Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2024 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, May 2nd, 2024. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen-only mode. If you have a question, please press the star followed by the one on your push button phone. I would now like to turn the conference over to Carrie Maddox, Chief Communications and Administration Officer. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Zimmer Biomet's first quarter 2024 earnings conference call. Joining me today are Yvonne Tornos, our President and CEO, and CFO and EVP Finance, Operations and Supply Chain, Suki Upadhyay. 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 Q1 earnings release, which can be found on our website, ZimmerBiomed.com. With that, I'll turn the call over to Yvonne. Yvonne?

Thank you, Keri, and thank you, everyone, for joining the call here this morning. I'd like to start today the way that I typically do, by taking a moment to recognize and to show my gratitude to the 18,000 Zimmerbaum Ed team members across the globe who each and every day work relentlessly in driving our mission forward. Simply put, I'm very proud of each and every one of you. Thank you for your dedication, for your commitment, resilience, and for your strong performance to start off this year, 2024. It is truly this great workforce and the culture that we have here in place at Zimmer Biomed that gives me, gives us confidence behind the financial commitments that we're making. Given the fact that we have a very robust investor day coming up in just a few weeks, I will keep my opening remarks short with the goal of moving quickly into today's Q&A session. I'll touch on three key areas briefly. First, I'm going to provide some general comments on the results in the quarter. versus our own expectations. Secondly, I'll cover the drivers of the performance, and we'll touch on why we believe that these drivers are sustainable. And then lastly, I'll close with a brief summary on our progress against our three strategic priorities, which have been discussed since day one, those being people and culture, operational excellence, and diversification innovation. Starting with the quarterly results, overall, we are very encouraged with our Q1 performance, which was ahead of our own expectations, driven by healthy end markets, combined with a strong execution across the organization globally. We ended the quarter continuing the momentum that we saw in 2023, delivering 4.4% constant currency revenue growth while overstepping a sizable day rate headwind and facing rather difficult comps versus a year ago. In fact, it is reassuring to see that on a day rate adjusted basis, our growth for the quarter was greater than 6% with several areas of the business and geographies contributing to such solid results. In addition to the sound revenue performance, we drove adjusted margin expansion and grew adjusted earnings even while our effective tax rate increased over 200 basis points. These results to start 2024 give us great confidence that Zimmer Biomed will deliver 5% to 6% constant currency revenue growth in the year, while driving sizable adjusted operating margin expansion. So pleased to reaffirm our guidance for the year. This, in turn, will enable mid to high single-digit adjusted earnings growth while realizing our commitment of seeing free cash flow growing faster than earnings. Suki is going to provide more color around these areas later, but strong performance in the quarter, and again, reaffirming guidance for the year. NetNet is encouraging to see us exiting Q1 of 2024 with a revenue growth run rate in the mid single-digit range, which is consistent with where we exited the second half of 2023. With new products, new product introduction ramping later in the year, we like what we see in terms of sustainability in our growth trajectory, which we have said all along will accelerate in the second half of 2024. Key drivers behind our Q1 results came from both a macro and micro standpoint, starting with macro factors or in markets, as we've been saying all along, remain very healthy, driven by high levels of patient demand due to demographic shifts. The continued shift to the ASC here in the U.S. is also a tailwind. And across the board in the industry, we've seen better surgical outcomes and technological advancements, which are driving more patient demand. On top of that, you got improved pricing dynamics. And to that end, pleased to report that pricing in the quarter was about flat, as opposed to the 200 to 300 basis points of price erosion that this space, this industry, has seen historically. From a macro standpoint, the main enablers of Q1 results were the adoption of ROSA technology globally with a correlated pull-through of persona needs. We also saw sound execution of drug drivers within SET, particularly in shoulders, within sports medicine, and in our CMFT, cranio-maxillofacial thoracic business, in conjunction with rapid adoption of Persona Osteotype, that is our CEMENDES platform, which is quickly gaining share in the markets where we have launched the product. As we enter the second half of 2024, these new product introductions, as well as other new product entries, will become more meaningful from a revenue growth standpoint with Persona Oceotide entering then full launch status, seeing higher utilization of Hemr or Surgical Impactor, which we recently launched, and also gaining traction with Rosa Solder, which we started doing cases recently here in the U.S. On top of that, we're going to be entering the market with our triple taper hip stem, that's Z1, which is going to allow us to better compete in the direct anterior hip category. So really excited about the completed portfolio in hips and the upcoming launch, FDA approved now, for Z1 hip stem. In addition to driving successful 2024 annual results, We are committed to the three strategic priorities that I outlined in my first earnings call as the CEO in November 2023. This, no doubt, will enable long-term success for the organization. I continue to repeat these three priorities over and over at every Zimmer Biomed meeting around the world, and I can tell you that they are resonating with the audience as the absolute must-dos for the long-term success of the organization. Once again, these three imperatives are people and culture, number one, operational excellence, number two, and innovation and diversification, number three. I would like now to quickly provide you with an update in terms of key progress across these three areas. Further detail will come during our May 29th Investor Day in New York City. First, in the area of people and culture, we continue to operate Zimmer Biomed with best-in-class engagement metrics and low employee attrition. We have been recognized across different areas when it comes to people and culture, and recently we've been showcasing various publications, including Newsweek, Great Places to Work, and Forbes. In the area of people and culture, it's worth noting also that our restructuring program which we announced a quarter ago, has now been implemented almost entirely with no major disruptions to report. We have realized substantial benefits post this initiative, including realizing cost savings earlier than initially expected, as well as achieving increased operational agility and enhanced accountability. In the second area of operational excellence, we've made robust progress in implementing or enhance inventory management programs around the world. Working intensely with third-party firms, we developed a plan, and we executed against that plan. We remain committed to a meaningful improvement in DOH in the year 2024, and in years to come, again, more color in that regard during our investor day. In operational excellence, We have also established core initiatives around best-in-class product launches to ensure that these new product introductions gain traction sooner than expected. And we launch these products in a better way than we have launched in the past. This is beyond critical for Zimmer Biomed as we continue to deliver a rapid cadence of product launches. We plan to release more than 40 new products in the next 24 to 36 months. One final comment in operational excellence in the area of pricing, we've made structural changes to further enhance the pricing strategy that we put in place over the last several quarters. Moving on to the third and final strategic priority in the area of innovation and diversification, we're making solid progress. We continue to see a strong traction in key brands such as Persona Oceotide. I mentioned already gaining share in the markets where we have launched. We've seen progress with ROSA. We continue to gain momentum with Signature One planning guides in the solar space. And we like what we're seeing with our embodied soft tissue franchise. Team FT continues to deliver new product introductions, gaining share in the markets where we partake. And I'm very excited about the new product introductions that we have seen and will continue to see in our ASC portfolio in the U.S. We've also made tremendous strides in new products with a more focused pipeline that today, as of Q1 2024, has twice the dollar value that we had at the end of 2018. So the dollar value of the pipeline in innovation is twice what it was four or five years ago. Worth reminding everyone that north of 80% of these products in the pipeline reside in markets growing above 4% And many of them are accretive from a gross margin standpoint. So we continue our commitment of innovating from a customer-centric standpoint, but also innovating to see incremental profitability and an increased WEMGAR profile. In addition to driving results in core markets, we'll also focus on diversifying our portfolio into more attractive, faster growth in markets with the goal of increasing our WEMGAR, weighted average market growth rate. We have made significant progress over the past several years, balancing to where it is today. And this fact, in addition to the confidence around future free cash flow generation, give us the optionality and the far power to execute on the right deals at the right time, that most importantly, mirror internal hurdles from both a financial and a strategic perspective. So again, lots going on inorganically, potentially, as well as organically with the size of the pipelines. While we have flexibility in the size of the deals to come, we continue to favor smaller tuck-ins to mid-size deals that's up to $2 billion in acquisition price that become EPS neutral within two years and that, from a ROIC standpoint, return on invested capital will deliver upper single digit to low double digit within five years. As I mentioned earlier, we're very encouraged with our Q1 performance, a quarter in where we grew 4.4% in constant currency, north of 6% in day rate, while overcoming a number of headwinds and tough comps. It is these quarter results from the first quarter of 2024 that give us strong confidence that in the year 2024, we'll realize our guidance of delivering 5% to 6% in revenue growing 100 to 200 basis points above market, while delivering earnings growing faster than revenue, and delivering free cash flow above the earnings growth. This is a commitment that we're making for 2024, and it's a commitment that we're going to reiterate in our investor day for years to come. Before closing the call, I'd like to announce that Kerry Madox has made a decision to depart from Zimmerman at the end of May. Carrie has been a trusted partner and a very close collaborator and friend on this journey, and has enabled great things for Zimmer Biomed in her four plus years here with CV. She's going to be missed, and we wish her the best in her future endeavors. A search for a head of IR position is in progress with a leading executive search firm, and we hope to announce Carrie's replacement here very soon. Zach is going to continue to lead IR interactions for Zimmer Biomed. So a plan for continuity is in place. In conclusion, we're very proud of how far we have come as an organization and are even more excited about where we can go. Strong confidence on the year 2024. We continue to make commitments and deliver on those commitments as evidenced by these results and as evidenced by the new product introductions commitment that we made and we're realizing. I love the fact that we're impacting the lives of millions of patients around the globe. And I'm inspired by the fact that my teammates and I are living the Zimmerbaum 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. Suki?