Q3 2023 Zimmer Biomet Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet third quarter 2023 earnings conference call if.

If anyone needs assistance at any time during the conference. Please press star followed by the zero as a reminder, this conference is being recorded today November 7th following today's presentation. There will be a question and answer session. At this time all participants are in a listen only mountain. 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 Kerry Maddox, Chief Communications and Administration Officer. Please go ahead.

Thank you operator, and good morning, everyone welcome to Zimmer Biomet <unk> third quarter 2023 earnings Conference call. Joining me today are a van toward us, our president and CEO and EVP and CFO Suki, you'll probably be I before we get started I'd like to remind you that our comments. During this call will include forward looking statements acts.

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.

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 Ivan Ivan.

Well, thank you very much Gary and good morning, and greetings, everyone for worse, Indiana, the orthopedic capital of the warm welcome to our Q3 earnings call. My first call as the CEO of this amazing organization really grateful that all of you are joining US here. This morning, I'd like to begin by saying how truly excited I am to be in the new role what I deem to be a very inspiring time to adjust.

Musculoskeletal health, which it is but also in med tech in general.

Simply put the space is not what it used to be just so five years ago. When you look at orthopedics. When you look at the entire category has changed he says a lot groundbreaking technologies are shaping how procedures are done beyond the backlog and continued favorable demographics global demand for treatment is higher than it has historically been this is driven by.

By better clinically reported outcomes. This is driven by shorter episodes of care. This is driven by better more comparable waste to do physical therapy. This is driven by greater waste to approach different disease states.

This is driven by Saturday Freedman migrations I mean, what we've seen here in the U S with a rapid shift of cases more into an AC while also preserving what are very compelling volume levels in the traditional in basin.

<unk> savings so in plain English healthy market, Great Basin dynamics, New technology. These rapid innovation, although has changed and I don't see us going back to four or five years ago. So again, a very inspiring time to be in musculoskeletal health on orthopedics in general all of these market accelerating trends are opening.

Oh for countless patients to benefit from what we do here at Seabee, which is to drive life changing solutions.

We do that every single day for the countless patients and the best part about it. We're just getting started so I could not be more excited to be here in my new role with recent quarters the market dynamics sustainable trains and building on the solid track record of execution that the CV team has enabled it's great to be here today to report what it is another solid quarter of a strong performer.

While it's strongly reaffirming our guidance for the year 2023.

Even more exciting as I look forward to our future.

More convinced than ever that <unk> will continue to lead the way on customer centric innovation already a competitive advantage and solid commercial execution, enabling not just the delivery of our mission, but also improving on our other key value creation drivers those regaining and sustaining top quartile performance and again this is something that.

We treat with a lot of rigor and something that is mainly for the organization, we must regain a sustained top quartile performance.

For today's call I want to first share my thoughts on my first few months of C. O Zimmer Biomet, while also providing key insights into what Blair.

How about learning has shaved we're gonna be my three key priorities as the new CEO of the enterprise. This would answer the question on what is fundamentally going to change the right here in the next chapter of our transformation.

With that I'm going to talk about the key drivers behind the solid Q3 performance makes yoga will takeover will discuss the financials for the quarter.

What is the expectations for the rest of the year.

Our favorite part of the goal Q&A.

Before we move into these updates I do want to take a moment to thank the global Zimmer biomet team for their unwavering commitment to our purpose tour plans.

I thank them for their sense of urgency in driving that execution I want to thank him for everything that they do this is a highly engaged and focused team that has been operating at a very rapid speed.

And he's eagerly deciding to do even more more patients more for customers more for the theme of what each other more for the company well for the communities, where we work at least like right here in Warsaw and Frac.

<unk> far more photo shareholders is Athena has gone through a lot and a lot is a lot. This team has done a lot of heavy lifting and now with the heavy lifting behind from a remediation standpoint, it's great to be in a different states.

It's great to be able to show to the warm weather the Zimmer biomet team can do I will do.

Beyond proud of the organization and I'm generally inspired by what they do each and everyday we do this for a while around the world and I can truthfully tell you I've been at war with a better team than the one we have here the tumor biomed and again I can't hardly wait to showcase our results in quarters to come. So thank you I also want the same Brian Hansen for their all their brand lead to brings in mobile.

And at this moment, we are grateful with a stronger because of his leadership. So thank you Brian.

Now, let me share some perspective as the new CEO of Zimmer Biomet. During my first 11 weeks or 77 days in the job I have spent significant time with team members customers analyst investors are board my peers.

These are Cros med Tech government officials and other key if they hold if your health care, so that I call listen I could learn.

What I would call a good property insights are beating every zimmer biomet, we get around the globe.

Interacting with every came out of a factory in facility.

I have visited a hungry so decision makers across every major country, Dan and I have collected countless pages of feedback and recommendations most critically I've used this reflection time to ensure that we are zimmer biomed are boldly prioritizing what needs to get done.

And this I can assure you would be a trademark of my time as CEO of Zimmer biomet, having the courage to say no to several things. So that we can become truly great and those things that will drive the most value for the enterprise and our key stakeholders.

These key priorities are for some people number one we.

We have a winning culture, we have the absolute best talent in the industry. He has been a foundational priority for seabee.

We continue to be critical under my leadership.

People porpoise styling culture, we'd have very data centric organization, we use the same level of data centricity to track how it is that we're doing with our human capital to that in we track level of engagement development D I engage span across different segments and geographies hypotension.

<unk> and everything in between.

Really excited to report that door and most recent engagement survey, which we completed about six weeks ago deliver the absolute best this quarter in the history of the company.

Let me say that again.

The latest engagement score for organization plus the 20000 employees showcases the absolute best is of course in the history of the organization frankly going up across every single category. This tells me that the team is energized. This tells me that the team is ready and this tells me that the team is about one lease.

A lot of great in this for the organization.

The second priority is to create and sustain a framework of operational excellence across the board.

Simply put it's about being great. When he goes through running the business. This means simplifying what we do where we play and how we play this means being courageous emboldened by the choices that we make it as status would be an intention about driving sustainable revenue growth. We know this is the number one driver of that performance and we also know that innovation customer centric innovation and commercial.

The Houston are the two key drivers or sustainable revenue growth.

So we will accelerate that but at the same time, we're nowhere I forget that we can I will do better across the entirety of the P&L.

We want to drive a culture of ownership by every single employee across the globe with all of that is waking up every single day acting as co investors in the business I'm thinking of palimony as the key currencies all the organization.

This means continuing to align our incentives with an even greater emphasis on best in class performance from both top and bottom.

By delivering on our operational excellence.

Our mandate or mindset for the organization, we're gonna enable number one revenue growth of at least 100 to 200 basis points above market, while growing earnings faster than revenue on <unk>.

Free cash flow growing faster than the rate of earnings.

Number two operational excellence will enable best in class supply and operational outcomes by simply find a rather complex operations and matter of fact in footprint and then thirdly operational excellence at the mandate is going to enable an agile nimble and simplified company that can anticipate can be proactive.

In successfully navigating market trends.

So again operational excellence the mindset is going to deliver revenue growth of at least a hunger to 200 basis possible market, while growing earnings faster than revenue and free cash flow faster than the rate of earnings while enabling best in class supply and operational outcomes by making Zimmer Biomed Igl nimble in a very simplified company that is.

Our active and what he does.

Based on where we are as we close the year 2023 based on our latest guidance, we're really on track to deliver the metrics that I mentioned above around revenue.

Earnings and free cash flow.

We were on the company, but that we expect to do it again with even greater rigor in 'twenty 'twenty four to that and we look forward to hosting an analyst day and something we've not done ever since we merged the two companies.

They were going to be sharing more details on the slides that I have highlighted the specific drivers of these goals. So that this becomes truly the DNA of Zimmer biomet.

My third priority is about innovating and diversifying Zimmer biomet into higher growth markets table Stakes, we must enter higher growth markets, we do need to diversify our portfolio and we will do that we're going to do it through organic and inorganic means we're going to do it through innovation any money.

On the innovation front, we're going to innovate by continuing to boldly invest in the right segments of R&D. So that is new product development. So that we always think customer programs and bringing solutions to those problems, we're going to make sure that those products are in attractive growth areas that are mission centric, but also are in the right markets.

By bringing the solutions, we're going to become and remain market leaders in these categories, where we choose to play aided.

<unk> aided by both product and solutions launches that will enable the category leadership for Zimmer Biomet.

Gonna be relentless about the surrogate opportunities.

Namely the AFC opportunity here in the U S, where we're already growing in the strong double digit rates, but we know we are far from realizing their true potential.

These Germany by the way innovation journey.

Already started we are on track to launch over 40, new products over the next 36 months.

And the value the dollar value of our barbell today, it's twice the dollar value that we had back in 2018, so a lot of new exciting technologies out of other good launch here at Zimmer Biomet.

The issue on 80% of our products in our pipeline. We started in markets that are growing at least 4% many.

In areas that are growing more than 4%.

Equally vital we're going to ensure that our innovation journey.

Accelerates value creation through making sure that we're monitoring no jazz the revenue associated with these launches the vitality index, but also what we call our innovation profitability index or Ipi and thus the gross margin dollars go out for new products.

We've got to make sure that these new products are driving margin accretion to the overall margin profile of the organization. So again, it's about innovation and ease.

Value creation at the same time, Michelle and our margin expansion will look like she is will go like ceased as part of our innovation journey.

So materially change our portfolio, we're going to also leverage the strength over balance sheet, which is stronger than ever we will do M&A, we're going to be thoughtful and disciplined about the spaces. We prioritize how we can ensure that the spaces are mission centric and at the same time. This is patients are the areas, where the Zimmer biomet has a right to win.

We focus on opportunities that are gonna Hebe strategic tryst holds but also he'd financial thresholds.

Got to make sure that these acquisitions drive strong returns and create long term shareholder value.

It is worth noting that these diversification of our business has it started already yes, we have to be bolder and we will be bolder, but he has already started in the last two or three years, we have shifted our portfolio ready into mid single digit audible market environment on a weighted average market growth rates have already increased throughout 15.

Basis points and this happens through thoughtful resource allocation.

The active portfolio management, we've done again, we're gonna be bolder, but the journey has already started.

We're excited about what we can I will do across these three priorities.

It's about first and foremost people human capital, having a best in class culture.

Secondly, it's about delivering operational excellence as a company mindset or mandate.

Thirdly is about making sure that we diversify and innovate in a far broader way through organic and inorganic means those are the three priorities.

So now that you've got a better sense of our priorities are what I'll talk about Q3, and again I want to reiterate that we're really excited about the performance that was on the quarter performance that was driven by continued execution, especially in the key areas, where we've been investing.

In particular I wanted to talk about niche it was a great quarter for knees, where we delivered above market performance in key markets around the world.

We also grew in areas that are mission critical within set upper extremities C. M. S T as well as sports Medicine, we had solid performance in the ASC environment, which saw revenue generation coming up strongly from our data technology solutions platform, primarily within Rosa ironed out now mobility.

Any special analysis tie our highly differentiated cement this platform continues to.

Perform above our expectations I was recently in Dallas at the hip and knee Society and the feedback continues to be Super cant.

Can't wait until our we continue to bring this technology to other geographies.

We also had a strong quarter continued to see great adoption, we've seen a lot of Rosa shall happening in the ASC setting.

<unk> speed, we're dealing with higher volumes that matter.

In the AFC without leadership look into teams executing contracts daily or portfolio second to none.

Benefiting from the recent acquisitions, we done such as embody a reliable.

Against the backdrop of this strong execution metic sector stocks have been facing pressure related to GOP, one drugs and the impact or the perceived impact on obesity.

This was a long term perspective, we're a mission centric base and devoted organization. So it is a drug class truly desk.

That's accelerated that improves patient health and <unk> truly do become the N of the obesity pandemic around the world that is great news for everyone as long as truly this is sustainable in the long term what I can tell you that we've spent a lot of time researching GOP one drugs engaging third parties.

Engaging third partners and key opinion leaders across every major market.

These <unk> drugs today become a tailwind for us.

This type of framing the root causes of osteoarthritis disease, which impacts Fiat and 28 million people around the world. According to the World Health organization.

Osteoarthritis factors are ranking order H genetics and journey injury.

Obesity certain ancillary to the disease and certainly is an element of the disease or the driver to their disease, but let's not forget the ones. The cartilage damage there is no recovery.

Once you get a swap strategies.

You will now get rate a host of arthritis.

And dropping weight is no other acute osteoarthritis.

Again this is the narrative and known global disease that we're talking about.

If anything obesity is a blocker today the joint surgery as many surgeons are uncomfortable operating on patients with a BMI greater than 47 countries or even above their therapy thresholds in some locations.

So why put GOP ones, Zambia tailwind for orthopedics three compelling reasons first.

We lowered our paces BMI below a certain threshold 40 or 30 in some cases these patients now become eligible for surgery and all the data points that we're gaining in primary markets like the U S is that there is a large percentage of patients who today are not going through surgery, because there'd be a nice too high.

Secondly, if a patient does lose the way and our savings is pretty logical and they do become more active there would be a greater reach for additional joined procedures because it will be injury absurd, if a patient loses weight they are likely to live longer.

Again, expanding the patient funnel for an orthopedic procedure a great example of these factories, Japan, the second largest market in the world photos to arthritis with minimal obesity rates are very very long life expectancy dynamics.

We've not seen any near term impact from Jetblue ones and we've seen the long term impact would be a positive one for orthopedics and Zimmer biomet with engaged independent third parties to perform surgery the surveys.

Gather use base claims data what it still is early in the process. We are very excited by the initial findings.

We look forward to presenting them. So in a nutshell more of a tailwind will be sharing data very soon we're seeing that the logic will prevail and these will be the end of what has been so far are rather emotional argument that is not being five base.

In closing I hope you can tell that I'm very confident about the future of this organization I'm very excited to be here or the end markets have never been stronger our believe that this market beyond the backlog is sustainable or execution is strong and is also sustainable we've been delivering consistently for a while and will continue to do so with even greater folk.

And it's been we know what we need to do the strategy is clear and we will execute on this strategy, we have financial flexibility to invest in higher growth markets and we are going to continue to shift our portfolio mix and diversify our business.

I generally believe this is the time for Zimmer Biomet I'm proud of the work we've done and even more proud of the awards that we're gonna be doing ahead. This is why I am excited to be this year and even more excited to be a proud Zimmer biomet shareholder as I believe that now is the time for real value creation with that.

Turn the call over to <unk> for a run through of our Q3 financials.

Thanks, and good morning, I'd like to start my prepared remarks today by welcoming Avon to his first earnings call as the Zimmer Biomet CEO Ivan has been a constant force and a driver within the organization for several years and are proud to work with him and I'm excited by the partnership.

As Bob noted, we had another strong quarter, driven by healthy and improving end markets and continued strong execution across the organization.

Overall, we remain on track to deliver mid single digit constant currency revenue growth and adjusted operating margin expansion in the back half of the year, just as we committed to on our second quarter call.

Moving to results unless otherwise noted my statements will be about the third quarter and how it compares to the same period in 2022 and my commentary.

There will be on a constant currency and adjusted operating basis.

Net sales were $1 $75 4 billion, an increase of 5% on a reported basis and an increase of four 7% excluding the impact of foreign currency.

Additionally, we had a selling day headwind of about 150 basis points that impacted all regions and product categories at about the same level.

Excluding the selling day impact consolidated ex FX sales would've grown just over 6%.

U S growth was 6% and international growth was two 9%.

In the U S are strong year over year results were driven by recon in a step up in our S. E T category in tandem with strong capital sales.

Side of the U S. We saw more moderated growth across Europe, and Asia, driven by tough comps and geopolitical headwinds, which I'll discuss in our product categories section.

Global knees grew seven 3% with the U S growing six 1% and international growing nine 1% the.

The strong performance in knees was driven by continued uptake from our persona product portfolio combined with the benefits of our Rosa robotics platform.

Global hips declined by 60 basis points with the U S growing 3% and international declining by four 2% tough.

Tough comps in China, and headwinds in Russia disproportionately impacted our O U S hip business. Excluding these impacts our international hip business grew in the low single digits.

Looking ahead portfolio expansion will continue to support growth in our hips business.

Next the S. E. T category grew two 8% again as a reminder, there was about 150 basis points selling day headwind across all categories and regions.

Our key focus areas within S E T, including sports Upper extremities, and <unk> continued to post double digit growth, which was partially offset by other sub segments within the category.

<unk> confident that <unk> will grow in the mid single digits in the fourth quarter.

Finally, our other category grew 16, 4% driven by Rosa sales.

Now moving onto the P&L.

In Q3, we reported GAAP diluted earnings per share of <unk> 77, compared to GAAP diluted earnings per share of <unk> 92 in the prior year, while we had higher year over year revenue and higher pre tax operating profits post tax income is lower due to a favorable tax settlement in 2022 that did not repeat this year.

On an adjusted basis, we reported diluted earnings per share of $1 65, compared to adjusted diluted earnings per share of $1 58 in the prior year.

<unk> is primarily driven by our revenue growth in the quarter, partially offset by higher operating expenses and higher interest costs.

Our adjusted gross margin was 79% up 20 basis points from the prior year, primarily driven by favorable mix.

Adjusted operating margin was 26, 4% and up slightly versus the prior year.

Better gross margin and savings from efficiencies across SG&A were partially offset by higher R&D expenses that will support upcoming product launches ultimately driving a continued increase in our vitality index.

Net interest and other adjusted non operating expenses of $48 million was higher than the prior year due to certain foreign currency exposures as well as higher interest rates.

And our adjusted tax rate was 16, 7% in the quarter.

Turning to cash and liquidity, we had operating cash flows of $338 million in free cash flow of $189 million in the quarter.

We ended with cash and cash equivalents totaling just under $300 million.

Our balance sheet remains strong providing the financial flexibility and strategic Optionality as we move forward.

Now regarding our outlook overall for 2023 and the outlook remains largely unchanged from the prior quarter, implying over 7% constant currency revenue growth and 9% EPS growth at the midpoint of our range.

We expect reported growth for the full year to be six to six 5% and are maintaining our ex FX growth expectations for the year of seven to seven 5%.

Inside of that the U S. Dollar has strengthened so we are increasing our outlook for foreign currency to be about 100 basis point headwind to revenue growth for the full year.

Additionally, we are reiterating our EPS guidance of $7 47 to $7 57 for the full year. Despite the strengthening dollar, which we project to be about a four cent headwind to fourth quarter earnings.

This guidance implies that we will increase full year operating margins by about 100 basis points in the backdrop of a challenging environment.

In addition to our formal guidance ranges I will reiterate that there is no material impact from selling days on a full year revenue growth expectations. However, we do expect about 100 basis point tailwind in the fourth quarter.

Additionally, our expectations for interest and other nonoperating expenses as well as tax rate and shares outstanding remain unchanged, we expect free cash flow for the year to be between $950 million and $1 billion.

In summary, we delivered another excellent quarter on both the top and bottom lines. We remain confident in our 2023 expectations and are excited about the next year with revenue growing in the mid single digits and earnings growing faster than the top line with that I'll turn the call back over to Kerry.

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

Thank you we will go first to Robbie Marcus with JP Morgan.

Oh, great. Thanks for taking the questions.

I'll ask both upfront as they're kind of interrelated.

The ban in Turkey, I was hoping you could address just the health of.

The ortho market you talk to it but we see your results and we see your peer results in most of them were in line to slightly below in the quarter. So wonder how youre thinking about the health of the market and then second you touched last quarter and then this quarter as well on longer range guidance for 'twenty.

For.

You talked newer guidance. This time about 1% to 200 basis points above your end market growth I think last quarter. It was implying something like 4% plus is that a change in how do we think about margins for next year I think previously it was slightly up thanks a lot.

Hey, Thank you Robby.

I'll start and I'll talk about the market dynamics and briefly comment on a on 20, Florida pass it onto suited to provide more color on doing for them and maybe these guys where he can discuss at this point when it comes to the margin profile, but I'll start with the market dynamics. We are the fourth company to report in Q3. So by now everybody sees that the markets are healthy.

And quite frankly, I won't talk much about Q4, but so far so good. So this is not a one quarter that both from a market dynamic.

The reasons behind the market profile of the market growth profile and why I continue to say these market is different than four or five years ago.

Is the things that I alluded to we might prepare remarks.

The explosion of agencies Theyre more membership today see Israel that means new afcs are opening in the U S that means a new digital surgery are happening demographics around the world play a factor we continue to track data in terms of the H Ford asked about wanted to get a heat or knee.

These are younger patients in the U S would also see more today, so far of surgery and I don't see and this is just the backlog dynamics.

Pricing you see what the every single one of US is reporting these days.

At the same pricing dynamic that we've had in the past and beyond that is technology.

We are driving these rapid innovation, we got more efficient solutions surgeries are short term and are you sort of getting shorter so we're dealing with that with the patients.

The final patients with them with more efficiency again. This is a durable train as happened in Q3 Q4, nothing is really changing as we look into 2020 for every early indicators suggest that things are not going to change and.

And relative to performance well look at in the background of these healthy market dynamics in the U S. We gained share in.

In Q3 in both categories really proud of being number one in these for the quarter, we don't pay a lot of attention to any given quarter, but that is a fact that we are the fastest growing company in the quarter and then globally net of a couple of one timers.

Both in Russia, and China, when he goes to hips or performance was where she led with hips and knees was very strong.

And then as we get into 'twenty reported I'll, let sue could comment, but we will be mid single digits. That's the point of entry and nothing has really changed its just getting closer to the end of the year and realizing that these market trends are sustainable and the innovation pipeline that we have that will drive the type of growth, but I'll pass it on to shoot to come in or not or the drivers, yes, Hey, Ravi good morning, Thanks for the <unk>.

First thing I'd say is.

Starting with the back half of this year, we committed to mid single digit ex FX growth for the second half of the year with operating margin expansion, both sequentially and year over year.

Q3 was a really another strong validation and proof point of that and we feel confident in that pool. The reason I mentioned that I think it gives us a running start as we go into 2024 and so I.

I do want to talk a little bit about 24 back to your question.

First we've already provided a lot of color I think on 24 more than most of our peers, but we feel that being transparent in giving you guys. A robust view of what we're going to do not only this year, but into the future is really important.

Let me talk a little bit about the headwinds and tailwind as we see it going into 'twenty four and some things that have modestly changed.

First I'll start with the headwinds one we do see a higher tax rate into next year because of the OECD pillar two.

<unk> based on where FX rates are today, we'd see some additional pressure from a foreign currency perspective into into next year again. Both of these are more macro versus execution right. There are things that are outside of our control, but we're going to contend with them, we'll get a deal with them I will tell you a little bit about how.

On the on the tailwind side I would say, yes, we are more confident in our outlook for revenue next year, our end markets are stronger than they've ever been and our portfolio and new product launches has been executing extremely well in some areas above expectation our performance relative to market has been very strong and that's <unk>.

Consistent and durable and quite frankly, we're seeing a more moderated price environment still erosion, but but much more moderated than what we've seen historically all of those elements give us confidence that we're going to be able to post a mid single digit growth topline ex FX into 2024, and then despite those sort of P&L headwinds I talked about we do.

Bleed.

That we're going to be able to grow earnings faster than revenue.

<unk> talked about gross margin next year stepping down because of the FX hedge gains from this year not repeating at the same level that will still happen, but we're going to be able to offset some of that the operations and manufacturing team has been working really hard at efficiency and so we feel more optimistic about where our gross margins going into next year Secondly, as I said, we've already got a running.

Start on a lot of SG&A efficiency programs in the back half of this year that are going to run into next year. So when you combine those two elements together again, we feel really confident that we're going to be able to do that mid single digit topline growth next year as well as earnings growing faster than revenue. So thanks again Robyn for the question.

I appreciate the color thanks, a lot.

Okay.

Thank you we'll go next to Ravi.

Morgan Stanley.

Hy Bon and <unk>, thanks for taking the question.

Questions just maybe on 24 also.

You haven't talked about backlog much recent conferences, you kind of pointed out that you think it's going to carry through.

24, but just maybe.

Maybe help us a bit more of how you're factoring that into your mid single digit directional guide for next year I know its not I know that your growth is not all dependent on backlog.

But just how do you think about that helping to support the orthopedic market growth and maybe just talk to us about your ability to capture a disproportional amount of share of that backlog. Thank you.

Yeah drew thank you very much and first things first use will be in your honeymoon considering that you got married that recently.

I'm disappointed you here look I'm going to keep this short and sweet we don't see backlog as a major driver.

<unk> profile for that next year. So once we can add it doesn't not mid single digit we're not assuming any any real meaningful backlog. So no not a key driver.

We believe and we spent a lot of time going back and forth on backlog that he's going to remain here throughout the end of 'twenty for at least but we are not a backlog the pending backlog dependent that type of companies. So we don't have we don't focus on that but we are tracking is innovation in the background that we have but we're tracking is the investments we made in the ASC, which IGN is commercial execution.

And in the background just sustainable pricing dynamics, so no backlog. Thank you.

Thanks.

Second as a follow up.

Your commentary was very strong that youre expecting mid single digit set growth into next year, but just.

Mind us about what's what's it going to take to really accelerate set.

And maybe just talk a bit more about the lift on the organic side and maybe what you're thinking about in terms of M&A to get that growth rate higher and more sustainable thanks for taking the questions.

Yes, absolutely great question. So first things first that Q3 said was in line.

As we move into Q4, we would actually going to be a mid single digit grower.

Mcgrath Douglas dynamics floored at 24 will do that bromine guidance, but very excited in terms of where we are.

We integrated a couple of companies we've seen sports med those are performing very well or the upper extremities, who sold their business is growing in the mid to upper single digits in most regions.

When you look at our CMS.

Maxillofacial thoracic, which is part of a butterfly I said it has been performing very well. It continues to perform very well. So again lots of reasons to believe that as we get into 'twenty four you should expect.

Our sustainable performance in <unk> in terms of M&A again, we're going more on that later, but it remains the number one recipient of capital allocation, we haven't changed in that regard and yet said. These one category that that is very attractive given higher market growth dynamics.

Our position in this space. So you should assume that that this is one area, where we're going to be focusing from an M&A standpoint, but again NATO their money.

Already delivering mid single digit growth entering Q4 as strongly and we are excited about 'twenty 'twenty four thank you.

Thanks, Katy can we go to the next question. Please.

We will go next to Matt Taylor with Jefferies.

Hey, Thanks for taking my question and congrats on a good quarter.

I was curious about your outlook comments for 2024, and I was hoping you could specifically address the concern I think investors have about growth, especially in the first half of the year with all new air quotes on this but tough comps, especially in Q1. So maybe you could address how you think you can grow throughout the year.

Address investor concerns about those tough comps in the first half.

Yes.

I'll start Matt and again Sue can you maybe want to chime in here, but we've got to there about 2020 for it because the market dynamics are sustainable so theres been a little back and forth in terms of what's going to happen. Once the backlog is out and all that first the backlog. We don't think is going to be out anytime soon and then pricing is sustainable.

All the things that I mentioned excuse me my answer to a Ravi are here they move today to see the shorter episodes of care more decent surgeries. So macro wise every data point. We gave mad is is very compelling and then on the micro we are seeing a bolus of innovation being launched.

Got 40, new products that we're going to be launching over the next 36 months.

Some of these products are very compelling.

We launched or <unk> now <unk>, which is the same in this construct earlier in 2003 that is going to be a truly full market release in the U S. In 24 of them with the right amount of sets and Thats high growth as a as we enter the first semester of 24 to your point Theres, another two or three very meaningful product launches Sami.

Robotics amount within recon signing set that's that's very compelling the integration of embody the integration of relying continues to generate revenue.

Been an hour, but I will tell you there is the balance of really sustainable macro dynamics and solid innovation and then on top of that you've got great commercial execution, which are highly engaged sales force. So I'm not we're not deeply concerned about the about the comps.

Yes, I think just building on that remember the first half of this year, which was very strong was more about comps versus 2021 or excuse me versus 2022, then it was something about.

Abnormal market growth. So again, just building off waterborne said, we feel confident that now we're not of course, giving specific guidance and we're certainly not giving quarterly guidance into next year. So as always quarters can be choppy or driven by seasonality mix changes, but overall, we're confident in that mid single digit maybe one less coming here might quickly we can move on.

Don't forget that the FERC messed it up 23, while it had very solid comps also had a pretty challenging dynamics from a supply standpoint. So as we think about 2020 for that that we believe is going to be a tailwind.

Great. Thanks, guys I'll leave it there thank you.

Okay.

Thank you thanks, Matt.

Well go next to Sharon.

With RBC capital markets.

Thank you so much im just.

Go ahead try to us. Thank you for implied in 2020 guide in a different way.

Your Q4 implied guidance.

Assumes a deceleration from Q3 and your commentary seems pretty positive.

It implies a deceleration even on a stack basis industrial comm. So should we just assume that it's conservatism and then look at growth on an underlying basis adjusted for China, BBB selling days and all one time items.

I think you did plus 6% in 'twenty, two you're looking to do 7% to seven 5% in 'twenty three.

Adams.

In terms of what we're looking for about four 5% growth in 'twenty four.

No one else see all our target is to drive that revenue growth acceleration, you've indicated that you will not be satisfied with 5% growth for the company. So just what is their reaction to that four 5%.

Thank you.

In the context of the comments that you made.

Sure Hey, Doug on this is <unk>. Thanks for the question. So just first on the fourth quarter I'll, just keep going back that we do.

Don't give quarterly guidance and obviously with our implied you can pretty much squeezed into the last quarter of the year.

We talked about mid single digit growth margins expand in the back half of this year and we're going to we're going to deliver on that.

We have a range around our guidance obviously to the downside.

Geopolitical factors continue to be erosive or supply doesn't continue to that very positive trend has been on than you are towards the bottom end, however that supply picks up and remediate is even faster than it has already been improving then as well as better execution of our new products, we could be at the upper end. So there is a range around that and so ill.

Just leave it at that but overall, we feel really good about where we're ending the second half of this year and where our end markets are at.

As we look into next year.

I think <unk> seen a bit of a pivot where our commentary was before anchoring towards or maybe even better to now where we're saying mid single digit and I think that reflects the momentum that we've seen to your point in 'twenty two 'twenty three.

Got it and if I could just ask.

Any.

Yeah go ahead go ahead.

Oh, Okay, great just on M&A Ivan if you can just elaborate a little bit more in your thinking of tuck ins versus larger deals high growth Adjacencies that may allow you to diversify outside of elective procedures, and then and most interested about ESG is.

A lot of your business is moving to ALC that as a growth driver what do you need to further succeed there do you need a broader bag or more thank you for taking the question.

Yeah, absolutely so on M&A.

I already mentioned and he was he might prepared remarks as well.

Will remain our top strategic priority from a capital allocation standpoint, so there's no changing and we are excited about the opportunities that we have in front of us we're going to continue to focus on our growth markets or areas that are not only mission centric, but offered an exciting growth profile and.

That is three things <unk>.

No ranking order three key areas.

Segments within <unk> that are growing faster than or wind god or collected our collective market growth rates and there is a lot in there you got navigation you got data technology elements of a week on that are really attractive.

Is that said as we've done already buying.

I am seeing some sports med buying <unk> and they're looking at other categories that I don't I don't want to get into for a competitor dynamics, but again optionality. There and then AUC is also one attractive area is one area, where we have dedicated resources, we grow in the teens.

We have currently 10% to 15% of our sales in that space and there is opportunities there to acquire to acquire things. So that's a bit of the strategic summary of where we are where we bought from an M&A perspective in digital finance yields.

We're not changing the story, we'd like to do things at the $2 billion in acquisition price and again that gives you a lot of options you can do a mid size deal you can do some tuck ins combination of different things. We won these deals to be EPS neutral within two years and we spoke about.

High single digit ROIC.

We've seen now five years, so that's a bit of a strategic and a financial profile.

As we look into the next three to five years, we spent a lot of times, you're going to have to spend time looking at the strat plan. What is the growth profile. The great news is that we are convinced that the free cash flow generation solid so we're going to be able to do M&A and potentially do other stuff when it goes to capital allocation. So that's the answer to your first question on ASC look I don't think we need.

So much more we can.

Growing India strong teams already here in the U S in the ASC.

I mentioned, 10% to 15% of ourselves are there we've got the right portfolio. This is where we were down to say three or four years ago. We got the robotic platform for the ASC, We got a great cement less knee that is gaining share very quickly, we've got a full bag and exports and across it.

We got best in class technologies, So the portfolio is great.

Got dedicated resources, which are very much needed in an ASC environment.

We have a dedicated sales force we've got simple contracting simplified contracting I look while we don't have organically, we partner with others. So whether it is sterilization Boone shanghai's, although the staff we've got the right partnerships. So very very confident that we're going to continue to perform in the ASC environment. Thank you.

Thanks, so much jargon.

Okay next question here.

We'll go next to Josh Jennings with Cowen.

Hi, Good morning, Thanks, Kerry wanted to just follow up on your ESG comments.

I wanted to ask about the migration of total joint surgeries.

Any back do you have the loop assumptions you would have issues just in terms of where the penetration where the migration for knees and hips, it's been what percentage of the cases for each categories reported in Afg's. Currently here at the end of 'twenty three versus.

2022.

And then any metrics you can share just with Rosa penetration in <unk>, and then any pricing dynamics for total George as this migration is occurring.

Multi part question, but I appreciate you've taken it.

Alright lets see if my memory is as good as a I think it is so starting with ASC macro wise, we believe that roughly between 40% to 60% of cases in the next five years are going to move to the ASC.

And I will say that.

A large portion of our cases are already moving today is what we like about this dynamic is that our schedules are moving to the ASC or their cases are going to inpatient outpatient so he's a little bit of a double dip happening there Josh but.

Yes, the number is 40% to 60% over the next three to five years and I would say a good percentage has already is already moved.

We are growing in the upper teens when it comes to the ASC.

And today around 10% to 15% repeating myself of cases or revenue rather of Zimmer Biomet goes from the ASC.

I will tell you that is pretty equal in terms of both hips and knees. So we didn't see one category being able to the other and I like the fact that given the recent CMS changes youre going to see stronger cases also accelerating the ASC.

It is a great opportunity for Zimmer biomet. So that's the that's the answer on an ASC in peso Rosa dynamics I think we've been very transparent in terms of about one third roughly one third of our all of our installations are happy and ASC. That's a trend that has been happening for a few quarters and thats a trend.

We continue to see happen in the next quarters.

Environment speed matters, not having to get engaged in complex preplanning matters efficiency does matter and having a need that you are confident you can be the right need as matter and those dynamics are driving Rosa penetration in ASC and then outside of the ASC Rosa continues to perform.

We are selling and placing Rosa is frankly at a rapid pace you see in the other category. We saw a nice increase is driven by our Rosa.

We are on track to at least installed 300 units at the end of the year of 2023, when he goes through Russia, So really satisfied and Thats before we launched next generation Rosa across recon and deliver their first stop shoulder robotic platform. So like I said.

Added about both AUC and Ross and thank you for the question Josh.

Thanks, Jess Katy can we go to the next question. Thank you.

We'll go next to Larry <unk> with Wells Fargo.

Good morning, Thanks for taking the question.

I have enjoyed watching you post on Linkedin.

It looks like you've traveled around the world.

Literally since you've taken over as CEO.

I wanted to ask us if we start on the margins Youre going to end 'twenty three with an operating margin of about 28 and a half.

<unk>, which is towards the high end of Med Tech.

Where do you see as peak margins for Zimmer.

10 years ago, the margins were in the low thirty's set still realistic and I have one follow up.

Yeah sure. So good morning, Larry Thanks for noticing it's actually two years in a row, where we've expanded margins in the backdrop of really challenging environment by the way while also accelerating revenue.

I think it's 22 expanding margins operating margins by about 40 to 50 bps and this year you're right. The implied is about 100 basis points.

So again really proud of what the team has done collectively again in the backdrop is still investing for growth, which we've been able to demonstrate.

As we move into next year, I think I've been pretty front footed and our ability to continue to grow margins in 'twenty four and quite frankly, we're going to we're going to do that in every year after 2024.

And continue to deliver a profile where earnings are growing faster than revenue.

I'm not going to go out and put a marker out there as to where we think it can get to.

But.

Historical levels, we will look for overtime.

Definitely.

And exceed those.

I'll just leave it there again really happy with where the teams performed over the last couple of years very confident in what we're going to do next year quite excited about our outlook in the longer term.

That's helpful. And then you had a rental out Larry.

Yes, the other the other category was obviously very strong we heard you talk about Rosa sales in the quarter.

Was the change in the quarter that drove that strength.

And how sustainable is that thanks for taking the questions.

Yes, I don't think I don't think that is anything changing really there's not a change of the strategy is we continue. We're also we continued to show strong clinical efficacy. We continued to demonstrate time neutrality. After a few cases, we continue to see great adult Sharon in a in an ASC environment.

We have city Rosa indications.

Today within recon, so total knee partial and keep we've done a lot of volume presence. If you attended the Dallas meeting. This last weekend there was a lot of noise around posters or whatnot. So I think we're just getting the right adoption is moving quickly and then a driver I will tell you has been tremendous a lot of these cases that are done in the ASC.

Do like or do want a lot of surgeons in an ASC one the combination of robotics and <unk> in the past when you had the rights them in this construct we do now with persona El show de <unk>, there's been a bit of a tailwind, but I wouldn't say, it's a major change of the strategy is just the fact that has been true three years in market now and you're starting to see the data.

Really excited in terms of what we are.

Alright, Thank you Hey, Larry just to get back Larry just to get back to your original question just to make sure. It was clear I do see getting back to historic margins are better overtime, absolutely a definable.

<unk> for us now, having greater insight and taking over for ops and supply chain I would say this is an area, where we can certainly do better we're going to do better going forward and I can tell you that the company's focus on not just revenue growth, but operating profit and free cash flow generation.

Been more acute stronger than it's ever been so I think we've got the pathway. We've got the culture we have.

Got the levers to get there over time.

Thank you.

Larry Yes, thank you for being my warm forward or maintain the whole time, if that was my wife supporting I appreciate it.

Thanks, Larry.

Can we go to the next question in the queue.

Thank you we'll go next to Chris Pasquale with Nephron.

Thanks, just wanted to follow up real quickly on Larry's Rosa question was the mix of sales versus placements different in <unk> than what we saw in the first half of the year just trying to figure out whether that played a role or the acceleration and other sales was really driven by system volume.

Yeah. Thank you Chris for the follow up we did see more sales.

We haven't changed the strategy. So is reflective of the fact that there is capital in the hospital systems that reservoir and we saw we saw people wanting to buy them and we sold the units is not a fundamental change is that a change in the strategy. We have said all along that we prefer plating, given the annuity factor or whatnot, but yet capital strong.

We need to do some deals in <unk> and in some of their systems and that's why you see the other category growing thank you Chris.

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

Yeah, let.

Let me start with the second part we really don't do hope here. So we do have plans to drive better performance in the three areas that so far have.

I have not been that compelling those being restarted these therapies for an ankle and trauma, what I will tell you that the restorative therapies biologics. The issue there was a reimbursement change a year ago. That's been resolved. So that's not a concern moving forward and then foot and ankle lower extremities is something that we're looking at it may require may require.

Organic inorganic place, but given the space. We are we paying close attention to what is that we need to do and then trauma for many markets continues to be very attractive.

Some smaller tuck ins, so I would expect that the declines that we've seen in the past argon.

We're going to disappear so again, not really doing a hold there we got plans to remediate and to get back to growth in those three categories.

That said the city most compelling priorities within set remain upper extremities shoulder sports medicine, and CFT and those three are performing very nicely.

Great. Thank you.

Thank you. Thanks, Craig Katy can we go to the next question in the queue.

We will go next to Travis Steed with Bank of America.

Hey, Thanks for taking my question I guess, a quick follow up on M&A any way to frame, how much margin or EPS dilution youre willing to take and yours wanted to realize you said neutral by year three.

Curious kind of what the framework is on you're wanting to and when you think about bid ask spreads.

Ultimately you think you could get done this year or is it probably more something for 2024.

Hey, Travis <unk> I'm not sure I completely got that second question can you repeat that.

Yes in terms of like when you think about like bid ask spreads and the progress on on your conversation.

Adult happening in 2023, a possibility or is it probably something that we need to like 2024 to see M&A.

Yeah. So first of all on your first question around earnings per share dilution.

Really going to depend on the type of asset that we acquired the size of the transaction and what markets and where it is in its journey and its lifecycle.

That's just launch or something that is very mature in marketplace. So I'm not going to sort of give a guidepost on year, one or year, two because I think that would be premature because it is going to be very situation dependent but what we will commit to is that we're going to look for breakeven by at least 2012 to 24 months, if not sooner than that so that's the profile that we.

We look for in our M&A relative to bid ask and timing of course for a variety of reasons.

Mostly proprietary we're not going to get into the timing of any specific deal as you know those are often opportunistic situation based so.

Here's what I would say is that we've got a lot of strategic flexibility to balance sheets in the strongest position. It has been since the merger of Zimmer Biomet, we feel really good about the optionality, we have going forward.

And we think we can deploy capital to continue to accelerate our growth profile and diversify the company, but I'm not going to get into specific timing I'm sure. You can appreciate that but thank you for that.

Yes, Sir thank you. Thanks for the answer in a couple of housekeeping questions.

Yes.

One time stuff in hips this quarter does that get better in Q4.

When you think about tax rate next year, if I heard your comments, but curious if that would be less than 100 basis points or more than 100 basis points on tax rate and when you think about the interest line, you've got I think 850 million of debt coming due so there is interest of headwind or tailwind next year.

Alright, I'll briefly comment on Q4, and I'll keep it and keep it simple it is to go away. So this is a one timer in Q4, we get back that we get back to growth in terms of the tax and interest will be do you want to comment on that.

So.

On the expense line.

Right now, we're not going to give full guidance on that so we'll unveil that I think the one thing you want to keep and the backdrop is we do believe we can grow earnings we will grow earnings faster than revenue on the tax rate.

Right now our best estimate is that it'll be about 150 basis point increase.

All of our full year 2023 tax rate.

Thank you thanks, a lot thanks Chad.

I think we have time for maybe one last question Katie.

Here.

We will go next to Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for squeezing me in here.

Maybe just one question for me.

U S hips, I think he called out Russia headwinds.

Is that done with in fiscal 'twenty, two you should that continue into fiscal 'twenty four.

And I think you did speak about M&A.

Can you comment on your hurdle rates given current interest rate environment for deals.

Yeah, sure Hey, Vijay is good.

Good to hear from you.

On the O U S hip headwind, specifically due to Russia. If you go back the last.

Quarters call second quarter, I talked about Russia, being about a 50 basis point headwind in the back half.

2023 that estimate is still largely true in most of that occurred in the third quarter. So we are going to see a little bit of pressure in the fourth quarter, but it's largely behind us we don't see that as being a headwind at this time into 2024.

And I'm sorry, Vijay can you repeat your question around.

I'm sorry.

Yes.

Mmm given current interest rate environment can you talk with your era.

The hurdle rates for.

Deals.

Yes, so look we would still look at debt financing over equity financing all day long, even though it's.

Two acts of where it was a year ago it still.

Versus historical rates still at pretty attractive source of capital.

Has become marginally more difficult to make make the deal economics work at these interest rates.

Just means that we've got to be that much more disciplined on our valuation.

And our purchase price and so that's how we do things right now.

Thanks, Vijay and thanks, everyone for the question.

I think now we're probably nearing the end of the call I'll turn it back over to Yvonne just for any closing remarks, yes. Thank you Kari and I'll keep it to two minutes or less here. So we can close on time, but.

Couple of things here number one really really pleased with the progress here at Zimmer Biomet really proud of the team and their work.

They have done they are doing and most importantly, the weather I know that we are going to continue to do.

<unk> about the markets lots of questions on market dynamics every data point suggest that theyre healthy markets.

They're durable markets no we're not concerned about GOP once and I'll say that with the utmost respect accumulative, but every data point shows that this is not something that we should be concerned about.

The performance is strong and he is going to continue to get there. We saw a great Q3 performance in recurrent net of the key piece you'll use it was solid I like where we are with both the heaps and he's here in the U S and the largest market.

The fact that we've seen said being in line now allow the profile as we enter Q4 and as we head into 2024.

These will be the year for CIT.

And I like the Optionality that we got around M&A, so healthy market solid portfolio, a great opportunity to leverage the balance sheet. I do thing is is a different place a different environment. So really excited to be here look forward to leading this great team I look forward to answering more questions in quarters to come. Thank you for your time today.

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

Thank you.

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

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