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

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

Thanks, Keri, and thanks for joining us for the call this morning. We've got three sections of the call. First, I'm going to briefly talk about our Q3 performance and really the momentum that we saw in Q3 that has allowed us to increase our outlook for the year and doing so, even in the face of some pretty meaningful macro pressures that we're certainly still facing. I also want to spend time talking about our ZB innovation. This is clearly the driver of our continued strong performance and will be the driver as we go forward. And for the second section, Suky will provide more detail on the quarter, but probably more importantly, our 2022 guidance update. And then we'll close things out by addressing any questions you might have. Before I get started on Q3, I just want to make sure that I take a minute to say thank you. Thank you to the ZB team members that I know are listening. I know a lot of you listen to the call and I appreciate that. Your continued strong performance is -- it's just built on day-in and day-out execution. You're just focused on driving results. And I know you're showing up and facing some very, very real macro challenges right now and I appreciate it. The fact is I'm just really proud that even in the face of these challenges, you're delivering results for our customers, you're delivering results for our patients and for our shareholders and you're moving the mission of this company forward every single day. I know it's not easy but I promise you it is much appreciated. Okay. So turning to the third quarter. Although, the beginning of the quarter was a bit choppy when it comes to procedure cancellations, we did see…

Thanks Bryan and good morning. Overall, we delivered another good quarter driven by strong execution and continued recovery of elective procedures. While we continue to navigate challenges our third quarter performance gives us the confidence to raise our full year financial guidance. With that I'll turn to our third quarter results. Unless otherwise noted, my statements will be about the third quarter of 2022 and how it compares to the same period in 2021. And my commentary will be on a constant currency and adjusted continuing operations basis. Net sales in the third quarter were $1.670 billion, a decrease of 0.9% on a reported basis and an increase of 5% on a constant currency basis. US sales grew 3.2% driven by strong elective procedure recovery and commercial execution, especially in our Knee and Hip businesses. This was partially offset by expected declines in the S.E.T. and other categories. International sales grew 7.3% driven by strong procedure volumes across most markets in EMEA and APAC in tandem with lighter comps and continued strong commercial execution. EMEA performed better than expected driven by recovery in developed markets and continued strength in emerging markets and APAC performed better than expected with China largely inline with expectations and strength in Japan. Turning to our business category performance. Global Knees grew 7.2% with US Knees up 7.3% and International Knees up 7%. The strong performance was driven by knee procedure recovery across most regions and easier comps along with continued global traction of our Persona Knee System especially with Persona Revision in the US and continue to increase in ROSA procedure penetration and pull-through. Global Hips grew 10.5% with U.S. Hips up 5.3% and International Hips up 15.5% driven by strong international procedure recovery and an easier comp outside of the US. Continued traction across…

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

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

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

Okay. Two really good questions right out of the gate. So maybe Suky, I'll start with the revenue side of that equation, and then you could answer on the margin side. And certainly any color you want to provide that I might miss feel free to do that. Maybe just to make it simple I'll just start with the end of the story and then I'll get into some of the details around variables that I think are important to consider. But just going to the end of the story, we said that in an undisturbed market we would be disappointed if we couldn't grow 4%. Now I would tell you that we do not see 2023 as a normal market or not a straight market. There's just too many variables moving, but we do see -- we still do see a pathway to 4% growth. So that's kind of the end of the story. Now let's take a look at some of the puts and takes that we have to look at that could either benefit or detract from that. On the positive side of the equation, I'm going to start first with those things that are controllable by our company. There are really three major things that I look at that give me confidence and should give you confidence. Number one, it's around innovation. I'm just going to call it the innovation flywheel here at ZB is really moving in the right direction, and it's creating a solid pipeline that importantly is translating into moving our Vitality Index north and that continues to move north for us and we expect to continue to do that on a go-forward basis. So innovation is a really big part of our confidence. The team is executing. Really strong execution right now…

Yes. Thanks, Bryan. Good morning, Shagun thanks for the question. On the margin side you're right. The macro environment has become incrementally more challenging here in the back half than we originally assumed. That's been reflected in our rest-of-year outlook. And despite those challenges we've been able to raise the back end of our year. So we're pretty proud of that and the team is doing a great job. As that rolls into next year, it has become incrementally more challenging, but we still see a path to maintaining or slightly improving our operating margin versus 2022, despite some of these headwinds. And that assumes current market conditions. If things erode or if things improve, we'll revisit that. But where we are today and assume stability on some of those headwinds, that's how we're thinking about 2023. The biggest move for us really has been around FX. So as you know, we increased our full year outlook by 50 basis points to 550. That means we're exiting the year at 600 basis points of headwind on revenue. That translates to about 300 basis points of headwind into next year. So that's got a pretty significant impact on the top line in absolute dollars. And of course there's a flow-through to margin and to earnings on that. But despite that pretty big drag again, we believe there is a pathway and we're committed to maintaining or growing margins into next year. The other major area you touched on was inflation. Our previous estimate was that we'd have 50 to 100 basis points capitalized out of 2022 into 2023. We're now at the top end of that but still within our overall purview that we gave earlier this year. The real driver of that increase has been less about supply and raw material costs and less about wage and inflation, which were the bigger areas and it's more about higher freight costs right now trending higher as well as energy costs, especially in Europe. But again, at least on the bigger components of that we're starting to see some stabilization. So hopefully, that's a positive light towards the end of the tunnel. And then interest expense. Again just recognizing the higher interest rate environment we're in, we would expect overall interest expense to be modestly higher next year so just making sure that folks have that as an update to their model. But look, we're continuing to address our efficiency programs. We're going deeper and faster. I really want to commend the overall ZB team for embracing these challenges and hitting them head on. They've done a fantastic job. And again just based on that execution and assuming current market conditions hold into 2023, we think we've got a pathway to maintain or slightly improved.

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

Yes. Thanks. And maybe I'll start off with that, and then Ivan, if you want to weight in feel free to do so. We clearly still see the ASC as an attractive submarket of our recon business and also clearly other parts of our S.E.T. business. It's one of the faster-growth submarkets and we're clearly increasing our focus and spend in that area. And we're doing it in a couple of ways. Number one, we're putting infrastructure in place. We've got dedicated commercial teams that focus only on the ASC. And that's important because you've got to have contracting prowess in that space and we've done that over the last couple of years and really getting good traction as a result of it. Additionally, we're making sure that we scale up in the product categories that the ASC is looking for. We wouldn't have purchased a booms and light company, if we didn't want to have that infrastructure for the ASC. Not to take anything away from booms and lights but it's not an area that we would have waited into, if it wouldn't have given us scale in the ASC marketplace. Same thing in sports acquisitions that we've done in other parts of our business. So we're really doing it two ways: commercial infrastructure, product portfolio, so that we have a broad-based contracting opportunity in the ASC and we're seeing traction as a result of that. We do expect the ASC to continue to move north relative to the number of procedures being done in the ASC versus the hospital. I don't know that I would agree with the numbers you stated. But certainly, we believe that it's going to continue to move north and we want to make sure that we're taking advantage of that. So Ivan, I don't know if you had anything else you want to add.

Yes, I wanted to but I think you covered pretty much everything Bryan. But I do think one of the drivers of having a complete portfolio now is that we have best-in-class contracting. So there were contracts back in 2020 and 2021 that were not a part of Zimmer Biomet was not a part of we're a part of today. So indeed the portfolio that has been remediated the dedicated structure working. And while we don't disclose the specifics in terms of growth we are growing doubl-digit. In the ASC category here in the US, we believe will continue to grow at double-digit rates.

Thank you.

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

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

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

Yes. I'll probably pass the -- just that its product related more than anything I'll probably pass it to Ivan to speak to the Hip performance. And also, Ivan maybe speak to some of the things that without too much specificity that we're predicting in the future to help the Hip business as well.

Absolutely. Thank you. Steve, I will just summarize the Hip performance so far, when it comes to robotics at above expectations. We like the fact that this is the only pin-less robotic system in the world. We like the fact that it remains CT scan-less, which is a great advantage for the ASC setting that we're talking about. We've seen versus conventional hip procedures at similar level -- higher level of accuracy in the procedure. So for all the clinical reasons that I'm alluding to, it continues to be a best-in-class product launch. It's going to continue to scale up. We are right now placing installing about 30% of all robotics including Hips in ASC settings, so again a major advantage in settings where time and efficiency makes sense. Beyond robotics, beyond Hip robotics, we’re also excited about other product launches. We have on Hips. I think you might have heard from Bryan in the opening remarks. We've got a partnership in Mixed Reality with a company called Surgical Planning Associates that enables Zimmer Biomet to be the only FDA-approved Mixed Reality platform in hips in the US. What do we saw through Mixed Reality? We get better visibility in hip surgery. We get better accuracy, and overall better efficiency. This is some of the technologies that we're going to be explaining down this week both at Hip as well as Mixed Reality HipInsight but it's a CAGR of other products that continue to have momentum. Continue to perform strongly globally with having a complete -- we believe that we have the best robotic platform with G7 and Arcos. So again, a multiple examples of innovation that are gaining some traction both here in the US and globally.

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

Yes. Thanks for the question, Steven. So, we have so far this year seen an improvement in overall pricing erosion at the company level. Our historic pricing erosion was in the 200 to 300 basis points per year coming into 2022. And so far this year, we're tracking about 100 to 150 basis points. So, there's been some marked improvement. We've been making investments around data and analytics systems, better governance. We've hired additional capabilities. Ivan talked a little bit about contracting. All of these are contributing strategically and tactically to that improved price. As we move into next year, we do expect there to continue to be pricing erosion, but we would hope that and expect it to be at the lower end of our historic average, if not better. So, while we do expect it to be better than where we've been for the last several years, it will still be a headwind year-over-year. Now having said that there are a number of other efficiency programs, that we're targeting to help offset some of these headwinds. Like our new global business services or shared services operating model that we created through the pandemic. We're taking a much more targeted look at country profitability. The product portfolio active portfolio management that Bryan spoke about looking at products that have lower margin lower growth opportunities and thinking differently about those investment profiles, these are all things that are going to help contribute to offset those headwinds.

Got it. Thanks, Suky.

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

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

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

Yes. I think you've kind of laid them out already. When I think about the go-forward-looking revenue growth you're going to have puts and takes. The things that we know are going to be positive for our business will absolutely be innovation. So, when I think about the calculus on revenue growth going forward, there's no question that we've included innovation. We're spending a lot of money and a lot of focus in research and development. We're bringing great products to the market and we absolutely expect that to buoy our revenue growth. That's part of reason why we gain from a 0% growth business in 2017, 2018, and now we're predicting we can get to 4%. So, that's been a big part of that movement. The execution of our team is another part of it. There's no question. I know that it's hard to put a dollar amount on momentum in an organization, but momentum does matter and we have it right now. And the other big one is that weighted average market growth. We have moved our weighted average market growth north during the last five years. So, as we get closer for our weighted average market growth to that 4%. It gives us more confidence that without share taking, we can deliver the 4% in a consistent way. Now, certainly we wouldn't stop there. Active portfolio management is Phase 3 of this organization and we're going to have more financial flexibility going forward. We're going to continue to change that weighted average market growth rate up. But getting to the 4% to start is a good thing. The negatives against that because you're saying okay we've got all these positive and why isn't it more than that? We still have real challenges around supply and that is a distractor for growing your business. And so we're going to have to manage through that as we get through 2023. We believe at least through the middle of 2023 potentially beyond. And even though staffing in our capacity isn't as acute as it was before, it's no question that this is going to be a headwind for us going forward. And of course we have to calculate some potential risk associated with the recession if that does occur. So, I think it's all those things combined in concert with this concept of having some backlog that we're hoping we can count on in 2023. But as of yet, we haven't seen it. Even Q3 which was a great quarter, we still don't believe backlog was consumed. We certainly might have had some backlog in certain areas consumed, but it was offset by some of these negative headwinds that we actually think backlog built in Q3. So, those are the variables that we're looking at as we think about 2023 and beyond.

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

Yes, Vijay we did -- we have posted a really good nine months here. I would say there is some timing benefit in the third quarter that will reverse in the fourth quarter. It has to do with some payments around VBP as well as some tax payments that normally would fall in the third quarter but now land in the fourth quarter. All-in-all, I think you nailed it. We're having a pretty good year in cash and we feel confident in our overall range for this year.

Understood. Thanks guys.

Yes, thank you.

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

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

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

Sure. So, Bryan I'll go ahead and take those. So, the one thing to remember on the EPS line is I talked about 300 basis points of headwind on revenue into next year. And so as Bryan thinks -- talks about that 4% on an ex-FX basis, you need to take into consideration the foreign currency headwind that matriculates into next year. So, having said that, with the margins kind of being relatively in line maybe slightly up and with interest expense up year-over-year, which I'll talk about in a moment, you would expect on a reported basis to see EPS kind of travel in line with overall reported revenue. So, hopefully that gives you a little bit more color. Again that's our best view right now. Things can obviously change between now and when we finally give guidance for 2023 in the first quarter of next year. On your question related to interest expense, you're right we are on face value in fixed debt, but we also do and have done some previous strategies to swap out our fixed to floating. So it's really the interest burden on those swaps that create that higher interest expense.

Okay. No, that's helpful color. And then -- and Bryan I wanted to ask on M&A. Like you kind of always talked about getting more aggressive with M&A once the market stabilize which it seems like 2023 is a year where we're in a much more "almost a normal market". So that's -- willing us to do something on M&A that can maybe move the needle a bit more and more adjacent to the portfolio versus some of the things you've been doing historically with your more smaller private stuff in S.E.T.?

Yes. So first of all, I want to be careful what I say because it's a pretty competitive space right now. We don't want to telegraph too much what we want to do. But clearly, we as an organization are squarely in the Phase 3 of our transformation. And we Travis have been very clear that Phase 3 is all around active portfolio management to transform the portfolio, shifting toward more WAMGR accretive markets and diversifying our business. So that's kind of a broad-based way of looking at what Phase 3 is all about for our company. And we've already made some changes here. I know you're saying there's been smaller acquisitions that we've done, but we haven't had as much firepower obviously. But we have spun businesses out as well that have helped in this strategy. That said, COVID is getting behind us. There's no question. And as a result just exactly the way you're saying we would expect to have more strategic flexibility going forward. What I'd probably be willing to say and maybe not give any more detail is that we're going to look at vetting assets across a few metrics, outside of the typical financial metrics. We look at mission centricity. We've got to make sure that we're acquiring something that can move the mission. We want absolutely something that can drive WAMGR accretion for our organization and it's going to translate into revenue growth that's accretive. Because just because you're in a fast-growth market, if you don't have a good asset you don't necessarily get the growth rate out of it and it's got to accelerate our EPS growth over time because that's kind of the vetting. And then the categories that we're going to look at would be first and foremost, probably closest to the best would be vast growth subcategories of recon. So that would be things like data robotics or building more scale in the ASC setting like we were talking about just a minute ago. It would be faster growth areas outside of recon, but still in orthopedics and that would be mainly in our S.E.T. category. So that diversifies our business away from just recon in those faster-growth subcategories of orthopedics. And then to your point attractive white spaces that are completely out of orthopedics less selective in nature and provide more diversification again out of orthopedics. I don't want to say which of those we're going to prioritize, but just know that all of those vectors are on the table and we're looking at a number of assets in each of those categories.

Great. Thanks for the color.

Absolutely.

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

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

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

Yeah. I'll make some comments and then Ivan can correct anything I say incorrectly. But clearly capital is not as big a component for us. So I almost don't like talking about the capital market because I don't want to say anything that's going to hurt those businesses that depend more on the capital market. But from our perspective, where we do focus on it, it hasn't been a major barrier for us. Again, we really focus on from a ROSA perspective trying to place through agreements that allow for payment for the ROSA system through commitments and increased business. Consider a leasing arrangement, but the leasing payment is actually a commitment of business. That is what we focus on and we did more of those in the quarter and that's a good thing for our business. But we do have opportunities to continue to sell and we do not feel at this point anyway serious constraints in the capital market when it comes to ROSA. But maybe Ivan, if you've got any further color to provide around that you can help as well.

Absolutely, Bryan. And good morning, Robbie. I'm pretty sure that correcting my boss publicly is a bad career move. So I'm not going to correct him. Mr. Bryan, your answer is very right. The only thing, I'll add is that, it is really a global performance. So 50% of the installations are in the US, 50% are oUS. as I referenced earlier around 30% of are robots are going to the ASC, and that segment is growing, and we've seen exciting momentum with the hip software. So I would say, all in all our robotic installations placement sales are in line. They continue to move in the right direction. And as we enter Q4, we're very excited about, where we are from a ROSA standpoint.

Great. Thanks. Maybe as a follow-up, I think Bryan you said, last quarter extremities grew double digits. This – a little less visibility in this line item. Anything you could give us on extremities? I know, sports medicine has the HA reimbursement changes, so that there's some pressure there. But any color on what we're seeing in extremities versus trauma and sports and how that might shake out US, APAC, EMEA? Thanks.

Yeah, no problem. So maybe just as a quick reminder for everybody. When we think about our S.E.T. businesses and there's really no proxy for S.E.T. in other businesses, because we have different categories in it than others would probably consider. We have the upper extremities business inside of S.E.T. trauma; CMFT, which is our craniomaxillofacial and thoracic business; sports; separate from sports would be restorative therapies; and then foot and ankle. Those are the categories that we manage across the S.E.T. categories. The pressure that you were talking about in restorative therapies would be separate from sports, but it's still in the S.E.T. categories. On areas that we really focus, and invest in our growth drivers would be upper extremities, CMFT and sports. It doesn't mean the other businesses aren't important they just don't get the same level of resourcing at this point. And those three that we do concentrate on did have another good quarter. And if I look at all three of them, without giving specifics, I would say, they ranged anywhere from mid-single digits to double-digit growth again this quarter. So in the areas, where we're concentrating, there's no question that we're getting the performance in the field. A lot of that has to do with commercial infrastructure, and then the incremental support that we're giving in research and development to those areas. And of course, the acquisitions that we've been tucking in to drive a more fulsome portfolio. What you're seeing relative to pressure in the quarter for the global S.E.T. business it really has more to do with what Suky said in the prepared remarks around Asia Pacific pressure and trauma, mainly associated with VBP, which we'll reverse next quarter. And then that restored therapies pressure from a reimbursement change in G1. And unfortunately, that will carry through to the middle of 2023 or so.

Appreciate it. Thank you.

Sure.

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

We'll go next to Joanne Wuensch with Citibank.

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

That's a great question. It's an interesting question. I think, what I'll probably do is again maybe start off on some of the things that I'm seeing that, I think are interesting. And then Ivan, Suky, Keri anybody who wants to add anything, because I think it's a really interesting question. It's a good one. My view in part the thing that, I like the most that, I'm seeing kind of state of the union that you're saying is just the rapid adoption in open arms that, I'm seeing from an orthopedics customer perspective to technology. There was a lot of question marks in my mind coming over to orthopedics, on whether or not that transition could truly occur. We saw it with Mako obviously in robotics but we're bringing a lot of other technologies to bear. And I've been very excited to see all companies kind of doubling down on the technology front robotics and data. We're all moving in that direction. And I'm hearing from our customer base that, they're looking for it and very importantly willing to pay for the value that it brings. That's really important, because if that type of innovation comes into a marketplace, particularly in medtech, it usually doesn't leave. And when you do bring that kind of technology, it is more sticky than previous technology and it does have the ability to impact pricing dynamics. Because the more technology that has stickiness to it the longer the term contracts, and the better stability you have in pricing. And you also get this benefit of increased, let's call it share of wallet or mix for every procedure. So if you can bring technology in to the very same procedure you had yesterday, you get more revenue for that procedure. And as we see that adoption continue to move up of things like robotics and data or cementless technologies in knee that actually allows a mix benefit for the entire market, and that could buoy the overall market growth rate. Taking pricing, stability, moving that forward, bringing more revenue per procedure that has a real positive effect for the overall orthopedic space. And so that's a dynamic that's happening real-time that's pretty exciting in my view anyway. But I'll open it up to anyone else if you want to add anything.

Maybe quickly here Bryan I'll just recap some of what you said in four bullet points here. Number one, as it was mentioned earlier, the shift of care on to the ASC and frankly in some cases something getting on a home like physical therapy is real. No longer it's all about the inpatient unit, there's a real shift of care again to ASC, and then post-surgery some of the stuff getting down a home. So that's number one. Number two, clearly the decision maker is not just the physician or the provider. The patient plays a role that's why we're excited the best technologies that we're launching that directly target consumers, patients. So it's not only just the physician and provider, it's basically physician, provider and payer. Some of the data and the technology that Bryan is talking about becomes really a powerful tool for us to engage payers in demonstrating that we are not just a solid clinical value proposition, but also an economic value proposition. Number three, and I think this is aligned with the pricing story there is an emphasis in discussing value just as much as pricing. Some of the discussions that we're having today around length of stay, reducing length of stay, some of the discussions we're having around lowering readmission rates, increasing patient satisfaction, having a shorter surgery with the same outcomes were not discussions that were happening maybe three years ago and they're happening right now. And then number four, the role of innovation. I've been in med-tech for 28 years. I was working in orthopedics 15 years ago. When I rejoined or when I joined orthopedics again four years ago, I would say that things were pretty much the same, net of a couple of robotic introductions. Over the last three, four years we've seen a lot of innovation coming to orthopedics in mixed reality, in infection management, in bringing machine learning, really thinking about the entire organization [ph]. So I would say those are the four key things that we pay attention to and we think we'll have a competitive advantage in those areas.

Very helpful. Thank you.

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

Hi, thanks for taking the question. I wanted to just follow-up first, Bryan on what you were talking about on some of the pricing opportunities you mentioned with new technology. Mixed reality, smart implants, I'm curious within the buckets of mixed, the ability just to preserve your pricing as contracts roll off and discrete opportunities to charge for some of these newer areas, particularly on that third bucket, can you give some examples of where these new technologies might be able to fall into that third category, or which of those buckets should we expect more of the pricing impact from?

Yeah. It's -- make sure that I understand your question specifically. But when I think about the innovation that we're bringing -- and not just us by the way. That's what I like about it there's momentum across the entire orthopedic space and all the major players moving in this direction. I think in certain areas we're ahead. But make no mistake everyone is moving in this direction. So if I just take a couple of examples and hopefully this will answer the question that you're asking. Think about mymobility for instance, which is one of the first launches that we had in data collection, leveraging the relationship that we have with Apple. This uses an Apple Watch to collect data and then ultimately uses machine learning to be able to do some predictive analysis. And we're actually now looking at that through an opportunity to tell a surgeon and the patient when they're falling out of the norm for recovery. So that's the type of thing that we're able to do. And we do sell that. So there's an opportunity to monetize that application. So it's not just giving it to them and getting pull-through of implants, it certainly is getting the pull-through of implants because you get that natural gravitational pull once you bring technology in, but there's also a discrete way of making money or monetizing that mymobility application. So that's one example. Another example is robotics. I mean, robotics comes in you get that natural gravitational pull for competitive surgeons to come over, but you also get an uplift every time they use a robotic procedure because you get the uptick in disposable value. So that procedure now cost more for the account to do, but you get the benefit of robotics inside of that. So it's a fair trade. Those are two examples of the way technology is leaning in, in that way. Same thing with Persona IQ. That's the first smart implant that will be on the market. It's collecting data in a very compliant way, because you can't take it off. They're nonstop for the patient. And that will also drive a premium in the marketplace. So if you're going to use Persona IQ, you're going to pay discretely for that that sensor capability. And that's the way we're monetizing this. So you could see a combination of things where we monetize the technology or sometimes it just brings value that is unique to us that would allow us to pull in additional implants. But it's some combination of those two things. And again, Ivan, if you wanted to add anything else or Suky or anybody else.

I think you've done a very good job, Bryan. We can get our next question.

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

Yeah. What I've learned over the years is committing to timelines in a situation like this is always a bad idea. What I can say is that we are absolutely sprinting and using our limited launch focused on, getting users that will use significant quantities and be able to collect data with us so that we can ultimately look for different ways of providing insights that will matter to our customers. The things that we want to focus on first would be what are those things that we could predict that will obviously be good for the patient, but also derail the cost associated with caring for the patients, so reduce the cost of caring for the patients? And in infection is great. If you could get there, that's fantastic. If we could predict a risk of infection before it occurs, that would be fantastic. Certainly something that we're going to be looking to do but it doesn't happen very often. So you just think about the power, the number of patients you're going to have to have and the amount of data it's going to take us a little longer to get there. What we're also going to be looking at though is just loosening, which also happens. Can we predict loosening before it happens? You're looking at stiffening. There are certain things you've got to do from a stiffening perspective that if we can get out ahead of we can reduce the amount of care that needs to be provided to the patient. So there's, a lot of other things that we're looking at to try to predict that will derail, the cost or reduce the cost of caring for the patient and make sure for better outcomes for the patient. So I don't want people to get hyper focused on infection. It's something that we're going to pursue. It will take longer. But the real goal right now is to be able to look at the data that we're collecting which is significant already, and then be able to derive those insights that will change the way we care for our patient. Once we get to those we can define those that will really begin to bolster that value proposition that we have for the product and be able to support a higher price point for Persona IQ.

Thank you.

Sure.

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

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

Yeah. Thanks. Good morning guys. Bryan maybe even building further out on this pricing discussion, I think it's all interesting stuff and the premiums you can get on new technologies on sensor-based technologies moving that mix higher and all that that all makes sense. I'm more interested or equally interested I guess I should say on kind of your base business. I don't know what your Vitality Index is right now but let's say 70% or 80% of your revenue is generated on products that are a few years or older in the portfolio, where are hospitals that in understanding that they can't keep extracting two or three points of price even out of those base products every single year if you're going to continue to invest and develop this new technology in that, or are those conversations with hospitals improving at all in this -- especially in this inflationary environment?

Yeah. Probably what I'll do is I'll turn this one over to Suky, because we don't look at pricing just through one vector one lens. There's, multiple variables that we have in that equation that we think are going to benefit the company going forward. But maybe Suky, you could talk about the variables that we do look at when we think about pricing and I know Ivan probably have some color as well you want to provide.

Yes. So we do think overall that this can help pricing discussions. They're becoming much more strategic in nature and more centered around value. We're not completely there where we want to be, but we're starting the dialogue more around value versus just straight price and transactions. But maybe Ivan, do you want to talk a little bit, because I know you've got some real world experience.

Yes, absolutely. It's a real discussion. It's happening Jeff in pretty much every country. As you think about our Vitality Index, there is a direct correlation between improvements in Vitality Index percentage of sales coming from new products and stability around price. And it may not be mixed the product launch itself that you launch in a given year. But as you launch as an example Persona IQ that creates a category contracting opportunity where we contract that for the rest of the portfolio in knees, they've got to keep a certain price. And again, that is a real discussion one very real example of how we think about it. We do that in knees. We do that in hips across the board. So, again, a very direct correlation between new product introductions Vitality Index and keeping the price premiums for the product a couple of years later, but also for the category of products in a given space.

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

I'll start with it and turn over to Ivan. You're thinking about it the right way right? Upfront here there is some investment relative to those placements, because we start that depreciation and you really haven't ramped up that overall growth commitment. We're still in the early innings on that, but maybe Ivan do you want to talk a little bit?

Yes. I would say the governance when it comes to robotics is second to none. So when we do install place our robotic unit in any center globally there is a minimum commitment of cases that the center has to perform where we take the unit back. One reason is financial. The other reason perhaps more important is from a compliance standpoint giving fair market value exchanges, we cannot have capital equipment in centers that are not delivering on the contracted number of cases. That's why we keep talking about how we prefer to place units versus semi units so we get the annuity. On the other side of the question, as we think about those cases, there is also a governance around disposables. There is zero latitude when it comes to pricing discounts on the disposables, the peripheral items that are part of that robotic case. So again, I would say that the robotic governance is second to none and really early innings here in terms of where we are in the journey.

Thank you.

Yes. Thanks for the question. Yes, I think, operator, we have time for maybe one more.

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

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

Okay. The positive news is, that's the question I'm getting not a question of whether we could deliver the 4%. So we're making progress there. I would say, that I still think that as I talked about before there are a lot of headwinds that we have to pay attention to. And so, I don't want to say that -- first of all, we're giving more color than we would ever give in a normal year, just given all the challenges that everybody is facing trying to help you out here. But I would say, 4% is a number that I'm saying is doable we see a pathway to 4%. But make no mistake, that there are challenges that are out in the market macro challenges, not things that are internal to our own organization that could stress that. And there are opportunities from a macro perspective, that we just talked about that could also help that. So we're trying to take a balanced view, of what could happen positive or negative to what we think organically, we can do in 2023. And that's the reason why, I would say, for 4% you should not consider a floor. 4% you should consider a good way to look at all things considered, a fair way to look at growth in 2023. And by the way if 2023 was just a normal year, and we didn't have all these noises, we believe that 4% is about the right way to think about our business. Given all the portfolio moves that we've made the WAMGR, improvements that we've made the innovation flywheel that we're now moving we believe, that's what we deserve. Could we do more than that? Certainly. Particularly, as we start to continue to move our active portfolio management strategy, we have more financial flexibility and we continue to move that weighted average market growth rate north. But, I don't want people thinking that I mean 4% as a floor. I didn't mean to attend that. Q – Matthew O'Brien: Understood. Thank you.

Sure. End of Q&A:

All right. Operator, I think we're a little past 9:30, unless there's any closing remarks. So Bryan, anything you'd add we're probably good to end the call.

Yes. I'd probably just add, I think I want people to continue to focus on the transformation that has occurred at Zimmer Biomet. We've been extremely disciplined in our portfolio decisions. And portfolio to me is, in all aspects of the business. We are biasing our spend whether it be research and development, commercial infrastructure, the way we compensate people in active portfolio management through M&A, on ensuring that we're increasing the weighted average market growth of our business and diversifying our business over time. That is happening. It has already happened and more of it will happen on a go-forward basis. And I keep talking about that innovation flywheel, but that was nonexistent just a few years ago. The Vitality Index is moving in the right direction in a rapid way, and we expect that to continue. All of that combined with the execution that we're seeing from the field is putting us in a good place, in a very challenging market. So I guess, I'll leave it with that Keri.

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

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