The operator welcomes participants to Zimmer Biomet's Fourth Quarter 2023 Earnings Conference Call and introduces Keri Mattox, Chief Communications and Administration Officer. Mattox reminds listeners of the possibility of forward-looking statements and non-GAAP financial measures. CEO Ivan Tornos thanks everyone for joining the call.

In 2023, Zimmer Biomet had a successful year with strong financial performance and impacting the lives of 4 million patients. Despite challenges such as inflation and supply issues, the company still grew constant currency revenue by 7.5% and generated $1 billion in free cash flow. This success is attributed to the dedication and commitment of the 20,000 team members. The CEO is confident that this is just the beginning and is excited about the company's bold pipeline.

In 2018, our pipeline has doubled in size and we have launched new products in 2024. We have a stable supply and strong commercial execution. The market growth has improved significantly and we are confident that it will continue. Our strong balance sheet and investor support further solidify our bright future. Our goal is to grow 100-200 basis points above market revenue, with EPS and free cash flow growing even faster.

The guidance for 2024 shows Zimmer Biomet's commitment to financial discipline, and their upcoming Analyst Day will provide more details about their long-term plan. The company is focused on three strategic imperatives: people and culture, operational excellence, and innovation and diversification. In terms of people and culture, they are working towards having the right people in the right roles and creating a culture of ownership and agility. They also aim to become leaner and closer to the customer, and have implemented a pay for performance system.

The company is focused on growing revenue and free cash flow through incentivizing employees and restructuring the company for greater efficiency. They have also implemented initiatives to reduce inventory levels and improve new product launches. These changes were necessary and have already been put into motion.

The company is focusing on operational excellence through restructuring, better inventory management, and improved pricing dynamics. They are also investing in R&D and customer-centric innovation to drive product launches and increase margin expansion. The pipeline for new products is twice the value compared to 2018, and they have significant launches planned for 2024 to regain lost market share in the hip area.

In 2024, the company plans to launch new products in hips, shoulders, and knees, including a stemless shoulder and a smart knee. They also plan to increase their penetration rates in the cementless knee market and see growth in their S.E.T. business. They are confident that these product launches will help them regain lost momentum and continue to grow in the future.

The company is excited about the return on investments made in S.E.T. and their strong product launch cadence. They plan to launch over 40 new products in the next 24 months that will establish them as leaders in their categories. They are also investing in innovation for the ASC side of care and plan to diversify their end markets through smart M&A, which will be their top priority for capital allocation.

The speaker expresses excitement about the company's ability to continue share buybacks and pursue smart M&A opportunities due to strong free cash flow generation. They are committed to delivering on their growth targets for 2024 and beyond, with a focus on flawless execution and creating value for shareholders. The team is ready and the company's mission is to improve the quality of life for patients around the world. The speaker then hands the call over to Suky, who discusses the company's successful fourth quarter and full-year results, with strong performance in all business segments.

In the fourth quarter of 2023, the company saw a growth of almost 4% and expanded adjusted operating margin by almost 100 basis points. This was the second consecutive year of operating margin expansion in a challenging environment. The company closed the second half of 2023 with mid-single-digit revenue growth and levered earnings growth. In the fourth quarter, net sales were $1.94 billion, with a selling day tailwind of about 100 basis points. The U.S. and international markets both saw growth, with the knee business being driven by the Persona product portfolio and ROSA robotics platform. The hips segment also saw growth and the company plans to introduce new product offerings in 2024. The S.E.T. category saw a growth of 6.4% in the quarter, with strong performance in sports, CMFT, and upper extremities. Overall, for the full-year, global knees grew 10.2%, global hips grew 5.1%, and the S.E.T. category grew 6.4%.

In the fourth quarter, the company reported a 3.8% growth, with a significant increase in the second half of the year. Their other category also saw a strong growth of 15.9%, driven by global sales. On a GAAP basis, the company reported a diluted earnings per share of $2.01, compared to a loss in the prior year. Adjusted earnings per share were $2.20, representing a 17% growth. This was driven by higher revenue, improved gross margins, lower operating expenses, and a lower tax rate. The company also saw a 200 basis points increase in adjusted operating margin, driven by revenue leverage and efficiencies. Net interest and other adjusted non-operating expenses were $43 million in the quarter and $194 million for the full-year, with an adjusted tax rate of 15.8% for the quarter and 16.3% for the full-year.

In 2024, the company generated operating cash flows of $588 million and free cash flow of $447 million. They completed a $500 million share buyback program and have a strong balance sheet. The company's financial outlook for 2024 includes a 5-6% growth in constant currency revenue, adjusted diluted earnings per share in the range of $8 to $8.15, and operating margin expansion of over 50 basis points. However, there may be a slight decrease in gross margins, but it will be offset by efficiency and restructuring programs.

The company is expecting net interest and other non-operating expenses to be around $205 million and a step up in the effective tax rate to 18% due to the implementation of Pillar Two. They also expect to end the year with 207 million shares and have initiated a restructuring program to streamline their organization and save costs. The program is expected to result in cash charges of $125 million to $150 million and deliver up to $200 million in savings. The company expects constant currency revenue growth to be at the lower end of mid-single-digits in the first half of the year, with quarterly results being impacted by billing days. They also anticipate a slight decrease in gross margin for 2024 due to lower FX hedge gains and increased third-party manufacturing costs.

The company expects a strong year in 2023, with higher gross and operating margins in the first and second halves respectively. They anticipate maintaining this momentum into 2024 and beyond. The CEO discusses the key assumptions for the 5-6% growth in 2024, including macro and micro factors such as healthy markets and younger patients. The CFO mentions a $500 million buyback and the company's confidence in finding good M&A targets.

The speaker discusses the positive outlook for the company in the U.S. market, citing an increase in days of surgery and shorter rehabilitation processes. They also mention upcoming product launches and a commitment to meeting their 5-6% growth guidance. The $500 million share buyback demonstrates confidence in the business and does not imply any deterioration in M&A targets.

The company is confident in their knee franchise despite lower than expected performance in the quarter. They had a solid year with double-digit growth and are not too concerned about one quarter's results. They believe in their strategy of prioritizing smart M&A and tuck-in acquisitions, as well as their significant M&A firepower. They do not see any deterioration in their targets and are not overly focused on short-term results.

The company does not focus on one particular quarter's performance, but looks at trends over 8 to 12 quarters. Despite some volatility, they continue to be the top player in knees and gain market share. They are confident in their guidance for 2024 due to increasing cementless and ROSA penetration, solving backorder challenges, and strong commercial execution in the ASC. There may be potential headwinds in 2024 and 2025 due to efforts to lower inventory levels and restructuring.

The company's restructuring and inventory management plans are guided by their overall guidance. Inventory reductions will be made in non-critical areas and countries, while the announced job cuts will mostly be in non-customer facing roles. S.E.T. and Other line items performed well in the last quarter, with S.E.T. expected to grow mid-single-digit or above in 2024. The key drivers of this growth are the use of suspects.

The company is performing well in most geographies with upper single-digit and double-digit growth in upper extremities, CMFT, biologics restorative therapy, and sports med. They have stabilized their restorative therapies business in the US after facing reimbursement challenges. However, they still have some work to do in trauma and ankle business, but are confident in their growth potential for the future. The guidance for mid-single-digit growth in the first half and higher in the second half includes the selling day benefit.

The operator introduces Joanne Wuensch from Citi who asks about the expected decrease in gross margins and the impact of increasing the use of cementless knees. Suky Upadhyay explains that the decrease in gross margins is due to the loss of FX hedge gains and increased costs in third-party manufacturing, but the company is able to offset some of these headwinds. The operator then introduces Robbie Marcus from J.P. Morgan. The company also announces restructuring and reductions in back office positions, which are not customer-facing and are already accounted for in their guidance.

In response to a question about the strong performance of the S.E.T. and other line items in the latest quarter, Ivan Tornos explains that the growth is driven by factors such as the use of suspects, new product launches, and strong commercial execution. He also mentions that the CMFT business and biologics restorative therapy business are performing well, while there are some challenges in the trauma and sports med businesses. In 2024, the company is aiming for mid-single digit growth in S.E.T., with potential for higher growth in certain geographies.

The company is confident in its growth potential due to its investments in innovation and infrastructure. The guidance for the first half of 2024 includes the selling day benefit. Gross margins are expected to be lower year-over-year, primarily due to the loss of FX hedge gains. The company plans to increase the percentage of cementless knees, but the benefits of this shift are not specified.

In 2024, the company expects to see a slight decrease in gross margins due to increased costs and third-party manufacturing, but this will be offset by improved efficiency and revenue growth, resulting in an overall increase in operating margins. The company also plans to increase the use of cementless Persona OsseoTi, which has a higher ASC uplift and is often paired with robotics, leading to additional revenue. The company aims to reach a penetration rate of 50-60% for cementless in the coming years.

The speaker discusses the company's plans to reach 60% market share, with a focus on new product launches and expansion into international markets. They also mention the guidance for the year, with a projected 4% market growth and a significant contribution from new products.

The speaker discusses the launch of three new hip products in 2024 and the potential impact on revenue. They also mention the absence of supply chain headwinds and a shift to the ASC as potential contributors to their confidence in their guidance. The speaker also mentions the impact of pricing erosion and the restructuring program on operating margins. They expect operating expenses to decrease by about 100 basis points as a percentage of sales.

The company is focusing on reducing SG&A costs through efficiency and restructuring programs in the near-term. However, they are also working on longer-term initiatives to maintain and stabilize gross margin, such as SKU rationalization and inventory reductions. The $200 million in cost savings is expected to be fully realized by the end of 2025, with $100 million in savings expected for 2024. The majority of these savings will be dropped to the bottom line, resulting in an 80 basis point increase in operating margins.

The company is reinvesting a significant portion of their profits back into priority areas such as cementless and ROSA uptake, as well as commercialization efforts for new product launches in the hip franchise. This is made possible by their efficiency program which has led to margin expansion for three consecutive years. The new compensation plan will not have a material impact on margins and is already factored into their guidance for 2024. The company still expects a two-year dilution from M&A, but hopes to reduce it.

Jeff Johnson asks about the timing and potential uptake of the ROSA shoulder launch, as well as the number of ROSA placements. Ivan Tornos responds that he cannot give a specific timeline for the launch, but it will not be in late 2024. He also mentions the benefits of the ROSA shoulder and expects it to be well-received in the ASC environment. He also shares that there will be around 300 installations per year and a minimum 5-7% penetration rate, with one-third going to ASCs.

The speaker discusses the success of ROSA installations and the expected push towards cementless procedures. They also mention the positive outlook for gross margin, cost savings initiatives, and EPS growth. The speaker agrees that a low-double-digit EPS growth rate is possible in the long term.

Richard Newitter from Truist Securities asks about upcoming data presentations at AAOS. Ivan Tornos confirms that there will be data on Persona IQ and GLP-1. Persona IQ will have a full market release in 2024 and will reduce complexity and costs in the episode of care. They will also submit for a PPT in the near future. GLP-1 remains a tailwind and only 20-30% of patients are using it pre-surgery. Ivan is glad that the conversation about GLP-1 being a headwind is being muted.

Richard Newitter asks Ivan Tornos about the potential impact of earnings dilution and M&A transactions on the company's earnings growth. Tornos responds that it is difficult to predict the specific impact, but that the company is confident in its ability to sustain high-single-digit earnings growth through organic growth and operational levers. The operator then allows one more question, from Jayson Bedford, who asks about the supply challenges the company faced in 2023 and their impact on the P&L. Suky Upadhyay responds that the impact on revenue cannot be quantified.

The impact of days on backorder on sales is difficult to quantify, but it is believed to have been a headwind for last year and will be a tailwind for this year, contributing to the company's projected organic growth of 5-6%. The company had to do limited market releases and prioritize existing customers over converting accounts due to supply constraints, and this also affected global expansion plans. Russia is expected to be a net tailwind in 2024, with a less than 50 basis point impact on revenue growth.

The speaker, Keri Mattox, thanks the questioners and announces that the call is wrapping up. Ivan Tornos then gives some closing remarks, thanking the team members at Zimmer Biomet for their hard work and announcing the company's growth in 2023 and commitment to continued growth in 2024. He also expresses excitement about the company's pipeline of products and solid financial profile. The call ends with a final thank you to the team members and the operator providing instructions to disconnect.

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