Zimmer Biomet Holdings, Inc. (NYSE: NYSE:ZBH) reported a strong finish to 2023, with substantial growth in both revenue and adjusted earnings per share. In the fourth quarter, the company experienced a 7.5% increase in constant currency revenue and a significant rise of 9.5% in adjusted earnings per share. The robust financial performance was underlined by nearly $1 billion in free cash flow, despite facing supply challenges throughout the year. Looking forward, Zimmer Biomet is preparing for an exciting early 2024 with a pipeline of product launches, expecting these new offerings to bolster its market share, particularly in the hip sector.
Key Takeaways
- Zimmer Biomet reported a 7.5% growth in constant currency revenue and a 9.5% increase in adjusted earnings per share for Q4 2023.
- The company generated nearly $1 billion in free cash flow in spite of supply challenges.
- A robust pipeline, twice the size of 2018's, is set to drive new product launches in early 2024.
- Zimmer Biomet aims to grow at least 100-200 basis points above market revenue with earnings per share and free cash flow dollars growing faster than revenue.
- The company plans to provide more details about its long-range plan at an Analyst Day in May 2024.
Company Outlook
- Zimmer Biomet expects constant currency revenue growth of 5% to 6% for 2024.
- Adjusted diluted earnings per share are projected to be in the range of $8 to $8.15.
- Free cash flow is anticipated to be between $1.05 billion and $1.1 billion.
- A global restructuring program is expected to deliver up to $200 million in run rate savings by the end of 2025.
Bearish Highlights
- Gross margins are expected to be slightly lower in 2024 due to the loss of FX hedge gains and increased third-party manufacturing costs.
- The company anticipates two years of earnings per share dilution from potential M&A transactions.
Bullish Highlights
- The company completed a $500 million share buyback program, contributing to strong cash reserves.
- Zimmer Biomet outperformed competitors in the U.S. in knees and hips and expects to regain market share in these areas.
- They plan to expand cementless knee operations, aiming for a penetration rate of 50-60%, which is expected to drive additional revenue through higher pricing and the use of robotics.
- The company is confident in achieving sustainable double-digit EPS growth.
Misses
- Supply chain disruptions in 2023 impacted revenue growth and limited new business opportunities.
- Russia's market conditions affected sales, but it is expected to become a net tailwind in 2024.
Q&A Highlights
- Zimmer Biomet discussed the expected impact of new product introductions on their guidance, with 40 new products set to launch in the next two years.
- The company's new compensation plan is not expected to significantly impact margins.
- They provided updates on the ROSA shoulder product, anticipating a meaningful impact upon its launch.
- Supply challenges from the previous year are believed to be resolved, setting a positive tone for the current year's growth.
Zimmer Biomet's earnings call reflected a company that is navigating through challenges with a clear strategy for growth and innovation. With a strong balance sheet and a series of strategic initiatives, the company is poised for continued success in the dynamic medical device industry. Investors and stakeholders can look forward to more detailed insights during the company's Analyst Day in May 2024.
InvestingPro Insights
Zimmer Biomet Holdings, Inc. (NYSE: ZBH) has demonstrated resilience and strategic acumen in its financial performance, as evidenced by its strong finish in 2023. The company's commitment to innovation and market expansion is poised to be further supported by key financial metrics and management actions, as indicated by real-time data from InvestingPro.
InvestingPro Data shows Zimmer Biomet with an adjusted market capitalization of $25.72 billion, reflecting its substantial presence in the medical device sector. The company's P/E ratio stands at a calculated 24.67 for the last twelve months as of Q4 2023, suggesting a valuation that is mindful of near-term earnings growth. This is further supported by a PEG ratio of 0.8, indicating potential for growth at a reasonable price. Additionally, Zimmer Biomet's revenue growth of 6.55% over the last twelve months underscores the company's ability to expand its financial base amidst market challenges.
An InvestingPro Tip highlights that Zimmer Biomet has a perfect Piotroski Score of 9, which is a testament to its strong financial position and operational efficiency. Another InvestingPro Tip notes that management has been aggressively buying back shares, which can be seen as a signal of confidence in the company's future and a contributor to shareholder value.
Investors seeking to delve deeper into Zimmer Biomet's prospects and financial health can access additional InvestingPro Tips. There are 8 more tips available, which discuss various aspects such as earnings revisions, stock volatility, and profitability forecasts. For a more comprehensive analysis, readers are encouraged to visit https://www.investing.com/pro/ZBH.
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Full transcript - Zimmer Hldgs (ZBH) Q4 2023:
Operator: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today February 8, 2024. 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, Chief Communications and Administration Officer. Please go ahead.
Keri Mattox: Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's fourth quarter 2023 earnings conference call. Joining me today are Ivan Tornos, our President and CEO; and CFO and EVP, Finance, Operations and Supply Chain, Suky 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 Q4 earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan. Ivan?
Ivan Tornos: Hey, thank you, Keri, and thanks, everyone for joining the call here this morning. I like to start the way that I typically do, taking a moment to recognize, to show my gratitude to the almost 20,000 Zimmer Biomet team members for their dedication, for their commitment, for their strong resilience, and for their superb performance in 2023. Simply put, 2023 was just a great year for our company and I want to say thank you. In 2023, we impacted the lives of almost 4 million patients and along the way we deliver best-in-class financial performance, growing our constant currency revenue by 7.5% while adjusted EPS earnings per share grew almost 9.5% in the year. That's 200 basis points of leverage between the 7.5% revenue growth and the 9.5% growth in EPS. In the year, we generated almost $1 billion in free cash flow, and that's with some turbulence around inventory management and whatnot. So again, strong performance top to bottom. And I'm just very, very proud of the execution in the year. It's worth noting that, that this level of execution and performance came in a year in which we still had to deal with fairly complex micro issues, whether it's inflation, FX, geopolitical challenges. I don't think I need to talk much about that and also some micro challenges in the year. We did struggle with some supply challenges throughout some of the periods. I'm happy that's behind, but it was a headwind in many periods in 2023. And again delivering 7.5% in 2023 against some top comparables, having grown constant currency revenue in 2022 the year before by 6.6%, so clearly a great trend in the making, clearly strong performance, and I'm just so grateful and so proud of all of you, the Zimmer Biomet team. At the same time, beyond grateful, I'm truly excited as I know that this is just the very beginning when it comes to the level of performance that we can realize here at Zimmer Biomet and multiple drivers of why I'm confident that this is just the very beginning. But I'll start with highlighting the bold pipeline that we have in place. The size of our pipeline is twice what it used to be in 2018. We got great new product launches that are happening here early in 2024. We have a stable supply, we've created an stable supply environment and we got great commercial execution. We're developing flawless commercial execution as evidenced by these growth rates that I just highlighted. To compound our belief behind this level of examine ahead is the fact that we have seen and we continue to see a substantial improvement in our end markets. This is not the same market growth profile that we used to have. Pacing demand is strong, procedure volume is very strong, given a variety of reasons and as the market leader in both knees and hips, being in better markets is just very exciting as we enter 2024. Back five years ago, when I joined the company, we used to think of for WAMGR weighted average market growth rates as being somewhere in the 3% range. And today, we PEG or WAMGR as being very near, if not at 4%. And again, that's a meaningful increase and we believe it's sustainable. So we're not going back to the 3% days when it comes to market growth rates. So again, internal and external dynamics gives me, gives us confidence that the best is truly ahead. When you add to all of these variables, the fact that we have the strongest balance sheet in the history of the company, there is no doubt then that we can claim that our future is nothing short of truly bright. So again, very pleased, very proud and very confident. I'd like to thank our investors as well for their support in 2023 and for their confidence in 2024 and beyond. We continue to take biggest strides forward toward being a company with a very different growth profile from top to bottom. Committing to an expectation to grow at least 100 basis points to 200 basis points above marketing revenue, with our EPS, with our earnings per share, growing faster than revenue, and our free cash flow dollars growing faster than EPS. The guidance that we are providing today for 2024 already reflect such a commitment to this type of financial discipline. And I'm very much looking forward to our Analyst Day on May 29 in when we will provide additional details in terms of our long range plan, which will illustrate that this is not a one-year wonder, this is a multi-year commitment. And you will see then that Zimmer Biomet has truly entered our growth stage era. We're no longer in turnaround mode. We're ready to deliver by being laser-focused on the three strategic imperatives that I highlighted during my very first earnings call as CEO back in November, three strategic imperatives that I continue to repeat over and over at every Zimmer Biomet meeting. And frankly, I will continue to repeat because those are the three drivers that we know are going to drive our performance. Those being number one, people and culture; number two, operational excellence; and number three, innovation and diversification. So let's talk about our 2024 commitments, how different initiatives across these three strategic imperatives will drive our growth forward. First in the area of people and culture, and again, I've explained this in the past, what it means, it's about having the right people in the right roles within the right culture. We must make sure that we support team members to act as owners and operators of the business. This means decentralizing decision making, driving agility, and empowering team members at every level, across every function around the world. We must become leaner; we got to be closer to the customer. Equally important, we must truly live an environment of pay for performance. This is something that has already kicked off in a very meaningful way in the fiscal year -- in this fiscal year 2024. An example of that is the fact that we're incentivizing free cash flow dollar generation or growth in a much more disciplined way across the enterprise knowing that revenue is also the most durable driver of free cash flow performance. Incentives are also set for revenue growth to meaningfully drive compensation across our firm at every level. So again, we change the way we pay people in terms of growing revenue above market. We change the way that we pay people, giving a larger percentage of compensation in adherence to the fact that we as a company need to grow free cash flow dollars at double-digit rates. In the second area of operational excellence, and again, this is about how we think about growing the business top to bottom. You can see already in today's update in the press release that we mean it. It is tough to restructure a company. It's certainly something that we don't take lightly. You read the press release, we had to do it. It's a tough choice once again, but we needed to make operational changes to simplify our structure, to deliver greater efficiency, and to ensure that we enhancing investments in the right areas of the business, again closer to the customer, so again, not an easy thing to do, but something that we had to do and something that we have done. Beyond the restructuring, other initiatives in the area of operational excellence that are already in full motion, are the new programs that we got in place kicking off how to drastically reduce inventory levels at Zimmer Biomet. This will drive substantial improvement in our free cash flow dollar growth, while also reducing our days on hand, DOH by 50 days or more and will reduce or excess an obsolescence exposure, which is something that frankly we've not done that well in previous years. Second thing we're doing is the rollout of a global initiative to drive new product launch excellence across the key new product introductions that we have in the year 2024. In simple terms, the seven or eight most meaningful product launches, let's make sure we have a cadence of operating mechanisms with proper governance to ensure that we're maximizing these product launches across each key geography. And then the third thing we're doing in operational excellence beyond the restructuring is the integration of the pricing organization under the finance structure, reporting directly to Suky, our CFO, to ensure maximum governance and accountability across the enterprise. While we are pleased with the reduction in price erosion over the last two to three years, we believe there is much greater opportunity to drive even better and more durable pricing dynamics. So again, in the area of operational excellence, beyond the restructuring, it's about drastically reducing inventory levels to generate improved free cash flow dollar growth. It's about governance beyond or behind the new product launches. And then thirdly is around doing better in the area of pricing dynamics. In the third strategic imperative of innovation and diversification, we're going to continue to invest in innovative R&D, in customer centric R&D, we're going to continue to fuel our pipeline with meaningful product launches. We're going to continue to drive our vitality index, which has already expanded very meaningfully over the last three years. And we're going to make sure that as we continue to launch new products, we also see margin expansion coming from these new products. I'm excited about where we are today. Our pipeline, the dollar value associated with our pipeline is twice what it was at the end of 2018. And as we enter 2024, we had very meaningful product launches, particularly in the hip area in where we lost market share in the last two years, given the lack of products in key categories like surgical impactors, triple tapered stems, or hip navigation. So again, 2024 is the year in where, through very meaningful product launches, we will regain the momentum that we lost. Beyond hips, I'm excited about where we are in shoulder; Identity continues to generate great excitement. We will enter 2024 in full launch mode when it comes to Identity. We're excited about stemless shoulders entering the market, and yes, very excited about being first to market in the category of shoulder robotics with a very highly differentiated offering in robotics for shoulders that will apply for both anatomic and reverse surgeries. In the area of knees, we're in the early days of our cementless knee launch, in 2024, we seek to increase our penetration rates drastically. Here in the U.S., our penetration rate in cementless is not even in the 20% range and we are committing to drive the penetration rate into the 50% to 60% range at a very rapid pace. Again, more details to those plans at our Analyst Day, but rest assured that our knee penetration rate in the cementless category is not going to stay in the teens or even the low-20s for long. Beyond cementless, we're excited about next-generation robotics in knee. We are excited about partial cementless knees, and we're excited about the fact that in 2024, we're going to be entering the full launch for Persona IQ, the only smart knee in the world that fully integrates data, technology and best-in-class implants in a way that nobody else is doing. In the category of S.E.T., which is six different businesses, sports, foot and ankle, restorative therapies, trauma, extremities, and CMFT, craniomaxillofacial thoracic, we are seeing great growth already exiting 2023. The second semester of 2023, we grew S.E.T. by mid-single-digit or above. And as we entered 2024 and beyond, the expectation is that S.E.T. will continue to grow mid-single-digit or above. And this is something that as a company, we've not realized ever since the merger in 2015 with exclusion of the post-COVID year given comes, so really excited about the return on the multiple investments we made in S.E.T. particularly in the areas of innovation and commercial execution. There is a great cadence of product launches in S.E.T., already mentioned some of those and more to come when we do our Analyst Day in later in the spring. So excited about S.E.T., excited about innovation as a whole or new product development pipeline is strong. We're going to be launching over 40 different new products in the next 24 months or so. Most of them are going to enable category leadership, establishing Zimmer Biomet as the leader or the second position in the category. And virtually all of them are going to be in market spaces that are growing 4% plus or above. So I like the quantity, I like the quality, and I like the market growth profile in terms of where innovation is going. I'm also particularly excited about the innovation plans that we have for the ASC here in the U.S., ASC side of care. We made meaningful investments innovation during all stages of the episode of care, what happens before surgery, what happens during surgery, and what happens after surgery. And relative to the ASC in the intra op stage of the ASC, we are best-in-class when it comes to solving problems, delivering efficiency, best-in-class outcomes and safety. So again, truly excited about our ASC strategy where we're going relative to this side of care. Diversification of Zimmer Biomet's end markets will happen not just by innovation internally, but will happen through smart M&A, which will remain the number one category when it comes to capital allocation, with a best-in-class labor ratio, and with deep confidence in our free cash flow generating plans over the next few years, our strategy is to make a smart M&A the top recipient of our capital. But at the same time, I just love the fact that we have the optionality to continue to do share buybacks as we announced this morning and perhaps at a more meaningful level. So the combination of smart M&A and buybacks can coexist, given the strong free cash flow dollar generation that we are seeing in -- from this regard. I'm energized by the very detailed and focused plans that the team has put in place, which I know that upon their execution will position Zimmer Biomet to deliver on the growth profile that we keep recommitting and that is to grow above to 100 basis points to 200 basis points. So that's a minimum point of entry commitment of 5% in the year 2024, with earnings per share always growing faster than revenue and free cash flow always growing faster than EPS. This is not a one year commitment. This is a multi-year commitment. And again, I know based on the very detailed plans, we will get there. In closing, we are very excited about where we're at, the track record over the last two years, and most importantly, we're deeply excited in terms of where we're going to go in 2024 and beyond. The team is ready. We are establishing the right trend and we're going to continue to drive flawless execution, delivering our commitment. Along the way, we're going to help patients, we're going to create shareholder value, and we will leave our mission of alleviating pain and improving the quality of life for people around the world. With that, I'll turn the call over to Suky.
Suky Upadhyay: Thanks, and good morning, everyone. As Ivan mentioned, our fourth quarter results ended a successful year for Zimmer Biomet, with full-year constant currency revenue growing 7.5% and adjusted earnings growing more than 9.5% on reported basis, while generating just under $1 billion in free cash flow. Inside of that, our business segments performed well for the year. Global knees constant currency growth of over 10%, hips growth of 5%, and S.E.T. growth of almost 4%, all while also expanding adjusted operating margin by almost 100 basis points, the second consecutive year of operating margin expansion in a challenging environment. Also, as previously guided, we closed the second half of 2023 with mid-single-digit revenue growth and levered earnings growth, a profile we expect to continue moving forward. Let's dive into the fourth quarter results. Unless otherwise noted, my statements will be about the fourth quarter of 2023 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 in the fourth quarter were $1.94 billion, an increase of 6.3% on a reported basis and an increase of 6.1% on a constant currency basis. We had a selling day tailwind of about 100 basis points in the quarter. U.S. growth was 4.4% and international growth was 8.7%. As expected, we saw a robust sequential step up versus the third quarter across all regions. Global knees grew 5.6% in the quarter with the U.S. growing 5.4% and international growing 5.8%. The knee business continues to be driven by our Persona product portfolio combined with our ROSA robotics platform, and we remain excited about the positive feedback around our recently launched cementless form factor for Persona OsseoTi. For the full-year, global knees grew 10.2%. Global hips grew 3.6% in the quarter with the U.S. growing 4% and international growing 3.2%. We are eager to accelerate performance of this segment with the addition of multiple new product offerings in 2024. For the full-year, global hips grew 5.1%. Next, the S.E.T. category grew 6.4% in the quarter, with our key focus areas of sports, CMFT and upper extremities all growing in the mid-single-digit to low-double-digit range. The strong growth in these focus areas was partially offset by other sub segments within the category. For the full-year, S.E.T. grew 3.8%, including a step up to mid-single-digit growth in the second half of the year. Finally, our other category grew 15.9% in the quarter, driven by another strong quarter of global ROSA sales. Now moving to the P&L. In Q4, we reported GAAP diluted earnings per share of $2.01 compared to GAAP diluted loss per share of $0.62 in the prior year. The increase in GAAP results was driven by higher revenue, a goodwill impairment charge in 2022 that did not repeat favorable one-time tax benefits in 2023, and a lower share count. The details around our financial performance can be found in today's press release. On an adjusted basis, we reported diluted earnings per share of $2.20 compared to $1.88 in the prior year, representing year-over-year reported growth of 17%. The step up is driven by revenue growth, better gross margins, lower OpEx margin in tandem with a lower tax rate. Our adjusted gross margin was 72.5%, up 80 basis points from the prior year, driven by favorable mix, higher volumes and lower royalties. And for the full-year we came in slightly above expectations, representing 90 basis points of year-over-year expansion. Adjusted operating margin was 30.3%, up 200 basis points from the prior year. The year-over-year operating margin step up was primarily driven by revenue leverage, better gross margin and realized efficiencies across SG&A. For the full-year, operating margin was slightly ahead of expectations at 28.2%, up 90 basis points year-over-year. Net interest and other adjusted non-operating expenses were $43 million in the quarter and $194 million for the full-year, and our adjusted tax rate was 15.8% the slightly more favorable tax rate was driven by discrete one-time items in the quarter, bringing our full-year tax rate to 16.3% and in line with overall expectations. Turning to cash and liquidity, we generated operating cash flows of $588 million and free cash flow totaled $447 million and we ended the year with cash and cash equivalents totaling $416 million. As Ivan mentioned earlier, we completed a $500 million share buyback program in early 2024, which is more than required to offset annual dilution. For the full-year, we generated operating cash flow of just under $1.6 billion and free cash flow of $979 million. Our balance sheet remains strong; leaving us continued financial flexibility and strategic optionality as we move forward. Now moving on to our financial outlook for 2024. Our outlook takes into account certain key assumptions, including pricing, which is expected to be about 100 basis points to 150 basis points of erosion, but it's a continued step change improvement from historical trends. We expect to see continued strength in our end markets in tandem with new product introductions and continued improvement in product supply. Against that backdrop, we expect 2024 constant currency revenue growth of 5% to 6%, including a foreign currency exchange headwind of approximately 50 basis points, translating to reported growth of 4.5% to 5.5%. Adjusted diluted earnings per share in the range of $8 to $8.15 representing reported growth of 6% to 8%. And currency is expected to have about an $0.08 headwind on EPS based on recent rates and the implementation of Pillar Two has an $0.18 or about a 250 basis points headwind on earnings per share growth for the year. This implies operating margin expansion of greater than 50 basis points at the EPS guidance mid-point when compared to 2023 We expect slightly lower year-over-year gross margins to be more than offset by efficiency and restructuring programs that were initiated in 2023. Net interest and other non-operating expenses are expected to be about $205 million and as previously discussed, our effective tax rate is expected to step up to 18% in conjunction with the implementation of Pillar Two. We expect to end the year with about 207 million shares outstanding lower than 2023 due to the $500 million share buyback plan that I've referenced earlier. Finally, we expect our free cash flow to be in the range of $1.50 billion to $1.1 billion, or growth of about 10% at the mid-point. As Ivan mentioned, we initiated a global restructuring program along with other cost savings initiatives in late 2023. These programs further streamline our organizational structure, shift select reporting lines, prioritize how we spend across the organization, and further evolve our operational footprint in order to simplify and maximize efficiency. This program is expected to result in total cash charges of about $125 million to $150 million over the next two years and deliver up to $200 million in run rate savings as we exit 2025, enabling us to invest in priority areas, while driving margin expansion and earnings leverage despite a meaningful step up in tax rate. In terms of cadence through the year, we expect constant currency revenue growth for the first half of the year to be at the lower end of the mid-single-digits, while the second half will be at the higher end of mid-single-digits. Also, quarterly results are expected to be choppy due to billing day impacts. Q1 will be about 150 basis point to 200 basis point headwind, Q2 and Q3 will be 150 basis point tailwind in each quarter and Q4 will be a 50 basis point tailwind. Full-year impact will be immaterial or less than 50 basis point tailwind. 2024 gross margin is expected to set down slightly versus 2023 due to lower FX hedge gains and the realization of capitalized third-party manufacturing cost increases observed in the second half of 2023. From a cadence standpoint, gross margin will be higher in the first half of the year. Additionally, because of the timing of the restructuring program, we expect operating margin will be higher in the second half than in the first half with Q4 being our high watermark followed by Q2. In summary, 2023 was another strong year for the company and we expect to maintain that momentum into 2024 and beyond. With that, I'll turn the call back over to Keri for the Q&A.
Keri Mattox: Thanks, Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one brief 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?
Operator: We'll go first to Larry Biegelsen with Wells Fargo.
Larry Biegelsen: Hi, good morning. Thanks for taking the question. Ivan, congratulations on a nice first year here as CEO. I'd love to ask about the 2024 guidance. Just talk about the key assumptions for the 5% to 6% constant currency growth in 2024. What you're assuming for the recon market. And Ivan, talk about your guidance philosophy. Have you incorporated any conservatism in the guidance? What would get you to the high end of the range? And just quickly, Suky, on the buyback, the $500 million, does that imply that it's hard to find good M&A targets? How should we interpret that? Thanks for taking the question.
Ivan Tornos: Hey, thank you, Larry. Always great to hear from you. So I'll take the first two parts and then Suky can talk about the rest. So embedded in the guidance for 2024, which we're very confident on the 5% to 6% is macro and micro reasons. So from a macro perspective, by now you heard from most of our peers, the markets are very healthy. We believe beyond the backlog, the markets are going to continue to be healthy. You got better patient demographics, younger patients; you got the dynamic of cases moving into an ASC. You got more days of surgery in the U.S. where it's not just two days you see in three days. You've seen shorter, better rehabilitation processes. I can go on and on, but the markets are very healthy. And then from a micro perspective, we got a cadence of new product launches. Most of them are going to be very meaningful as you hit the second semester of the year. We got three new product launches in hips early in 2024, which again will be more material later in the year. We launched in ROSA shoulder. We got a cadence of new product introductions in S.E.T. We're going to continue to increase or penetration in cementless and ROSA. So again, the combination of new product launches, great commercial execution, amplified by the healthier market dynamics, gives us confidence on a minimum 5% and a range of 5% to 6%. Relative to my philosophy when it comes to guidance is very basic. We make commitments and we don't miss them. So we study the different dynamics. We study where we're at. We know that operationally we're in a better place. We don't have the headwinds that we had in 2023 around supply and whatnot. So my guidance represents or exemplifies my philosophy of making commitments and delivering on those commitments. I'm not going to comment today on whether there is opportunities to beat and raise for the year. I just leave it at my philosophy is to make commitments and deliver commitments, and these are very well studied commitments. So with that, I'll pass it on to Suky for your second question.
Suky Upadhyay: Yes. Hey, good morning, Larry. Thanks for the question. I say, first of all, the $500 million share buyback; I think demonstrates our confidence in our outlook in the business. And the short answer to your question, does this imply some deterioration in M&A targets? And I would say absolutely not. I think based on where the company is from a firepower perspective; we feel that we've got the balance sheet strength and power as well as the forward-looking results. To really do both, we still will prioritize smart M&A as Ivan has talked about; we still favor tuck-in acquisitions to mid-size acquisitions. But even in the backdrop of doing heightened level of share buyback, we still see very significant M&A firepower to execute that strategy as well. So short answer again is no. We don't see this as any type of deterioration in targets.
Larry Biegelsen: All right. Thanks for taking the question.
Keri Mattox: Thanks, Larry. Yes, thanks so much. Katie, can we go to the next question in the queue?
Operator: We'll go next to Matthew O'Brien with Piper Sandler.
Matthew O'Brien: Good morning. Thanks for taking the question. Just maybe start a little bit, Ivan or Suky on the knee performance in this quarter. It was a little bit below what we were expecting, still better than one of your competitors, but below another one on a two-year stack basis, it's not quite 50% of sales, but close to it. So I would anticipate that that's going to need to see very good performance here in 2024 in order to hit the guidance range, which I think is maybe being questioned a little bit this morning. So what is it there specifically between cementless, between robotic, between Persona IQ that gives you the confidence in the knee franchise outside of the macro environment here in 2024? And then I do have a quick follow-up.
Ivan Tornos: Thanks, Matt. So performance relative to the quarter, we're very pleased with the quarter. We perform in line with our expectations for knees and frankly for the entire business, and for the year, it was a solid year with a knees growing double-digit and the entire business growing 10.5% with nice EPS expansion. We really don't pay acute attention to what happens to one quarter. I know that it's our job to do that, but we just don't. The 60 to 62 working days in a quarter, all kinds of volatility, then you add comps. So when it comes to performance, we look to 8 to 12 quarters. And if you do run the analysis 8 to 12 quarters, you're talking about knees, but take a look at S.E.T. hips and whatnot, the performance is there. Speaking of volatility in Q4 for knees, we did see in the U.S. we did see some tons of orders. That impacted some of our largest IDNs here. We also had, let's remember, some tougher comps versus Q4 of 2022 particularly in the U.S. where we were 500 basis points ahead of our strongest competitor in knees. And again, if you look at Q3 that's a quarter where both the knees and hips we outperformed all competitors in the U.S. So again given all this volatility, all these ups and downs we just don't pay attention to one particular quarter. We look acutely at the trends and the trends do show that, 50 years later, we continue to be the number one player in knees and we continue to gain market share. Relative to the second part of your question around 2024, what gives us confidence around the guidance is the fact that we continue to see increases in cementless penetration. We continue to see increases in ROSA penetration. We have solved the backorder challenge that we had in this, which was a headwind for many periods in 2023. And we've seen this great commercial execution in the ASC. So we're very confident about where we are in knees and we are very confident around the acceleration in knees going into 2024.
Matthew O'Brien: Appreciate that. Follow-up is just on there's a lot of good things coming this year as far as new products, et cetera. But you're trying to lower inventory levels significantly, 50 days of ton in this space. And then, the restructuring as well. Those -- how you factored in those potential headwinds in 2024 and even into 2025 in terms of potentially some lost revenues or dislocation you may suffer as a result? Thank you.
Ivan Tornos: Thank you. Well, let me just begin with a simple answer. Anything and everything we're doing, restructuring wise and inventory management wise is embedded in the guidance we give it. So that's part of that. In terms of inventory management or inventory reductions, we're going to be bold but not reckless. So we're not reducing inventories in the key categories. We actually are making sure that inventory is what it needs to be for those key brands, whether it's Persona, whether it's the key components in hip, whether it is the key components in S.E.T. This is a lot of the leftover from the integration that we didn't do. So the inventory reduction is going to be in non-critical areas, frankly, in non-critical countries. So again, we're doing this thoughtfully. In terms of the restructuring, the reductions that we announced this morning, these are happening in back office. I will tell you virtually all reductions are non-customer facing. And again, the changes we make in inventory and people are embedded in the guidance that we're giving.
Keri Mattox: Thanks, Matt. Katie, can we go to the next question in the queue, please?
Operator: We'll go next to Robbie Marcus with J.P. Morgan.
Robbie Marcus: Great. Thanks for taking the questions. I want to ask on S.E.T. and other. Those were the two line items that beat versus the Street. Was just hoping you could breakout some of the trends there, what did well, what might have underperformed, if anything, and how we think about those different line items as part of the guide in 2024 and how much of the strong growth is coming from that versus hips and knees. Thanks.
Ivan Tornos: Hey, thank you, Robbie. So solid quarter for S.E.T. frankly, solid last semester of 2023 for S.E.T. growing around mid-single-digit, around 5%, and committing to growing mid-single-digit or above in 2024. The key drivers are the use of suspects. We continue to do really well with upper extremities growing upper single-digit, double-digit in most geographies, that's new product launches, that's focusing the ASC, that's stable supply, just great commercial execution. Our CMFT business, craniomaxillofacial thoracic, continues to do really well. We call that we did two, three acquisitions over the last three years, and those continue to do really well. And again, CMFT is a business where we see upper single-digit, double-digit. We finally stabilize our restorative therapies business here in the U.S. Recall that we had some reimbursement challenges there, and those are behind. So you've seen the biologics restorative therapy business growing at a nice clip now. And then sports med, we've done some acquisitions. We have had some challenges, but that continues to perform in line with expectations. So I will tell you, Robbie, out of the six businesses within the category, four are going really well. Trauma put an ankle; we got some work to do. We got some decisions, some strategic considerations to make. As we enter 2024, mid-single-digit is the point of entry. This has to be the year where we see S.E.T. growing mid-single-digit. Frankly, in some geographies, I think it's going to be higher than that. We got the innovation; we got the investments in terms of dedicated infrastructure and specialization, heavy emphasis here in the U.S., in the ASC environment. So again, full confidence in the growth profile that we're going to see moving forward.
Robbie Marcus: Great. Thanks. Maybe just a quick follow-up for Suky on the guidance and a clarification. The lower end of mid-single-digit in the first half and then higher end second half. Is that inclusive or exclusive of the selling day benefit? Thanks.
Suky Upadhyay: That is inclusive of the selling day benefit, Robbie.
Robbie Marcus: Okay. Thanks a lot.
Ivan Tornos: Yes.
Keri Mattox: Thanks, Robbie. Katie, can we go to the next question in the queue, please?
Operator: We'll go next to Joanne Wuensch with Citi.
Joanne Wuensch: Excuse me. Good morning and thank you for taking the questions. Putting them both right up front. I'm curious why gross margins are expected to be somewhat down year-over-year, what the dynamics are for that? And then my second question has to do with cementless. Can you walk us through the math of what you think moving to 50% to 60% of your knees being cemented or cementless, excuse me, either way 50%. What the benefit is of that? Thank you.
Suky Upadhyay: Yes. Hey, Joanne, it's Suky. I'll start with the gross margin one and then pass it over to Ivan on cementless. Overall, we had a really good year on gross margin in 2023, up 90 basis points year-over-year. Drivers of that are really around we had some FX hedge gains, which we had talked about at length throughout 2023, as well as improved mix and better pricing, still, pricing erosive year-over-year, but better than we expected. Overall, generated a pretty nice profile for 2023. We had previously communicated that we had thought that gross margins might dip down slightly into 2024, primarily driven by the loss of those FX hedge gains. They won't repeat at the same level in 2024 as they did in 2023, but also we're seeing in the capitalization of some increased costs in the back end of 2023, around third-party manufacturing, which will feather into the P&L towards the back end of 2024. Despite those two headwinds, we're able to offset a large component of that, but overall, we do expect to see gross margins down just slightly ZBH-009 restructuring, the reductions that we announced this morning, these are happening in back office. I will tell you virtually all reductions are non-customer facing. And again, the changes we make in inventory and people are embedded in the guidance that we're giving.
Keri Mattox: Thanks, Matt. Katie, can we go to the next question in the queue, please?
Operator: We'll go next to Robbie Marcus with J.P. Morgan.
Robbie Marcus: Great. Thanks for taking the questions. I want to ask on S.E.T. and other. Those were the two line items that beat versus the Street. Was just hoping you could breakout some of the trends there, what did well, what might have underperformed, if anything, and how we think about those different line items as part of the guide in 2024 and how much of the strong growth is coming from that versus hips and knees. Thanks.
Ivan Tornos: Hey, thank you, Robbie. So solid quarter for S.E.T. frankly, solid last semester of 2023 for S.E.T. growing around mid-single digit, around 5%, and committing to growing mid-single digit or above in 2024. The key drivers are the use of suspects. We continue to do really well with upper extremities growing upper single-digit, double-digit in most geographies, that's new product launches, that's focusing the ASC, that's stable supply, just great commercial execution. Our CMFT business, craniomaxillofacial thoracic, continues to do really well. We call that we did two, three acquisitions over the last three years, and those continue to do really well. And again, CMFT is a business where we see upper single-digit, double-digit. We finally stabilize our restorative therapies business here in the U.S. Recall that we had some reimbursement challenges there, and those are behind. So you've seen the biologics restorative therapy business growing at a nice clip now. And then sports med, we've done some acquisitions. We have had some challenges, but that continues to perform in line with expectations. So I will tell you, Robbie, out of the six businesses within the category, four are going really well. Trauma put an ankle, we got some work to do. We got some decisions, some strategic considerations to make. As we enter 2024, mid-single digit is the point of entry. This has to be the year where we see S.E.T. growing mid-single digit. Frankly, in some geographies, I think it's going to be higher than that. We got the innovation, we got the investments in terms of dedicated infrastructure and specialization, heavy emphasis here in the U.S., in the ASC environment. So again, full confidence in the growth profile that we're going to see moving forward.
Robbie Marcus: Great. Thanks. Maybe just a quick follow-up for Suky on the guidance and a clarification. The lower end of mid-single digit in the first half and then higher end second half. Is that inclusive or exclusive of the selling day benefit? Thanks.
Suky Upadhyay: That is inclusive of the selling day benefit, Robbie.
Robbie Marcus: Okay. Thanks a lot.
Ivan Tornos: Yes.
Keri Mattox: Thanks, Robbie. Katie, can we go to the next question in the queue, please?
Operator: We'll go next to Joanne Wuensch with Citi.
Joanne Wuensch: Excuse me. Good morning, and thank you for taking the questions. Putting them both right up front. I'm curious why gross margins are expected to be somewhat down year-over-year, what the dynamics are for that? And then my second question has to do with cementless. Can you walk us through the math of what you think moving to 50% to 60% of your knees being cemented or cementless, excuse me, either way 50%. What the benefit is of that? Thank you.
Suky Upadhyay: Yes. Hey, Joanne, it’s Suky. I'll start with the gross margin one and then pass it over to Ivan on cementless. Overall, we had a really good year on gross margin in 2023, up 90 basis points year-over-year. Drivers of that are really around we had some FX hedge gains, which we had talked about at length throughout 2023, as well as improved mix and better pricing. Still, pricing erosive year-over-year, but better than we expected. Overall, generated a pretty nice profile for 2023. We had previously communicated that we had thought that gross margins might dip down slightly into 2024, primarily driven by the loss of those FX hedge gains. They won't repeat at the same level in 2024 as they did in 2023, but also we're seeing in the capitalization of some increased costs in the back end of 2023, around third-party manufacturing, which will feather into the P&L towards the back end of 2024. Despite those two headwinds, we're able to offset a large component of that, but overall, we do expect to see gross margins down just slightly versus 2023 in the backdrop of those headwinds. Now, having said that, if you take the mid-point of our EPS guidance, I think that would back you into an implied operating margin of about 29%, which represents about an 80 basis point increase year-over-year. And so while gross margin may set down slightly, you are seeing operating margins increase as we drive better efficiency and revenue growth through the company. So again, there are a lot of puts and calls throughout the P&L. The great thing is we've got optionality where we see headwinds in one area. We can make that up with efficiency and tailwinds in other areas. I think you've seen that now, once we deliver 2024 three years in a row, which in a challenging environment, in all three years, we're able to continue to grow operating margin and operating earnings. But thanks for the question.
Ivan Tornos: And Joanne, relative to your question on cementless, I'll give you as much as I can. So, starting with the basic pricing dynamics we see with cementless Persona OsseoTi, we see an ASC uplift of around 10% to 15%, frankly closer to the 15% than the 10%, around 40% to 50% of the time, we combo the cementless knee with robotics, with ROSA, and that drives additional uplifting revenue in the form of disposals and whatnot. So that's a great dynamic we see in particular in the ASC. Our penetration today on cementless, we're exiting 2023 somewhere near 18% to 20% with both expectations; excuse me, to get into the 50% to 60% range. And I'm not going to give you a commitment today, but at our Analyst Day, you will see the long range plans and some of the trending when it comes to getting to 60%. We believe that there's going to be a fairly quick uplift, given the fact that the market is already being developed by some of the work that our peers have done. So again, you should not expect that getting to 50% to 60% is going to be a long journey. All of these dynamics are in the U.S. We're launching in 2024 in other markets outside of the U.S., and I will disclose the pricing dynamics when the time is right. But excited about the launch in Japan in 2024 and other key markets. So those are the dynamics here when it comes to cementless.
Joanne Wuensch: Thank you very much.
Keri Mattox: Thanks, Joanne. Yes, absolutely. Katie, can we go to the next question in the queue?
Operator: We'll go next to Ryan Zimmerman with BTIG.
Ryan Zimmerman: Thank you. Thanks for taking the questions. Following-up, maybe on Larry's questions about guidance, you talked about the WAMGR being at 4%, and clearly we're in this stronger market environment. And so as I think about the components of guidance with pricing as a headwind of 100, 150 basis points, it suggests product mix is going to contribute 200 basis points to 300 basis points. I just want to see one if that's how you're thinking about it, or if you're thinking about the market contribution to guidance at a higher rate in 2024 and maybe potentially the product mix contribution lower. Maybe just help us flush a little that out.
Ivan Tornos: Yes, I'll try to simplify it. And Suky, by all means elaborate, but we believe the market is around 4% all in. And again, we model this in different ways, but let's call it 4%. I'm not going to quantify the new product contribution, but pretty significant. We got 40 new products getting launched in the next two years, and these are meaningful products. I mentioned we got three large hip products that are going to get launched early in 2024. We got ROSA shoulder, which we believe is going to be meaningful in the year 2024, given the fact that it's not a late year launch. We got a lot of products in the S.E.T. category. So again, you should think of new product introductions as a very meaningful contributor of the guidance. Add to that the fact that we don't have the headwinds that we had in 2023 when it comes to supply, I would say between number one and number two; we got confidence on where we're going. Beyond that, we don't see a headwind when it comes to the shift to the ASC. We actually see that as a tailwind. We're excited about some of the dynamics we're hearing about when it comes to the movement of shoulders into the ASC. That's going to be a contributor. And as I mentioned to Joanne, the uplift that we see on cementless and ROSA, which are products that we launched three years ago but now going to get accelerated are the main contributors to the confidence in the guidance. I don't know, Suky, you have anything else here?
Suky Upadhyay: I think that's well said. One of the key points Ivan you touched upon, you said, pricing erosion is assumed in that 4% uplift.
Ryan Zimmerman: Right. Okay. That's helpful from both of you. And then just to kind of dovetail on Joanne's question around margins, you talk about gross margin, Suky. Clearly operating margins are doing more heavy lifting this year. And so how much from the restructuring program is benefiting, is driving some of that operating margin expansion? How much are you assuming for top-line leverage in that 80 basis points or so of expansion? And yes, that's about it. Thanks for taking the question.
Suky Upadhyay: Yes. So the key driver with gross margin being sort of flat to down slightly, it really is coming from revenue leverage and operating margin. You could expect overall OpEx as a percentage of sales to drop by about 100 basis points, give or take. And that's even with R&D increasing year-over-year. So the efficiency and the restructuring programs in the near-term are really focused on SG&A. However, inside of that full program, we are working on things inside of COGS to help maintain and keep gross margin stable over time. Those are going to be a little bit more mid-term in nature and how they get realized. Things like SKU rationalization, site optimization, inventory reductions and corresponding D&O reductions, those are all things that have a little bit longer lead time, naturally, as you can expect as you're moving your supply chain around and not wanting to disrupt the ability to supply demand. But they are definitely is going to take more of a prominence as we move forward beyond 2024. But for 2024, the way you characterize is right. It's primarily revenue driven and SG&A.
Ryan Zimmerman: Thank you.
Suky Upadhyay: Yes.
Keri Mattox: Thanks for the question, Ryan. Katie, can we go to the next question in the queue?
Operator: We'll go next to Travis Steed with Bank of America.
Travis Steed: Hey, thanks for taking the question. I want to ask about the $200 million in cost savings that you guys called out this year. Curious, is the plan for that to kind of drop through to the bottom line or are you going to reinvest that? And what does that mean for kind of margins beyond this year and longer-term?
Suky Upadhyay: Yes. So the way we characterized it was that it would be $200 million run rate as we exit 2025. In year for 2024, we expect that to be about $100 million, or about half of the run rate savings that we're predicting over a two-year period. We're dropping a lot of that to the bottom line, as you can see with our implied guidance at the mid-point would suggest about an 80 basis point increase in operating margins. And so we're actually taking a good portion of that, dropping it to the bottom. But we're also reinvesting a pretty significant portion back into our priority areas, ensuring that we've got the appropriate amount of sets and instruments for cementless uptake as well as Persona uptake through ROSA. Ensuring that we've got the right level of commercialization and execution in our new ROSA shoulder launch, ensuring and ramping up commercialization efforts in our hip franchise around the product launches that we have for hip. So it really is a combination of both. And that's the great thing about this efficiency program. It enables us to reinvest back into our priority areas while dropping pretty significant, substantial margin expansion now, for the third year in a row.
Travis Steed: Yes. Helpful. And on the new comp plan that you called out, curious if that's going to have an impact on margins or just not material enough to impact margins. And then on M&A, just curious if there's been any change on the two years of EPS solution from M&A.
Suky Upadhyay: Yes. On the comp plan, it's not really going to have any material impact and it's embedded in our guidance. I think it's more about a mix shift of how that comp plan is designed, right, whereas previously it was more focused and biased towards revenue growth. I think now what we're trying to do is get a greater balance between top and bottom lines all the way through cash flow. So it's really a mix shift in how we think about comp versus an increase in comp. And again, all of that is embedded into our guidance for 2024. Relative to the dilution, we still think about two years from a dilution standpoint is reasonable. Of course, we'd like it to be inside of that. But just given where valuations are today, as well as the cost of debt, which hopefully is going to come down over time, that's kind of where we see one of our guard reps.
Travis Steed: Great. Helpful. Thanks a lot.
Ivan Tornos: Thank you.
Suky Upadhyay: Yes.
Keri Mattox: Thanks, Travis. Katie, can we go to the next question in the queue, please?
Operator: We'll go next to Jeff Johnson with Baird.
Jeff Johnson: Thank you. Good morning, guys. Congratulations on the quarter. Ivan, maybe you mentioned in passing that shoulder for ROSA is not going to be a late year 2024 launch. Just could you dial in that timing anymore? And I'd be interested in hearing about kind of your view on the uptake of ROSA shoulder, obviously, shoulder surgeries, replacements, technically more challenging. I think some questions about what role robots can initially play in those procedures. So just how does that help the uptake of ROSA? And I don't think I heard a ROSA placement number. I think sometimes you give it on kind of an annualized basis. Any updates on kind of exiting 2023 where ROSA placements were? Thanks.
Ivan Tornos: Hey, thank you, Jeff. So I got to be careful what I say about time lapse for ROSA shoulder. I'll just say that I'm very confident that this is not a late 2024 launch. And as I mentioned, I think it's going to be very meaningful. So beyond being first to market, it's a high quality product. It's going to be applicable for both reverse and anatomic surgeries. It's going to simplify a very complex procedure. It's going to be fully integrated with the rest of the shoulder CVH ecosystem. I believe it's going to get great traction in an ASC environment where speed and accuracy matters. And we're going to hopefully demo these next week at the academy meeting. Whether it's ready or not, it will be demoed there at the academy meeting. Relative to your second question on the ROSA placements and the numbers, you should expect us to do around 300 installations per year. You should expect us to drive penetration rates of minimum 5% to 7% at least per year. You should expect that one-third of these ROSA -- overall ROSA installations are going to go into an ASC environment. And as I mentioned earlier to Joanne, you should expect that in a large percentage of cases, these ROSA installations are going to push cementless. So again, great momentum with ROSA and I'm very excited about where we are with shoulder.
Jeff Johnson: Thank you. And maybe as a follow-up, just as I think about the 5% to 6% constant currency guidance and 100, 200 basis points above market, it seems like market is settling in at a good rate. If I think about gross margin, obviously some of the hedge settlements should normalize as you get into 2025 P&L coming down, pricing getting less bad. So it sounds like gross margin, at least not a big, big headwind going forward. And then of course, you've got the cost savings initiatives here on the SG&A side. If I roll all that together, including the improving balance sheet and cash flow and a commitment to some share buyback, it feels like 10%, 10.5% EPS growth, which is kind of the mid-point of your guidance this year. If it weren't for tax rate and FX headwinds, that sounds like it could be a sustainable kind of target. I'm sure you don't want to lay out an LRP here out of your Analyst Day, but is there anything in my thinking there that would say 10%-ish plus or minus is not a reasonable kind of longer-term EPS growth rate to be thinking about. Thank you.
Suky Upadhyay: Hey, Jeff. I think that was actually a really good articulation and summarization of what we're trying to get across today. In fact, if you look at our guidance today on reported EPS, it would suggest 6% to 8% at both ends of the range. That's after overcoming about 400 basis points of headwind between non-operational things like interest expense, FX and tax rate, right. So again, that's about a 400 basis point drag that's embedded in that 6% to 8%. So the way you're thinking about it, could we be in that low-double-digit zip code on EPS in a sustainable, durable way? I think yes.
Jeff Johnson: Thank you.
Keri Mattox: Thanks for the questions, Jeff. Katie, do you have another question in the queue?
Operator: We'll go next for Richard Newitter with Truist Securities.
Richard Newitter: Hi, thanks for taking the questions. Just with AAOS next week, I was wondering anything that we should be on the lookout for with respect to canary or paternal few rather, and data presentations. I think you had also mentioned on a prior call you were expecting a GLP-1 kind of data analysis, possibly at AAOS and then I have follow-up.
Ivan Tornos: So the answer is yes to both, Richard. So we will have some data points on Persona IQ, and we'll have some data on GLP-1. On Persona IQ, we moved from a limited market release in 2023 to full market release in 2024. We got the value proposition finalized. We got over 2 billion data points. We understand there's a product that is going to enable clinicians to intervene when needed. We got data points on how this product will reduce overall complexity in the episode of care. How we can by intervening soon reduce cost, especially post-surgery, when it can be pretty taxing. We don't reimbursement. We spoke about the NTAP new technology add-on payment, which we got back in October. So that's in full launch mode. We will submit. Barry always asks me this question. We will submit for a PPT coming some point in the spring, summer, and we're going to bring some data around, some of the experiences that we've seen with Persona IQ at the Cleveland Clinic, HSS and other facilities. So excited in terms of what we have with Persona IQ, more to come at the academy. And then for GLP-1s, yes, we're going to be sharing some of the data we've done in conjunction with the academy. And what I will tell you is that so far, everything we've seen with GLP-1s is that it remains a tailwind. We're actually tracking the number of patients that are using a GLP-1 pre-surgery, and that number is in the 20% to 30%. So by all means, this is not a headwind, and I'm glad that conversation is being muted.
Richard Newitter: Great. And then just piggybacking off of Jeff's question, even with potential earnings dilution, if you're potentially going to be -- have the potential to be in a low-double digits or 10 plus earnings growth range, and I'm given your commitment to growing earnings faster than the top-line, where it sounds like 5% is kind of a sustainable floor, given your end market and your WAMGR it sounds like no matter what, even with dilution over a 1.5, two-year period, you feel confident, or we should feel confident in a high-single-digit earnings growth rate at worst. Is that also a reasonable assumption based on all the different commitments and commentary that you provided?
Ivan Tornos: Well, I think what you're asking is, can you still sustain that in a world where you do a sizable M&A a transaction? If I've gotten that correct, that's really difficult to tell, right? There is no two deals are created equal. It's very situational. And so I don't want to get out there front footed to kind of hypothesize, theoretically, what could happen to EPS inside of a sort of make a new [ph] deal. So I think that what you should take away is that from an underlying perspective, at 5% to 6% organic growth, with the levers that we have operationally, but also with the strength of our balance sheet organically, that we can deliver that attractive earnings per share profile.
Richard Newitter: Okay.
Keri Mattox: Thanks, Rich. Katie, I think we have time for one more question if there's one in the queue.
Operator: We'll go next to Jayson Bedford with Raymond James. Mr. Bedford, your line is open. Please go ahead. Please check your mute function.
Jayson Bedford: Oh, sorry, I was off. Yes, sorry about that. I'll be quick. On the supply challenges that you incurred in 2023, can you just remind me what was the impact of these challenges on the P&L last year meaning, is there a way to quantify the impact on revenue?
Suky Upadhyay: Yes. Hey, Jayson, it's Suky. It's a bit of more stress to try and say exactly how days on backwater really impact sales, because one, obviously you have an impact on actual cases, but the more meaningful impact is the ability for our sales rep to go out there and actually hunt for new business, right? They're going to be a little bit hesitant to go shift and make conversions if they don't feel like they can supply. So that's actually probably the bigger impact. But trying to frame that in percentage points is very difficult to do. The way I looked at it is the tailwind for last year. We believe it's part of the -- sorry, it was a headwind for last year, we believe it's part of the tailwind that's going to help give us confidence in delivering that 5% to 6% organic growth for this year.
Ivan Tornos: Yes. We have some internal data points that we don't share. What I will tell you, Jayson is that new product launches, we had to do limited market releases instead of full market releases, Persona OsseoTi is an example. Conversion, as Suky mentioned, we had to prioritize or send some family customers versus converting accounts. And then the third headwind of supply, from a revenue perspective, we couldn't embark on global expansion of these new product launches. So the example that I used earlier around Japan, second largest market in the world, we could have done things differently. We could have been on the market. So it is sizable and it is behind us.
Jayson Bedford: Okay. That's helpful. Maybe just along a similar vein, I think you talked about a 50 basis point impact to revenue growth in the second half from Russia. Is Russia a net tailwind as we look to 2024?
Suky Upadhyay: It is. It is. I would say it's less than 50 basis points. But given that we now have all the licenses secured we need to operate, that that will be a tailwind probably most pronounced in the third quarter because that's when we saw the biggest impact in 2023.
Jayson Bedford: Thank you.
Keri Mattox: Thanks for the questions, Jayson. I think we're wrapped up with the queue and just hitting 9:30. So I'll turn it over to Ivan for some closing remarks.
Ivan Tornos: Sure. Thanks, Keri. I'll keep it short. I know we got to get going here, so a minute or less. I want to start, I want to end the way that I started the call by thanking the team members, the almost 20,000 team members here at Zimmer Biomet who are doing a remarkable job in executing the plans that we lay forward. So grew 7.5% constant currency in 2023 with a nice EPS expansion of 200 basis points that's after growing 6.6% in 2022. And now we're committing to at least 5% revenue growth, 5.5% mid-point with nice EPS expansion and double-digit growth in free cash flow. So very proud of the work that team members are doing. And we're very excited about 2024. We are moving from remediation to -- we have moved from remediation to innovation. I'm excited about the pipeline of products. I'm excited about the financial profile that we commit into or growing EPS faster than revenue and free cash flow faster than EPS. And so far during the year, everything that we're seeing gives us confidence, or confidence that it's going to be a very solid year for Zimmer Biomet. So thank you for your attention this morning, and thank you, team members at Zimmer Biomet.
Operator: Thank you for participating in today's conference call. You may now disconnect.
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