Good morning, everybody. Travis Steed, Medical Device Analyst at B of A. Next up, we have Zimmer Biomet. Got the full team up here, Brian, Suky, and Ivan. So thanks for coming, and welcome. Thanks for having us. Great. I was thinking that to break the conversation up in kind of 3 pieces. We'll talk kinda Q1, Q2, more near-term trends. Then kinda move to the 2nd bucket, more of the longer term structural growth drivers for ortho and how some of that potentially could be structurally different. Then maybe M&A as kind of the longer term transition for Zimmer Biomet. That's how I was thinking about breaking the conversation up. For some of the Q1 stuff, it seems like there was a lot of moving parts in Q1. There was the comp benefit. There was the easier staffing environment. There was also the offsets on some of the supplies. maybe kind of walk through some of those moving pieces and kinda get to a normalized growth rate, if you will, for kinda Zimmer Biomet. Wanna start with quarter? Yeah. We knew that Q1 was gonna be the strongest quarter of the year, largely driven by the comp benefit in first quarter 2023 versus 2022. Remember in 2022, you still had Omicron kind of floating through the system in January and February, so that gave rise to a very large comp benefit. You know, from there, I think it was, the next, you know, biggest factor was likely the easing of staffing pressures that we had seen through most of 2022. From there, we did see some backlog in the quarter. It was probably the next biggest variable. Again, you saw, I think, very good execution from the team. As you said, an offset to that was continued supply headwinds. Those are sort of the building blocks that made up the quarter. As we think about, you know, moving forward, relative to the rest of the year, you know, we not only increased our guidance by that Q1 over performance, but we actually said we're gonna see that momentum pull through in the rest of the year. Sort of looking at the middle of our guidance range on revenue, that would imply about a 4%-5% growth rate for the rest of the year. The quarters are gonna look a little bit different, but that's the way you should think about the sort of underlying growth or the growth through the rest of the year. Inside of that, while that might feel normal, the elements that make that up are not yet normal. We're still assuming that there's gonna be some modest pressure from staffing. Supply is gonna continue to be a headwind, and that there will be some level of backlog that'll help offset that. On the supply side, you know, kind of what the visibility there on the supply getting better and potentially what you'd assumed for the full year? Yeah. You know, I'd say it's gotten maybe incrementally more challenging. You really gotta break it down into two components. There's the supply side, which fortunately, we're actually seeing some easing in some spots, like labor, some elements of raw material and supplies. You know, sterilization is sort of stabilizing. The supply side is getting, you know, like I said, stable to marginally better. The challenge is the demand side. I mean, with the uptick in the volume, it's required us to dig a little bit deeper into our inventories out in the channel, which could potentially put some incremental challenge through the rest of the year. No doubt, the team's been doing a great job in navigating that so far. Kind of the same question on the staffing. What you kind of assumed for the rest of the year, potential for that to get better. On the kind of the staffing, well, the overall environment. I guess another question on that would be more is like, are you seeing the staffing get better, the procedure environment better more in the inpatient or ASC? We've heard some stuff about ASCs really driving a lot of the volume uptick in Q1. I'll take the first part of the question. Yeah. Maybe ask Ivan to take the second. Overall, our original guide had assumed that we would continue to see improvements in the overall macro environment on those two factors. We're just seeing it happen a little bit faster and better than originally anticipated. Maybe you can give some insights. Just, on the second part, in the ASC, there is no staffing issues whatsoever. On the inpatient, outpatient, we're seeing some minor glitches, if you will. Overall, the story is almost identical to 2019. Okay. It's not a headwind by any means today. Okay. It feels like the ASC is probably driving a little bit the upside in Q1. There's probably a couple of things that are driving the better volumes, if you will, in addition to whatever the backlog may be. 1, you are seeing more days of surgery. In the old days, the old days for me is now anything before March of 2020 COVID. Cases were done on Mondays and Tuesdays. You wanted, as a surgeon, to release the patient by Friday. You didn't need to do anything over the weekend. Now we're seeing that Wednesdays have surgical days. Length of a stay is lesser, given technology, efficiency models and whatnot. Sure, you are seeing an additional day of surgery in many cases. That's 1. Then 2 is ASC. We're seeing a shift to the ASC that is real. Some people talk about 40%, others talk about 30%. I have no idea what it is, but it's a real shift into the ASC. Those are true volume drivers that were very acute in Q1 of 2023. On the comp benefit, the way I was thinking about it is Zimmer grew like 13% in Q1. You're thinking about kind of 6%-7%, you know, guidance in the back half of the year. Is some of the difference there, like 500-600 basis points more the comp benefit? It's hard to peel apart all those components, the large component, the biggest driver of that Q1 versus rest of year is the comp benefit. Okay. I think you also said some backlog was starting to come through. Maybe talk about how you're seeing that and measuring it, and kind of the opportunity on the backlog side of things. W e did see some benefit in the first quarter. I kind of went through some of the elements that made up the first quarter performance. We're assuming we're going to see some backlog benefit through the rest of this year. We do believe that there continues to be a sizable backlog out there. It's tough to pinpoint exactly what the size of that is, and at this point, how long that'll be sustained, in other words, that potential tailwind of backlog. Maybe you want to give a little bit of color on what you're seeing in the field. We know there is some backlog. I'm not trying to be cute when I say I don't know what it is, 'cause it changes depending on who you ask. I've been fired from the backlog analysis team already 3 times, I gotta be careful what I say here. We've seen that there is backlog in some areas. Other people, they don't say there is backlog. They think there is just a new bolus of patients, who knows? What we do know is that whatever backlog is happening is not gonna get resolved right away. It's gonna be here for a while. One of these other drivers that are gonna get the volume sustainability there. Yes. potentially it could last longer than the 6 quarters that others have said. Well, that's what competitors are saying. I don't know. I really don't know. It's not something that gets resolved today, and sometimes backlog creates additional backlog. It's something that we gotta get better at. I would tell you, and we've done a lot of work on this. We talked about it before. We've used two external partners that are unbiased and have looked at it and tried to solve the equation. Both came up with different values of the backlog, and both came up with different times that it would actually be consumed. We're gonna learn, you know? We're learning right now. The first time we've actually consumed backlog was in Q1. Every month that goes by, we're gonna get smarter on this and be able to predict it more. It's just challenging to come up with the actual size and the timing today. As Ivan said, depending on who you ask, it's a different answer. Guarantee we're getting smarter every day, though. Right. I mean, how do you think about as an incremental growth driver? You're getting backlog this year, you get backlog next year, kinda consistent given the supply of staffing, and if you think that could be an incremental growth driver next year. The second part of the question would be, obviously, if it's not, it's still incremental dollars and incremental profit dollars. Would you let that flow through, or would you use that for kind of reinvestment? I'll handle maybe the first part, and then, you know, Suky, you can talk about, you know, our investment strategy versus, you know, flow through. First of all, if it stays consistent, and again, we gotta learn more to say whether it can, but let's make an assumption that it does, that it goes through all of 2024. Then from a growth perspective, it's a net zero, right? There's really no value associated with that 'cause it's already built into your base. That's kind of the way we're thinking about it, is don't think about it as an acceleration of growth into next year. It just goes away. It's in your base, and it's no longer an impact. If you can speak to, 'cause you still get the $, what we would do with the actual profits. Yeah. You know, the building blocks of our earnings power story has always been about, you know, maintaining revenue at least at 4%-5%, stabilizing gross margin, mix shift within SG&A to our higher priority areas, and leveraging that fixed cost in our SG&A base, which ultimately expands margins over time. If we do expect to see or we do actually see additional volumes through backlog, the great thing is we'll have the optionality, right? We believe we can do both. We can both invest a portion of that in the business while dropping some to the bottom line in margin enhancement as well. I agree. Maybe we can touch on, kind of a lot of things could potentially be tailwinds to the ortho market. Pricing less, you've got product mix, you've got some post-COVID stuff that you've talked about. I don't know, maybe you could start with some of the post-COVID changes, structural changes that you were starting to look at, and kind of expand upon some of that. You know, I look at it in probably two different ways, and you guys can chime in anytime. The first part is the things we can control and what is giving us confidence about our momentum. The first thing is maybe you know, maybe you don't. We've done a lot of work over the last five years to increase our weighted average market growth, which is really important for overall growth of the company. Our innovation is very strong, and that's giving us a catalyst not only for mix benefit, but also competitive conversion opportunity, which we're taking advantage of. Our pricing has gotten much better, much more disciplined for various reasons. We're just better at managing and governing pricing on a global basis, and our execution right now is flawless. All those things give us confidence in our momentum, but separate from that, I think is what you're talking about, it feels like there's a change in patient behavior as well, and we're trying to validate this, where patients are feeling more confident now about the outcome of the procedure, and that is a motivation to go get a procedure. You have a lot of patients that sit on the sidelines. They don't get entered into the funnel even though they should. If they have more confidence in the outcome, that's a, that's a reason to enter. The second is there's a comfort level with the ASC environment versus the hospital. Let's face it, no one wants to go where a lot of sick people are in the hospital. It's overwhelming. The ASC is like a concierge service that's dedicated to that procedure. It just feels less overwhelming. The final 1 is just convenience. I mean, you know, you got a lot of outpatient procedure now. You're gonna go in, you're gonna be home very quick. Even if you're doing rehab, if you're in a flexible work environment, that's even less disruptive. There's a lot of things that we're looking at that just are happening around us that give us confidence in the strength of the market, not just our business. You're starting to see some signs of that in some of the work you're doing. Exactly. On some of the pricing side, like, I guess if you think through, like, some of your competitors are kind of seeing flattish pricing for ortho, is that kind of where we're going, and is that sustainable in the longer term? Yeah. You know, we'll see. Definitely the pricing environment, we've seen more elasticity in pricing over the last 12 to 15 months because of the inflationary environment we've been in. We'll have to see how that progresses as inflation starts to moderate, moving forward. As Brian said, there have been temporal factors versus structural factors that have improved our pricing performance year-over-year. Those structural elements will continue to help us perform better regardless of what the environment is moving forward. Maybe talk about some of the pricing things that you put inside, like some of the pricing muscle and things that you're doing differently that you weren't doing in the past. Yeah. You know, we've hired capabilities and resources around this. One, we've put a pricing czar in place, who's got a very deep background in orthopedics and MedT ech. He has built resources around him in each one of our regions. One is resources and capabilities. Two, we've put systems and analytics into place. We didn't have a view account by account when we were making pricing decision, what that meant to profitability. We now have that, and we can make much more disciplined decisions. We didn't, quite frankly, have a very good pricing strategy overall in how do we use the full breadth of our portfolio at an account level versus pricing on an individual product. There's a number of factors that are driving that we feel really good about. There's always room to improve from here. Maybe I'll throw two quick ones there. One sounds simple, but it's been transformational. We pay people on pricing. We didn't used to do that. General managers around the world were not incentivized or penalized on pricing. Today, they are. At the sales rep level, you know, we are paying people on gross margin. That's one element. The other one is far earlier. On the new product development cycle, we think about that dynamic. We obviously have a vitality index,% of sales coming from new products. We also have what we call the IPI, the innovation profitability index. You know, are we certain that as we launch these products, we're gonna command a higher price? Are we gonna get expansion in gross margin with this innovation? By the way, as we launch this new innovation, are we gonna lock in pricing for peripheral items around that product? I will say that in addition to the data, to the contracting, to the people, there is a change, a mindset change around how we think about gross margin and pricing, that it is sustainable even in a better inflation environment. That's helpful. On the new product innovation, Ivan, I know what you're most excited about. Yeah. I'm gonna be here for the next 45 minutes. Grab a drink. I'm excited about the fact that it's a different Zimmer Biomet. You guys have been following us for a while. You know, four years ago, we were talking about remediation. Today, we're talking about innovation. I generally believe it is the competitive advantage of Zimmer Biomet. We don't disclose the size of the pipeline, but it's dramatically higher than it was in 2018. Our vitality index, the percentage of sales coming from new products, gross sales, new products, is 2x, if not 3x what it was, you know, in '18. We launched 50 new products in the last three years. By the way, it's not just the quantity, it's the quality of the new products. These are first to market. These are Winger accretive new products. We have a commitment to launch 40 new products over the next 3 to 5 years. Again, this is not competitive-centric products. They're not me-too products. They're customer-centric. They're gonna command the number one or number two position. With that framework, we got innovation going on in each and every category. We recently launched our cementless platform. The goal is to go from 15% penetration to 50% penetration in a rapid amount of time. If my boss was not here, I will tell you what a rapid amount of time looks like, but it's not over multiple years. We got what we need when it comes to robotics. We are less than 12 months away from launching a triple tapered stem. That is a gap in our hip portfolio. We got surgical impaction devices in hip. That is our HAMMR launch that we disclosed at the Academy. A theme that is gonna give us an edge in hip. We got a ton of stuff happening in ASC, whether it's on anchors, sutures, whether it's in booms and lights, whether it's on... You name it, we have what we need to compete in the ASC. Our CMFT, cranio-maxillofacial thoracic business or portfolio through inorganic and organic means is best in class, hence why we're growing that business in the solid double-digit growth rate. Beyond that, on data technology and solutions, partnerships with Apple and Microsoft, we're innovating rapidly when it comes to things like mixed reality, things like data and informatics, and across the board. Again, I could spend literally an hour on this, but it is a competitive advantage of Zimmer Biomet. Yep. Then the cementless knee, what do you think the key differentiator there is? Is this more of a play on gaining share or more mix? Yeah. I'll give you three words. I'll expand on each of those words. Stable, versatile, anatomic. I know I sound like a sales guy. I used to be a sales guy. A really bad one. I was a sales guy. Stable, we have proven technology around the stability of the device. That stability means better mechanical fixation and long-term biological fixation. If you understood nothing of what I said, what this means is that the implant will stay with you forever. We achieve that stability because of the Porous Plasma Spray with the type of material that we use, that we've been using in hips forever, because of the actual design. The stability of the cementless knee is second to none. On the versatility, we are the only company that has a device where you can choose to do cemented or cementless all the way to the end of the procedure. That matters because you got a large percentage of customers that are now convinced that a cementless knee is the way to go. For those surgeons, for those customers, they have the optionality all the way to the end of the case to choose one versus the other. The third word was anatomic. This is part of the Persona family. Persona is the world's most personalized knee. You can customize the implant for any type of patient, any type of anatomy, and that's something we have in the cementless configuration as well. Stability, versatility, and anatomic design are the three main advantages of the product. Yep. Do you have something to say? Yeah. I was just gonna say that for all those reasons, we see it as a mixed benefit for sure, because as you cannibalize your cemented, you get that mixed benefit. We also see it as an opportunity to take share. There's no question. And it's not just in the cementless portion, but now that we have the full Persona family, even the Persona family, the entire portfolio becomes more attractive to our customers. We really have an opportunity through this, closing out that full portfolio to then take Persona and go get customer conversions we couldn't get before. With your competitors, there's been an attach rate, cementless with a robot, kind of both penetration rates went up together. Now that you've got both, feels like there could be an inflection point in both robotic penetration as well as cementless penetration. Thank you for that, Travis. My number for next year just went up, right? Yeah. We've disclosed publicly that our cementless penetration is somewhere around 15%. Our robot penetration is a similar number. Talking about the U.S., by the way. Comparable rates are U.S., but we don't track them as closely. Our competitors are in the 50% range, so that's a good place to be. When you're at 15 in robotics and 15 in cementless, and you know the market will reward you to get into the 50% range, that is definitely the target for both of them. I think it's important because there's a link between the two, because when you're using cementless, you want the accuracy of a robotic system. As cementless gets more high, more highly penetrated, if you don't have a robotic system, there's more incentive to bring it in. The third driver, just to close on this, the ASC dynamics are gonna make this journey far shorter for us because those dynamics were not in place 5-7 years ago when others were starting to do some amendments on robotics. Great. On ROSA, are you kind of where you wanna be on ROSA in terms of penetration and placements and overall? Yeah. No. Just curious. I'm not where I wanna be. Again, 15% penetration is not where I wanna be. The new launches that we got going on, we launched hip, and [Theo], about to launch at some point in the near future, posterior. Shoulder robotics being first to market, next generation, partial knees, ROSA robotics partial knees this summer. V2, version 2 for our primary. All of those robotic platforms in conjunction with the implants and the data around that tells me we'll be where I wanna be, which is not in the 15% range. Right. Then on ROSA shoulder, what's the next update we'll get there? How are you thinking about that opportunity? We said in the past, and we'll say it again, that we believe, strongly believe we're gonna be first to market. We're not gonna talk about when exactly, but we'll be first to market. By the way, speed matters, but also having the right design. It's a design that is gonna address some of the key challenges in shoulder surgery today. Do you see it as more of like the mix shift that we saw in knees, or is it more of expanding the market because of better outcomes? I think it'll be both. I think it'll be both. I think there's a place for in the current market dynamics to have a faster procedure with faster recovery post-procedure with more accuracy. I do think as this becomes a standard of care, and with the right platform it will, many patients in the sidelines, I'm one of them, I've been postponing, you know, seeing my shoulder surgeon for a while, will like the idea of being able to go into an ASC, get their shoulder procedure done, have a shorter physical therapy course, and have a reliable outcome. I think it's gonna be both. Yeah. That's helpful. Maybe we'll touch on margins real quick. Suky, I guess it sounds like spot buys are a little bit worse. Is that, is that the right message? You know, inflation overall was a pretty big headwind in 2022 for us. I think everybody out there, right? You all have been hearing some of it, which is capitalizing into this year. I would say overall inflation broadly is been stable to the exit of 2022. There's puts and calls inside of that across all our elements of or categories of inflation. The two areas we are watching are contract manufacturing pricing, because as that demand snapback I talked about earlier around supply has happened, some of our smaller contract manufacturers have to put investments in to keep up with that. That requires some increased pricing, so we're just watching that. There have been some episodic spot buys that are continuing. Those are just two areas that we need to continue to watch. we don't see any material impact into this year around that, but again, just something we're watching closely. Overall, the key takeaway is broadly inflation has stabilized from the exit of 2022. Yeah. That's helpful. For the overall margin guidance for the year, Q1 came in a little ahead. I guess the message is that's really FX and hedge gains. The rest of the year is kind of underlying margin year-over-year is flat. Yeah. you know, overall operating margins this year, if you take our guide, the midpoint of our guide and the implied operating margin from that, is about 100 basis points better than it was in 2022, even with that inflationary pressure capitalizing into this year. It's been a pretty tremendous year, largely driven by revenue, upside, some things that are temporal, some things that are more structural in nature. Those temporal things like FX hedge gains and maybe more pronounced mix benefit in Q1 will taper through this year, could present a headwind into 2024, but even when we think about that, given our efficiency programs and our revenue sort of cadence, we still think that 2024 could look very much like the elevated operating margins you're seeing this year, if not slightly better. The 100 basis points of inflation supply chain, does some of that start to roll off later this year and into next year? It's pretty even because you saw that inflation kind of rise and peak sort of symmetrically last year, and so you'll see that feather into the P&L about the same way. On 2024 gross margins, kind of flat is the message. Op margin, I think we talked about this a second ago, but kind of think about sequential step-ups and operating margin expansion in 2024. Yeah. I think the way I think about gross margin for 2024 is, as I said, because of some of those temporal things that I just talked about that you referenced as well, you would expect to see a step down on 2024 gross margin versus 2023, but very much in line with 2022. That's been our long-term story for a couple of years now, is stability in gross margin. That's what we expect to see. 2023 just happens to be a better year because of some of those temporal items. That's helpful. On M&A, Brian, I feel like there was a little bit of a tightening of the message on M&A on this earnings call, so maybe you can touch on that. And as everybody has known, we've talked about Phase 3 of the organization as being a big part of that, the portfolio transformation. We've been very transparent. We have tightened the message a bit. You could think of us in the nearer term looking at smaller to mid-size deals and probably closer to the orthopedic space. We've said in the past that one of the categories we are looking at would be outside of orthopedics to drive more diversification, less dependence on elective procedures. That's still something in the strategy, but probably not in the nearer term. That's the tightening of the message. Okay. In terms of the size that you gave, like kind of $1 billion in revenue, is that more of like a ceiling, or is that kind of the target area that you're going after? When you think of that broad swath to say smaller to mid-size deals, there's a whole lot of size differences in those. We're just trying to say, "Hey, listen, that's about for us likely the $1 billion or less," from a revenue standpoint, not, you know, cash, but revenue. Right. Suky, maybe talk about capacity and kind of the appetite to use capacity on one deal versus saving it for, you know, a lot of different deals. Yeah. If you think about the upper end of what Brian just talked about from a revenue component, if you put a reasonable purchase price or kind of, normalized purchase price multiple on that of 4x-6x, that sort of gets us to the upper end of where we think our M&A firepower capacity is while still maintaining investment grade. you know. M&A is episodic at best. You can't exactly plan for it. We'll see how it progresses. As Brian said, we'd like to be on the lower end of that range and closer to orthopedics. The good thing is we've got the optionality to do something different if something strategic came up. Right. What's kind of the reason to kind of shift out the more non-elective transformational deal? If we just think about the market today, unfortunately, all the great assets that we like are not getting any less expensive, which is what we kind of all hoped would happen, and the cost of capital is going up. In that environment, when you're gonna take a bet, you wanna make sure that you win in that bet, and the higher probability of winning is if it's closer to what you know. It's not that we're not interested in that diversification outside of orthopedics. It's just that the probability of success in the near term is greater given the cost of doing a transaction if it's in orthopedics. Orthopedics, I would assume, means more extremities at this point? I'm not gonna say specifically 'cause there's a scarcity assets, and everybody's trying to go after them. But clearly, you know, everybody knows the more attractive areas of orthopedics. No, for us, even as we're scaling in orthopedics, that is diversifying the business because right now we're overweight in large joints. As we build in areas like sports that we've been very front-footed on, that does provide diversification, keeps us in orthopedics. We clearly have a right to win in that space, the other areas are probably obvious to you, but I just don't wanna continue to repeat those given that, again, there's a scarcity of assets. Right. What's gonna be the change to allow you to kinda take the bigger step, get to the third stage of the more diversifying? Yeah, I mean, you know, when we make the decision that we will, let's say, you know, in the nearer term, we'll digest that acquisition. We'll make sure that it's moving in the right direction, and then we'll reload. You know, when you look at the past 10 years of companies who have done this really well, and we've done a lot of data on it's typically a lot of smaller deals, a slightly bigger deal, reload, smaller deals, slightly bigger deal. That would be the cadence that you would probably expect from us. It's just that right now, we wanna stay closer, as I said, to orthopedics. Makes sense. When you do venture further out, any color on kind of the things that you're looking at? Like, just not obviously at types of markets or, you know, characteristics of assets that you would think about. You talking about outside of orthopedics? Yes, kind of outside of orthopedics. Yeah. We actually talked about this. One of the very intentional things that we did as an organization was to bring leaders in that did not just have orthopedic experience. We've got a very diverse group. We've got a lot of diverse thinking. We've got a lot of experience in various areas of MedT ech. We feel very comfortable entering into spaces with knowledge base on the team on where we should go and where we shouldn't. I don't wanna, again, get into specifics of where we'd go outside of orthopedics, but there's not a lot of areas we're afraid of, and there's not a lot of areas we don't have expertise in our organization already. Okay, great. Any questions from the audience? Very good. I think that covers my list. Thanks, guys. Thank you. For coming. Thanks, Brian. Thanks a lot. Thank you.