Q3 2022 Zimmer Biomet Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet third quarter 2022 earnings conference call if anyone needs assistance at any time during the conference. Please press star followed by Zero as a reminder, this conference is being recorded today November 22.

Two following today's presentation, there will be a question and answer session.

At this time all participants are in a listen only mode. If you have a question. Please press the star followed by the one on your push button phone I would now like to turn the conference over to <unk> Senior Vice President Chief Communications and Administration Officer. Please go ahead.

Thank you operator, and good morning, everyone. I Hope you are all well and safe welcome to Zimmer Biomet third quarter 2022 earnings conference call. Joining me today are Brian Hanson, our chairman President and CEO EVP and CFO. So he will probably be I N C O L bonds, where notes before we get started I'd like to remind you that our common.

During this call will include forward looking statements actual results may differ materially from those indicated by the forward looking statements due to a variety of risks and uncertainties.

Please note we assume no obligation to update these forward looking statements, even if 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.

Additionally, the 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 our Q3 earnings release, which can be found on our website Zimmer biomet dot com with that I'll turn the call over to Bryan Bryan.

Thanks, Gary and thanks for joining us for the call. This morning, we've got three sections of the call first I'm going to briefly talk about our Q3 performance and really the momentum that we saw in Q3 that has allowed us to increase our outlook for the year and doing so even in the face of some pretty meaningful macro pressures that were certainly.

Still facing I also want to spend time talking about our ZB innovation. This is clearly the driver of our continued strong performance and will be the driver as we go forward and for the second section is sticky will provide more detail on the quarter, but probably more importantly, our 2022 guidance update and then we'll close things out by.

Addressing any questions you might have before I get started in Q3 I just wanted to make sure that I'd take a minute to say thank you. Thank.

Thank you to the ZB team members that I know are listening I know a lot of you listened to the call and I. Appreciate that your continued strong performances. It's just built on day in and day out execution. You were just focused on driving results and I know youre showing up and facing some very very real macro challenges right now and I appreciate it.

The fact is it I'm just really proud that even in the face of these challenges you're delivering results for our customers delivering results for our patients and for our shareholders and you're moving the mission of this company for it every single day I know, it's not easy, but I promise you. It is much appreciate it.

Okay, so turning to the third quarter.

Although at the beginning of the quarter was a bit choppy when it comes to procedure cancellations, we did see very nice improvement throughout the quarter and we finished strong.

And that execution and recovery occurred in all of our regions, but especially in our O U S regions with both EMEA and APAC performing better than our expectations.

Side of this we saw good momentum in our large joints business with our knee franchise growing in the high single digits and our hip business growing just above 10% and as you've seen this was somewhat offset by the telegraphed an expected pressure in our ICT business and our other category now, although we did see the strength in the quarter, we continue to face significant challenges.

Across foreign currency supply inflation and staffing.

The team has been able to navigate these challenges and mitigate their impact you can't completely eliminate them, but they certainly mitigated their impact and have done this through operational and commercial discipline as well as driving our innovation in the field and as a result, our confidence continues to grow and you see that reflected in our updated financial.

In short our underlying business is clearly strong and I truly do believe it is getting stronger and just as an example, when we look at the quarter, we announced a first of its kind three year agreement with hospital for special surgery, where H S. S. You know the partnership creates H S. S. Zimmer Biomet innovation center for artificial intelligence and robotics.

Joint replacement and we're focused here with HSA is to develop new tools that will be powered by AI to provide data driven recommendations or insights to surgeons for robotic assisted joint surgery. It's really you know it's a big deal. It's we're clearly very excited about it we really do believe this is a future of medicine opportunity and works.

Cited to be involved with H S S.

And our Q3, our new product pipeline continued to deliver as well while it's early we are definitely excited about the launch of hip inside. This is the first FDA cleared mixed reality navigation system for total hip replacement hip insight is the latest addition to our octave your portfolio and it further expands our.

Z be edge suite of solutions. Additionally, we announced the FDA clearance of our identity shoulder system. This is a technology that has proprietary capability of aligning each surgeon's approach to an individual patient's anatomy all of this with the goal first and foremost of alleviating pain, but also optimizing the range of.

Motion for that patient and I've got to tell you our existing product portfolio kept up the momentum as well demand continues for Rosa both in knee and hip persona revision traction in the U S remains strong and our limited launch of persona IQ is driving positive feedback and interest and we're focused on aggressive data collection. So that we can.

Established clinical use benefits and we expect to build on this momentum with new product launches in the coming months, including as we talked about our new persona cement was form factor additional launches in our set category and our hip product launch that we're excited about in early 2023.

I can tell you that all of these product innovations coupled with our ongoing efforts to reshape our business and accelerate zb's transformation positioned us very well for future growth. We continue to strive to be a best and preferred place to work for our team members and we continue to strive to be a top quartile performer for our shareholders and to be a trusted.

Partner to all of our stakeholders, but in particular, our customers and our patients.

So just in summary, we're navigating and really managing through some very real macro headwinds that are definitely muting our growth.

But we're also seeing an offset via Covid recovery very strong execution from the team and meaningful innovation in the field and against that backdrop. Our team continues to execute our strategy and I feel increasingly confident about our future as a company.

With that I'm going to turn it to <unk> to talk more in depth about Q3, and give you an outlook for 2022 guidance okay sake.

Thanks, Brian and good morning.

Overall, we delivered another good quarter, driven by strong execution and continued recovery of electric procedures.

While we continue to navigate challenges our third quarter performance gives us the confidence to raise our full year financial guidance.

With that I'll turn to our third quarter results.

Unless otherwise noted my statements will be about the third quarter of 2022 and how it compares to the same period in 'twenty one.

And my commentary will be on a constant currency and adjusted continuing operations basis.

Net sales in the third quarter were $1.670 billion.

A decrease of 0.9% on a reported basis and an increase of 5% on a constant currency basis.

U S sales grew three 2% driven by strong elective procedure recovery in commercial execution, especially in our knee and hip businesses.

This was partially offset by expected declines in the S E T and other categories.

International sales grew seven 3% driven by strong procedure volumes across most markets in EMEA and APAC in tandem with lighter comps and continued strong commercial execution.

And APAC performed better than expected with China, largely in line with expectations and strength in Japan.

Turning to our business category performance.

Global knees grew seven 2% with U S knees up seven 3% and internationally is up 7%.

Strong performance was driven by knee procedure recovery across most regions and easier comps.

Along with continued global traction of our persona knee system, especially with persona revision in the U S and continue to increase in Rosa procedure penetration and pull through.

Global Hips grew 10, 5% with U S hips up five 3% and international hips up 15, 5% driven by strong international procedure recovery and an easier comp outside of the U S.

Continued traction across key products, including the G. Seven revision system and Avenir complete primary head, which is focused on the direct anterior surgical approach and lastly continued solid rosa pull through in the hip category, especially in the U S.

The sports extremities and trauma category declined two 1% and was impacted by a tough comp in 2021, and the expected pressure around B B P, which is expected to reverse in Q4 and reimbursement headwinds in U S. Restorative therapies that will anniversary in mid 2023.

Within the category, we continued to deliver strong performance across our key focus areas of C. M F T sports medicine and upper extremities.

Finally, our other category declined 4% driven by tough comps and expected lower capital sales related to a higher mix of Rosa placements versus upfront sales.

Moving to the P&L for.

For the quarter, we reported GAAP diluted earnings per share of 92 cents compared to GAAP diluted earnings per share of 77 and.

In the third quarter of 2021.

The increase was driven by a decline in litigation related expenses and a tax benefit in the quarter from a favorable tax liability outcome.

On an adjusted basis diluted earnings per share of $1 58 represents a decrease from $1 71 in the third quarter of 2021.

Adjusted gross margin was 77% inline with expectations.

As previously discussed heightened inflationary pressure will drive full year gross margins to be slightly down when compared to the prior year.

As previously noted.

Increasing input costs from this year, we'll pull through into 2023, and we now expect a headwind from inflation in 2023 to be at the upper end of our previously communicated 50 to 100 basis point range.

Our adjusted operating expenses were $742 million, an increase versus the prior year due to inflationary pressures and higher investments into R&D to support future product launches.

Our adjusted operating margin for the quarter was 26, 3%, a 200 basis point decline from the prior year and largely driven by increased inflationary pressures and continued investments into the pipeline and product portfolio.

Despite ongoing macro headwinds we continue to expect our efficiency programs to drive improved second half operating margins versus the first half of the year with a step up in the fourth quarter in tandem with higher revenue.

The adjusted tax rate was 16, 3% in the quarter in line with our expectations.

Turning to cash and liquidity.

Operating cash flows were $451 million, a free cash flow totaled $332 million for the quarter.

We reduced our debt by about $160 million in the third quarter, excluding the effects of foreign currency and ended the quarter with cash and cash equivalents of about $545 million.

On a related note despite a higher interest rate environment. In 2022 interest expense is expected to be broadly in line with our previous expectations for the year. However, we would expect a step up of interest expense into 2023.

We have made significant progress in strengthening our balance sheet through improved financial performance and ongoing debt reduction ultimately, providing greater strategic flexibility for the company.

Moving on to our updated financial outlook for the year.

Constant currency revenue growth is now expected to be five and a half to six 5% versus 2021 with.

With an expected foreign currency exchange headwind based on recent spot rates of 550 basis points versus our previous assumption of 500 basis points.

This means that reported revenue growth will be in the range of zero to 1% versus 2021.

Also related to revenue based on the recent spot rates, we estimate that the strengthening of the dollar through 2022 will create about a 300 basis point headwind to revenue growth in 2023.

Additionally, we are tightening our expected adjusted diluted EPS range to $6 80.

The $6.90.

All other metrics in our 'twenty two financial guidance remain unchanged from our second quarter update.

As a reminder, we expect Q4 revenue growth to be slightly higher than the third quarter due in part to a tailwind related to Q4 2021, Pvp charges that will be partially offset by about a one day selling day headwind.

In summary, we had another solid quarter underpinned by market recovery and good execution and we are pleased to again raise our full year outlook.

While we expect to have to continue to navigate a number of persistent macro headwinds.

Ongoing market recovery in tandem with strong execution and attractive product pipeline leaves us confident about our future.

Lastly, I am extremely proud of and want to thank our broader CEB team for all that they do with that I'll turn the call back over to Carrie. Thank you.

Thanks Eddie.

When we start the Q&A session. Just a quick reminder, to please limit yourself to a single question and one follow up so that we can get through as many questions as possible during the call with that operator may we have the first question. Please.

Thank you, we'll take our first question from Sean <unk> with RBC.

Oh, great. Thank you so much for taking my question and congratulations on a strong friend here, despite a pretty challenging environment.

So Bryan and Suki I was just wondering if you can elaborate a little bit more on 2023, just on the top line how should we think about the durability of growth I think last quarter, you talked about a 4% floor, but it looks like you have stronger momentum going into next deal, but the 6% exit rate.

And then on margins given the incremental impact you called out from FX and inflation you still believe you can drive operating margin expansion next year or is that going to be more challenging and then I have a follow up.

Okay.

Really good questions right out of the gate, So maybe I'll start with the revenue side of that equation and then you could you can answer on the margin side and sort of any color you want to provide that I might miss feel free to do that.

Maybe maybe it's to make it simple I'll just start with the with the end of the story.

Then I'll get into some of the details around variables that I think are important to consider but just going to at the end of the story, we said that in an undisturbed market. We would be disappointed if we couldn't grow 4% now I would tell you that we do not see 2020 three as a normal market or not disturbed market, you're just too many variables moving but we do see we still do see a path.

We had a 4% growth so that's kind of the end of the story.

Now, let's take a look at some of the puts and takes that we have to look at that could either benefit or detract from that on the positive side of the equation I'm going to start first with those things that are controllable by our company. There are really three major things that I look at that give me confidence and should give you confidence number one its around innovation I'm just going to call. It the innovation flywheel here at <unk>.

<unk> is really moving in the right direction, and it's creating a solid pipeline.

That importantly is translating into moving our vitality index north and that continues to move north for us and we expect to do continue to do that on a go forward basis. So innovation is a really big part of our confidence.

The team is executing really strong execution right now in hitting a stride, which is important for momentum in the business and the third one is around a continued focus from this organization on moving our weighted average market growth north through very disciplined portfolio decisions.

I'm talking about not just active portfolio management, but truly looking at the way we spend in research and development commercial infrastructure, where we compensate our people the way we actively move things out of the portfolio that are not helping our Windsor and move things into the portfolio to do that has allowed us to increase our weighted average market growth and we're continuing to do so so those are the <unk>.

Positive coming into 2023.

A macro standpoint, we have a couple of positives as well.

I really look at the backlog of patients in orthopedics as being real I can't put a number to it but it's hard to size, it's hard to say when it's going to be impacting the markets. The piece, that's going to impact the market, but at some point. This has got to begin to work its way through the system and that could provide a tailwind to 2023 and then.

Comps as well in 2023, it's going to be choppy, we got choppy comps you're going to see differences in growth rates by quarter, but the fact is when I look at the full year, we should look at comps, there's a slight positive to 2023 on the negative side. It's a stuff that everybody is talking about unfortunately, we do have a very constrained supply challenged situations and where.

Managing through it but it's it's a tough road and that's going to continue throughout 2020 through 2023, we believe and in staffing you know our capacity has continued it's not as difficult as it was but that's going to remain a headwind for us in 2023, and then we also look at recession risks on elective procedures, particularly if it impacts unemployment, but all of that.

Say.

2023 is not a normal year given all of these variables theres a lot to manage a lot to think through and a lot to contemplate in the way that we set up our guidance range, but based on what I'm seeing today I expect there to be a fore handle in that range, which they may or not may or may not sound like a lot to people looking at med tech but to us.

Knowing where we started that's a pretty significant step up from where we were we started the journey and we're proud of it and again, we're just getting started.

It gives you a sense for revenue components in our view on revenue as you come into 2023, and it took me I'll pass it to you on the margin side.

Yeah, Thanks, Brian and good morning, Sharon Thanks for the question.

On the margin side Youre right the macro environment has become incrementally more challenging here in the back half than we originally soon that's been reflected in our rest of your outlook and despite those challenges we've been able to raise the backend of our year. So we're pretty proud of that and the team's doing a great job.

That rolls into next year.

It has become incrementally more challenging, but we still see a path to maintaining or slightly improving our operating margin versus 2022. Despite some of these headwinds.

And that assumes current market conditions are things erode or if things improve we'll we'll revisit that but where we are today and assuming stability on some of those headwinds.

That's how we're thinking about 2023, the biggest smoothed for Australia its been around FX. So as you know we increased our full year outlook by 50 basis points to 550 that means we're exiting the year at 600 basis points of headwind on revenue that translates.

So about 300 basis points of headwind into next year. So that's got a pretty significant impact on the top line in absolute dollars and of course, there's a flow through to margin and the earnings on that but despite that pretty big drag again, we believe there is a pathway and we're committed to.

Maintaining or growing margins into next year. The other major area. He touched on was inflation.

Previous estimate was that we'd have 50 to 100 basis points capitalize that 'twenty two into 'twenty three we're now at the top end of that.

But still within our overall per view that we gave earlier this year the real driver of that increase has been less about.

Supplying raw raw material costs, and less about wage inflation, which were the bigger areas.

It's more about higher freight cost right now trending higher as well as energy costs, especially in Europe .

But again at least on the bigger components of that were starting to see some stabilization. So hopefully that's a positive light towards the end of the tunnel.

And then interest expense again, just recognizing the higher interest rate environment. We're in we would expect overall interest expense to be modestly higher next year. So just making sure that folks have that as an update to their model, but no.

We're continuing to address our efficiency programs will go deeper and faster I really want to commend. The overall ZB team for embracing these challenges and hitting them head on and they've done a fantastic job and again, just based on that execution and assuming current market conditions hold into 2023, we think we've got a pathway to maintain or slightly improve.

That's really helpful. Thank you so much for the color just as a follow up I was just curious to get your thoughts on portfolio management.

You know in the context of shift of procedures to the ASC setting we are hearing about 60% of the gone procedures could be done in the ASC setting by 2028, or let's say even by the end of the decade.

Any any thoughts on that and I, you're still under indexed in that setting and thank you so much for taking the questions.

Yeah. Thanks, maybe I'll start off with that and then upon if you want to wait and feel free to do so yeah. We clearly still see the ASC is an attractive submarket of our recon business and also clearly other parts of our business. Each one of the faster growth Submarkets and where we're clearly increasing our focus and spend in that area.

And we're doing it in a couple of ways number one we're putting infrastructure in place. We've got dedicated commercial teams that focus only on the ASC and thats important because you've got to have contracting prowess in that space and we've done that over the last couple of years, you're really getting good traction as a result of it.

Additionally, we're making sure that we scale up in the product categories that the ASC is looking for we wouldn't have purchased eight booms and lights company. If we didn't want to have that infrastructure for the ASC not to take anything away from booms and lights, but it's not an area that we would have waited into if it wouldn't have given our scale in the ASC marketplace same thing in sports out acquisitions that.

We have done in other parts of our business. So we're really doing it two ways commercial infrastructure product portfolio. So that we have a broad based contracting opportunity in the ASC and we're seeing traction as a result of that we do expect the ASC to continue to move north relative to the number of procedures being done in the ASC versus the hospital.

I don't know that I would agree with the numbers that you stated, but certainly we believe that it's going to continue to move north and we wanted to make sure that we're taking advantage of that.

So Bob I don't know if you had anything else other than that.

Yes, good morning, sorry, good afternoon everybody.

Everything Brian , but I do think one of the drivers of having a complete portfolio now.

Is that we have best in class contract.

Our contracts on banking at 2020, one that we're not a part of Zimmer Biomet was not a part of where our products today. So indeed, the portfolio gaps have been remediated.

Did it get distracted working and now while we don't disclose the specifics in terms of growth we are growing at double digits in the ASC category here in the U S. We believe will continue to grow at double digit rates.

Thank you.

John Thanks for the question Yeah, all ready to go to the next to Keith Please.

Thank you, we'll take Steven Lichtman with Oppenheimer <unk> company.

Thank you. Good morning, I was wondering if you could talk about the strength you're seeing in the hip side of your business, particularly as it relates to Rosa pull through.

What are you seeing as it relates to surge in interest on the hip side with Roes then would you say you're still in the early days in terms of that being a tailwind.

Right.

I'll probably pass the.

Product related more than anything I'll, probably pass it to a bond to speak to the hip performance and also maybe speak to some of the things that without too much specificity that works, we're predicting in the future to help their business as well.

Absolutely. Thank you Steve I'll, just summarize the performance so far when he goes through robotics.

Above expectations we.

We like the fact that this is the only English robotic system in the world.

The fact that it remains Cps cabinets, which is a great advantage for our for the ASC setting that we're talking about.

We've seen average versus conventional she procedures.

Similar level at even a higher level of accuracy in the procedure. So for all the clinical reasons that I'm alluding to.

We are best in Gaslog, Josh is going to continue to scale up we are right now, placing installing about 30% of our robotics, including kids in ASC settings. So again, a major advantage in settings, where that time on efficiency that makes sense.

Begin robotics keep robotics also excited about other launches we got about on hips theme, you've heard from Brian in the opening remarks, we've got a partnership in mixed reality.

With a company called surgical planning associates that enabled Zimmer biomet to be the only FDA approved midstream additive platform huge.

In the U S.

Why do we still have to meet reality, we get better visibility in that.

Surgery, we get better accuracy.

Now, although better efficiency.

Only thing is that we're going to be at explaining that this week.

Sheep as well as mixed reality that he'd been sites.

Peter.

Other products do.

You do have momentum.

Continued to perform strongly globally with Avenir complete we believe that we have deep based robotic platform <unk> and Argos.

In a multiple examples of innovation that are gaining some traction in that market in the U S and globally.

Great. Thanks Yvonne.

And then if you can.

Just a follow up thanks for the color on the 2023 inflationary headwinds.

I was wondering if you could talk about offsets you you mentioned some of the internal efficiency programs, but what about on pricing.

Are you seeing any progress on pricing initiatives any color you can provide on that and what potential impact. They may have that might have on the on the on the offset side.

Yeah. Thanks for the question Steve. So we have so far this year has seen an improvement in overall pricing erosion at the company level.

Our historic pricing erosion was in the two to 300 basis points per year coming into 2022, and so far this year were tracking at about 100 to 150 basis points. So there's been some market improvement, we've been making investments around data and analytics systems.

Better governance, we've hired additional capabilities upon talked a little bit about contracting all of these are contributing strategically and tactically to that improved price.

As we move into next year, we do expect there to continue to be pricing erosion.

But we would hope that and expect it to be at the lower end of our historic average if not better.

So while well, we do expect it to be better than where we've been for the last several years. It will still be a headwind year over year, but having said that there are number of other efficiency programs that we're targeting.

To help offset some of these headwinds like our new global business services or shared services operating model that we created through the pandemic.

We're taking a much more targeted look at country profitability.

The.

Product portfolio active portfolio management that Brian spoke about looking at products that have lower margin lower growth opportunities and thinking differently about those investment profiles. These are all things that are going to help contribute to offset those.

Headwinds.

Got it thanks Julie.

Thanks.

Yeah, and operator can we go to the next slide in the queue. Please.

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

Hey, guys. Thanks for taking my question.

Brian maybe my first one on <unk>.

On your up 4% for fiscal 'twenty, three as a starting point I'm curious at what does that floor, assuming it looks like there is no backlog.

Pricing still continues to be a headwind.

It looked like you sounded pretty bullish on new products.

I'm, assuming that four is assuming minimal contribution from new products. So could you just go through the assumptions. Please.

Yeah, I think you kind of laid them out already.

When I think about the go forward looking revenue growth youre going to have puts and takes the things that we know we're going to be positive for our business will absolutely be innovation. So when I think about the calculus on revenue growth going forward. There's no question that we've included innovation.

We're spending a lot of money and a lot of focus in research and development, bringing great products to the market and we absolutely expect that to buoy. Our revenue growth. That's part of the reason why we came from a zero percent growth business in 2017, 2018, and now we're predicting we can get for you. So that's been a big part of that movement. The execution of our team is another part of it is there's no question.

I know that it's hard to put a dollar amount.

On momentum and an organization, but momentum does matter and we have it right now and the other big one is that weighted average market growth. We have moved our weighted average market growth north during.

During the last five years, so as we get closer for a weighted average market growth to that 4%. It gives us more confidence that without share taking we can deliver the 4% in that consistent way now certainly we would we wouldn't stop there.

Active portfolio management is phase III of this organization and we're going to have more financial flexibility going forward, we're going to continue to change that weighted average market growth rate up but you know getting to the 4% to start is a good thing. It's a good thing the negatives against that because youre, saying that gave you got all these positive why isn't it more than that we still have real challenges around supply.

And that is a distractor.

Growing your business. So we're gonna have to manage through that as we get through 2023, we believe at least through the middle of 2023 potentially beyond even though staffing into our capacity.

Isn't as acute as it was before.

No question that this is gonna be a headwind for us going forward and of course, we have to calculate some potential risk associated with recession. If that does occur. So I think it's all those things combine in concert with this concept of having some backlog that we're hoping we can count on in 2023, but as of yet we havent seen it even in Q3, which was a great quarter, we still don't believe.

<unk> backlog was concerned we certainly might've had some backlog in certain areas consumed but it was offset by some of these negative headwinds that we actually think backlog built in Q3. So those are the variables that we're looking at as we think about 2023 and beyond.

Okay. That's helpful, Brian and so Q1 for you on.

The free cash flows year to date, it's really been impressive up year on year a free.

Casting were from north of 80%, probably one if a few med tech companies to have recapped flu. So is that the timing.

Impac or anything else going on in the free cash flow line item.

Yeah, Vijay we we did a we have posted a really good nine months here I would say there is some timing benefit in the third quarter that will reverse in the fourth quarter.

It has to do with some payments around DVT as well as some tax payments that.

Normally what fall in the third quarter, but now planned in the fourth quarter.

All in all I think you nailed it we're having a pretty good year on cash and we feel confident in our overall range for this year.

Understood. Thanks, guys.

Yes. Thank you thanks Vijay.

Operator can we go to the next question.

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

Hey, good morning, everybody I wanted to follow up a little bit more on the 2023 comments I think before you said EPS would grow faster than the revenue growth and so now now that that was what the op margins op margins are kind of flat to slightly improving.

That's how we should think about EPS growth now versus the 4% constant currency growth. If EPS is still up but probably less than 4% and I did want to clarify on the interest expense you said higher interest expense, but I think you have no floating debt. So just kind of curious what's driving the higher interest expense.

Sure So Brian I'll I'll go ahead and take those so one thing to remember on the EPS line as I talked about 300 basis points of headwind on revenue into next year and so as Brian thinks talks about that.

That's 4% on an ex FX basis, you'd need to take into consideration.

The foreign currency headwind.

Matriculates into next year.

So having said that.

With the margins kind of being relatively in line maybe slightly up.

And with interest expense up year over year, which I'll talk about in a moment.

You would expect on a reported basis to see EPS kind of travel in line with overall reported revenue. So hopefully that gives you a little bit more color again, that's our best view right now things can obviously change between now and when we finally get guidance for 2023 in the first quarter of next year.

On your question related to <unk>.

Interest expense you are right we are on face value in fixed debt, but we also do and have done some.

We have strategies to swap out our fixed to floating so its really the interest burden on those swaps that create that that higher interest expense.

Okay. No. That's helpful color and then Brian I wanted to ask on M&A like you kind of always talked about getting more aggressive with M&A. Once the market stabilizes. It seems like 2023 is a year, where we're in a much more almost a normal market.

That's the willingness to do something on M&A that can maybe move the needle a bit more in.

More adjacent to the portfolio versus some of the things you've been doing historically, which are more smaller private stuff and Scott.

Yes so.

First of all I want to be careful what I say, because it's a pretty competitive space right now and we don't want to telegraph too much where we want to do but you know clearly.

We as an organization are squarely in the phase three of our transformation and drabs, we've been very clear that phase III is all around active portfolio management to transform the portfolio shifting towards more whampoa accretive markets and diversifying our business. So that's kind of a broad based way of looking at what phase III is all about where our company and we've already.

Some changes here I know, you're saying they've been smaller acquisitions that we've done, but we haven't had as much firepower, obviously, but we have spun businesses out as well that have helped in this strategy.

That said go but it is getting behind US there's no question and as a result, just exactly the way you are saying you would expect to have more strategic flexibility going forward.

I'll, probably be willing to say and maybe not give any more detail is that we're gonna look at vetting assets across a few metrics outside of the typical financial metrics. We look at missions interested and we've got to make sure that we're acquiring centers that can move the mission, we want absolutely something can drive <unk> accretion for our organization and it's got to translate into revenue growth that's accretive.

Because just because you're in a fast growth market. If you don't have good asset you don't necessarily get the growth rate out of it and it's got to accelerate our EPS growth over time.

The vetting and then the categories that we're going to look at would be first and foremost probably closest to the best would be fast growth subcategories of recon.

So that would be things like data robotics or building more scale in the ASC setting like we were talking about just a minute ago.

The faster growth areas outside of recon, but still in orthopedics and that would be mainly in our set category that diversifies our business away from just recon in those fast growing subcategories of orthopedics and then to your point you know.

Attractive white spaces that are completely out of orthopedics less elective in nature and provide more diversification again out of orthopedics I don't want to say, which of those we're going to prioritize but just know that all of those vectors are on the table and we're looking at a number of assets in each of those categories.

Great. Thanks for the color.

Absolutely not.

I think we can go on to the next question in the queue.

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

Oh, great. Thanks for taking the questions and congrats on a good quarter.

Maybe to start Brian I'd love to hear a little bit more about what youre seeing on the capital equipment environment I know, it's a smaller overall component for Zimmer biomet, but you talked about lower.

Lower capital sales in the quarter it sounded like it was a bit more placement versus upfront sales, but.

Any color on Rosa or what you're seeing if it's different U S. First so U S and how you expect that to trend going forward over the next 12 to 18 months.

Yeah, I'll make I'll make some comments and then Yvonne can correct anything I say incorrectly.

But you know clearly capital is not as big of a component for us. So I almost don't like talking about the capital market because I don't want to say anything that's going to hurt those businesses that depend more on the capital market, but from our perspective, we're we do focus on it it hasnt been a major barrier for US you know again.

Again, we really focus on from a Rosa perspective trying to place through agreements that allow for payment for the the Rosa system through commitments and increased business.

Consider it a leasing arrangement, but the leasing payment is actually commitment a business that is what we focus on and we did more of those in the quarter and that's a good thing for our business, but we do have opportunities to continue to sell to sell and we do not feel at this point anyway serious constraints in the capital market when it comes to Rosa, but.

But maybe Ivan if you've got any further color to provide around that you can help as well.

Absolutely, Brian and good morning, Ravi I'm pretty sure that correctly my boss publicly is about career moves. So I'll never know correctly. You are asking is running $90. The only thing I'll add is that that it is really a global performance so 50% of the installations in the U S.

Fortunately not all U S.

I referenced earlier around 30% of our robots are going to the ASC and that segment is growing.

We're seeing exciting momentum we saw with the hip software. So I would say all in all a robotic installations placement sales are in line they can be.

The move in the right direction and as we enter Q4, we are very excited about where we are now from a retro standpoint.

Okay.

Great. Thanks, maybe as a follow up I think Brian you said last quarter extremities grew double digits.

A little less visibility in this line item.

Anything you could give us on extremities I know sports medicine has the.

Hey.

Reimbursement changes so that there is some pressure there, but any color of what we're seeing extremities versus a trauma and sports and how that might shake out U S. APAC EMEA. Thanks.

Yeah, Yeah no problem. So so maybe just as a quick reminder, for everybody. When we think about our set business isn't there's really no proxy percent, yeah and other businesses because we have different categories in it than others would probably consider we have the upper extremities business inside of set trauma.

<unk>, which is our cranial maxillofacial Jurassic business sports.

Separate from sports it'd be restorative therapies, and then putting nagle says those are the categories that we manage across the set categories.

The pressure that you were talking about in restorative therapies would be separate from sports, but it's still in the snack category.

On the areas that we really focus and invest in our growth drivers would be upper extremities, CMS tea and sports doesn't mean, the other businesses are an important and they just don't get the same level of Resourcing at this point.

And those those three that we do concentrate on did have another good quarter and if I look at all three of them without giving specifics I would say they ranged anywhere from mid single digits to double digit growth again this quarter. So in the areas, where we're concentrating theres no question that we're getting the performance in the field a lot of that has to do with commercial infrastructure.

And then the incremental support that we're getting in research and development to those areas and of course, the acquisitions that we've been talking to you and to drive a more fulsome portfolio.

What youre seeing relative to pressure in the quarter for the global set business. It really has more to do with what <unk> said in the prepared remarks around Asia Pacific pressuring trauma, mainly associated with GBP, which will reverse next quarter, and then that restorative therapies pressure from a reimbursement change and gel one and unfortunately that will carry through to the middle of 2020.

Yourself.

Okay. Appreciate it thank you.

Sure.

Thanks Ravi.

Can we go to the next question please.

And we'll go next to Joanne Wuensch with Citibank.

Good morning, and thank you so much for taking the question.

I was wondering if you can step back a little bit and talk about the orthopedics market.

What you're viewing as maybe changes or not changes in the competitive landscape maybe.

Maybe something in physician practices pricing.

Or generally what you think of that sort of the state of the Union.

And that's a great question interesting question.

I think what I'll, probably do is again, maybe start off on some of the things that I'm seeing that I think are interesting and and then a bond sookie carry but he wants to add anything because I think it's a really interesting question.

A good one.

My view and probably the thing that I like the most that I'm seeing kind of state of the Union is youre, saying is just the rapid adoption and open arms that I'm seeing from an orthopedics customer perspective to technology.

There was a lot of question marks in my mind coming over to orthopedics, and whether or not that transitioned to truly occur we saw it with Mako, obviously in robotics, but we're bringing in a lot of other technologies to bear.

Been very excited to see all companies kind of doubling down on the technology front robotics and data were all moving in that direction and I'm hearing from our customer base that they're looking for it and very importantly willing to pay for the value that brings that that's really important because it is that type of innovation comes into our marketplace, particularly in med tech it usually doesn't.

And when you do bring that kind of technology. It is more sticky than previous technology and it doesn't have the ability to impact pricing dynamics, because the more technology that has stickiness to it the longer term contracts into better stability and pricing and you also get this benefit increased let's.

Let's call it share of wallet or mix for every procedure. So if you can bring technology in to the very same procedure procedure. You had yesterday you get more revenue for that procedure and as we see that adoption continue to move up with things like robotics and data or some Atlas technologies in a knee that actually allows a mixed benefit for the entire market and that.

Buoy, the overall market growth rate, taking pricing stability moving that forward, bringing more revenue per procedure that has a real positive effect for the overall orthopedic space. So that's that's a dynamic that's happening real time that it's pretty pretty exciting in my view anyway, but I'll open it up to anyone else want to add anything.

Maybe quickly here, Brian I'll, just recap some of what you said.

Four bullet points here number one.

It was mentioned earlier.

The shift of care on to the ASC or frankly in some cases, some some things getting done at home like usually got therapies.

We're no longer is all about the inpatient unit there is a real shift of care into ASC.

And then on a post synergy somebody start getting going at home. So that's number one number two clearly the decision makers and digest <unk> or the provider.

<unk> plays a role that's why we are excited about finally, the technologies that we're launching that directly target back consumers patients. So there is no longer just stuffy CCM provider is facing in precision provider and payer consolidated data and the technology that Brian is talking about becomes really powerful tool for us to engage failures in demonstrating that.

No just a solid clinical value proposition, but also an economic value proposition.

<unk> and his team is aligned with the pricing story. There is an emphasis in discussing value just as much as pricing.

Some of the discussions that we're having today around length of stay reduce literally stay some of the discussions we're having around lowering readmission rates increasing patient satisfaction.

Having a shorter surgery with the same outcomes, we're not discussions that were happening maybe.

Three years ago, and they're happening right now.

And the number for the role of innovation I've been in Med Tech for 20 years I was working in orthopedics at 15 years ago.

When a rejoin on a joint orthopedics again 40 years ago, I would say that things were pretty much the same native a couple of robotic introductions over the last three four years, we've seen a lot of innovation bones orthopedics immediate reality in infection management.

Bringing our machine learning and what are you thinking about in diabetes program. So I would say those are the four key things that we pay attention to.

We have a competitive advantage in that in those areas.

Very helpful. Thank you.

Okay, We will take our next question from Richard <unk>.

Securities.

Hi, Thanks for taking the questions.

I wanted to just follow up first.

Brian what you were talking about.

Kind of some of the pricing opportunity you mentioned with new technology.

Mixed reality slight implants, I'm curious within the buckets of mix.

The ability just to preserve your pricing of contracts at a loss and discrete opportunities to charge for some of these newer areas, particularly on that third bucket can you give some examples of where these new technologies might be able to fall into that third category or which of those buckets should we expect more.

More of the pricing impact from.

Yeah. It's.

To make sure that I understand your question, specifically, but when I think about the innovation that we're bringing in not just us by the way that's what sort of like that at this momentum across the entire orthopedic space in all the major players moving in this direction I think in certain areas. We're ahead, but make no mistake everyone's moving in this direction. So if I just take a couple of examples.

And hopefully this will answer the question that you're asking I think about my mobility for instance, which is one of the first launches that we had in data collection leveraging relationship that we have with with Apple.

And Apple watch to collect data and then ultimately uses machine learning to be able to do some predictive analysis.

We're actually now looking at that through a an opportunity to tell our surgeon and the patient when they are falling out of the norm for recovery. Okay. So that's the type of thing that we're able to do and we do sell that so there's an opportunity to monetize that that application. So it's not just giving it to them and getting pull through of <unk>.

Plants. It certainly is getting the pull through of implants, because you get that natural gravitational pull once you bring technology in but Theres also a discrete way of making money or monetizing that my mobility application. So that's one example.

Another example is robotics robotics comes in you get that natural gravitational pull for competitive surgeons to come over but you also get an uplift every time they use the robotic procedure because you get the uptick in disposable value. So that procedure now costs more for the for the account to do but to get the benefit of robotics inside of that so it's a fair a fair trade.

Those are two examples of the way technology is leaning in and that way same thing with persona IQ. That's the first smart implant that will be on the market. It is collecting data in a very compliant way because you can't take it off their non stop for the patient and that will also drive a premium in the marketplace. So if youre going to use persona Iq.

Youre going to pay discreetly for that sensor capability and that's the way. We're monetizing. This so you could see a combination of things, where we monetize the technology or its sometimes it just brings value that is unique to us that would allow us to pull in additional implants, but it's some combination of those two things.

Again, if you wanted to add anything else are sticky or anybody else.

So you've done a very thorough job Bryan we can get our next question.

Great and just on persona IQ it seems like the infection prevention capability or the ability to detect a infection before it occurs that's probably going to be the killer app for a product like that that will allow you to get that kind of premium I guess, what does your residual timelines on the data collection.

Be able to get an approval for infection prevention indication.

Yeah.

What I've learned over that what I've learned over the years is committing to timelines in situations like this is always a bad bad.

A bad idea what I can say is that we are absolutely sprinting and using our limited launch focused on getting users that will use significant quantities and be able to collect data with us. So that we can ultimately look for different ways of providing insights that will matter to our customers. The things that we want to focus on first would be.

What are those things that we could predict that will obviously be good for the patient, but also derail the cost associated with carrying caring for the patients to reduce the cost of caring for the patients.

Infection is great. If you could get there that's fantastic if we could predict the risk of infection before it occurs that would be fantastic certainly something that we're going to be looking to do but it doesn't happen very often so you just think about the powered the number of patients you're going to have to have in the amount of data that's going to take us a little longer to get there, but we're also going to be looking at though is just loosening, which.

Also happens can we predict loosening before it happens you're looking at Stephanie there's certain things you Gotta do from a stiffening perspective that if we can get out ahead of we can reduce the amount of of care that needs to be provided to the patient. So there's a lot of other things that we're looking at to try to predict that will derail that.

The cost or reduce the cost of carrying for the patient.

Make sure for better outcomes for the patient so I don't want people to get hyper focused on infection, it's something that we're going to pursue it'll take longer but the real goal right now is to be able to look at the data that we're collecting which is significant already and then be able to drive those insights that will change the way we care for a patient once we get to those that we can define those that will really begin.

Bolster that value proposition that we have for the product and be able to support a higher price point for persona Iq.

Thank you.

Sure.

We'll take our next operator.

Thank you.

We will take our next question from Jeff Johnson with Baird.

Yeah. Thanks, good morning, guys.

Brian maybe even building further out on this pricing discussion I think it's all interesting stuff in the premiums you can get on new technologies on sensor based technologies are moving that mix higher and all that that that all makes sense.

Interested are equally interested I guess I should say on kind of your base business I don't know what your vitality index is right now, but lets say 70 or 80% of your revenue is generated on products that are a few years or older in the portfolio.

There are hospitals that in understanding that they cant keep extracting two or three points of price even out of those base products every single year, if youre going to continue to invest and develop this new technology in that or are those conversations with hospitals improving at all in this especially in this inflationary environment.

Yeah, you know probably what I'll do is I'll turn this one over to Sookie, because we don't look at pricing just through one vector of one lens that there's multiple variables that we have in that equation that we think are going to benefit the company going forward, but maybe you could talk about the variables that we do look at when we think about pricing and I know you probably have some color.

Well you want to provide.

Yeah. So.

We do think overall that this can help pricing discussions they are becoming much more strategic in nature and more centered around value. We're not completely there where if we want to be but but we're starting the dialogue more around value versus just straight price.

Transactions.

But maybe if you want to talk a little bit because I know you've got some real world experience, yes, absolutely as a real discussion happening pretty much every every country. As you think about our vitality index that is a direct correlation between improvements in vitality index percentage of sales coming from new products and a steadily at around price.

You may now be there'll be mix the product launch itself that you're launching a given year, but as you launch is an example of that persona in Q.

That creates a category contracting opportunity.

We contract that that for the rest of the portfolio nice they've got they've got to keep a certain price and again that is a real discussion on one a very real example of how we think about it.

We do that it needs with regarding heaps across the board. So again, a very direct correlation between that new product introductions vitality index.

And keeping that keeping the price premiums for the product a couple of years later.

But also for the category of products in this space.

Yeah. That's helpful. Thank you and then maybe just a follow up and I think it's probably for you, but as I think about the placement strategy with Rosa or kind of how the market has shifted over the last six to 12 months to more of a placement strategy and it sounds like that's probably going to continue.

At least for the foreseeable future.

Do we get that crossover where the minimum purchase commitments may be the minimum price point things like that that are guaranteed and those contracts those start out way on the good guy side versus I'm sure, which are some upfront costs youre, having to eat here on the placement strategy and it is probably not helpful. In the in the very short run on the margins things like that so just when does that crossover happen.

The longer tail of those positives really start to kick in.

Yes, I'll start with that ill turn it over to bond youre thinking about it the right way right upfront here or are there some investment relative to those placements because we start that depreciation and you really haven't ramped up that to better overall growth commitment. We're still in the early innings on that but maybe nobody wants to talk a little bit.

I will say the governance when it comes to robotics is second to none.

So when we do install place a robotic unit in any center globally. There is a minimum commitment of cases.

The center has to perform while we take the Union back one recent knees financially all of the other reason perhaps more important.

Clients are standpoint.

Giving a fair market value of exchanges, we cannot have catalytic remaining centers that are not delivering on the contract a number of cases and that's why we keep talking about how we prefer to place <unk>.

<unk> versus sending units so we'll get the annuity on the other side of equation as we think about those cases. It is also our governance around disposables.

Zero attitude when it comes to pricing discounts on the disposables. The brief for a lot of items that are part of that robotic case, so again I will say that.

The robotic over 92nd to none.

Early innings here in terms of where we ended the journey.

Thank you.

Thanks for the question Yeah, I think operator, we have time for maybe one more.

We will take our next question from Matthew O'brien with Piper Sandler.

Okay.

Thanks for taking the questions.

Just maybe I'll just stick with one and Brian I just wanted to put a finer point on this.

This topline number that youre talking about for next year first of all is that 4% kind of a floor that you are thinking about.

For the business next year, and just as I think about the components that youre talking about between GDP.

And pricing in Aac's et cetera, It just seems like the environment.

For hips, and knees, specifically is going to get more robust or really levered to hips and knees. So.

Why wouldn't 4% would be the floor and there is the potential for meaningful upside to that as we head into next year. Thanks.

So the positive news is that the question I'm getting at not a question of whether we could deliver before so we're making progress there.

I would say that I still think that as I talked about before there are a lot of headwinds that we have to pay attention to.

I don't want to say that first of all we're giving more color than we would ever get in a normal year, just given all the challenges that everybody's facing trying to help you out here, but but I would say before is a number that I'm, saying is doable, we see a pathway to four but make no mistake. There are challenges that are out in the market macro challenges not things that are internal to our own organs.

Nation that could stress that there are opportunities from a macro perspective that we just talked about that could also help that so we're trying to take a balanced view of what could happen positive or negative to what we think organically we can do.

In 2023, and that's the reason why I would say for you should not consider our floor for you could you should consider.

A good way to look at all things considered it a fair way to look at growth in 2023.

By the way at 2023 was just a normal year.

And we didn't have all these noises, we believe that 4% is about the right way to think about our business.

Given all the portfolio moves that we've made the <unk> improvements that we've made the innovation flywheel that we didn't have moving we believe that's what we deserve.

Could we do more than that certainly, particularly as we start to continue to move our active portfolio management strategy, we have more financial flexibility and we continue to move that weighted average market growth rate north.

But I don't want people thinking that I mean for as a floor.

I didn't I didn't mean to attend that.

Understood. Thank you.

Sure.

Operator, I think we're a little past 90, 30, unless there's any closing remarks, Brian anything you'd add we're probably good to end the call.

Yeah, I, probably decided I think I want people to continue to focus on the transformation that has occurred at Zimmer biomet.

Been extremely discipline discipline in our portfolio decisions and portfolio to me is in all aspects of the business. We are biasing, our spend whether it be research development commercial infrastructure. The way, we compensate people and active portfolio management through M&A on ensuring that we're increasing the weighted average market growth of our business and diversifying our business.

Overtime that is happening it has already happened and more of it will happen on a go forward basis, and I keep talking about that innovation flywheel, but that was nonexistent just a few years ago. The vitality index is moving in the right direction in a rapid way and we expect that to continue all of that combined with the execution that we're seeing from the field is putting us in a.

Good place in a very challenging market.

So I guess I'll leave it with accurate.

Alright, thanks, so much Brian and thanks, everyone for joining the call. This morning of course, if you have questions feel free to reach out to the IR team I know.

Many of you today, thanks for joining.

Okay.

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

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