The operator welcomes listeners to the Zimmer Biomet’s Third Quarter 2023 Earnings Conference Call and introduces the speakers, Keri Mattox, Ivan Tornos, and Suky Upadhyay. Keri Mattox reminds listeners of the forward-looking statements and non-GAAP financial measures that will be discussed. Ivan Tornos expresses his excitement for being the new CEO and welcomes everyone to the call.

The orthopedics industry has seen significant changes in the past five years, with groundbreaking technologies and better patient outcomes driving demand for treatment. This has also led to a shift towards outpatient settings, while still maintaining strong volumes in traditional settings. These market trends are creating new opportunities for ZB to provide life-changing solutions for patients. The company has a solid track record of execution and is on track to meet its year-end guidance for 2023.

The CEO of Zimmer Biomet is confident in the company's future and believes they will continue to be a leader in customer-centric innovation and commercial execution. He shares his thoughts on his first two months as CEO and discusses his three key priorities for the company's transformation. The solid performance in Q3 is attributed to the team's commitment and sense of urgency. The CEO thanks the team for their hard work and dedication and acknowledges their desire to do more for patients, customers, and shareholders.

The CEO of Zimmer Biomet praises the team for their hard work and looks forward to showcasing their results. He thanks the former CEO for his leadership and shares his perspective as the new CEO, emphasizing the importance of prioritizing key tasks and focusing on purpose and people. He also mentions his interactions with various stakeholders and his goal of creating a winning culture with the best talent in the industry.

Under the new leadership of ZB, there is a strong focus on people, talent, and culture, with a data-driven approach to track progress. The recent engagement survey showed the highest scores in the company's history, indicating a motivated and energized team. The second priority is to establish operational excellence by simplifying processes, making bold choices, and driving sustainable revenue growth through innovation and customer-centricity. The goal is for every employee to take ownership and think of time and money as valuable assets for the organization.

The company is focused on aligning incentives to achieve best-in-class performance and operational excellence. This will lead to revenue growth of 100-200 basis points above the market, faster earnings growth, and free cash flow growth. Operational excellence will also simplify the company's operations and enable it to be more agile and proactive in navigating market trends. The company is on track to meet these goals and will provide more details at an upcoming Analyst Day. Diversifying into higher growth markets is a priority for the company.

The company plans to achieve growth through both organic and inorganic means, focusing on innovation and mergers and acquisitions. They will invest in R&D to develop new products that solve customer problems in attractive and growing markets. They are also focused on the ASC opportunity in the US and plan to launch over 40 new products in the next 36 months. The company will monitor the success of these launches not only in terms of revenue, but also in terms of profitability and margin accretion.

Zimmer Biomet's mission and margin expansion will coexist as the company leverages its strong balance sheet for M&A opportunities that align with their mission and have potential for financial success. The company has already started diversifying its portfolio and increasing market growth rates through strategic resource allocation and portfolio management. The CEO's three priorities are people, operational excellence, and innovation through organic and inorganic means. The company's Q3 performance was driven by continued execution and investment in key areas, such as niche markets.

The company had a successful quarter in niche markets and saw growth in key areas such as upper extremities, CMFT, and sports medicine. Revenue was also generated from their data technology and solutions platform, particularly through ROSA and Mobility. The Persona OsseoTi cementless platform received positive feedback and the company plans to expand its reach. Adoption of ROSA was strong, especially in the ASC setting. The company's recent acquisitions, Embody and ReLign, have also contributed to their success. Despite pressure on Medtech stocks related to GLP-1 drugs and obesity, the company remains focused on their mission to improve patient health. They believe weight loss may help prevent disease, but once osteoarthritis occurs, there is no cure.

Obesity is a degenerative disease that can block patients from receiving joint surgery. However, GLP-1s, a type of medication, could potentially be a positive factor for orthopedics for three reasons: it could make patients eligible for surgery, increase the risk of joint procedures due to increased activity, and potentially expand the patient pool due to longer life expectancy. While there is currently no immediate impact from GLP-1s, early findings from surgeon surveys and claims data are promising. The speaker is confident in the future of the organization and believes that GLP-1s will ultimately be a positive factor for orthopedics.

Zimmer Biomet's CEO believes that the market beyond the backlog is sustainable and the company's execution is strong and sustainable. They have a clear strategy and financial flexibility to invest in higher growth markets. The company had a strong quarter and is on track to deliver mid-single digit revenue growth and operating margin expansion. The CFO welcomed the new CEO and reported a 5% increase in net sales, or 4.7% excluding the impact of foreign currency.

In the third quarter, the company faced a headwind of 150 basis points due to a selling day impact, which affected all regions and product categories. Excluding this impact, consolidated sales would have grown by over 6%. The U.S. saw strong growth in knees and S.E.T. categories, while international growth was more moderate due to tough comps and geopolitical factors. Global knees saw growth driven by the Persona product portfolio and ROSA robotics platform. Hips declined slightly due to tough comps in China and headwinds in Russia. The S.E.T. category grew by 2.8%, with key focus areas posting double-digit growth. The other category saw significant growth driven by ROSA sales. On the P&L, the company reported GAAP diluted earnings per share of $0.77 compared to $0.92 in the previous year.

The company had higher revenue and pre-tax profits compared to the previous year, but post-tax income was lower due to a one-time tax settlement in the previous year. Adjusted earnings per share increased due to revenue growth, but were offset by higher operating expenses and interest costs. The company's gross margin and operating margin also improved, but were partially offset by higher R&D expenses. Cash and liquidity remain strong, and the company's outlook for 2023 is largely unchanged with expected revenue and EPS growth. However, the strengthening of the U.S. dollar will result in a 100 basis point headwind to revenue growth for the full year.

The company has reiterated its EPS guidance for the full year and expects to increase operating margins despite a challenging environment. There is no significant impact from selling days on revenue growth expectations. Interest and other expenses, tax rate, and shares outstanding are expected to remain unchanged. Free cash flow for the year is projected to be between $950 million and $1 billion. The company remains confident in its 2023 expectations and expects revenue to grow in the mid-single digits with earnings growing faster than the top line. The call was then turned over to Keri Mattox for the Q&A session, with a reminder for participants to limit themselves to one question and a brief follow-up. The first question was asked by Robbie Marcus from JPMorgan, who inquired about the health of the ortho market and the company's longer range guidance for 2024.

In response to a question about the company's guidance for the upcoming year, Ivan Tornos explains that the market dynamics are currently healthy and continue to show growth. He attributes this growth to factors such as the rise of ASCs, younger patient demographics, and technological advancements. Tornos also mentions that these trends are expected to continue into 2024. He passes the question to Suky to provide more information on the company's margin profile for 2024.

The company has gained market share in both knee and hip categories in the US, making them the fastest growing company in the quarter. Globally, they have faced some one-time challenges in Russia and China. The company is confident in their mid-single digit growth for the second half of the year and is committed to expanding their operating margin. They have provided a transparent view of their plans for 2024, including potential headwinds such as a higher tax rate due to OECD's Pillar Two. However, they are confident in their innovation pipeline and believe it will drive growth.

The speaker discusses potential currency pressures and market conditions for the upcoming year, but also expresses confidence in revenue growth and earnings exceeding revenue growth. They mention efficiency programs and strong performance in new product launches as contributing factors to this growth. A question is asked by Robbie Marcus and the speaker thanks them for it.

Drew Ranieri from Morgan Stanley asks Ivan Tornos and Suky questions about backlog and its impact on the company's growth. Tornos clarifies that they do not see backlog as a major driver of growth, but rather focus on innovation, investments, and commercial execution. He also mentions that they expect mid-single digit S.E.T. growth in the next year and are not dependent on backlog for this growth.

The speaker is asked about the organic growth rate and M&A plans for the company. They mention that Q3 S.E.T. was in line and Q4 is expected to be a mid-single digit grower. They are not discussing S.E.T. dynamics for 2024 yet, but are confident in the current performance and potential for sustainable growth. The speaker also mentions that M&A remains a priority, with a focus on the S.E.T. category. The next question is about the company's outlook for 2024 and the concern about tough comps in Q1.

The speaker is confident about the company's growth in 2024 due to sustainable market dynamics and a strong lineup of new products to be launched in the next 36 months. They also mention the successful integration of other companies and strong commercial execution as factors contributing to their positive outlook. They are not concerned about tough comps in the first half of the year, as they believe the market growth is sustainable.

The company is confident in their single vision for the future, but they are not giving specific quarterly guidance for next year. They believe that the first semester of 2023 will be a tailwind and that the implied deceleration in Q4 is due to conservatism. They are aiming for revenue growth acceleration and will not be satisfied with 4-5% growth.

The company is confident in its expected growth margins for the rest of the year, but there is a range depending on geopolitical factors and supply. They are also seeing positive momentum for 2022 and 2023. M&A remains a top priority for the company, with a focus on growth markets and areas that align with their mission.

The company has identified three key areas within recon that are growing faster than the overall market: navigation, data and technology, and ASC. They plan to continue expanding through acquisitions, with a focus on sports med and CMFT, and have a budget of up to $2 billion for deals. They aim for these acquisitions to be EPS neutral within two years and have a high-single digit ROIC within five years. The company's strong free cash flow generation allows for flexibility in capital allocation. In terms of ASC, the company is already seeing strong growth and has a suitable portfolio, including a robotic platform and a popular knee product.

The speaker discussed the company's success in the sports and across set markets, thanks to their best-in-class technology and dedicated resources. They also have a dedicated sales force and partnerships for additional products. They are confident in their continued performance in the ASC environment. In response to a question about the migration of total joint surgeries to ASCs, the speaker estimated that between 40% to 60% of cases will move to ASCs in the next five years, with a good percentage already having done so. This will also lead to a double dip effect as other cases move to in-patient and outpatient settings.

The company is experiencing growth in the ASC sector, with around 10-15% of revenue coming from Zimmer Biomet. Both hips and knees are seeing equal demand in the ASC. The recent CMS changes are expected to accelerate ASC cases for the company. One-third of all ROSA installations are happening in the ASC, and this trend is expected to continue. ROSA is performing well outside of the ASC and the company is on track to install 300 units by the end of 2023. The company is also planning to launch a next-generation ROSA platform for recon and shoulder procedures. The CEO has been traveling extensively since taking over the role.

Zimmer Biomet's operating margins have been consistently expanding despite a challenging environment, with a projected 28.5% margin for 2023. The company plans to continue growing margins every year after 2024 and aims to exceed historical levels. The "other" category saw strong growth in the quarter, driven by the continued use of ROSA technology. There have been no changes in strategy.

The company reports strong clinical efficacy and time neutrality with their products, and has seen great adoption in an ambulatory care environment. They have three indications for their ROSA system and have had a lot of presence at conferences. The company is also seeing a positive impact from their Persona OsseoTi cementless construct. The company is focused on improving margins and generating free cash flow.

Chris Pasquale asks a follow-up question about the mix of sales versus placements in the third quarter and if it played a role in the acceleration of other sales. Ivan Tornos responds that there has been an increase in sales due to strong capital in hospital systems. The company's strategy remains the same, but they have sold more units. SET's strategy is to focus on categories that are already growing well, but they also have plans to improve performance in areas such as restorative therapies, lower extremities, and trauma. Tornos mentions a reimbursement change in restorative therapies and the company is paying attention to the need for potential organic and inorganic growth in the lower extremities and trauma markets.

The company has experienced declines in some areas, but they have plans to improve and grow in those categories. The three most important areas for the company are performing well. They are open to M&A opportunities, but the impact on earnings per share will depend on the type and size of the transaction. The timing of a potential deal is uncertain.

The company is committed to achieving a 20-24 month break even period for their M&A deals and has a lot of strategic flexibility due to a strong balance sheet. They cannot disclose specific timing for deals but believe they can continue to accelerate growth and diversify the company. The one-time issue in hips in the current quarter will go away in Q4. The tax rate is expected to increase by about 150 basis points in 2023.

In the final paragraph of the article, Keri Mattox thanks the participants and asks if there are any final questions. Vijay Kumar asks about the impact of OUS hips in Russia and the company's approach to M&A in the current interest rate environment. Ivan Tornos responds that the OUS hip headwind from Russia is mostly behind them and they do not anticipate it continuing into 2024. He also mentions that they prefer debt financing over equity financing and are being more disciplined in their valuation and purchase price due to the current interest rates. The operator then thanks everyone for their questions and turns it back to Ivan for any closing remarks.

The speaker is proud of the progress at Zimmer Biomet and believes that the markets are healthy and durable. They are not concerned about GLP-1s and are confident in the company's performance. They are pleased with the Q3 performance and believe that 2024 will be a strong year for the company. They are also excited about the potential for M&A and look forward to answering more questions in the future. The call has ended and the IR team will be in touch.

This summary was generated with AI and may contain some inaccuracies.