Good morning, ladies and gentlemen, and welcome to Zimmer Biomet's Fourth Quarter 2023 Earnings Conference Call. This conference is being recorded today, February 8, 2024. 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, Chief Communications and Administration Officer. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's fourth quarter 2023 earnings conference call. Joining me today are Ivan Tornos, our President and CEO; and Suky Upadhyay, CFO and EVP, Finance, Operations and Supply Chain. 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 the 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, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our Q4 earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan.

Hey, thank you, Keri, and thanks, everyone, for joining the call here this morning. I like to start the way that I typically do, taking a moment to recognize, to show my gratitude to the almost 20,000 Zimmer Biomet team members for their dedication, commitment, resilience, and superb performance in 2023. Simply put, 2023 was just a great year for our company and I want to say thank you. In 2023, we impacted the lives of almost 4 million patients, and along the way, we delivered best-in-class financial performance, growing our constant currency revenue by 7.5%, while adjusted EPS grew almost 9.5% in the year. That's 200 basis points of leverage between the 7.5% revenue growth and the 9.5% growth in EPS. In the year, we generated almost $1 billion in free cash flow, and that's with some turbulence around inventory management and challenges. So again, strong performance top to bottom. And I'm just very proud of the execution in the year. It's worth noting that this level of execution and performance came in a year in which we still had to deal with fairly complex macro issues, whether it's inflation, foreign exchange, geopolitical challenges, and also some micro challenges in the year. We struggled with some supply challenges throughout some periods. I'm happy that's behind us, but it was a headwind in many periods in 2023. And again, delivering 7.5% growth in 2023 against some tough comparables, having grown constant currency revenue in 2022 by 6.6%, clearly reflects a great trend in the making. I'm truly excited as I know that this is just the beginning when it comes to the level of performance that we can realize here at Zimmer Biomet with multiple drivers of why I'm confident this is just the very beginning. But I'll start with highlighting the bold pipeline that we have in place. The size of our pipeline is twice what it used to be in 2018. We have great new product launches happening early in 2024, a stable supply environment, and excellent commercial execution, as evidenced by the growth rates that I just highlighted. We're developing flawless commercial execution. We've seen and we continue to see substantial improvement in our end markets. This is not the same market growth profile that we had before. The demand pacing is strong, and procedure volume is also strong. As the market leader in both knees and hips, being in better markets is just very exciting as we enter 2024. Five years ago, when I joined the company, we used to think of the weighted average market growth rates as being somewhere in the 3% range. Today, we perceive our weighted average market growth rate as being very near, if not at 4%. This is a meaningful increase, and we believe it is sustainable. Therefore, we are not going back to the 3% days when it comes to market growth rates. Internal and external dynamics give me, give us confidence that the best is truly ahead. When you add to these variables the fact that we have the strongest balance sheet in the history of the company, there is no doubt that we can claim our future is nothing short of truly bright. So again, I am very pleased, proud, and confident. I'd like to thank our investors as well for their support in 2023 and for their confidence in 2024 and beyond. We continue to make significant strides forward toward being a company with a different growth profile from top to bottom. Committing to an expectation to grow at least 100 to 200 basis points above market revenue, with our earnings per share growing faster than revenue, and our free cash flow growing faster than EPS. The guidance that we are providing today for 2024 already reflects such a commitment to this type of financial discipline. I'm looking forward to our Analyst Day on May 29, when we will provide additional details in terms of our long-term plan, illustrating that this is not a one-year wonder; this is a multi-year commitment. You will see that Zimmer Biomet has truly entered our growth stage era. We are no longer in turnaround mode. We are ready to deliver by being laser-focused on the three strategic imperatives that I highlighted during my very first earnings call as CEO back in November; number one, people and culture; number two, operational excellence; and number three, innovation and diversification. Let's talk about our 2024 commitments and how different initiatives across these three strategic imperatives will drive our growth forward. First, in the area of people and culture, I’ve explained this in the past, what it means is about having the right people in the right roles within the right culture. We must make sure that we support team members to act as owners and operators of the business. This means decentralizing decision making, driving agility, and empowering team members at every level and function around the world. We must become leaner; we must be closer to the customer. Equally important, we must truly create an environment of pay for performance. This has already kicked off in a meaningful way in this fiscal year 2024. An example of that is that we’re incentivizing free cash flow dollar generation or growth in a more disciplined manner across the enterprise, knowing that revenue is the most durable driver of free cash flow performance. Incentives are also set for revenue growth to meaningfully drive compensation at every level across our firm. We are changing the way we pay people regarding growing revenue above market, and we are now committing a larger percentage of compensation to the need for the company to generate free cash flow at double-digit rates. In the second area of operational excellence, again, this is about how we think about growing the business from the top to bottom. You can see in today's press release that we mean it. It is tough to restructure a company, certainly something we don't take lightly. We had to do it, and it's a tough choice. We needed to make operational changes to simplify our structure and enhance investments in key areas of the business, again closer to the customer, which was not an easy decision but a necessary one. Beyond the restructuring, we have other initiatives in place kicking off how to drastically reduce inventory levels at Zimmer Biomet. This will drive substantial improvement in our free cash flow growth while also reducing our days on hand by 50 days or more and will reduce excess and obsolescence exposure, which has been a challenge for us in previous years. The second thing we are doing is the rollout of a global initiative to drive new product launch excellence across key new introductions in 2024. For the seven or eight most significant product launches, we will ensure governance and operating mechanisms to maximize these launches across each geography. The third initiative we are implementing is the integration of the pricing organization under our finance structure, reporting directly to Suky, to ensure maximum governance and accountability across the enterprise. While we are pleased with the reduction in price erosion over the last two to three years, we believe there is an opportunity for even better and more stable pricing dynamics. In the strategic imperative of innovation and diversification, we will continue investing in innovative R&D. We will fuel our pipeline with meaningful product launches. We will continue to drive our vitality index, which has expanded significantly over the last three years. Additionally, we will ensure that as we continue to launch new products, we also see margin expansion from these new products. I'm excited about where we are today. Our pipeline's dollar value is twice what it was at the end of 2018. Entering 2024, we have significant product launches, particularly in the hip area where we lost market share in the last two years due to a lack of products in core categories like surgical impactors, triple tapered stems, and hip navigation. Again, 2024 will be a year where we regain the momentum we lost through substantial product launches. Beyond hips, I’m also enthused about our progress in shoulders; Identity continues to generate great excitement. We will enter 2024 in full launch mode for Identity and are looking forward to the launch of stemless shoulders, as well as being first to market in shoulder robotics with a highly differentiated offering that applies to both anatomic and reverse surgeries. In knees, we are in the early days of our cementless knee launch and aim to increase our penetration rates drastically. Currently, our penetration rate in cementless knees in the U.S. is below 20%, and we are committing to drive penetration to 50-60% rapidly. More details will be shared during our Analyst Day, but rest assured, our knee penetration rate in the cementless category will not remain in the teens or low 20s for long. We are also excited about next-generation robotics in knees, with partial cementless knees and the full launch of Persona IQ, the world’s only smart knee that fully integrates data, technology, and best-in-class implants in a unique way. In the S.E.T. category, covering sports, foot and ankle, restorative therapies, trauma, extremities, and CMFT, craniomaxillofacial thoracic, we anticipate continued strong growth. In the second half of 2023, S.E.T. grew mid-single-digits or better. As we enter 2024 and beyond, we expect S.E.T. to maintain that growth rate. We are excited about the numerous product launches in S.E.T., some of which have already been mentioned and will be elaborated upon during our Analyst Day in the spring. We are also looking forward to innovation in general; our new product development pipeline is robust, with over 40 products launching in the next 24 months, most enabling us to lead or be in strong positions within growing market spaces. I'm particularly optimistic about plans for ASC care in the U.S. We have made significant innovations throughout all stages of the episode of care, what happens before, during, and after surgery. In terms of intraoperative care at ASCs, we are best-in-class in delivering effectiveness and safety. Diversification of Zimmer Biomet’s end markets will occur not only through internal innovations but also through smart M&A, which will remain our top capital allocation strategy, maintaining an optimal leverage ratio while executing our robust free cash flow plans over the next few years. Our strategy involves combining smart M&A with share buybacks, as was announced this morning. Therefore, the combination of smart M&A and buybacks can coexist, thanks to our strong free cash flow generation capabilities. I am energized by the detailed and focused plans the team has put in place, which I believe will help Zimmer Biomet meet our growth objectives. We are committed to achieving a minimum growth rate of 5% in 2024, with earnings per share always growing faster than revenue and free cash flow always growing faster than EPS. This is a multi-year commitment, and based on our detailed plans, I am confident we will get there. In closing, we are very excited about where we are at currently, our track record over the past two years, and most significantly, our prospects for 2024 and beyond. The team is equipped, we are establishing the right trend, and we are committed to delivering on our obligations. Along the way, we will continue helping patients, creating shareholder value, and carrying out our mission of alleviating pain and improving the quality of life for individuals around the globe. With that, I'll turn the call over to Suky.

Thanks, and good morning, everyone. As Ivan mentioned, our fourth quarter results mark a successful year for Zimmer Biomet, with full-year constant currency revenue growing 7.5% and adjusted earnings growing more than 9.5% on a reported basis while generating just under $1 billion in free cash flow. Inside of that, our business segments performed well for the year. Global knees constant currency grew by over 10%, hips grew by 5%, and S.E.T. grew by almost 4%, all while expanding adjusted operating margin by nearly 100 basis points, marking the second consecutive year of operating margin expansion in a challenging environment. As previously guided, we closed the second half of 2023 with mid-single-digit revenue growth and levered earnings growth, a trend we expect to continue. Let's dive into the fourth quarter results. Unless otherwise noted, my statements will focus on the fourth quarter of 2023 and its comparison to the same period in 2022, and my commentary will be based on a constant currency and adjusted operating basis. Net sales in the fourth quarter reached $1.94 billion, marking a 6.3% increase on a reported basis and a 6.1% increase on a constant currency basis. We experienced a selling day tailwind of about 100 basis points in the quarter. U.S. growth was 4.4%, while international growth saw an 8.7% increase. As expected, we observed a substantial sequential step up versus Q3 across all regions. Global knees grew by 5.6% in the quarter, with the U.S. contributing 5.4% and international becoming 5.8%. The knee business continues to benefit from our Persona product portfolio combined with our ROSA robotics platform, and we remain optimistic about positive feedback regarding the recently launched cementless variant of Persona OsseoTi. Year-to-date, global knees experienced a growth of 10.2%. Global hips grew 3.6% in the quarter, with the U.S. achieving 4% growth, and international growth was at 3.2%. We are eager to accelerate the performance of this segment with the addition of multiple new product offerings in 2024. For the full year, global hips achieved a growth of 5.1%. In the S.E.T. category, we saw a 6.4% growth in the quarter, with our pivotal focus areas of sports, CMFT, and upper extremities growing in the mid-single-digit to low-double-digit range. The strong upswing in these critical areas was partially offset by sub-segments within the category. For the total year, S.E.T. experienced a growth of 3.8%, which included a revival to mid-single-digit growth in the second half of the year. Lastly, our other category grew 15.9% in the quarter, driven by another strong performance from global ROSA sales. Now, turning to the P&L. In Q4, we reported GAAP diluted earnings per share of $2.01 compared to a diluted loss per share of $0.62 in the previous year. This increase in GAAP results stemmed from higher revenue, the absence of a goodwill impairment charge seen in 2022, favorable one-time tax benefits in 2023, and a lower share count. Detailed information regarding our financial performance can be found in today's press release. On an adjusted basis, we reported diluted earnings per share of $2.20 compared to $1.88 in the previous year, showing a year-over-year reported growth of 17%. This step up is attributed to revenue growth, improved gross margins, and a lower operating expense margin, in tandem with a reduced tax rate. Our adjusted gross margin was 72.5%, marking an 80 basis points improvement from the previous year, driven by favorable mix, higher volumes, and lower royalties. For the full year, we came in slightly above expectations, representing a 90 basis points year-over-year expansion. Adjusted operating margin stood at 30.3%, up 200 basis points from the prior year. This operating margin increase is primarily driven by revenue leverage, enhanced gross margins, and efficiencies realized across SG&A. For the full year, operating margin slightly exceeded expectations at 28.2%, an increase of 90 basis points year-over-year. Net interest and other adjusted non-operating expenses were $43 million in the quarter and $194 million for the full year, while our adjusted tax rate was 15.8%. The slightly more favorable tax rate resulted from discrete one-time items during the quarter, bringing our full-year tax rate to 16.3%, in line with overall expectations. Turning to cash and liquidity, we generated operating cash flows of $588 million, with free cash flow totaling $447 million, ending the year with cash and cash equivalents of $416 million. As Ivan mentioned earlier, we completed a $500 million share buyback program in early 2024, effectively offsetting annual dilution. For the full year, we generated operating cash flow of just under $1.6 billion, yielding free cash flow of $979 million. Our strong balance sheet offers continued financial flexibility and strategic options as we advance. Now, moving on to our financial outlook for 2024, our outlook incorporates several key assumptions, including pricing, which is expected to reflect erosion of about 100 to 150 basis points, albeit with an ongoing step change improvement from historical trends. We anticipate ongoing strength in our end markets, complemented by new product introductions and enhancements in product supply. Against that backdrop, we expect 2024 constant currency revenue growth of 5% to 6%, accounting for a foreign currency exchange headwind of approximately 50 basis points, translating to reported growth of 4.5% to 5.5%. Adjusted diluted earnings per share are estimated to be in the range of $8 to $8.15, representing reported growth of 6% to 8%. Currency is expected to confer an approximately $0.08 headwind on EPS, while the implementation of Pillar Two is anticipated to pose a $0.18 or about 250 basis points headwind on earnings per share growth for the year. This suggests operating margin expansion of over 50 basis points at the midpoint of EPS guidance for comparison with 2023. We foresee slightly lower year-over-year gross margins being compensated by efficiency and restructuring programs initiated in 2023. Net interest and other non-operating expenses are expected to total around $205 million. As discussed earlier, our effective tax rate is set to step up to 18% in line with the implementation of Pillar Two. We forecast to end the year with approximately 207 million shares outstanding, lower than 2023 due to the aforementioned $500 million share buyback. Finally, our anticipated free cash flow will range from $1.50 billion to $1.1 billion, representing roughly 10% growth at the midpoint. As Ivan stated, we initiated a global restructuring program along with other cost-saving initiatives in late 2023. These actions aim to simplify our organizational structure, shift select reporting lines, prioritize resource allocation, and evolve our operational footprint for better efficiency. This program is expected to result in cash charges of about $125 million to $150 million over the next two years while delivering up to $200 million in run-rate savings as we exit 2025. This will enable us to invest in high-priority areas while driving margin expansion and earnings leverage despite a notable increase in our tax rate. In terms of revenue cadence throughout the year, we expect constant currency revenue growth for the first half to be at the lower end of mid-single digits, while the second half should reach the upper end of mid-single digits. Quarterly results may be impacted by billing day effects, with Q1 facing a headwind of about 150 to 200 basis points, while Q2 and Q3 each provide a tailwind of approximately 150 basis points, and Q4 will reflect a 50 basis point tailwind. The cumulative effect of this will be minimal or less than a 50 basis point tailwind for the full year. In 2024, gross margins are anticipated to slightly decline from 2023 due to lower FX hedge gains and the realization of capitalized third-party manufacturing cost increases seen in the latter half of 2023. Cadence-wise, gross margins should be higher in the first six months. Additionally, because of the restructuring program’s timing, we expect operating margins to be stronger in the second half than in the first, with Q4 potentially representing our peak followed by Q2. In summary, 2023 proved to be another robust year for the company, and we are optimistic about maintaining that momentum into 2024 and beyond.

Thanks, Suky. 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?

We'll go first to Larry Biegelsen with Wells Fargo.

Hi, good morning. Thanks for taking the question. Ivan, congratulations on a nice first year here as CEO. I'd love to ask about the 2024 guidance. Just talk about the key assumptions for the 5% to 6% constant currency growth in 2024. What are you assuming for the recon market? And Ivan, talk about your guidance philosophy. Have you incorporated any conservatism in the guidance? What would get you to the high end of the range? And just quickly, Suky, on the buyback, the $500 million, does that imply that it's hard to find good M&A targets? How should we interpret that? Thanks for taking the question.

Hey, thank you, Larry. Always great to hear from you. I'll take the first two parts, and then Suky can address the rest. So embedded in the guidance for 2024, which we're confident on the 5% to 6%, are both macro and micro reasons. Macros will be very healthy in our market. You have better patient demographics, younger patients; you have case dynamics moving into ASCs. In the U.S., we see more days of surgery, moving beyond just the two, you've seen shorter, better rehabilitation processes. I can elaborate further, but the markets are favorable. On the micro side, we have meaningful product launches. We anticipate three key product launches in hips early in 2024, with key ROSA shoulder introductions and a cadence of new product opportunities in S.E.T. Therefore, the combination of new product launches supported by great commercial execution amid an improving market profile gives us confidence on a minimum 5% and a range of 5% to 6%. As for my philosophy regarding guidance, it’s straightforward; we make commitments, and we work diligently to fulfill them. We study various dynamics extensively. With operational enhancements in place and the absence of supply headwinds that we faced in 2023, my guidance signifies my philosophy of making studied commitments and delivering on them. I won’t comment today about potential opportunities to exceed or revise outlook but will maintain that we are committed to meeting our commitments and our guidance is well-founded. I'll pass it over to Suky for your second question.

Yes. Hey, good morning, Larry. Thanks for the question. Firstly, the $500 million share buyback illustrates our confidence in our business outlook. To address your question regarding M&A targets, this does not indicate any deterioration in opportunities. We believe that we possess the balance sheet power and strength to pursue both avenues, prioritizing smart M&A, with a focus on tuck-in acquisitions rather than mid-size ones. Even while executing share buyback, we still have significant M&A capability. Short answer: no, we don’t perceive any weakness in potential targets.

All right. Thanks for taking the question.

Thanks, Larry. Yes, thanks so much. Katie, can we go to the next question in the queue?

We'll go next to Matthew O'Brien with Piper Sandler.

Good morning. Thanks for taking the question. Just maybe start a little bit, Ivan or Suky on the knee performance in this quarter. It was a little bit below what we were expecting, still better than one of your competitors, but below another one. On a two-year stack basis, it's not quite 50% of sales, but close to it. So I would anticipate that that's going to need to see very good performance here in 2024 in order to hit the guidance range, which I think is maybe being questioned a little bit this morning. So what is it there specifically between cementless, robotic, and Persona IQ that gives you the confidence in the knee franchise outside of the macro environment here in 2024? And then I do have a quick follow-up.

Thanks, Matt. We are pleased with our performance, having met our expectations for knees and the entire business for the quarter, achieving a solid year overall with knees growing double-digit rates and the business achieving 10.5% growth, accompanied by EPS expansion. We typically don’t focus on just one quarter, although it’s our job to monitor that. The working days per quarter can introduce volatility, and you factor in our comparisons. In looking at trends, considering the last 8-12 quarters, while we are discussing knees, it may also be helpful to evaluate S.E.T. and hips. We noted volatility in Q4, especially in the U.S. where we saw fluctuations in orders impacting a few significant IDNs. The previous Q4 saw tougher comps relative to 2022, where we outperformed our top competitor. In Q3, both knees and hips showed superior performance compared to all competitors in the U.S. So we concentrate on the trends, and data shows we remain market leader in knees, gaining share steadily. In regard to the guidance, it’s the increasing penetration of cementless products and ROSA, while the backorder issue has been resolved. Coupled with strong execution in ASCs, all these reasons collectively bolster our confidence surrounding knees and our positive expectations for 2024.

I appreciate that. A follow-up is just on the variety of good developments anticipated this year. You are trying to lower inventory levels significantly, 50 days, in this space while also restructuring. How have you factored potential headwinds into 2024 and into 2025 regarding possible revenue losses or disruptions as a consequence?

Thank you. To start simplistically, all inquiries regarding restructuring and inventory management are accounted for within the guidance we provided. We are intent on being bold but cautious about our approach to inventory reduction. We do not aim to decrease inventories in key categories. Our focus will be to streamline inventories in non-critical areas and less essential countries. This audit is really about effective management, not clearing critical stock levels. Regarding restructuring, personnel reductions were primarily in back office functions that will not directly impact customer-facing operations. Changes in both inventory management and staff adjustments are considered in the guidance we have released.

Thanks, Matt. Katie, can we go to the next question in the queue, please?

We'll go next to Robbie Marcus with J.P. Morgan.

Great. Thanks for taking the questions. I want to ask about S.E.T. and other categories. These were the two line items that beat versus the Street. Could you break down some trends there, highlighting both strong performers and any potential underperformers and how you see those categories contributing to your 2024 guidance compared to hips and knees?

Thank you, Robbie. S.E.T. had a solid performance last semester of 2023, showing 5% growth, and we're committed to achieving mid-single-digit growth in 2024. The main drivers include upper extremity products, which are seeing growth in the upper single-digit to double-digit areas, thanks to new product launches, dedicated ASC focus, and stable supply chains. Our CMFT sector continues to thrive; acquisitions over the past few years have positively influenced outcomes. We have stabilized our restorative therapies sector in the U.S., which is now showing growth after overcoming prior reimbursement challenges. While we’ve had some struggles in sports med due to recent acquisitions, our performance remains consistent with our expectations. I'd say, out of the six businesses in that category, four are performing exceptionally well. Trauma and ankle require strategic assessments moving forward. Beyond mid-single-digit growth as a starting point, we have high expectations in particular geographies. Our prior investments in innovation, a dedicated infrastructure, and specialization, especially in the U.S. ASC sector, give us confidence about growth in the near future.

Great. Thanks. I have just a quick follow-up for Suky regarding guidance clarification. The lower end of the mid-single-digit growth estimate refers to the first half, while the upper end is regarding the second half. Is this inclusive or exclusive of the selling day benefit?

That is inclusive of the selling day benefit, Robbie.

Okay. Thanks a lot.

Thanks, Robbie. Katie, can we go to the next question in the queue, please?

We'll go next to Joanne Wuensch with Citi.

Excuse me. Good morning and thank you for taking the questions. I have two quick ones. I'm wondering why gross margins are expected to dip slightly year-over-year and what the dynamics are behind that? My second question does relate to cementless. Can you explain the math behind increasing the percentage of your knees that are cementless to 50 to 60%? What do you anticipate the benefits to be?

Yes. Hey, Joanne, it’s Suky. I'll start with the gross margin query and then pass it over to Ivan. Overall, we recorded a notable improvement in gross margin in 2023, up 90 basis points year-over-year, driven largely by FX hedge gains, improved product mix, and better pricing, although still facing pricing erosions year-over-year but improved from previous expectations. We had previously communicated expectations of slight declines in gross margins for 2024. This is mainly due to loss of FX hedge gains not recurring at the same levels, alongside increased costs associated with third-party manufacturing that we observed in the latter half of 2023. Even with those two pressures, we can offset much of that impact. However, overall, we do expect gross margins to see slight declines compared to 2023 amid those headwinds. The mid-point of our EPS guidance would yield an implied operating margin of roughly 29%, suggesting an approximate 80 basis point improvement year-over-year. While gross margin may reduce slightly, we will likely achieve operating margin increases through better efficiency and revenue growth. We have flexibility to manage headwinds in one area with improvements and growth in others, and despite a challenging environment over the last three years, we have continued to increase our operational margins and earnings.

Joanne, in regard to your cementless query, let's break down the pricing dynamics tied to the cementless Persona OsseoTi. We’ve identified an ASC increase potential of about 10% to 15%, more commonly closer to 15%. Roughly 40% to 50% of the time, we couple cementless advancement with robotics leveraging ROSA, resulting in additional revenue streams associated with disposals. Currently, our cementless penetration is around 18% to 20%, with high ambitions of reaching 50% to 60%. I won’t specify an exact timeline today, but you will see our long-term plans in our Analyst Day this spring, showcasing trend analysis towards the 60% mark. We project that achieving 50% to 60% penetration should be rapid, primarily because the market is already developing, helped by prior work from our competitors. These movements are focused within the U.S. market and will extend to international markets, including a key launch in Japan in 2024, where we will disclose pricing details at the appropriate time.

Thank you very much.

Thanks, Joanne. Yes, absolutely. Katie, can we go to the next question in the queue, please?

We'll go next to Ryan Zimmerman with BTIG.

Thank you. Thanks for taking the questions. Following up on Larry's questions about guidance, you discussed the WAMGR being at 4%, and clearly, we're in a stronger market environment. Considering the guidance components, given a pricing headwind of 100 to 150 basis points, this suggests product mix will contribute 200 to 300 basis points. I’d like to validate if that's the lens you're using, or if you're seeing market contributions to guidance at a higher rate in 2024 and perhaps product mix contributing less. Could you clarify that?

I will try to simplify. The market is indeed around that 4% benchmark. We assess it in various approaches, but let’s provisionally stick with 4%. While I won’t specify the exact contribution from new products, it will be substantial. We’re launching around 40 new products in the next two years, all significant. There are three major hip products launching early in 2024, including the ROSA shoulder. The combination of substantial new product launches coupled with the absence of supply chain hindrances that encumbered 2023 provides us confidence in our guidance range of 5-6%. Beyond that, our transition to ASCs is not a headwind; rather, it’s a favorable factor. Exciting developments are accompanying the movement of shoulder procedures to ASCs. Moreover, we will see the uplift accompanying cementless and ROSA, which will significantly enhance our performance. Suky, did you want to elaborate on that?

That's accurately characterized. The pricing erosion is accommodated in the 4% projection.

That’s quite enlightening. Lastly, could you elaborate on how the restructuring program contributes to the operating margin expansion, apart from the cost of sales? What portion of the 80 basis points of expansion stems from increased revenue leverage that you’re expecting? Thanks for taking the question.

Indeed. The increase in operating margin stems mainly from revenue leverage in light of flat or slightly downward trending gross margin. You may anticipate a decrease of approximately 100 basis points in operational expenditures as a percentage of sales, even with an increase in R&D expenditure relative to the previous year. Our immediate focus on efficiency and restructuring programs is primarily centered on SG&A, while transformative initiatives in COGS will take more time to realize. Methods such as SKU rationalization, site optimization, inventory reductions, and corresponding D&O reductions all require lead time as we revamp our supply chain without compromising our capacity to meet demand. Nevertheless, these aspects will gain prominence as we move beyond 2024. For the upcoming fiscal year, revenue growth and enhanced SG&A efficiency will be the main drivers of margin improvements.

Thank you.

Yes.

Thanks for the question, Ryan. Katie, can we go to the next question in the queue?

We'll go next to Travis Steed with Bank of America.

Hey, thanks for taking the question. I'm curious about the $200 million in cost savings you referenced. Is the intention for this to translate into the bottom line, or do you plan to reinvest it? Additionally, how does this impact margins in the long term?

Yes. The $200 million is characterized as a run-rate to be realized as we exit 2025; in 2024, we anticipate seeing about half of that, roughly $100 million. Much of this will directly flow to the bottom line, as suggested by our guiding midpoint reflecting an operating margin that could reach an 80 basis point increase. However, we will also reinvest a substantial share back into our key priority sectors. This includes ensuring that we have adequate sets and instruments to accommodate cementless and Persona lift through ROSA, enabling comprehensive commercialization strategies for new launches in hips and ensuring execution in new shoulder products. Therefore, it’s truly a dual approach, balancing immediate margin improvement with reinvestments in growth areas, which is a tremendous advantage of our efficiency program.

That's very helpful. Regarding the new compensation plan you mentioned, will this have any impact on margins, or is it simply a matter of shifting the compensation focus without a material effect on overall earnings?

This new plan will not create any material impact, as it’s embedded in our existing guidance. Rather, it's a shift in focus, aiming for better balance between top-line and bottom-line performance. It’s more about mixing the compensation structure than elevating costs. Our guidance remains unchanged.

Great. Thank you very much.

Thank you.

Yes.

Thanks, Travis. Katie, can we go to the next question in the queue, please?

We'll go next to Jeff Johnson with Baird.

Thank you. Good morning, guys. Congratulations on the quarter. Ivan, I think you mentioned in passing that the shoulder ROSA is not going to be a late 2024 launch. Could you specify that timing further? Additionally, I’d be interested in understanding your perspective on the uptake of ROSA shoulder; I think shoulder surgeries are technically more challenging, raising questions about the role that robotics can play initially in those processes. How does that impact the uptake? By the way, I don’t think I heard an update on ROSA placements; did you provide an annualized basis for that? Any insights on where those placements are heading? Thanks.

Hey, thank you, Jeff. I must be cautious regarding the specifics of the ROSA shoulder launch timeline, but I assure you it's not a late 2024 release. I am confident it's going to be very significant. Beyond being the first to market, it's a high-quality offering set to revolutionize both reverse and anatomic surgeries. This advancement will simplify complex procedures and fully integrate into our shoulder CVH ecosystem. I anticipate strong traction, particularly in the ASC setting where speed and accuracy are critical. We plan to demo the technology next week at the academy meeting, and whether it’s ready or not, we will demonstrate it there. In terms of ROSA placements, we expect to achieve around 300 installations annually, aiming for an acceleration in penetration rates of at least 5% to 7% per year. Additionally, approximately one-third of ROSA installations will be in ASCs. This should lead to a considerable uptick in cementless utilization as well.

Thank you. As a follow-up, when considering the 5% to 6% constant currency guidance along with your insights on the WAMGR being in alignment with a solid market, it looks like gross margins may potentially normalize beyond 2025 swelling your EPS growth target closer to the 10%-ish neighborhood. I'm aware you don't want to present a long-range plan right now, but can I assume that a low double-digit growth rate appears achievable based on everything you've conveyed?

Yes, Jeff. Your assessment effectively captures the essence of what we're trying to convey. If you review our guidance today on reported EPS, it suggests growth of 6% to 8%, despite a 400 basis points headwind across non-operational elements such as interest rates, foreign exchange impacts, and tax rates. So indeed, your interpretation of a sustainable double-digit EPS growth target appears reasonable and achievable.

Thanks for the questions, Jeff. Katie, do you have another question in the queue?

We'll go next to Richard Newitter with Truist Securities.

Hi, thanks for taking the questions. With AAOS next week, can you provide any previews regarding canary data? Additionally, you earlier mentioned the potential for GLP-1 data analysis at AAOS. Can you clarify what we're likely to see?

Yes to both, Richard. We will share valuable insights on Persona IQ and have GLP-1 data to present. Regarding Persona IQ, we are transitioning from a limited market release in 2023 to a full market rollout in 2024. We’ve finalized its value proposition, backed by over 2 billion data points that illustrate its ability to enable clinicians to intervene at key moments. We also have data indicating how this product should reduce overall care complexities. We discussed the NTAP, new technology add-on payment received in October, confirming its full launch now. We will certainly present more of our experiences with Persona IQ, including insights from prestigious institutions like Cleveland Clinic and HSS. For GLP-1 utilization, we’ll present data showing an increasing patient count using GLP-1 pre-surgery, approximating 20% to 30%. Therefore, I consider GLP-1 to remain a supportive factor rather than a challenge.

Great. Following up on Jeff's question, if you're looking at the ability to achieve high-single-digit EPS growth over a couple of years despite potential dilution from your M&A efforts, should we expect a margin growth in the mid-single digits moving forward? Does that offer confidence in a high single-digit earnings growth projection?

What you're inquiring about is whether achieving high-single-digit growth in the face of considerable M&A engagement is feasible. If that’s accurate, I would say it’s very challenging to comment on definitively since not all deals are comparable and each scenario is unique. Therefore, while projecting growth at 5% to 6% organically, against projections tied to our strong operational bonds and superior balance sheet, we can affirm our commitment to an appealing EPS journey.

Thanks, Rich. Katie, I think we have time for one more question if there’s one in the queue.

We'll go next to Jayson Bedford with Raymond James.

Oh, sorry, I was on mute. Yes, sorry about that. I'll be quick. Concerning the supply challenges you faced in 2023, can you remind me about the financial ramifications these posed, meaning can you quantify the impact on revenue?

Yes. Hey, Jayson, it’s Suky. It’s quite a challenge to articulate exactly how supply chain distress translates to revenue loss. On one hand, we face direct impacts on case deliveries, but the more significant effect is hesitation among our sales reps towards pursuing new opportunities without confidence in existing product supplies, leading to a broader impact. The repercussions of this are challenging to quantify precisely. From my perspective, the headwinds of 2023 will position us favorably for growth and confidence in our 5% to 6% assumptions for 2024.

Yes. We hold some internal metrics that we don’t disclose. However, what I can share is, we completed limited market releases on some product launches such as Persona OsseoTi whereas we initially aimed for full market releases. The conversion from established customers slowed due to these supply issues, which impacted revenue potential significantly—our underperformance impacted market reach extensively. A notable example would be Japan, which is the second largest market. It hampered our potential expansions. This situation is sizable but behind us now.

That’s helpful. Gradually, combining those factors, I think you indicated a 50 basis point impact on revenue growth in the latter half from Russia. Is Russia a net contributor as we look into 2024?

Yes, it is. The positive impact is less than 50 basis points. With the acquisition of all necessary licenses to operate, we expect this will create a shift in Q3, reflecting the most noticeable advantage as compared to 2023.

Thank you for your questions, Jayson. I believe we’ve reached the end of our queue, so I’ll turn it over to Ivan for some closing remarks.

Sure. I'll keep it brief. I want to start and end similarly: by thanking the nearly 20,000 Zimmer Biomet team members who are executing our outlined plans with remarkable performance. We achieved 7.5% constant currency growth in 2023, and our EPS expanded by 200 basis points, following a 6.6% growth in 2022. Now, we commit to at least a 5% revenue growth in 2024, with steady EPS advancement and double-digit free cash flow growth. I am proud of our team and excited for 2024. We've progressed into a phase of innovation and growth, with a potential year full of exceptional product launches and solidifying our financial profile, aiming for EPS growth beyond revenue increases. We are optimistic regarding the upcoming year. Thank you for your attention today, and thank you to the Zimmer Biomet team.

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