Zimmer Biomet Holdings, Inc. (NYSE:ZBH) Q3 2023 Earnings Call Transcript

This from a long-term perspective. With a mission-centric patient in the board organization, so if this drug class truly does accelerate and improves patient health, and if these drugs truly do become the end of the obesity pandemic around the world that is great news for everyone as long as truly this is sustainable in the long-term.

528 million [ph]: Obesity is certainly an accelerator of the disease and certainly is an element of the disease or a driver of the disease. But let’s not forget that once the cartilage is damaged, there is no recovery. Once you get osteoarthritis, you will not get rid of osteoarthritis. And dropping weight is not going to cure osteoarthritis. Again, this is a degenerative and non-curable disease that we’re talking about. If anything, obesity is a blocker today to joint surgery as many surgeons are uncomfortable operating on patients with a BMI greater than 40% countries or even above the 30 thresholds in some locations. So why could GLP-1s then be a tailwind for orthopedics? Three compelling reasons. First, if you can lower the patient’s BMI below a certain threshold, 40 or 30 in some cases these patients now become eligible for surgery.

And all the data points that we’re getting in primary markets like the U.S. is that there is a large percentage of patients who today are not going through surgery because their BMI is too high. Secondly, if a patient does lose their weight, and I would say, this is pretty logical and they do become more active, there will be a greater risk for additional joint procedures because there will be injury. And third, if a patient loses weight, they are likely to live longer, again, expanding the patient final for an orthopedic procedure. A good example of this fact is Japan, the second largest market in the world for osteoarthritis with minimal obesity rates, but very long life expectancy dynamics. We’ve not seen any near-term impact from GLP-1s, and we’ve seen the long-term impact would be a positive one for orthopedics and Zimmer Biomet.

We’ve engaged independent third parties to perform surgeon surveys and have gathered U.S. based claims data. What still is early in the process, we are very excited about the initial findings. We look forward to sharing them. So in an nutshell, more of a tail win. We’ll be sharing data very soon. And We think that the logic will prevail, and this will be the end of what has been so far a rather emotional argument that is not being fact-based. In closing, I hope you can tell that I’m very confident about the future of this organization. I’m very excited to be here. Our end markets have never been stronger. I will believe that this market beyond the backlog is sustainable. Our execution is strong and is also sustainable. We’ve been delivering consistently for a while.

And we’ll continue to do so with even greater focus and speed. We know what we need to do. The strategy is clear and we will execute on the strategy. We have financial flexibility to invest in higher growth markets, and we are going to continue to shift our portfolio mix and diversify our business. I generally believe this is the time for Zimmer Biomet. I’m proud of the work we’ve done and even more proud of the work that we’re going to be doing ahead. This is why I’m excited to be the CEO and even more excited to be proud Zimmer Biomet shareholder as I believe that now is the time for real value creation. With that, I’ll turn the call over to Suky for a run through of our Q3 financials. Suky?

Suky Upadhyay: Thanks and good morning. I’d like to start my prepared remarks today by welcoming Ivan to his first earnings call as a Zimmer Biomet’s CEO. Ivan has been a constant force and a driver within the organization for several years. And I’m proud to work with him, and I’m excited by the partnership. As Ivan noted, we had another strong quarter driven by healthy and improving end markets and continued strong execution across the organization. Overall, we remain on track to deliver mid-single digit, constant currency revenue growth, and adjusted operating margin expansion in the back half of the year, just as we committed to on our second quarter call. Moving to results. Unless otherwise noted, my statements will be about the third quarter and how it compares to the same period in 2022.

And my commentary will be on a constant currency and adjusted operating basis. Net sales were $1.754 billion, an increase of 5% on a reported basis, and an increase of 4.7% excluding the impact of foreign currency. Additionally, we had a selling day headwind of about 150 basis points that impacted all regions and product categories at about the same level. Excluding the selling day impact, consolidated ex-FX sales would have grown just over 6%. U.S. growth was 6%, and international growth was 2.9%. In the U.S., our strong year-over-year results were driven by recon and a step up in our S.E.T. category in tandem with strong capital sales. Outside of the U.S., we saw more moderated growth across Europe and Asia driven by tough comps and geopolitical headwinds, which I’ll discuss in our product category section.

Global knees grew 7.3% with the U.S. growing 6.1% and international growing 9.1%. The strong performance in knees was driven by continued uptake from our Persona product portfolio combined with the benefits of our ROSA robotics platform. Global hips declined by 60 basis points with the U.S. growing 3% and international declining by 4.2%. Tough comps in China and headwinds in Russia disproportionately impacted our OUS hip business. Excluding these impacts, our international hip business grew in the low single digits. Looking ahead, portfolio expansion will continue to support growth in our hips business. Next, the S.E.T. category grew 2.8%. Again, as a reminder, there was about 150 basis points selling day headwind across all categories and regions.

Our key focus areas within S.E.T., including sports, upper extremities, and CMFT continue to post double-digit growth, which was partially offset by other subsegments within the category. We remain confident that S.E.T. will grow in the mid-single digits in the fourth quarter. Finally, our other category grew 16.4% driven by ROSA sales. Now moving on to the P&L. In Q3, we reported GAAP diluted earnings per share of $0.77 compared to GAAP diluted earnings per share of $0.92 in the prior year. While we had higher year-over-year revenue and higher pre-tax operating profits, post-tax income was lower due to a favorable tax settlement in 2022 that did not repeat this year. On an adjusted basis, we reported diluted earnings per share of a $1.65, compared to adjusted diluted earnings per share of a $1.58 in the prior year.