Q4 2019 Earnings Call

Variety of risks and uncertainties.

Please note we assume no obligation to update these forward looking statements, even give actual results or future expectations change materially.

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

Addition, discussions 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 found on our website at Zimmer Biomet Dot com with that I'll turn over the call Brian Brian.

Thanks call I appreciate it and before I jump into it I just wanted to say.

Congratulations first of all the Kerry.

Obviously, keri mattox first call with us and Zimmer Biomet.

In her new role I'd say, it's early on but we're pretty excited about what we think she's going to bring to the table. So looking forward to that I just want to make sure that I think the I just came in here and say thanks call spend.

Hard to believe that already two years that we've been working together in this capacity in that would say that we've come a long way and a lot of that has to do with your guidance along the way. So I certainly appreciate it I know you're not going anywhere were going to have access to that this will be the last time, you're on one of these calls so hard to make sure that call you out for out what you being able to do for us over the last few years and look for the next year yet.

[music].

All right so getting into the quarter, we're encouraged by our performance in the fourth quarter, we posted solid revenue growth slightly above our weighted average market growth rate expectations and grew earnings per share faster than revenue. This was driven by improved performance versus prior year across all geographic regions as well as most of our businesses.

We also made further progress executing on our short term priorities supply quarter remediation you product introductions in GBS mission and culture. We also continue to invest for growth. This progress is laid the foundation for further innovation and commercial execution that will drive or accelerated growth over the long term.

These are all important steps forward and while we were happy with our progress. We're certainly not satisfied rest assured that we're still striving to continuously improve our business our performance and the value we delivered a patients as well as customers investors.

Along those lines, let me talk about teens momentum around the key short term priorities.

Regarding supply we have consistently met customer demand improved service levels further enhancing the confidence of our global sales teams and putting them back on often with disciplined stabilization. We are focusing more on opportunities to decrease the complexity and increased the efficiency of our supply chain.

I'm happy with our progress thus far.

On quality I confirmed that the FDA recently concluded a re inspection of our Warsaw North facility. This inspection was anticipated based on the progress reports weve been providing the FDA onsite readiness.

I want to thank the agency for productive and collaborative visit.

Background. The FDA last inspected this facility in April of 2018, and we've been executing a comprehensive remediation plan over the past couple of years, we believe the latest at the inspection validates the significant improvement in progress that has been made it to Warsaw North facility not surprisingly the issued observations at the conclusion of the inspection.

And we're confident in our ability to address them to FDIC satisfaction.

Our anticipated password with the FDA is fully contemplated in the 2020 guidance that we provided earlier this morning.

We look forward to continuing to partner with the FDA as we strive to make worse on north.

Best in class medical device manufacturing facility.

Let me take a moment to thank our quality and operations teams for their tireless work and dedication to patient safety.

You have accomplished over the past two years and but I know they will deliver for Zeevi moving forward is impressive.

With improvements made in supply and quality. We also continue to sharpen our focus on innovation, our enhanced R&D efforts drove significant new innovation in 2019 and give us increased confidence in our new technology pipeline as we move into 2020 and beyond and these programs increasingly include enabling technology and solutions around our implants.

Such as robotics mini robotics, informatics and operating room efficiency.

The implant is core to what we do our goal is to provide a complete ecosystem that is both patients and customer centric.

At the upcoming WBLS meeting in March will showcase additional renovations inside this ecosystem that connect our implants data and robotics, all designed to optimize decision, making and improve patient outcomes.

Moving to mission and culture, we continue to communicate and drive emission of the Zeevi organization I can say today with confidence that everyone. In the organization considers themselves part of one team our strategy is very clear and Cascades down to all team members in the organization. It's important that everyone knows where we're going and how we're going again.

There.

Now turning to our fourth quarter results all three of our regions performed well versus prior year with strong performance from Asia Pacific and improving performance in the Americas.

Relative to our businesses. We are pleased with the performance of the knee franchise with solid results across all three regions.

Our core knee business accelerated driven by persona, including the recently launched revision system.

Frozen he also accelerated and drove a little more than 50% of the overall global knee growth.

It was a placements were strong accelerating from Q3 and our customer pipeline continue to grow supported by very positive feedback so far.

We project continued growth with Rosa in 2020, as we increase our commercial efforts, including Salesforce expansion and enhance surgeon training support in summary, we were very pleased with the Roes in the launch in the overall robotics uptake.

Well it continues to be an important focus area for us is not yet delivering at our goal of durable mid single digit growth.

We'll continue to prioritize innovation and accelerate the expansion investment in our specialized sales channel nor drive scale in the high growth SBQ markets.

Our dental team delivered its third consecutive positive growth quarter.

Team's focus on strategic priorities execution and culture, along with the targeted investments in key areas continues to drive the business forward, we still have much to proven this business, but I'm happy with the current momentum and the performance of the dental team.

Relative to our spine and CMS business, although we did see improvement from Q3, we continued to perform below market in the quarter. The primary focus areas for this business will be working through the final steps of our channel consolidation and leveraging our new product pipeline, including recent and upcoming product launches.

We're making steady progress driving innovation in shaping the future of this organization. We've built a strong foundation and are now better position to accelerate our innovation and execution strategy I am encouraged as we reshaped Zimmer biomet for sustained success with that I'll turn the call over to seeking to get further into the financials.

Thank you, Brian we delivered solid financial performance in the fourth quarter with accelerated revenue growth and leverage earnings while increasing investments for long term growth also robust cash generation, we continue to make progress and de levering the balance sheet for strategic flexibility.

I'll provide some highlights on our fourth quarter financial results unless otherwise noted the numbers I will be discussing on a constant currency basis.

Sales totaled $2.1 billion in reported increase of 2.6% over the prior year with an increase of 3.2% excluding the impact of foreign currency changes.

During the quarter all three of our geography is performed well our Asia Pacific team delivered 8.6% sales growth driven by continued strength across both developed and emerging markets.

America has increased 2.4% strength in knees and hips, driven by new product introductions supplied stability and improved commercial execution.

Our Europe Middle East in Africa team delivered 1.4% revenue growth led by strength in developed markets.

Turning to our businesses in Q4, our global knee business grew 4.9% with improved execution and new product launches are hips business grew roughly in line with market growth at 3.2% and was aided by the recent launch of Avenue, where we're seeing good early market acceptance.

CK grew 3.1% slightly below our expectations, but we remain focused on growing that business at mid single digits overtime.

That's all posted another solid quarter at 5% growth driven by increased commercial on channel investments throughout 2019.

And CMS posted 0.2% revenue growth.

While the growth was positive and sequentially better we still have more work to do to stabilize the business.

Turning to the piano well reported GAAP diluted earnings per share for the quarter of $1.54 cents.

Adjusted diluted earnings per share with $2 in 30 cents.

5.5% increase over the prior year.

Better adjusted operating margins and lower interest expense drug this leverage earnings profile.

Adjusted gross margin was 73.1%.

Financial improvement an increase over prior year due to higher volumes and favorable timing of costs within the quarter.

Adjusted operating expenses increased sequentially due to sales commission and investments across commercial and R&D priorities and Arnie and set businesses.

Overall, adjusted operating margin was 29% in the quarter.

Moving beyond operating margin interest expense of 52 million was down both sequentially and versus prior year due to debt paydown.

Lastly, we had solid free cash flow generation at $295 million in the quarter and pay down an additional $161 million of debt further de leveraging the balance sheet.

It was a solid quarter.

Looking ahead, our growing confidence in the business is evident in the 2020 guidance that we provided in our press release.

And with revenue while quarterly results may fluctuate due to seasonality and timing, we expect our full year constant currency growth to be between 2.5% to 3.5%.

The first quarter will benefit from about one additional billing day with no material impact expected in the remaining quarters.

We expect our adjusted operating margin for the full year to be between 27 at 28%.

Our adjusted effective tax rate should be between 16% 17%.

And we expect adjusted diluted earnings per share can be between 8015 cents an $8.45.

Against the backdrop of these 2020 expectations I'd like to spend a few minutes on incremental steps, we're taking to enhance shareholder value and to move our financial profile closer top quartile.

We have begun to implement the comprehensive multiyear restructuring plan with the objective of reducing costs and driving a mix shift of investments to higher priority growth opportunities.

We estimate that these activities will generate gross annual adjusted pre tax operating expense savings of approximately $2 million to $300 million by the end of 2023.

This program gives us additional confidence that we can invest for growth and accelerate adjusted operating margins.

I know the next question will be what does accelerate margins me.

While we expect to deliver operating margins at at least 30% by the end of 2023.

To support this restructuring, we estimate approximately $350 million to $400 million in onetime costs over the same period.

Consistent with this during the fourth quarter, we recorded a charge of $31 million.

As part of these restructuring activities. We have also reorganized several businesses to drive enhanced strategic alignment across our key growth areas.

As a result of this reorganization you can expect that we will modify elements of our external reporting in the first quarter of 2020, and we'll share that information with you before our next earnings call.

With that I'll turn the call over to Brian.

Thanks, and then summary, we're proud of the progress that we're seeing in 2019, we've clearly stabilize many parts of the business. We've made key investments in priority areas, we drove better topline growth and delivered solid sustainable financial performance, others clearly more work to do we enter 2020 with increased.

And it's in our business and remain optimistic about our future.

Turning the call over their coal and carried a managed Q and a portion of the call.

Thanks, Brian before we start the acuity session I want to again remind you to please limit yourself to a single question with a brief follow up if and only if needed.

So preferred show back in queue afterwards, I promise, we'll get through his many questions as we can during the call with that operator may 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.

We'll take our first question from Raj Denhoy with Jefferies.

Hi, good morning.

Maybe I could start with the new growth in the quarter really stood out so probably maybe a couple of questions. There. One could you maybe offer where do you think you have stabilized that business on underlying basis, you offered at half the growth was from roasted, but on an underlying basis do you feel your share position is now secure and then on on roasters. There anymore. You can offer in terms of where you're seeing placements with the demand is.

And just really anything you can offer in terms of how that system is fairing.

Yes, absolutely.

I would tell you that.

We're pretty pretty excited actually about the quarter.

On the stake of over that across the business, particularly needs what was strong for us in what I like about it. In addition to US we saw strength in other parts of the market. So I know, it's just one quarter, we only get too excited about that but the fact that we were able to surge in the market as others did I think thats a good sign.

Yes rows of was clearly a big part of that contribution in the growth.

As we said is a little bit more than half of the overall growth, but even when you look at the base business I would say that we're seeing that business move as one would expect.

It's not where we needed to be I need the overall marketing knee our business in the Mark you need to be able to outperform the overall market, we're not there yet.

But the fact is we're definitely seeing traction in basically as well, it's actually one of our best growth quarters, and basically that we've seen since emerge.

What I would tell you is that rose.

Demand is very strong.

We have probably what we do have the largest funnel right now for four.

For placements than we've ever had.

We've done over 2000 procedures already and again, just a couple of quarters in in this launch so that would tell you that we're really seeing acceleration of focus in this area.

Had an opportunity to be out in the field and see if you cases, one, particularly on the west coast.

Had a surgeon continue to.

Across the operating room, and say I Couldnt do this before without Rosen.

It is making you know half millimeter adjustments in tissue balancing and getting real time feedback in the procedure and use practically giddy about the response he was getting from from the robotic system. So again I think people are seeing this as a result of that more people are desiring to get trained on the system and we're going to continue to see that moment.

And go forward was great to see our competition have really strong quarter as well that tells you that the uptick in robotics is real and benefits all of us. So again im pretty happy with where we are right now with base business as well as momentum with Rosen I'm still have a lot to do I think it's going to take us sometime to get above market growth in need.

Remember, we have a very large base, that's going to take time to influence it because it's a significant number.

We still have some of that negative and nurse associated with the competitors placements of robotics is going to take a while for us and disrupt at a nurse and but I think we will over time and we still have the major products that are out there that are launching they're doing well, but the early so again I feel really bullish in the area, which is going to take some time to be able to get that business growing.

Above market.

Great. Thank you. Thanks for that Thanks Raj next question. Please.

Next question comes from BJ Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question.

If I could maybe a two part question on not one not roads expectations were twentytwenty.

No you said that sequential.

Step up and not placements for 19 is that still the modeling assumption for twentytwenty and on the margin Suky.

Implicitly we're looking at.

60, 70 basis points of annual margin expansion when does that kick in right is that peak starting in 2020 or is that more for 2021, new into non congrats and thanks guys.

Okay, I'll start off with the Rosen tester views of the obvious and margin piece, yes, as I said for Rosa funnel is as strong as it's ever been we're adding commercial infrastructure to be able to support that and we're adding significant training capability. So that we can get people trained with safe and effective use of the product. So absolutely expect 2020 to be.

Better than what we saw in 2019 is kind of logical just given the fact that we'll have it for the full year. We did not have in for the full year 2019, but that momentum is real I would expect it to continue and certainly be a driver for us in 2020.

Yes, Thanks, Brian and thanks, BJ fitting question.

Regarding margins and the overall restructuring program that we announced just just a few minutes ago Youre right. We talked about 30% operating margins by 2023 at least 30% operating margin. So your math is right. If you sort of took a linear glide path. That's about 60 70 basis points per year, However, I would say that.

It may not be linear right, depending on the overall revenue profile, our investment profile over that three to four year horizon that that margin expansion could be a bit bit lumpy and it could fluctuate. So I wouldn't look at it sort of in a linear fashion regarding 2020 operating margins a completely consistent with how we've we've.

Characterize this all the way through 2019, and including our third quarter call, where we said we see the opportunity for modest operating margin expansion in 2020, and if you look at our guidance. That's represented in a top half of that guidance, but we also said given the number of attractive opportunities we have across the business that we may.

Ooh some of that margin upside to two instead invest against the business for topline growth because we do see topline growth as as the best best most durable pathway to long term margin expansion earnings growth and shareholder value and so that's that's reflected more in the and the bottom half of that overall margin profile guidance.

I would say, we're an early days as part of that restructuring program.

However, we do expect to see some benefit into 2020 and Thats been flows fully incorporated into the margin guidance that we've provided today.

Thanks, guys.

Thanks BJ next question. Please next question comes from Matt Miksic with Credit Suisse.

Hi, Thanks, so much for taking my question just just one one on the follow up on on Roger's question on knees and then I did have one follow up as well if that's okay.

On on the knee growth, Brian you mentioned.

It's going to take a while to get above market growth and news. If you could talk maybe a little bit about where you are in the us in terms of holding share.

And what's the timing looks like in the us given given the given the trick the robot sales and so many other projects you mentioned timing to get back to get above market growth.

Yeah. So we'll give specific timing on that but just no. We have our sights on getting above market growth and we also believe that we have the fuel to do it and I'll. Just go through a couple of those things that I think will give us that confidence.

But when I think about the US we're still were civil market, we're still ceding share, but the rate that we're losing market share is much slower. So we're clearly closing that gap and in our confidence level side I mean, the U.S. momentum is readjusted to kick off meeting for the Americas, Obviously, a big part of that is the use of.

Patient and I can tell you an all my years of doing kick off meetings around the world I have never been doing event, where the energy was as high as it wasn't that meeting. So people are ready to go fired up and that that momentum is real and that's meaningful.

John products in innovation supply and everything else the way people feel and their confidence absolutely job traction in the field I can say right now is there. So thats probably the first thing that would tell me that we have a pathway.

To get above market the real.

Breast taxes associated with products, though.

As I mentioned before Roses strength is real.

I've also seen as amount in the world and I'm seeing Rosa placements I'm seeing people that we did meeting expect to surgeons that are competitive surgeons now getting trained rapidly to understand how to use our robotic system and as a result of that over time, we're going to expect to see that pull through because they have to use our implants. When they begin to use that Rosa system.

That will take time, because they have to first drop the implants that they are using really get trained and understand how to use robotic system that we have and then we're going to get that uptick but that will take time, because we're early in the launch but it will happen when I look at Cementless, we're still seeing traction and persona in persona cementless I'm not going to get into specifics here, but but there's no question.

This gives us an opportunity for mix, a little bit of conversion opportunity to particularly tied with robotics, but a big part of it is mixed benefit and then persona revision I guess a.

Few different ways, we can we can to drive revenue growth here, but the traction we're getting in the momentum that we are getting is bigger than we expected.

As a matter of fact were actually building triple the amount of sets that we expected based on the demand that we're seeing so theres no question in my mind people love the revision system and is being well accepted in the marketplace really three different ways that we can grow business inside of revision first one is I've already got persona users out there that.

Our not using my revision system, because we're just launching it theres no reason if they like the persona product that they wouldn't convert to the person revision system. So thats. The first order business go to our current accounts, where they are using persona and get the revision business second one is I've got an opportunity to get out and get those surgeons that wanted to move to pursue.

No, but wouldn't go there until we got the revision system in the third one is just competitive conversions, we have a great revision system revisions are always a little more challenging for surgeons. So when you can make revision easier as a result of a system like persona, there's an attraction to that system that opens the door to competitive conversions. So those are the piece.

Is that I know, we have in place that get us to at or above market growth, but the key thing is it's going to take time.

We're early on in the in the rollout of these things, but I can guarantee is going to happen. It's just a question of land next can't give a specific time right now.

I appreciate that color.

And so maybe.

Matt.

Sorry, one is one question Matt one question per person sorry next question. Please.

Our next question comes from David Lewis with Morgan Stanley.

Okay I'll keep it telephone question there call.

I will talk about a 2020 outlook I mean, you've been adamant around the two and add 2% to 3% growth. This is 50 bips better on the margin and the comps are going to be tougher in 2019, so you're clearly guiding to improving momentum in the business into an after three and half for 2020 can sort of walk us through where that confidence is coming from either either by segment or sort of across the business broadly.

Thats the kind of the key focus here the call. Thanks, so much yeah. So David would have been Glenn if you have to come on and said yet to report question, but good luck.

Yes.

So I would say, yes, it's a number of things first and foremost. It's just the momentum were seeing I mean, if you look at the last couple of quarters Theres. No question that there's a difference in the business right now that the momentum is real we've proven that now for two quarters in that's that's a big confidence booster for all of US you know if you think about.

Performance is good but there hasn't been that many quarters as a company that we've had that type of performance that have to in a row does give you some of that confidence so certainly that strength across all regions that performance that we've had already in the future looking impact of new products gives us the confidence to be able to take that revenue.

Going forward guidance, but our view of what 2020 is going to look like.

So that was really the.

Major impact I mean, I look at to say, we're still not delivering what I expect us to deliver and NCT, but the investment is there the new product innovation is there so thats going to happen I have confidence going to happen, we're not where we want to be yet, but just given the amount of investment in focusing this area I know, it's coming already talked about knee hip just.

Yeah continues to hang in there you have in your complete is going well, we have a robotic application that will be coming soon that may be the catalyst for us to be able to boost the hit performance as well been hanging in with markets, but I'd like to see that above market and I believe that the robotic application would give us that that momentum. So again, a lot of things moving in.

Right direction, I always want to balance that with some of the things that that could be challenges for us. The fact is we do have great momentum in our products.

The demand is high but early so that that momentum has got to continue.

You just talked about a multiyear restructuring program, which is a must have because it's going to allow us to invest for growth. While also driving margin expansion, but there is always a risk of disruption when you put a program like that in place. So I'm trying to look at the no. The ebbs and flows the puts and takes for our business and give you guys, but we really believe is going to happen in 2020 and there is enough.

Momentum is enough positive.

Offset all those things that could be disruptive and that's why we took the number up.

Thanks for that David and thanks for complying with the one question rule Operator next question. Please.

Well take our next question from Bob Hopkins with Bank of America.

Great. Thank you and good morning.

So I guess my one question I'd Love to Brian If you don't mind follow up a little bit more on your comments on this UTI and just maybe a little more specifics on kind of whats coming in when and when we might see better growth and obviously a lot of people are trying to wonder if some of the merger activity going on around you might lead to some opportunities. So maybe just a little more color in essence.

Yes, yes, so what I'm just take a step back when I think about this business overtime, obviously, we're not suggesting in 2020 being at the overall business ZBB being at a mid single digit growth because that's where we need to go when you think about our our strategic pillar of being a top ports.

Performer in total shareholder return it requires us to increase our growth rate, we have to get to that mid single digit growth rate in one of the major contributors to that is going to be a sustained kind of durable growth rate in that market growth range for SGT.

Fact really need to see it on the top end of that range that mid single digit range and we need to see the outperformance of need. So those are the two major categories that were going to be heavily focused on to ensure that we get GB at mid single digit growth. Our again over time, but that's that's got to happen when I think about us being able to do that is pretty clear to me we.

I have the formula in place number one we've got to be able to increase the innovation pipeline and we've been doing that not just pipeline with the cadence of those new products things like the alliance glenoid that we're launching that is more personalized way to do a a total shoulder is going to be exciting to surgeons were early on in this no but I can.

Right now the response from certain is very strong signature one planner, we lag in this area. When you look at pre surgical planning, we no longer lag in this area and we have a lot more coming when it comes to informatics, Andrew a robotics in this space as well so I feel confident that the innovation cycle is real it's coming and it will.

I have an impact and the other one that we've been talking about for a long time now and we're really doubling down in his continued investment in a dedicated channel. This takes time obviously.

The hope would be that with some of the disruption out in the marketplace that facilitates quicker expansion of our sales organization, we're certainly going to try to make sure that we take advantage of that but but the fact is we've got to be able to get that channel and place. We're investing in it now and then the operating mechanisms around that channel to make sure that we're driving accountability and focus brings all these.

Things together, so I know the Formula is there the variables are all lined up we discuss all the equation and it's just a matter of time since I have high level of confidence is going to happen, it's just not happening yet and it's not happening durably yet.

Thanks for that Bob next question. Please.

Well take our next question from Richard Newitter with SVP Leerink.

Thank you just a follow up on the restructuring.

Can you.

Maybe just elaborate a bit.

The types of projects or initiatives and the timing within that three year.

But that three year trajectory I guess really.

If you could also parse it out between things like sales.

Sales incentive structure changes or any kind of its incentive structure changes throughout the organization what.

What's low hanging fruit versus kind of maybe the harder stuff to go after and when it went in the timeframe that from your timeframe you're going to go after each thank you.

Well I just can't provide is a real general overview of what we were trying to accomplish in the restructuring and again early days. So as you know.

No that we've done these things yet, but we're just the intent of the restructuring and then second even getting some more detail of the underlying assumptions.

First of all the whole goal of this was a drive better alignment.

For accountability and efficiency license. So we really do believe the restructuring is a better way to manage the business with efficiency and included in if I just think about it we've taken all businesses now we have them under one leader and the whole intent behind that is to have faster and less bias to resource deployment decisions, but we still have.

Centers of excellence around robotics, and informatics and other areas that you want to have unbiased views of how you can deploy those resources across the businesses that now exists by having all businesses going to one person. We also want to have clear accountability.

So if you're going to make these decisions on resource deployment, you better have accountability for getting it done and accountable accountability for executing against it and we're streamlining the organization, we're making it less complex and as a result of doing that you can drive margin expansion raise it. So those are the reasons why we've done this ultimately it's going to allow us to invest aggressively for growth.

While expanding margins and managing the business more effectively so that was the purpose behind it and so if you're going to give some additional detail yes sure. So Richard you're thinking about the right way there are a number of initiatives and they're going to be cadence at different times.

Just based on sort of complexity and time and takes against some of these initiatives on the running in the early days I would say it very much is about blocking and tackling and some of the low hanging fruit that you sort of reference.

One we took a complete cost taxonomy of the organization and we looked at that cost taxonomy relative to that spending versus external benchmarks relative to internal benchmark relative to our growth opportunities in our markets in our businesses and that's leading to quite frankly, a mix shift and a lot of our spending but also.

Some very clear areas of opportunity to reduce spending and lower value areas bought blocking and tackling things like T any procurement.

Just basic cost down again blocking and tackling the second area.

That's more near term, Brian talked about the reorganization and some of our business units, that's leading to efficiency, that's leading to efficiency by de layering. The organization. So we're putting our our commercial leadership closer to our customer closer to the patient and that's also leading to some reductions and redundancies. So those are those are all we call no regret moves because.

As a lead to margin expansion, but but also make the organization more fashion efficient and effective longer term. We're also putting things in a place it's going to take some while for those to mature and bear fruit, but it's around consolidating of a pretty fragmented footprint. When you. When you think about the two companies Zimmer biomet coming together and then follow on.

Acquisitions and some of the some of the focus of the company's had spent over the last few years on supply and quality remediation. We can now start to turn the corner from stabilization to efficiency and start to think about how do we consolidate some of that footprint and make ourselves more efficient and then of course, there's going to be some opportunity in the longer term around centralization of back office.

DNA type type function. So those are just a few examples there are several other initiatives or a number of initiatives as we've talked about going on in manufacturing supply chain, which we think over time. After we've stabilized gross margins can can lead to some modest improvement in gross margin as well. So hopefully that gives you a little bit more color as to how we're thinking of.

Got it and how we're approaching it.

With that rich.

Next question please operator.

Our next question from Matthew O'brien with Piper Sandler.

Good morning, Thanks for that question in coal good luck in the future.

Brian I was hoping to talk a little bit about rose.

Over the last maybe four or five years here, you've lost about four or 500 basis points of nice year. So I'm curious on the Rossa side I know, it's early but you talked about this massive funnel can you talk about what you're seeing that funnel in terms of is it just more people than a venue the zimmer over the last several years and have been good customers are.

The majority of those people that are in the funnel right now or have you been surprised by the number of folks to do worked within the past that have come back into the funnel and could be to be customers here in the near term again or even just de novo people that you've never worked within the past if you could kind of wait.

Where some of those.

Some of those clinicians with kind of sit within those three buckets I think that'd be helpful. Thank you.

Absolutely, it's kind of a mixture when we put the strategy in place it was pretty clear that our first intent was to go after those accounts that are already using us.

Folks that no and love our implants have always had an interest in moving into robotics, but wouldn't do it at that couldn't use around implants. So theres no question that that's a pretty big element of our success just pursuing those.

Of the implant Zimmer Biomet and now can use that implant in concert with robotics, but what we're finding is that it's never a perfect world in the way you rollout of plan and there are situations that are competitive where we know accounts that we would not have pursued in the first place.

Our actually active and looking at robotics, so naturally as a result of having a robotic solution. We get involved in that process and we have found that in those competitive situations, even where we didnt have the primary strengthen the account we're winning some of those decisions and so as a result, we are actually seeing conversions being.

Part of placement that we see with Rosa. So so it's kind of both and then it on top of that we're also planning, which I kind of referenced before is once we do get a robotic system in place even in an account that is one of our platinum accounts one of our big users Theres always individual surgeons that are using competitive implants and if.

They want to migrate to robotics, there's obviously, a natural gravitational pull to do that but they have to use our implants and so that was what I was referencing before I was just an account were five surgeons that we're using competitive price or using competitive implants are now getting trained on robotics want to begin using robotics, which is great because that will drive.

Conversions, but it will also drive demand for another robotic system, because that's going to get tapped out pretty quick. So again. It was is a combination of those things also to make sure that we recognized that theres multiple ways to drive revenue when we do place robotic system. The obvious upfront capital purchases is clearly an opportunity for US you get a mix.

If it kind of a share of wallet benefit because there is an increased price associated with the disposables you need to do a robot procedure and then you get that natural pull through that I just referenced we get can competitive conversions to to be able to use robotic system. So again its.

It's all coming together I mean is the fact is it's early.

We're rapidly training and getting these things out there and building a commercial infrastructure to be able to to support demand, but but it feels good so far.

Thanks for that.

Operator next question. Please our next question comes from Jerry Larry Biegelsen with Wells Fargo.

Good morning, Jerry for taking the question.

Hey coal.

Thanks for taking the questions just.

The pipeline I'm just a question on that Brian I heard you talk about hit or coming soon so could you give us an update on but on the hip Judy and revision knee or those 2020 approvals and his rosen one spine still in early 2020 launch thanks for taking the questions.

Yes, So I would just take a quick quick step back and just let you know that.

There's been a pretty significant shifts to focus in the organization we've done a very good job of.

Rethinking, how we deploy resources inside of research and development and commercial infrastructure by the way, but we really taken a hard look at the R&D pipeline started to to get more biased towards robotics, and informatics and spend significantly more money almost a mix shift that has occurred in those areas. It doesn't mean that we're not going.

You know continue to do implants, but the fact is most of the money now we're shifting a good portion of that money shifting towards rose.

Towards a mini robotics towards informatics towards efficiency in in doing the procedure. So that was a pretty significant innovation shift for the organization because we think it could bring real value to the patient and the customer. So that was a big shifts that occurred as a result of that we now have more in the pipeline in applications for rose in other areas.

So the next things that you're going to see from Roes that we've been very transparent about this is a partial knee application as well as a hip application those will likely come in 2020, but I don't want to give specifics we'll learn more about these at the Wls meeting, but those are the next in line revision is something that we're clearly working on we have an opportunity.

To be able to do this because we don't need a CD scan to be able to do you use the robotic system opens the door for our vision procedure, but thats a challenging application to provide would be a big win them because it's one of the most challenging procedures to do so if you could have robotic assistance inside of that would be attractive, but I don't want to give a view on timeline for that so again were shifted.

Basically our innovation pipeline to those very important elements of the ecosystem that are around the implant.

We don't lose focus on the implant, but we just we enhanced our capability to bring the implants or the market in a way that helps patients and customers more.

Thanks for that Mr. Biegelsen next question. Please.

Our next question comes from Matt Taylor with CBS.

Hi, Thank you for taking my question.

So I just wanted to clarify one thing on those operating margin guidance can you talk about the 30%.

In 2023 is that the full year number and the reason I ask systems.

The midpoint of this year that those implied higher than that 50 to 70 bips beyond this year over that timeframe and I guess I was wondering if that's right and what what has to happen on the topline you to achieve.

I'd say, it's interesting because we're talking about 30% and 30% of our questionnaires have been Matt.

[laughter].

Yes, so you're thinking about it correctly, Matt it is 30% in year in 2023.

Again as I said earlier in the call. It is it's not going to be we were not expected cadence to be linear.

It could happen sooner or could it could be more in the back end of that period, depending on on topline growth and our level of investment back into the business I'll come back into that you're right relative to 2020, the midpoint would not suggest any significant margin expansion on an operating margin level.

And thats consistent with how we've talked about the year, where we could see some modest improvement in overall operating margin. However, again coming back and if we see the right opportunities to invest for long term growth near term growth for that matter. We will make that we will make that decision and the overall guidance range reflects that optionality. If you will around margin expansion.

Or investment.

I will say, though.

Got confidence and we're early days, but the team is executing extremely well against these programs that we've launched and I would I would say that we're going to see margin expansion as early as 2021, but again I don't know that you can take a linear footprint from today to 2023 and a in March 2021 and.

That way, but but we do expect to see some margin expansion into 2021.

Matt It pretty probably is worth it to expand on that just to remind everyone. Again, we don't guide to mid points, we guided ranges and that's exactly what.

So if you just talking about there and I think as an important thing to keep in mind, we think pretty carefully about what ranges to give without.

Next question please.

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Our next question comes from Ricky why is at Stifel.

Hey, Ricky.

Some people that.

Brian.

[laughter].

Maybe turning some of the.

Financial perspective.

Yes.

So if you'd be operating cash flow guidance, but.

Obviously, the balance sheets made significant improvement over the last 12 months.

Your gut was almost four times leverage now you're roughly three times leverage are you, where you want or need to be.

Just where you where you.

Aiming toward from here in the progress on the balance sheet and driving cash flow.

Open the door in some way you could we imagined the doors a little more open.

Increased growth enhancing M&A in the year ahead. Thank you very much.

Thanks for the question Rick So first of all and on 2019, we ended the year at about $1.1 billion, a free cash flow as we move into 2020, we expect that number to be somewhere between $1.1 billion to $1.3 billion again 2020, and that's inclusive.

Of these restructuring charges, but I've talked about a bit relative to the restructuring programs that were initiating again, we're saying operating costs or investments for that program will be somewhere between 350 400 million.

Over the time horizon to 2023, we think a little more than half of that will be in 2000 and wanting.

Again, our guidance for cash flow free cash flow in 2000, 21.1 to 1.3 billion and again that is inclusive of these restructuring charges that we'll have to pay you're right. We've made good progress on the balance sheet and de levering.

We got ourselves to a point where were just under three on a net debt basis.

Ending 2019 and relative to our overall capital allocation priorities, we expect to continue to make progress on de levering the balance sheet into 2020 and again that strong.

Durable sticky cash flow generation is a big component of that.

The second thing I'd say, though is beyond the priority to continue to de lever the balance sheet. We are in a better position now operationally financially I think strategically as well.

Where if we see attractive M&A targets that meet our strategic filters or financial filters, but also maintain a strong capital structure and profile and investment grade, we may decide to invest capital into into M&A.

In 2020 and beyond so again organically, we expect to continue to de lever the balance sheet.

But again, we may also decide to deploy some capital towards M&A meets all of our.

With that I talked about.

Thanks, Rick.

Thanks, and we all know thats not the worst you've ever said on and on an earnings call. So next question. Please operator.

Our next question comes from Robbie Marcus with JP Morgan.

Thanks for taking the question and nice quarter.

But just from me.

Brian I was hoping you could give a little more color on the updates with the FDA inspection what exactly did the.

New items entail are you know how how should we think about the.

The seriousness of them and then is this something that can get resolved in 2020 or do you expect to resolution more in 2021 timeframe. Thanks.

Yeah. So so first of all I just want to say anytime that we're talking about interaction with the FDA quality patient safety any of those things I just wanted to be very clear that we take quality of our products and patient safety as the most important thing we do as an organization mission to this.

Company is to alleviate the pain of people in the hurdle and make the quality of life better that absolutely means that our product needs to do is intended to do and keep them safe. So thats. The first thing that we look at and we feel very confident we're in we're in check there.

The fact is it also shows we saw the FDA come in that we've made real progress I mean, it's hard to describe because you have not been able to see the factory, but a lot of the same sta investigators that were there actually where there from the very beginning needed for me when I walk in the factory. It just looks different you literally.

He looks different and the culture.

The.

Energy in the factory is different and that was recognized by the FDA back as we got observations, though we have eight observations in the factory.

I would tell you that all of the observations we feel are manageable and we feel very confident that we can respond to the FDA in a way that's going to be satisfactory to them.

The way I look at these things as we already had money earmarked to be able to continuously improve that factory and the fact that the FDA has given us guidance in the way that they have on where we should focus is actually a good thing because it we're going to spend money I'd rather spend in an area that I know the FDA is concentrating on so it's basically a roadmap for us.

To be able to do that but I want to reiterate the fact that we feel very confident that we're going to be able to respond in a way. The FDA is gonna be satisfied we're going to be able to continue to move that factory forward I think it's important to recognize though that this isn't going to be an issue that gets resolved in 2020.

Issues not I mean, the only way you moved down a path to remove a warning letter is to have an audit where you have basically very little to no observations and obviously that didnt happen. This go around in from here, It's just up to the FDA and when they come back and we're going to respond to the observations in a very timely manner in a comprehensive way.

Hi, keep that dialogue moving with the FDA, but ultimately it's there it's their decision when they come back in and even when they come back in if we get a stellar audit and and we have very few to know observations. It still takes time to be able to remove a warning letter. So it's just a process. That's involved at the end of the day, though even with the.

Warning letter in place I, just want to reiterate the fact that weekend absolutely function effectively out of that factory. Okay. So I. Appreciate the question, we feel really good about the progress that we're making obviously some work to do still but we feel confident we can get there.

Thanks for that Robbie lot next question. Please.

Our next question comes from Matt, Mike Matson Needham and company.

Hi, Thanks for taking my question I guess I just wanted to ask another Rosa question. So I didn't really hear any commentary on the status of the spine and bringing version of the robot. So can you maybe talk about the launch plans, there and whether or not you sold in the fourth quarter.

Thanks.

Yeah I appreciate that we have we have folks using the rose.

Buying system.

But it's really just those that are developers. So we're not in a really a launch mode yet for that system, but if I just take a step back and I think about the spine business overall I think about it in a few different ways.

We clearly have not been performing the way I would like and we're not possible performing right now with predictability in that business. They are key areas that we need to concentrate on the number one thing is we have to get that channel that we've decided on to be able to take advantage of the portfolio that we have.

The fact is we have the best cervical disc in the market and we need to make sure. The now we're taking advantage of the Mobi C. In the way that we should know that we have stability in the channel we have the together, which which is an absolute.

Pivotal change for four for those with scoliosis it dramatically changes the the care for that for that patient population, a very exciting technology with the channels got to take advantage of that and we have now gap fillers like the the trellis titanium threed printed inter body that was a major gap for us we now.

I have that Threed printed interbody that we need to make sure that we're taking advantage of and we have to launch Rosen and that's got to happen. In 2020 is not just Rosa, though it's got to be Rosa in concert with our mini robotics platform and Walter because that provides a comprehensive solution for the surgeon when we talked about robotics matches, placing screws, but also being that third or fourth arm for.

The surgeon in the procedure all those things need to come together in a predictable way. So that we can start during that business. So Rosa spine is definitely a part of the equation is just not the whole equation and the intent is to launch that in 2020.

Thanks for that Mike next question. Please.

Next question comes from Ryan Zimmerman with BT IP.

Great. Thank you so just want to fall Brian.

Hirji loud and clear on this business.

And I just wanted to dig into the components of that between sports extremities and trauma can you just talked about kind of where you're most focus of those three florida kind of parse that out a little bit more than than kind of what we've seen thus far thank you.

Yeah, It's a great observation I mean, the fact is the said businesses, although in aggregate they do growing that mid single digit growth area, they're not all created equal obviously in the whole idea in our organization has to make sure. We're disciplined in focus so as a result of that discipline and focus we need to make sure.

So that we're picking the most attractive submarkets inside of SGT and I can say, it's kind of obvious when you look at it sports and extremities will be the areas that we focused most on so you're going to see a lot of our attention not just in research and development, but also from a commercial channel standpoint training and education being focused in those areas.

The fact is we already have a significant right to win and we need to take advantage that an upper extremities I want to see as build more scale and lower extremities and absolutely become a market share leader there and we have a lot of traction and opportunity for us in sports. So those are going to be the areas, where you're going to see significant investment significant focus our operating mechanisms are being built around that.

And that will be the area that we concentrate inside of SCG.

Thanks for that next question. Please operator.

Next question comes from Josh Jennings with Cowen.

Hi, good morning, Thanks for taking the questions.

Just.

Get an update on the sales force until there is different so switches for different divisions, but just from a high level can you just share with us the attrition rate you're experiencing trim 2020, or exiting 2019 versus actually 2018, human I think you talked historically about the compensation scheme.

Im pleased to drones Salesforce, Colin all sense.

Talk help us understand.

Nuances to that compensation scheme and that was put into effect.

Thanks for taking the questions.

I would say, it's we've actually had zero regrettable turnover in the commercial organization and I always always look at it to say if if you stuck with the organization through all the Hell that occurred over the last number years and you leave the organization now and the momentum comes I probably don't.

Launch in the organization anyway, because you're not making rational decisions, but thats playing out I said, it kind of tongue in cheek in the past, but the fact is we've had zero regrettable turnover in the commercial organization. It is it's a testament to the fact that people understand momentum is coming that we have a market leading should leadership position.

And large joints, we have potential to do the same thing and NCT and we have new products that are coming that get the sales organization excited and so I just again I see that momentum I feel that I was in the Asia Pacific kick off meetings.

Phil significant energy there same thing in Americas, albeit actually after this after this event will be heading to Spain for the for the European kick off event and I can tell you. The energy is yes. There. So we're not seeing that turnover when you see momentum like this and you don't have regrettable turnover. It gives you the opportunities.

Who stays in the organization and new doesn't and that gives us an opportunity to upgrade talent as we go that will be a major focus of this organization always ensuring we have the best talent developing the best talent retaining the best talent.

Thanks for that Josh next question. Please.

Our next question comes from Peto Shuttering with Deutsche Bank.

Thanks, guys for taking my questions and coal thanks for help over the years waffle early in the gross a launch I was curious what percent of Roes on needs are being done from that list right. Now no answer to you spent with hazelnut robots are starting to convert the nonworking money to spend less.

Okay.

So none of those yes, so rose the Cementless opportunity is it's kind of bifurcated, we have an opportunity to be able to convert.

These two cementless without Rosa, but I wouldn't so we're certainly trying to do that and are doing that at same time. When you look at the robotic application you get such confidence in cuts that typically what you find is people are more willing to go to Cementless as result of having robotics in so it is a combination of those two things.

You would naturally see in robotic cases, a higher mix of cementless versus non robotic cases, but either way.

Yeah, we don't have a lot of robotic systems out there today, and we're not slowing down in our pushing on the Cementless option, because we think it's a very good one so if it's both of those sense right. So we're going to go after conversions and get a mixed benefit for those that are already using our implant with cementless and we're absolutely going to take advantage of robotics to be able to dress analysis as well.

Thanks next question please.

Our next question comes from Kristen Stewart with Barclays.

Hi, Thanks for taking my question.

Paul I guess, he will mean that.

Hi, Good question just about the restructuring program in general So if I look at the pretax savings that you're expecting to see generated it looks like that.

Have you.

Pretty much all of the operating margin.

The next several years.

Then the.

Free cash flow I guess as well I guess, that's also eating into that cash flow I guess that you're expecting as well the 1.1 to 1.3 that you're guiding to how should we just think about the operating cash flow for the next couple of years Q1, 0.1 to 1.3 seems kind of flattish.

To break that out for last couple of here. So just trying to understand what kind of the thief fitness ceiling.

This restructuring charge or charge as any savings. Thanks.

Yeah sure.

So you're right, Chris and if you. If you took the range that we discussed $2 million to $300 million by 2023.

And you dropped all that some margin you could effectively get to 30% right. We.

Your math is right on but I think it's important to understand that that that program is not just about margin expansion and through cost reduction and and dropping that it really is more about creating a mix shift.

And providing us the ability and the confidence to invest against our highest priority opportunities.

To drive topline growth right. So.

I would say the program is more about creating and liberating that funding to drop topline versus just a share dropdown into into operating profit. So we think it's actually going to be a combination of accelerating revenue growth from where we are today, but also improving overall margins as we leverage our infrastructure.

And grow SGN, a slower rate than top line.

Okay. So that's that's how we think about overall the margin profile between now and 2023, where we're saying at least 30% operating margin.

Relative to free cash flow again, we ended 2019 at at just about $1.1 billion, we do expect to see an improvement into 2000, and and I'm, sorry, 2020, So our guidance.

Our guidance has that profile is baked into $1.1 billion to $1.3 billion and again that one one to one three is burden.

By some of these restructuring costs.

That we said will be $350 million to $400 million over that three to four year period again more than half of that being in 2020, so the underlying cash flow.

Operationally within the business is in fact, improving and improving at a really healthy clip into 2020 and again as we think about what are our key metrics and financial priorities revenue growth margin expansion free cash flow conversion, we do expect to see increase and improvement in overall free cash flow conversion into 2020, so hopefully that.

Hello.

Yes that is that 1.1 to 1.3 is that an adjusted cash flow or is that like our rail cash flow number that straight cash flow, that's operating cash flow less property plant and equipment and instruments.

Okay.

Is.

Okay I'll ask another question on line. Thank you.

Through the last off logs were out to the bottom of the hour. So if we're going to wrap it right. There. Thanks, everyone for joining us today certainly appreciated.

Carry environment.

Carry in Barb and I will be around for the rest today to answer any questions. You may have there will be a replay of this call available.

On our website posted later on today best way to reach US is probably by emails and send us a no did you have any follow up questions have a great day integrate week everyone Goodbye.

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

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