Zimmer Biomet Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 30, 2024

There are 13 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Third Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, October 30, 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 David DeMartino, Senior Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Q3 2024 earnings conference call. Joining me on today's call are Ivan Tornos, our President and CEO and CFO and EVP Finance, Operations and Supply Chain, Sokhia Pardier. 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.

Speaker 1

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, 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 Q2 earnings release, which can be found on our website, simprobiomet.com. With that, I'll turn the call over to Yvonne.

Speaker 1

Yvonne?

Speaker 2

Good morning, everyone, and thank you for joining today's call. Welcome, David, to your very first Zimmer Biomet earnings call. Truly lucky to have you. We love what you bring to the team already. I'd like to start today the way that I always do, by taking a moment to recognize and to show my gratitude to the over 18,000 Zimmer Biomet team members, who each and every day across the globe move our business and our mission forward.

Speaker 2

Thank you for your commitment to the organization. Thank you for your tireless work. Thank you for your very strong performance. And most importantly, thank you for what you do for our customers and patients every single day. As I said in the past, and as I will continue to say as long as I'm here, the Zimmer Biomet workforce and the culture that we have truly is one of our key competitive advantages.

Speaker 2

During the call today, I'm going to cover 4 things. First, I'll give an update on the recent ERP implementation and the challenges associated with it. Secondly, I'll cover some general comments on the quarter and the broader market dynamics. I'll move to then talk about a brief innovation overview. And then 4th and last, I'll close with a usual update on our 3 strategic priorities.

Speaker 2

After this, Suki is going to cover our financials in more detail and we'll make sure to leave plenty of time for questions at the end of the prepared remarks. To begin, I'm very excited to report that we've made greatest strides in managing the ERP implementation challenges outlined in early September. Through the dedicated work of the Zimmer Biomet team and our external partners, we now expect the impact of this challenge in the second half of twenty twenty four being lower than the 100 basis points of annual sales that we initially communicated. And we also fully expect to be back to normal shipping levels by the end of the year 2024. Turning to results, in Q3, we grew sales at mid single digit level, including a strong results in knees, in hips and in set.

Speaker 2

This quarter, the 3rd quarter now marks the 11th consecutive quarter of mid single digit or better constant currency revenue growth for Zimmer Biomet. In addition to the strong revenue performance, adjusted EPS once again grew faster than revenue. Our combined knee and hip businesses, what we call our reconstructive platform, grew in the mid single digit range globally, while SED delivered upper single digit growth aided by strong performance across our key growth drivers. Suki is going to cover this later, but I'm very proud of these results and specifically I love the consistency of growth in the key categories. Beyond commercial execution, our performance was fueled by mid single digit growth in our end markets, which we anticipate continuing based on all the analytics that we have at hand.

Speaker 2

An aging and increasing active population combined with technological advancements, driving procedures to outpatient settings like ASC here in the U. S, accelerating recovery times and best in class outcomes should continue to provide tailwinds to market growth in the coming years. So again, we see the markets being healthy and we don't foresee these markets slowing down. From an innovation standpoint, Zimmer Biomet has the most robust product cycle in recent memory with over 50 meaningful planned product launches over a long range planned horizon. I'm particularly excited about the momentum we are generating our hips platform as evidenced by the improved results in this business, and particularly in the U.

Speaker 2

S. Where we deliver almost 5% growth in the Q3. With Z1, our new triple taper hip stem for anterior hip implant procedures and with our surgical impact or HAMR as well as comprehensive navigation, robotics and platforms in navigation like Ortho Grid, we are going to continue to be on the offense when it comes to gaining sharing hips. So great innovation and we expect consistency in execution over the next several quarters. In this, our cemented Persona Ocea Time continues to gain rapid traction, while the recently launched Persona IQ Stubby, the shortest stem for Persona IQ is driving continued uptake of this differentiated technology.

Speaker 2

Early in the launch, the feedback has been superb. Within extremities, ROSA shoulder has the potential to change the treatment paradigm in shoulder implants. It's a platform that allows for reproducible, anatomic and reverse procedures. Finally, Zimmer Biomet is the only orthopedic company offering both a CT scanless robotic system in Russia and through a recent partnership with Sync Surgical, we also offered a smaller footprint handheld CT scan based system in TMEI. So when it comes to navigation and robotics, we got the most comprehensive suite of solutions.

Speaker 2

Beyond all of this, we're expecting to launch a cadre of new robotic applications in the short to mid term with and without CT scan capabilities as well as other differentiated features. In the ROSA franchise alone, we expect to launch 3 new indications in the next 18 to 36 months. While the underlying business performance remains strong, the team continues to execute on the same 3 strategic priorities that I have outlined in the past. Those being people and culture, which is foundational to everything that we do, operational excellence, innovation and diversification. As I said at the beginning of the call, people and culture are key competitive advantages for Zimmer Biomet.

Speaker 2

Recently, we appointed new leadership in our hips, knees, set in our ASC and in our digital technology and solutions businesses. I'm excited about these leadership changes and I'm confident that the growth and the leadership of these new individuals is going to accelerate. In addition, we have a greater talent in critical areas like IT, information technology and operations. On the second imperative, operational excellence, we are maintaining expectations for the long term financial commitments that we outlined at our Investor Day earlier in the year. With a terrific progress we made towards the resolution of the ERP issues, we feel even more confident in delivering mid single digit revenue growth, adjusted earnings per share growth of at least 1.5 times revenue and free cash flow growing at least 100 basis points faster than earnings throughout 2027.

Speaker 2

So again, the same commitments towards revenue, EPS and free cash flow remain. Finally, we continue to make progress in diversifying our business to increase the company's growth and profitability profile. This includes a highly disciplined approach towards M and A as well as internal capital allocation dynamics. To that extent, the value of Zimmer Biomet's pipeline of new products expected to be launched over our long range plan is more than twice the value that it was just a short 5 years ago, and 80% of these new product launches are accretive to the Zimmer Biomet Wengar of 4%. In conclusion, we're very proud of the progress in organization and we look forward to continuing to execute above and beyond expectations.

Speaker 2

I love the fact that we're impacting the lives of millions of people and I'm deeply inspired every day in knowing that my teammates and I are living the Zimmer Biomet mission of alleviating pain and improving the quality of life for people around the world. And with that, I'll turn the call over to Suki. Thank you very much.

Speaker 3

Thanks and good morning everyone. As Yvonne mentioned, we closed another solid quarter showcasing the resilience and winning attitude across our nearly 18,000 team members. Despite ERP related headwinds, we grew sales over 4% while maintaining steady operating margins, generating $1.74 in adjusted earnings per share and $310,000,000 in free cash flow. Given the challenges we have outlined related to our ERP implementation, we are now updating our 2024 full year guidance, which I'll touch on later. I would like to start by discussing the ERP implementation.

Speaker 3

As Yvonne reviewed, we cut over to a new system in the Q3 for North America distribution, which resulted in slower shipping levels of products to our customers. We disclosed this disruption in early September and initially noted that the ERP related headwinds could impact up to 1% of annual sales in the second half of the year. Through the excellent work of our team members, we now believe the impact will be 60 basis points to 80 basis points of annual sales, split about evenly between the 3rd Q4. We continue to expect to be back to normalized service levels exiting 2024. Moving on to results.

Speaker 3

Unless otherwise noted, my statements will be about the Q3 of 2024 and how it compares to the same period in 2023. And my commentary will be on a constant currency and adjusted operating basis. Net sales were $1,824,000,000 an increase of 4% on a reported basis and 4.1% excluding the impact of foreign currency. Consolidated pricing was 70 basis points positive in the 3rd quarter marking the 3rd consecutive quarter of positive pricing. Our U.

Speaker 3

S. Business grew 2% and international grew 7.1%. Growth in the U. S. Was driven by strong performance from hip and set partially offset by other, which saw the largest impact from the ERP headwinds.

Speaker 3

Our international business continues to perform well with strength across knee and set. Global knees grew 5.5% in the quarter with U. S. Growing 2.9% and international 9.2%. Our international business continues to benefit from our Persona portfolio and our ROSA robotics platform.

Speaker 3

Global Hips grew 3.7% with the U. S. Growing 4.9% and international 2.4%. As Yvonne mentioned with the launch of Z1 accelerating rollout of HAMR and closing of the OrthoGRID acquisition, we now have a complete product portfolio in Hips and are on the offensive. Next, our SET segment grew 7.3% led by CMFT, Sports and Upper Extremities, which all grew between mid single digits and high teens.

Speaker 3

This marks the 4th consecutive quarter of at least mid single digit growth in SET and a trend we expect to continue. Finally, our other category declined 9.5%. The decline was driven by a combination of difficult comps from the prior year as well as our surgical business being disproportionately impacted by ERP related challenges. Turning to our P and L, we reported GAAP diluted earnings per share of $1.23 compared to GAAP diluted earnings per share of $0.77 in the prior year. The increase in GAAP earnings was driven by higher revenue combined with a lower tax rate and share count.

Speaker 3

On an adjusted basis, we delivered diluted earnings per share of $1.74 compared to $1.65 in the prior year with earnings growing faster than revenue. Adjusted gross margin was 71% and adjusted operating margin was 26.3%. Despite the ERP related headwinds in the quarter, gross margin and operating margin were largely in line with the prior year. Net interest and other adjusted non operating expenses were $51,000,000 in the quarter, up slightly on higher net debt and interest rates. Our adjusted tax rate was 17.7% higher than 2023 due to the implementation of Pillar 2 and fully diluted shares outstanding were 203,000,000 down year over year due to share buybacks.

Speaker 3

Turning to cash and liquidity. We generated robust operating cash flow of $396,000,000 free cash flow of $310,000,000 bringing year to date free cash flow to $652,000,000 and ended the quarter with $569,000,000 of cash and cash equivalents. Aligned with our capital allocation strategies to return at least 65% of free cash flow to shareholders over the LRP, we repurchased approximately $600,000,000 in shares during the Q3. Through the end of October, we have repurchased over $850,000,000 in shares in the open market and we maintain flexibility to continue our share repurchase program. Regarding our outlook for the rest of the year, given the ERP related headwinds, we are updating our full year financial guidance.

Speaker 3

We now expect 2024 constant currency revenue growth of 4.25 percent to 4.75 percent. With recent exchange rate fluctuations, we now anticipate about a 75 basis point headwind from currency in 2024, resulting in reported revenue growth expectations of 3.5% to 4%. Also, we now expect full year pricing to be flat to 50 basis points positive. For margins, we anticipate full year gross margin to be down slightly from 2023, while operating margin is still projected to be up year over year, marking the 4th consecutive year of operating margin expansion. We are reiterating our expectations for net interest and other non operating expenses at about $205,000,000 and an effective tax rate of 18%.

Speaker 3

Fully diluted weighted average shares outstanding for the year are expected to be about 2 $4,000,000 resulting in adjusted diluted earnings per share of $7.95

Speaker 2

to $8.05

Speaker 3

And we expect full year free cash flow to be about $1,000,000,000 In summary, despite the challenges, this was another solid quarter for Zimmer Biomet. With that, I'll turn the call back over to David.

Speaker 1

Thank you, Suki. Operator, let's open it up for questions. In order for us to take as many questions as possible, please limit yourself to one question. Operator, please go ahead.

Operator

Thank you, sir. Ladies and gentlemen, at this time, we will now begin the question and answer session. We'll take our first question from Travis Steed with Bank of America.

Speaker 4

Hey guys, thanks for taking the question. I wanted to understand first, why are you cutting the guide by more than the ERP issue on an organic basis for 2024? And how to think about 2025 and the ERP? Is there catch up there? Should we think about 2025 kind of the low end of your 4% to 6% LRP?

Speaker 4

Thanks a lot.

Speaker 2

Thank you, Travis. Yvesant here. Good morning. So just on the first part of your question on the guidance for 2024. Look, listen, we're going to be somewhat conservative when it comes to the year and allow us to be conservative given the PTSD, if you will, of the recent ERP challenge.

Speaker 2

In Q4, all kinds of things happened. We want to see where we end up with pricing. Pricing has been positive for the entire year. Let's see where we end up in Q4 with all the puts and takes that happened around rebates, etcetera, etcetera. I want to make sure that we see the commercial execution that we need to see around new product introductions.

Speaker 2

We got 3 very meaningful new product introductions as we speak. We're late to get some of the sets out given the challenges with ERP. So again, I want to get at least a solid month, month and a half before I get too positive on Q4. And then look, there are some macro factors early in the quarter. We saw some disruption with the hurricane and whatnot.

Speaker 2

And the IV bags, we believe those are going to come in within the quarter. As a matter of fact, we are seeing those cases coming back already in the quarter. So allow us to be somewhat conservative and we'll see what we end up in Q4. Relative to 2025, we're very positive. The ERP constraint or challenge is well contained within the year.

Speaker 2

We'll update you in early 2025 when it comes to what 2025 is going to look like. But I will say today we're feeling very positive given new product introductions, the resolution at the ERP, etcetera, etcetera. Thank you.

Speaker 5

Great. Thanks a lot. I'll take the 1 question.

Speaker 2

Thank you. We'll move

Operator

to our next question from Larry Biegelsen with Wells Fargo.

Speaker 6

Hey, good morning. This is Vik Chopra in for Larry. Yvonne, can you provide us with your updated thoughts on M and A in areas of interest? Why haven't we seen more deals from you given that valuations have come down? Thank you.

Speaker 2

Thank you for your question. Let me start with the latter part. So why have you not seen more deals? We have said all along that we don't need to do deals to remain a mid single digit revenue grower over the life of the long range plan. 11 quarters now, we've been growing mid single digit revenue or above, delivering most of the time EPS faster than revenue and generating meaningful cash flow.

Speaker 2

Obviously, we're excited about M and A and the potential to diversify even more beyond the 4% WAMGAR. The deals need to make strategic sense and financial sense. Valuation are down, yes they are. But I will tell you as we go through the filters, there is not a single deal that is jump on us as saying we have to reallocate capital and do this deal immediately. We continue to evaluate deals, deals in higher growth segments within Recon, opportunities within our SET business and things that are in the ASC space.

Speaker 2

We don't deal that are exciting. OrthoGrid is the fastest navigation company today in the U. S. We've done some tacking scenarios offset. And when the right deal comes our way, we will jump on it.

Speaker 2

Thank you for your question.

Operator

We'll move to our next question from David Roman with Goldman Sachs.

Speaker 5

Thank you and good morning everybody. I was hoping you could dig dive a little bit deeper into the reconstructive businesses and maybe starting with knees where I know you had called out some supply chain dynamics last quarter that negatively impacted your U. S. Business. That looks to have turned around here.

Speaker 5

Have you fully recovered from that? And maybe you could take us through a little bit more what's going on outside the U. S. Because that also looked to be an area of strength this quarter and how should we think about the geographic performance across recon on a go forward basis here?

Speaker 2

Yes. Thank you, David. So let's start with NICE overall. So international grew almost 10% in the quarter. In the U.

Speaker 2

S, we grew 3%, constant currency that is. The challenges that we highlighted in the Q2 call, they were pre ERP related. It was revision shortage that we had that's been resolved. So I will tell you, as we see here right now exiting the year, there are no supply constraints when it comes to order or knee performance. The one thing that did slow down or knee growth in the quarter relative to the U.

Speaker 2

S. Is the ERP challenges. While the impact of ERP was primarily in other, we could have had more Persona Ocea Tag sets going into the market. We could have done a better job in pulling through the multiple rosa's installed in the U. S.

Speaker 2

So that has been the challenge. As we enter Q4, we're excited about where we are with NICE, and we really look forward to 2025.

Speaker 5

Great. Thanks so much.

Speaker 2

Thank you.

Operator

We'll move to our next question from Matt Nixic with Barclays. Sir, your line is now open. Matt, we're unable to hear you. You may be muted.

Speaker 1

Operator, we can go to the next question.

Operator

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

Speaker 7

Hi, this is Alan on for Ravi. I wanted to dive a little bit deeper into the guidance question that we kind of opened the Q and A session with. Just because you despite the ERP challenges that you had in the quarter, you ended up beating your what kind of where I think expectations were for constant currency and organic guidance for the quarter. So could you just help us a little bit more to kind of quantify some of the headwinds that you're being a little conservative on, whether that's the disruption from the hurricane or the IV bags because you're seeing those cases coming back through. Just help us kind of bridge the gap between the beat that you had in this quarter, the fact that ERP challenges are now coming in better than expected and the 100 basis points lower guide?

Speaker 7

Thank you.

Speaker 2

Hey, thank you, Alan. I'm not sure that I can offer any more color than what I offer. There is a level of conservatism given the multiple variables. Again, we just reactivated shipping volumes. We got through the ERP.

Speaker 2

We want to make sure that we like what we see. And again, it's no more complex than that. Don't read too much into it. We are 1 month behind in the quarter. We like what we see.

Speaker 2

And again, let's see what happens in November December, but nothing else to add on the guidance question.

Operator

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

Speaker 8

Good morning. Thanks for taking the question. I'd love to talk a little bit about the set performance in the quarter because that was strong. It was a 2 year stack acceleration. And as I think about that category, the growth that we're seeing overall across the category plus the margin profile, I'm just curious what that can do for Zimmer Biomet as we head into 2025.

Speaker 8

Can it really help drive us to that mid single digit upper even upper end of the range of 6%? And then what it might do for the profitability profile of the business as well? Thanks.

Speaker 2

Sure. I'll go over the first part and I'll let Sukh elaborate on the margin opportunity here we said. So this is the 4th quarter in a row where we have grown, as Z, at mid single digit revenue or above. Actually, this quarter is low, upper single digit. We typically don't talk about the geographic split U.

Speaker 2

S. Or U. S. 4%. But I'm pleased with the U.

Speaker 2

S. Z performance, where we grew 5% in the quarter. Once again, virtually all of the 6 drivers we've seen Z grew above our expectations. The 3 growth drivers of set, Sports Medicine, shoulder and CMFT, continue to perform very strongly. As we've been saying for a while, here is where we have invested a lot of innovation over the last 3 years.

Speaker 2

And what you see now is the early results of all those launches. And yes, we do believe that the growth is sustainable as we get into 2025 and 2026. As we highlighted in the investor at the Investor Day, is a category that has to be growing at this pace, if not above. And there is plenty of new products to get there. Suki, you want to comment on the margin piece?

Speaker 3

Yes. So I won't give too much detail on 2025, but overall, it's a very attractive segment as Yvonne said from a growth profile perspective, but also from a margin perspective. Margins in those key three businesses that Yvonne talked about are above our overall company average and so that's a good thing. They are slightly under our Recon business, but again, from an overall growth and EBITDA perspective, we're very excited about how that business is performing and where it's going.

Speaker 2

One last comment I'll throw in there, related to the financial performance. Typically, this business, these segments require less instruments on working capital. So again, it's another enabler of free cash flow growth over the life of the plan. Thanks for the question.

Speaker 8

Thank you.

Operator

We'll move to our next question from Chris Pasquale with Nephron.

Speaker 7

Thanks. You announced that you're going to be rolling out Z1 in a couple of weeks. Our data suggests that triple tapered stems have become a big portion of the U. S. Hit mix for your competitors.

Speaker 7

So it'd be great to hear how you're thinking about that opportunity as you plug that hole in your portfolio. And could you also talk about what your supply situation is going to look like with Z1 initially? And at what point you could have broad availability of that product in the U. S?

Speaker 2

Thank you, Chris. So first things first, we have launched already Z1. We're going to embark in the full launch of the product next week in Dallas at the Hip and E Society meeting. We have trained the sales force. We're going to continue to train physicians.

Speaker 2

We believe this category, to your point, is going to become the standard of care. It's one category where we didn't play, but it's more than C1. It's the combination of C1, the triple taper, along with surgical impactors, HAMR, which is now also fully launched. That's why we delivered 5% growth in the U. S.

Speaker 2

In Q3. And then navigation, which is robotics as well as surgical guidance by Ortho Grip. So I think the combination of those three products and more to come is what's going to get us to get back to gaining market share. It will be the standard of care. We're going to be on the supply side, we're going to be where we need to be as we enter the year 2025.

Speaker 2

So we don't expect to have a shortage of supply. As a matter of fact, we won't have a shortage of supply to make sure that it's a full launch all the way from January 1, 2025. Thanks for the question, Chris.

Speaker 7

Thanks.

Operator

We'll move to our next question from Steve Lukman with Oppenheimer.

Speaker 1

Thank you. Good morning, guys. Yvonne, you talked about 50 meaningful product launches planned over the long term plan. Near term, you've highlighted PersonaIQ, ROSA shoulder, hip new products. Are there pipeline products you'd highlight in the medium term that could be meaningful?

Speaker 1

You mentioned ROSA indication expansion. Anything else you can talk about on pipeline drivers would be great. Thanks.

Speaker 2

Yes, absolutely. And I'll try to keep it short because it can be a 45 minute discussion right here on innovation. My most favorite topic and certainly something we didn't have 3 years ago. So you know the usual suspects in the short term. As you think about mid- to long term, Oxford partial cementless, which is mid-twenty 25 product, is going to be the only PMA approved partial cementless knee in the U.

Speaker 2

S. This is a product, Steve, with 60 percent market share in the European market. It has the longest data on joint survivorship according to the U. K. Registry.

Speaker 2

So in a world of ASC expansion, we deem this product to be extremely meaningful. ROSA shoulder picks up in 2025. We do believe in late 2025 and 2020 6 is going to be one of the major growth drivers of the company. I like where we are with the smart implants. It took a while to get there.

Speaker 2

But with the recent launch of the short stem, what we call Persona IQ study, unfortunate name by the way, we're going to see meaningful adoption in 2025 and 2026. To your point, there are 3 ROSA indications coming up. They're going to hit mid-twenty 25, 2026 that keep the acceleration going. In HIFS, that will be NIS. In HIFS, out of the launch of Z1 HEMR and navigation like OrthoGRID and ROSA posterior in Europe, which is going to get launched soon, we'll be first to market with coated implants, which addresses a meaningful problem when it comes to infection in hip surgery.

Speaker 2

So we expect to be ready to launch coated hip devices late 2025, early 2026. And again, that address is a category that for the most part has not been touched. And then instead, it will be all kinds of things. But beyond ROSA shoulder, which already mentioned is going to be a meaningful growth driver, you got the stainless shoulders, you got next generation identity and all kinds of other products. So again, I could spend an hour, but the cycle of innovation is not a 1 and done 25 opportunity.

Speaker 2

There are 50 new products over the next 3 years and a lot of them are very meaningful. Thanks for the question.

Speaker 1

Great. Thanks, Yvonne.

Operator

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

Speaker 9

Hi, this is Sofia Kanop on for Vijay. I have one quick one on 25. I was wondering if you guys could talk about the assumptions around gross margins and operating margins. You had previously called out some gross margin headwinds for next year. Do you have any updated thoughts on those headwinds and if we should expect to see operating margin expansion next year?

Speaker 9

Thanks.

Speaker 3

Yes. Thanks, Sofia. So first of all, yes, we continue to expect to see operating margin expansion into 2025. And really just going back to our LRP that we unveiled at our Investor Day back in May, we expect to generate at least 30 basis points of operating margin expansion per year, if not better than that. Inside of gross margin, I think our comments are still consistent with our thinking into 2025.

Speaker 3

There are some FX headwinds that occur that are going to peel off into 2025. So that will be a headwind. But operationally, we continue to make really good progress in containing our costs. We're also seeing a better pricing environment. I'm not saying it's going to be positive in the next year, but overall it's been much better than what we had anticipated coming into the year.

Speaker 3

So there's a lot of puts and takes onto the gross margin line. We still expect it to be relatively stable, opposite 2024, but in the backdrop of all that we are still committed to and have a very clear pathway to expanding operating margin next year and beyond.

Speaker 9

Great. Thank you very much.

Operator

Our next question comes from Richard Newler with Truist Securities.

Speaker 5

Hi. Thanks for taking the question. I was wondering if you could comment on T Mini and how that collaboration is progressing for you, particularly in the ASC setting, even if anecdotal feedback, I know it's early in that relationship, but would love to hear what kind of momentum that might be able to generate for you going forward and what kind of impact it's had so far? Thanks.

Speaker 2

Thank you, Richard, for the question. It's another exciting partnership that we have going on that gives the company optionality. So there is a segment of customers that think the footprint is important in robotics, primarily in ASC. So TME does give us that optionality. There is a segment of customers that prefer that CT scanning capabilities when they do robotic cases and T Mini give us that opportunity.

Speaker 2

To your point, early in the launch, we have already seen some conversions of customers that have come to Zimmer Biomet to use that type of robotic application with the world's number one implant in knees. The partnership is giving us that optionality. The data so far suggests that this is a meaningful opportunity. We're going to be doing additional training next week in Dallas. And again, we like the fact that we have the portfolio that we have that gives optionality across the board.

Speaker 2

So good data so far, and we'll continue to keep you updated on it.

Operator

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

Speaker 10

Thank you. Good morning, guys. Maybe a 2 parter here, if I could. Just one clarifying just on the selling days. Can you just remind us 3Q, 4Q and for 2025 versus 2024 what selling days look like?

Speaker 10

But more importantly, Yvonne, maybe I think at your Analyst Day, you had just performed or surgeons at Mayo had just performed maybe the first couple of cases using ROSA's shoulder. Any more anecdotal updates from what you're seeing on ROSA's shoulder from some of your surgeons? How many cases have been performed? And what kind of early learnings are? Thank you.

Speaker 3

Hey, Jeff, good morning. It's Suki. On selling days, in the quarter, it was about a day of a tailwind for the full year. It's not meaningful. And for 2025, we'll provide that update when we give guidance in the Q1, but we don't see it as being material.

Speaker 2

And then, Jeff, on Roche's shoulder, we've done now hundreds of cases continue to validate the value proposition of this product. We settled along that it was going to be a limited market release. Beyond Mayo, we are now in more institutions. And the feedback in terms of the opportunity continues to be strong. This is a product that we believe can change the standard of care in solid arthroplasty.

Speaker 2

The robot does offer the optionality of doing anatomic or reverse solder cases. It is extremely accurate. You can do surgeries impacting the glenoid, rimming the glenoid. You can get into a complex human resections. It is efficient.

Speaker 2

Some of the early feedback is that you can cut your operating time meaningfully. So one of the claims will be faster surgeries with more accuracy that also equals faster recovery times. And it's part of the CB Edge solar ecosystem, leverages the data we collect before surgery and during surgery, which enables better post surgery recovery. So again, first to the world technology, we knew we're going to take our time, but so far we like what we see and we'll continue to keep you informed in terms of this launch. Thanks.

Speaker 2

Thank you.

Operator

Our next question comes from Caitlin Cronin with Canaccord. Hi, thanks for taking the questions. I'd like to focus a bit on pricing. I think it was positive again this quarter. Could you provide some more color on what you're seeing in the U.

Operator

S. And also the change in the full year expectations for pricing?

Speaker 3

Yes. Hey, Caitlin, it's Suki. So the Q3 marks the 3rd consecutive quarter where we've actually had positive pricing at the consolidated level across the entire company. Inside of that, the U. S.

Speaker 3

Was down modestly, but still well better than the historic average. Asia Pacific was up slightly and we saw good continued strong performance in EMEA. There's really three factors there. First is around market. We just think structurally the market's in a better spot relative to pricing.

Speaker 3

1, the value of our products and solutions is being rewarded by the marketplace. And 2, we're seeing, I think, relatively rational behavior across the larger medtech segment. Secondly, structurally, we've made a lot of improvements inside the company around strategy, governance and execution and incentives around pricing. And so we're seeing better performance because of that. And then 3rd, we're seeing some opportunistic price taking in certain areas where we see the opportunity and the advantage.

Speaker 3

So all of those combined have led us into a really good spot. We do think we'll be at least flat, probably positive for the full year. Whether that's sustainable or not, we think a lot of those variables I talked through are sustainable. Others, we'll just have to wait and see. Our planning assumption throughout the LRP is that we'll be at about 100 basis points of pricing erosion.

Speaker 3

So this year is a good starting point and hopefully we can beat that long term look.

Operator

Awesome. Thanks. We'll take our next question from Mike Matson with Needham and Company.

Speaker 11

Yes. Thanks for taking my questions. I guess just want to ask one on China. Some of your competitors talked about continued pressures over there from the volume based purchasing. Are

Speaker 2

you what sort

Speaker 11

of impact are you seeing there, I guess? Thanks.

Speaker 2

Thanks, Mike. So starting with a data point, China is around 2% to 3% of global sales for Zimmer Biomet. We've been monitoring the situation in China for the last 4 years. We understand fully the impact of volume based procurement. We have the right level of investment with the right level of returns.

Speaker 2

Right now, we've not seen anything that can change the way we think of our revenue contribution from China in the next, call it, 3 or 5 years. I'm actually going to be in China next week myself, sustain very close to the situation. We don't have a large capital footprint like some of the other met tech companies have reported. So we don't depend on capital sales there. And again, the expectations that we have internally, that we have conveyed externally are well met when it comes to China.

Speaker 2

Thanks for the question.

Operator

We'll take our next question from Shikun Singh with RBC Capital Markets.

Speaker 12

Great. Thank you so much. I had 2 quick follow ups. On M and A, you did note that you don't need to do large deals to maintain that mid single digit growth outlook. And I was wondering, how do you think about diversification and pushing that top line beyond the mid single digit growth longer term?

Speaker 12

And then just a follow-up on 2025. Is it possible for you to share anything on sales and margin cadence as we move through the year, first half, second half? Could you be at the upper end of that mid single digit range just given easier comps, possibility to get some lost sales due to ERP implementation in 2025. And then you also called out ROSA shoulder that it would be a meaningful contributor. So if you can just help us bridge that, that would be helpful.

Speaker 12

Thanks for taking the question.

Speaker 2

Thanks, Saguen, and great to hear from you. Let me make the second question answer very succinct. We're not going to get into any of that. We'll get into it in early 2025. We'll talk about revenue.

Speaker 2

We'll talk about margins. We'll provide some color on facing and whatnot. So today, the only thing I'll say the only thing we'll say about 'twenty five is that we're excited. We're excited about the innovation. We're excited about how we close the ERP challenge in 'twenty four.

Speaker 2

And again, we'll talk about 'twenty five when it's time to talk about 'twenty five. On your first question on M and A, what I said is we do not need to do it, but certainly, we like to do it. We got the optionality from a balance sheet standpoint to do it. One of the goals that we highlighted in New York at the Investor Day is to move from the current Vanguard weighted average market growth rate of around 4% today for us to 5%. And clearly, the organic pipeline is going to get us there, launching all these products in SAID that I mentioned, but we do need to do something inorganically.

Speaker 2

We're going to continue to assess those opportunities. When they do make sense strategically and financially, we'll act on those. Thanks, Agun.

Operator

Thank you.

Speaker 2

I believe that is the last question. Do we have any more questions, operator?

Operator

There are no further questions at this time.

Speaker 2

So then I'd like to close the call, anchoring my closing remarks on maybe 4 words, grateful, proud, relief and excited. So on the grateful front, I'll close the call the way that I started by thanking the Zimmer Biomet team for their commitment, their passion, their resilience. It's been quite a quarter with the ERP challenge. So I'm really grateful to all of you. I'm proud of the work that we've done in the quarter to mitigate the impact of this ERP challenge.

Speaker 2

Frankly, that's a fair word and relief that this has turned to be a short term issue versus being something that could have impacted the company for the long term. And then my 4th and final word here, I'm really excited about this innovation cycle that we're going through. The pipeline is strong. I know we're going to remediate some of the commercial execution challenges we have had in the past, and the combination of innovation and best in class commercial execution is going to enable Zimmer Biomet to deliver on the growth that we know that we can deliver. Thank you very much.

Operator

Thank you again for participating in today's conference call. You may now disconnect and have a great day.

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Earnings Conference Call
Zimmer Biomet Q3 2024
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