Zimmer Biomet Holdings, Inc. Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen and welcome to the Zimmer Biomet Third Quarter 2022 Earnings Conference Call. This conference is being recorded today, November 2, 2022. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Chief Communications and Administration Officer. Please, go ahead.

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's third quarter 2022 earnings conference call. Joining me today are Bryan Hanson, our Chairman, President and CEO; Suky Upadhyay, EVP and CFO; and Ivan Tornos, COO. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q3 earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Bryan. Bryan?

Thanks, Keri, and thanks for joining us for the call this morning. We've got three sections of the call. First, I'm going to briefly talk about our Q3 performance and the momentum that we saw in Q3 that has allowed us to increase our outlook for the year, even in the face of some meaningful macro pressures that we're certainly still facing. I also want to spend time talking about our ZB innovation. This is clearly the driver of our continued strong performance and will be the driver as we go forward. For the second section, Suky will provide more detail on the quarter, but probably more importantly, our 2022 guidance update. We'll close things out by addressing any questions you might have. Before I get started on Q3, I just want to take a minute to say thank you. Thank you to the ZB team members that I know are listening. Your continued strong performance is built on day-in and day-out execution, focused on driving results. Even in the face of very real macro challenges, I appreciate it. I'm really proud that even amidst these challenges, you're delivering results for our customers, our patients, and our shareholders. So turning to the third quarter, the beginning was a bit choppy due to procedure cancellations, but we saw significant improvement and finished strong. This improvement occurred in all of our regions, especially in OUS regions, with both EMEA and APAC performing better than our expectations. Inside this, we saw good momentum in our large joints business, with our knee franchise growing in the high single digits and our hip business growing just above 10%. This was somewhat offset by expected pressure in our S.E.T. business. Although we did see strength in the quarter, we continue to face significant challenges across foreign currency, supply, inflation, and staffing. That said, the team has been able to navigate these challenges. They’ve facilitated operational and commercial discipline, driving our innovation in the field. As a result, our confidence continues to grow, which is reflected in our updated financial guidance. Our underlying business is strong and getting stronger. Recently we announced a first-of-its-kind three-year agreement with Hospital for Special Surgery, or HSS, to create the HSS/Zimmer Biomet Innovation Center for Artificial Intelligence in Robotic Joint Replacement, aimed at developing new AI-powered tools for data-driven recommendations to surgeons for robotic-assisted joint surgeries. Our Q3 saw exciting product pipeline news as well, including the launch of HipInsight, the first FDA-cleared mixed-reality navigation system for total hip replacement, enhancing our ZBEdge suite of solutions. Furthermore, we announced the FDA clearance of our Identity Shoulder System, which aligns each surgeon's approach to an individual patient’s anatomy, optimizing pain relief and range of motion. Demand for ROSA, both in knee and hip, continues to be strong. Persona Revision traction in the US remains solid, and our limited launch of Persona iQ is driving positive feedback. We're focused on data collection for clinical use benefits. We expect to build on this momentum with upcoming product launches including our new Persona cementless form factor and other launches in the S.E.T. category. All our product innovations combined with ongoing efforts to reshape our business position us well for future growth. We strive to be a preferred workplace for our team members, a top quartile performer for our shareholders, and a trusted partner to our stakeholders, particularly our customers and patients. In summary, we’re managing through real macro headwinds that are muting growth. However, the COVID recovery and strong execution are offsetting this. Our team continues to execute our strategy and we feel increasingly confident about our future as a company. Now, I’ll turn it to Suky to talk more about Q3 and give you an outlook for 2022 guidance.

Thanks Bryan and good morning. Overall, we delivered another good quarter driven by strong execution and continued recovery of elective procedures. While we continue to navigate challenges, our Q3 performance gives us the confidence to raise our full year financial guidance. With that I'll turn to our third quarter results. Unless otherwise noted, my statements will be about the third quarter of 2022 and how it compares to the same period in 2021. My commentary will focus on a constant currency and adjusted continuing operations basis. Net sales in the third quarter totaled $1.670 billion, down 0.9% on a reported basis and up 5% on a constant currency basis. US sales grew 3.2%, driven by strong elective procedure recovery and solid execution, particularly in our Knee and Hip businesses, partially offset by expected declines in the S.E.T. and other categories. International sales grew 7.3%, driven by strong procedure volumes across most markets in EMEA and APAC, aided by lighter prior year comparisons and continued strong execution. EMEA performed better than expected due to recovery in developed markets and robustness in emerging markets. APAC outperformed expectations, with China largely in line and significant strength in Japan. Looking at our category performance, Global Knees grew 7.2%, with US Knees up 7.3% and International Knees up 7%. Strong recovery drove knee procedure growth across regions and easier comparisons, along with strong traction for our Persona Knee System, especially with Persona Revision in the US and increased ROSA utilization. Global Hips grew 10.5%, with US Hips up 5.3% and International Hips up 15.5%, bolstered by strong international recovery and easier comparisons outside the US. Continued traction across key Hip products like the G7 Revision System and Avenir Complete Primary Hip contributed to this success, along with solid ROSA performance in the hip category in the US. The S.E.T. category declined by 2.1%, impacted by tough comparisons from 2021 and expected volatility around VBP, which we expect to reverse in Q4, along with reimbursement headwinds in US restorative therapies holding steady until mid-2023. The Other category declined 0.4%, driven by challenging comparisons and lower capital sales amidst a greater share of ROSA placements versus upfront sales. In terms of financial performance, on a GAAP diluted basis, we reported earnings per share of $0.92 versus $0.77 in Q3 2021, thanks to a decline in litigation-related expenses and a favorable tax benefit during the quarter. Adjusted diluted earnings per share was $1.58, down from $1.71 in Q3 2021, while adjusted gross margin stood at 70.7%, in line with expectations. It's worth noting that ongoing inflationary pressures will lead to slightly decreased full-year gross margins compared to last year. Increased input costs this year are expected to affect 2023 expectations, and we now anticipate inflation to be a headwind of 50 to 100 basis points on margins into next year. Our adjusted operating expenses were $742 million, reflecting increases due to inflationary pressures and enhanced R&D investments for future product launches. Our adjusted operating margin for the quarter was 26.3%, down 200 basis points year on year, mainly due to inflationary pressures and ongoing investments. Despite macro challenges, we expect our efficiency programs to lead to improved operating margins in the second half of the year, with a ramp-up in Q4 as revenue increases. In cash and liquidity terms, operating cash flows reported were $451 million, and free cash flow amounted to $332 million for the quarter. We reduced our debt by approximately $160 million in Q3, excluding foreign currency effects, ending the quarter with about $545 million in cash and cash equivalents. Notably, despite rising interest rates this year, we see interest expenses aligning with our previous estimates but anticipate higher interest expenses in 2023. Progress has been made in strengthening our balance sheet through enhanced performance and ongoing debt reductions, providing greater strategic flexibility. Moving on to our updated financial outlook for the year. Constant currency revenue growth is now expected to be between 5.5% to 6.5% versus 2021, although we do expect a foreign currency headwind of approximately 550 basis points versus an earlier assumption of 500 basis points. Therefore, reported revenue growth for this year is projected to fall between 0% to 1% versus 2021. Based on recent spot rates, we also foresee weakened dollar effects creating roughly a 300-basis point headwind on revenue growth in 2023. Additionally, we are tightening our estimated adjusted diluted EPS range to between $6.80 to $6.90. Most other metrics in our 2022 guidance remain unchanged since the last quarter. We expect Q4 revenue growth to outpace Q3, partially driven by previous Q4 2021 VBP charges offset by a single-day selling day headwind. In short, we had another solid quarter driven by market recovery and effective execution, allowing us to once more raise our full-year outlook. We're aware of persistent macro challenges but ongoing market recovery combined with strong execution and a promising product pipeline keeps us confident about our future. I want to commend and thank our broader ZB team for their dedicated efforts. Now, I'll hand it back to Keri.

Thanks Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow-up, so that we can get through as many questions as possible during the call. With that, operator may we have the first question please?

Thank you. We'll take our first question from Shagun Singh with RBC.

Great. Thank you so much for taking the question and congratulations on a strong print here despite a pretty challenging environment. So Bryan and Suky, I was just wondering if you can elaborate a little bit on 2023. Just on the top-line how should we think about the durability of growth? I think last quarter you talked about a 4% floor, but it looks like you have stronger momentum going into next year with a 6% exit rate. And then on margins given the incremental impact you called out from FX and inflation, do you still believe you can drive operating margin expansion next year, or is that going to be more challenging? And then I have a follow-up.

Okay. Two really good questions right out of the gate. So maybe Suky, I'll start with the revenue side of that equation, and then you could answer on the margin side. Perhaps to simplify, let me begin with the conclusion: we stated that in a stable market, we’d be disappointed if we couldn't achieve at least 4% growth. I want to clarify that 2023 is not anticipated to be a normal market, due to numerous shifting variables. Nevertheless, we do see a clear pathway towards 4% growth. Let’s discuss the positive and negative influencing factors. Positively, first, our innovation flywheel at ZB is functioning effectively, bolstering a solid product pipeline. This is enhancing our Vitality Index, which we expect to maintain moving north. Secondly, we currently have strong team execution. The momentum observed lately is crucial for fostering business growth and progress. Thirdly, we remain committed to increasing our weighted average market growth rate through disciplined portfolio decisions. This includes not only active management of our portfolio but effectively managing our R&D investments, commercial infrastructure, and employee compensation. As for the macro environment, certain favorable factors include a backlog of orthopedic patients, though the timing and impact of this are still unclear. Comparably, our year-over-year comparisons can be slightly favorable. Concerning negatives we need to remain focused on: we face constraints related to supply, staffing challenges, and recession risks associated with elective procedures if unemployment rates rise. All in all, 2023 does not appear to be a standard year, containing both challenges and opportunities. From what I observe now, my expectation is for at least 4% growth, which would be a notable improvement from our earlier performance. That outlines my perspective on revenue; Suky, please address margin.

Thanks, Bryan. Good morning, Shagun, and thanks for the question. On the margin front, the macro environment has indeed become increasingly challenging during the latter half of the year compared to our initial forecast. Despite these challenges, our team has managed to enhance our outlook for the second half of the year, an accomplishment we're proud of. Overall, we foresee that maintaining or slightly growing our operating margin in comparison to 2022 is still achievable, assuming market conditions persist. The greatest impact has come from FX adjustments; we raised our full-year outlook by 50 basis points, expecting around a 550 basis point hit to revenue in the end. That translates into a 300 basis point headwind next year. This sizable impact inevitably affects top-line growth and, by extension, margins. Additionally, while we anticipate inflationary pressures, our previous guidance indicated a 50 to 100 basis point drag, which now sits at the higher end of that range. Significantly, this change predominantly arises from soaring energy and freight costs rather than from rising raw material or wage inflation. Nonetheless, the outlook suggests some stabilization in those major cost components. Interest expense is another consideration; although we generally deal with fixed debt, our strategic initiatives involving swaps may lead to a modest increase in interest burdens next year. We are actively focusing on deeper efficiency strategies and commend the ZB team for tackling these issues head-on. As we anticipate market conditions to hold, we are targeting to maintain or even improve our margins next year.

That's really helpful. Thank you so much for the color. Just as a follow-up, I was just curious to get your thoughts on portfolio management in the context shift of procedures to the ASC setting. We're hearing about 60% of recon procedures could be done in the ASC setting by 2028 or even by the end of the decade. Any thoughts on that? Are you still under-indexed in that setting? Thank you for taking the questions.

Yes. Thanks. I’ll begin, and Ivan, feel free to chime in. We believe ASCs represent an attractive market segment in our recon and S.E.T. businesses. This submarket is one of the fastest-growing segments, and we are increasing our focus there through a few strategies. Firstly, we are building infrastructure with dedicated commercial teams concentrating exclusively on the ASC business. Achieving this requires adept contracting capabilities, and we've made good strides in that area over the past couple of years. Additionally, we are scaling our product offerings to fit ASC requirements; our acquisition of a booms and lights company reflects our intent to establish a significant operational foothold in this market. We expect the ASC to continue capturing a growing share of procedures compared to traditional hospital settings. While I can't endorse the specific figures mentioned, we are confident about an upward trend in ASC procedures, and we want to maximize that opportunity. Ivan, anything to add?

Yes, I wanted to emphasize that our portfolio now encompasses best-in-class contracting. Compared to previous years—2020 and 2021 contracts—Zimmer Biomet now partakes actively in those deals. The newly streamlined portfolio allows us to integrate dedicated structures, resulting in demonstrated growth in the ASC sector in the US, where we are witnessing double-digit growth.

Thank you.

Thanks Shagun for the question. Yes. Operator, can we go to the next queue please?

Thank you. We'll take Steven Lichtman with Oppenheimer & Company.

Thank you. Good morning. I was wondering if you could talk about the strength you're seeing in the Hip side of your business, particularly as it relates to ROSA pull-through. What are you seeing as it relates to surgeon interest on the Hip side with ROSA and would you say you're still in the early days in terms of that being a tailwind?

Yes. I’ll delegate this to Ivan because he’s more adept at addressing product-related specifics.

Absolutely. Thank you, Steve. To summarize, Hip performance related to robotics has exceeded expectations. It's notable that we possess the only pin-less robotic system globally, which lacks reliance on CT scans, benefitting ASC settings. We've observed a higher level of accuracy in procedures compared to conventional hip operations. This cutting-edge product launch continues to grow in adoption. Currently, 50% of our installations occur in the US and 50% globally, with 30% of robotic applications now occurring in ASCs. We're enthusiastic about the progress of our hip software. Overall, we believe we have a cutting-edge robotic platform with G7 and Arcós, and we expect further traction from our mixed reality collaboration with Surgical Planning Associates in making our Mixed Reality platform the only FDA-approved option for hips in the US.

Great. Thanks Ivan. And then Suky just a follow-up, thanks for the color on the 2023 inflationary headwinds. Just wondering if you could talk about offsets. You mentioned some of the internal efficiency programs. But what about on pricing, are you seeing any progress on pricing initiatives? Any color you can provide on that and what potential impact they may have on the offset side?

Yes. Thanks for the question, Steven. So far this year, we have seen improved pricing erosion at the company level; previous erosion rates averaged 2% to 3% annually entering 2022. This year, however, we’re tracking reductions closer to 1% to 1.5%. We’ve increased investments in data analytics systems and governance, alongside strengthening our contracting capabilities. For the upcoming year, we expect some pricing erosion to continue, but we hope to maintain it at the lower end of historical averages or better. Nevertheless, pricing will serve as a headwind year-on-year. Additionally, we have various efficiency initiatives we are targeting to mitigate these headwinds. These include implementing new global business services and assessing country profitability alongside Bryan's previously discussed active portfolio management.

Got it. Thanks, Suky.

Steve, thanks so much. Yes. And operator, can we go to the next slide in the queue, please.

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

Hey, guys. Thanks for taking my question. Bryan, maybe my first one on your 4% for fiscal '23 as a starting point. I'm curious where is that floor assuming? It looks like there is no backlog. Pricing still continues to be a headwind. And it looked like you sounded pretty bullish on new products, but I'm assuming that 4% is assuming minimal contribution from new products, could you just go through the assumptions please?

Yes. You’ve articulated that well. Our revenue growth calculation incorporates both positives and negatives. While innovation is a major highlight, our team execution remains essential, and we've seen significant momentum driving our business. More importantly, our weighted average market growth has considerably improved over the past five years, which provides added confidence to hit or exceed 4%. However, we do need to acknowledge ongoing supply challenges, staffing issues, and a potential recession that may impact elective procedures. Therefore, while we’re optimistic, we also remain aware of external pressures that could complicate growth prospects in 2023. We want to approach our forecasts with a balanced view.

That's helpful, Bryan. And Suky one for you on your free cash flows year-to-date. It's really been impressive, up year-on-year free cash conversion north of 80%. You're probably one of a few MedTech companies to have free cash flows up. Is that a timing impact or anything else going on in the free cash flow line item?

Yes, Vijay, we’ve posted a strong nine months here. I’d say there's a slight timing benefit in Q3 that will reverse in Q4 due to some payments related to VBP and tax payments shifting from Q3 to Q4. Overall, we’re pleased with our cash flow performance and feel confident in our range for this year.

Understood. Thanks guys.

Yes, thank you.

Thanks, Vijay. Operator, can we go to the next question?

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

Hey, good morning everybody. I wanted to follow-up a little bit more on the 2023 comments. I think before you said that EPS would grow faster than revenue growth. And so now that was with operating margins up but now margins are kind of flat to slightly improving. So, I’m just curious how we should think about EPS growth now versus the 4% constant currency growth if EPS is still up but probably less than 4%? And I wanted to clarify about the interest expense. You had a higher interest expense, but I think you have no floating debt. So, I'm kind of curious what's driving the higher interest expense?

Sure. From the EPS perspective, keep in mind the anticipated 300 basis point headwind on revenues next year. As Bryan mentioned regarding 4% on an ex-FX basis, the foreign currency headwinds need to be taken into account. We expect EPS to align closely with the reported revenue figures, given margins hold steady or see slight improvement, alongside interest expenses rising year-over-year. While we are predominantly in fixed debt, some swaps from previous strategies have led to higher interest expenses.

Okay, that's helpful color. And Bryan, I wanted to ask on M&A. Like you’ve emphasized getting more aggressive once the market stabilizes, which it seems like 2023 might resemble a more, quote-unquote 'normal' market. Would you entertain more significant M&As rather than previous smaller private acquisitions in the S.E.T. category?

I want to be cautious with specifics since it’s a competitive space. However, we’re squarely in Phase 3 of our transformation, which emphasizes active portfolio management to enhance growth in desirable markets. We intend to broaden our asset vetting process beyond financial metrics, ensuring acquisitions align with our overall mission and lead to Weighted Average Market Growth Rate improvements that drive future growth and EPS growth. In terms of focus, we are particularly interested in high-growth segments of recon, data robotics, or expanding further into the ASC market, alongside attractive white space markets outside orthopedics.

Great. Thanks for the color.

Thanks. Operator, I think we can go to the next question in the queue.

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

Oh, great. Thanks for taking the questions and congrats on a good quarter. Maybe to start Bryan, I'd love to hear a bit more about what you're seeing on the capital equipment environment. I know it’s a smaller overall component for Zimmer Biomet. But you talked about lower capital sales in the quarter. It sounded like it was a bit more placement versus upfront sales. Any color on ROSA and what you're seeing if it's different in the US versus oUS? How do you expect that to trend over the next 12 to 18 months?

I want to be cautious when discussing capital since it doesn’t significantly affect our revenue. That said, from our ROSA perspective, we’re focused on constructing agreements that allow payment for the system through commitments rather than upfront costs, often akin to a leasing arrangement tied to customer business commitments. We increased our ROSA unit placements this quarter without encountering notable capital market constraints. Ivan, would you like to provide additional insights?

Absolutely, Bryan. Good morning, Robbie. Our global performance reflects balanced installations, with 50% in the US and 50% internationally. Approximately 30% of our robots are placed in ASC settings, which are capturing market share. We're optimistic about where we stand with ROSA, as evidenced by our positive momentum as we move into Q4.

Great. Thanks. Maybe as a follow-up, I think Bryan you said last quarter extremities grew double-digits. This category has less visibility. Any insights on extremities, especially considering that sports medicine has had HA reimbursement changes, so there's some pressure there? What are you seeing in terms of extremities versus trauma and sports, and how might this play out across the US, APAC, and EMEA?

Sure. A quick recap: Our S.E.T. businesses have incongruous segments, with distinct categorizations unique to us, such as upper extremities, trauma, CMFT, and sports medicine. The pressure in restorative therapies you mentioned is not associated with sports, but we are channeling resources into our growth drivers, specifically focusing on upper extremities, CMFT, and sports, achieving strong results. These categories saw mid-single to double-digit growth this quarter, thanks to robust commercial infrastructure and enhanced R&D investments. Spanning our S.E.T. business, Asia Pacific is experiencing some trauma pressure correlated with VBP, which should alleviate in the next quarter, while restorative therapy pressures persist into mid-2023.

Appreciate it. Thank you.

Yes. Thanks for the question. Operator, can we go to the next question in the queue, please?

We'll take our next question from Joanne Wuensch with Citibank.

Good morning, and thank you so much for taking the question. I wonder if you can step back a little and talk about the orthopedic markets, what you're viewing as changes or no changes in the competitive landscape, perhaps something in physician practices, pricing, or generally, what you think of as the state of the union?

Great question. It’s fascinating to consider. I’ll start with key observations. The rapid adoption of technology across orthopedic practices is particularly noteworthy. I had initial doubts about whether this transition would occur, sparked by emerging robotics and data applications. But I have been encouraged by our customers’ enthusiastic embrace of these technologies, indicating a willingness to compensate for the added value. This shift instills confidence that technological advancements will remain sticky within the industry, potentially leading to positive pricing dynamics. Our ability to offer innovative solutions also means we can enhance our service mix in existing procedures, indirectly allowing pricing stability across our portfolio. With more technology being continuously integrated, we expect this will positively affect the overall orthopedic market growth rate. The inclusion of this technology generates stability, thereby increasing revenue per procedure.

Bryan summarized well. I’d add four key points to emphasize: 1) There is a genuine care shift to ASCs, including home therapy setups. 2) Decision-making involves not only physicians; patients now play a significant role. 3) There's a growing emphasis on value rather than just pricing. 4) Innovation has surged, leading to exciting advancements in mixed reality, infection management, and machine learning within orthopedics.

Very helpful. Thank you.

We'll take our next question from Richard Newitter with Truist Securities.

Hi, thanks for taking the question. I wanted to just follow-up first, Bryan, on what you were talking about some of the pricing opportunities you mentioned with new technology mixed reality and smart implants. I'm curious within the buckets of mixed reality, the ability just to preserve your pricing as contracts roll off, and discrete opportunities to charge for some of these newer areas. Can you give some examples of where these new technologies might yield the price impact your shareholders are expecting?

I appreciate your inquiry. Understanding pricing through a multifaceted lens is critical. Consider mymobility, which utilizes the Apple Watch for data collection aimed at predictive analysis—this technology is monetized directly. Similarly, robotics advancements yield mandatory upticks in disposable value for procedures, positioning ROSA to command a premium. Additionally, Persona IQ, as the first smart implant, naturally attracts a premium for its imperative capabilities. These examples illustrate how technology integration can enhance our competitive landscape and increase revenues beyond traditional transaction methods.

I believe Bryan covered it well. Nothing to add on this front.

Great. And just on Persona IQ, it seems like the infection prevention capability or the ability to detect the infection before it occurs, that's probably going to be the killer app for a product like that that will allow you to get that kind of premium. I guess, what should we think of timelines on the data collection to be able to get an approval for infection prevention indication?

While I typically avoid committing to specific timelines, I assure you our team is accelerating efforts. We're harnessing limited launch opportunities to foster strong user engagement and gather valuable insights. Our focus lies on deriving actionable data to cushion patient care costs significantly. Infection detection is an attractive angle, and while it will be a goal, predicting other risk factors such as loosening is also important. The substantial data we are amassing will advance our understanding and capacity to make meaningful clinical revelations that can foster expansion and higher price points for Persona IQ.

Thank you.

Sure.

Operator, can we go to the next person in the queue?

We'll take our next question from Jeff Johnson with Baird.

Thanks. Good morning everyone. Bryan, building further on the pricing discussion, it's all interesting, especially the premiums associated with new sensor-based technologies and how that shifts the mix. I'm equally interested in your base business. I’m not sure what your Vitality Index is now, but let’s assume 70% or 80% of your revenue comes from products that are a few years old in the portfolio. How are hospitals responding, knowing they can't always increase prices by two or three points every year on these base products if you're continuing to invest in and develop new technologies? Are discussions with hospitals improving, particularly in this inflationary environment?

Indeed, the pricing atmosphere in our base business entails twists and turns. Thankfully, discussions around value have gained momentum. We continuously strive to contrast our innovations with core products. As our Vitality Index grows, enhancing products can stabilize prices across our product range and prolong existing contracts. This phenomenon is vital for negotiating price stability in today’s inflationary environment.

Right. Our overall engagements have taken on a more strategic dimension, effectively tying value to our discussions. However, we’re not fully where we’d like it to be just yet.

Bryan mentioned this earlier: there is a clear correlation between an uptick in our Vitality Index and price stability; hence, as we introduce more innovations, we expect that correlation to strengthen.

Yes. That's helpful. Thank you. And then maybe just a follow-up, and I think Suky it's probably for you. But as I think about this placement strategy with ROSA, the market has shifted over the last six to 12 months to more of a placement strategy, and it sounds like that’s probably going to continue at least for the foreseeable future. When do we get that crossover where the minimum purchase commitments—the minimum price points guaranteed in those contracts start likely outweighing the upfront costs you’re having to eat on this placement strategy? And it’s probably not helpful in the short run on the margins—things like that? So just when does that crossover happen, and the longer tail of those positives really start to kick in? Thanks.

Yes, that’s a great observation, Travis. Upfront investments are apparent, as we initiate depreciation before significant growth commitments materialize. We’re still early in this equation, but I believe our placement governance should guide us effectively in the necessary trajectory.

In regard to robotics, our governance is robust. Each robotics unit installation mandates performance commitments regarding case volumes. This ensures fair market transactions. We prefer placements that can support ongoing growth, thus ensuring that we benefit long-term. Moreover, as we think through our strategy regarding case volumes, there’s strict adherence to the pricing schemes established for any associated disposables.

Great. Thanks for the color.

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

We'll take our next question from Matthew O'Brien with Piper Sandler.

Good morning. Thanks for taking my questions. Just putting a finer point on this top-line number that you're talking about for next year. First of all, is that 4% kind of the floor that you're thinking about for the business next year? Just as I think about the components that you're talking about between VBP and pricing and ASCs, et cetera, it just seems like the environment for hips and knees specifically is going to get more robust or leveraging Hips and Knees. So, why wouldn’t 4% be the floor? Is there potential for some meaningful upside to that as we head into next year? Thanks.

The encouraging takeaway is that I’m receiving optimistic inquiries now regarding our capacity for delivering 4%. We’re making measurable progress there. Conversely, I must stress that this number represents what we consider achievable, not a definitive floor. We must be mindful of the multitude of external pressures we face. While we have confidence, it’s also essential to be aware of the potential pitfalls surrounding our business moving forward into 2023. It’s important to provide a balanced perspective on growth opportunities.

Yes, thank you. Operator, I think we're a little past 9:30 unless there's any closing remarks. Bryan, anything you'd add, or shall we conclude the call?

Yes. I want to emphasize the transformation occurring at Zimmer Biomet. Our focused portfolio decisions showcase our commitment to portfolio management in all business aspects. We're optimizing investments in R&D, commercial practices, and managing our active portfolio and M&A strategies to drive Weighted Average Market Growth. The innovation flywheel we’re currently fostering was merely an idea a few years ago, as we now see the Vitality Index improving remarkably, which promises sustainable results moving forward. These developments, combined with strong execution from our field teams, position us favorably in a challenging market. That would be my closing thought, Keri.

Thanks so much, Bryan. And thanks everyone for joining the call this morning. If you have any questions, please feel free to reach out to the IR team. I know we'll speak to many of you today. So thanks for joining.

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