Operator:

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 7, 2024. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Zach Weiner, Director of Investor Relations. Please go ahead.

Ivan Tornos:

Thank you, Zach. Thank you, everyone, for joining today's call. Good morning. I would like to start the way that I usually do, by taking a quick moment to show my sincere gratitude to the north of 18,000 Zimmer Biomet team members across the world, who each and every day go above and beyond in delivering on our mission, elevating pain and improving the quality of life for people around the world. That's what you and I get to do each and every day, and you're doing an unreal job in bringing this mission into action. Thank you for your commitment to Zimmer Biomet, thank you for your tireless work, and thank you for the very strong performance so far in this year 2024. We are now past the midpoint in the year and we're growing 5% after having delivered strong performances in 2023, 2022, and 2021. So the trend is real, the performance is there, and I'm deeply proud of the work that you're doing daily. As I've said countless times, the Zimmer Biomet workforce and our culture here is truly one of our key competitive advantages. In today's call, I'm going to give some opening remarks and then Suky will cover financials. And then, as always, we will leave ample time to answer your questions. The agenda for today, first, I'll cover some perspective on the quarter. Secondly, I'll discuss the drivers of our performance and why we are even more confident than ever in our updated full year guidance for 2024 and why, already looking into 2025 and beyond, we're also very confident that we'll continue to deliver on the long-range plan commitments that we outlined at the end of May at our first ever Zimmer Biomet Investor Day. Recall, those commitments were driving revenue growth at least at mid-single digit growth rates, driving EPS at 1.5 revenue growth, and driving free cash flow growth at least 100 basis points above our EPS commitments. The third thing in the agenda, we'll close with our strategic priorities, those being people and culture, operational excellence, and innovation and diversification. Starting with our Q2 results, we continue to be very encouraged by our global performance. In the second quarter of this year 2024, we grew 5.6% on a constant currency basis. And with that, we have now closed the first half of 2024, growing 5%. Worth noting that this 5% is versus very tough comps in the first half of 2023. The second quarter of 2024 now marks the 10th consecutive quarter in which Zimmer Biomet has grown mid-single digit or above. So, again, a trend in the making that is real, and we're very confident that this performance will continue, if not will accelerate as we continue to move our business forward. Against the backdrop, in the quarter, we did see some weakness early in the first half of the quarter in the U.S. It's worth noting that May and June here in the U.S. were better than April. And in July, the U.S. Recon business actually delivered mid-single digit growth. So, choppiness through the first half of the quarter and then an improvement through the second half, which has continued with very strong performance through the month of July. Our OUS international business, outside the U.S. business, has delivered above expectations. We saw a strong demand in the key markets across both Recon and the S.E.T. categories. So, overall, very diversified, solid performance coming out of these markets. I love the fact that in Q2, in our second quarter, we continued to deliver excellent performance in our other category. This category is primarily focused on enabling technologies, primarily ROSA. We saw a strong demand for ROSA, growing double digit in that business and we also saw strong demand in enabling technologies and navigation systems. As we have been saying for quite some time, we want to be more than just a leading reconstructive knees and hips company in key geographies, where we have a really high market share, as an example, the U.S. or key countries of Europe and Asia Pacific. One example of this diversification journey has been S.E.T. We've been committing to growing S.E.T. at least mid-single digit and Q2 of 2024 is now the third quarter in a row in where we are growing mid-single digit or above, a trend that we expect to continue towards the end of 2024 and moving into 2025 and 2026. So, nice growth in other, nice growth in international, and nice growth in S.E.T. One area that I'll tell you we've made significant strides is within our hips portfolio. We did lose some market share in hips in the U.S. and OUS markets over the last three years to five years. And as I said over and over, this was due to lacking three key product items, direct anterior stems -- what we call triple taper stems, elegant navigation, and surgical impactors. As we sit here today, we have remediated those gaps. We have 510(k) approval for Z1 or triple taper stem. We are regaining market share already with HAMMR, or surgical impactor. And today, we have the most comprehensive navigation in hip arthroplasty. Not only do we have ROSA Hip, we also have the only 510(K) FDA-cleared augmented/mixed reality hip navigation platform via a partnership with our colleagues at Hip Insights. And now, we have also signed and announced an agreement to acquire OrthoGrid that is going to give us a leading position in navigation using artificial intelligence devices. So we have the most comprehensive suite of solutions in navigation, in direct anterior stems, and in surgical impactors, not to mention having the best core implant technology with products like G7 and Avenir Complete. So the expectation is to grow again above market when it comes to hips and regain some of the market share that we lost over the last three years or five years. Moving from hips, we have developed and we are today the first and only robotic-assisted shoulder replacement platform in the world. The feedback on the cases we've done with ROSA Shoulder continues to be very compelling, and as we enter late Q3 and early Q4, we expect to see an acceleration of those cases. And in 2025, we expect ROSA Shoulder to be a very meaningful growth driver for Zimmer Biomet. We recently announced the partnership with THINK Surgical. This is going to provide our surgeon customers optionality across the robotic landscape. We have conducted extensive training, with one voice on customer, and the feedback on this partnership with THINK remains super. With this partnership, Zimmer Biomet is the only orthopedic company in the world that will offer both a handheld CT scan-based system in the TMINI, exclusive for Zimmer Biomet platform, as well as a simplified, CT scan-less robotic system in our current form factor of ROSA for total knee arthroplasty. We're excited about the optionality and we're also excited about the fact that we continue to innovate at a very fast pace when it comes to ROSA and we're expecting to launch at least three new ROSA modalities in the next three quarters to eight quarters. From an earnings standpoint, we generated $2.01 of adjusted earnings per share in the quarter or a growth of 10%. This is in line with our long-range plan targets I outlined at our Investor Day in May. Inside of the strong performance through the first half of the year, the team continues to execute on the three strategic priorities that I keep outlining in each and every earnings call and at every Zimmer Biomet meeting around the world. The three priorities of people and culture, foundational to everything that we do; operational excellence; and innovation and diversification. As I said in my opening, people and culture continues to be a key competitive advantage for Zimmer Biomet. I'm proud to share that Zimmer Biomet was recently named one of America's Best Midsize Companies to work for by TIME magazine. This reflects the strength in team member satisfaction and engagement, our revenue growth profile, and the turnaround of the organization now behind us. On the second imperative, operational excellence, we continue to expect to grow constant currency revenue at least at mid-single digit level, with adjusted earnings per share growing at least 1.5 times revenue, and free cash flow growing at least 100 basis points faster than earnings. It's a commitment that we're making not just for 2024, but also for the long-range plan 2025, 2026, and beyond. This is a mindset that continues to proliferate throughout the organization. We pay people on delivering towards such commitments. We have trained people to deliver on those commitments and the trend, as I've repeated a few times in my opening remarks, is in the making. In the past, when it comes to innovation and diversification, it's been very much portfolio-centric, moving from lower-growth markets to higher-growth markets, point in case, the super performance in S.E.T. But today, we're also thinking diversification from a geographic mix standpoint. We want to continue to invest in key markets outside of the U.S. where we see an opportunity to deliver sustainable revenue and profit growth. We're encouraged by the sound performance that we've seen in our OUS business and we expect to continue to accelerate growth in these markets without compromising our margin performance. In conclusion, we are very proud of how far we have come as an organization in terms of the financial progress, the innovation progress, and the commercial execution. Our second quarter results are another proof point that we make commitments and deliver on those commitments, and we fully expect that the trend is going to continue for the balance of the year and beyond. We're confident in our guidance for the year and we love the fact that we're impacting the lives of millions of people, and I'm deeply inspired every day in knowing that my teammates and I are living the Zimmer Biomet mission of alleviating pain and improving the quality of life for people around the world. With that, I'll turn the call over to Suky. Thank you.

Zach Weiner:

Thanks, Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one brief follow-up, so we can get through as many questions as possible during the call. With that, operator, may we have the first question, please?

David Roman:

Thank you, and good morning, everybody. I wanted just to start with the U.S. knee business and appreciate the comments around the month-to-month fluctuations in growth. But maybe you could just take a step back and help us think through the impact of the conversion to cementless and cementless robotic? How is that tracking? And how should we think about the way that shows up in reported numbers?

David Roman:

That's -- thank you for all the detail. It's super helpful. Maybe, Suky, just a quick follow-up for you on the P&L. Can you help us think about the kind of interplay here between the benefits you're seeing from the restructuring? And I think you had talked about planning to reinvest some of the savings. Where are you in sort of the progress with respect to the restructuring benefit, and then at the same -- on the -- at the same token, kind of that level of reinvestment that you had contemplated when you introduced the restructuring back in February?

Zach Weiner:

Thanks, David. Can we go to the next question, please, Katie?

Matt Taylor:

Hi, guys. Thanks for taking the question. I guess, I just wanted to ask you more about the hip progress that you're expecting, calling out the opportunity to move back into a share-taking position over the next couple of years and tying that back to the Analyst Day goal. So, I guess, I'll ask the question as to when you expect this to really start and how we should measure your progress against the share gain goals? And are there inflection points along the way that we should be looking out for in your hip business?

Matt Taylor:

Great. And just one clarification. So, the issues you mentioned in the U.S., you're basically saying those are temporary, related to the surgeons being out, the supply issue, not a change in the market or something else bigger happening?

Zach Weiner:

Thanks, Matt. Katie, could we have the next question?

Drew Ranieri:

Hi, Ivan and Suky. Thanks for taking the questions. Maybe, Suky, for you to start. Just you've talked more -- you've talked about growth and margin improvement and increasingly so about free cash flow. But when we kind of look at your guide for the year, it still implies a significant step-up in the back half versus the first half. I guess, some of that would be growth in the leverage opportunity that you kind of talked about. But is the environment supportive enough to see kind of a meaningful working capital improvement and, especially, with all these new products coming and I have to imagine you're going to be spending on FX, but just -- or on CapEx. But just how do you kind of get to your free cash flow guide and your plans on using that cash this year?

Drew Ranieri:

Got it. Thanks, Suky. And Ivan, maybe just over to you quickly on the OrthoGrid acquisition. Can you just talk a little bit more about how this supports the overall large joint strategy and maybe how you think this platform could evolve over time across the portfolio or care settings and maybe eventually into the S.E.T. business? Thanks for taking the questions.

Zach Weiner:

Thanks, Drew. Can we have the next question, Katie?

Joanne Wuensch:

Good morning, and thank you for taking the questions. You mentioned somewhere in the script several new ROSA robots that you expect over the next three quarters to eight quarters. Could you remind us of how many is several and which those are and how we should think about those launching over essentially the next two years? And I'll throw one more in there for Suky. How do you think about the revenue contribution from those robots ramping? Thank you.

Joanne Wuensch:

Perfect. Thank you so much.

Zach Weiner:

Thanks, Joanne. Can we have the next question?

Larry Biegelsen:

Good morning. Thanks for taking the question. One for Ivan and one for Suky. I'll try to ask them both upfront. So, Ivan, I'd love to hear an update on the status of Persona IQ, the launch and the short -- have you launched the short stem extension and how that could help and the TPT, we saw you applied for that. Just confident you'll get it and what that could mean for adoption of? Just as my follow-up for Ivan on the gross margin here -- I mean, I'm sorry, for Suky. I -- the gross margin was a little lighter than expected in Q2. What's assumed for the full year? Did you say that gross margin steps down as the year progresses? So, Q3 lower than Q2 and Q4 lower than Q3, and is gross margin still expected to be in line with 2023? I think that was the prior guidance. So, I apologize, Suky, if I heard incorrectly your comments earlier. But thanks for taking the questions.

Suky Upadhyay:

Yes. Good morning, Larry. On your questions on gross margin, I think, actually, you largely got it right, but let me just step back and go through it for you. Just year-over-year overall, we expect gross margins to be in line with '23, but potentially slightly down. That's the new element there and that's largely driven by the mix of our business. We're just seeing much stronger international sales, which have a lower gross margin than the U.S. So, it's really mix related. But again, in line to potentially slightly down. In the second quarter, you're right, it was a little bit lighter than our expectation, again, back to that mix component where the U.S. was just much stronger from a growth perspective than the U.S. for all the reasons that Ivan spoke about. Even in the backdrop of that, Larry, we still managed to expand operating margin by 100 basis points and grow earnings quite nicely. On the cadence, you got it right, and it's consistent with everything that we provided earlier this year, which is to say gross margin will step down sequentially in the second half versus the first half. And you should see that also Q2 to Q3, Q3 to Q4 sequentially down. The primary driver of that, again, going back to our earlier comments from this year, are really around the inflationary pressure we saw in third-party manufacturing costs in 2023. That got capitalized and are now feathering into the P&L throughout this year. So that's the driver of the cadence there. But again, I'll just revert you back to the backdrop of all that is we do still expect to see operating -- meaningful operating margin expansion for the full year and we do expect to see operating margin in the second half step up versus the first half, again, driven by the restructuring program despite the sequential lowering of gross margin. So I'm sorry for all the detail there, but I wanted to get it all out in sort of one compact commentary.

Zach Weiner:

Thanks, Larry. Katie, can we have the next question, please?

Ryan Zimmerman:

Good morning. Thanks for taking our questions. I want to ask -- I'll ask both questions upfront. The first one I want to ask is around ROSA versus TMINI. And when you announced that transaction or you announced that partnership, I think there was some fear that TMINI could replace ROSA, at least in terms of how the stock reacted. And so, Ivan, if you could kind of talk about kind of how you think about adoption of those two options over time, where TMINI fits in terms of either setting of care or utilization? And does that kind of reflect the proportion of knees and hips that are done in an ASC versus hospital? And should we think of it that way? And then my second question is just a follow-up to Larry's question on margins for Suky. Price was positive this quarter. But you did call higher manufacturing costs. And so, when do you turn the corner on higher manufacturing costs? Is that sometime in 2025 that we see that improve? And how durable is your pricing benefits? Thanks for taking the questions.

Suky Upadhyay:

Hi, Ryan, Suky. Good morning. Thanks for the question. Let me start with price and then I'll go to your question on manufacturing costs. So price, as I noted in my earlier commentary, we were positive 80 basis points in the second quarter, and that marks overall a positive pricing first half for the company. I think it's probably the first since I've been here. The way that breaks down is, we saw really strong performance in EMEA, APAC was about flat to slightly up in the second quarter, and the U.S. -- the U.S. was down year-over-year on pricing. But overall, a very good quarter. That's a combination of a number of variables. One, a more favorable environment; two, we're getting greater discipline in analytics and governance around pricing and a better culture, I would say, around pricing; and the third is, we saw some onetime benefits, especially in EMEA, that helped drive that positive performance in price for the second quarter. Our outlook for the full year on price, originally, I started out the year saying that we thought we'd be about 100 basis points. I would say now we're going to be somewhere flat for the full year to potentially down 50 basis points. And the reason why that flip is in the second half is because some of those onetime benefits that we saw in EMEA in the second quarter, we don't expect to repeat at the same level or intensity in the second half. So that's a little bit about price. Definitely seeing much better improvement in performance this year. And we think a large part of that is going to run into 2025, because a large part of our business is contracted. So, again, we'll give more color on '25 when we get to that point, but really happy about the trend that we've got going here on pricing in 2024. Relative to manufacturing costs, yes, manufacturing costs are higher this year, again, because of the capitalization for 2023. I'm not going to give specific guidance into '25, but rather, I'll refer back to our LRP in our Investor Day, where we talked about operational stability in gross margin over the LRP. That, in fact, implies that we should start to see operational stability in manufacturing costs through that LRP. But again, as we continue to progress through '24 and into '25, we'll provide more color on that. All right. I feel good about the progress -

Suky Upadhyay:

Yes, I feel good about the progress the team's making on manufacturing costs. And I will say, we're finally starting to see some stabilization in overall inflation, both on raw materials, as well as third-party manufacturing costs. So, glad to see that inflection.

Zach Weiner:

Thanks, Ryan. Katie, could we have the next question?

Robbie Marcus:

Great. Good morning. Thanks for taking the questions. Two for me. First, the -- outside the U.S., hip and knee came in pretty strong today, even when factoring in the currency headwind versus consensus. So, maybe you could speak to the trends you're seeing there? Is it different Europe versus Asia Pac? And did you see the same headwinds that you saw in the U.S. with vacation days or supply constraints there?

Ivan Tornos:

Great. Maybe on -

Robbie Marcus:

Do I get a follow-up?

Robbie Marcus:

Great.

Robbie Marcus:

Maybe on S.E.T., you talked about all of the segments grew. Maybe could you just give us a little color into each of the segments there, how they grew and sort of the trends you saw? Thanks a lot.

Ivan Tornos:

Yes. Thanks, Robbie. I won't get into a lot of detail here. What I will tell you is that the growth drivers, those being CMFT, sports, and shoulder, are growing either upper-single digit or double digit. And the other three, foot and ankle, trauma, and restorative therapies, are growing at different levels, but all of them growing. So the challenge we've had with RT reimbursement-wise, that's behind. So, great to see all six businesses within S.E.T. performing.

Robbie Marcus:

Appreciate it. Thanks a lot.

Jayson Bedford:

Good morning. Thanks for taking the questions. I guess, first, I appreciate you don't guide by segment, but maybe within your 5% to 6% organic revenue growth guide, has your internal thinking changed with respect to growth in the different segments?

Jayson Bedford:

Yes. So I'm just wondering, relative to the beginning of the year, your 5% to 6% topline growth hasn't changed. But I'm just wondering, has the -- your view on segment growth changed at all? Meaning, is S.E.T. now a bigger contributor than you thought at the beginning of the year, et cetera.

Jayson Bedford:

Okay. Fair enough. And just as a quick follow-up, Ivan, international was strong. You talked earlier about -- you stressed geographic diversification. I was a little unclear, are you entering new markets? Are you allocating more resources to certain geographies? Just if you could expand on the stressing of geographic diversification?

Zach Weiner:

Thanks, Jayson. Katie, can we go to the next question, please?

Josh Jennings:

Hi, good morning. Thanks for taking the question. A multi-part on the hip franchise and the recovery here. I may have missed some of this in your answers and prepared remarks, but just wanted to focus in on ROSA Hip. Just can you help us think through where robotic assistance penetration is for total hips? Do you think Zimmer's ROSA Hip platform is holding its own? Are you maintaining share in that channel? And then is this worth a good acquisition? Could you integrate that technology into the ROSA Hip application down the line?

Josh Jennings:

Thanks for taking the questions.

Josh Jennings:

Thanks a lot.

Ivan Tornos:

Well, I'd like to close the way that I started with, gratitude. I'm very thankful to all the Zimmer Biomet team members for the progress. As I alluded to earlier in the call, this is the 10th quarter in a row where we're growing mid-single digit or above. We're pleased with the quarter, delivering close to 5-point - or actually 5.6% ex FX revenue, with double-digit EPS. We've proven that we can make commitments and deliver on those commitments. I like the fact that we have a diversified portfolio. We don't depend on one segment in one country. It's a well-diversified sustainable performance. And what we'll tell you is that we are more confident than ever that we will deliver in the guidance that we reaffirmed today. So, thanks to everyone for joining the call, and I look forward to the next update.

Operator:

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, May 2, 2024. Following today's presentation, there will be a question-and-answer session. [Operator Instructions].

Keri Mattox:

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2024 Earnings Conference Call. Joining me today are Ivan Tornos, our President and CEO; and CFO and EVP Finance, Operations and Supply Chain, Suky Upadhyay.

Travis Steed:

Keri, great working with you and good luck in your next endeavors. I guess, kind of high level, you guys have this kind of algorithm, 5% to 6% revenue growth potential for some margin expansion and possibly kind of low double-digit EPS growth. And just trying to think about how we should think about that algorithm over the long term. Is it more of a base case or kind of best case? There's just a lot of skepticism from the investor community on that algorithm. And trying to think about what's the Zimmer growth rate kind of on a sustainable basis in a normalized market? And then just the second question I'll go ahead and throw out too. Just any color on Q2 sequentially. It's usually down, Hips and Knees is usually down a little bit sequentially, but with some of the selling day stuff, I just wanted to make sure there wasn't any titration on Q2.

Keri Mattox:

Katie, can we have the next question in the queue?

Steven Lichtman:

Congratulations on the quarter, guys. And Keri, it's been great working with you. I guess I'll first start on pricing commentary. I thought that was notable. Ivan, can you talk about where the positive surprise came from on that front? Are the benefits of your efforts coming sooner? Just some general comments on the pricing environment would be great.

Steven Lichtman:

Great and then quickly follow-up -- just wanted to follow up real quickly on the ROSA shoulder. Just on the initial launch and your outlook for ramp this year?

Vikramjeet Chopra:

This is Vik Chopra in for Larry Biegelsen. Keri, thanks for all your help and good luck. So 2 for me. I just wanted to get a sense as to kind of what we can expect at your upcoming Investor Day at the end of the month. With regard to financial goals, will you have specific LRP goals for revenue? Or will it be relative to the market, for example, growth of 100 to 200 basis points above market. And then I had a follow-up.

Vikramjeet Chopra:

The second question I had was you beat consensus EPS by about $0.07, but you didn't really raise the guidance on EPS. Can you just provide some color on that?

Operator:

We'll go next to Rick Wise with Stifel.

Ivan Tornos:

Thank you, Rick. I'll cover the Hip question, and then we'll proceed with the interrogation of Suky here when it comes to the margin. One product is not -- one product is not what's going to win the battle here, right? It is a category of products. We've been very transparent. We've not done great when it comes to hips over the last 3 or 5 years and essentially driven by 3 product categories.

Suketu Upadhyay:

And Rick, it's Suky. Always good to hear from you. On the margin front, I know the past isn't always indicative of the future, but I'll just -- it is a good validation and proof point, I think, in our situation. Both '22 and '23, we're able to expand operating margins quite significantly, I would say, even in the backdrop of a pretty hostile inflationary environment. And so again, kudos to the entire [ CE ] team.

Operator:

We'll go next to Pito Chickering with Deutsche Bank.

Ivan Tornos:

Absolutely. Thanks for the question. So let's start with the global picture, if you will, very excited in terms of where we are overall with ROSA. So globally, ROSA is becoming the preferred robotic option in many markets outside of the U.S. Here in the U.S., we're approaching around 20% penetration of ROSA in cases.

Ivan Tornos:

So we're starting to see a dynamic in where cases are moving to the ASC for shoulders, getting the CMS change. I would say today, probably around 60% to 65% of the cases of shoulder are now done in ASC, but that's moving pretty rapidly, given the change of reimbursement. And we've got a strong position both in the inpatient, outpatient as well as the ASC. But I would say net-net, is around 60%, 65% to 35% in terms of that mix.

Caitlin Cronin:

Just touching a little bit further on ROSA and the strength in the other line, Suky, did you say that you expect lower growth in this segment through the year?

Caitlin Cronin:

Yes, apologies. Did you say that you expect lower growth in the segment throughout the year?

Keri Mattox:

Go ahead with a follow-up. Line is kind of choppy. Go ahead.

Ivan Tornos:

Yes. Thank you, Caitlin. It's moving in the right direction. I will say, as of late, things are accelerating, both from an innovation and a commercial execution standpoint. So on innovation, we did receive recently the 510(k) approval for -- didn't make it to the press release for the study. So as the shorter stem version of Persona IQ, which has been a gating factor for some surgeons that don't use the longer stem. So that's an innovation and they are right there.

Michael Matson:

Yes. So I just want to ask one about kind of what the guidance implies for second quarter revenue. you're saying you expect to be at the low end of the mid-single digits to sort of like 4% in the first half. Based on what you did in the first quarter, that implies kind of like 3.5% constant currency growth, but you have the 1.5% selling day benefit. So that applies like 2% kind of underlying growth. Is that -- is my math right there? And I guess why do you only expect 2% growth in the second quarter?

Michael Matson:

Okay. And then just a follow-up on OsseoTi. So you mentioned it's gaining share. Does that mean that it's actually converting competitive surgeons? Or does that just mean it's cannibalizing the cemented Persona?

Operator:

We'll go next to Vijay Kumar with Evercore ISI.

Suketu Upadhyay:

Yes. No real -- in any given quarter, there's going to be puts and calls, both in gross margin and operating margin, but nothing material or out of the ordinary. We did a little bit better on gross margin than we expected to. We saw that flow through in the operating margins. So we feel really good about the start of the year.

Unknown Analyst:

Okay. follow-up question -- just one quick one on M&A. I know you guys have made some comments about tuck-ins and kind of what that profile will look like. But anything in the pipeline that are particularly interesting right now that will fit now in the portfolio?

Robert Marcus:

Congrats on a good quarter. Maybe just one for me. You kind of talked about second quarter and the expectation on the top line, and you just answered kind of margin cadence through the year. But I want to put a finer point on it and try and avoid some of the cadence issues that we had last year. So you talked about operating margin expanding.

Suketu Upadhyay:

Yes. So Robbie, just a little bit of a correction. I'm not sure if I caught everything you said or understood, I should say everything you said. Fourth quarter will be our high watermark relative to operating margin in line with that being our high watermark from a revenue perspective. And so our margin does, in many ways, correlate heavily to our revenue outlook.

Operator:

We'll go next to Chris Pasquale with Nephron.

Ivan Tornos:

Absolutely. So closing the Q1 quarter approaching 20%. So it's fairly similar to robotics. So cementless is approaching 20%. We'll break down some of these commitments, we keep repeating the same answer at the Investor Day. But our expectation, our ambition is to be where our competitors are, 60% 6-0. We'll provide time lines in that regard, but the north star is to have robotic penetration in the 60% range and cementless penetration in the 60%. So the fact that today we're at 20%, that tells you that there is pretty significant upside, and we're excited about the journey.

Operator:

I'll go next to Shagun Singh with RBC.

Ivan Tornos:

So starting with robots and capital dynamics. Look, I will tell you one thing that is pretty prevalent is that here in the U.S., we've seen the cases move today, I see not a week goes by that is not a new ASC opening. And those ASCs do want to acquire robotics and you either install or you purchase it. And we saw a dynamic in Q1 where we saw more purchases.

Keri Mattox:

Thanks, everyone, for joining. We'll be talking to all of you today. If you have questions, of course, please don't hesitate to reach out to the IR team. Thank you again for joining the call this morning.

Operator:

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today February 8, 2024. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Chief Communications and Administration Officer. Please go ahead.

Ivan Tornos:

Hey, thank you, Keri, and thanks, everyone for joining the call here this morning. I like to start the way that I typically do, taking a moment to recognize, to show my gratitude to the almost 20,000 Zimmer Biomet team members for their dedication, for their commitment, for their strong resilience, and for their superb performance in 2023. Simply put, 2023 was just a great year for our company and I want to say thank you. In 2023, we impacted the lives of almost 4 million patients and along the way we deliver best-in-class financial performance, growing our constant currency revenue by 7.5% while adjusted EPS earnings per share grew almost 9.5% in the year. That's 200 basis points of leverage between the 7.5% revenue growth and the 9.5% growth in EPS. In the year, we generated almost $1 billion in free cash flow, and that's with some turbulence around inventory management and whatnot. So again, strong performance top to bottom. And I'm just very, very proud of the execution in the year. It's worth noting that, that this level of execution and performance came in a year in which we still had to deal with fairly complex micro issues, whether it's inflation, FX, geopolitical challenges. I don't think I need to talk much about that and also some micro challenges in the year. We did struggle with some supply challenges throughout some of the periods. I'm happy that's behind, but it was a headwind in many periods in 2023. And again delivering 7.5% in 2023 against some top comparables, having grown constant currency revenue in 2022 the year before by 6.6%, so clearly a great trend in the making, clearly strong performance, and I'm just so grateful and so proud of all of you, the Zimmer Biomet team. At the same time, beyond grateful, I'm truly excited as I know that this is just the very beginning when it comes to the level of performance that we can realize here at Zimmer Biomet and multiple drivers of why I'm confident that this is just the very beginning. But I'll start with highlighting the bold pipeline that we have in place. The size of our pipeline is twice what it used to be in 2018. We got great new product launches that are happening here early in 2024. We have a stable supply, we've created an stable supply environment and we got great commercial execution. We're developing flawless commercial execution as evidenced by these growth rates that I just highlighted. To compound our belief behind this level of examine ahead is the fact that we have seen and we continue to see a substantial improvement in our end markets. This is not the same market growth profile that we used to have. Pacing demand is strong, procedure volume is very strong, given a variety of reasons and as the market leader in both knees and hips, being in better markets is just very exciting as we enter 2024. Back five years ago, when I joined the company, we used to think of for WAMGR weighted average market growth rates as being somewhere in the 3% range. And today, we PEG or WAMGR as being very near, if not at 4%. And again, that's a meaningful increase and we believe it's sustainable. So we're not going back to the 3% days when it comes to market growth rates. So again, internal and external dynamics gives me, gives us confidence that the best is truly ahead. When you add to all of these variables, the fact that we have the strongest balance sheet in the history of the company, there is no doubt then that we can claim that our future is nothing short of truly bright. So again, very pleased, very proud and very confident. I'd like to thank our investors as well for their support in 2023 and for their confidence in 2024 and beyond. We continue to take biggest strides forward toward being a company with a very different growth profile from top to bottom. Committing to an expectation to grow at least 100 basis points to 200 basis points above marketing revenue, with our EPS, with our earnings per share, growing faster than revenue, and our free cash flow dollars growing faster than EPS. The guidance that we are providing today for 2024 already reflect such a commitment to this type of financial discipline. And I'm very much looking forward to our Analyst Day on May 29 in when we will provide additional details in terms of our long range plan, which will illustrate that this is not a one-year wonder, this is a multi-year commitment. And you will see then that Zimmer Biomet has truly entered our growth stage era. We're no longer in turnaround mode. We're ready to deliver by being laser-focused on the three strategic imperatives that I highlighted during my very first earnings call as CEO back in November, three strategic imperatives that I continue to repeat over and over at every Zimmer Biomet meeting. And frankly, I will continue to repeat because those are the three drivers that we know are going to drive our performance. Those being number one, people and culture; number two, operational excellence; and number three, innovation and diversification. So let's talk about our 2024 commitments, how different initiatives across these three strategic imperatives will drive our growth forward. First in the area of people and culture, and again, I've explained this in the past, what it means, it's about having the right people in the right roles within the right culture. We must make sure that we support team members to act as owners and operators of the business. This means decentralizing decision making, driving agility, and empowering team members at every level, across every function around the world. We must become leaner; we got to be closer to the customer. Equally important, we must truly live an environment of pay for performance. This is something that has already kicked off in a very meaningful way in the fiscal year -- in this fiscal year 2024. An example of that is the fact that we're incentivizing free cash flow dollar generation or growth in a much more disciplined way across the enterprise knowing that revenue is also the most durable driver of free cash flow performance. Incentives are also set for revenue growth to meaningfully drive compensation across our firm at every level. So again, we change the way we pay people in terms of growing revenue above market. We change the way that we pay people, giving a larger percentage of compensation in adherence to the fact that we as a company need to grow free cash flow dollars at double-digit rates. In the second area of operational excellence, and again, this is about how we think about growing the business top to bottom. You can see already in today's update in the press release that we mean it. It is tough to restructure a company. It's certainly something that we don't take lightly. You read the press release, we had to do it. It's a tough choice once again, but we needed to make operational changes to simplify our structure, to deliver greater efficiency, and to ensure that we enhancing investments in the right areas of the business, again closer to the customer, so again, not an easy thing to do, but something that we had to do and something that we have done. Beyond the restructuring, other initiatives in the area of operational excellence that are already in full motion, are the new programs that we got in place kicking off how to drastically reduce inventory levels at Zimmer Biomet. This will drive substantial improvement in our free cash flow dollar growth, while also reducing our days on hand, DOH by 50 days or more and will reduce or excess an obsolescence exposure, which is something that frankly we've not done that well in previous years. Second thing we're doing is the rollout of a global initiative to drive new product launch excellence across the key new product introductions that we have in the year 2024. In simple terms, the seven or eight most meaningful product launches, let's make sure we have a cadence of operating mechanisms with proper governance to ensure that we're maximizing these product launches across each key geography. And then the third thing we're doing in operational excellence beyond the restructuring is the integration of the pricing organization under the finance structure, reporting directly to Suky, our CFO, to ensure maximum governance and accountability across the enterprise. While we are pleased with the reduction in price erosion over the last two to three years, we believe there is much greater opportunity to drive even better and more durable pricing dynamics. So again, in the area of operational excellence, beyond the restructuring, it's about drastically reducing inventory levels to generate improved free cash flow dollar growth. It's about governance beyond or behind the new product launches. And then thirdly is around doing better in the area of pricing dynamics. In the third strategic imperative of innovation and diversification, we're going to continue to invest in innovative R&D, in customer centric R&D, we're going to continue to fuel our pipeline with meaningful product launches. We're going to continue to drive our vitality index, which has already expanded very meaningfully over the last three years. And we're going to make sure that as we continue to launch new products, we also see margin expansion coming from these new products. I'm excited about where we are today. Our pipeline, the dollar value associated with our pipeline is twice what it was at the end of 2018. And as we enter 2024, we had very meaningful product launches, particularly in the hip area in where we lost market share in the last two years, given the lack of products in key categories like surgical impactors, triple tapered stems, or hip navigation. So again, 2024 is the year in where, through very meaningful product launches, we will regain the momentum that we lost. Beyond hips, I'm excited about where we are in shoulder; Identity continues to generate great excitement. We will enter 2024 in full launch mode when it comes to Identity. We're excited about stemless shoulders entering the market, and yes, very excited about being first to market in the category of shoulder robotics with a very highly differentiated offering in robotics for shoulders that will apply for both anatomic and reverse surgeries. In the area of knees, we're in the early days of our cementless knee launch, in 2024, we seek to increase our penetration rates drastically. Here in the U.S., our penetration rate in cementless is not even in the 20% range and we are committing to drive the penetration rate into the 50% to 60% range at a very rapid pace. Again, more details to those plans at our Analyst Day, but rest assured that our knee penetration rate in the cementless category is not going to stay in the teens or even the low-20s for long. Beyond cementless, we're excited about next-generation robotics in knee. We are excited about partial cementless knees, and we're excited about the fact that in 2024, we're going to be entering the full launch for Persona IQ, the only smart knee in the world that fully integrates data, technology and best-in-class implants in a way that nobody else is doing. In the category of S.E.T., which is six different businesses, sports, foot and ankle, restorative therapies, trauma, extremities, and CMFT, craniomaxillofacial thoracic, we are seeing great growth already exiting 2023. The second semester of 2023, we grew S.E.T. by mid-single-digit or above. And as we entered 2024 and beyond, the expectation is that S.E.T. will continue to grow mid-single-digit or above. And this is something that as a company, we've not realized ever since the merger in 2015 with exclusion of the post-COVID year given comes, so really excited about the return on the multiple investments we made in S.E.T. particularly in the areas of innovation and commercial execution. There is a great cadence of product launches in S.E.T., already mentioned some of those and more to come when we do our Analyst Day in later in the spring. So excited about S.E.T., excited about innovation as a whole or new product development pipeline is strong. We're going to be launching over 40 different new products in the next 24 months or so. Most of them are going to enable category leadership, establishing Zimmer Biomet as the leader or the second position in the category. And virtually all of them are going to be in market spaces that are growing 4% plus or above. So I like the quantity, I like the quality, and I like the market growth profile in terms of where innovation is going. I'm also particularly excited about the innovation plans that we have for the ASC here in the U.S., ASC side of care. We made meaningful investments innovation during all stages of the episode of care, what happens before surgery, what happens during surgery, and what happens after surgery. And relative to the ASC in the intra op stage of the ASC, we are best-in-class when it comes to solving problems, delivering efficiency, best-in-class outcomes and safety. So again, truly excited about our ASC strategy where we're going relative to this side of care. Diversification of Zimmer Biomet's end markets will happen not just by innovation internally, but will happen through smart M&A, which will remain the number one category when it comes to capital allocation, with a best-in-class labor ratio, and with deep confidence in our free cash flow generating plans over the next few years, our strategy is to make a smart M&A the top recipient of our capital. But at the same time, I just love the fact that we have the optionality to continue to do share buybacks as we announced this morning and perhaps at a more meaningful level. So the combination of smart M&A and buybacks can coexist, given the strong free cash flow dollar generation that we are seeing in -- from this regard. I'm energized by the very detailed and focused plans that the team has put in place, which I know that upon their execution will position Zimmer Biomet to deliver on the growth profile that we keep recommitting and that is to grow above to 100 basis points to 200 basis points. So that's a minimum point of entry commitment of 5% in the year 2024, with earnings per share always growing faster than revenue and free cash flow always growing faster than EPS. This is not a one year commitment. This is a multi-year commitment. And again, I know based on the very detailed plans, we will get there. In closing, we are very excited about where we're at, the track record over the last two years, and most importantly, we're deeply excited in terms of where we're going to go in 2024 and beyond. The team is ready. We are establishing the right trend and we're going to continue to drive flawless execution, delivering our commitment. Along the way, we're going to help patients, we're going to create shareholder value, and we will leave our mission of alleviating pain and improving the quality of life for people around the world. With that, I'll turn the call over to Suky.

Keri Mattox:

Thanks, Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one brief follow-up so that we can get through as many questions as possible during the call. With that operator, may we have the first question, please?

Larry Biegelsen:

Hi, good morning. Thanks for taking the question. Ivan, congratulations on a nice first year here as CEO. I'd love to ask about the 2024 guidance. Just talk about the key assumptions for the 5% to 6% constant currency growth in 2024. What you're assuming for the recon market. And Ivan, talk about your guidance philosophy. Have you incorporated any conservatism in the guidance? What would get you to the high end of the range? And just quickly, Suky, on the buyback, the $500 million, does that imply that it's hard to find good M&A targets? How should we interpret that? Thanks for taking the question.

Suky Upadhyay:

Yes. Hey, good morning, Larry. Thanks for the question. I say, first of all, the $500 million share buyback; I think demonstrates our confidence in our outlook in the business. And the short answer to your question, does this imply some deterioration in M&A targets? And I would say absolutely not. I think based on where the company is from a firepower perspective; we feel that we've got the balance sheet strength and power as well as the forward-looking results. To really do both, we still will prioritize smart M&A as Ivan has talked about; we still favor tuck-in acquisitions to mid-size acquisitions. But even in the backdrop of doing heightened level of share buyback, we still see very significant M&A firepower to execute that strategy as well. So short answer again is no. We don't see this as any type of deterioration in targets.

Keri Mattox:

Thanks, Larry. Yes, thanks so much. Katie, can we go to the next question in the queue?

Matthew O'Brien:

Good morning. Thanks for taking the question. Just maybe start a little bit, Ivan or Suky on the knee performance in this quarter. It was a little bit below what we were expecting, still better than one of your competitors, but below another one on a two-year stack basis, it's not quite 50% of sales, but close to it. So I would anticipate that that's going to need to see very good performance here in 2024 in order to hit the guidance range, which I think is maybe being questioned a little bit this morning. So what is it there specifically between cementless, between robotic, between Persona IQ that gives you the confidence in the knee franchise outside of the macro environment here in 2024? And then I do have a quick follow-up.

Matthew O'Brien:

Appreciate that. Follow-up is just on there's a lot of good things coming this year as far as new products, et cetera. But you're trying to lower inventory levels significantly, 50 days of ton in this space. And then, the restructuring as well. Those -- how you factored in those potential headwinds in 2024 and even into 2025 in terms of potentially some lost revenues or dislocation you may suffer as a result? Thank you.

Keri Mattox:

Thanks, Matt. Katie, can we go to the next question in the queue, please?

Robbie Marcus:

Great. Thanks for taking the questions. I want to ask on S.E.T. and other. Those were the two line items that beat versus the Street. Was just hoping you could breakout some of the trends there, what did well, what might have underperformed, if anything, and how we think about those different line items as part of the guide in 2024 and how much of the strong growth is coming from that versus hips and knees. Thanks.

Robbie Marcus:

Great. Thanks. Maybe just a quick follow-up for Suky on the guidance and a clarification. The lower end of mid-single-digit in the first half and then higher end second half. Is that inclusive or exclusive of the selling day benefit? Thanks.

Robbie Marcus:

Okay. Thanks a lot.

Keri Mattox:

Thanks, Robbie. Katie, can we go to the next question in the queue, please?

Joanne Wuensch:

Excuse me. Good morning and thank you for taking the questions. Putting them both right up front. I'm curious why gross margins are expected to be somewhat down year-over-year, what the dynamics are for that? And then my second question has to do with cementless. Can you walk us through the math of what you think moving to 50% to 60% of your knees being cemented or cementless, excuse me, either way 50%. What the benefit is of that? Thank you.

Keri Mattox:

Thanks, Matt. Katie, can we go to the next question in the queue, please?

Robbie Marcus:

Great. Thanks for taking the questions. I want to ask on S.E.T. and other. Those were the two line items that beat versus the Street. Was just hoping you could breakout some of the trends there, what did well, what might have underperformed, if anything, and how we think about those different line items as part of the guide in 2024 and how much of the strong growth is coming from that versus hips and knees. Thanks.

Robbie Marcus:

Great. Thanks. Maybe just a quick follow-up for Suky on the guidance and a clarification. The lower end of mid-single digit in the first half and then higher end second half. Is that inclusive or exclusive of the selling day benefit? Thanks.

Robbie Marcus:

Okay. Thanks a lot.

Keri Mattox:

Thanks, Robbie. Katie, can we go to the next question in the queue, please?

Joanne Wuensch:

Excuse me. Good morning, and thank you for taking the questions. Putting them both right up front. I'm curious why gross margins are expected to be somewhat down year-over-year, what the dynamics are for that? And then my second question has to do with cementless. Can you walk us through the math of what you think moving to 50% to 60% of your knees being cemented or cementless, excuse me, either way 50%. What the benefit is of that? Thank you.

Ivan Tornos:

And Joanne, relative to your question on cementless, I'll give you as much as I can. So, starting with the basic pricing dynamics we see with cementless Persona OsseoTi, we see an ASC uplift of around 10% to 15%, frankly closer to the 15% than the 10%, around 40% to 50% of the time, we combo the cementless knee with robotics, with ROSA, and that drives additional uplifting revenue in the form of disposals and whatnot. So that's a great dynamic we see in particular in the ASC. Our penetration today on cementless, we're exiting 2023 somewhere near 18% to 20% with both expectations; excuse me, to get into the 50% to 60% range. And I'm not going to give you a commitment today, but at our Analyst Day, you will see the long range plans and some of the trending when it comes to getting to 60%. We believe that there's going to be a fairly quick uplift, given the fact that the market is already being developed by some of the work that our peers have done. So again, you should not expect that getting to 50% to 60% is going to be a long journey. All of these dynamics are in the U.S. We're launching in 2024 in other markets outside of the U.S., and I will disclose the pricing dynamics when the time is right. But excited about the launch in Japan in 2024 and other key markets. So those are the dynamics here when it comes to cementless.

Keri Mattox:

Thanks, Joanne. Yes, absolutely. Katie, can we go to the next question in the queue?

Ryan Zimmerman:

Thank you. Thanks for taking the questions. Following-up, maybe on Larry's questions about guidance, you talked about the WAMGR being at 4%, and clearly we're in this stronger market environment. And so as I think about the components of guidance with pricing as a headwind of 100, 150 basis points, it suggests product mix is going to contribute 200 basis points to 300 basis points. I just want to see one if that's how you're thinking about it, or if you're thinking about the market contribution to guidance at a higher rate in 2024 and maybe potentially the product mix contribution lower. Maybe just help us flush a little that out.

Suky Upadhyay:

I think that's well said. One of the key points Ivan you touched upon, you said, pricing erosion is assumed in that 4% uplift.

Suky Upadhyay:

Yes. So the key driver with gross margin being sort of flat to down slightly, it really is coming from revenue leverage and operating margin. You could expect overall OpEx as a percentage of sales to drop by about 100 basis points, give or take. And that's even with R&D increasing year-over-year. So the efficiency and the restructuring programs in the near-term are really focused on SG&A. However, inside of that full program, we are working on things inside of COGS to help maintain and keep gross margin stable over time. Those are going to be a little bit more mid-term in nature and how they get realized. Things like SKU rationalization, site optimization, inventory reductions and corresponding D&O reductions, those are all things that have a little bit longer lead time, naturally, as you can expect as you're moving your supply chain around and not wanting to disrupt the ability to supply demand. But they are definitely is going to take more of a prominence as we move forward beyond 2024. But for 2024, the way you characterize is right. It's primarily revenue driven and SG&A.

Suky Upadhyay:

Yes.

Operator:

We'll go next to Travis Steed with Bank of America.

Suky Upadhyay:

Yes. So the way we characterized it was that it would be $200 million run rate as we exit 2025. In year for 2024, we expect that to be about $100 million, or about half of the run rate savings that we're predicting over a two-year period. We're dropping a lot of that to the bottom line, as you can see with our implied guidance at the mid-point would suggest about an 80 basis point increase in operating margins. And so we're actually taking a good portion of that, dropping it to the bottom. But we're also reinvesting a pretty significant portion back into our priority areas, ensuring that we've got the appropriate amount of sets and instruments for cementless uptake as well as Persona uptake through ROSA. Ensuring that we've got the right level of commercialization and execution in our new ROSA shoulder launch, ensuring and ramping up commercialization efforts in our hip franchise around the product launches that we have for hip. So it really is a combination of both. And that's the great thing about this efficiency program. It enables us to reinvest back into our priority areas while dropping pretty significant, substantial margin expansion now, for the third year in a row.

Suky Upadhyay:

Yes. On the comp plan, it's not really going to have any material impact and it's embedded in our guidance. I think it's more about a mix shift of how that comp plan is designed, right, whereas previously it was more focused and biased towards revenue growth. I think now what we're trying to do is get a greater balance between top and bottom lines all the way through cash flow. So it's really a mix shift in how we think about comp versus an increase in comp. And again, all of that is embedded into our guidance for 2024. Relative to the dilution, we still think about two years from a dilution standpoint is reasonable. Of course, we'd like it to be inside of that. But just given where valuations are today, as well as the cost of debt, which hopefully is going to come down over time, that's kind of where we see one of our guard reps.

Ivan Tornos:

Thank you.

Keri Mattox:

Thanks, Travis. Katie, can we go to the next question in the queue, please?

Jeff Johnson:

Thank you. Good morning, guys. Congratulations on the quarter. Ivan, maybe you mentioned in passing that shoulder for ROSA is not going to be a late year 2024 launch. Just could you dial in that timing anymore? And I'd be interested in hearing about kind of your view on the uptake of ROSA shoulder, obviously, shoulder surgeries, replacements, technically more challenging. I think some questions about what role robots can initially play in those procedures. So just how does that help the uptake of ROSA? And I don't think I heard a ROSA placement number. I think sometimes you give it on kind of an annualized basis. Any updates on kind of exiting 2023 where ROSA placements were? Thanks.

Jeff Johnson:

Thank you. And maybe as a follow-up, just as I think about the 5% to 6% constant currency guidance and 100, 200 basis points above market, it seems like market is settling in at a good rate. If I think about gross margin, obviously some of the hedge settlements should normalize as you get into 2025 P&L coming down, pricing getting less bad. So it sounds like gross margin, at least not a big, big headwind going forward. And then of course, you've got the cost savings initiatives here on the SG&A side. If I roll all that together, including the improving balance sheet and cash flow and a commitment to some share buyback, it feels like 10%, 10.5% EPS growth, which is kind of the mid-point of your guidance this year. If it weren't for tax rate and FX headwinds, that sounds like it could be a sustainable kind of target. I'm sure you don't want to lay out an LRP here out of your Analyst Day, but is there anything in my thinking there that would say 10%-ish plus or minus is not a reasonable kind of longer-term EPS growth rate to be thinking about. Thank you.

Jeff Johnson:

Thank you.

Operator:

We'll go next for Richard Newitter with Truist Securities.

Ivan Tornos:

So the answer is yes to both, Richard. So we will have some data points on Persona IQ, and we'll have some data on GLP-1. On Persona IQ, we moved from a limited market release in 2023 to full market release in 2024. We got the value proposition finalized. We got over 2 billion data points. We understand there's a product that is going to enable clinicians to intervene when needed. We got data points on how this product will reduce overall complexity in the episode of care. How we can by intervening soon reduce cost, especially post-surgery, when it can be pretty taxing. We don't reimbursement. We spoke about the NTAP new technology add-on payment, which we got back in October. So that's in full launch mode. We will submit. Barry always asks me this question. We will submit for a PPT coming some point in the spring, summer, and we're going to bring some data around, some of the experiences that we've seen with Persona IQ at the Cleveland Clinic, HSS and other facilities. So excited in terms of what we have with Persona IQ, more to come at the academy. And then for GLP-1s, yes, we're going to be sharing some of the data we've done in conjunction with the academy. And what I will tell you is that so far, everything we've seen with GLP-1s is that it remains a tailwind. We're actually tracking the number of patients that are using a GLP-1 pre-surgery, and that number is in the 20% to 30%. So by all means, this is not a headwind, and I'm glad that conversation is being muted.

Ivan Tornos:

Well, I think what you're asking is, can you still sustain that in a world where you do a sizable M&A a transaction? If I've gotten that correct, that's really difficult to tell, right? There is no two deals are created equal. It's very situational. And so I don't want to get out there front footed to kind of hypothesize, theoretically, what could happen to EPS inside of a sort of make a new [ph] deal. So I think that what you should take away is that from an underlying perspective, at 5% to 6% organic growth, with the levers that we have operationally, but also with the strength of our balance sheet organically, that we can deliver that attractive earnings per share profile.

Keri Mattox:

Thanks, Rich. Katie, I think we have time for one more question if there's one in the queue.

Jayson Bedford:

Oh, sorry, I was off. Yes, sorry about that. I'll be quick. On the supply challenges that you incurred in 2023, can you just remind me what was the impact of these challenges on the P&L last year meaning, is there a way to quantify the impact on revenue?

Ivan Tornos:

Yes. We have some internal data points that we don't share. What I will tell you, Jayson is that new product launches, we had to do limited market releases instead of full market releases, Persona OsseoTi is an example. Conversion, as Suky mentioned, we had to prioritize or send some family customers versus converting accounts. And then the third headwind of supply, from a revenue perspective, we couldn't embark on global expansion of these new product launches. So the example that I used earlier around Japan, second largest market in the world, we could have done things differently. We could have been on the market. So it is sizable and it is behind us.

Suky Upadhyay:

It is. It is. I would say it's less than 50 basis points. But given that we now have all the licenses secured we need to operate, that that will be a tailwind probably most pronounced in the third quarter because that's when we saw the biggest impact in 2023.

Keri Mattox:

Thanks for the questions, Jayson. I think we're wrapped up with the queue and just hitting 9:30. So I'll turn it over to Ivan for some closing remarks.

Operator:

Thank you for participating in today's conference call. You may now disconnect.

Operator:

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today November 7. Following today’s presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Keri Mattox, Chief Communications and Administration Officer. Please go ahead.

Ivan Tornos:

Thank you very much, Keri. And good morning, and greetings, everyone from Warsaw, Indiana, the orthopedic capital of the world, welcome to our Q3 earnings call. My first call as the CEO [indiscernible] organization really grateful that all of you are joining us here this morning. I’d like to begin by sharing how truly excited I am to be in the new role. Team to be a very inspiring time, not just in musculoskeletal health, which it is, but also in med-tech in general. Simply put the space is not what it used to be just so five years ago. When you look at orthopedics, when you look at the entire category, it’s changed, it’s changed a lot. Groundbreaking technologies are shaping how procedures are done beyond the backlog and continuing femoral demographics, global demand for treatment is higher than it has historically been This is driven by better clinically reported outcomes. This is driven by shorter episodes of care. This is driven by better, more comfortable ways to do physical therapy. This is driven by greater ways to approach different disease states. And this is driven by subtle treatment migrations like the one we see here in the U.S. with a rapid shift of cases moving into an ASC while also preserving what are very compelling volume levels in the traditional in-patient and outpatient settings. So in plain English, healthy market, great patient dynamics, new technology, disruptive innovation, a lot has changed. And I don’t see us going back to four or five years ago. So again, a very inspiring time to be in musculoskeletal health and orthopedics in general. All of these market accelerating trends are opening new doors for countless patients to benefit from what we do here at ZB, which is to drive life changing solutions. And we do that every single day for countless patients. And the best part about it, we’re just getting started. So I could not be more excited to be here in my new role. With this encouraging market dynamics, sustainable trends, and building on the solid track record of execution that the ZB team has enabled. It’s great to be here today to report what it is, another solid quarter of a strong performance while strongly reaffirming our year-end guidance for the year 2023. Even more exciting, as I look forward to our future, I’m more convinced than ever that Zimmer Biomet will continue to lead the way on customer-centric innovation, already a competitive advantage and solid commercial execution, enabling not just the delivery of our mission, but also improving on our other key value creation drivers, those regaining and sustaining top quartile performance. And again, this is something that we treat with a lot of rigor and something that is a mandate for the organization. We must regain and sustain top quartile performance. For today’s call, I want to first share my thoughts on my first two months as CEO of Zimmer Biomet, while also providing key insights into what I’ve learned, how my learning has shaped what are going to be my three key priorities as the new CEO of the enterprise. This will answer the question on what is fundamentally going to change around here in the next chapter of our transformation. After that, I’m going to talk about the key drivers behind the solid Q3 performance, next Suky will take over, will discuss the financials for the quarter as well as the expectations for the rest of the year, and then our favorite part of the call Q&A. Before we move into these updates, I do want to take a moment to thank the global Zimmer Biomet team for their unwavering commitment to our purpose, to our plans. I want to thank them for their sense of urgency in driving site execution. I want to thank them for everything that they do. This is a highly engaged and focused team that is being operating at a very rapid speed and is eagerly designed to do even more, more for patients, more for customers, more for the team, more for each other, more for the company, more for the communities where we work and live, like right here in Warsaw, and frankly, far more for the shareholders. It’s a team that has gone through a lot, and a lot is a lot. This team has done a lot of heavy lifting, and now with the heavy lifting behind from a remediation standpoint, it’s great to be in a different stage and it’s great to be able to show to the world what the Zimmer Biomet team can do and will do. Beyond proud of the organization and I’m genuinely inspired by what they do each and every day. Been doing this for a while around the world, and I can truthfully tell you I’ve never worked with a better team than the one we have here at Zimmer Biomet. And again, I can hardly wait to showcase our results in quarters to come. So thank you. I also want to thank Bryan Hanson for all that Bryan lead to bring Zimmer Biomet to this moment. We are grateful and we’re stronger because of his leadership. So thank you, Bryan. Now let me share some perspective as the new CEO of Zimmer Biomet. During my first 11 weeks or 77 days in the job, I’ve spent significant time with team members, customers, analysts, investors, or Board, my peers, healthcare executives across med-tech, government officials, and other key stakeholders in healthcare so that I could listen, I could learn and I could get the property insights. I’ve been in every Zimmer Biomet region around the globe. I’ve interacted with every key manufacturing facility. I have visited hundreds of decision makers across every major continent, and I have collected countless pages of feedback and recommendations. Most critically, I’ve used this reflection time to ensure that we at Zimmer Biomet are boldly prioritizing what needs to get done. And this, I can assure you would be a trademark of my time as CEO of Zimmer Biomet, having the courage to say no to several things so that we can become truly great in those things that will drive the most value for the enterprise and our key stakeholders. These key priorities are purpose and people, number one. We have a winning culture. We have the absolute best talent in the industry. It has been a foundational priority for ZB and will continue to be critical under my leadership. People, purpose, talent, culture with a very data centric organization, and we use the same level of data centricity to track how it is that we’re doing with our human capital. To that end, we track level of engagement, development, DEI, engagement across different segments and geographies, high potential ratings and everything in between. I’m really excited to report that, or the most recent engagement survey, which we completed about six weeks ago delivered the absolute best scores in the history of the company. Let me say that again. The latest engagement score for organization close to 20,000 employees showcase the absolute best scores in the history of the organization, frankly, going up across every single category. This tells me that the team is energized. This tells me that the team is ready, and this tells me that the team is about to unleash a lot of greatness for the organization. The second priority is to create and sustain a framework of operational excellence across the Board. Simply put is about being great when it comes to running the business. This means simplifying what we do, where we play, and how we play. This means being courageous and bold about the choices that we make. It starts with being intention about driving sustainable revenue growth. We know this is the number one driver of top quartile performance, and we also know that innovation, customer-centric innovation and commercial execution are the two key drivers of sustainable revenue growth. So we’ll accelerate that, but at the same time, we’re not going to forget that we can and will do better across the entirety of the P&L. We’re going to drive a culture of ownership by every single employee across the globe. With all of us waking up every single day acting as true investors in the business and thinking of time and money as the key currencies of the organization. This means continuing to align our incentives with an even greater emphasis on best-in-class performance from both top and bottom. By delivering on operational excellence, as a mandate or mindset for the organization, we’re going to enable, number one, revenue growth of at least 100 to 200 basis points our market, while growing earnings faster than revenue and free cash flow growing faster than the rate of earnings. Number two, operational excellence will enable best-in-class supply and operational outcomes by simplifying a rather complex operations and manufacturing footprint. And then thirdly, operational excellence as a mandate is going to enable an agile, nimble, and simplify company that can anticipate – can be proactive in successfully navigating market trends. So again, operational excellence and mindset is going to deliver revenue growth of at least a 100 to 200 basis points of market while growing earnings faster than revenue and free cash flow faster than the rate of earnings, while enabling best-in-class supply and operational outcomes and by making Zimmer Biomet, agile, nimble, and a very simplified company that is proactive in what it does. Based on where we are, as we close the year 2023 and based on our latest guidance, we’re already on track to deliver the metrics that I mentioned above around revenue, earnings and free cash flow the way we’re run the company, but we expect to do it again with even greater rigor in 2024. To that end, we look forward to hosting an Analyst Day, something we’ve not done ever since we merged the two companies. And at that Analyst Day, we’re going to be sharing more details on these thought that I have highlighted and the specific drivers of these goals. So this becomes truly the DNA of Zimmer Biomet. Priority is about innovating and diversifying Zimmer Biomet into higher growth markets, table stakes. We must enter higher growth markets. We do need to diversify our portfolio, and we’ll do that. We’re going to do it through organic and inorganic means, we’re going to do it through innovation and M&A. On the innovation front, we’re going to innovate by continuing to boldly invest in the right segments of R&D, so that is new product development. So that we always think customer problems and bringing solutions to those problems. We’re going to make sure that those problems are in attractive growth areas that are mission-centric, but also are in the right markets. And by bringing those solutions, we’re going to become and remain market leaders in these categories where we choose to play aided by both product and solutions launches that will enable category leadership for Zimmer Biomet. We’re going to be relentless about the certain opportunities, namely the ASC opportunity here in the U.S. where we are already growing in the strong double-digit rates, but we know we are far from realizing our true potential. This journey, by the way, innovation journey has already started. We’re on track to launch over 40 new products over the next 36 months. And the value – the dollar value for pipeline today is twice the dollar value that we had back in 2018. So a lot of new exciting technologies are about to get launched here at Zimmer Biomet. In addition, 80% of our products in our pipeline, we’re studying markets that are growing at least 4%, many in areas that are growing more than 4%. Equally vital, we’re going to ensure that the innovation journey accelerates value creation through making sure that we monitoring not just the revenue associated with these launches, the vitality index, but also what we call our innovation profitability index or IPI, and that’s the gross margin dollars coming from new products. We got to make sure that these new products are driving margin accretion to the overall margin profile of the organization. So again, it’s about innovation and it’s about value creation at the same time. Mission and margin expansion will coexist and will coexist as part of our innovation journey. To materially change our portfolio, we’re going to also leverage the strength of our balance sheet, which is stronger than ever. We will do M&A. We’re going to be thoughtful and disciplined about the spaces we prioritize, and we’re going to ensure that the spaces are mission centric, and at the same time, these spaces are the areas where Zimmer Biomet has a right to win. We focus on opportunities that are going to hit strategic thresholds, but also hit financial thresholds. We’re going to make sure that these acquisitions drive a strong returns and create long-term shareholder value. It is worth noting that this diversification of our business has started already. Yes, we have to be bolder and we will be bolder, but it has already started. In the last two, three years, we have shifted our portfolio already into mid single digit or above market environments and our weighted average market growth rates have already increased from 50 basis points. And this happened through thoughtful resource allocation and some of the active portfolio management we’ve done. Again, we’re going to be bolder, but the journey has already started. I’m excited about what we can and we’ll do across these three priorities. It’s about first and foremost people, human capital, having a best-in-class culture. Secondly, it’s about delivering operational excellence as a company mindset or mandate. And thirdly, it’s about making sure that we diversify and innovate in a far bolder way through organic and inorganic means. Those are my three priorities. So now that you got a better sense of all priorities. I want to talk about Q3. And again, I want to reiterate that we’re really excited about the performance that was on the quarter. Performance, that that was driven by continued execution, especially in the key areas where we’ve been investing. In particular, I want to talk about niche. It was a great quarter for niche, where we delivered a both market performance in key markets around the world. We also grew in areas that are mission critical within set upper extremities, CMFT, as well as sports medicine. We had solid performance in the ASC environment and we saw revenue generation coming strongly from our data technology and solutions platform, primarily within ROSA and Mobility. In knees, Persona OsseoTi are highly differentiated cementless platform continues to perform above our expectations. I was recently in Dallas at the hip and knee society, and the feedback continues to be superb. Can’t wait until we continue to bring this technology to other geographies. ROSA had a strong quarter continue to see great adoption. We’ve seen a lot of gross adoption happening in the ASC setting, where speed, we’re dealing with higher volumes that matter. In the ASC, we continue to see growth in the teams, and we’re executing contracts daily or portfolio second to none, and we’re benefiting from the recent acquisitions we done such as Embody and ReLign, against the backdrop of this strong execution, Medtech sector stocks have been facing pressure related to GLP-1 drugs and the impact or the perceived impact on obesity. This from a long-term perspective. With a mission-centric patient in the board organization, so if this drug class truly does accelerate and improves patient health, and if these drugs truly do become the end of the obesity pandemic around the world that is great news for everyone as long as truly this is sustainable in the long-term.

Suky Upadhyay:

Thanks and good morning. I’d like to start my prepared remarks today by welcoming Ivan to his first earnings call as a Zimmer Biomet’s CEO. Ivan has been a constant force and a driver within the organization for several years. And I’m proud to work with him, and I’m excited by the partnership. As Ivan noted, we had another strong quarter driven by healthy and improving end markets and continued strong execution across the organization. Overall, we remain on track to deliver mid-single digit, constant currency revenue growth, and adjusted operating margin expansion in the back half of the year, just as we committed to on our second quarter call. Moving to results. Unless otherwise noted, my statements will be about the third quarter and how it compares to the same period in 2022. And my commentary will be on a constant currency and adjusted operating basis. Net sales were $1.754 billion, an increase of 5% on a reported basis, and an increase of 4.7% excluding the impact of foreign currency. Additionally, we had a selling day headwind of about 150 basis points that impacted all regions and product categories at about the same level. Excluding the selling day impact, consolidated ex-FX sales would have grown just over 6%. U.S. growth was 6%, and international growth was 2.9%. In the U.S., our strong year-over-year results were driven by recon and a step up in our S.E.T. category in tandem with strong capital sales. Outside of the U.S., we saw more moderated growth across Europe and Asia driven by tough comps and geopolitical headwinds, which I’ll discuss in our product category section. Global knees grew 7.3% with the U.S. growing 6.1% and international growing 9.1%. The strong performance in knees was driven by continued uptake from our Persona product portfolio combined with the benefits of our ROSA robotics platform. Global hips declined by 60 basis points with the U.S. growing 3% and international declining by 4.2%. Tough comps in China and headwinds in Russia disproportionately impacted our OUS hip business. Excluding these impacts, our international hip business grew in the low single digits. Looking ahead, portfolio expansion will continue to support growth in our hips business. Next, the S.E.T. category grew 2.8%. Again, as a reminder, there was about 150 basis points selling day headwind across all categories and regions. Our key focus areas within S.E.T., including sports, upper extremities, and CMFT continue to post double-digit growth, which was partially offset by other subsegments within the category. We remain confident that S.E.T. will grow in the mid-single digits in the fourth quarter. Finally, our other category grew 16.4% driven by ROSA sales. Now moving on to the P&L. In Q3, we reported GAAP diluted earnings per share of $0.77 compared to GAAP diluted earnings per share of $0.92 in the prior year. While we had higher year-over-year revenue and higher pre-tax operating profits, post-tax income was lower due to a favorable tax settlement in 2022 that did not repeat this year. On an adjusted basis, we reported diluted earnings per share of a $1.65, compared to adjusted diluted earnings per share of a $1.58 in the prior year. The step up is primarily driven by revenue growth in the quarter, partially offset by higher operating expenses and higher interest costs. Our adjusted gross margin was 70.9%, up 20 basis points from the prior year, primarily driven by favorable mix. Adjusted operating margin was 26.4% and up slightly versus the prior year. Better gross margin and savings from efficiencies across SG&A were partially offset by higher R&D expenses that will support upcoming product launches ultimately driving a continued increase in our vitality index. Net interest and other adjusted non-operating expenses of $48 million was higher than the prior year due to certain foreign currency exposures as well as higher interest rates. And our adjusted tax rate was 16.7% in the quarter. Turning to cash and liquidity, we had operating cash flows of $338 million and free cash flow of $189 million in the quarter. We ended with cash and cash equivalents totaling just under $300 million. Our balance sheet remains strong providing us financial flexibility and strategic optionality as we move forward. Now, regarding our outlook. Overall for 2023, the outlook remains largely unchanged from the prior quarter, implying over 7% constant currency revenue growth and 9% EPS growth at the mid points of our range. We expect reported growth for the full year to be 6% to 6.5% and are maintaining our ex-FX growth expectations for the year of 7% to 7.5%. Inside of that, the U.S. dollar has strengthened. So we are increasing our outlook for foreign currency to be about a 100 basis point headwind to revenue growth for the full year. Additionally, we are reiterating our EPS guidance of $7.47 to $7.57 for the full year. Despite the strengthening dollar, which we project to be about a $0.04 headwind to fourth quarter earnings. This guidance implies that we will increase full year operating margins by about a 100 basis points in the backdrop of a challenging environment. In addition to our formal guidance ranges, I will reiterate that there is no material impact from selling days on the full year revenue growth expectations. However, we do expect about a 100 basis point tailwind in the fourth quarter. Additionally, our expectations for interest and other non-operating expenses as well as tax rate and shares outstanding remain unchanged. We expect free cash flow for the year to be between $950 million and $1 billion. In summary, we delivered another excellent quarter on both the top and bottom lines. We remain confident in our 2023 expectations and are excited about the next year with revenue growing in the mid-single digits and earnings growing faster than the top line. With that, I’ll turn the call back over to Keri.

Operator:

Thank you. We’ll go first to Robbie Marcus with JPMorgan.

Ivan Tornos:

Hey, thank you, Robbie. I’ll start, I’ll talk about the market dynamics and briefly I’ll comment on 2024. I’ll pass it on to Suky to provide more color on 2024 and maybe discuss what he can discuss at this point when it comes to the margin profile. But I’ll start with the market dynamics. We’re the fourth company to report in Q3. So by now everybody sees that the markets are healthy. And quite frankly, I won’t talk much about Q4, but so far so good. So this is not a one quarter type of market dynamic. The reasons behind the market profile, the market growth profile and why I continue to say this market is different than four or five years ago is the things that I alluded to in my prepared remarks. The explosion of ASCs, the movement, the shift to ASC is real. That means new ASCs are opening in the U.S. That means [indiscernible] surgery are happening. Demographics around the world play a factor. We continue to track data in terms of the age for someone to get a hip or a knee. And these are younger patients. In the U.S., we would also see more days of surgery. And I don’t think this is just a backlog dynamic pricing, you see what every single one of us is reporting these days. It’s not the same pricing dynamic that we’ve had in the past. And beyond that, the technology. We are driving disruptive innovation. We got more efficient solutions, surgeries are shorter, and the episode occurred is shorter. So we are dealing with the patients, the fellow patients with more efficiency. Again, this is a durable trend. It’s happening in Q3. As I think about Q4, nothing is really changing. As we look into 2024, every early indicator suggests that things are not going to change. And relative to performance, well, look in the background of these healthy market dynamics in the U.S., we gain share in Q3 in both categories. Really proud of being number one in knees for the quarter. We don’t pay a lot of attention to any given quarter, but that is a fact that we’re the fastest growing company in the quarter. And then globally net of a couple of one-timers both in Russia and China. When it comes to hips, our performance was in line with hips and knees was very strong. And then as we get to 2024, I’ll let Suky comment, but we will be mid-single digit. That’s the point of entry. And nothing has really changed. It’s just getting closer to the end of the year and realizing that these market trends are sustainable. And the innovation pipeline that we have will drive the type of growth. But I’ll pass it on to Suky to comment on all the drivers.

Robbie Marcus:

Appreciate the color. Thanks a lot.

Operator:

Thank you. We’ll go next to Drew Ranieri…

Operator:

…with Morgan Stanley.

Ivan Tornos:

Yes, Drew, thank you very much. And first things first, you should be in your honeymoon considering that you got married recently. So I’m disappointed you here. Look, I’m going to keep this short and sweet. We don’t see backlog as a major driver, growth profile for the next year. So when Suky and I said on mid-single digit, we’re not assuming any real meaningful backlog. So not a key driver. We believe and we spend a lot of time going back and forth on backlog that is going to remain here throughout the end of 2024 at least. But we are not a backlog depending – backlog dependent type of a company. So we don’t have – we don’t focus on that. What we’re tracking is innovation, the pipeline that we have, but we’re tracking is the investments we made in the ASC we’re tracking is commercial execution and in the background, just sustainable pricing dynamics. So no backlog. Thank you.

Ivan Tornos:

Yes, absolutely. Great question. First things first. Q3 S.E.T. was in line. As we move into Q4, we’re actually going to be a mid-single digit grower. I’m not going to talk about S.E.T dynamics for 2024. We’ll do that coming guidance, but very excited in terms of where we are. We integrated a couple of companies we have seen SportsMed. Those are performing very well. Our upper extremities, our shoulder business is growing in the mid to upper single digits in most regions. When you look at our CMFT, craniomaxillofacial thoracic, which is part of S.E.T. It has been performing very well. It continues to perform very well. So, again, lots of reasons to believe that as we getting 2024, you should expect a sustainable performance in S.E.T. In terms of M&A, again, we’re coming more on that later, but it remains the number one recipient of capital allocation. We haven’t changed in that regard. And yet, S.E.T. is one category that is very attractive, given the higher market growth dynamics or position in the space. So you should assume that this is one area where we’re going to be focusing from an M&A standpoint. But again, native M&A already delivering mid-single digit growth entering Q4 strongly, and we are excited about 2024. Thank you.

Operator:

We’ll go next to Matt Taylor with Jefferies.

Ivan Tornos:

Yes, I’ll start Matt, and again, Suky maybe want to chime in here. But we confident about 2024 because the market dynamics are sustainable. So there has been a lot of back and forth in terms of what’s going to happen once the backlog is out and all that. First, the backlog. We don’t think it’s going to be out anytime soon. And then pricing is sustainable. And all the things that I mentioned, excuse me, my answer to Robbie, are here. They move to the ASC the shorter episodes of care more days of surgery. So macro wise every data point we get in that is very compelling. And then on the micro, we are seeing a bolus of innovation being launched. We got 40 new products that we’re going to be launching over the next 36 months. Some of these products are very compelling. We launched our Persona OsseoTi, which is the cementless construct earlier in 2023. That is going to be a full – truly full market release in the U.S. in 2024 with the right amount of S.E.T.s and that’s high growth. As we enter the first semester of 2024 to your point, is another two or three very meaningful product launches. Some in robotics, some within recon, some in S.E.T., that’s very compelling. The integration of embodying, the integration of relying continues to generate revenue. I could spend an hour, but I will tell you that is the balance of really sustainable micro dynamics and solid innovation. And then on top of that, you got great commercial execution with a highly engaged sales force. So I’m not – we are not deeply concerned about the about the comps.

Ivan Tornos:

And maybe one last comment here, Matt, quickly we can move on. Don’t forget that the first semester of 2023, while it had very solid comps, also had pretty challenging dynamics from a supply standpoint. So as we think about 2024, that we believe it’s going to be a tailwind.

Suky Upadhyay:

Thank you.

Operator:

We’ll go next to Shagun Singh with RBC Capital Markets.

Suky Upadhyay:

Sure. Hey Shagun, this is Suky. Thanks for the question. So just first some fourth quarter, I’ll just keep going back to – we don’t give quarterly guidance and obviously with our implied, you can pretty much squeeze into the last quarter of the year. We talked about mid-single digit growth margins expanding in the back half of this year, and we’re going to deliver on that. We have a range around our guidance. Obviously, the – to the downside, geopolitical factors continue to be erosive or supply doesn’t continue to, that very positive trend has been on. Then you’re towards the bottom end. However, if that supply picks up and it remediates even faster than it’s already been improving, then as well as better execution on our new products, we could be at the upper end. So there’s a range around that and so I’ll just leave it at that. But overall, we feel really good about where we’re ending the second half of this year and where our end markets are. As we look into next year, I think you’ve seen a bit of a pivot where our commentary was before anchoring towards 4%, maybe even better to now where we’re saying mid-single digit. And I think that reflects the momentum that we’ve seen to your point in 2022 and 2023.

Ivan Tornos:

Yes, go ahead. Go ahead, Shagun.

Ivan Tornos:

Yes, absolutely. So on M&A, as already mentioned, and it was in my prepared remarks as well, it will remain our top strategic priority from a capital allocation standpoint. So that’s not changing. And we’re excited about the opportunities that we have in front of us. We’re going to continue to focus on growth markets or areas that are not only mission-centric, but offer an exciting growth profile. And that is three things. No ranking order. Three key areas, segments within recon that are growing faster than [indiscernible] or collected or collective market growth rates. And there’s a lot in there. You got navigation. You got data, technology, elements of recon that are really attractive. Two is set as we’ve done already. Buying things in sports med, buying things in CMFT, and then looking at other categories that I don’t want to get into for our competitive dynamics. But again, optionality there. And then ASC is also one attractive area, is one area where we have dedicated resources, we growing in the teams. We have currently 10% to 15% of our sales in that space. And there is opportunities there to acquire things. So that’s a bit of the strategic summary of where we go from an M&A perspective. In terms of financials, we’re not changing the story. We like to do things up to $2 billion in acquisition price. And again, that gives you a lot of options. You can do a mid-size deal. You can do some tuck-ins combination of different things. We want these deals to be EPS neutral within two years. And we spoke about high-single digit ROIC within five years. So that’s a bit of a strategic and financial profile. As we look into the next three or five years, we spend a lot of time, Suky and I have spent a lot of time looking at the strap plan. What is the growth profile? The great news is that we convinced that the free cash flow generation is solid. So we’re going to be able to do M&A and potentially do other stuff when it comes to capital allocation. So that’s the answer to your first question. On ASC, look, I don’t think we need to do much more. We growing in the strong things already here in the U.S. in the ASC. I mentioned 10% to 15% of our sales are there. We got the right portfolio. This is now where we were let’s say three, four years ago. We got the right robotic platform for the ASC. We got a great cementless Knee that is gaining there very quickly. We got a full bag in sports and across set. We got best-in-class technology so the portfolio is great. We got dedicated resources, which you very much need in an ASC environment. We have a dedicated sales force. We got simple contracting, simplified contracting, and look what we don’t have organically, we partner with others. So whether it’s sterilization, booms and lights or other stuff, we got the right partnerships. So very, very confident that we’re going to continue to perform in the ASC environment. Thank you.

Operator:

We’ll go next to Josh Jennings with TD Cowen.

Ivan Tornos:

All right. Let’s see if my memory is as good as I think it is. So starting with ASC macro wise, we believe that roughly between 40% to 60% of cases in the next five years are going to move to the ASC. And I will say that a large portion of cases are already moving to the ASC. What we like about this dynamic is that as cases are moving to the ASC, other cases are going to in-patient and outpatients. So it’s a little bit of a double dip happening their just, but yes, the number is 40% to 60% over the next three to five years. And I would say a good percentage has already moved. We are growing in the upper teens when it comes to the ASC and today around 10% to 15% repeating myself of cases or revenue rather of Zimmer Biomet comes from the ASC. I will tell you that it’s pretty equal in terms of both hips and knees. So we don’t see one category being above the other. And I like the fact that given the recent CMS changes, you’re going to see sold their cases also accelerating the ASC. We believe that’s a great opportunity for us here at Zimmer Biomet. So that’s the answer on ASC. In terms of ROSA dynamics I think we’ve been very transparent in terms of one-third, roughly one-third of all of our installations are happening in the ASC. That’s a trend that has been happening for a few quarters, and that’s a trend that we continue to see happen in the next quarters. In an ASC environment speed matters, not having to get engaged in complex pre-planning matters. Efficiency does matter and having a knee that you are confident it’s going to be the right knee that matter. And those dynamics are driving ROSA penetration in the ASC. And then outside of the ASC, ROSA continues to perform. We are selling and placing ROSA’s frankly at a rapid pace. You see in the other category, we saw nice increase that’s driven by ROSA. And we are on track to at least install 300 units at the end of the year 2023 when it comes to ROSA, so really satisfied. And that’s before we launch next generation ROSA across recon and deliver the first shoulder robotic platform. So excited about both ASC and ROSA. Thank you for the question, Josh.

Operator:

We’ll go next to Larry Biegelsen with Wells Fargo.

Ivan Tornos:

Yes. Sure. So good morning, Larry. Thanks for noticing. It’s actually two years in a row where we’ve expanded margins in the backdrop of really challenging environment, by the way, while also accelerating revenue. I think in 2022, we expanded margins, operating margins by about 40 to 50 bps. And this year, you’re right, the implied is about 100 basis points. So again, really proud of what the ZB team has done collectively, again, in the backdrop of still investing for growth, which we’ve been able to demonstrate. As we move into next year, I think I’ve been pretty front footed in our ability to continue to grow margins in 2024. And quite frankly, we’re going to do that in every year after 2024 and continue to deliver a profile where earnings are growing faster than revenue. I’m not going to go out and put a marker out there as to where we think it can get to, but historical levels we will look for over time to definitely hate and exceed those. So I’ll just leave it there. Again, really happy with where the team’s performed over the last couple of years. Very confident what we’re going to do next year. Quite excited about our outlook in the longer-term.

Ivan Tornos:

You had a follow-up, Larry?

Ivan Tornos:

Yes. I don’t think there is anything changing really. There’s not a change of strategy is we continue with ROSA. We continue to show strong clinical efficacy. We continue to demonstrate time neutrality after a few cases. We continue to see great adoption in an AC environment. We have three ROSA indications today within recon. So total knee partial and hip, we’ve done a lot of podium presence. If you attended the Dallas meeting this last weekend. There was a lot of noise around posters and whatnot. So I think we just get in the right adoption is moving quickly. And then a driver, I will tell you has been tremendous. A lot of these cases that are done, the ASC do like or do one, a lot of surgeons in an ASC won the combination of robotics and cementless. In the past, we didn’t have the right cementless construct. We do not with Persona OsseoTi. So I think that’s been a bit of a tailwind, but I wouldn’t say it’s a major change of the strategy is just the fact that it’s been two, three years in market now and you’re starting to see the data. So really excited in terms of what we are.

Suky Upadhyay:

Hey, Larry, just to get back to your original question, just to make sure I’m completely clear. I do see getting back to historic margins are better over time. Absolutely, a definable objective for us, now having greater insight and taking over for option supply chain, I would say, this is an area where we can certainly do better. We’re going to do better going forward. And I can tell you that the company’s focus on not just revenue growth, but operating profit and free cash flow generation has been more acute and stronger than it’s ever been. So I think we’ve got the pathway, we’ve got the culture, we’ve got the levers to get there over time. Thank you.

Keri Mattox:

Thanks, Larry. Katie, can we go to the next question in the queue?

Chris Pasquale:

Thanks. Just want to follow up real quickly on Larry’s ROSA question. Was the mix of sales versus placements different in 3Q than what we saw in the first half of the year? Just trying to figure out whether that played a role or the acceleration in other sales was really driven by system volume.

Chris Pasquale:

Thanks. That’s helpful. And then on SET, is the strategy there to lean into these focus categories that are already growing pretty well and then hope that the overall performance improves as they become a bigger part of the mix? Or do you see an opportunity to reinvigorate areas like lower extremities that maybe aren’t on that list today?

Chris Pasquale:

Great. Thank you.

Keri Mattox:

Thanks, Chris. Katie, can we go to the next question in the queue?

Travis Steed:

Hey, thanks for taking the question. I guess, a quick follow-up on M&A, any way to frame how much margin or EPS solution you’re willing to take in yours one and two, realize you said neutral by year three. But curious kind of what the framework is on year one and two. And when you think about bid ask spreads, is a deal something you think you could get done this year or is it probably more something for 2024?

Travis Steed:

Yes. In terms of like, when you think about like bid ask spreads and the progress on your conversations, is a deal happening in 2023 a possibility or is it probably something that we need to like the 2024 to see M&A?

Travis Steed:

Yes. That’s fair. Thank you. Thanks for the answer. And a couple housekeeping questions. The OUS, one time stuff in hips this quarter, does that get better in Q4? And when you think about tax rate next year, I heard your comments, but curious if that’d be like on a less than a 100 basis points or more than a 100 basis points on tax rate. And when you think about the interest line, you’ve got I think $850 million in debt coming due. So is interest a headwind or tell in next year?

Suky Upadhyay:

Yes. So on the expense line, right now we’re not going to give full guidance on that. So we’ll unveil that. I think the one thing you want to keep in the backdrop is we do believe we can grow earnings, we will grow earnings faster than revenue. On the tax rate, right now our best estimate is that it’ll be about 150 basis point increase off of our full year 2023 tax rate.

Keri Mattox:

Thanks, Travis. I think we have time for maybe one last question. Katie, is there one in the queue?

Vijay Kumar:

Hey, guys, thanks for squeezing me in here. Maybe just one question from me. This OUS hips, I think you called up Russia headwinds. Is that done with in fiscal 2023? Should that continue in the fiscal 2024? And I think you did speak about M&A. Can you comment on your hurdle rates you given current interest rate in monument for deals?

Vijay Kumar:

Sorry. On the deal M&A given current interest rate environment, can you talk with your herded rates for you know, deals?

Operator:

Thanks, Vijay. And thanks everyone for the question. Yes, absolutely. I think now we’re probably nearing the end of the call. I’ll turn it back over to Ivan just for any closing remarks.

Keri Mattox:

Thanks everyone for joining us. The IR team will be in touch of course, and if you have questions or comments, please feel free to reach out. Thank you.

Operator:

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Chief Communications and Administration Officer. Please go ahead.

Bryan Hanson:

All right. Thanks, Keri, and thanks to everyone for joining us on the call this morning. It's always good to be with you. But I would say it's even a little better and certainly more fun when we have great performance in the quarter. So we're pretty happy about the results that we get to discuss today, and I can tell you, we're looking forward to the dialogue. And I'll start things up, as we normally do, I'll talk about our Q2 performance and the key drivers inside of the quarter. But I think also really important is to talk about the key drivers that we see continuing to move this business forward. And then Suky will walk us through the financial details of the quarter and importantly, discuss how we are again raising our full year financial guidance. And then, of course, we'll close things out with a Q&A session, and we look forward to answering your questions and having a dialogue in that session. Okay. To kick things off, I'm just going to take a step back, which I've been doing now for the last handful of quarters and I think deservedly so, because I want to say thank you. I want to say thank you to each and every one of our team members around the world because it's your hard work, it's your dedication to getting the job done that is moving this business forward. And I will tell you that I'm proud to say that you have delivered another very strong quarter, while once again making ZB a certified Great Place to Work. And you've done all of this while improving our scores and as a result of that, our rankings on the environmental, social and governance front. So I think simply stated, we are doing well, while also doing good. And that means for our team members, our patients, our customers and our communities and even our planet. So once again, I want to say thank you to our team for all that you do for ZB and to move our mission forward. And most importantly, for doing it together as one team, one ZB team. Now let's talk about the second quarter. And I'm just going to say simply, we delivered another strong quarter, again beating our own expectations. And that performance positions us to again raise our financial guidance on both the top and bottom line. And this is in the face of some pretty significant macro factors that are impacting us in the entire market. Ongoing supply challenges are very real, and I'll talk about those in a minute, but also inflationary pressure, a tough labor market and the geopolitical landscape that is putting pressure on everybody. But against that, I feel very confident about our pipeline, our execution and the team's demonstrated ability to navigate these headwinds, which gives us confidence to increase our financial outlook. Okay. With that said, let's talk about the key drivers inside of Q2, and there were some positives and there were some negatives. I'll start with the positives, and the most important one, in my view, is that our team's execution remains flawless. We're seeing significant traction, probably the best we've ever seen with our new product innovation. And that paid dividends in the quarter for sure, but most importantly, is it pays dividends as we move this business forward. And I would say that procedure recovery continued in the quarter, again showing no meaningful impact from COVID or staffing challenges, and that allowed for a tailwind from increased provider capacity, and that resulted in backlog pull-through in the quarter. In terms of headwinds, I would say that the team is doing a great job of managing the supply-constrained environment. But I would say that it is still very clearly a governor to our overall growth in the quarter, and it continues to be a distraction for the organization. See if I combine these things, though, all in all, our momentum continues, and it continues to grow. And I've said before, my confidence in this business, our confidence in this business is as high as it's ever been. And it's high for a good reason. If you just look at the knee franchise alone, our innovation strategy is working. We now have 4 meaningful pillars inside of this business. All of which can drive pricing stability, mix benefit and competitive conversions. First, let's look at the ROSA Robotic Platform combined with our Persona cementless Knee. Now this is a powerhouse combination that is and will continue to accelerate growth. And based on the traction we're seeing so far, we continue to believe that ROSA and Persona cementless together will enhance our robotics and cementless penetration from the current mid-teen level to 50% or better, 5-0% or better. The second pillar that we're focused on is Persona revision. This provides a meaningful conversion and mix opportunities inside the revision category. But importantly, it also acts as a powerful tip-of-the-spear product for conversions and primary needs. And then third, it's just the overall shift of the ZB legacy knee systems to our now fully rounded out Persona portfolio. And this is a meaningful mix benefit that we can take advantage of that, I would say, is somewhat unique to our business. And then fourth, on top of all this, we have the world's first and only Smart Knee which is Persona iQ. And I know this is still in limited launch, but already, it offers surgeons unparalleled data access and is attractive to patients, those patients who want more direct engagement with their care recovery. And we're taking on a similar approach to our hip portfolio where we continue to launch meaningful innovation, again, giving us the opportunity for price stability, mix benefit and competitive conversions. And we have 4 pillars of focus here as well. First, it's ROSA and Hip Insight. These are technology shifts in robotics and mixed reality that are setting up the ZB Hip portfolio for greater adoption and growth. Second is the Avenir Complete. This is our current flagship product combined with G7, which gives us a very strong position in both the attractive direct anterior and revision submarkets of hip. And then third, this position will be enhanced with work being done on a triple taper stem which will fully round out our direct interior approach portfolio. We believe this new portfolio, combined with the G7, which is the most versatile acetabular component available will be unmatched in the industry. And then fourth, HAMR. This is our upcoming full launch of an automated impaction system that builds on a proven need in the market, and we fully expect that this launch will create surgical efficiencies while bringing personalized precision to each and every patient. And then finally, in S.E.T., we are being disciplined and targeting investment in our growth driver categories, Upper extremities, Sports and CMFT, and each of these categories continue to perform. And given our momentum in these businesses and continued investment in innovation and dedicated infrastructure, we fully expect the S.E.T. set business to be a mid-single-digit grower in a normalized market environment. So overall, we're very excited about our innovation momentum. It's very real. Remember, we've called out that we have 40 planned product launches between this year and the end of 2025. With the majority in 4%-plus growth markets. And that's important because these innovations will certainly drive near-term growth. There's no question about that, but also create better sustainability of that growth because of the markets they're in. This portfolio shift that we're seeing and the team's execution capabilities are clear signs that our ZB transformation has taken hold. But I can tell you right now that we're not going to stop there. The goal is to continue to enhance our growth profile through our ongoing focus on active portfolio management, and that is supported by our already strong and strengthening balance sheet. And with that, I'll turn the call over to Suky for a closer look at Q2 and our latest expectations for the remainder of 2023. Okay, Suky?

Keri Mattox:

Thanks, Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up so that we can get through as many questions as possible during the call. With that, operator, may we have the first question, please?

Travis Steed:

Good Morning Bryan and Suky. Nice quarter. I guess I'd start out with looking at the Hips and Knees in the quarter. I would think that knees 2x the growth rate of hip this quarter, backlog will be similar there. Is the elevated knee growth, mostly the mix shift from cementless and ROSA coming through? I'm curious how much supply is limiting growth in Hips and Knees here and what you're assuming about that improving in the back half?

Ivan Tornos:

I will say that the growth in knees is mainly innovation. We continue to see great momentum with ROSA penetration, so a pretty dramatic increase in penetration in the U.S. and core markets OUS. The launch of Persona OsseoTi or cementless launch is gaining great traction here in the U.S. In the prepared remarks, Bryan mentioned how we plan to go from 15%, 1-5 to 5-0- I won't disclose where we are in Q2, but it was a significant uptake in that side as well. We did also see great momentum in the ASC. We continue to grow here in the U.S. double digit in the ASC space. And yes, there was some backlog in key markets around the world. We saw better backlog consumption in EMEA than here in the U.S., but nonetheless backlog was part of the performance. And to the latter part of your question, certainly, supply was a governor. I do believe -- we do believe that in a normal environment with better supply or already very compelling growth rate could have been even higher. But all summarize backlog, innovation and great commercial execution were the key drivers behind the knee performance.

Suketu Upadhyay:

Yes. Travis, this is Suky. So yes, very perceptive on our comments. Yes, we've got confidence in our business in a normalized environment that we're going to be at 4 plus or, as I said, a mid-single-digit grower. There's a few things. First, I focus on qualitatively execution is incredibly strong. Right now, we've got -- if you think about -- our WAMGR, weighted average market growth continues to improve. That's been steadily improving, one, by investing in R&D organically in higher-growth submarkets even within recon, but then in sports, Extremity and Trauma, and then if you look at the M&A that we've been doing, it's been in higher growth markets in Sports, Upper Extremities as well as CMFT. So overall, our weighted average market growth has been improving. Next, it's really around our innovation and what that innovation brings in terms of the ability to compete in the market, what it brings relative to share of wallet as well as mix is all very positive as well. And then the last is our performance relative to market. I think we've demonstrated for a number of quarters now that we can perform at or better than market on a consistent basis. So really execution is the primary driver why we've got confidence behind that. And secondly, you're also seeing some improving market dynamics. One, we think that overall, the patient dynamics are changing. You're seeing a lowering of the average age of our patients. That's expanding our overall market. Two, we think that they're getting more confident in the outcomes of recon procedures and sports procedures, again, because the technology, the innovation is improving, we're bringing real value to the marketplace. And I think the last thing is really the convenience and the comfort with the ASC setting is also helping to accelerate the overall market. So the market dynamics are still early and preliminary, but the execution is very strong and very real. So -- we've got a lot of confidence qualitatively. And I think if you look at the back half of our guidance, the implied growth rate of being roughly about 5%, I think that's another proof point quantitatively that gives us that confidence. So again, thanks for picking up on that. And those are the things that give us confidence.

Richard Newitter:

Maybe just looking at the margins, I'm trying to calibrate if we're kind of back to normalized levels sustainably, what your normalized margin and margin improvement prospects are? You did about 200 basis points of year-over-year operating leverage in the first quarter, and you grew double digits on the top line. Now you're at about 100 basis points roughly in the back half, and that's like you said, a mid-single-digit implied growth rate on the top line. So can we assume like that -- those are basically the right level of operating leverage to correlate to call it, upper mid-single digits? You're getting north of 100 basis points, something more in the lower mid-single digits or upper low single digits, you're 50 basis points plus operating leverage?

Richard Newitter:

Okay. And just maybe feeding that into M&A. As we think about your M&A and tuck-in strategy, how should we think of the prioritization of top line from tuck-in M&A versus margin and earnings dilution trade-off?

Operator:

We'll go next to Pito Chickering with Deutsche Bank.

Suketu Upadhyay:

Yes. So a couple of things that inside the second quarter on S.E.T. One, we continue to work through some of the reimbursement changes in our Restorative Therapies business that we talked about a year ago. We believe we've now sunsetted those. So those shouldn't be a challenge as we move into Q3 and Q4, the rest of the year. However, we did see some pretty acute supply issues, especially in our Sports business and to a lesser extent, Trauma. That muted growth. But underneath that, our priority areas of Sports, Upper Extremities and CMFT all performed incredibly well. And so we're happy with the continued progress and momentum we're making in those businesses. We do expect an inflection in the back half of the year for those -- for the S.E.T. category as a whole to rebound. It's likely going to be stronger in the fourth quarter as we continue to work through the fluid situation on supply in the third quarter.

Suketu Upadhyay:

Sure. So overall, Russia is less than 1% of total sales on a full year basis. We became aware at the end of -- towards the end of the second quarter, that new and unexpected sanctions were being placed on certain medical device products. Our products sell into that category. So we basically have to go back and reapply for licensing against all of our products. We don't think that, that's going to be a governor in perpetuity, but at least for the third quarter, it's going to create a bit of a headwind potentially a little bit into Q4 worst case. We think that, that headwind is roughly about 50 basis points in the back half of the year. And again, most of that will be felt in the third quarter. From a raw materials exposure, I think the biggest area, and we've talked about this at length -- our titanium supplies coming out of Russia have been relatively stable. That's a good sign. But we also took the additional measure at the end of '22 to create some redundancy and to find alternate suppliers, multiple suppliers outside of Russia. So we feel good about our titanium supplies.

Jeffrey Johnson:

Kind of, I guess, we're ticking through all the segments here. So maybe if we just look at the Other segment, the 6% growth that was at least a nice step-up from what we've seen kind of on a trailing 12-month basis. Maybe any insights there what drove that and just kind of how we're seeing mix between leasing contracts and/or outright purchases on ROSA?

Jeffrey Johnson:

All right. Great. And then maybe just a follow-up, just on backlog. I know you don't guide on backlog and any high-level comments though on how you're thinking about that backlog clearing in EMEA and what you saw in the U.S.? And just kind of comfort with that backlog still continuing to provide some tailwinds maybe over the coming year or 2? Thanks.

Operator:

We'll go next to Larry Biegelsen with Wells Fargo.

Ivan Tornos:

Absolutely, Larry. I'll take that one. First and foremost, we remain on track with our limited market release. We've been saying all along that by January Q1 of 2024, we'll be ready for a full launch. And I will say that we're almost there in gain on the data. We're approaching 1 billion data points from multiple patients thousands of implants by now. And really we're answering 3 questions. Number one is, to your point, what is the value proposition? Can we demonstrate a reduction in the length of the episode of care? Can we bring objectivity to a range of motion metrics? Can we demonstrate better gate performance given better technique, better surgery? Can we compare recovery curves? Who does better post implantation? There's a lot of data we get in that regard, and we'll be filing some claims once we digest the multiple data points that we're getting. So that's question number one. Question number two in the limited market release is how do we make the whole thing seamless? This is new to the word technology. It's got a home base station, as you know. It involves the patient, involves the surgeon, the caregiver. So we want to make sure that is a best-in-class experience, and there are some things that we're working around. And then the third question, and I know this is near and dear to you is who's going to pay for the technology? To that end, we got the NTAP kicking in at the beginning of October. You'll be pleased to know that we follow up with your question around TPD, transitional pass-through. We had a deadline of August 23 to submit. We're in the final stages of evaluating what the submission could look like. We're evaluating commercial payer strategy as part of this limited market release. So we continue to think about the payer as well. So with all of that said, the what, the how and the who will pay, I think going to be in a good position to start to see a full market release by January, if not late Q1 2024.

Ivan Tornos:

I'd love to give you more color, but Bryan and Keri will shoot me. I will tell you that we remain convinced capital letters that would be first to market in Shoulder Robotics, and beyond the speed to market, what I like is what the actual platform offers. Faster surgeries, more accurate outcomes, shorter recovery. So a lot what we've seen, we've done our final validation labs with customers, both friends and family customer surgeons and also competitive surgeons and the feedback has been outstanding. Beyond the platform dynamics that I mentioned around shorter recovery, faster surgery, I just love the integration that Russia shoulder will have with the rest of the CDH ecosystem. So more than that soon.

Ryan Zimmerman:

We all heard United Healthcare's comments this quarter. It was evident in results, but it was specific to recon on Medicare. I'm just wondering if you can kind of parse out the procedure environment within S.E.T.? It's hard to see given some of the supply chain dynamics. I'm just wondering if you can kind of speak to that environment relative to recon in your expectations for durability of its robustness, if you will? Through the remainder of this year, similar to the recon environment.

Bryan Hanson:

I think the key takeaway you just don't see as much impact on the S.E.T. business as you do the Recon business when you think about backlog.

Suketu Upadhyay:

Yes. So first of all, BBP is not a material driver for us at all in 2023. We sort of turned the corner on that between the end of '21 and 2022. So we actually see China as a growth driver for us, albeit at a lower level, but we do believe that, that market has some very strong growth for us. I'd say pre-BBP, that market was growing in the low double-digit range. And we'd be surprised if we didn't return to that level, if not better.

Michael Matson:

Back to the S.E.T. business. So Bryan called out kind of the subcategories there that seem to be the area of focus. But the things I didn't hear a mention were lower extremities, i.e., foot and ankle or trauma? So can you maybe just comment on why those were kind of left out of the comments?

Bryan Hanson:

Yes. And to be clear, it doesn't mean that we don't see foot and ankle, trauma and restorative therapies as potentially attractive markets. It's just we want to be disciplined in the way that we're going to invest -- and the -- if you look at the strat plans that we have for upper extremity, CMFT and Sports, they're very attractive. So we're going to focus our investment there. Out at the end of the day, the individuals running foot and ankle, trauma or restorative therapies, put a plan in place that's attractive, they could become growth drivers. But today, we want to differentiate those growth drivers to non-growth drivers, nothing against any other categories. It's just the plan right now is very attractive in those 3.

Michael Matson:

All right. Got it. And then just in terms of the supply chain issues, I don't know if it's possible, but is there any way you could quantify the impact either to your revenue growth and/or your margins in the quarter?

Operator:

We'll go next to Robbie Marcus with JPMorgan.

Suketu Upadhyay:

Sure, Robbie. Great to talk to you. So one of the biggest drivers in the overall profile in the back half of the year, by the way, we do believe operating margin in the back half will be modestly better than what you saw in the first half. That's largely going to be driven by better revenue, mostly coming from the fourth quarter. Fourth quarter is always our strongest from a dollar perspective, from sales view. The second thing is you're likely going to see a step down in overall operating expenses from the second quarter. That was sort of our high watermark as we were dealing with a number of inflationary pressures. But quite frankly, also investing pretty handsomely against things like R&D, which was up like 19% in the quarter, investing against commercial infrastructure in places like sports and upper extremities to continue to specialize that sales force as well as ASCs. So the two common combined things of higher revenue, lower OpEx as we move into the back end of the year is what's going to drive that margin expansion improvement versus the first half. As we look into 2024, you're right, we did talk about some FX hedge gains this year, which we sized at about 50 basis points on the full year that won't repeat into next year. That will be a headwind, but we're still confident that we can grow operating margins into 2024. It may not be at the same level of 100 basis points that you're seeing this year. But we do believe, as I said earlier, that we can take this sort of high watermark that we are in operating margins that continue to enhance that as we move into 2024. What are some of the building blocks? One, pricing is still a headwind, but we're seeing really great performance. It's not the headwind that it used to be for the company. And what's even more exciting about that is we're truly seeing very strong mix benefit inside the company, and that's coming from our new products and the innovation into the marketplace, which is helping to offset that price erosion. So we think that, that can be a tailwind for us. Secondly, we continue to work aggressively on our site optimization in manufacturing and supply chain, which we think can generate some tailwind in cost of goods as we move forward. And then as you move through the rest of the P&L into SG&A, there's still ample opportunity with our Global Business Services agenda that we just started a few short years ago. We've got a completely different culture and mentality when we think about go-to-market and market profitability. Where at one time, it was revenue growth at all costs. And now it's all about revenue growth at the right profitability level and with earnings growing faster. And so there's just those cultural shifts and that discipline is also driving some really nice margin expansion both in the U.S. as well as outside. So these are just a few levers that quite frankly, we've been pulling on already. There's still room to go and why we feel confident that we can take this high watermark for 2023 and grow it into 2024.

Frederick Wise:

And maybe starting off with a couple of the key new product launches that you highlighted. Bryan, you said as you were talking about the 4 pillars of Knee growth that ROSA+ the cementless Knee launch, were -- that was your first comment, your first focus area, taking cementless from mid-teens to 50% over time. Related to that point, where are you in the rollout? When, or are you even at full launch now or what's required? And how do we think about the acceleration of that launch over the next year or 2?

Ivan Tornos:

Yes, I would say, Rick, that it's early innings, frankly, both for ROSA as well as cementless. We are in what I think is not still a full launch for cementless, given some of the supply constraints. I think as we exit 2023 and early 2024, we'll have as much supply as we need to meaningfully drive the penetration of cementless with a goal of going from 15% to 50%. I won't say when 50% is going to happen, but that's definitely the North Star. ROSA is the same situation. We launched 2 platforms in Knee. We are about to launch ROSA Partial this summer, a new and improved version of that. We're working actively on next-generation total knee, which will be a meaningful launch going into '24. We got all kind of ZBEdge add-ons data technology solutions that are going to augment the penetration there. But I would say net-net, both for ROSA, cementless and some of the peripheral launches around those 2 components, we are in the early innings.

Bryan Hanson:

Thanks, Rick. I mean I'll kind of tongue-in-cheek say we're thinking about everything. But obviously, that doesn't get you anywhere you focus. And we've been very clear from the very beginning that we had 3 phases of the transformation of this company. Phase one is always going to be alive, but we're in great shape Phase 2 is kind of what you just said. We have a great innovation pipeline. We're executing from an organic standpoint. We feel very confident in that phase. And now we're squarely in Phase 3, as we've been saying, and the big focus for us is that portfolio transformation that will leverage our balance sheet. And the balance sheet is strong and strengthening us in the prepared remarks, and that is the area of focus for us. How do we continue to move our weighted average market growth forward. I can tell you we've already made great progress in the focus area here. We've already moved it North. With the balance sheet strength, we expect it to continue to move in the right direction. So that's an area of focus, not just for me but for this entire team.

Joshua Jennings:

Hi good morning...

Unidentified Company Representative:

I think he got electrocuted...

Operator:

We'll go next to Jayson Bedford with Raymond James.

Suketu Upadhyay:

It was about 1% erosion year-over-year in the second quarter. I think in the first quarter -- I think the average is somewhere around for the first half of the year. We would expect in the second half or somewhere to be between 100 to 150 basis points of erosion. We're seeing really good traction there for the number of reasons that I've talked about at length previously. But again, I think the really exciting thing is we're starting to see that mix benefit come through from our new product introductions and helping to offset even an improved price erosion profile.

Ivan Tornos:

I'll start by saying that we have not seen anything new. All along, there were really 3 buckets that summarize the problem, materials, labor and sterilization, augmented with, frankly, just put demand plan on aside because the demand that we felt kept getting better and better and better. Sequentially, we've seen improvement. We've seen better forecast accuracy on the demand side. And then as we think about labor, at the Tier 1 level, our labor capabilities are much better than before. We're hiring people in our sites. When you think about sterilization, we had the right strategies, materials continue to be a challenge, but again, it's much better than before. So I would say improvement versus the past. And sequentially, we continue to see improvement across both supply and demand.

Keri Mattox:

Thanks so much, Jayson.

Kyle Rose:

Suky, on -- just circling back on gross margins, strong in 2023, obviously, you walked through some of those benefits. I guess just help us understand maybe how much of an impact inflation in the supply chain has been on underlying gross margins? I mean I understand the positive tailwinds that you've outlined earlier. But how much have you truly been offsetting? And I guess just trying to understand how much -- when you talk about supply chain challenges and increased unit costs and wages, are we still -- is there a potential to see a second shoe drop? And I'm just kind of trying to understand as inventory turns flows through the business if and when we'll actually ever see that impact through the P&L? And then secondly, let's talk about returning to a normalized operating environment. I think we all understand it's been a dramatic 3 to 4 years. But I guess just -- when is it fair to start thinking about when we will be in that more of a normalized operating environment, whether it's supply challenges the industry is facing, staffing challenges. Just how should we think about actually getting step back to that mid-single digits?

Keri Mattox:

All right. Katie, I think we might have time for one last question in the queue.

Matthew Miksic:

So just a couple of follow-ups. One on margins. And I know there's been a fair amount of talk about on the call and progress in terms of driving leverage commitments to leverage this year. I was wondering if we could sort of zoom out and think about where margins were pre-pandemic in that kind of like low 30s range? If you could remind us, is that -- is that a target to get back to and maybe the time line for getting there? And then just one quick follow-up on the Persona iQ, if I could.

Matthew Miksic:

Sure. Just a follow-up on Persona iQ. I think the number, I think maybe that was mentioned earlier was something like 1,000 implants. I mean that's a pretty -- it's a pretty small percentage of total maybe 1%, less than 1% of your total implants a year. And I just want to get a sense of at what level do some of the data start coming through? Is it a couple of thousand implants? Is it 300 to 500 implants? When do you expect seeing some of the results you mentioned earlier in the call?

Keri Mattox:

Thanks, Ivan, and Matt thanks for your question. I think we're almost at the bottom of the hour. I'll actually turn it over to Bryan just for some closing remarks.

Keri Mattox:

Thanks, everyone. We'll talk to you soon. And obviously, if you have any further questions, please don't hesitate to reach out to the IR team.

Operator:

Good morning, ladies and gentlemen. And welcome to the Zimmer Biomet First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today May 2, 2023. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Chief Communications Officer. Please go ahead.

Bryan Hanson :

All right. Thanks, Keri. And thanks to everyone for joining us on the call this morning. We don't get the opportunity to do this too often. So I'm going to take advantage of it. And I'm just going to start the call by simply saying this was a phenomenal quarter, where pretty much everything went better than expected. And importantly, as a result of that momentum, we are significantly raising our full year top and bottom line outlook, which Suke Upadhyay is going to talk about in just a minute. With that said, and maybe taking a step back, for today's call, I'll talk more about our Q1 performance and the drivers of that performance. And then Suke will get into more details for the quarter and importantly, also our financial guidance for the rest of the year. And then we'll make sure that we save plenty of time for your questions which we look forward to addressing. But before we do any of that, I just want to take a minute to speak directly and personally to the ZB team. And it really just say thank you, truly say thank you. For yet again, you have delivered beyond our expectations. And I'm very proud of what this team is doing to navigate an environment that while improving, there's no question it's improving, it is still fluid. And it presents us with challenges that quite frankly seem like daily challenges. And it is truly impressive how you're navigating that environment right now. And I'm very proud of the dedication, the resilience and the innovative thinking that you're bringing to your roles each and every day. It is truly making a difference. But I'm most proud of how together and I do mean together, we are living the ZB mission to alleviate pain and improve the quality-of-life for people around the world. And as we know, we do that every eight seconds, 24 hours a day, seven days a week, which is really what it's all about in the first place. So thank you. Thank you for what you do for ZB, thank you for what you do for our customers and most of all, and most importantly, what you do for our patients, the patients that we serve every day. Okay, so let's take a look now at the first quarter. And as some of you may recall coming into the year, our guidance assumed that Q1 would have the easiest comp of the year, but also experienced some headwinds from both staffing and COVID-related challenges that we felt would put pressure on elective procedures during the quarter. We also assumed that there would be a pretty high level of supply pressure in the first quarter. Our assumptions also believed that all three of these headwind variables would then improve throughout the year providing less impact to the business. But then outside of the easy comp, Q1 would be pretty bumpy. Okay, so what actually happened in the quarter? And why was it considerably stronger than we expected? Well, first and foremost, procedure recovery was much better than we anticipated, really having almost no material or meaningful impact from COVID or staffing challenges in the quarter. And second, we manage the supply constrained environment better than we originally anticipated. Make no mistake, supply is a real problem. And it's putting pressure on the business. But this team has done an excellent job managing that environment, probably leveraging some muscle memory from the past. And then third, and I think really importantly, our team's execution and traction with our new product innovation is even stronger than we anticipated. And that's important because it's going to continue to provide benefit to the rest of the year. And so because of this, we saw another quarter of very positive year-over-year momentum in large joints, with our global hip and knee businesses growing approximately 13% and 18% on an ex-FX basis. Our overall S.E.T. category grew more than 6%, driven by strong low-double-digit performance in our growth drivers in S.E.T. which we've talked about before being sports, CMFT and upper extremities. And then this was partially offset as expected, from headwinds from our restorative therapies business, where these headwinds will anniversary, and as you remember, these are reimbursement change headwinds that we have in that business, they should anniversary by the back half of this year. And then finally, our other category grew 11% in the quarter. So needless to say it was a pretty strong quarter. And the momentum is real in this business and our confidence is extremely high. And there's good reason for this competence. If we just think about this quarter alone, we officially launched our new cementless knee form factor Persona OsseoTi, and this is adding to the Persona family and really strategically rounding out that portfolio. And this new keel design tray is extremely versatile, it's anatomic because it is the Persona family and it's stable. And it's the only knee that you can do a cemented or cementless procedure with an inter operative decision possible for the surgeon. And that's a big deal. We believe that this will enhance the potential for cementless penetration, because surgeons can go into a questionable bone quality procedure with the intent to use cementless, but then they have the ability to pivot back to cement it as the bone quality isn't there. And for this reason, and a lot of other reasons, customer feedback so far has been extremely positive, as we've launched this product. And as you may know, our cementless penetration is already in the mid-teens. But we believe that this can get to 50% or higher penetration. And we're excited about that. And we truly do believe that this premium product can accelerate that growth for ZB and is already doing so. It's still early days. Our full launch is planned for the middle of this year as more sets become available. Make no mistake, this is a real driver for not just our knee franchise, but for the overall company. So we're very excited. As you remember, back in February, we also closed our acquisition of Embody, which is providing access to differentiated products and an innovative pipeline for our sports medicine business. And this investment helps expand ZB's presence in this very attractive high growth market, while also in that market, serving our customers and our patients better. And this combined with a very strong innovation pipeline that we have in sports, and this dedicated commercial channel that we put into place gives us continued confidence in our global sports franchise. And if you're at the AAOS meeting, you would have seen that we previewed our Hammer product, which is designed to ensure consistent and reproducible compaction for hip procedures, while allowing the surgeon to dial up or dial back the force of the strike, depending on the individual patient need. And this ability to be more personalized, actually differentiates Hammer versus other compaction devices on the market. So needless to say, we're excited about this differentiated product. We believe this could actually increase not only the consistency for surgeons, but also the procedure efficiency, which is really important right now. And our current expectation is to launch Hammer in the third quarter of this year. And if you just look at these combined products, this is actually building on other launches that we've talked about the Persona IQ, Hip Insights, the Identity Shoulder system, and in total, we've introduced more than 50 new products from 2018 through the end of 2022, with the majority of those products coming in markets growing 4% or faster. And we're geared to continue that momentum, doesn't stop here with another 40 planned product launches between this year and the end of 2025, again, with the majority of those products to be launched in 4%-plus growth markets. And this shift not only continues to transformation of our product portfolio, because the short term revenue growth, but it also improves our weighted average market growth. And ultimately, as a result of that gives us more confidence that our markets and our portfolio mix positions to company for sustainable mid-single-digit growth. And with this kind of traction around our product pipeline, increasing strength of our balance sheet, and our team members' ability to execute, ZB continues to be well positioned to deliver value today and in the future and achieve our mission as a company. And with that, I'm going to turn the call over to Suke to take a closer look at Q1 and our latest expectations for 2023. Okay, Suke.

Keri Mattox :

Thanks, Suke. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up so that we can get through as many questions as possible during the call. With that, operator, may we have the first question, please?

Steve Lichtman :

Good morning, guys. And congratulations on the quarter. I guess, first one, I want to start on the knee and hip market. Obviously, very strong for ZB and for the market. As you noted comps play a part. I was wondering if you could talk about what you think sort of underlying market growth here is, and maybe talk a little bit about procedure growth and where sort of pricing stands as well?

Steve Lichtman :

Great, thanks. And one product on the new side that is yet benefiting you is on a Persona IQ. I was wondering if you could give us your updated thoughts on that, how the limited launch is going and maybe your latest thoughts on the outlook for that product, particularly after the NTAP proposal. Thanks.

Steve Lichtman :

Thank you, Ivan.

Operator:

We'll go next to Shagun Singh with RBC.

Suketu Upadhyay :

Yea. Shagun, it's Suke. Thank you for the question. We definitely saw a very good quarter in the year in the first quarter, and we're expecting that momentum to carry through. And I think you would see that in our rest of year guide coming up to 6% to 7% ex FX. From a quarterly cadence standpoint, I would expect the overall growth rates in each quarter from here to step down from the first quarter. And it really goes back to that one that comp benefit I talked about in the first quarter on Steve's question, but also we have that day rate tailwind of about 100 basis points in the first quarter. So that you should think about, again, the first quarter being the highest fourth quarter being the second highest from a growth perspective and the second and third being a little bit lighter just based on tougher comps and a net day rate headwind. And so that's how you should think about cadence. But definitely, we're lifting our guidance by more than just the first quarter outperformance. We're actually pulling that momentum through the rest of the year as part of that raise. Maybe Bryan, do you want to talk about the underlying growth as we move forward.

Shagun Singh :

And just any color on April trends?

Shagun Singh :

Thank you.

Operator:

We'll go next to Matt Taylor with Jefferies.

Keri Mattox :

We can.

Suketu Upadhyay :

Yeah. I'd say the first thing is that it feels good to be in a position where you have the optionality, right, of deciding where you're going to put that additional growth in the margin or the profitability upside that comes from that. We continue to have a very strong, robust and innovative pipeline. We're going to continue to invest against the business in the right way, in a disciplined way. We're going to continue to be focused and make choices about, continue to expand in faster-growth submarkets that have good profitability profiles. We believe we can do that while still expanding margins over time. And that really comes from the strength and the discipline of the overall team in driving efficiency and mix shift in that investment profile to make sure that we're growing the top line while still growing the bottom line. So we think we can do both over time.

Suketu Upadhyay :

Yeah. Just going back to your point there, remember the comp benefit in Q1 was a key driver beyond underpinning that large overperformance relative to sort of that 4% to 5% we've been talking about. So just want to make sure that we've got good clarity around that. Having said that, as Bryan talked about, we do think and have even more confidence now based on our execution, based on the normalization of markets based on our pipeline, that 4 to 5 is a durable number, and we'd be disappointed again if we weren't able to achieve that in normalized markets. So we think that, that's sustainable over time. And then as we talked about, if that provides profitability upside that can be reinvested back into the business while still driving margin expansion. I mean that's where we want to be, right? That was the story underpinning our margin expansion all the way back to the beginning a few years ago, which is to be able to do this through revenue leverage, and do it in a high-quality way while investing back to the business.

Keri Mattox :

Thanks so much. Operator, can we have next question please?

Vijay Kumar :

Thank you, guys. Congrats on really strong. I'll start here. My first one here, Bryan, there is some debate on perhaps demand being pulled forward here. Do you see this also in market growth as perhaps a catch-up of backlog as against a pull forward of demand and do you feel like with your product portfolio that you have, is Zimmer now gaining share in the market versus the industry?

Suketu Upadhyay :

Yeah. So there are a lot of factors inside the quarter that drove the outsized performance. I talked about year-over-year our original expectations, but we were above that, again, for a number of variables, including less pressure than we expected. We saw some backlog. I talked about, and we were able to navigate supply chain and good commercial execution. I would say backlog was probably the smaller component of the overall change our performance relative to expectations in Q1. We do expect that to continue for the rest of the year. That's built into our guidance as we move forward. And so yeah, it's good to have that a bit of an offset or tailwind relative to some of the other challenges we're seeing in the marketplace.

Suketu Upadhyay :

Yeah. So thanks for the question -- second question here, Vijay. The first thing is I'm just going to step back a little bit. As part of the overall margin expansion story, the Zimmer Biomet, we talked about ability to stabilize gross margins from '22 out for the next few years. Side of that on better revenue growth, we would leverage SG&A, which would give us the platform to then expand margins increase our earnings balance as a company. So that continues to be the strategy and story, and I think you're just seeing that play out here to 2023. Remember, as we came into '23, we talked about 100 basis points roughly of inflationary pressure in '22. That was going to capitalize in our P&L this year. That still remains true. In fact, probably seeing a little bit of additional incremental pressure on some areas of supply chain and inflation. I talked about contract manufacturing supply prices. We're still doing some spot buys for certain raw materials. It's putting a modest amount of incremental pressure. Nothing significant, but something we just want to keep our eyes on for the rest of this year and into 2024. But again, inflation has largely stabilized. So that 100 basis points is definitely coming in year-over-year. But despite that, we said that 22% on gross margins would be relatively in line, excuse me, '23 versus 2022, right? So the teams are going to be able to find a way to offset that incremental headwind and we've largely done that. Now in the first quarter, we did see exceptional growth sequentially, but also year-over-year. There are a number of variables that drive that. But I'd say the three biggest are around volume gains, right, that led us year-over-year but also versus expectation. Saw some FX hedge gains in the quarter and also a pretty pronounced mix benefit, especially given the outsized performance of our large joints versus our S.E.T. and other category and also U.S. versus the rest of the world. So those are kind of the three dynamics that are going on. In the first quarter, we -- as we go through the rest of the year, we still expect those three variables to play a positive impact, but not at the same level, okay? So the way to think about this is gross margin for the rest of the year will step down versus Q1, but still for the overall year will be higher than it was in 2022. So you should think about it on an underlying basis, '23 being still in line with 2022, okay? So gross margin is definitely a tailwind, underlying still consistent with prior year. The operating margin that you're implying off of our EPS guide is I think the directionally right way to think about that, and that upside is coming primarily from gross margin. So those are some of the building blocks that underpin our EPS raise for the year.

Operator:

We'll take our next question from Robbie Marcus with JPMorgan.

Ivan Tornos :

Hey. Thank you, Robbie. Good talking to you this morning. I will probably bucket the performance in two key areas

Bryan Hanson :

Yeah. So maybe just quickly before I get into our focus areas. I'd say in valuations, I still think -- see things as being pretty expensive. I look at assets that are out there today. We're not seeing as much downward pressure on valuations as we certainly were hoping for. Maybe a little better recently, but not as good as we would have expected. And then that, combined with the fact that capital is a little more expensive to come by is not necessarily a great combination. That said, we still think there's opportunities that we're going to try to pursue. We are absolutely in Phase 3 of the transformation. As we said many times, Phase 3 is focused on portfolio transformation using capital to be able to acquire technologies that are attractive to the organization. And we're very focused on this and extremely disciplined, number one, we're not going to look at a target if it's not mission centric. That's very important to the organization. We are a mission-driven organization, and that target needs to move our mission forward. We need to see a path to leadership at some point if we move into that space or we're already in that space. We need to see a WAM accretion, so increasing our weighted average market growth and as a result of that, our revenue growth and then ultimately helping us drive faster EPS growth. So those are the types of deals. And then inside of that, we're looking at enhancing our position through acquisitions in fast growth subcategories of recon, which may not seem super exciting, but the fact is there's some fast growth subcategories that we want to build scale in so that we can grow faster than the overall market in a consistent way. And then we're also going to look to diversify. So looking at acquisitions, which we've already shown in other parts of orthopedics that are faster growth, that's mainly in our set category for us. Eventually looking to diversify outside of orthopedics to diversify outside of electric procedures and give us other forms of opportunity to grow the business again outside of orthopedics. And we would say most likely in the near term, we would look at smaller to midsized deals, and we would kind of quantify that to say about $1 billion in revenue or less would put us in that category. And we would probably stay a little closer to the vest in Orthopedics in the near term. So that's the way we're thinking about it right now. Anything else you want to add to that?

Bryan Hanson :

And what's key about that, we were very disciplined about this. It's who we put phases into the organization transformation. We wanted to make sure that the base business was humming. That the organization was executing just like Ivan spoke to, we have. Our confidence level is very high. So not only do we have the balance sheet to move into that Phase 3 transformation. We now are ready to do it. We have the capability. We have the right team in place and we have the execution of the base business. So we're excited about Phase 3.

Keri Mattox :

Yeah. Operator, can we get the next question in the queue.

Matthew O'Brien :

Thanks for taking the question. Brian and Ivan, you talked a lot about new product introductions. And I think you said 40 through the next three years. How does that compare to the number of products you've introduced over the past three years? And then I know you've got your competitors listening probably don't want to give us too much. But just can you give us a general sense of where those are going to go? Are they going to go into set specifically? And are you going to start touching maybe some areas kind of outside your traditional power alleys, I guess, with those new product introductions.

Matthew O'Brien :

Thank you can hear the enthusiasm there. I appreciate it. A question for Suke. On the pricing side, I think you said down 140 bps in Q1. You had a competitor report last night, and they said more like neutral this year, they're more diversified. I know it's a little different. But are you guys a little bit more on the stream side as far as pricing concessions at this point in the marketplace? Is that part of the strategy? And can pricing actually be a little less of a headwind for you guys over the next maybe year or two versus what you've seen historically? Thanks.

Keri Mattox :

Thanks, Matt. Can we go to the next question, please?

Joanne Wuensch :

Good morning. And very nice quarter. Just summing back just a little bit. I don't think anyone expects these kind of growth rates to go on forever that it's a new normal. But it does give you what I would call, breathability to make some strategic decisions as you get these really strong quarters on a cash flow basis and on a revenue basis. What changes and maybe the way you approach your strategy given it?

Joanne Wuensch :

And then as my follow-up. You did mention that there are some, we'll call it, niggling supply chain issues that are out there. Is there a way to put some color around that, what those issues may be? Are they easing? Or are they staying the same, intensifying -- and just sort of maybe give us a line of sight on what would make those go away.

Bryan Hanson :

Yeah. The other factor that's impacting it is you've got all these negative pressures that Ivan just referenced. And then, of course, our demand is going up pretty substantially. So the demand signal is coming in much higher than we expected in the face of that environment that's pretty challenging. And I just want to -- again, I know I said it in my prepared remarks, but I want to compliment the team. I've been with the commercial teams around the globe. And they're just doing an excellent job. These guys are really fighting 24 hours a day to make sure that we get product to the cases where they're needed. And trust me, it's a lot of work. It's a lot of effort. It's a lot of frustration I'm positive of that, but the team is doing a wonderful job indeed.

Operator:

We'll take our next question from Lawrence Biegelsen with Wells Fargo.

Ivan Tornos :

Thank you. I'll keep it short, so you can continue with Bryan. But first things first, NTAP. New technology add-on payment enables an additional payment of around $850 per additional knee, so up to $1,700 for both knees. The decision kicks in, in October or actually the indication. The approval kicks in, in October '23 and the last for 30 years. So it's pretty material. In terms of -- and by the way, it's not done. So we're going to be requesting these additional payments for the base station and other components. So there may be some additional upside to these numbers that I just quoted. In terms of the percentage of patients, this is for Medicare inpatient. We estimate that to be between 15% to 20%. Relative to the second part of the question, do we think that commercial payers will follow. I think that comes down to the data to the clinical data. As we expand the number of patients that benefit from this technology, we're able to validate the clinical claims that we think that we're going to able to validate, of course, this will become a new standard of care, and this will impact not just Medicare patients, but also commercial patients. So I think you had a follow-up question for Bryan.

Ivan Tornos :

We're in the process of evaluating that, but we have not done that as of right now, no, we don't have any.

Bryan Hanson :

Yeah. I think it's important to go back to the first quarter and just say, hey, that's not indicative of recon market. That is an easy comp for everybody, not just us, but across the board. So you have to look at that outsized performance and kind of haircut it by the comp. But even without that, it's a very hot market, to your point right now. And there are certain things about that, that you might think would be for just a period of time. Backlog recovery should be here for a while. But that will eventually go away. But there are some things associated with Recon that we think are sustainable. And we've talked about these in the past. I don't know that everybody connects with what we're saying. But here's what I see. If I think about market in total, there's a pretty significant technology shift that's occurring in Orthopedics at a very rapid pace. And by the way, we're just really getting started with that technology shift. That has a mixed benefit associated with it. So you don't need one new patient. You just need that technology to come in and that lifts the overall market growth and creates because of the innovation, better pricing stability. So the combination of those two things, in my view, is durable and sustainable to elevate the overall recon market growth, and we're certainly going to take advantage of that. The other benefit that we have in this area for us specifically is that we're investing very disciplined in areas in recon that are faster growth. So our weighted average market growth will be better than the overall market growth in Recon. That creates more sustainability for fast growth and above-market growth for the company. And then outside of that and specific to us, as Suky said, we're doing a much better job on pricing. And that's a big benefit. So if we can stay below our historical average in pricing that does also elevate our Recon business. And then finally, if I think about our innovation, we do believe it's differentiated. So we have an opportunity to also take market share through that innovation. So we really do believe Recon is attractive and sustainable. It's not going to be first quarter type of growth. That's abnormal because of the comp. But we do believe it could be elevated. We're also looking into some patient behavior potential changes that we're seeing through COVID. This is early days. We're kind of analyzing it right now, but the feedback is that there's really three things that may be changing the perspective of a patient on whether they do or don't get a procedure. Which would be positive for us because we think that we're going to make the decision to get the procedure. The first one is the technology advancements are giving people confidence that the outcome of the procedure is going to be good. A lot of people don't get the procedure because they're afraid the procedure is not going to do what they wanted to do. If that fear goes away, you may see more people enter the funnel. The second is that you're getting out of the hospital or the ASC faster. So that turnaround for the procedures 24 hours a lot of times used to be dates. So that also then is less inconvenient for the patient. And then the ASC setting by itself is attractive. I mean we don't want to go to a hospital to get a knee procedure where a bunch of sick people are. The ASC setting is less overwhelming, feel safer. And I think people are more attracted to it. And the final thing is you've got flexwork right now. That's pretty rampant out there. And so people feel more comfortable, more confident rehabbing and also staying in work. So we think those three things really have the opportunity to continue to elevate the recon market. And we're going to continue to look at it and take advantage of it.

Keri Mattox :

Thanks, Larry. I think we have time for one more question in the queue.

Travis Steed :

Hi, thanks for taking questions. I guess I hear you on all the strong momentum to carry through post Q1 and improvement throughout the year. And so maybe given the funky comps on Q1. Maybe think about Q2 in dollars, like hips and knees before the pandemic were typically flat to slightly down. And so I don't know if you think on a dollar basis, Q2 hips and needs would still be flat or if it can actually go up sequentially. Just kind of thinking about the momentum you have going through the year?

Travis Steed :

Okay. Appreciate that clarity. And then I did want some clarification. I think I heard you say gross margin for the full year would still be flat year-over-year. I wanted to make sure I understood why it was still flat every year given the momentum on Q1. And then it looks like you bought back $268 million of stock in the quarter. I don't know if there was any color on that, if that's kind of a new use of capital for you. Thank you.

Travis Steed :

Perfect, thanks so much.

Operator:

Thank you again for participating on in today's conference call. You may now disconnect.

Operator:

Good morning ladies and gentlemen and welcome to the Zimmer Biomet fourth quarter 2022 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, February 3, 2023. Following today’s presentation, there will be a question and answer session. At this time, all participants are in a listen-only mode. If you have a question, please press the star followed by the one on your pushbutton phone. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Chief Communications and Administration Officer. Please go ahead.

Bryan Hanson:

All right, great. Thanks Keri, and thanks to all of you for joining us this morning for the call. We’ve really got three sections for the call this morning. First, I’m going to talk briefly about our fourth quarter performance and spend a few minutes on our teams, what I just define as solid execution, as well as our innovation and drivers for continued strong performance. Then for the second section, as usual, Suke will provide more detail on the quarter itself and very importantly our 2023 guidance and expectations. Then of course, we’ll close things out by addressing any questions that you might have. Before we get started, I wanted to take a minute to thank really the ZB team, just the full ZB team not only for their work in making Q4 another successful quarter but also for their resilience. The innovative thinking and dedication to getting the job done throughout all of 2022, even in the face of very real adversity, there’s no doubt in my mind that this team is the engine that is driving us forward, so again thank you. I can tell you that I’m very proud to be on this journey with you. Now as we turn to Q4 results, know that each and every one of you made the quarter happen, and I can tell you it was a solid quarter. We again saw better than expected growth driven by continued procedure recovery, strong execution, and a solid momentum with our new innovation, and as expected, we also benefited from some favorable comps in the quarter. Inside of this, we saw another positive quarter of year-over-year momentum in large joints with our overall global hip and knee business growing more than 8% and 10% on an ex-FX basis, and our overall set category grew in the high single digits driven by strong performance in our business growth drivers, which as we said before, are supports, CMFT, and upper extremities, as well as the expected tailwind from BBP comps in our trauma business. That said, we are clearly seeing overall market stabilization, but our fourth quarter execution and procedure recovery is still set against a macro backdrop that is challenging and fluid. Foreign currency has improved but remains a challenge and supply, inflation and staffing pressures continue. In fourth quarter, our team was once again able to navigate these challenges, flexing what I would just define as a muscle memory that I think, fortunately or unfortunately, is a bit unique to ZB and has served us well over the past year during 2022. But make no mistake - the challenges are real and they’re ongoing, but regardless of this environment with COVID mainly in the rear view mirror, I have confidence that the ZB team will continue to deliver. Our culture, our strategy, innovation and execution are coalescing right now, driving tangible momentum and importantly belief from the team, and as a result confidence in our business continues to grow. Let me just give a few examples from Q4. In the quarter, we announced the approval of our new cementless knee form factor which is adding to our Persona family and strategically rounding out that portfolio. The first procedures have been completed with this new keel design, and the feedback, as expected, has been very positive. We continue to belief that our cementless knee penetration will grow significantly and that this differentiated, premium product can really accelerate that growth. It’s early days with full launch planned for the middle of the year, but make no mistake, this is a real growth driver for our knee franchise. This launch builds on other recent product launches, like hip insights and our Identity shoulder system introductions, bringing now our total to more than 50 new product launches from 2018 through 2022, and importantly the largest majority of these launches came in markets we see growing in the mid single digits or better. That’s really important, being launched in markets that we see growing in the mid single digits or better. This strategic prioritization and output from our innovation pipeline has helped ZB more than double our vitality index over that time, and very importantly increase our revenue in faster growth markets and sub-markets, which of course drives positive increases in our weighted average market growth. That momentum continues. We expect to launch another 40-plus products between now and the end of 2025, once again with the majority of those launches in 4%-plus growth markets. This will drive further increases in our vitality index and weighted average market growth, and most importantly bring real and meaningful innovation to the patients and customers that we serve. So what I know for sure is that our current momentum, very robust new product pipeline, and our strengthening balance sheet focused on accelerating our portfolio transformation positions ZB well for the future, and as a result, I feel increasingly confident about ZB’s ability to transform our business, drive growth, deliver value, and achieve our mission to alleviate pain and improve the quality of life for people around the world. With that, I’ll turn the call over to Suke for a closer look at Q4 and again our expectations for 2023. Suke?

Keri Mattox:

Thanks Suke. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up so that we can get through as many questions as possible during the call. With that, Operator, may we have the first question, please?

Ryan Zimmerman:

All right, can you hear me okay?

Ryan Zimmerman:

All right, good morning. Thanks for taking the questions, Bryan and Suke. Bryan, maybe starting with guidance, if I think back to third quarter, you were asked whether 4% organic growth was an appropriate way to think about ’23, and at the time you said ’23--you know, you didn’t see ’23 as normal. But then in January, you said we’re in a better place, procedures are kind of normal and we’d expect that to continue in ’23. So as we sit here today with guidance at, you know, 4% constant currency at the midpoint, just help us understand kind of that shift that’s occurred in the fourth quarter that gives you a more optimistic view of the year ahead. Really, the key to my question is, this 4%, do you view that as a floor, do you view that as realistic or aspirational, and just help us kind of characterize where you’re sitting in guidance and the year ahead.

Suketu Upadhyay:

Yes, so Ryan, thank you for the question. Good to be with everyone. First of all, I’d say we had a really good close to the year. We ended top line, bottom line, and free cash flow at the top end of our third quarter guidance, so a really strong finish. There was a number of variables behind that, but the key one is really about execution, so feel really good about the momentum that we have. As we move into 2023, some of the key variables that underpin our guidance, I talked a little bit about them on our--in the scripted remarks. The first is around stabilization related to case cancellations, staffing shortages and things of that nature. We expect that to continue to improve throughout 2023. We’re not completely at normal markets - there are still some underlying dynamics impacting the overall market, but things are definitely improving and we expect that to continue to work through the rest of this year, so procedure recovery for sure in ’23. The other thing we have to think, though, to balance that out is we’re continuing to see supply challenges. We saw those in the fourth quarter. Our supply chain team as well as our commercial teams responded incredibly well to those challenges, but we’re assuming that those supply challenges remain at least through the first half of this year and begin to improve in the second part of this year. But as we put all that together, we’ve got a lot of confidence against our full guidance range. We’re optimistic about where trends are going and, like I said, we’re really excited about where the business is headed. I don’t know, Bryan, if you want to talk a little bit about what we’re seeing so far?

Ryan Zimmerman:

Very helpful. Then if I could ask a follow-up, Suke, the street’s margin expectations going into today for operating margins were essentially flat, maybe up 10 basis points, so really in line with your guidance. But just maybe walk us through the levers that you think are at your disposal here on the operating margin line that could maybe move that up a little bit higher than where we’re starting today.

Keri Mattox:

Ryan, thanks so much for the questions. Katie, can we go to the next one in the queue?

Mike Matson:

Yes, good morning. Thanks for taking my questions. I guess I’ll start with the recon market. It looks like it grew about 8% in 2022, and this is well above the 3% to 4% that we were seeing prior to COVID. What do you think is driving this above-normal growth? It seems like it’s got to be the COVID backlog, because I don’t think pricing has been all that strong, but maybe you could comment on that, and do you think that this type of high single digit market growth can carry into 2023?

Mike Matson:

Great, thank you.

Larry Biegelsen:

Good morning, thanks for taking the question. Congrats on a nice finish to the year here. Suke, FX of negative 1.5%, can you tell us the rate you’re using - that seems a little high, and the EPS flow-through?

Larry Biegelsen:

That’s helpful, and then on SET, it was about 2% in 2022. Can you help us think about the growth that’s embedded in the 4% constant currency at the midpoint and how you’re thinking about the different sub-segments there? Thanks for taking the question.

Larry Biegelsen:

Yes, and certainly for ’23, Bryan.

Larry Biegelsen:

Thank you.

Operator:

We’ll go next to Travis Steed with Bank of America.

Ivan Tornos:

Hey Travis, good morning - Ivan here. I don’t know where they are, we don’t pay attention to where competitors are. We pay attention to where we are in the process. I’ll tell you frankly, I’ll be very surprised if we’re not first to market, given where we are in the development cycle. My expectation remains that we’re going to be ahead. The most important part is not just the speed in the actual launch, it’s the quality, the features and benefits that we have in the platform. Given the mix of developers that we have involved in the project, I do think it’s going to be transformational for our platform, so that would be my answer.

Bryan Hanson:

Sure. Maybe I’ll just start with the Embody thing. That’s a relatively small acquisition. I would probably think more about that as a product launch, so it’s not overly material but it’s a very attractive subspace of sports. As we’re building our that commercial channel, it’s one of those things you really need in your bag to attract talent to that commercial channel, so it’s important to us but I wouldn’t look at that as a significant or a material impact to the year, only in the sense that we’re going to be able to bring that channel in place and get good momentum in sports overall. From an M&A standpoint, yes, we are clearly in Phase 3 of the transformation of the company, which I’ve clearly talked about looks at portfolio transformation, focused on getting more revenue in faster growth markets in its simplest form, and that’s exactly what we’re going to concentrate on. The fact is as our balance sheet continues to strengthen, our flexibility here, strategic flexibility goes up, and we will look at acquiring technologies that make sense from a mission standpoint for the company, that we see a path to leadership in, that we think will increase our weighted average market growth because that’s important for sustainability, and we see a path to be able to increase growth rate and EPS. I’ve said before there are three areas that we’ll look at for acquisitions, mainly kind of smaller to midsized deals, but we’d look at things that would enhance our position in recon in those faster growth sub-markets - that could be robotics, data, or the ASC setting. In orthopedic area diversification, that would be in faster growth sub-segments like sports or CMFT or extremities, and then as you said, those things that might be outside of orthopedics that would help us diversify the business away from elective procedures but also in fast growth markets. All of those things are on the table right now, and again as our balance sheet strengthens, our ability to action that obviously also increases. We’re going to stay disciplined, there’s no question about it, but we are clearly on the hunt for targets that make sense in those ways.

Keri Mattox:

Thanks for the question, Travis. Katie, we can go to the next question in the queue.

Drew Ranieri:

Hi, good morning Bryan and Suke. Thanks for taking the question. Maybe Bryan, just to start, a question for you. You’ve talked about your confidence in the business, and I understand that your thinking is this year’s not normal relative to pre-pandemic times, but it’s been a while since you last discussed long term plans. I’m just curious how you’re thinking about the business longer term and your confidence in gross margin expansion opportunities ahead. Just anything that you could help frame investors with in terms of thinking about the business from a margin or growth perspective.

Suketu Upadhyay:

Yes, I’ll actually level up from margin expansion and talk a bit more about how we think about it, which is earnings power inside the company. Our goal is to drive a leveraged P&L, right, and what do I mean by that? We’re looking for earnings growing faster than revenue, and as we approach those revenue outlooks that Bryan just talked about, we see a very clear path to being able to do that. Now, margin expansion will be a key building block in that, but it’s not the only one, right? Obviously sales leverage and then our ability to continue to leverage our interest rate, as well as tax, there are a number of levers at our disposal to drive that earnings power higher than revenue. Inside of that for margin, we continue to have the same variables that I’ve been talking about for quite some time, and the company has continued to show improvement on all those fronts, whether it’s pricing, manufacturing simplification, cost improvement, SG&A improvement - I mean, just look at our SG&A this year, we’ve been flat year-over-year while driving expansion in a number of areas in commercial infrastructure, so we’ve shown that we can do this. I’m confident we can continue moving forward and start to really see that durable revenue expansion that Bryan talked about. I’m very confident we can drive earnings power faster than revenue.

Ivan Tornos:

I’m happy to take that one, Drew. I’ll tell you, Q4 was solid both from a Rosa installation and purchasing standpoint. I’m not aware of any deal that we’ve lost, whether it’s here in the U.S or OUS relative to capital. We also do small capital deals in the surgical business and those were on track as well, so sequentially Q3 to Q4 of 2022 was solid. Because of comps, obviously, it’s a lower number than a year ago, but so far, so good when it comes to capital, so nothing that I’ve seen so far leads me to believe that we’re going to have a challenge when it comes to robotics.

Keri Mattox:

Thanks for the question, Drew. Katie, can we--oh sorry, the cementless mix, was that part of the question, as a follow-on?

Bryan Hanson:

Can you repeat the question? We didn’t catch it, sorry.

Ivan Tornos:

Yes, I can take that as well. We’ve been in the low teens, as we’ve been disclosing. That’s obviously prior to the launch of Persona OsseoTi, which is now in the market, it’s been around for two weeks. The expectation is that number is going to dramatically increase, and as you know, Drew, in combination with robotics, you’re going to see a collateral effect. You’re going to see increase of cementless mix, you’re going to see an increase of robotics penetration, so we’re already bullish about where we’re going to end at the end of the year. We don’t disclose that externally, but you should expect something fairly aggressive.

Drew Ranieri:

Thank you.

Operator:

We’ll go next to Josh Jennings with Cowen.

Suketu Upadhyay:

Sure, I’ll take that. First of all, thanks for the question, Josh. On pricing, we had a really good fourth quarter. If you look at our disclosure, our press release, you’d actually see that pricing is positive in the fourth quarter. Now, I would say on an underlying basis, pricing had erosion of about 100 to 150 basis points. We benefited by some year-over-year comps due to BBP, and we also had some one-time pull adjustments that were favorable in the quarter that drove us to be positive in the fourth quarter. But on an underlying basis, I would still think about it as 100 to 150 basis points erosion, which is still incredibly good versus our historical average of 200 to 300 basis points. We ended the year at about 150 basis points of erosion, again, so a pretty clear step change to where we’ve been historically. I talked about in my scripted remarks, we expect next year--or this year, I should say, 2023 to be slightly better than that annual average that we had before 2022, so maybe not as good as ’22 but definitely better than where we’ve historically been. There are a number of drivers inside of that. Some of them are transitional, some are more structural in nature. The ones that I’m more excited about are those structural improvements that we’ve made. We’ve made a lot of investments around capabilities, around systems, around analytics. We’ve got better governance, we’ve got better discipline. It’s an area we incent the field force off of now, so there are a host of things that structurally are improving our price performance as we move to 2023, and that’s sticking and part of our guide. If you think about the dynamics between U.S. and EMEA and Asia Pacific, maybe I’ll let Ivan talk a little bit about what he’s seeing.

Josh Jennings:

Thanks for that. Maybe just a follow-up. I think we, at least our team has been tracking share for large joints in the United States more effectively than internationally, but maybe you could just help us understand where you think you had success capturing share in knees and hips in Europe and Asia-Pac, and just where that stands and how you’re thinking about share capture in those markets, those international markets in ’23. Thanks for taking both questions.

Josh Jennings:

Thanks a lot, appreciate it.

Operator:

We’ll go next to Robbie Marcus with JP Morgan.

Bryan Hanson:

Yes, so maybe I’ll start off on a broad-based basis, because there’s really two factors that you talked about, Suke, in being able to drive performance in the fourth quarter. One would be supply challenges alleviating, but also the innovation building, because those are almost two separate things, so we’ll make sure that we talk about both of those, and Ivan, maybe talk about some of the innovation. For us when we think about the supply challenges, it really comes down to material shortages that we’re seeing, that we think are going to get better as we move in through the year, labor shortages that we think are going to get better as we move in through the year, and then sterilization capacity, which everybody is dealing with right now, that I do believe is going to catch up at some point. That’s why we think supply challenges are going to get better, but it’s pretty broad-based. I can’t look at supply challenges and say it’s just this product or that product because it’s in packaging, it’s in resins. Almost everything that we’re dealing with has some form of supply challenges, like sterilization for instance, so I wouldn’t isolate the supply challenges to a product or product set. It’s just a broad-based pressure that we’re feeling. Outside of that, it’s around innovation that’s going to be building, and maybe you can talk to some of the things you’re excited about there.

Suketu Upadhyay:

Yes, and Robbie, just back to your question around supply chain, our comments on Q4 and then 2023, we did see pressure in the fourth quarter around supply chain. I think you’ve heard us comment on that, and not inconsistent with what you’re hearing around the sector, we expect those challenges to continue into 2023. The commentary on Q4, just to provide a little color that we think that our group did a really nice job in navigating that. The situation continues to be dynamic into ’23, but our expectation is that we’re going to continue to navigate that really well.

Bryan Hanson:

Yes, we’re ready now. Again, the balance sheet is moving in a place that allows us to have even more strategic flexibility than we’ve had in the past, which is a good thing. As I’ve said, it’s probably more of those smaller to midsized deals that would be a bit closer to the vest for now, in other words closer to the orthopedic space that we are already in, but we’re ready. We’re definitely ready. Now it comes down to opportunistically finding the right target at the right price and the right returns, but we are ready to move into Phase 3 of the transformation for sure.

Operator:

We’ll go next to Jayson Bedford with Raymond James.

Suketu Upadhyay:

Yes, let me take that one. You heard us correctly. First half will be stronger than the second half from a growth rate perspective, top line ex-FX. First quarter will be the strongest followed by the fourth quarter, and then the second and third quarter. Let me go into a little bit more detail. On the first quarter, that will be our strongest one primarily due to procedural recovery. Remember, we’re comparing against the first quarter of 2022, which had omicron in it, and therefore you’ve got a nice comp benefit. In the fourth quarter, that’s generally from a seasonality perspective from growth, usually one of our strongest quarters, and we’re assuming a nice benefit from the innovation, the momentum of innovation build throughout the year from new products and execution, so that’s why we characterize that as our second-largest quarter. Then inside of that, the second and third quarter will actually have tougher comps because that’s when we began to see some recovery last year relative to omicron. The day rate impact, you’re right - we said 100 basis points for each of Q1 and Q4, that’s a tailwind which will be offset by headwinds in Q2 and Q3, so you’ve got it largely right there.

Suketu Upadhyay:

Yes, we would see this as breakeven to positive in the first 24 months, so it’s very attractive from a margin profile, from an earnings accretion profile. As Bryan said, it’s more or less like a product launch right now, but as that begins to ramp up from a revenue standpoint and begins to cover some of the investments we’re making in a very important sector in sports and extremities, we feel good about the return profile. It meets all of our hurdles from an NPV, IRR, ROIC metric perspective, and so again it’s early days but neutral within the first 24 months.

Keri Mattox:

Jayson, thanks for the questions. Katie, can we go to the next question in the queue?

Kyle Rose:

Great, thank you for taking the questions. Just wondered if--apologies if I missed it, I wonder if you could give us a little more insight into where you’re at from an inflationary perspective into 2023. I think previously you talked about being at the higher end of the range of 50 to 100 BPs. I just wanted to see if that was the way to think about the inflationary impact in the P&L in ’23, and then maybe update us on the actual headwinds you did see in 2022.

Kyle Rose:

Great, that’s helpful. Then overall in the commercial channel, you talked historically about making investments in specialized sales forces and investing alongside your distributors to support some of the higher growth market segments. Just wondered, can you help us understand how these initiatives are trending, and then any potential updates in where you stand from a distributor versus a direct model across some of those higher growth segments?

Kyle Rose:

Thank you very much.

Operator:

We’ll take our next question from Chris Pasquale with Nephron.

Ivan Tornos:

Yes, I’ll keep it short and sweet here. In any year, we expect to do no less than 300 installations, and we exceeded that expectation across all three regions. As you think about the future, ’23, ’24 and whatnot, that’s frankly the point of entry. I would be disappointed, maybe even jobless if we didn’t exceed that number, given the new applications in shoulder, next generation hip, and other technologies coming in, but we’re so far exceeding those expectations.

Bryan Hanson:

That is the question that I think we’re all grappling with. There’s clearly backlog. You might call it longer waiting lists, backlog - you can define it the way you want, but the fact is there’s pent-up demand for these procedures. The rate limiting factor is really capacity at the provider level. You could--because even it’s a supply challenged environment, maybe even capacity constraints the company level, but I think the bigger capacity constraint at this point is at the provider level. We actually had a third party run this analysis for us because we really wanted to get in tune to what is the size of the backlog based on the third party’s view, and then also when they believe the backlog would start coming through and at what pace. What we found in that is that, number one, they came back with there is a very sizeable backlog in orthopedics - actually, their analysis came back smaller than what we expected, but still very material. They said that when we start to work through it, it would be constrained again because of the capacity, and it was a relatively minor impact, a tailwind for sure but impact to the overall market growth, just given the capacity constraints you’re going to have in the provider for some period of time. The good news about that, I guess, is when we start to digest the backlog, it will come as a positive tailwind, likely for years. It wouldn’t be overly material in any given year, but it would be a tailwind for multiple years, so that’s the analysis that we have and we just--again, just doing the math, we don’t believe that we’re into that backlog yet. Hopefully we’ll see some of that come in 2023, but we’re not depending on that when you look at the center of our guidance range.

Operator:

We’ll take our next question from Rick Wise with Stifel.

Bryan Hanson:

Yes.

Suketu Upadhyay:

That’s a great question.

Suketu Upadhyay:

Yes, so we’re seeing China and COVID surges clearly start to stabilize in the first quarter. It was pretty acute there in the fourth quarter. Fortunately, we were able to offset it with strength in other markets, so overall China wasn’t as big a factor in the fourth quarter and we don’t see it as a material mover, at least from a COVID standpoint, in the first quarter. We do see China as a very attractive market for overall growth in ’23 and beyond, especially now that we’ve moved through all of the pain and noise of BBP, which is now sunsetting behind us, so really feeling good about where that market is, and now that team can start to position towards not only growing the business but start to really work on the margin structure of China as a whole, coming out of BBP. So again, feel very optimistic about where we are there. Yes, what a way to end a call on a good quarter and good outlook with shared services, but I love your ambition and I’m going to share that with the leadership team that we’ve got to move faster, so thanks for the question.

Bryan Hanson:

Just a couple thoughts. First of all, thanks for joining us this morning. I would say I hope it’s clear that the Phase 1 and Phase 2 of the transformation of this company are well on track and we’re feeling very good about where we stand. I can tell you because of those two phases, I feel that we’ll at least take our fair share of the markets that we play in, and certainly hope to do more than that. Now we’re moving onto Phase 3, and that really is the portfolio transformation of our company. We’re looking at changing the mix of our revenue to make sure that we have more of that mix in high growth markets, and we’re going to do that in three ways, which is kind of a combination of Phase 2/Phase 3. The first one is innovation - we’re going to invest in innovation in the right areas, in faster growth markets so that we build more revenue through that innovation in those attractive markets. It gives you real time revenue growth but it also makes it sustainable by increasing the weighted average market growth of the company. The second is investment in the commercial channel. You’ve got to have the commercial channel and capability to drive that innovation and make it real. The third is portfolio--active portfolio management, really looking at moving things into the organization and out of the organization that can drive our weighted average market growth rate up, so we are clearly in that phase. We have a better balance sheet right now that we’re going to be able to leverage in that part of the transformation, and make no mistake, we feel very confident about Phase 1, Phase 2, and now Phase 3 given that balance sheet freedom that we’re going to have going forward. With that, I think we’ll go ahead and end the call.

Operator:

Thank you again for participating in today’s conference call. You may now disconnect.

Operator:

Good morning, ladies and gentlemen and welcome to the Zimmer Biomet Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 2, 2022. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Keri Mattox, Senior Vice President, Chief Communications and Administration Officer. Please, go ahead.

Bryan Hanson:

Thanks, Keri, and thanks for joining us for the call this morning. We've got three sections of the call. First, I'm going to briefly talk about our Q3 performance and really the momentum that we saw in Q3 that has allowed us to increase our outlook for the year and doing so, even in the face of some pretty meaningful macro pressures that we're certainly still facing. I also want to spend time talking about our ZB innovation. This is clearly the driver of our continued strong performance and will be the driver as we go forward. And for the second section, Suky will provide more detail on the quarter, but probably more importantly, our 2022 guidance update. And then we'll close things out by addressing any questions you might have. Before I get started on Q3, I just want to make sure that I take a minute to say thank you. Thank you to the ZB team members that I know are listening. I know a lot of you listen to the call and I appreciate that. Your continued strong performance is -- it's just built on day-in and day-out execution. You're just focused on driving results. And I know you're showing up and facing some very, very real macro challenges right now and I appreciate it. The fact is I'm just really proud that even in the face of these challenges, you're delivering results for our customers, you're delivering results for our patients and for our shareholders and you're moving the mission of this company forward every single day. I know it's not easy but I promise you it is much appreciated. Okay. So turning to the third quarter. Although, the beginning of the quarter was a bit choppy when it comes to procedure cancellations, we did see very nice improvement throughout the quarter and we finished strong. And that execution and recovery occurred in all of our regions, but especially in our OUS regions, with both EMEA and APAC performing better than our expectations. Inside of this, we saw good momentum in our large joints business, with our knee franchise growing in the high single digits and our hip business growing just above 10%. And as you've seen, this was somewhat offset by the telegraphed and expected pressure in our S.E.T. business and our other category. Now, although, we did see the strength in the quarter, we continue to face significant challenges across foreign currency, supply, inflation and staffing. That said, the team has been able to navigate these challenges and mitigate their impact. You can't completely eliminate them, but they've certainly mitigated their impact. And they've done this through operational and commercial discipline, as well as driving our innovation in the field. And as a result, our confidence continues to grow and you see that reflected in our updated financial guidance. In short, our underlying business is clearly strong and I truly do believe it's getting stronger. Just as an example, when we look at the quarter, we announced a first-of-its-kind three-year agreement with Hospital for Special Surgery, or HSS. The partnership creates HSS/Zimmer Biomet Innovation Center for Artificial Intelligence in Robotic Joint Replacement. We're focused here with HSS to develop new tools that will be powered by AI to provide data-driven recommendations or insights to surgeons for robotic-assisted joint surgery. It's really -- it's a big deal. It's -- we're clearly very excited about it. We really do believe this is a future of medicine opportunity and we're excited to be involved with HSS. In our Q3, our new product pipeline continue to deliver as well. While it's early, we are definitely excited about the launch of HipInsight. This is the first FDA-cleared mixed-reality navigation system for total hip replacement. HipInsight is the latest addition to our OptiVu portfolio and it further expands our ZBEdge suite of solutions. Additionally, we announced the FDA clearance of our Identity Shoulder System. This is a technology that has proprietary capability of aligning each surgeon's approach to an individual patient's anatomy. All of this with the goal first and foremost of alleviating pain, but also optimizing the range of motion for that patient. And I got to tell you our existing product portfolio kept up the momentum as well. Demand continues for ROSA both in knee and hip. Persona Revision traction in the US remained strong and our limited launch of Persona iQ is driving positive feedback and interest and we're focused on aggressive data collection, so that we can establish clinical use benefits. And we expect to build on this momentum with new product launches in the coming months including as we've talked about our new Persona cementless form factor additional launches in our S.E.T. category and a hip product launch that we're excited about in early 2023. And I can tell you that all of these product innovations coupled with our ongoing efforts to reshape our business and accelerate ZB's transformation position us very well for future growth. We continue to strive to be a best and preferred place to work for our team members and we continue to strive to be a top quartile performer for our shareholders and to be a trusted partner to all of our stakeholders, but in particular our customers and our patients. Just in summary we're navigating and really managing through some very real macro headwinds that are definitely muting our growth. But we're also seeing an offset via COVID recovery very strong execution from the team and meaningful innovation in the field and against that backdrop our team continues to execute our strategy and I feel increasingly confident about our future as a company. And with that I'm going to turn it to Suky to talk more in depth about Q3 and give you an outlook for 2022 guidance. Okay Suky.

Keri Mattox:

Thanks Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up, so that we can get through as many questions as possible during the call. With that, operator may we have the first question please?

Shagun Singh:

Great. Thank you so much for taking the question and congratulations on a strong print here despite a pretty challenging environment. So Bryan and Suky, I was just wondering if you can elaborate a little bit more on 2023. Just on the top-line how should we think about the durability of growth? I think last quarter you talked about a 4% floor, but it looks like you have stronger momentum going into next year with a 6% exit rate. And then on margins given the incremental impact you called out from FX and inflation, do you still believe you can drive operating margin expansion next year, or is that going to be more challenging? And then I have a follow-up.

Suky Upadhyay:

Yes. Thanks, Bryan. Good morning, Shagun thanks for the question. On the margin side you're right. The macro environment has become incrementally more challenging here in the back half than we originally assumed. That's been reflected in our rest-of-year outlook. And despite those challenges we've been able to raise the back end of our year. So we're pretty proud of that and the team is doing a great job. As that rolls into next year, it has become incrementally more challenging, but we still see a path to maintaining or slightly improving our operating margin versus 2022, despite some of these headwinds. And that assumes current market conditions. If things erode or if things improve, we'll revisit that. But where we are today and assume stability on some of those headwinds, that's how we're thinking about 2023. The biggest move for us really has been around FX. So as you know, we increased our full year outlook by 50 basis points to 550. That means we're exiting the year at 600 basis points of headwind on revenue. That translates to about 300 basis points of headwind into next year. So that's got a pretty significant impact on the top line in absolute dollars. And of course there's a flow-through to margin and to earnings on that. But despite that pretty big drag again, we believe there is a pathway and we're committed to maintaining or growing margins into next year. The other major area you touched on was inflation. Our previous estimate was that we'd have 50 to 100 basis points capitalized out of 2022 into 2023. We're now at the top end of that but still within our overall purview that we gave earlier this year. The real driver of that increase has been less about supply and raw material costs and less about wage and inflation, which were the bigger areas and it's more about higher freight costs right now trending higher as well as energy costs, especially in Europe. But again, at least on the bigger components of that we're starting to see some stabilization. So hopefully, that's a positive light towards the end of the tunnel. And then interest expense. Again just recognizing the higher interest rate environment we're in, we would expect overall interest expense to be modestly higher next year so just making sure that folks have that as an update to their model. But look, we're continuing to address our efficiency programs. We're going deeper and faster. I really want to commend the overall ZB team for embracing these challenges and hitting them head on. They've done a fantastic job. And again just based on that execution and assuming current market conditions hold into 2023, we think we've got a pathway to maintain or slightly improved.

Bryan Hanson:

Yes. Thanks. And maybe I'll start off with that, and then Ivan, if you want to weight in feel free to do so. We clearly still see the ASC as an attractive submarket of our recon business and also clearly other parts of our S.E.T. business. It's one of the faster-growth submarkets and we're clearly increasing our focus and spend in that area. And we're doing it in a couple of ways. Number one, we're putting infrastructure in place. We've got dedicated commercial teams that focus only on the ASC. And that's important because you've got to have contracting prowess in that space and we've done that over the last couple of years and really getting good traction as a result of it. Additionally, we're making sure that we scale up in the product categories that the ASC is looking for. We wouldn't have purchased a booms and light company, if we didn't want to have that infrastructure for the ASC. Not to take anything away from booms and lights but it's not an area that we would have waited into, if it wouldn't have given us scale in the ASC marketplace. Same thing in sports acquisitions that we've done in other parts of our business. So we're really doing it two ways

Shagun Singh:

Thank you.

Operator:

Thank you. We'll take Steven Lichtman with Oppenheimer & Company.

Bryan Hanson:

Yes. I'll probably pass the -- just that its product related more than anything I'll probably pass it to Ivan to speak to the Hip performance. And also, Ivan maybe speak to some of the things that without too much specificity that we're predicting in the future to help the Hip business as well.

Steven Lichtman:

Great. Thanks Ivan. And then Suky just a follow-up, thanks for the color on the 2023 inflationary headwinds. Just wondering if you could talk about offsets. You mentioned some of the internal efficiency programs. But what about on pricing, are you seeing any progress on pricing initiatives? Any color you can provide on that and what potential impact they may -- that might have on the offset side?

Steven Lichtman:

Got it. Thanks, Suky.

Operator:

We'll take our next caller from Vijay Kumar with Evercore ISI.

Bryan Hanson:

Yes. I think you've kind of laid them out already. When I think about the go-forward-looking revenue growth you're going to have puts and takes. The things that we know are going to be positive for our business will absolutely be innovation. So, when I think about the calculus on revenue growth going forward, there's no question that we've included innovation. We're spending a lot of money and a lot of focus in research and development. We're bringing great products to the market and we absolutely expect that to buoy our revenue growth. That's part of reason why we gain from a 0% growth business in 2017, 2018, and now we're predicting we can get to 4%. So, that's been a big part of that movement. The execution of our team is another part of it. There's no question. I know that it's hard to put a dollar amount on momentum in an organization, but momentum does matter and we have it right now. And the other big one is that weighted average market growth. We have moved our weighted average market growth north during the last five years. So, as we get closer for our weighted average market growth to that 4%. It gives us more confidence that without share taking, we can deliver the 4% in a consistent way. Now, certainly we wouldn't stop there. Active portfolio management is Phase 3 of this organization and we're going to have more financial flexibility going forward. We're going to continue to change that weighted average market growth rate up. But getting to the 4% to start is a good thing. The negatives against that because you're saying okay we've got all these positive and why isn't it more than that? We still have real challenges around supply and that is a distractor for growing your business. And so we're going to have to manage through that as we get through 2023. We believe at least through the middle of 2023 potentially beyond. And even though staffing in our capacity isn't as acute as it was before, it's no question that this is going to be a headwind for us going forward. And of course we have to calculate some potential risk associated with the recession if that does occur. So, I think it's all those things combined in concert with this concept of having some backlog that we're hoping we can count on in 2023. But as of yet, we haven't seen it. Even Q3 which was a great quarter, we still don't believe backlog was consumed. We certainly might have had some backlog in certain areas consumed, but it was offset by some of these negative headwinds that we actually think backlog built in Q3. So, those are the variables that we're looking at as we think about 2023 and beyond.

Suky Upadhyay:

Yes, Vijay we did -- we have posted a really good nine months here. I would say there is some timing benefit in the third quarter that will reverse in the fourth quarter. It has to do with some payments around VBP as well as some tax payments that normally would fall in the third quarter but now land in the fourth quarter. All-in-all, I think you nailed it. We're having a pretty good year in cash and we feel confident in our overall range for this year.

Suky Upadhyay:

Yes, thank you.

Operator:

We'll take our next question from Travis Steed with Bank of America.

Suky Upadhyay:

Sure. So, Bryan I'll go ahead and take those. So, the one thing to remember on the EPS line is I talked about 300 basis points of headwind on revenue into next year. And so as Bryan thinks -- talks about that 4% on an ex-FX basis, you need to take into consideration the foreign currency headwind that matriculates into next year. So, having said that, with the margins kind of being relatively in line maybe slightly up and with interest expense up year-over-year, which I'll talk about in a moment, you would expect on a reported basis to see EPS kind of travel in line with overall reported revenue. So, hopefully that gives you a little bit more color. Again that's our best view right now. Things can obviously change between now and when we finally give guidance for 2023 in the first quarter of next year. On your question related to interest expense, you're right we are on face value in fixed debt, but we also do and have done some previous strategies to swap out our fixed to floating. So it's really the interest burden on those swaps that create that higher interest expense.

Bryan Hanson:

Yes. So first of all, I want to be careful what I say because it's a pretty competitive space right now. We don't want to telegraph too much what we want to do. But clearly, we as an organization are squarely in the Phase 3 of our transformation. And we Travis have been very clear that Phase 3 is all around active portfolio management to transform the portfolio, shifting toward more WAMGR accretive markets and diversifying our business. So that's kind of a broad-based way of looking at what Phase 3 is all about for our company. And we've already made some changes here. I know you're saying there's been smaller acquisitions that we've done, but we haven't had as much firepower obviously. But we have spun businesses out as well that have helped in this strategy. That said, COVID is getting behind us. There's no question. And as a result just exactly the way you're saying we would expect to have more strategic flexibility going forward. What I'd probably be willing to say and maybe not give any more detail is that we're going to look at vetting assets across a few metrics, outside of the typical financial metrics. We look at mission centricity. We've got to make sure that we're acquiring something that can move the mission. We want absolutely something that can drive WAMGR accretion for our organization and it's going to translate into revenue growth that's accretive. Because just because you're in a fast-growth market, if you don't have a good asset you don't necessarily get the growth rate out of it and it's got to accelerate our EPS growth over time because that's kind of the vetting. And then the categories that we're going to look at would be first and foremost, probably closest to the best would be vast growth subcategories of recon. So that would be things like data robotics or building more scale in the ASC setting like we were talking about just a minute ago. It would be faster growth areas outside of recon, but still in orthopedics and that would be mainly in our S.E.T. category. So that diversifies our business away from just recon in those faster-growth subcategories of orthopedics. And then to your point attractive white spaces that are completely out of orthopedics less selective in nature and provide more diversification again out of orthopedics. I don't want to say which of those we're going to prioritize, but just know that all of those vectors are on the table and we're looking at a number of assets in each of those categories.

Bryan Hanson:

Absolutely.

Operator:

We'll take our next question from Robbie Marcus with JPMorgan.

Bryan Hanson:

Yeah. I'll make some comments and then Ivan can correct anything I say incorrectly. But clearly capital is not as big a component for us. So I almost don't like talking about the capital market because I don't want to say anything that's going to hurt those businesses that depend more on the capital market. But from our perspective, where we do focus on it, it hasn't been a major barrier for us. Again, we really focus on from a ROSA perspective trying to place through agreements that allow for payment for the ROSA system through commitments and increased business. Consider a leasing arrangement, but the leasing payment is actually a commitment of business. That is what we focus on and we did more of those in the quarter and that's a good thing for our business. But we do have opportunities to continue to sell and we do not feel at this point anyway serious constraints in the capital market when it comes to ROSA. But maybe Ivan, if you've got any further color to provide around that you can help as well.

Robbie Marcus:

Great. Thanks. Maybe as a follow-up, I think Bryan you said, last quarter extremities grew double digits. This – a little less visibility in this line item. Anything you could give us on extremities? I know, sports medicine has the HA reimbursement changes, so that there's some pressure there. But any color on what we're seeing in extremities versus trauma and sports and how that might shake out US, APAC, EMEA? Thanks.

Robbie Marcus:

Appreciate it. Thank you.

Keri Mattox:

Thanks, Robbie. Operator, can we go to the next question in the queue, please?

Joanne Wuensch:

Good morning, and thank you so much for taking the question. I wonder, if you can step back a little bit and talk about the orthopedics markets, what you're viewing as maybe changes or no changes in the competitive landscape maybe something in physician practices pricing, or generally, what you think of as sort of the state of the union? Thanks.

Ivan Tornos:

Maybe quickly here Bryan I'll just recap some of what you said in four bullet points here. Number one, as it was mentioned earlier, the shift of care on to the ASC and frankly in some cases something getting on a home like physical therapy is real. No longer it's all about the inpatient unit, there's a real shift of care again to ASC, and then post-surgery some of the stuff getting down a home. So that's number one. Number two, clearly the decision maker is not just the physician or the provider. The patient plays a role that's why we're excited the best technologies that we're launching that directly target consumers, patients. So it's not only just the physician and provider, it's basically physician, provider and payer. Some of the data and the technology that Bryan is talking about becomes really a powerful tool for us to engage payers in demonstrating that we are not just a solid clinical value proposition, but also an economic value proposition. Number three, and I think this is aligned with the pricing story there is an emphasis in discussing value just as much as pricing. Some of the discussions that we're having today around length of stay, reducing length of stay, some of the discussions we're having around lowering readmission rates, increasing patient satisfaction, having a shorter surgery with the same outcomes were not discussions that were happening maybe three years ago and they're happening right now. And then number four, the role of innovation. I've been in med-tech for 28 years. I was working in orthopedics 15 years ago. When I rejoined or when I joined orthopedics again four years ago, I would say that things were pretty much the same, net of a couple of robotic introductions. Over the last three, four years we've seen a lot of innovation coming to orthopedics in mixed reality, in infection management, in bringing machine learning, really thinking about the entire organization [ph]. So I would say those are the four key things that we pay attention to and we think we'll have a competitive advantage in those areas.

Operator:

We'll take our next question from Richard Newitter with Truist Securities.

Bryan Hanson:

Yeah. It's -- make sure that I understand your question specifically. But when I think about the innovation that we're bringing -- and not just us by the way. That's what I like about it there's momentum across the entire orthopedic space and all the major players moving in this direction. I think in certain areas we're ahead. But make no mistake everyone is moving in this direction. So if I just take a couple of examples and hopefully this will answer the question that you're asking. Think about mymobility for instance, which is one of the first launches that we had in data collection, leveraging the relationship that we have with Apple. This uses an Apple Watch to collect data and then ultimately uses machine learning to be able to do some predictive analysis. And we're actually now looking at that through an opportunity to tell a surgeon and the patient when they're falling out of the norm for recovery. So that's the type of thing that we're able to do. And we do sell that. So there's an opportunity to monetize that application. So it's not just giving it to them and getting pull-through of implants, it certainly is getting the pull-through of implants because you get that natural gravitational pull once you bring technology in, but there's also a discrete way of making money or monetizing that mymobility application. So that's one example. Another example is robotics. I mean, robotics comes in you get that natural gravitational pull for competitive surgeons to come over, but you also get an uplift every time they use a robotic procedure because you get the uptick in disposable value. So that procedure now cost more for the account to do, but you get the benefit of robotics inside of that. So it's a fair trade. Those are two examples of the way technology is leaning in, in that way. Same thing with Persona IQ. That's the first smart implant that will be on the market. It's collecting data in a very compliant way, because you can't take it off. They're nonstop for the patient. And that will also drive a premium in the marketplace. So if you're going to use Persona IQ, you're going to pay discretely for that that sensor capability. And that's the way we're monetizing this. So you could see a combination of things where we monetize the technology or sometimes it just brings value that is unique to us that would allow us to pull in additional implants. But it's some combination of those two things. And again, Ivan, if you wanted to add anything else or Suky or anybody else.

Richard Newitter:

Great. And just on Persona IQ it seems like the infection prevention capability or the ability to detect the infection before it occurs, that's probably going to be the killer app for a product like that that will allow you to get that kind of premium. I guess, what should we think of timelines on the data collection to be able to get an approval for infection prevention indication?