Q3 2019 Earnings Call

Only by by enhancing and Suky Upadhyay.

We started the I'd like to remind you that our comments. During this call will include forward looking statements.

Actual results may differ materially from those indicated by forward looking statements due to a variety of risks.

And uncertainties. Please note that we assume no obligation to update these forward looking statements, even if actual results for future expectations change materially.

Please refer to our FCC filings for a detailed discussion of these risks and uncertainties. In addition to the inherent limitations of such forward looking statements.

Also the discussion on this call will include certain non-GAAP financial measures reconciliation of these measures to the most directly comparable GAAP financial measures is included within the earnings release, founded our website and Zimmer Biomet Dot com well that I'll now turn on called Fine Brian .

Hi, Thanks, cool and I want to say again, thanks for joining the call today, we delivered as probably everyone has seen already with the press release pretty strong quarter for Zimmer Biomet third quarter.

Other than expected revenue growth driven by improved performance across all of our geography and across all of our business.

Our team remains focused and engaged in our key priorities and we continue to make progress in each of these critical areas.

Although there was clearly still much to be accomplished I'm pleased with the teams momentum thus far.

In terms of supply, we've been able to meet customer demand and improve service level, which further enhances the confidence of our sales teams around the world putting them back on the often.

Plenty of opportunity to decrease the complexity and increase the efficiency of our supply chain, but again.

15 credit I'm happy with the progress thus far.

Our quality remediation efforts at the worst saw North campus remain on track. We continue to keep you updated on our progress and are highly confident in our path to full remediation.

It was still further confidence in our progress we have engaged independent third parties to conduct comprehensive mock audits for remediation work and the feedback has been positive. Additionally, we're seeing the benefits of our global rollout of the quality begins with me program, which is focused on driving a salad and sustainable quality culture.

This program supporting environment of empowerment, and accountability for all of our manufacturing team members, ensuring that every individual deals personal ownership of the quality process.

Progress, we're making quad remediation is also but then to free up engineering time and a lot of many of these R&D team members to shift back towards innovation.

This gives us increased confidence in the robustness of our technology pipeline as we move into 2020 and beyond.

Our innovation focus is also shifted.

Being much more aggressively towards enabling technology around the implant such as robotics, many robotics informatics and operating room efficiency.

Although the implant will always be at the center of what we do our goal is to provide a complete ecosystem that is both customer and patient centric to this end. We're excited about recent launches like Rossini My mobility developed in partnership with Apple Our Walter me robotic platform. The signature one planner for upper extremities and increased focus on.

Our efficient care pre surgical planning process.

Relative to mission and culture, we've continued to focus on communicating and driving the mission of the organization as it is the primary reason, we all wake up in the morning to come to work.

Every team member is essential to driving our mission, which is to alleviate pain and improve the quality of life for people around the world and our team members take pride in knowing that our products and proof of patients like every 10 seconds 24 hours a day seven days a week.

We're also relentlessly focused on driving a winning culture.

Recently rolled out our culture promises these promises of shaping tomorrow, igniting collaboration and focusing on when our inspiring and actionable each comprises a set of practices to empower the team at every level on the organization to collaborate and innovate with an emphasis on the future, while working with clarity and folks.

Just to maximize or impact today and to deliver on our commitments.

Speaking of delivering on commitments, let's turn to third quarter results.

All three of our geography performed well with strong performance in Asia Pacific and EMEA and improving performance in the America.

Relative to our businesses, we're pleased with the performance of the knee franchise this quarter.

Solid results across all three regions I know that everyone is interested in hearing more about rosen need so to give you a bit more color rose a capital sales were strong in the quarter and accelerated from Q2.

Rather unique customer pipeline continues to grow and is very strong and the feedback remains extremely positive.

To provide some context around roses contribution to the third quarter global knee number Rosa with a strong contributor to the quarter more than half of the overall growth came from other new products inside a knee and our base ne business.

Even though we're early in the process. The team is very pleased with the Rosen launch and the overall momentum we're seeing in the robotics market. In addition, we recently received FDA clearance for the persona revision system now rounding out our flagship persona personalizing the offering.

Our Sep business delivered solid growth in the quarter.

Again fueled by growing confidence from the Salesforce due to supply stability.

Product launches across these businesses increased traction in the specialized sales channel and a much more intense operating mechanism focused on driving results in this space.

We'll continue to prioritize innovation and accelerate the expansion and investment in our specialized sales channel in order to further increase our focus in traction in these higher growth Sep market.

I'd like to congratulate our dental team for another positive momentum quarter. The team is focused on strategic priorities execution and culture, along with targeted investment in key areas continue to drive the business forward, we still have much to prove in this business, but I'm happy with the current momentum and the performance of the dental team.

Relative to our spine in that business, although we did see improvement from Q2, we continued to perform below market in the quarter.

As we have previously stated we don't expect to see real momentum shifting in this business until sometime in 2020.

The primary drivers for this shift will be working through the final steps of our channel consolidation in spine and leveraging our new product pipeline, including the recent limited launch of the trellis titanium threed printed interbody system, the upcoming launch of robotics with Rosa spine and Walter and the recently approved tether system.

Actually the FDA approval of the tether innovative treatment for young patients with scoliosis was a highlight in the quarter for the spine business.

This approval March the culmination of multiple years of cooperation between the FDA and Zimmer Biomet and represents the first approval for humanitarian use device in spinal pediatrics in the last 15 years.

So as you can see we're making steady progress shaping the future of this organization. We have built a strong foundation and with every quarter. We have continued to reduce the risk in the business and further our progress toward reshaping Zimmer biomet for sustained success.

And with that I'll turn it to 50 to get further into the numbers in the quarter.

Thanks, Brian to reiterate we had solid revenue growth in the quarter, but also saw strength in earnings and cash flow generation I'll provide some highlights on our third quarter financial results and unless otherwise noted the numbers I'll be discussing our on a constant currency basis.

Net sales totaled $1.9 billion in the quarter.

Ported increase of 3% over the prior year and an increase of 3.9% excluding the impact of foreign currency changes.

As we previously noted the first half headwinds from billing days.

Offset in the third quarter and there's no material impact on our growth rate from billing days differences for the full year.

During the quarter with solid results across all geographic regions, Our Asia Pacific team delivered strong performance with 8.8% sales growth driven by continued strength in emerging markets and across our ne and se key segments.

Our Europe Middle East in Africa team also had strong quarter with 4.8% revenue growth led by FCC and improvements across our knee and hip franchises.

Developed and emerging markets within EMEA, both performed well get a healthy market growth and as a result of some tender wins.

The Americas increased 2.3%, reflecting improved performance across most of our product category.

And by new product introductions supply stability and commercial execution.

Our knee franchise grew 4.9% with solid performance across all geographic region.

It's grew 4.3% and our Sep and dental businesses grew 6.2% and 3% respectively.

By CMS revenues decreased 1.3% in the quarter.

As it relates to revenue in the fourth quarter foreign exchange rates have been a headwind since our last guidance update and we now expect the impact of foreign exchange on a full year to be closer to the high end of our range.

Also while revenue growth may be lumpy from quarter to quarter, our continued supply stabilization improved execution and new product introductions give us greater confidence in our ability to deliver consistent constant currency sales growth in line with our weighted average market growth of 2% to 3%.

Moving to the income statement, we reported GAAP diluted earnings per share for the quarter of $2 an eight cents.

After accounting for special items, our adjusted diluted earnings per share or $1.77 cents.

Reconciliation of reported earnings per share to adjusted earnings per share is included in this mornings press release.

Adjusted gross margin in the quarter was 72.4% and improvement of about 80 basis points from the prior year.

It was aided by a number of items, including medical device tax refund that we referenced last quarter.

Gross margin in the quarter was broadly in line with the first half of 2019, despite seasonally lower revenues.

Adjusted operating expenses in the third quarter were higher than same period last year, driven by increased investments across R&D and commercialization efforts, including spending on new product launches and Salesforce expansion.

Adjusted operating margin was 26.5% for the quarter about 90 basis points ahead of prior year, driven by gross margin and the adjusted effective tax rate was 16.5%.

All of this translated in to 80 plus percent growth in adjusted earnings per share demonstrating good earnings leverage on revenue.

Operating cash flow accelerate in the quarter to $578 million and our free cash flow was $425 million.

During the quarter, we paid $49 million and dividends and pay down just over $300 million debt as we continue to make progress in de levering the balance sheet.

Relative to our capital structure in light of upcoming maturities and market conditions, We may look to opportunistically refinanced debt to optimize our liquidity profile and cost of capital.

Before I turn it over to Brian I'd like to reiterate that we're pleased with our performance in the quarter and our previous guidance remains unchanged and with that I'll turn the call back over to Brian .

Hi, Thanks Ricky.

Before we move into Q in a I also want to take time said it is clear to me and I think really to the team here that our team members in general have a really high energy right now the engagement is high and the focus to win is there and I'm confident as a result of that it's going to allow us to move forward and progress in the right manner.

This is one of the primary reasons why our confidence level is very high around consistently and durably delivering 2% to 3% topline growth through 2020.

And for many other reasons and I want to make sure I'm clear on this overtime I also see a pathway for acceleration beyond 2% to 3% without the need for M&A.

We'll take time, but the pathways clear to this team of course, our goal at the right time in the right spaces and for the right returns is to further enhance this organic revenue growth with inorganic activity focused on increasing our growth rate and increasing our weighted average market growth rate.

And with that Im going to turn it back to call and weekend jump into the question.

Thanks, Brian before we start to Q and a session I want to remind you to please limit yourself to a single question with a brief follow up is needed feel free to put yourself back in queue. Afterwards, I promise, we'll get through his many questions as we possibly can with that operator can we please have the first question.

Thank you, Sir ladies and gentlemen at this time, we will now begin the question and answer session. One moment. Please for the first question.

Our next question comes from Larry Keusch with Raymond James.

Thank you good morning, everyone.

Brian just given the announcement the right acquisition by Stryker yesterday.

You talk a little bit about the positioning of zimmers extremity business and maybe touch on the growth in investment strategy there.

Yes, absolutely.

It's not surprising to me that we saw that that activity out in the market, let's face. It when we think about our Sep businesses. We've been talking in the very beginning this would be an area of concentration for us for the most part we have lower penetrations in these markets are faster growth than in our core.

Large joints markets and as a result of that they're attractive.

No not surprised to see others move in that direction as well we're going to continue our focus is well in fact is if I look at the CTG business overall for the quarter. It was pretty good performance for us and to be honest that needs to continue we need to continue to see at least market growth and not the high end market growth in our sctv.

Businesses to be that'll allow us to get scale in the space in these spaces and ultimately as a result of that increase our weighted average market grows. So you will absolutely see us continue to focus here, we're going to focus in a number of elements first and foremost we have to make sure that we keep our supply stability in place as I think everybody probably remember.

Is it took us a little longer to get supply stability here, because we focused on large joints first but we havent now and that is absolutely increasing the morale the organization and in that needs to stay there and we're going to be launching new products. We already have we're going to continue to do so we have a full pipeline and these new products I think as everybody knows also drives morale and traction in the fuel cell.

Jason.

Thats going to be an element of focus for us and I tell you know with some of the new team members that we have this idea of changing the operating mechanisms to be much more disciplined much more focus much more transparent on whether you are or not performing in the area will drive accountability in space and in a big when we've been talking about which I think.

We are making advances on when you meet a specialized sales organization. So we have focus I guess I think personally we still got some work to do here.

To me specializing in the sales organization is just step one you also have to make sure that you have the right compensation structure in place and write operation mechanisms. So that those specialized sales reps actually stay focused a lot of times, which you see is that when large joints takes off those specialize reps go back to large joints, because they can make more money there.

We can allow that to happen to our compensation scheme and also our operating mechanisms. So again I see the Cts space.

Particularly with extremities being very attractive that we will continue to focus in this area and I'm not at all surprised to see the activity that we just heard about.

Okay, great. Thanks, Larry Claire.

Okay and Larry.

As you can say just just to clarify there.

So robotics in extremities is that is that a focus for you guys.

We haven't gotten into specifics there, but one could certainly look at robotics application in large joints and believe that there would be an opportunity for us to move those applications to other areas.

Want to get into specifics, obviously for competitive reasons, but there would be no reason to believe that robotic applications or informatics could could couldnt benefit extremities as well.

Thanks, Larry next question. Please operator.

Our next question comes from Steven Lichtman with Oppenheimer.

Thank you good morning.

Yes, you'll get a lot of questions Understandably I did want to ask about hips I had a nice pop I thought sequentially even in take into account the extra selling day can you talk Brian about that franchise, what's driving it in your outlook for for that hip business overall.

Yes, you wouldn't nashi Allison, thank and same thing I'm going to get much any questions and Rosa questions and everything else I. Appreciate the question navigate so I appreciate that fee.

So I'd say is up pretty happy with within performance in the quarter. Obviously, we had the days benefit we made different billing days, which which benefited all the businesses I'm not going to repeat at over and over again that helps but even without that it was a solid quarter for us and we like to see those it's interesting that when I look at the hit.

Business over the last number of quarters, what I found is so little bit lumpy. We've had some quarters that had been on the low end of of market growth, even some below some right square in dental and some above but but I think generally speaking the way I view the hip business for us is to meet growing at market, which is that kind of low sing.

We will digits market growth what could change that over time would be really two things that we're going to be concentrating on.

Number one and this is more real time is the launch of the Avenue or complete which I think everybody knows at this point is a new short stem collared version of the avid year.

Certainly love that can be used to more for that interior approach procedure and hit that actually is one of the fastest growth sub categories of hit. So obviously, that's the reason why we're going to be concentrating in that area. So as we get more traction with that launch more education for surgeons. So that they can do that procedure, well and ultimately begin to drive scale with that product launch that's going.

To help us get strengthen hip overtime and the other one and I'm not going to speak to specifics will be the eventual application in Roes that would also be applied to hit I think the combination of more scale and net anterior approach procedure Rosa launch application that will be coming in the future combination of those two things would allow us to go.

That upper end of hip growth, if not above overall market growth in here, but I want to be clear in the short term I'd be thinking about our hit business at market growth in a longer term as we launched some of those are the products and build scale that I referenced potentially above market growth.

Thanks for that Steve Lauren next question. Please.

Our next question comes from Chris Pasquale Guggenheim.

Thanks, Congrats on nice quarter, Brian you mentioned is any growth was really multifaceted beyond just the impact or rose I was hoping you give us a little more color on some of the drivers there how much of an impact is persona cementless, having on your business at this stage and how meaningful in addition, as the new revision system.

Yes.

First I'll just.

Hit the revision system. The we didn't have any revenue in Q3 on the revision system, but what's interesting is that there wasn't a lot of hype around the revision system coming and that's important because it drives excitement in the field because there are a lot of surgeons that have been waiting to move to persona until they saw.

Comfortable we would have a percent of revision system. So the fact that didnt provide any revenue didnt didn't change the fact that increase some high in the marketplace in Q3.

So outside of that I'd, just say the major reasons for this strong performance in need that we saw number one.

Keep repeating this because I think it's really important we are seeing the morale of the commercial organization shift and shift in a meaningful way that puts them back on offense, which is exactly where we need them to be and it's our new products. Obviously Rosa was a big part at the quarter Ari reference that in the prepared remarks.

It continues to be in engine for us will be an engine for us as we move forward and then all the persona launch is that we've had not just.

The revision system, we just talked about.

But our partial.

Persona and our Cementless persona for very important parts of our of our total package there and then again.

Going to just keep repeating this as well we have a much more disciplined approach to driving the operating mechanism of running the commercial organization.

And that is creating an environment, where we do what we said and done if we don't do what we say that theres accountability to that Theres transparency doing so all those things kind of came together to be able to drive a strong quarter.

I do want to reference when I think about Cementless since you.

Asked about that.

The fact is we're getting great feedback on all of our new products and we are getting great feedback on the Cementless version of persona as well in overtime I expect to significantly increase the penetration of Cementless knees.

With the goal of achieving similar penetration rates to some of what our competitors have been saying they've been able to do.

I think Rosa being out there given the accuracy in the cut should increase our ability to to get Cementless penetration and I think just a shift in focus by the sales organization is going to drive it as well I do want to make sure that I, just clarify something though when I talk about the penetration of Cementless moving to these higher.

Percentages.

Is that persona cementless, so it would be a percentage of the persona family not to total knee.

Clearly it is a it as a growth driver that will be leveraging side any.

Thanks for that Chris next question. Please.

Our next question comes from Peto, triggering the with Deutsche Bank.

Thanks, guys I was like I'll be the lead off that Rosa questions.

Thank you for giving us as detailed on the call.

If half of worldwide growth.

Nice came from Roes that implies about $15 million. It rose sales. So looking at American <expletive> does that mean that you ask consumables was about 384 million or flat year over year, and then embedded within guidance. How should we think that Roes have sales and fourth quarter versus core Americas consumable growth.

Yeah, So we didnt say half.

Sure that I clarify that we said less than half of the global ne revenue came from from Rosa.

So again, a material impact to the quarter, but it was less than half of the total revenue number and I want to get into specifics of sub region growth profiles, and certainly don't want to give any predictions of what we do in the fourth quarter I think probably the most important thing though to think about when we think about Rosa is that.

The demand is high.

I'm very excited about what we're seeing in the field as mentioned the number of times in my entire career in Med Tech I've seen certain product launches really get the attention of the market in shape things. It's only been a handful of times. This is one of those times. This is exactly what we're feeling it's early days, but there's no question that demand of rose.

Is very high in the beautiful thing about this is that as we place more Rosa systems, which will happen over time.

You get this this annuity revenue you get the instruments revenue you get the service revenue you get pull through of competitive implants, as well and that's exciting because it gives us some more predictable view of what our knee franchise is going to be able to do over time and so some im pretty excited about what we're seeing so far I do want to make sure that I clarify something no.

And this is something that truly is becoming more clear to all of us the annuity revenue stream that I just talked about it does take time to materialize. After you make placements of Rosa, sometimes a quarter, even two quarters to really get a good trend going from those placements.

Truly expect that base knee business.

We'll take some time to create positive inertia as result of the Roes and placements and ultimately that's got to offset some of the negative inertia that we have from our competitor getting there much earlier than we did so as much as on very enthusiastic about the demand for Rosa. It will take time to have that debt, resulting impact on our base knee business.

Yeah.

But again it couldn't be more happy with what we're seeing right now it was an important part of the quarter and we would expect it to continue to accelerate into 2020.

Thanks for that Peto next question. Please.

Next question comes from Kristen Stewart with Barclays.

Hi, guys. Thanks for question and just wanted to ask a question on just margins I know this quarter you had been a benefit from FX hedges flying through gross margins. You also had the benefit from the medical device.

Freebie tax how should we just think about margins as we look ahead I know the device tax could eventually come back not sure how that would eventually flow through the impact on enough at all even hit next year, if thats something that wed.

Rafter, depending upon how the inventory kind of plays through.

How should we just think about kind of trends looking ahead. I know you guys had talked about trying to see some level of operating margin improvement next year, Although I think you've said gross margins next year could see.

Our pressure just trying to gauge I know you don't want to get 2020 guidance, obviously, but just.

Directionally how are you seeing about margins, maybe even not so much next year, but also just looking ahead as you guys think about just the cost structure of the company. Thanks, So much.

Thanks, Chris in for I think the longest question I've ever heard on it.

Earnings call, Let me, let me turn it over time.

Yes, I learned from listening to you call.

I.

We've done Kristen Hi, Chris So can you get to talk to you again, So let me try and take your question I'll start with the near term and then and then Weve it into 2020 commentary so.

I think the first thing to understand is where the companies come from and I think if you look back over the last four years, the company's contracted gross margins and operating margins close to four to 500 basis points.

As we think about gross margin within the quarter and actually over the last several quarters. It's great to see that were actually stabilizing even in the backdrop of continued price erosion that that Dan that the industry faces.

Our gross margin was was better than prior quarter of prior year I should say.

By about 80 basis points for many of the reasons that that you talked about and the good thing is that slow through down into operating margins, which were about 90 basis points ahead in fact, as the first quarter in several quarters, where we've actually shown operating margin expansion. So again, given where the company spin I think this is that this is a good proof point. It is it is one quarter and we got many more.

More to prove that consistently over time, but what we're really happy with what the progress that we've made in sort of stabilizing supply now starting to pivot towards towards efficiency.

As we think about the rest of the year into the fourth quarter and that we as we said we're going to maintain our overall guidance range and so our view on gross margin operating margins are consistent that that ultimately underpinned that guidance update that we gave at the last quarter. So so no material changes there.

As we think about.

2020.

Our commentary is consistent with what we said before.

While gross margins are a bit better this year and we feel really good about that lot of good progress. There are some headwinds as we as we move into 2020, we've talked about a few things there which are some of the cost increase in investments and getting to stabilization and supply.

Ultimately get capitalize on the balance sheet and slow through cost of goods sold is that inventory turns and as you know we have close to Europe , and inventory, which which is another challenge and opportunity we have in front of us, but those those differ or capitalized costs will flow through at a higher level into 2020, So thats a headwind we had the medical device tax onetime gain this quarter.

That will not repeat next year of course pricing erosion continues to be a headwind into next year and FX hedge gains. This year will be stable. So you won't see that as a tailwind or headwind, but but you won't see that as a tailwind as you saw an 18 now having said that there are number us tailwinds as we go into into next year one.

Brian talk a little bit about Cementless right and we have other products that from a mix perspective had the benefit to gross margin. So we see that as a positive.

We're also in process and also kicking off a number of cost down initiatives across our manufacturing network and our supply chain, so that will start to yield benefit.

Over time, however, in 2020, specifically those headwinds more than offset the tailwinds. However, beyond 2020 will start to see those tailwinds become more prominent so thats a little bit gross margin commentary again very consistent with what the companies have before now despite gross margin headwinds into 2020.

We still.

Jack that we'd be in a situation, where we can generate.

Some modest or slight level operating margin enhancement, primarily driven by better revenue growth.

And more consistent revenue growth in that 2% to 3% range now having said that we're also very excited about many of the new products. We've launched the morale in the company the opportunity to accelerate top line. If we see the right opportunities to invest at a higher level to accelerate the topline we may choose.

To reinvest that margin enhancement in 2020 to grow the topline because we all know that driving long term durable above market growth rate is the best path to margin expansion.

So so again, our commentary on 2020 gross margins or sorry operating margins remain consistent.

With where we were so thanks for the question a great quarter, hopefully we spend a lot more of these together in future.

Thanks for that Chris and next question. Please.

Next question comes from Macau Rose Rose with Canaccord.

Great. Thank you very much for taking the question, Brian just wanted to circle back on the Stat business I appreciate the color in the previous answer, but I guess, maybe just help us understand or what age of the investment cycle are you in with respect to specialized sales forces in the sat business in any plans to potentially accelerate those investments just given you've got to potential.

Market disruption over the course of the next 12 18 months with the acquisition.

Your your reading our minds I think on that one I would say we're in the early innings of.

A robust look at specialization done the right way.

As I referenced before it's not just specialization it has to be in tandem with better compensation structure. So that you've got to write incentives in place and the right operating mechanisms to ensure you keep that focus so I'd say, we're early innings and we are moving as fast as we possibly can to get to the late innings and we do believe that just by the very.

Sure of integrations in our space that there will be some disruption in in the extremities market and we certainly want to make sure that we take advantage of that.

Thanks for that Kyle next question. Please.

Our next question comes from Josh Jennings with Cowen.

Hi, good morning, Thanks for taking the questions.

And Brian just.

A little bit more about how the Rosa launch has evolved and any incremental color you can share just about when we build out of salesforce.

Any.

Comes around.

Placements versus capital sales and then just what should we expect on the terms with data accrual past.

And you could address data that should be coming out soon or anything that we acute data that we could see for many that early adopters.

Sorry, multipart question, but thanks, thanks for taking.

Yes, no no problem, though I mean rose obviously is a big focus for all of us and.

We're all very focused on making sure. It goes well I would just tell you that generally again the feedback has been positive we've been very aggressive in adding commercial infrastructure when I when I think about Rosa and I think about capacity I think about it in manufacturing I think about it and commercial footprint I think about an education capability.

And in service all those things need to be in place. So that we can move aggressively to place a robotic systems in the correct way and I can tell you that we've been moving very fast in each of those buckets to make sure. We have the right capacity just from a an example, just very short period of time. We've added another 60 reps that are dedicated to sell.

Capital.

Not just frozen knee, but other parts of our capital as well, but a lot of their focus right. Now is in Rosen need we've done a lot to trained surgeons to believe me we've been increasing our capability through the semis that we have they can go to year location and train you and other hard locations, where you can get the training done as well. So we've got now into hundreds of surgeons that had been true.

And which is very important part of moving the moving the needle forward and now we have close to 2000 cases that have been done out in the real world with Rosa and that feedback continues to be strong. So again very very happy with with the progress that we're making so far in building the capacities do the right way and we fully expect that to continue.

As we move into 2020 this will be one of the primary growth engines of the organization, we will absolutely make sure that we do a right.

Thanks, Josh next question please.

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning, guys can you hear me okay.

Yes, Jeff go right ahead, all right great. Good morning, So Brian I wanted to focus maybe on pricing in the quarter. It was down a little bit more than we've seen in both the Americas and on a global basis.

Especially the mix of knee products were seen launch.

Our assumption had been and still is that pricing should actually get maybe a little bit better for you guys going forward.

But just wanted to check kind of more your forward outlook on pricing I guess, but also some explanation on what happened in the third quarter. Thank you.

Yes, I really try to stay away from thinking too much about what happens in individual quarter on pricing. There just so many different variables involved in it if we got all worked up about a specific quarter up or down we'd be wasting a lot of our time, what I would tell you is that I don't see anything fundamentally from a pricing perspective and knee or otherwise that that has.

Are you concerned I still think of that 2% to 3% being pretty consistent overall for our business with negative pricing pressure.

I would agree with you, though and again, it's going to take time to deal with approve this out but one would assume as we get better it placing robotic systems as we get better at doing longer term contracts with DCB connect organization that we put into place, which is really a corporate sales organization.

One could assume that at some point with those contracts in place you could stabilize pricing and potentially big enough to offset some of that headwind I don't want to get ahead of us here I don't want to get over our skis on that but that would certainly be a focus of the organization to try to retired some of that pricing pressure by doing longer term contracts that are good for us and given the customer.

Thank you next set you up next next question. Please.

Our next question.

Craig BG with Cantor Fitzgerald.

Good morning, guys. Thanks, Thanks for taking the questions.

Just maybe a follow up on the acquisition that was announced yesterday. So I mean, you guys said that as you are stabilizing the business year at least now more willing to look at M&A. So is the business is stabilizing you're paying down some debt. So wanted to get your thoughts on what you're seeing out there in the market, namely availability of assets.

Valuations and how we should expect you guys to use M&A.

To bolster the existing businesses through.

Tuck ins or even potentially expand the offerings beyond your core today.

Okay Im glad to somebody saw that that acquisition out there. So we appreciate preceding bringing that up so what I'd tell you is.

I've been pretty clear from the beginning I think the team has in general that we really wanted to.

Get into M&A, but do it in a way that was logical.

First and foremost we wanted to make sure that we stabilize the core business.

That was an important part you don't want to distract an organization when they're trying to get their feet underneath them. In the fact is we've done that we do feel that we're moving in the direction of stabilizing the core business. We've also assemble what I would define is much stronger M&A team and have begun to establish a new M&A process and integration playbook.

Our work book, if you will.

And then we're moving into right direction when it comes to paying down our debt ratios. So when you just combine those things it clearly states that we're in a better position today to be able to look at active portfolio management and we were even six months ago. So one would expect us to be much more focused in this area.

As we move forward.

What I would also say is let's face it as as a team as GB in the past we had not had the best track record when it comes to M&A and certainly feel that we have the right team in place today, the right process to change this but our preference added again just to kind of test the team with tuck in acquisitions in spaces that we actually have the right to win.

And I once we've proven that we can.

Accomplish these types of acquisitions, then we'd start to think about potentially larger acquisitions or more diversified acquisitions things that would diversify us further into new spaces.

That said I just want as a caveat I just want make sure that you know, it's the right asset that was larger or more diversified there what I'm referencing came along it has strategic fit in had good return metrics. We would certainly look at it but with the plan would be to do those tuck ins test the system a bit and make sure that we play in areas that we have a higher our chance.

In winning.

Thank you don't have anything yes, I was just kind of say Craig just building off of what Brian said I think the company's capital structure supports that that new as well, we continue to make progress and.

Paying down debt and de levering the balance sheet are very strong stable cash flows as a company also put us in a position to.

Given strategic flexibility and.

Brian we often look at that does does that deal potentially mean strategic hurdles financial hurdles. But then we also look very closely at the overall leverage impact of of those transactions and we want to make sure that anything we enter into gives us a glide path to maintain that investment grade.

Over a reasonable period time, but if you think about obviously the deal you are referencing.

Kind of tongue in cheek, that's obviously a bit figure of a bike than we'd be looking to take out of the gate clearly a space that we're interested in that but that wouldn't be the size or scope of a bite that we take right at the gate here.

Thanks for the color guys.

Thanks, Craig next question please.

Next question comes from Bob Hopkins with Bank of America.

Oh, Thanks, and good morning.

So.

And I was wondering if I could just gets you to comment a little bit on your core hip and knee markets because.

Even excluding the selling day.

Mike.

All of the four largest players in orthopedics.

Nice underlying organic acceleration in hip and knee growth in Q3 and I'm. Just wondering is there anything going on in the market worth commenting on or is this just strong economy and good utilization so any thoughts there appreciate it.

It's so hard to say buffer so thanks for the question, but but it's.

What I have almost trained myself to do in my team is to not to pay too much attention to an individual quarter and the momentum that we might see I can do the math the same as you by looking all the other players in what they present in a quarter, but they're just so many other variables associated with the wise somebody's quarter might look the way it does that I try not to get to call.

It up in something that looks negative in a quarter or something that looks positive in a quarter. So I'm I'm not really reading much into it to be honest to actually do believe that the market growth is stable. It was a pretty strong quarter for all of US if that happens again in the fourth quarter and the first quarter in second quarter than than we have a trend, but otherwise I seen these.

Up quarters, and then down quarters and people get all worked up about them I, just don't want to burn the time or the efforts associated with that because you get a few of them together doesn't really meeting thing to me anyway.

Thanks for that Bob next question. Please.

Our next question comes from David Lewis with Morgan Stanley .

Good morning had a quick follow for Suky and one for for Brian Ossenbeck together I mean suky.

One thing that was absent for your 2020 earnings comment was just SG name and since the first time in almost two years that X gene is down year over year, just want to its obviously glimpse of at higher revenue can do any reason that would reverse that trend reverse in 2020, and then Brian I just see my take kind of stock of side of your your tenure at the business your commentary on spine in dental from a year and a half.

I go to today, it's almost sort of reversed a bit and I'm wondering if you could just sort of juxtapose how youre seeing the strategy now look for these two businesses. Thanks, so much.

Yes, so David Thanks for the question so first on SG today.

Year over year. We are we are higher as you mentioned this is on a seasonally lower revenue base. So of course commissions et cetera are going to be lower so you should expect that third quarter, a lower SG in a number.

But again, we were inline or slightly ahead on an absolute dollars basis versus the prior year, we expect that to ramp up into the fourth quarter, one because of higher revenues.

Again from seasonality, but also we're investing I would say in a in a much bigger weigh against some of this growth drivers that Brian talked about.

Both in knee.

As wells beyond knee and some of the ecosystem that surrounds that that key and plant, but also within our assay tea business. So can we expect that overall SGN a profile to accelerate as we move into the fourth quarter and then we're not giving specific guidance into 2020, we do expect.

Parts of the business there will be increases and spent.

But we're also looking for resource allocation shifts that we may choose to de prioritize other parts of other parts of the business. So that we can invest in higher growth higher margin opportunities and we're going to constantly look for DNA efficiencies to help fund that increased investment. So again I'm not going to give too much guidance on 2020, and let the DNA profile.

Like the one thing I can say with confidences wears on invest in a better way against as growth drivers to accelerate that topline.

Alright and on the.

Spine in dental business, what I would say that they really did kind of start in the same place from my perspective, both were struggling negative growth in both had new leadership and they were focusing on putting a game plan in place that would allow stabilization and eventually positive revenue growth both had the same plan.

What I would tell you is that we probably at least I did.

Underestimated, how complicated being able to roll the spine plan out would be particularly when you're talking about channel dissynergies that occur when you make significant changes. So if I just think spine first and foremost I would say.

That's that's really been the thing that has retired at our ability to get back to two.

Flat growth to it and then to market growth.

I feel at least a good that we improved from Q2.

Looking Q3, we continue to perform below market selling and certainly I believe not at our best.

We're working through the channel consolidations that we talked about and finished.

Towards the end of this year.

But we still have work to do there we just to make sure that channel continues to jail and then we've got to launch our new products. We haven't had a lot of new product launches in this space in a while and that is something that needs to come in quite frankly, we delayed some of that from a rose a perspective, because we wanted to double down and Rosen need. So we fully expect now with robotics like Rosa coming in with Walter.

Coming in with the trellis titanium inter body that we just launched as Lynn limited launch, but that wasn't gap in our portfolio with the tether technology that that we just got approval on the should be the things that allow this organization to begin to stabilize and as we move into 2020, hopefully get back to market growth that would be the way that out.

Look in spine I think about dental.

Less complicated space than spine, you have less risk of Dyssynergy, there's always risk. So I don't want to diminished with this team has had to deal with but the fact is it just less complicated less dyssynergy risk in this business.

The team has done a nice job they really have focused with the limited assets. They have in the right areas driven a culture of accountability and they've shown that taking performed at the end of the day I still look at that businesses that we have a ways to go we're still below market. So I'd like to see them show durability in positive growth Thats first first step and then second.

Step is overtime get to market growth in showed durability in that so thats really the big difference between the two and gives you a bit of a backdrop in each of the businesses in the when thinking about.

Thanks, David next question please.

Our next question comes from Robbie Marcus with JP Morgan.

Thanks for taking the question and congrats on the nice quarter.

Brian you've done a great job stabilizing the business next step is to get back to market growth. What are the steps that you still need to complete before we can start to be the margin expansion down the pn outlets that you made a pretty clear. It's not next year is that something we could see in 21 and better that drivers.

To really get there.

Yeah, what I would tell you is on the most important driver to being able to drive margin expansion is topline growth.

Couple of going to talk about it on this call that topline growth is the gift that keeps giving when you talk about leveraging the BNL. So that will come obviously, we're already feeling we're in that 2% to 3% that's a big difference from where were before.

That does help drive margin.

The other pieces are just going to be the good old fashioned costs down.

We havent had a lot of focus in our manufacturing organization to take cost out and we've only had headwinds we've had no push against those headwinds and thats something that is change it takes a while for that that that work to capitalize into our gross margin number but that will be coming and then we're also going to be looking in our organization as say are we spending in the right area.

The fact is we spend a lot of money and we haven't been as judicious are disciplined in the way we spend that money. So you're going to see certain categories that are very interesting to us that have high weighted average market growth opportunities, where we think we have a right to win where we're going to be doubling down in spend and we're going to be taking from areas that don't have those same opportunities.

Kind of a mix shift that occurs there as well so it isn't just increasing spend to get growth, it's being smarter about how we spend the money. We already have so all those things I think will contribute in fact is one of the strategic pillars that we have as an organization is to be at top quartile outperformer in total shareholder return that does not happen.

With that margin expansion. So just know as we get past 2020, we will have our eyes very focused on margin expansion because it is very important part of the equation to deliver one of our strategic commitments.

Thanks for that Robbie. Thanks next question. Please.

Our next question comes from Larry Biegelsen with Wells Fargo.

Thank you. So my specific Shannon for Navy, Brian I wanted to talk about supply levels. The current supply levels are factored into your 2019 guidance, but you have indicated that you will be supply constrained on drill is up for some time. So can you give us an update on supply, which product continued to be impacted what steps.

Are you taking to expand the supply through that became a.

Into 2020, and then maybe sufficient supply for the one for spine beginning next year, especially as you try to meet larger orders for that Teekay. Thank you so much.

Yes, I appreciate the question. So what I would just a is that I don't view supply in any way shape or form as a barrier for us to deliver the commitments that we've we put out there where to overachieve those commitments by the way things going the right way I would just tell you that it with Rosa in particular, I don't see any concept sublicense.

Trains at this point, we've put a governor on how we're approaching the market because we want to make sure that we do this smart that we learn what the flaws may be in way, we educate we bring rose into the marketplace. So we've put a governor on how we're going to market, but it's not because of capacity constraints I just want make sure that I'm clear on that as a matter of fact I go further to say.

I hope we have a capacity problem in 2020, because that would mean that we're doing very very well in the marketplace. So I don't see capacity from a manufacturing perspective and or the other variables associated with commercial infrastructure education service levels I don't see those things being an issue for us with Rosa and I don't see that being a major barrier for us.

In any product category.

Chuck and I want to make sure we're very clear consistent what Brian said, we've never said that.

Capacity was an issue for.

So that may be what some people have asked have speculated out there, but this is not a change raising we've said all along we've never said that that that's going to be an issue.

Again, I hope, it's an issue in 2020 that'll be very good for all of us.

Thank you next question please.

Our next question comes from Richard Newitter with SVP Leerink.

Hi, Thanks for taking the questions.

Just just on going back to that margin expansion commentary for 2020.

I appreciate that totally understand.

Why topline is paramount and why you'd invest I guess I just wanted to make sure I'm understanding if you see opportunity to accelerate or on the investment to ultimately drive higher topline is that a comment to suggest that that would potentially lead to a situation where there is no margin expansion or just the limited margin expansion.

Guidance that you have out there for 2020 is inclusive of the potential for kind of accelerated investment. Thanks.

Yes, I just come in so if you wanted for any additional color.

I think the original way you're looking at it is correct. When we're looking at marginal margin expansion in 2020, but if we see an opportunity to be able to invest in drive revenue growth rate up in the short term, we're going to take advantage of that that is the thing you should want that is the thing that we want because that's the only sustainable way to drive margin.

We can easily cut costs and I can give you a lot of margin expansion in 2020, but that would be.

Absolutely wrong thing to do because the topline growth and accelerating that top line growth is the way to do a sustainably. So if we have opportunity in 2020 to be very clear to be able to invest in drive short term growth. We will do that in poor go margin expansion in 2020 with the idea is that gives us the runway to do a sustainably and really big.

In the show that traction in 2021.

And rich, let me clarify again, I mean again thats consistent with what we've said all along we've talked about.

Intentionally getting margin expansion in 2020. We've also we've also every single time.

Given the caveat that even from even if we do that you would be relatively small given the pressures and we've talked about on gross margin. So I don't think that should come a surprise to anyone.

Good question. Please.

Our next question comes from Matt Taylor with CBS .

Hi, guys. This is the from that thanks for taking my question.

I guess.

Appreciate the comment earlier on the 2000 Rosa cases.

Maybe just talk broadly about the utilization rates within Rosa account.

Are you seeing.

Asian within their account.

So I suppose through.

Any type of it would be helpful.

Yes, yes, so what I would just say is just just to do a correction there. It's been it's been well more than a thousand cases that we've had on the real world with rose. So far added again and again feedback has been very strong what I would say is we're learning utilization rates are all over the place it depends on how long the system has been in.

How focus the surgeon is that was bringing in is on using it in his cases or her cases. So I've just say, it's too early to say what the utilization rate. We think is actually going to be but we've seen so far is pretty consistent with what our competitor has talked about that changed just give you some feel for.

What I would say that as we continue to move forward, we'll get a better understanding of that that utilization I would expect that over time as people get used to the system that we would actually see more utilization than what's out there today because one of the primary things at frustrate surgeons with robotics is typically robotics slows.

Them down in the surgical procedure and as result of that they don't get the same throughput, which means they don't use at all the time, because you want to make sure that they have patients moving to the operating room, just like a factory you got to fixed expenses you want to move to patients through because that's how the surgeons make money in the hospital makes money our robotic system actually makes that easier because it doesn't change as much as a workflow.

In allows surgeons do conducted procedure basically the same time they had before the robotic system, but just more accuracy now so again too early to tell but I would expect our utilization to look pretty good overtime.

Thanks for that young next question.

Well take our next question from Rick Wise with Stifel.

Good morning, Brian .

Maybe with a bunch of the specific questions asked that.

Focus on the turnaround itself for your driving obviously, a significant turnaround zimmer.

With.

Significant cultural and operational change and it had a little extra curious where do you think we are in that process you. It seems like in multiple frontier well ahead spine more work to but maybe you from here you could highlight some of the.

Specific operational work to be done in terms of and I'm just throwing out some ideas answered as you will the manufacturing footprint the ability the possibility of.

Working capital reduction just the whole operational excellence process, but I assume overtime will also lead to.

Enhanced cash flow.

More available capital elsewhere, just that whole theme as you contemplate what you're trying to make happened in zimmer. Thanks, so much.

Absolutely I appreciate the question so what I would tell you is that.

We still have to make sure that a lot of things that we've changed actually gel.

With the fact is when you've had an organization that has been struggling for as long as Zimmer Biomet has.

It takes a lot of change is the only way youre going actually fix it moving into right direction and truly shape. It for success is to make significant change and we have in so just to give you a couple of examples of those things that we still need to give some time, but we're moving in the right direction. We've got to give us some time, which speaks to the number of new leaders.

That I have in the business do you think about the number new leaders that I brought in 70 plus percent of my team is knew that same thing is happening below them. So we need to make sure that those individuals settle in they show durability and driving this kind of increased effectiveness in but I'm just going to call. This maniacal focus on delivering what we say we're going.

What we say we're going to deliver that's a cultural shift for the organization that will take time Thats got to see that happened a lot of these people many are less than a year.

To make sure that they're getting traction. We've also change the structure of every one of our regions in everyone of our businesses and again less than a year ago, so need to make sure that that gels and that we continue to drive success with it.

Got a bunch of new products that we launched that was we had to get the new product engine going that was a big part of the variables in this equation. It's happening we're still in the early phases of those launch is going well, but they need to go through that full launch phase and they need to continue to perform the way they're performing today.

For a lot of things they went as.

So really good about where we are with quality remediation in the north campus, but the fact is the only scorecard accounts is when the FDA comes back in and they tell us that they love what we've done now we think we're in a position to be able to make that happen, but thats still something that's got to jail.

As we continue to progress through those in parallel we're now working on things that you're talking about we're moving away from this idea of supply stability and moving to efficiency and supply when I look at the the network manufacturing facilities. We have we better attack that we got to do it in a smart and strategic way.

Strand, what the footprint should look like and overtime, we need to reduce the footprint to make sure that we have the right organizational structure and footprint to be able to support what we need I also look at this business. This is whats nice is being an outside of north peaks coming in and I look at the inefficiencies associated with the amount of inventory that we have in the amount of inventory write off every year and.

You know hundreds of millions of dollars every year that impacts my PNM, we're going to attack that we're putting teams in place now to understand why is the Deo age. The weight is how do we start to bring that do you each down through systems and different business models and ultimately as results of that start to get the benefit of reducing the enough because that will help our PNM. So.

Know for sure that were already beginning to pay attention to those facets of the business and we see opportunity. There's no question is going to take time to get after it because we still have to have these other parse parts of the business gel that we've been moving forward on or already starting action in those areas I think just the Rick. This is seeking just to build on what Brian said, we sort of summarize all that.

To the entire organization through four key pillars, which is ultimately aimed at being a top quartile performance.

So we look at that and we speak to the organization about revenue acceleration, where do we need to invest what markets what categories that have high market growth rates, where the products that are going to take us above weighted average market growth that we look at margin expansion, Brian talked about how do we declare the supply chain through SKU rationalization through better ops.

Position of our footprint to other efficiency in value engineering type ideas, but also through SGN, a and taking a very fragmented sort of operating base and start to gain some more efficiencies out of that the third level. We then talk about as free cash flow yield. So how do we improved cash flow generation on our earnings and Brian talked about.

One of the biggest opportunities that we're attacking us around working capital and specifically on on inventory and just how much we have out there the opportunities to even get to appear level.

Working capital what would free up and liberate a lot of additional free cash flow that would give us optionality in in filling portfolio caps and then the last metric that we look at and that the organization basis decisions on his ROI C and so it's it's not only the elements that Brian talked about but its summarize very succinctly.

And in live by by the organization across as four key metrics.

Todd.

And then we need to wrap please.

My final question comes from Mark, Mike Matson Needham and company.

Hi, good morning, Thanks for fitting me in.

Brian I think you mentioned that you think that you did simmer can grow over the two or 3% Wham gur without doing M&A.

So just curious what what would drive that is that primarily robotics as its share gains as its something else. Thanks.

Yes, it's.

Good question, So first and foremost we have to see in I believe we will because of this structure, we're putting in place in the morale change, but we have to see the Americas improve just generally if I think about geographically speaking the Americas has to improve at 62% of our business. It has to move into right direction underneath that the things that we're going to.

Be highly focused on is getting our knee franchise above market and I really do believe it's going to take time for all the reasons that I mentioned before but we can get durably ease in the market R&D business to grow but market that has to happen. It's got to happen through new products, new product launches, particularly around Roosevelt also.

From that we're building in around it.

And then just traction in focusing on the fastest go submarkets, you've got Cementless, you've got partial and you've got robotics very attractive submarkets knee, where we have very good launches and morale boost inside of those.

Big one is.

With specific focus in extremities. The fact is we have to get that durably in mid single digit test the market growth, we have to be able to be there consistently we haven't proven out in the past we're moving into right direction. We have new products. We have the specialization sales organization, we're changing the comp structure, we're making sure that we have better operating mechanisms.

But those things must happen if I can just get knee above market.

I can get set at market I can keep hit right around that market growth and I can give some slight improvement in spine in dental staying where it is that can get us above that 2% to 3% growth.

I don't want to.

Offer this up today I really want people thinking as you model, 2022% to 3% is that right place to be but absolutely see a pathway to get above 2% to 3% I think just a factor here. If you go back I think I mean, I don't think I mentioned this but you go back to 2015, we've only had three quarters as a company Zimmer biomet and.

Including this one we're above 2% growth that's going all the way back to 2015.

So let us just.

Used to being able to do to two 3%, 2% to 3% Durably and once we do that we're not going to be happy with that obviously, we're going to move north of it that will come through the things that I just mentioned in very soon.

At the right targets with the with the right returns will add to that our M&A to be able to boost traction in that area.

Thanks for that Mike and without we're going to.

Conclude the call really appreciate everyone. Joining us also really appreciate that everyone with the exception one person complied with the one question only rule I'll talk about personal line, but thanks for everyone because of that we're able to get a lot of questions. As a reminder, replay of the call will be available later today for review on our website as environment Dot com.

And we'll be available to take your questions.

As needed every day and very weak right.

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