single digit or better, but you're obviously guiding low single-digits. So that implies that on average, the rest is kind of flat-to-down. So how do you think about the process of shaping the portfolio going forward? Do you expect more divestitures to the slower-growing products have good margins? And then how do you think about that from a perspective of just making sure that the portfolio remains of a size where it's continuing to generate the cash that you need to invest in the Recon?

So I would put this into buckets of activity. One is commercial execution. As we've said, we just have to get better across the portfolio and across the entire sales organization at executing. That's one. Two, we've got geographic expansion opportunities that I think are important that we can exploit that we just have to again get better at, but we've got, I think, some good runway there.

Three, I think we should continue to look at shaping the portfolio. There's SKU rationalization, portfolio rationalization to move up the growth profile and the gross margin profile. And then four is to look at the portfolio in its entirety and what are the components of that. And you saw we made the move on Dr. Comfort. I think that's a relevant conversation that we're having with the team.

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

Thanks for joining us today. I'm going to hand it over to Damien for some closing remarks.

Well, thanks, everyone, for joining. As I wrap up, I'd first like to thank all our employees for the ongoing commitment, focus and dedication to improving our patients' lives. After 9 months in the role, I am more excited about the opportunities and the strength that we have in the Enovis team. 2025 was an important year for Enovis. P&R growth accelerated to nearly 4%, 2x the market. Recon outgrew the global market at 8%. We strengthened our portfolio with key new product launches, improved our operating discipline and returned to positive free cash flow. Just as importantly, we made meaningful progress transitioning from a period of portfolio construction to a period of focused execution.

As we enter 2026, our priorities are clear. We'll continue to drive commercial execution, expand margins through mix and productivity, step meaningfully up the cash flow curve. We believe our innovation cadence, differentiated portfolio and disciplined capital allocation position us well for durable, profitable growth. So we appreciate your continued interest and look forward to updating you on our progress throughout the year. Thank you.

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

Good afternoon, everyone. I'm Robbie Marcus, the med tech analyst at JPMorgan. Really happy to present our next speaker, Damien McDonald, CEO of Enovis; along with Ben Berry, the CFO. Damien and Ben are going to do a presentation, and I'll come up and we'll do some Q&A afterwards.

Gentlemen?

Thanks, Robbie. Thanks for being here, everyone. My name is Damien. I'm the CEO. I've been with Enovis now for about 6 months. So I'm looking forward to some engaging questions. And Ben and I will do a little tag team, talk to you about the company. And then let's spend as much time as we can on Q&A, and be very interactive with us.

Standard forward-looking harbor -- safe harbor statement, so you can read that at your leisure.

Let's talk a little bit about Enovis. We're a orthopedics company, but orthopedics was a focus on mobility and the whole continuum of care. I'll come to that in a minute because it's been a journey as we've built this company over the last sort of 5-ish years through a series of 20-plus acquisitions. We're around about $2 billion in revenue. We're growing around about 6%, plus or minus. We just raised our guidance on EBITDA and EPS this morning.

And if you think about the business, it's roughly 50-50 orthopedics implants and prevention and recovery, and it's roughly 50-50 international and U.S. And it's been a journey to build this, and we're looking forward to telling you that story.

Growing the company has been about really building out the Recon portfolio and the way that, that's done has really morphed us into some high-growth subsections of the Recon market at the same time as taking market-leading position in the prevention and recovery. The DonJoy brand is something that you may all know. Roughly 100% of the top 25 college football teams use our braces, nearly all the NFL team use our braces. So that brand is really well known, and that was the jump-off point for us building the business.

With these 20-plus acquisitions now, we're very focused on a few things, getting the commercial execution really embedded, bringing together all of those family of companies. We've got different operating systems, different methodologies, different vibes, different metabolic rates. We're really now very focused on commercial execution and driving the innovation engine.

We have a history of Enovis Growth Excellence, the business system looks a lot like lean. And as we've built the company, we've now got this opportunity to put lean across the entire enterprise.

And the third thing we need to do is really focus on financial discipline. And we've got real work to do in gross margin, real work to do in the shaping of the middle of the P&L and a lot of focus on free cash flow generation, and Ben will talk about that in a minute.

Here's how to think about the growth. Including all the M&A, we're growing at about 12% ex M&A, around about 6% core. And we think that's a really robust and constant number for us to focus on in terms of are we a growth company? And the answer is yes.

At the same time, we've also done, I think, some really great work in improving margins. We've gone from 14-ish percent to about 18-ish percent. We see a pathway to 20%. Again, we can talk about that in Q&A, but it's a company that's growing and improving its leverage.

Some of these names may be familiar to you, but this is how we've transformed the company. And we think that the important aspect of this is it's been very thoughtful. It's been very planned, and it's been very much about shaping towards higher growth markets where we've got clinical differentiation.

And as a result of that, we've morphed the company into a much higher growth profile. So, for example, the P&R business now is 50% mid-single digit from a low single-digit company. And you can see here the red, the high-growth categories, particularly the extremities are a much, much greater percentage of the business, too. And we continue to see that as a prime opportunity for where our growth will continue.

As I said at the start, we've also morphed our portfolio in terms of our geographic exposure, and we were predominantly a U.S.-based company until we bought Lima in 2024. And now we've really morphed into a global company, global footprint, global capabilities, particularly in materials and particularly in talent. And we think, again, this is a real opportunity for us in terms of the long-term growth of the company.

So where are we focused looking forward? After all of these acquisitions, embedding a One Enovis mindset, we think this collaboration, teamwork is key to ensuring we have focused execution. Again, as you might suspect with a lot of acquisitions, we have a lot of different DNA. We think we've got this opportunity now to focus on ensuring that we've got a one team focus, an enterprise focus.

The way to do that also looks at shaping our operating model and making sure that we have an efficient and coherent operating model. We're doing a lot of work on that right now with the moves that I've just made with some of the leadership team over the last 3 or 4 months.

And then, as I said, embedding this DNA of continuous improvement and lean. EGX is part of how we work, but we've got lots of opportunity, and I can see pockets of excellence. Having spent a number of years at Danaher, I know what good looks like. And I know we have good in a number of places. We just need to template and replicate that across the rest of the organization. What I love about the way this will go is, I see the enthusiasm of the organization to take hold of this opportunity and really embed the system across the whole group.

I mentioned mobility health. I think there are 3 arcs to the longevity conversation that we're all having. It's gut health, it's brain health and it's mobility. And I think we're uniquely positioned to take advantage of supporting that for patients and clinicians. And we do from prevention, through diagnosis and planning, implants and surgery, recovery and then full mobility.

And each part of our portfolio has a core part to play with that, particularly as we think about workflow efficiency and how clinics are supporting patients. We've got real practical expertise in revenue cycle management and the MotionMD portfolio of SaaS products supporting clinical application of products in clinics. So, not only are we selling and growing our product base, but we really see a service base evolving here as well.

Just briefly on the 2 product portfolios. Recon, about $1 billion, again, about 50-50 international and U.S. Really interestingly, we have, I think, market-leading clinically differentiated products. We were one of the first orthopedic companies to talk about kinematic knee alignment. The EMPOWR Knee is really powerful. We have our own ceramic capability, which is almost unique to the industry. We have 3D printing capability, which is very powerful, and we could talk more about that in Q&A. And so I think our portfolio here is robust and poised for considerable growth.

The way we're going to continue to do that is by supporting innovation. We don't have to hit home runs. We need lots of singles and doubles, and I think that's the way our portfolio has been evolving very strongly. Last year, we posted more 510(k)s than we ever have in our history. We think that will continue to read through with the way our innovation pipeline is evolving.

We also have this opportunity in commercial excellence, which I think is something that we can use through EGX, but also, as I mentioned, the evolution of products and services we already have in the P&R business into the ASC on the surgical side. And as we see in the U.S. more and more procedures and clinicians working in ASCs with the funding models changing, we think this is a competitive advantage for us.

And lastly, we've made changes in the way we do our R&D, and I'm particularly excited about the way that will evolve over the next few years.

Similarly, we're taking a market-leading position in the P&R business. The growth of the portfolio has improved considerably, as I mentioned upfront, and that's due to the brand loyalty we have around things like DonJoy and Aircast, but also as we move into Spinalogic and the Manafuse products for bone stimulation, we see a much higher growth, higher gross margin portfolio. So what I'd like you to take away from this is that we're growing, we're growing in spaces that are higher growth markets, and we're growing in places where we're more profitable.

The aspect of P&R that I think is really powerful is just how much free cash flow it generates. It's hugely cash generative. It supports the business in terms of our ability to invest in the higher capital required orthopedics business in implants. But we also have these opportunities to grow into places for services that I think are unique to the industry where ASCs, as I said, are evolving using MotionMD and that capability, I think, is very exciting for us.

So, I talked about innovation. This is just to give you a quick snapshot of the number of products that we've launched over the last 3-ish years. And the fact that we're really early in the cycle of commercial release for a number of these, I think, puts us in a great place going forward in the next 2 or 3 years with our organic growth.

Why don't I throw it over to you, Ben, [ to ] just talk about some cash.

So we've been doing a lot to transform the company over the last several years. If you think about where we've been, we spun Colfax into a pure-play med tech player back in 2022, separated ESAB out. So, between separation of the company and 20-plus acquisitions over the last several years, we've been in a heavy integration mode and integration is expensive, especially as you're putting multiple assets together.

So we've been deliberately taking a step back as we've been integrating these companies to focus on making sure that we're setting the business up for durable, profitable growth, but that has come at the expense of cash over the last couple of years. So you can see in 2024 we were negative cash, 2025 we generated positive cash, but we still have a long way to go as we're working towards our goals of 70-plus percent free cash flow conversion.

In 2026, we'll make a step in the right direction as we continue to see improvement and reduction in integration cost efforts. We're finishing the journey in our European medical device regulation remediation. So you'll see a nice step-up towards that goal in 2026. And then as we continue to scale the company, there's more efficiency to be had in working capital, CapEx, as we continue to improve the company going forward. That will lead into compounding improvements in debt paydown and interest rate reductions that will allow us to get up to that goal of 70% free cash flow conversion.

As we think about one big component to the cash life cycle. It's investments around capital intensity, especially given a capital-intense business like the Recon side. So over 75% of the CapEx that we invest as a company goes into growth. So instrumentation to support Recon, capacity expansion as we think about building out facilities, some of the R&D expenses that we're investing as a company.

You've seen us drive a little bit of leverage here in the last year with regards to CapEx as a percentage of sale. We are still relatively inefficient as we are continuing to integrate some of these acquisitions that we put together. However, over the next several years, you'll be able to see leverage from CapEx as a percentage of sales. All of that is part of that equation that I just talked about in terms of our goal towards higher free cash flow conversion over time.

So, moving on in terms of our long-term ambition as a company. We feel we've built a strong company with strong products that will continue to drive profitable growth. If you think about the business, Recon, as Damien laid out, will be the growth driver for the company. So high single-digit to low double-digit profile on the Recon side of the business.

We are continuing to shape and improve the P&R side of the business. We're seeing that growth tick up closer to mid-single digit, especially here in 2025. And then we will continue to drive up the profit curve as well. So you'll see us continuing to expand margins year-over-year. That's coming from the mix of the business.

Just as we shape towards more Recon, that brings mix benefits. There's scale and operating leverage benefits that will come as well as we grow. And then there's also continued opportunities to drive cost synergy opportunity with regards to some of the integrations that we're doing. I already talked about the free cash flow conversion targets that we've laid out for the company over the LRP.

As we think about 2026, we're guiding growth towards -- organic growth towards mid-single digits. We've demonstrated 8% in 2023, 5.5% in '24 and 6% in 2025. We feel like the business is set up to really be able to continue to drive that growth. We'll continue to expand margins as we look into 2026, absorbing the tariff impacts that came our way in 2025. And like I mentioned, we'll take a step in the right direction towards our free cash flow conversion goals with greater than 25% in 2026.

So with that, I'll end the presentation, and we'll take some questions from Robbie. Thank you.

Great. Maybe we can start on 2025 guidance, and let's start on the top line. It came in a touch lower than where guidance was before and consensus. Maybe just talk to some of the trends you saw, which business was impacted more than the other? And we can take it from there.

Yes. So I would tell you that right through till the start of December, we were tracking right on plan. We saw a little softness in the last couple of weeks. I largely think this was due to just the way timing happened with the ordering patterns, surgical patterns as we headed into the Christmas, New Year break. A lot of it for us was very [ diffused ], a little bit Europe, a little bit U.S., a little bit Recon, a little bit P&R. I wouldn't be able to point to any particular area. But if you think about the absolute numbers, it was basically 1 day of sales as we guided the top line to the lower end of our range.

When you think about your 2026 guidance philosophy, I would say 1 day of sales is a pretty thin margin to miss or beat a quarter. When you take into the mid-single digit, and obviously, we'll get more specifics on the fourth quarter earnings call. How are you thinking about just the buffer or the margin for error when you give guidance next year?

Yes. I think as we look at next year, we've taken a pretty prudent -- you want to use the word conservative, conservative approach when we talk about the mid-single digit. We like the setup with our product portfolio and where we're going with the recent new product introductions. We like the setup with where we are with the talent and the way that the commercial organization is evolving. I would argue that the way we've approached next year is to be pretty conservative.

The good news is down the P&L, adjusted EBITDA came in probably at the midpoint, a little higher in the range for 2025 and EPS is clearly above where you were before. Obviously, adjusted EBITDA captures some of the operating benefits. So what came in a little better on the operating line? And on EPS, was it items below the line that helped beat consensus?

Yes, it's a combination of factors. I'd say that the work that we're doing to really improve the portfolio from a mix standpoint started to play out as we saw the results come through in the Q4 period. So we're seeing mix advantages of some of the higher growth parts of P&R coming with higher gross margins that are helping offset some of the impacts that we've seen from tariffs.

We're seeing the mix benefits of seeing strong extremities, particularly in shoulder performance continue as we closed out the year. So overall, I'd say gross margins continue to show some good mix benefit as we closed out the year. And then as we knew that we didn't know exactly how the days were going to fall, particularly with both Christmas and New Year's Eve falling on a Thursday, we wanted to make sure that we were very thoughtful around making sure that we were disciplined with regards to cost management as we closed out the year.

So both gross margins and managing costs, I think, helped us to deliver more towards the top end of our EBITDA range. And then with that EBITDA also, we've seen some improvement lower down in the P&L. I think interest rates continue to run favorable for us as we refinanced the debt as interest rate cuts benefited us as well. And then depreciation was running a little bit favorable for most of the year as well. So, feel good about where profit and earnings came through, especially given we're closer to the lower end on the revenue guide.

You launched a number of new products in 2025. It seems like there's a lot more to come in 2026, both recognizing some of the new product revenues and more to come. Orthopedics typically isn't a make or break it on any one given product, but a lot of new product introductions can have a positive impact on the revenue and margin line. So what are some of the key ones that launched in 2025 and will impact 2026 and some that are launching to keep in mind in this coming year?

I think this is one of the exciting things about the way the portfolio is evolving. Yes, we launched new products. So Nebula, the [indiscerni] stem for the hip with the Impactor, that was a brand-new product for us, and we only really released that in the back half, really Q4. So we've got a long runway with building that opportunity out for us.

As exciting was taking products from the Lima acquisition and bringing them into the original Enovis/DonJoy portfolio. So that was an exciting part of it, too. So now we have, for example, complete cross-compatibility of our shoulder portfolio. And that enables us to be more capital efficient, focused on growth with shoulder surgeons.

The last aspect of growth is just that geographical expansion. We, for example, were not in Japan in shoulders at all until Q4. And so, that's been another really big part of how we've been able to start thinking about growth more broadly, which is geographic expansion of the portfolio and crossing the Atlantic. So it's not just typical NPI. You've got to think about these 3 things holistically. And that's why we really look forward to a strong portfolio of growth with the Recon business.

The P&R business has also benefited from new products, but particularly things like Manafuse, which is very high gross margin bone stimulation product. We're about to step into a moment with reimbursement changing for cold therapy for the No-Pain Act. So that's going to be a tailwind for the P&R business. So it's been across the portfolio and in multiple vectors.

So in the slide you had up about the long-range outlook, you had mid- to high single digits on revenues. You've been doing mid-single digits the past 2 years. The goal is -- the guidance is for mid-single digits in 2026. What takes you from mid-single to high single?

Yes. So you referenced an earlier slide. I'll go back even earlier and talk about the commercial execution aspect of it. Think about this. We've been building the company through 20-plus acquisitions. And as I said, you bring a lot of different tribes together, a lot of different capabilities. But having them all talk the same language, having them be very focused on customer-facing activities necessarily gets distracted when you're doing a lot of acquisitions.

This is why we've talked about pausing the M&A work for a while and focusing very much on the 3 things: commercial execution; operational excellence; and financial discipline. The upside case is around the commercial execution.

Got it. So, as you think out long run, commercial execution seems to be entirely in your hands. What are you doing today to put into place that pathway to high single-digits? And is it something maybe we see in 2027?

Well, yes, so ,I mean there's a long double click on commercial execution, but -- selling skills, all of us using the same selling skills methodology. It's the way we do targeting and segmenting and going after particular groups of doctors or expanding into new segments, like predominantly our shoulder repair is for fellowship trained shoulder arthroplasty clinicians. We rarely, and to a much limited extent, work with sports medicine shoulder surgeons. So we've got an opportunity to expand there.

The way we think about targeting the use of, for example, the Zuk partial knee. We talk to clinicians that the outside case for utilization is to do the majority of your patients with a partial knee. We are, let's call it, mid- to high single-digit in terms of our penetration. So, somewhere between our current penetration and this outside case is a happy medium. Let's call it, 25% of cases could be done with the Zuk knee. That's about targeting and segmenting and commercial execution. So, there are multiple aspects of this, that just take time to get the sales organization confident and competent.

Similarly, around -- I talked about kinematic knee. I think we've got an opportunity to be much more aggressive in terms of how we market the EMPOWR Knee System. That takes a little more energy as a sales rep to learn the knee to be confident and competent to sell that knee and support a clinician in procedures. So again, we're early in the stage of developing that. We know what good looks like because there are a number of our distributor partners and sales reps who are really good at this and have enormous stickiness of clinicians post training. We need to be able to template and replicate that.

So, again, we could go on it because I think I'm very passionate about this side of the house for us and what we can do with it, and that's what gives us a lot of confidence in the upside case.

Let's spend a minute on Arvis. Where does that stand in terms of a full launch? And do you think that puts you on equal footing with the competition, with the full robotic system that perhaps this could be even a better alternative to ASC or for physicians where cost is an issue?

Yes, there's a lot to unpack in that question. We're just in the early release of the Arvis 2.0. You'll see a lot more as we get into AAOS in March. That's really where our coming out party will be on Arvis. I was just in some cases in the [ Mayo ] just before the holidays where I saw the utilization of it. The headset is substantially different to the 1.0. That means the hardware is much more user-friendly. The software is much more user-friendly. The tissue balancing for the procedure really makes a clinical differentiator for the product. If you're doing all your knees on a robot, it's pretty unlikely you're going to flip and use Arvis. That's not who we need.

But if your volumes are much lower, Arvis is a relevant clinical, cost-effective way of approaching the knee. If you're moving between multiple clinics, which a lot of clinicians are, between your hospital and 2 ASCs and maybe another community center, Arvis is a really viable clinical alternative for you.

And so, for clinicians who are doing lower volumes and need some planning and navigation support, for clinicians who are moving between multiple clinics and don't have the ability to move their robot around, this is a really viable option. We will launch in March. We'll focus very heavily on the shoulder in the first instance, knee more opportunistically and then in the back half of the year be starting to get into the international markets.

Do you think we'll see this contribute in a meaningful way to revenue in '26?

I think it will, but it won't be as a line that says Arvis in the P&L because really what we're about here is driving the clinical application of our implants. So what you should see is support for the base case and the upside case for our implant sales.

Is this a model where you'll be selling the system? It's obviously a much lower price tag than a big $1 million-plus robot. But is this something you place the hardware and pull through the disposables, do you lease it? How does this model work, [indiscernible] [ to ] monetize it?

That's a great question. The answer is yes. We're going to be very keen on making sure people have the access to the technology so they can place implants. So we're going to have a very flexible business model here. If people want to buy it outright, terrific. If they want a fee for service, if they want a fee for procedure, if they want to do an implant commitment, we will be very flexible.

As you think about your end market exposure, I think hips and knees is pretty stable in the 3%, 4% type of range. Where do you think lower extremity and upper extremity growth is right now on a global basis? And how does Enovis compare to that?

Yes. So I think lower extremity is probably more the 2% to 3%. I think the upper extremity is probably like 7-ish. So I think on balance, the math works at around about 4%. And this is what we like about our profile is that we've been nearly 2x that in our Recon business. So, again, I think we've got a durable model of competing in a very competitive space, but I think, again, with differentiated products and a clinical support system.

And what's the latest on share, you think? Because it's very hard to get shoulder and ankle share, and I'm sure it is for you as well. Any thoughts on where you stand?

Yes. In terms of absolute numbers, it's super hard, right? But I would say, if you look at the numbers that our groups are publishing, we're definitely taking share, both in shoulder and foot and ankle. Foot and ankle has been a bit [ swirly ] because the elective bunion market has been shifting in a very meaningful way. But given that our portfolio mix is beyond bunion, it's much more trauma-centric, we've continued to believe we've taken share in both of those segments.

If I look back over the past 5 years or so, there were a lot of little deals. Lima was a bigger deal. It put a lot of debt on the balance sheet, and there haven't been a whole lot of deals since that close. So where are you in terms of digesting Lima integration? How are you comparing against your deal model? And do you think you'll be ready for M&A anytime soon?

I think Lima has gone very well with regards to integration. I think in terms of what it's built from a portfolio growth and durability standpoint, we're really excited to see the contribution that, that acquisition has made. We're stepping into year 3 of the integration now, very much on track to deliver the $40 million plus of cost synergies that we laid out with regards to when we closed out the deal. So overall, we feel Lima has done really well with regards to our expectations.

We knew -- like I said in the slides, we knew we were taking a step back on cash and debt when we did the Lima deal. So we've been very focused on making sure we got the integration right over the last couple of years, and we're continuing to drive leverage down. When we levered up to do Lima, it was closer to 4x. We're down to 3.2 now.

I think as we close out the end of 2025, we're really looking to drive leverage down below 3 before we earn the right to do more M&A. We've got the flexibility on the balance sheet as we've refinanced our debt. So we have the capability to do more deals, but we really want to be very focused around the capital allocation, disciplined around continuing to expand margins, driving debt leverage down and generating free cash flow yield.

Again, if I look back several years ago, to me, it felt like, of the R&D capabilities, there was a lot more development done through acquisitions rather than internal research. Where does that stand now? Obviously, Enovis is a very different business than 5 years ago. How much of the research are you doing in-house? And do you need to do deals from here on out to drive top line growth moving forward?

Yes. I think, look, a legitimate way of innovating was to acquire the innovation and acquihire, and that was powerful and it's put us in a really terrific spot. I think now because of that process, that acquisition of talent, we've put ourselves in a really good place to be able to do this organically.

Back on to the Lima thing, I think we're pleasantly surprised with just how great the talent pool was in that organization as well as what they brought in with some of the technology around 3D printing, for example, which enables us even like real time -- the Cones portfolio that we've just released for revision has started making a meaningful contribution to our growth rate and the gross margin.

So I think it's been important to grow the way we have by bringing in the talent quickly. I think now we're at scale where we can really use that to think about hitting singles and doubles. And again, as Ben said, there's a point at which we've earned the right to get back into the M&A space to bring in more opportunities for us. But I think we've got scale, talent and processes now to use our organic R&D as an opportunity to grow.

Yes. And just to piggyback on that, I mean, I think if we lay out the LRP, talking about mid- to high single-digit growth at the company level, we have a portfolio that's capable to do that without doing any more M&A in our future. So we feel the business is built to be able to grow, grow organically. And now it's about using M&A to really continue to shape the company towards higher growth, higher margins, better cash into the future.

Let's continue on margins here. You've committed to 50 basis points plus, I believe, in 2026 on adjusted EBITDA and 50 basis points plus annual going forward in the longer range plan. Walk us through the drivers. How much is gross margin versus R&D versus SG&A to get there?

Yes. Gross margin is the major driver given the fact that Recon comes with higher gross margins. It's going to be the growth driver of the business, and there's productivity and mix benefits that are happening within the Recon side of the business. So, as Recon grows and given that we're mixed 50% extremities, we should see continued improvement there. We also see opportunity to continue to drive productivity and gross margin expansion on the P&R side. So you put those together and the major contributor of our margin expansion is through our gross margin based on how we've mixed the business.

We will continue to drive operating leverage as well. Our SG&A, we know is too high right now. That's a factor of integrating a bunch of companies over the last several years. So we'll continue to drive SG&A down over time. And then in terms of getting after more cost synergy opportunity, there's still some of that, that's available to us as we continue to integrate Lima as well. So, those are the 3 building blocks in terms of margin expansion.

R&D probably won't be a big driver of that in the near term. If anything, we'd like to invest a little bit more in R&D. It's not going to be at the expense of our margin expansion goals. But overall, I think we have a clear runway for continuous margin expansion, not only in the near term, but in the long-term.

And you're absorbing tariffs within that 50 basis points this year. How should we think about the impact in 2026 of tariffs? Is just using the run rate from 2025, multiplying by 2, is that a good way to get there? Are there some other factors?

It's evolving a little bit as we're mitigating against them. I think what we've talked about is we spent in Q2, Q3 about $10 million of tariffs. So if you think about that cash-wise, it's about a $5 million a quarter run rate. So that's something that we have to offset with mitigation actions. We think it will be slightly negative to our impact in 2026, but we still feel confident that we can absorb it, mitigate it and expand the company's margins overall by that 50 basis points plus.

And when you say negative, is that it will be somewhat of a incremental headwind, but maybe not that full $10 million incremental headwind?

Exactly. We'll mostly neutralize it through mitigation actions. We've already done some of that. So -- but overall, I think that's how to think about it.

Great. Free cash flow generation, 25% plus, this in 2026 moving to hopefully 70% plus. That's been an area that's taken a while to come back into positive territory. What are the drivers in 2026? And how do you get the extra 50% conversion over the long run?

Yes. I think it's in the materials we presented today. We'll step down our integration costs as we're continuing to integrate these 20-plus acquisitions that we've done. We finished the journey on EU MDR remediation for the most part. And then it's really about driving improvements into the business, continuing to step down integration-related costs, improving working capital. There's a lot of efficiency to be gained as you're putting multiple Recon assets together that require a lot of both CapEx and working capital investment to grow.

As we get more efficient and scale there, those will step down. And like I said, you compound that with more cash, pay down more debt, you pay less interest. All of those are contributing factors. So we feel like the step forward in 2026 is the right step forward after being negative a couple of years ago, being slightly positive. In 2025 we recognize that free cash flow yield is extremely important, and we need to get up the curve and closer to that 70% plus as soon as possible. We'll do it in steps, but overall, take a step in the right direction.

The ownership mindset is going to be very much in place, though, because starting next month, the new performance management scheme is going to have free cash flow as part of the metrics for achievement of goals. So, again, we're making this front and center. It's nothing to incentivize people. I put it as part of their bonus.

Exactly.

Well, good. Unfortunately, we're out of time. Thanks for a great discussion, and I appreciate everybody joining today.

Robbie, thanks for having us. Thanks, everyone. Cheers.

All right. Good afternoon, everyone. Thank you so much for joining us. My name is Danielle Antalffy. I'm the U.S. med tech analyst here at UBS. Very lucky to have with us, the Enovis team, Damien McDonald, CEO, Ben Berry, CFO; and of course, Kyle Rose, Head of Investor Relations. So listen, maybe a good place to start, just what is Enovis?

And Damien, I'd love to hear you're getting settled into your role. What brought you to Enovis, what attracted you about the story? And where are you most excited about?

Well, first of all, thanks for having us today. I really appreciate UBS hosting us and you, Danielle. Thank you. I'll try not to get into a monologue about why I'm so excited about this company, but it's a few things. So firstly, on Enovis, if you don't know the company, we're a challenger brand in the orthopedic space to the big 4. I think really what differentiates us is 2 things. Firstly, if you think about the portfolio, we're an innovative portfolio, but we cross over the whole spectrum of the patient continuum from prevention through implant into recovery. And I think that's exciting because the whole patient revenue cycle is covered, the whole patient trust cycle is covered and we've worked really hard when we -- the team before me because I've only been here about 6 months, worked really hard to build a really balanced portfolio where 50% U.S., 50% international, where 50% P&R, 50% Recon. In Recon, we're 50% extremities, 50% large implant. And so I think the portfolio is really exciting. And that's the first thing.

I think the other thing that differentiates us is our agility. As I talk to customers, one of the things that's really resonated with me is our proximity to the customers, our ability to make decisions, their ability to influence our pipeline is really close. And I think they've really much enjoyed moving into a space that's that agile. And I think also what it's become as a talent magnet for commercial people for innovators to join our company. So I think those 2 things, the portfolio and the agility. So what excited me about it coming from the outside in I really love the orthopedic space. I think it's got a long tailwind behind it. I mean, we could unpack that. There's a lot in that. I love the fact that we had an innovative pipeline, not just through acquisition, but inside our organic group. I think that what's exciting is that we have this ability to really touch patients and some people know that I came from Danaher. I also love that the EGX thing looks like a lot the business system that I grew up in at Danaher.

So all of those things combined made it a very exciting place to come.

Where do you see the most room for -- I don't want to say room for improvement, but where you think your skill set you have the most impact in shaping Enovis from here?

Well, in partnership with Ben and the rest of the leadership team, I think there's a few things. Firstly, this doubling down on commercial execution. We've done a great job, as I said, acquiring a great portfolio. What I really want to make sure we focus on is commercial execution, innovation execution. So I outlined this in my first earnings call.

I think the second thing is this operational excellence, this mentality of how continuous improvement really adds value to the company. It can differentiate us. I'm convinced it will differentiate us in the med tech space.

And third, again, working with Ben a lot on this financial discipline. We've got to double down on cash flow generation, debt reduction so that we can have permission again to go and use M&A as a weapon.

Absolutely.

So one of the questions I do get from folks is, you have built out Enovis through M&A and sort of how to think about the capital allocation strategy from here. You're taking a breather now and wait for some debt paydown, et cetera, just investing organically more now? Like maybe talk a little bit about the capital allocation.

Yes. I mean if you look at our history, we were really deliberate in terms of building the mix that Damien laid out with regards to half of business, half the business being Recon, half the business P&R and a lot of the M&A that we did to build out the Recon business because the total addressable market is quite large for us to continue to grow in. So when we did the Lima transaction at the beginning of last year. That was the last piece to really fully globalize us and to build out a portfolio that gave us the capability to really lean into organic growth. So we've been doing really well with regards to integrating that asset. It's been performing really well ahead of our expectations to date. We're a little bit over 1.5 years in, so getting close to 2 years in on that integration, continuing to grow double digits outside the U.S. getting after the synergies that we laid out.

So overall, it's been a muscle of ours in terms of leveraging M&A to build out a portfolio to help mix the business to more profitable capital-efficient growth over time. And so we will continue to be focused on that down the road. Now in the near-term, it's really important for us to just finish integrating and as Damien mentioned, make sure that we're getting up the cash curve driving leverage down and then unlocking the ability to do more strategic M&A into the future.

Are there specific white spaces that you're interested in at this point that you'd be willing to talk about? Or is it going to be more like channel acquisitions of channels, geographies?

Yes, I'd like to say all of the above. I mean, if you look at where we're focused right now, we're doing a little bit of channel acquisition and never let a good bit of disruption go to waste in the market. And people have said that they're getting out of certain jurisdictions. That's been useful to us. Some of the other things that are going on in the market have been great in terms of talent attraction. I think one of the really important things about the orthopedic space is that after the big 4 and us, there's a really long tail, the people who are innovating and I would call it in singles and doubles. Not everything has to be a home run. You've got little bits of the portfolio or people change your technique and you can really capitalize on that and bringing it inside our portfolio, we think, is pretty powerful.

So I would say what we're looking at is a whole combination of things, again, all subject to, first, we need to pay down debt.

And I would just add to that. I mean we're not looking outside of ortho in terms of adjacencies or other types of things. It's more focused around where do we have leverage today and where can we build that out.

You're not going to become a cardiology company.

I'm not.

Okay. Well, let's talk about the product pipeline a little bit here. So Arvis is obviously top of mind for everyone. Maybe talk about what's going on there, when this can roll into a full product launch. And most importantly, I think how we think about the ramp and contribution of top line growth because you're already putting up high single-digit Recon growth. And that's without some of these products. So...

Well, I think you've got to think about Arvis as being a tailwind for our business, particularly around knees and shoulder. And so as we go into the new year, look, we had a really great response at ASES for shoulder and [indiscernible] for hip and knee. The number of people who are at the booth really diving into where we're going with Arvis is pretty exciting. I think for us, what's important here is that this allows us to do several things for patients, but particularly for clinicians. First, it's really going to be very ROI driven. So we're not going to have a model that is a single like let's buy a single unit. We like the idea of being flexible. It meets the needs of customers.

So it might choose to be an outright purchase. It might choose to be financing. It might choose to be an implant-related contract. But all of that has to be customer-centric. So that's the first thing.

The second thing is it's 0 footprint. You can literally move it between any of your sites of care. So we know a lot of clinicians work in multiple sites, and you can't just take your robot with you. So we think that's pretty exciting.

And look, the last thing is it really allows the special navigation where you literally are not taking your eye off the patient for the procedure. And I think those 3 things are reading through. And so as we go into the new year, first half is when we'll start releasing it more broadly. We want to get the training right and then as I said, should be a tailwind for those 2 segments.

How heavy is the training lift here?

It's a pretty quick lab. And then what we do is we like to support the clinician in the theater for the first sort of 5 procedures. But it's pretty intuitive, especially if you've done any gaming.

Right. Okay, right. Fortnight. All right. What about -- so was that AOF back in March. So Damien, I guess that was before you...

That was before I joined, yes.

But walk through the booth, there's a number of new products, maybe some of the other less -- I don't want to say less exciting, but less top of mind.

Singles and doubles.

Yes. So maybe some in hips, knees, P&R.

Yes. So I mean, we launched the augmented glenoid in shoulder, the ARG product, and that's really been performing well for us. We believe that will continue to create good momentum for us even as we go into next year. We think about 30% of procedures can be using that device. We're only into the low double digits so far in terms of penetration. And it was a product that we had some conversion sitting on the sidelines until we fully got that product out into the market. So overall, ARG is going extremely well. We're growing double digits through 9 months in shoulder and see good momentum here as we go forward.

Another big one for us was the hip system launching the Nebula Stem and the Orthodrive Impactor device. Those are gaps in the portfolio. About 50% of our knee customers weren't using our hip because we had some portfolio gaps. So that's another area for us to continue to drive deeper into market penetration and share capture with regards to that device. So both of those have launched and are going extremely well building momentum and continue to have some of that, that will play out into 2026 and beyond as well.

And as you look at your or maybe even higher level, let's talk about the orthopedic market, 1 of the questions '23, '24 was how much of this volume growth is backlog work down. I mean I'm curious to hear your view on where the orthopedics market is. Let's just talk volume, take price. I want to keep the price conversations separate versus pre-COVID levels because I'll tell you, I feel like it's actually growing faster, but curious about what you guys would say.

I think it played itself the U.S. market relatively quickly in terms of the pent-up demand and working through that. So I think we've really worked through a lot of the backlog in the U.S. market when we think about post-COVID trends. The international markets are where I think it's created a little bit more of a tailwind. I thought we -- our view is it would start to slow down this year, it hasn't really. So I think if you look at international published numbers of all the competitors that are public, you would say the international markets are still running a little bit hot. So that will likely slow down over time. But when I don't think it's anybody's guess at this point.

And I think another question investors have is there is very much a focus on the shoulder that is arguably the more exciting part, higher growth part of the Recon business. How do you guys compete? How do you leverage your physician in shoulder to compete in hips and knees? And maybe talk about the interplay between the businesses.

Well, I think, again, often people who are doing shoulders are different from the hip and knee. There is not an enormous amount of overlap. But once you get into clinics, the peer-to-peer voice is pretty important. And trust and that partnership does spread. So I think the fact that we've built out this balanced portfolio now we've got a much deeper footprint at major clinics is allowing us to cross over using, again, the thing that you talked about, our outsized position in shoulder. It's allowing us to now have a bigger voice around hip and knee. And look, we're only like low single-digit hip and knee market share. So it's a really important voice to have travel across the corridor.

And I did ask about volume. What about price? What's the price dynamic right now in the orthopedics market?

So I'll start on the P&R side. We've been a leader there. If you think about post-COVID inflation, we were gaining about 1 to 2 points of price in P&R as we were offsetting some of those inflationary impacts that softened a little bit, but now that tariffs have started to become a headwind, we've had to reintroduce that muscle of price increases there. So I think about the P&R market more flat, more neutral to slightly up when it comes to pricing. On the Recon side, traditionally, it's been down a couple of points year-on-year. I'd say we see that trend being -- it's gotten a little bit better over the last couple of years, but one that we think probably reverts back to norm in the future, but I'd say a couple of points down on price on the broader Recon side.

Do you have to compete on price in hips and knees? Or are you at parity?

No. We are very competitive with our pricing in terms of our implant systems. We are an innovator. One of the things to build on Damien's answer there, too, it was really important for us to be an innovator when it comes to implant design and really attracting the right kind of KOLs to be partners with us as we really think about driving market capture and market share. So as we do that, we make sure that we have competitive systems and that we can go toe to toe with the large players out there.

Well, that's a good segue into one of the other perceived headwinds or concerns, I guess, I would say, as some of your competitors are launching robots for shoulders, maybe talk about the landscape you see as it evolves with robotic solutions for shoulder launching and how important it is or isn't to have a robotic solution?

Yes. Look, I think what we've seen in knee much less in hip, but what we've seen in knee is that enabling technologies are important and have a place. But it's not always evident that a large-format robot is the answer for the assistance stage. So for planning and navigation, you can see there's applications in knee that have been really important. And a lot of people use assistance for the knee. I think in shoulder, it's still evolving. So in terms of the enabling tech, I think for planning and navigation, it's going to be important. It's still not evident that a large-format robot is the right answer for the assistance step and indeed does it need to be in a system step. It's way more complex anatomy, it's way more complex procedure.

So we think that the pathway we're on with Arvis is a really good solution as it all evolves. Again, we're very customer centric. So we're working with clinicians to say, how should we think about the future, but we think Arvis is a great way in.

Yes. And actually, one thing we've heard, I'm curious what you would say to this, but we've heard that the implant itself matters so much more for shoulder, for example, than like knee implant kind of....

We've heard a lot about that. We've heard a lot about that and also being able to personalize it, which is why our ProMade product is so important in this space as well. The idea that you can have customized implants in this space, I think, is also pretty critical.

I'd argue, we have a pretty competitive knee design out in the market that's differentiated, but I also agree with you on the shoulder.

Yes. And as far as innovation on the implants go, like where is the focus? And for example, cementless, maybe talk about some of the areas where you guys are investing some of those R&D dollars on the side of things.

We've worked, again, pretty hard to have a balance of how we're focusing on shoulder and the larger joints. We're working very much on not just things like cementless, but the materials, we're a leader in ceramics. We're doing a lot of work on that. We're a leader in poly. We're doing a lot of work on that. So I would say it's not just about an implant. It's about the materials and it's about how procedures are done, how can we improve workflow. So I think the team are doing a really good job and again, very balanced portfolio.

Okay. Okay. And we haven't really talked much about the P&R business. And so the first question I have is -- why does the P&R business make sense as part of the portfolio?

Yes. This is where I think this continuum is so important. And an early dinner we were at with the customer, really highlighted this to me when he said, "Look, I trusted you with the recovery of my patient with your bracing, why didn't I trust you with the implant that brought me into your story. And so we've got a very big footprint with our brands, the DonJoy brand, the Aircast brand across a whole lot of different anatomies. And that voice gives us a reason to be partnering with the clinician and trusting their therapy with their patients. So I think it gives us an ability to talk about how more broadly we can be in the implant market, which, again, very low market shares relative to the entire space.

Yes. And it is a lower growth business, but my understanding, high cash flow generation funds, the innovation on the Recon.

And that's, again, pretty important. There's no secret. Recon is a very capital-intensive business. You've got a lot of forward equipment placement. So how do you generate cash in that environment, having something like the P&R business is highly useful.

I think it's also been a pretty big success story of really leveraging the business system and EGX in terms of taking a business that was pre Colfax acquisition of DJO wasn't really performing very well from a growth perspective had some challenges on the gross margin line as well. And over a pretty short period of time, we've rejuvenated that portfolio to where now it's growing consistently north of 3%. We continue to improve margins. We just divested a portion of that business that will help give it even more boost from a shaping and a mix perspective. So overall, P&R serves a great purpose not only for the benefits of we're the market leader, and we have customer access because of that.

But then within it as well, we're driving it to make it more growth accretive, more margin accretive and maintain that cash profile that can help us invest in the higher-growth Recon business. So overall, P&R serves a pretty important purpose for us.

There's one other thing, too, that I think is not really well understood. It has a very interesting and well-developed revenue cycle management business. which I think has a lot of application as we think about ASCs and how they develop. And you've got a lot of capital constrained, cash constrained, small businesses, hard to attract talent into them. We think we can help them in terms of how they generate cash, how they run their business. So I think the craft that we have of this revenue cycle management has applications for strategically where the market is going.

Interesting. Okay. My next question was site of care. And so the shift to the ASC and how you guys compete differently in the ASC maybe versus the hospital setting and...

Well, one thing is it offers I'd say, a little bit easier contracting environment than some of the larger hospital systems. So overall, from a how we can come to compete, leveraging some of the relationships that we have, given we are in a lot of ASCs already on the P&R side of the business is an area of advantage for us.

The other thing is we have really great products and really good products for outpatient candidates, so making sure good patient outcomes, we've streamlined some of the instrumentation that goes into ASCs. We have some tools to make sure that we identify the right kind of patient that's going to be successful in those types of settings. So overall, that has played well for us. We're about I'd say 25% close to that on our primary knees in the ASC, about 20% of our hips, and we're in the low teens, I'd say, on shoulder now. So we think we're a little bit ahead of market in terms of our shift to the ASC and we think that, that volume growth in ASCs will help us to continue to take share in the market going forward.

Okay. Got you. And maybe let's talk, Ben, about the financials here. Focus on free cash flow generation. Maybe talk about some of the headwinds in the first half of the year and how you can get conviction in the back half of the year that you start throwing off more cash flow?

Yes. I mean we've taken a little bit of, I'd say, a deliberate step back in cash flow as we were integrating a pretty complex transaction in Lima over the last couple of years. So we have started to get to the point to where a lot of those heavy investments upfront are starting to diminish going forward. That, plus we've been investing a lot in things like European medical device regulation, which really steps off next year. But if you looked at what we did in the Q3 period, we generated about $30 million of cash, about 70% free cash flow conversion. So the capability to generate cash is there for us, and we will continue to take steps towards that goal of 70% to 80% free cash flow conversion over time.

So as the integration costs start to step down as EU MDR starts to step down as we continue to drive implementation of our business system, all that creates good momentum in terms of getting up that cash flow curve, and we demonstrated that in Q3.

Okay. And then similar question but this time looking at adjusted EBITDA, there's a lot, I think, a lot more leverage in the business than investors might appreciate maybe talk about what some of the drivers are. I mean just even as you integrate Lima alone, it feels like there's a lot of momentum behind margins.

I agree with you. The Lima synergies are still coming through. There's opportunity on the gross margin side as we leverage the manufacturing footprint that we got with Lima trying to take high-cost production in areas to move it into lower cost facilities. So all of that is in flight right now. So overall, we see opportunity there. When I look at our EBITDA margins, I would say that we have an opportunity, not only with the natural mix of our business with Recon growing faster, which comes with higher gross and EBITDA margins that just naturally is going to drop us down accretive EBITDA margin expansion. You've got further synergies coming down the road. You've got scale and leverage that you can continue to grow costs less than revenues.

So overall, from an EBITDA margin expansion, the business is mixed in a way that should give us benefit year-on-year in years like this where you're dealing with something like tariff that pops up out of the blue, then you have to continue to drive productivity and figure out ways to get after that to where it doesn't become a long-term problem. But as we look forward, we see a lot of opportunity to expand our EBITDA margins year-over-year driven by those things, mix, productivity and synergy.

And I think this is where EGX really comes to play for us. The business system mentality, continuous improvement. We're seeing those sorts of things read through as we put more focus on it. The last quarter, the P&R business put up 110 basis points of gross margin improvement. A lot of that came through the application of EGX at the manufacturing facilities. I still think we've got a lot of runway in making that embedded. Look, we bought a lot of companies over the last 4 years that came into the family but I would say the application of EGX is not yet ubiquitous. And doing that constantly focusing on that is, I think, another opportunity for us.

And this is in the context of -- you talked about price headwinds actually, right? So okay. All right. As we think about the business mix between Recon and P&R and even within Recon, shoulder versus larger joints, like how do you think about in 3 years' time what the mix of business is the right mix for Enovis?

I have to say, I think this balance is good. The 50-50 in terms of revenue, that's really powerful because it's showing that we're not held hostage to one thing. I mean, often, you see in companies, well, one metric was often one anatomy and you get dinged for it. I think the balance is important. I think in terms of the longevity of the company, having P&R growing solidly and spitting off a lot of cash is important for us to be able to continue to invest in multiple anatomies. And again, as Ben said, that just naturally will lift our profit margins and lift our growth. So I think we have a real opportunity to use tools across the whole portfolio to make both grow.

Okay. Okay. And as you think about where to innovate from here or maybe I'll ask the question this way. And I appreciate what you said about M&A, you want to pay down debt first. But are there other exciting areas within ortho, higher growth areas that you do see white space in your own portfolio that you could take advantage of over the next few years?

Sure. I think, look, we have a natural place in shoulder but we're not particularly strong in sports medicine. And we sort of touch it from both sides with the shoulder implant and with the P&R, but I think there's a lot of opportunity for us to explore that space.

One area to highlight would be one of the products that we launched earlier this year, which is Manafuse, which is within P&R, bone growth stimulation device gives us a complementary device to what we already had there, which unlocks a new part of the market that we feel we can drive both penetration and market share capture. So you've got a business that comes with pretty strong margins, it's growing well. And it's something that unlocks a new part of the market for us to not only expand with a new product, but then to pull through other devices that we already have.

So there are more things like that, that are out there for us to bolt on with relatively small capital outlays. So we'll continue to look to those opportunities because, again, the focus is on how do we shape and mix the company towards higher growth, higher gross margins, create that compounding value equation. So we can do more of the same going forward. So there are a lot of those opportunities that are out there when you look at ortho.

And specifically within shoulder because that is where you guys seem to be most differentiated or at least that's the perception. What do you -- like what is -- what are the current end market dynamics there? What do you think the market is growing? Are you still taking share in shoulder and has anything changed? We touched on robotics. But just in general, I feel like you hear some of your big competitors talk about a revamped focus on shoulder because it is such a high-growth market within orthopedics.

Yes. Well, again, if you look at the on balance where you think orthopedics are 4% to 5%, shoulder is definitively growing faster than that. I think there's a lot of changes in the population dynamic and people playing sports and different sports. Well, shoulders and ankles, right? So we think that that's a secular tailwind for us. And so we've got a lot of really great products in that space. We're biased towards the innovation there because of our proximity to a lot of customers. But there's still a lot of opportunity for us. And again, I think it's important. You don't have to hit home runs in these things. You just have to have singles and doubles that continue to build the portfolio so that you can partner with clinicians on more and more patients.

And I would just add, one of the things that was really important for us to step into outside the U.S. markets was the ability to really drive shoulder and shoulder penetration. I'd say U.S. market with what we did with reverse shoulder and really changed the game in terms of how those shoulders of [indiscernible] came into the market that allowed us to climb up into the #3 share player in shoulder that conversion outside the U.S. is still in the early days. So there's going to be a lot of growth outside the U.S. that's in shoulder.

The other thing that's really been additive to us is the Lima portfolio of products within shoulder, not only the portfolio of products in current state, but just launching a new product called Prima, having the ProMade concept that can be driven for customization thinking about future innovation designs and personalization, all of that, we think there's a lot of opportunity still for innovation in shoulder on top of the enabling tech that Damien talked about. So it will be a focus area for us. We're a leader there and still will continue to drive a lot of effort to maintain that growth.

And the personalization, can you talk about that a little bit more and sort of what the focus is there? And how far are we into that and how that's being adopted?

We already have a well-established business. Again, Lima did a tremendous job in this space and particularly partnering with clinicians around customization in patients who are really clinically compromised. The work the team is doing now is to speed up that process and that cycle. There's work in the next development pipeline around AI in terms of process improvement. So that the idea from scan to implant is much quicker. And we think as we get better at this, this becomes a really important driver, again, patient proximity, clinician proximity, it's going to be a real enabler for us.

And as I said, the Lima team had done a great job both in Sicily, where we print the implant, but also in San Daniele where the engineering team is, it's a really great ecosystem.

Do you think you guys are ahead of the game on the personalization side of things?

Look, I think we're in a really good place. I think again, the fact that we're small and nimble enables us to be really responsive. And we've certainly inherited with Lima a great footprint. I'm looking forward to doubling down with this team around our commercial excellence like how do we really make this a competitive advantage.

And in the last 1.5 minutes here, I guess my question to you would be, where do you think the disconnects are for investors, sell-side analysts like what are we missing or what are folks missing? When it comes to the Enovis story?

I personally think that Ben talked about, we took a step back in cash generation to be able to invest in the Lima acquisition. The last 2 years in terms of cash has not been tremendous. I think you're seeing a focus now on cash generation. I think as that starts to read through into the debt reduction, you'll be able to build models that I think are more reflective of where the value is. We've already brought the leverage down from 3.5x to like 3.2x. Again, as all of that flow wheel starts to get going over the next year, I really hope that the valuation catches up with the promise.

Yes. Do you have a target for your leverage ratio?

We're running to get under 3 as fast as possible. So I think that's the near-term focus. It's all going to depend on how active we are with M&A, but we never want to be in a high leverage situation for any long period of time. So we're going to focus right now to drive it under 3, and then we'll go from there.

All right. Well, with that, we're almost out of time. So thank you so much, guys, for joining.

Thanks for having us.

Really appreciate it. Thanks very much, everyone.

Good morning. My name is Carrie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enovis Third Quarter 2025 Financial Results Conference Call.

[Operator Instructions] I would now like to turn the call over to Kyle Rose, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today for our third quarter 2025 results conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call today are Damien McDonald, Chief Executive Officer; and Ben Berry, Chief Financial Officer.

Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovis.com. We have also posted a slide presentation in relation to 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 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 might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them, except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, the accompanying 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 Damien. Damien?

Thanks, Kyle. Good morning, everyone, and thank you for joining us today for our third quarter earnings call. Since our last call, I've had the opportunity to meet more of our customers and team members, and I see a company with extraordinary talent and a unique portfolio spanning orthopedic implants, bracing rehabilitation, and enabling technologies which empower surgeons, clinicians, hospital leaders and distribution partners to improve patients' lives across the entire orthopedic continuum of care. Our solid third quarter results reflect strong performance broadly across the portfolio as we increasingly focus on commercial execution, operational excellence, and capital allocation.

Third quarter revenue grew 9% on a reported basis and 7% organically. On an organic basis, Recon grew 9%, Prevention and Recovery grew 4%, and we generated nearly $30 million in free cash flow. Our Recon business delivered another quarter of strong balanced growth. In U.S. Recon, we grew 7%, led by double-digit growth in extremities. Our augmented reverse glenoid system, ARG, continues to gain traction. What's exciting here is that we're still very early in the launch cycle, and there are additional products in the pipeline to support a multiyear cadence of innovation in extremities.

In Hips and Knees, we grew 6% in implants, adjusting for the prior year sales of enabling technology, and we continue to reinforce our portfolio to compete across hospital and ASC settings. The new products we've launched, Nebula Stem and Orthodrive Impactor, are performing well and surgeon feedback continues to be excellent. Internationally, we grew 12%, and this is where the Lima integration is driving value and producing benefits. We're executing across the cross-selling synergies we targeted in all anatomies. These are deliberate strategic wins that position us for sustained international growth against strong competitors.

We showcased the next-generation Arvis at ASC in August last month. Surgeon response to Arvis Ultra was outstanding. It's lighter, faster, and adds capabilities like soft tissue balancing for knees and advanced shoulder applications. Arvis continues to track for a broader launch in the first half of 2026.

Now moving to P&R. We delivered 4% organic growth with strength in BoneStim, revenue cycle management and our spine bracing products. Adjusted gross margins increased 110 basis points year-over-year, driven by product and geographic mix as well as EGX-driven initiatives across both our manufacturing and supply chain. We completed the divestiture of Dr. Comfort in early October. This was an important transaction in support of our purposefully shaping our business. I very much want to thank the entire Dr. Comfort team for their contributions as part of the Enovis family.

We're confident that as part of the Promus Equity Partner portfolio, Dr. Comfort has found an ideal environment to achieve its full potential. This transaction, coupled with our focused investment in innovation and growth, has resulted in over 50% of our P&R portfolio now growing mid-single digits or better.

I'll now turn it over to Ben to walk through the financial details.

Thanks, Damien, and hello, everyone. We are pleased to report third quarter sales of $549 million, up 9% versus the prior year on a reported basis, including a 190 basis point benefit from foreign currency and 7% organic growth. Our Recon business grew 9% organically, led by double-digit growth in Extremities and 7% in Hips and Knees globally. Prevention & Recovery grew 4% organically, reflecting continued stability and mix benefits across the portfolio. Year-to-date, organic growth is 7%, including 10% in Recon and 5% in P&R, a clear sign of balanced momentum across the business.

Adjusted gross margins improved 140 basis points in the quarter, driven by favorable mix, ongoing productivity in manufacturing and supply chain, and slightly offset by tariff impacts. Adjusted EBITDA margin was 17.3%, down 60 basis points year-over-year, reflecting planned R&D investments, phasing of expenses and tariffs. Year-to-date, we've expanded gross margins over 170 basis points and increased adjusted EBITDA margins by 40 basis points.

Third quarter effective tax rate was 21.8%. Interest expense was $9 million for the quarter, down from $11 million last year. As a result, adjusted earnings per share was $0.75, up 3% versus prior year. Year-to-date adjusted EPS is up 27%, driven by margin expansion and reduced interest expenses. Additionally, we recorded a non-cash technical impairment of goodwill of $548 million in the quarter due to a sustained decline in our share price and market capitalization. This impairment does not have any impact on Enovis' liquidity, cash flows, debt covenants, nor does it have any impact on future operations. We are still very confident and optimistic in the long-range plans we've communicated and believe our execution against yearly financial commitments since the spin has demonstrated a strong track record of operational performance.

In early October, we announced the sale of our diabetic foot care business, Dr. Comfort, to Promus Equity Partners for up to $60 million, including $45 million in upfront cash, which will be used to reduce debt. The transaction sharpens our focus on core P&R markets and aligns with our strategy of concentrating on higher growth, higher-margin opportunities. Dr. Comfort represented roughly 5% of P&R sales year-to-date. As a result of this sale for the fourth quarter, the impact to our revenue outlook is expected to be $15 million, and we plan to absorb the modest impact on margins and operating cash flow.

Turning to guidance. We are updating our full year 2025 outlook. Due to our positive Q3 performance and the divestiture of Dr. Comfort, we are adjusting revenue guidance by $5 million to $2.24 billion to $2.27 billion with no change to our organic growth guidance. We are also raising our profit and earnings outlook. We now expect adjusted EBITDA in the range of $395 million to $405 million. This is a $3 million increase to the range and is inclusive of a more favorable tariff outlook, solid Q3 results and the negative impacts from the divestiture.

As we have previously communicated, the tariff situation remains very fluid. We paid $4 million of tariffs in Q3, still mostly related to P&R. We are beginning to feel the impacts in the P&L, as the new costs have worked their way through inventory. However, we continue to execute against our mitigation action plans in effort to offset this inflation. No adjustments have been made to our outlook for depreciation, interest, tax rate or share count. We are also raising our adjusted EPS guidance by $0.05 to $3.10 to $3.25. We continue to expect positive cash flow for the year, which we will prioritize towards debt reduction and lower leverage levels as we exit 2025.

To summarize, through 9 months, our results highlight the resilience of our platform, the strength of our diversified portfolio, and the progress we're making towards sustainable, profitable, capital-efficient growth. The underlying fundamentals of the business are improving, and we will continue to manage the business responsibly through this dynamic environment as we maintain progress towards our strategic goals and financial commitments. Kyle?

Thanks, Ben. In an effort to accommodate everyone in the Q&A session and keep things to a reasonable time, we ask that analysts keep their questions to one question and one follow-up. You're welcome to rejoin the queue if we have time.

With that, operator, we'd like to now open it up for questions.

[Operator Instructions] Your first question will come from Vik Chopra with Wells Fargo.

Congrats on a nice quarter. Two for me here. Maybe starting off first, one of your larger competitors yesterday called out a modest slowdown in the U.S. revision market for both Hips and Knees. I'm just curious if you're seeing that dynamic play out as well?

Look, so far, Q4 procedure volume seems healthy and stable. Look, historically, our markets have been resilient. And look, there's no secret there are lots of factors affecting sentiment at the moment, entitlement cuts, government policy, changes in government inflationary concerns. So all of these could weigh on volume. But right now, we're seeing healthy and stable volumes.

Then given where we are in early November, I'm just wondering how you're thinking about the potential headwinds and tailwinds in 2026, and if high single-digit recall growth is still on the table for next year?

Yes. I mean, Vik, we're still going to see how the year plays out with regards to thinking how 2026 momentum is going to take us. So overall, I think we still see that as a potential for this business, but we're not guiding on 2026 right now.

Your next question will come from Xuyang Li with Jefferies.

I guess to begin, I wanted to hear a little bit more -- Damien, now that you've been in the seat for a while longer now, I wanted to hear your perspective on portfolio management and transformation. Obviously, the deal you've done with Dr. Comfort is helping to streamline the portfolio. Should we expect more to happen on that front going forward?

We're very focused on three things. The commercial execution. And again, I think you saw that read through in the quarter. The operational excellence, and we've talked about EGX a lot in the past, but we're really doubling down on that. And the last thing is this financial discipline. And we're taking a look across the whole portfolio, not only things like Dr. Comfort, but SKU rationalization and how we think about cash generation. So I would say everything is on the table, but being very focused on those three things is important for us in the near term.

Can you maybe help level set us a little bit on the Arvis Ultra full launch? How should we expect the pace of that following the full launch next year and maybe a few years down the line?

Yes. So I think given the reaction we had at AAHKS and OKHSA, we're very pleased with the way we've approached this. I know we talked about our delay last quarter, but doing that with the software and the hardware, I think, really read through in terms of the response we had from surgeons as we did the demos. We had a lot of traffic at both of those conferences. Our model is being examined like how we think about our go-to-market and offering lots of flexibility in terms of the financial model for customers to purchase lease or commit to implants. So we're working through that as we launch this in Q1, Q2 of 2026, as we go to a broader expansion.

Your next question will come from Robbie Marcus with JPMorgan.

This is Allen on for Robbie. I guess like first question is, as you've highlighted, the broader markets remain healthy so far in fourth quarter. So how should we think about the drivers of upside to your current guide and where you see that kind of positioning you for 2026?

So I think our upsides are really around this commercial execution in terms of the growth levers. Now, as I said, we're very focused on this with the commercial organizations. We just went through the quarterly business reviews with the business units in the U.S. We're very focused on things like account acquisition, account penetration. We're very focused on the way we think about prioritizing our innovation. We're very focused on customer segmenting customer targeting. So in terms of the growth line, these are the things we're doubling down on.

In terms of margin and reading through in the P&L, looking at gross margins, setting up war rooms on that for the various business units, working capital Kaizens, focusing on cash flow with accounts receivable, looking at the SKUs and the portfolio and rationalizing inventory, they're all things that are important for us. A lot of these things don't happen on a dime, but we're of the belief that all of this reads through in 2026.

Got it. And then just a quick follow-up. It was good to see continued progress in free cash flow this quarter. So how are you thinking about setting that up for 2026? What your priorities are between debt repayment and other methods of redeploying capital?

Yes. Thanks, Allen. Our clear focus is on debt paydown and reducing our leverage levels. If you look at our latest trailing 12 months, we're now down into the low 3s from a leverage ratio. We're making progress on cash flow. And as I've communicated in the past, we see some significant step downs in terms of integration costs and European medical device regulation costs in 2026. So we expect our momentum in free cash flow generation to continue as we step into 2026.

Your next question will come from Vijay Kumar with Evercore ISI.

My first one is on U.S. Recon and Arvis, specifically. You mentioned positive feedback to the new launch. I'm wondering, I know you called out the $3 million capital headwinds. Were there any implant sales utilization-based kind of agreements? Meaning could this lack of Arvis right now have had an impact on your implant sales right now? And when you think about Arvis coming back next year? Should implant U.S. Hip and Knees, which has been trending around mid-singles, should that accelerate?

So first, on the implant impact for the delay, no, we haven't seen any impact on implant sales because of the delay. And going forward, we're looking forward to engaging with people around implant utilization. We expect that the whole program is an interconnected ecosystem. And not only do people find some way to engage with Arvis just in and of itself, but also to drive implants. And so the whole program is an ecosystem approach.

Yes. And then I'd just lay in there, too, Vijay, and say, I mean, we still believe that U.S. Hip and Knee is a big growth driver for us. Our funnels are solid in terms of customer conversion, and we continue to invest in innovation for this portfolio, not only in enabling tech, but in implants as well. So we expect this business to continue to be a growth driver for us.

Understood. And maybe, Ben, one on your Q4 guidance assumptions. I know you have days headwinds. Could you just remind us on what the days headwinds to growth is in Q4? And I'm looking at your EPS implied at the high end, EPS is flattish Q-on-Q. Historically, you've had a pretty big step-up for Q4. Why are margins flat? Are your tariff assumptions changing here for Q4? Or is this the divestiture impact? Any color would be helpful.

It's a combination of those things, Vijay. I mean, I'd say from a days perspective, as we laid out at the beginning of the year, we had extra days in Q1. Those all come out in Q4. So it's going to be a 4-plus percent headwind to growth in the quarter. As we look at Q4, you've got the -- we've paid $10 million year-to-date on tariffs. That's starting to read through. We had about a 50 basis point impact to EBITDA margins in Q3 as a result of tariffs. So we're mitigating some, but some of it is starting to read through. That will continue to read through in Q4. And there's a modest impact due to the divestiture as well. So all those things factor into how you're thinking about the EBITDA guidance for Q4.

Your next question will come from Caitlin Roberts with Canaccord Genuity.

This is Michala on for Caitlin. Congrats on a great quarter. You noted softer volumes in foot and ankle on the Q2 call, but you said you expected some back half acceleration. Can you talk more about how that trended in the third quarter?

Yes. So actually, we did see a bit of a rebound in that space, which is great. Meeting with the team at the AOFAS conference in Savannah was a pretty exciting time for us talking about MIS surgery. And we talked a lot about how there's a very solid order book in terms of the way that market is rebounding. So we're continuing to see this team execute. We've got a lot of investment in innovation and customer engagement with them, and we're looking forward to them being a growth driver for us.

Great. And just one more from us, maybe. Can you talk about your thoughts on the J&J DePuy spin-off, and if that could create some long-term opportunities for you guys?

It's not my place to comment on that. I think J&J make portfolio decisions all the time that are interesting, and we look forward to competing with whoever owns it.

Your next question will come from Mike Matson with Needham.

So on the Dr. Comfort divestiture, is it possible to quantify the margin or growth accretion from that? I mean, is it even material that we would see it in the overall company margins and growth rate?

I think it will give us a little bit of a tailwind as we think about both growth and margin. So we laid out on the slides that we produced today in terms of the contribution of what we've seen to that business on revenue year-to-date. It's lower than the fleet average company margins. So we'll have a little bit of tailwind. And as I think we've discussed before, it's a business that's been flat to declining in the past. This year, it's been restabilized. But overall, I think it's accretive to both growth and margins for us, not materially, but will give us a little bit of help as we focus on shaping that portfolio.

The slides called out U.S., I guess, Hip and Knee was down 1% because of a capital order comp or something like that. So can you maybe explain what that capital was? Was it like instrument sets to distributors or harvest or something like that, that you had a year ago that didn't recur essentially? Is that what happened?

Yes. I think we laid this out a little bit last quarter is that we've been selling Arvis last year as we were seeding the market, especially in teaching institutions and things like that. So we were selling $2 million to $3 million a quarter of Arvis last year as we were starting to build that portfolio out. And given the delays to the launch of the new platform this year, all that's been put on pause. So for this quarter and even next quarter, we'll have some headwinds due to capital sales that we saw in 2024.

Okay. But the implants in the U.S., I think it says that was up mid-single digits. Correct?

Correct.

The implant part of the business.

Your next question will come from Russell Yuen with William Blair.

I wanted to focus first on the strength in Recon internationally. Could you maybe talk about the dynamics at play here with cross-selling, and maybe more specifics or anecdotal information on what you're seeing in terms of acceptance or feedback from respective product launches?

Well, I think there's a few things -- and thanks for the question. We talked specifically about cross-selling. I think we're seeing that read through and things like the Prima and SMR shoulder portfolio now really gives us a chance to talk about how to grow portfolios. So in terms of product focus, we're seeing good growth. Also in terms of geographic jurisdictional growth, I think the team is doing a better job at in-country execution, and I think both of those are reading through.

Then maybe I'm not asking for formal guidance on '26, but maybe how should we think about general impact of new product launches like Nebula and Orthodrive going into Q4, and then maybe its momentum into '26? And what exactly are you most excited about?

Yes. We believe that innovation is critical for our ability to grow above market in Recon, like we've demonstrated now for quite a long period. So that will continue to weigh into how we think about this business from a growth going forward. I think I was asked earlier about the momentum there in terms of growth rates of Recon. We still very much believe Recon will be a growth driver for us and above market. So high single-digit plus for that business is our expectation for sure. So overall, I'd say all these new product launches are contributors to that and building momentum as we've laid out during the course of this year, they're beginning to scale. So they should give us some help as we think about that above-market growth in 2026.

Your next question will come from Danielle Antalffy with UBS Financial.

Just a quick question on the new product launches. So just curious about -- as we think about Nebula Arvis launching in first half next year, how you think about the contribution of price versus volume? That's the first question. And then I just had one follow-up on the ramp of those products.

Yes. Dan, all of the new product launches, we anticipate will help us mitigate what are market headwinds in price. So we're making good progress in terms of the way we are able to execute new product launches, and you see that read through. We're making good progress on our account acquisition. And all of these things, we believe, help mitigate what is secular headwinds in price.

I was curious if you guys can talk about the split between Hips and Knees. So was there a major difference in growth or what you're seeing in market dynamics between the two? That's it for me.

Yes, Danielle, I mean, I think if you think about -- if you're talking about U.S. in particular, both implant systems are growing probably in about the same range. We expect to see some acceleration in hip, given the new product launches. Revisions for knees have been performing well for us as well. We expect Arvis will help to accelerate this category as well as we think about into the future. So overall, we don't break it out specifically, but I can tell you both sides of the equation there are growing for us.

[Operator Instructions] Your next question will come from Dane Reinhardt with Baird.

I guess I'll follow up a little bit maybe on Danielle's first question, kind of price mix related. I know back a few years ago when inflation was running a little bit higher, you got some price benefits in P&R. Can you just talk about if you're able to kind of passed through similar pricing, maybe given some of the tariffs that you're absorbing? That's question one.

Then to follow up on that, maybe within extremities, obviously, shoulder, it sounds like it's a little bit above that 13% and ARG has been a good contributor to that. Can you also talk there about -- I think you've got a price tailwind with that product? Then maybe how much of that a recent strength is due to new competitive converts versus just upgrading existing shoulder users?

Dane, thanks for the question. On P&R, we've laid out clearly that part of our mitigation efforts against the inflation coming in from tariffs is to leverage price. We have introduced some increases there to offset some of the impact. We're being a little cautious just given the market dynamics that are currently at play there. So -- but it will continue to be one of the tools in our toolkit as we think about trying to manage through this inflation that's come into the system as we go forward.

On the Recon side, particularly in shoulder, I would say that ARG continues to be a weapon for us as we think about converting customers and it allows us to drive deeper penetration in current accounts. And we're seeing both happen right now, and we think there's still a nice runway in front of ARG to continue to drive momentum in our extremities platform as we go into next year and beyond.

As we think about pricing, like-to-like pricing has -- we haven't seen a whole lot of changes happening there. If you think about the mix elements, ASCs, we continue to drive penetration in our portfolio into ASCs, hips, knee, shoulders all increasing year-over-year in terms of number of implants going through that site of care. And in that case, we have some price pressure from a mix standpoint. It's being offset by some of the premium products that we are launching, like ARG and like revisions and knees that continue to perform well for us, offset that a little bit. And then we would expect, as we start to drive Arvis into the market, that can be a bit of an offset to some of the pricing declines as well. But as for us, we're a volume game in terms of growing above market. That plus some of the mix of our portfolio with extremities is driving our ability to continue to grow gross margins as well.

Then my follow-up is on free cash flow. Obviously, you talked about some of the integration-related costs coming down next year, same thing with the EU MDR expenses. Can you just remind us what your long-term target is in terms of free cash flow conversion? I think it was something around 70% to 80%. One, is there a time line on that? And then two, any thoughts for where you could maybe shake out for 2026, specifically?

Yes. Yes. I think from our standpoint, it continues to be a key focal point for us to get up the cash flow curve. We see line of sight to 70% to 80% free cash flow conversion against adjusted net income. We'll continue to make progress towards that goal as we step into next year, but we're not guiding for next year at this point in time.

There are no further questions at this time. I'd like to turn the call back over to Damien, for any closing remarks.

Thanks, Carrie. On the last call, I outlined three near-term priorities: commercial execution, operational excellence, and financial discipline. We're making steady progress across all three and continue to believe in the value creation opportunities ahead of us. I'd like to thank all our teams who work tirelessly to bring our innovative solutions to clinicians and improve patients' lives through mobility.

Thanks for joining us this morning, and we look forward to sharing our fourth quarter and full year results with you in February.

Thank you for your participation. This does conclude today's conference. You may now disconnect.