Zimmer Biomet Holdings Inc (ZBH) 2015 Q4 法說會逐字稿

Good morning.

I would like to turn the call over to Bob Marshall, Vice President, Investor Relations and Treasurer.

Mr. Marshall, you may begin your call.

Good morning, and welcome to Zimmer Biomet's fourth-quarter 2015 earnings conference call.

I'm here with our CEO, David Dvorak and our CFO, Dan Florin.

Before we start, I'd like to remind you that our discussions during this call will include forward-looking statements.

And actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties.

Please refer to our SEC filings for detailed discussions of these risks and uncertainties.

During our call, we will compare revenues on a constant currency adjusted pro forma billing day basis.

This means revenues for prior-year periods have been adjusted to reflect of the inclusion of Biomet revenues and the impact of previously announced divestiture remedies, with growth rates measured on a per-billing day basis.

Additionally, expense ratios and related margin analysis through operating profit will be computed on the basis of adjusted pro forma financials as revised, adjusting in all periods for inventory step up and inventory manufacturing-related charges, certain claims, special items, intangible asset amortization, financing, and other expenses related to the Biomet merger and certain tax adjustments as applicable.

Reconciliations of the non-GAAP financial measures discussed during our call to the most directly comparable GAAP financial measures are available on our website at investor.

ZimmerBiomet.com.

In addition, we have posted to our website updated combined historical financials, as revised, along with adjusted pro forma revenue guidance.

With that, I'll turn the call over to Dave Dvorak.

Thanks, Bob.

This morning, I'll review our fourth-quarter and full-year financial results, as well as key highlights from our performance.

Dan will then provide additional financial details and discuss our guidance for 2016.

In June of 2015, we joined together two innovative companies and began executing our plans to expand our leadership position in musculoskeletal health.

Our combination provides significant growth opportunities with a highly-complementary portfolio of product and service offerings, as well as an enhanced ability to improve operating margins and drive free cash flows.

The early success of our execution of these plans is reflected in our strong earnings performance.

In the second half of 2015, we overdelivered against our initial net synergy targets, further validating our confidence in the effectiveness and accretive value of our combined organization.

Notably, in 2015, we generated our fifth consecutive year of adjusted operating margin expansion.

During the fourth quarter, we substantially completed the integration of our global commercial organizations.

These actions have included the appointment of proven sales leaders and experienced sales representatives, in addition to product cross-training activities, to ensure appropriate emphasis on our market-leading large joint reconstructive businesses, as well as an enhanced focus on faster-growing non-large joint categories.

Based upon our significant progress, we're confident in our ability to drive sequential revenue improvement as we progress through 2016.

Turning to market conditions, in the fourth quarter, global musculoskeletal markets demonstrated stability, with sequential strength in the United States offsetting a degree of softness in emerging markets in certain countries within the European, Middle East, and Africa region.

With respect to pricing, we experienced price pressure of negative 1.3% in the quarter.

Our resulting price decline for the year of 1.9% was in line with our expectations.

Moving on to our performance, Zimmer Biomet achieved stable global revenue growth in the fourth quarter, with sequential improvement in the United States, alongside continued solid results in the Asia-Pacific region.

Consolidated net sales for the fourth quarter were $1.93 billion, an increase of 58.1% reported, or an increase of 0.5% over the prior-year period, adjusting for billing day differences.

Importantly, our large joint, reconstructive and S.E.T categories in the United States delivered 240 basis points of sequential year-over-year improvement, compared to our flat sales results in the third quarter.

More broadly, revenues in the Americas region increased by 0.5% in the fourth quarter.

In the Asia-Pacific region, we delivered 4.0% sales growth, and our sales decreased by 1.5% in the Europe, Middle East, and Africa region.

Full-year sales for 2015 on an adjusted pro forma basis were $6.0 billion, an increase of 1.1% over 2014.

Zimmer Biomet's knee business grew sales by 2.2% in the fourth quarter, reflecting positive volume and mix of 4.1% and negative price of 1.9%.

Our knee results were led by improved performance in the United States and an ongoing strong contribution from the Asia-Pacific region, which delivered 8.2% growth over the prior-year period.

Our Americas segment increased revenues by 1.4%, and our Europe, Middle East, and Africa region grew knee sales by 0.6%.

Our Commercial Teams achieved this result with a portfolio of solutions that meet the personalized needs of each patient, while addressing surgeon and hospital preferences.

Knee sales growth was driven mainly by Persona, The Personalized Knee System, a leading cross-sell opportunity, but was also supported by the strong market demand for the Vanguard 360 Revision Knee System, as well as the bicruciate-preserving and clinically-proven Oxford Partial Knee system.

Sales from our hip business decreased by 0.6% in the fourth quarter, including positive volume and mix of 1.6% and negative price of 2.2%.

Our Asia-Pacific region revenues increased by 0.7%, and hip sales decreased by 0.8% in the Americas, as a positive performance in the United States was offset by Latin America results.

Our Europe, Middle East, and Africa sales decreased by 1.0% from the prior-year period.

In future quarters, we will continue to pursue growth with our broad hip portfolio, including our G7 acetabular system, Taperloc Complete Microplasty Stems, and the Arcos Femoral Revision system.

Turning to our S.E.T product category, sales in the fourth quarter increased 1.6% over the prior-year period.

We achieved solid results with our sports medicine, surgical, and extremities portfolios, which were offset somewhat by our trauma sales performance.

The ongoing growth of our sports medicine offerings is highlighted by our Gel-One Cross-Linked Hyaluronate and Subchondroplasty treatments.

In surgical, our sales were supported by the performance of our Transposal Fluid Waste Management System and A.T.S.

Automatic Tourniquet System, which continue to expand our presence in the operating room suite.

Within extremities, we're addressing a broad range of clinical situations and surgeon preferences, as evidenced by the commercial success of our Comprehensive Total Shoulder System and the Nexel Total Elbow.

In future quarters, we'll leverage our specialized sales force and robust trauma portfolio for improved results, with innovative solutions such as the DVR Crosslock Distal Radius Plating System, the AFFIXUS Hip Fracture Nail System, and the Natural Nail System.

Worldwide dental sales decreased by 6.7% in the fourth quarter.

Our dental category experienced revenue headwinds due to a supply disruption related to a voluntary field action in response to a packaging issue.

We're in the process of remediating this matter, and we expect to do so fully by the close of the first quarter, which will help position us to reestablish our momentum in dental in the second half of the year.

We remain encouraged by the early success of our cross-selling activity, particularly with our market-leading regenerative product line as we progress through the integration of this business.

Zimmer Biomet's spine, cranial maxillofacial, and thoracic category revenues decreased by 2.0% from the prior-year period.

Our Cranial Maxillofacial and Thoracic Team continued to deliver strong growth, driven by steady demand for our TraumaOne and SternaLock Blu systems, as well as growing acceptance of our RibFix Blu system.

With regard to spine, we successfully completed the integration of our US spine commercial channel with anticipated near-term revenue dyssynergies slowing our growth in the quarter.

We believe this business is well-positioned for accelerated performance in 2016 with a more comprehensive portfolio of innovative spinal solutions, including the Virage OCT Spinal Fixation System, the Polaris Spinal System, and a Timberline Lateral Fusion System.

With that, I'll turn it over to Dan, who will continue this discussion in greater detail, as well as review our guidance.

Dan?

Thank you, David.

I will review our fourth-quarter performance in more detail and then provide additional information related to our first-quarter and full-year 2016 sales and earnings guidance.

Our total revenues for the fourth quarter were $1.934 billion, an increase of 0.5% constant currency, compared to the fourth quarter of 2014 on an adjusted pro forma billing day basis.

Net currency impact for the quarter decreased revenues by 4.4%, or $90 million.

The negative currency impact for the quarter was related to the ongoing strength of the US dollar against many international currencies.

As David reviewed, we were encouraged to have substantially completed the integration of our Commercial Teams, which contributed to the sequential improvement of our reconstructive and S.E.T.

performances in the United States, which increased over a flat year-on-year growth rate in the third quarter, to 2.4% this quarter, in line with our expectations.

However, we did have some unanticipated headwinds, including decelerating market conditions in certain emerging and Southern European countries, as well as the dental field action, which David referenced.

These conditions led to our overall constant currency sales growth coming in at the bottom of our guidance range.

Our adjusted gross profit margin was 75.6% for the quarter, and 20 basis points less when compared to the prior-year adjusted pro forma results, due to the impact of foreign exchange and price declines, mostly offset by gains from our cash flow hedging program.

The Company's R&D expense was 4.4% of revenue, at $85.9 million, and 20 basis points higher when compared to the prior-year period.

Adjusted selling, general, and administrative expenses were $723.6 million in the fourth quarter, or 37.4% of sales, an improvement of 170 basis points over the comparable period in the prior year.

We continued to achieve process and operational efficiencies in the fourth quarter through the ongoing implementation of initiatives designed to capture synergies.

In the quarter, the Company recorded pretax charges of approximately $533 million in special items, primarily related to the Biomet acquisition and integration-related expenses.

Adjusted fourth quarter 2015 figures in the earnings release exclude the impact of these charges, which include $380 million of non-cash amortization and inventory step up charges, as well as $120 million of integration cost.

A full reconciliation of reported net earnings to adjusted net earnings is included in this morning's press release.

Adjusted operating profit in the quarter amounted to $652.4 million, or 33.7% of sales, a 120-basis point improvement over the prior-year period.

Net interest expense for the quarter amounted to $88 million, consistent with expectations.

Adjusted net earnings were $428.3 million for the fourth quarter, an increase of 39.2% compared to the prior-year period.

Adjusted diluted earnings per share increased 17.4%, to $2.09, on 205.2 million average outstanding diluted shares.

These adjusted earnings per share are inclusive of approximately $0.03 of share-based compensation.

Adjusted diluted earnings per share for the year increased 7.8%, to $6.90, on 189.8 million shares.

Our adjusted effective tax rate for the quarter was 23.8%.

The Company had approximately 202.6 million shares of common stock outstanding as of December 31, 2015, increasing from 169.7 million as of December 31, 2014, due primarily to the Biomet transaction.

During the quarter, the Company invested $150 million to repurchase 1.4 million shares.

As of December 31, 2015, approximately $450 million remained available under the existing share repurchase authorization.

Operating cash flow for the quarter amounted to $433.2 million, an increase of 22% over the fourth quarter of 2014.

This result includes $114 million of cash expenditures for integration and initiatives related to our synergy program.

Free cash flow in the fourth quarter was $303.7 million, which was 12% higher than the fourth quarter of 2014.

Capital expenditures for the quarter totaled $129.5 million, which included $80.4 million for instruments and $49.1 million for property, plant, and equipment.

During the quarter, the Company repaid $350 million on our term loan, bringing the repayment total in 2015 to $500 million.

Our gross leverage ratio at December 31 was 4.0 times.

I'd like to now turn to our guidance.

I will provide revenue and adjusted earnings per share guidance for both the first quarter and the full year.

Additionally, I will review our expectations for free cash flow in 2016.

Beginning with our market assumptions for 2016, we believe that the musculoskeletal markets in which we participate will grow approximately 3%.

We expect global market conditions to remain stable in 2016 when compared to the full-year 2015.

Price is forecasted to be approximately negative 2%, consistent with the last several years.

For 2016, we estimate our adjusted pro forma revenue growth to be in a range of 1.5% to 2.5% on a constant currency basis.

Foreign exchange is expected to decrease revenues by 2.0%, primarily driven by the euro and Australian dollar, along with certain emerging market currencies.

Taken together, revenue growth for the year should be in a range of negative 0.5% to positive 0.5%, or a range of $7.415 billion to $7.490 billion.

As David outlined, with the integration of our commercial organization substantially complete, we expect constant currency year-over-year revenue growth to improve sequentially as we progress through 2016.

In terms of quarterly revenue phasing, we expect first-quarter constant currency growth of 0.5% to 1%, and I would guide you toward market growth rates as we progress through the second half of 2016.

We will drive revenue acceleration across multiple product categories, with offerings such as Persona, The Personalized Knee System, the Oxford Partial Knee, Gel-One Cross-Linked Hyaluronate, Knee Creations Subchondroplasty, and the Arcos Modular Femoral Hip Revision System, additionally supported by a cadence of new product launches.

We expect to realize increasing sales force productivity over the course of the year, driven by added stability and specialization in our global sales organization and supported by the benefits of our medical education and training programs.

As you move down the income statement for 2016, assuming currency rates remain near recent levels, we expect our gross margin ratio to be between 75.5% and 76%.

This takes into account anticipated gains on foreign currency hedges, principally from the euro and Japanese yen.

I would like to note that the Company won't realize the full annual P&L benefit from the suspended medical device excise tax in 2016 because it was largely treated as an inventoriable cost.

The portion that provides relief to the P&L during the year amounts to approximately $20 million, and we intend to reinvest this benefit in R&D to accelerate our innovation and growth opportunities.

We expect R&D expense for the year to be in a range of 4.5% to 5.0% of sales.

SG&A is expected to be approximately 37% of sales, as we continue to realize efficiencies from our synergy initiatives and further leverage revenue growth.

Assuming interest rates remain near recent levels, we expect net interest and other expense of $365 million.

This incorporates our debt repayment plan throughout 2016.

We anticipate an adjusted effective tax rate to be approximately 26%, which is in line with our final full-year rate for 2015.

We anticipate the diluted weighted average shares outstanding for the first quarter to total approximately 204 million shares, and in a range of 203 million to 204 million shares for the full year.

This share count considers additional share repurchases planned during 2016.

Therefore, full-year adjusted diluted earnings per share is projected to be in a range of $7.80 to $7.95.

Given our early success in capturing cost savings, we remain on pace to deliver our net operating EBIT synergy target of $350 million by the end of year three, with approximately $225 million of cumulative net benefit achieved by year end 2016.

As I stated earlier, we expect revenues to increase between 0.5% and 1.0% on a constant currency adjusted pro forma basis when compared to the first quarter of 2015.

At this time, assuming currency rates remain where they have been during the first month of this quarter, we anticipate foreign currency translation will decrease our reported first-quarter revenues by an estimated 2.5%.

Therefore, we expect first-quarter revenues to be between 1.5% to 2.0% below the prior-year period, or a range of $1.870 billion to $1.880 billion.

We expect gross margin and operating expense ratios to be similar during the first quarter as those realized in the fourth quarter 2015.

Our adjusted effective tax rate is expected to be between 26.5% and 27%.

Therefore, we expect first-quarter adjusted earnings per share to be in a range between $1.90 and $1.95.

Turning to cash flow, we anticipate full-year 2016 operating cash flows to be in a range of $1.65 billion to $1.75 billion, inclusive of approximately $290 million of expenditures in support of our synergy program.

This compares to full-year 2015 of $863 million.

This includes total capital expenditures for the year, which are expected to be in a range of $550 million to $575 million.

Instrument capital is expected to be in a range of $300 million to $325 million, in support of our cross-sell initiatives, as well as new product introductions.

Traditional PP&E is expected to be approximately $250 million, including $105 million necessary to rationalize facilities and ERP systems, as well as to optimize our manufacturing and logistics network.

Free cash flow is therefore expected to be in a range of $1.075 billion to $1.020 billion for the year.

Our guidance assumes that we will continue to delever our balance sheet with planned debt repayments of approximately $1 billion, exiting the year with a leverage ratio of approximately 3.5 times on a gross basis, or just under 3.0 times on a net basis.

We intend to return excess cash to our stockholders through our share repurchase and dividend programs.

Free cash flow in excess of these capital allocation program is assumed to be held in cash and cash equivalents or other investments.

For modeling purposes, intangible amortization expense for the year is estimated to total approximately $600 million.

Finally, please note that our guidance does not include any impact from other potential business development transactions or unforeseen events.

David, I'll turn the call back over to you.

Thanks, Dan.

As we approach the opportunities of the year ahead, the substantial completion of our commercial integration, combined with our broadened highly-complementary portfolio, positions our business for accelerated top-line growth.

In addition, we have supplemented our product offerings with an enhanced R&D investment that is 60% greater than existed within either stand-alone company.

During 2016, we expect to release a cadence of differentiated products, technologies, and services across the entirety of our musculoskeletal portfolio.

Taken together with our demonstrated approach to disciplined capital allocation, we're committed to accelerating revenues and sustaining operating margin and earnings per share growth through the balance of the decade.

Now, I'd like to ask George to begin the Q&A portion of our call.

(Operator Instructions)

David Lewis with Morgan Stanley.

Just two questions.

I'll start with Dan, and then one for David.

Dan, I think the one thing about guidance that stands out to us, obviously, is the BPS guide looks strong.

Obviously, confidence at the high-end of the range, rather materially above the street.

Can you drill down this early and 2016, obviously, what are the factors that give you the confidence in that earnings visibility 2016?

And then a quick follow-up for David.

Sure, David.

What gives us confidence is really the integration and synergy program and the progress that we continue to make and the clearer line of sight that we have to the synergy opportunity as we progress through 2016.

If you recall, at the time of the merger announcement, we announced $135 million of net EBIT synergies in year one.

And then during the Q3 call, we raised that to $155 million and stayed with the $350 million by year three.

As we look at 2016, we see $225 million of cumulative net EBIT synergies in the P& L, and we have good line of sight to that.

So that's what gives us strong conviction in the ability to deliver on that synergy, along with the ability to see sequential improvement on the top line and the flexibility we have with our capital allocation.

Okay.

Thanks, Dan.

David, I think investors are getting more confident in earnings, but obviously, to move the multiple, the organic growth has to go higher.

And I think, from our math, the picture of the fourth quarter was one still of stability.

How do you move from stability in the fourth quarter to improvement in the -- throughout 2016, and what provides you the confidence that we're going to get that steady organic progression here?

Thank you.

David, I think it is appropriate to characterize the fourth-quarter performance as you did, and yet, I would tell you that the progress that we made on the commercial channel integration was very, very significant, probably the most important element of the integration as a whole.

As Dan said, and you reference, we have a high degree of confidence in our ability to deliver on the operating synergies.

But with the progress that we made in the fourth quarter to appoint sales leaders across the globe intermediary management level and clarify the roles of reps in all product categories, the compensation plans, and the bags that they are going to be carrying, the territories that they are going to be selling to, targets for them for 2016, all of that clarity and visibility along with a really aggressive effort to get people trained up on products that six months ago, they weren't at all familiar with because they didn't have in their bag.

That sets us up to make the progress that we are referencing in 2016.

And we're already seeing the beginnings of the cross sell coming to fruition.

As well, we've had some very successful kickoff meetings with further product training and education.

I would tell you that the attendance from a surgeon perspective, our medical education training program, show a big acceptance and interest in learning about the new products and technologies to ensure their safe and efficacious use.

All of that gives us visibility that we're going to push out sequential improvement each quarter of 2016.

It stands to reason, relative to where we were a year ago, that would be the case with the certainty that comes with the progress I just described to you.

Furthermore, the revenue dyssynergies will begin to anniversary out as we get into the latter part of the year.

So you can picture a line graph where the cross sell is accelerating through the year and the revenue dyssynergies, as you get to the back part of the year, begin to anniversary out.

As a consequence, we'd expect to hit market growth rates in the second half of the year and then exit the year at or above market growth rates.

Okay.

Thank you very much, David.

Bob Hopkins with BofA Merrill Lynch.

Just to really to follow up on that because you definitely agree there's really nice progress being made here with cash flow and earnings.

I just wanted to drill down a little bit more on the prospects for revenue growth improvement.

A couple quick things.

First, it sounds like this is the case, but can you just confirm, David, that the level of sales force turnover that you're seeing is as you expected?

I just would love to get a specific update there.

And then also, in your 2016 revenue growth guidance, are you assuming that Southern Europe and emerging markets improve?

Or are you assuming they stay the same?

And then lastly, and probably most importantly, I was wondering if you could just drill down a little bit more specifically on what are the product lines that you think are most likely to drive acceleration over the course of 2016?

What are the things that you have the most confidence in?

Thank you.

Sure, Bob.

I think to take them in order, the sales force turnover is very consistent with our expectations.

We had described to you that it was a fairly normal cadence of turnover in 2015, but what had transpired in the first half of the year was a slowing of the hiring, particularly in the case of the independent distributorships.

That began to correct out as the months progressed, and now we're entering 2016 with an expectation that will net one another out and we'll get into positive growth.

Particular emphasis is going to be placed upon the non-large joint to bring more sales force specialization because we have all the necessary ingredients from a product portfolio to compete very effectively in some of those faster-growing markets and a lot of room for growth and runway based upon our market share.

We're enthusiastic about that.

So consider the sales force to be stable, and we would look 2016 to bring that gains in sales force representation.

The presumption on the emerging markets and the certain countries within Europe that we referenced in our comments is a steady state, probably more of what we would expect to see or what we experienced in the second half of 2015 continuing into 2016.

There's been a lot of discussion around Latin America in particular.

We've experienced that in full.

In our case, our business in China is held up more strongly than what it sounds like other people are commenting on.

We continue to believe that will perform strongly.

Even that business has slowed down.

We're still in a growth mode in China.

So those emerging markets have gone from historically strong, mid- to upper-teen growth quarter to quarter, to double-digit growth by the middle of last year, into low single-digit growth.

And we'd expect that picture to improve because we are going to be anniversarying out of some of those downward trends.

So more than math that dictates that.

As far as the products go, it's a long list.

But I'd rattle off the top of my head some of the ones that we're already seeing a lot of interest and up take on.

Persona is doing really well, obviously, taking that product into the legacy Biomet customer accounts.

I would tell you that within the knee category, we're seeing a lot of interest in Oxford at this point in time, and that's an opportunity for us in light of the divestiture that's pretty special.

We're doing very well with Gel-One.

We're doing very well with Subchondroplasty.

We've talked to in the past about the hip products that are additive, mostly coming from the legacy Biomet side, that had been performing quite well.

That's a business unit that we need to shore up that includes revision on the side of the hips.

The comprehensive shoulder is doing very well on the extremities side.

And I would add in some of the complementary aspects of the product portfolio within trauma, distal radius plating, which was a space that legacy Zimmer was not part hardly present at all in.

We're going to do very well with that product.

That's a pretty good list for you.

I appreciate the detail.

I'll leave it at that.

Thanks very much for the help.

Mike Weinstein with JPMorgan.

My first question is -- pricing got better in the fourth quarter.

Your pricing was down 1.3% versus 1.9% for the year.

Ant then you've guided to down 2% for 2016.

So was there something in the fourth quarter that was an anomaly on the pricing front?

Or is there a reason to think that pricing will do better than what you're guiding to?

Thanks.

Sure, Mike.

You're right.

We had experienced in the last two years a very tight range, within 10s of basis points, right around that two number consistently.

So the year actually ended on a positive note.

And when you pull it all together, minus 1.9% for the year is on the low end, really, of what we had guided to coming into the year.

It was a good quarter.

I think that the Teams are doing a nice job in particular of positioning these products.

The broader portfolio creates opportunities to ensure that we are matching the customer needs to the best of our ability.

I think that this is going to be a sustained feature of the broader portfolio that comes with the combination.

That said, one quarter a trend does not make, and we just want to be smart about our guiding going forward.

I think that 2% number is the right way to think about price down in 2016, and remember that although we're anniversarying out of, at the end of Q1, the biannual adjustment, which got spread out over two years in Japan, we'll reenter that world come April 1 with the next round.

So all of that in, I think that approximate 2% down is the right way to think about 2016, Mike.

Okay.

Then just two clarifications.

So one, David, you talked about part of the math on the growth acceleration, and the back half is you'll have easier comps.

You said that the attrition on your reps was normal.

So what is it that you see as being easier in the back half of the year relative to the first half?

In terms of -- in the back half of the year, was there lost business that you will anniversary on or lost territory managers that you anniversary on?

And then just to clarify your view of market growth and getting to market growth in the back half of the year, is that 2.5%, 3%?

Is that better than that?

Would love to nail you down on that.

Thanks.

Sure, Mike.

I think about that market growth rate in round numbers of 3%.

The sequential improvement, really, isn't driven by anything in particular by way of anniversarying out of a loss in a particular area as much as it is just running the offense that we have at this point in time.

It's true that the math is advantageous to produce growth rates based upon the performance of the Company in the second half of last year, and you're able to have full access to those numbers to understand that dynamic.

But we're focused on taking what we believe to be the industry-leading product portfolio and executing.

And remember that as we built this channel out across the globe, we picked the most successful leaders.

In the US -- we've referenced this before -- on average, those selective leaders were growing their business of 300 basis points above those that were not selected to take the business forward.

So we have a lot of experience at the rep level, proven leadership at the territory level, and with this product bag and running the offense that we expect to run, we're just going to be driving ourselves back into that market growth rate.

So think of that in the second half as 3%, and then of course, with the presumption that we're communicating that every quarter, we're going to improve, that we ought to be exiting the year at or above that 3% rate going into 2017.

Okay.

Perfect.

Thank you, guys.

David Roman with Goldman Sachs.

I wanted to just start on the pipeline side of the story.

One of the elements, clearly, that is sitting under the hood at Biomet is the degree to which I think at the time of the acquisition, they were on pace to develop a fairly decent cadence of new products.

Maybe you could talk to us about where you are with respect to integrating the pipelines, products like the Biomet XP Knee and maybe some of products on the sports medicine side and when we can get update on how those rollouts are progressing.

We have a couple of dozen products that we expect to launch this year, David.

Just as the visibility to the existing product portfolio has become clear as we've been able to get around and talk to various stakeholders, I would tell you that the pipeline is just as impressive by virtue of the combination.

The thing I would tell you is that as we move those products into full commercial release, we'll be communicating those.

We'll update you in the conference calls.

Will be putting out press releases to highlight those product and solution releases and would look to a bit of a preview at the Academy this year, too.

We just want to be smart about the pace of communicating that.

But it is the case that it is across all product categories.

It's an impressive pipeline.

And that really isn't the basis for the sequential growth.

That plan is really built more fundamentally off of the existing bag.

But I would tell you that we think that this product pipeline is going to set us up well as we get back to market and beyond growth rates to sustain that performance going forward.

Okay.

So if I just ask a follow-up on that and then combine it with a financial question.

Is the right way to think about it, David, then, that the execution around the sales force and the integration is what drives you back to market growth, and the pipeline that you just referenced and on which will get more detail is what drives you toward that 4%-plus number you presented in January as a 2020 goal?

And then on the financial side, Dan, it looks like from your guidance that your conversion from adjusted net income to operating cash flow is roughly 100%, which is obviously a pretty good number.

Is that the right type of ratio to think about on a go-forward basis?

I'll respond to the first part.

Maybe a subtle adjustment to the way you frame the response, I would tell you that the existing product portfolio puts us in a position to get back to market growth and then above market growth rate.

And I see the pipeline as sustaining that above market performance thereafter.

David, with respect to operating cash flow and the relationship to adjusted net earnings, certainly 2015, and to a lesser extent 2016, cash flow has been weighted down by integration-related costs as well as the merger costs themselves.

So I think that you will absolutely see us return to a normalcy correlation between adjusted net earnings and our operating cash flows.

That's the right way to think about it.

Okay.

Thank you very much.

Larry Biegelsen with Wells Fargo Securities.

First, obviously, you showed a stability in Q4.

But there's a narrative out there that the disruptions might manifest a few quarters after the deal closed as contracts start expiring that you signed as part of retention programs.

David, can you allay people's concerns that maybe that will come to fruition?

And I had a follow-up.

Thanks.

Sure, Larry.

There really aren't any such contracts.

To the extent that there were any state plans, that was more on the Biomet side, and those would have been geared towards retention through closing.

So we've already transitioned the business.

We're running it as one entity.

And I would tell you, furthermore, that to the extent their third-party arrangements that were entered into as part of the distribution channel, that those, we've had great success in solidifying those contracts, getting those things executed.

Those include any compensation plans that would be carrying forward.

So that is seamless from 2015 and 2016, and we don't see risk along the lines of what you are questioning.

That's helpful.

And then for my second question, maybe it would be helpful to hear your updated thoughts, David, on robotics.

Obviously, one of your competitors seems to be getting a little more traction there, as well as custom implants.

And Biomet, I believe, talked publicly about having custom implants before the acquisition.

So an update on that program and how much of a priority that is for you.

Thanks for taking the questions.

Sure, Larry.

I think that the opportunity to drive enhanced quality in a cost-efficient way is an area of focus for us from an innovation standpoint.

It's been an area of focus for us through both internal and external development over the better part of the last decade.

And we're happy with our progress.

The portfolio of [pro-operative] and interoperative technologies that we've assembled and continue to expand is strong.

It includes proprietary technologies like iASSIST, as well as signature PSI eLIBRA for soft tissue balancing.

We think that there is a wonderful value proposition for that set of technologies.

But we're mindful in the way that we're developing these technologies to ensure that there is, in fact, a proven clinical benefit and it's delivered in a cost-efficient way.

In the evolving health care market that we're looking to serve and the partnerships that we want to create, that it will be deeper than ever with these customers to ensure that they are bringing about an enhanced level of quality and the patient care that they deliver at the same time that they are managing costs in an optimized way.

We think that that's the right recipe.

So we think that there is a need and an opportunity to improve.

We think that, for instance, on the large joint side, to drive towards more reproducible use of these systems.

The alignment, placement, soft tissue balancing -- all areas that we are very much focused on.

We just think that it needs to take the form of clinical proven, cost-efficient solutions.

So that's what we've been focused on and what we'll continue to focus on.

We're really agnostic, as to the embodiment of that technology so long as it meets those needs.

With respect to -- you referenced custom solutions.

We have built out a wonderful portfolio of personalized solutions.

Our interventions -- we can help clinicians, irrespective of where that patient is in the disease state along the continuum of care.

Wherever that plot point in on the continuum of care for that particular patient, we want to offer the most personalized solution.

So when you apply that to our portfolio of everything from early intervention, joint preservation solutions such as Gel-One and Subchondroplasty, through partial knee replacements, for instance, with Oxford, into a total knee solution, whether it's Vanguard or Persona, The Personalized Knee System, that's a system that offers approximately 17,000 permutations.

So we did extensive work to identify anatomical differences and design the system that would address any of those anatomical difference with clinical significance.

That really is a mass customization strategy that's worked very well to leverage off of the heritage and clinical proof points of the legacy systems and ensure that we're bringing about improved patient outcomes without incurring the risk of going backwards.

We referenced Biomet's custom solutions.

It is the case that the Vanguard Select is a custom solution.

So as I described to you, the mass customization approach that we took with Persona, there are going to be instances where a patient's anatomy is such an outlier, or in oncology context, bone void context, deformities, you need a true custom solution, and I'm sure that our Company has done more of that in the musculoskeletal space than anyone, including the solutions that Biomet has provided.

And that isn't just in large joints.

We do terrific work.

I was just down a week ago in our cranial maxillofacial group, and they've done some -- quite literally -- life-saving solutions for patients on a true custom basis.

So across all of our product lines, we have active efforts and existing solutions in that regard.

Thanks for taking the questions guys.

Joanne Wuensch with BMO Capital Markets.

Spine was lagging this particular quarter.

We're getting a lot of different results out of different manufacturers.

I was curious if you could provide a little bit of color on what you're seeing.

But more, what does it take for you to get that back more towards a market growth rate?

Sure, Joanne.

I think that's one where, as we indicated going back a quarter, the expectation was we were going to see some revenue dyssynergies by virtue of the integration.

We've completed that integration.

All of the independent distributors are signed up, at this point, in the United States.

It's strong channel.

The product portfolio is stronger than either entity had, quite obviously.

So whether it's MIS with the legacy Zimmer PathFinder system, or a lateral access approach with Timberline and the implant technologies, and we've got some exciting launches to come yet in 2016 on that front.

So that's a sales force that's ready to go.

I don't think we're going to be talking about that getting back to market growth for very long before we are past that point and we're taking share.

I expect that to happen in 2016.

All right.

That's helpful.

Then this is a boring question, so forgive me.

The tax rate, is there a way that this could be managed?

Thank you.

We give Dan all the boring questions.

(laughter) Thanks, Joanne.

(laughter) It's actually a very important issue for us and one that we're very focused on.

Over the past year, we've been focused on establishing a way to repatriate cash from offshore to the US in a tax-efficient manner.

We did that through structuring alongside the merger transaction.

So that was really a critical near-term priority that's complete at this point.

As we come in here to 2016, coordinating efforts with our Head of Manufacturing and Supply Chain, we see a path towards a lower future adjusted effective tax rate.

It takes some time to put the building blocks in place to accomplish that.

But we're very focused on it and expect to see improvements in the years to come.

Not in 2016, but beyond that, we see a path towards the lower effective tax rate.

Terrific.

Thank you.

Matt Keeler with Credit Suisse.

Just to start on -- you highlighted strong growth in Asia and mentioned that China had been a point of strength relative to some of your competitors.

To what do you attribute that?

Is it different mix, or do you think you are actually taking share there?

Well, we've had strong performance for a long, long time in that market.

So I would expect we continue to perform well relative to the market, Matt.

But I think it's also fair to point out that the mix of the business is likely different.

Some of the companies that are reporting out have business segments and sectors that we don't operate within, that it sounds like might be more materially impacted by what's happening in a macroeconomic sense, within that marketplace in particular.

For instance, the capital goods side is not that prominent for our business.

It's more of a traditional orthopedic business that we're focused within the Chinese marketplace.

So I would expect that business, for us, to continue to perform well.

But as I said, it did slow down relative to its historic growth rates.

Got it.

Thanks.

And just my follow-up, your Americas growth in knees got a little better.

I think in hips, it was relatively consistent with last quarter.

Just any color you can provide on how you see that market?

And can you give us any context around the impact of LatAm on Americas hips an knees in the quarter?

Yes.

It was fairly substantial within the quarter.

Notwithstanding the fact that in the scheme of things is not a large business just because the downturn has been pretty dramatic in Latin America.

As you said, within the United States market, we took us a sequential step forward just in growth rates in both the large joint categories, but closed the gap to a greater extent in knees.

And Dan, you may be able to provide a little bit more clarity on the Latin America breakout?

I think that, as David said, in the US, on knees, good progress, closed the gap to market, not at market growth rates based on our model for the fourth quarter, but importantly, began to close that gap.

Some work to do on hips.

But as we talked about, on the pipeline side and the cross sell opportunity, we see a path towards closing that gap to market first half of the year and then working our way back above market.

The Latin America piece, as David said, is not that significant.

But the declines are significant in a place like Brazil, which is enough to create a headwind at the Americas level, and quite frankly, at the consolidated level as well.

And back to the earlier question, our guidance for 2016 on Latin America assumes a very similar environment in 2016 as we've seen here in 2015.

Thanks.

Glenn Navarro with RBC Capital Markets.

Your EPS guide for 2016 came in well ahead of our expectations.

If I look at the two biggest changes within the P&L, at least relative to our thinking, it's in the gross margin as well as in the SG&A ratio.

So Dan, I'm wondering if you can provide us a bridge as to what's getting us to the higher gross margins for 2016 as well a bridge to what is getting us to a lower SG&A ratio?

Any specifics would be helpful.

Thanks.

With respect to the gross margin rate, our assumption is that 2016 actually is quite similar to 2015.

Now, there's a lot of moving parts within that ability to hold the gross margin rate.

There's the impact of foreign currency through the translation.

But then there's also the benefit of the cash flow hedges that flow through the gross margin line as well.

On top of that, the synergy program, we do start to begin to see some level of benefit at the COGS line by virtue of the integration.

That's also contributing to a flattish overall gross margin.

I think the other important point, while -- foreign currency, the impact to the 2016 P&L remains significant as it was in 2015, and so the foreign currency headwind to earnings is in the neighborhood of $0.15 or $0.16 of headwind on EPS.

The other important point is we are planning to reinvest the medical device tax, and so, we account for that up in COGS.

So there is a shift out of COGS into R&D in our 2016 guidance.

And then, just can you just comment a little bit on SG&A?

Because, at least relative to our model, the SG&A ratio is coming in below what we were forecasting.

Any specifics, there, that you can call out?

I know that you said on the call that the cost savings are right on track.

But leased to us, it seems like maybe cost savings are coming in a little bit quicker.

Thanks.

You're right.

The SG&A progress is predominantly related to the integration and the synergy program.

So I quoted a cumulative $225 million in 2016.

And that's really focused a bit in COGS and more proportionally in the SG&A area.

That's the main driver.

Okay.

Great.

Thank you.

George, we have time for one additional question.

Matt Taylor with Barclays Bank.

Can you hear me okay?

We can.

Great.

Two questions that are related.

One is, I just wanted to understand where you are on the synergies.

And given that you'd already raised the net guidance once and you are progressing pretty well, here, can you talk to any potential to actually raise that number again and outperform your pretax synergy guidance?

I'll take that, Matt.

I think we've communicated before, first and foremost, we're really pleased with the progress we're making.

The Teams have done it terrific job driving that.

It's not been easy, but the Team has been executing extremely well, and that manifests itself in that raise up to that $155 million in year one.

Importantly, to the extent that we're able to exceed what we've communicated, first and foremost, we would love to reinvest that back into the business and -- towards driving top-line growth.

So I think that's the right way to think about it.

Okay.

And then Dan, you've mentioned a couple times in the past, general comments on how you would approach getting your tax rate down over time.

Can you talk about any specifics around that strategy?

Because I noticed in your guidance, you don't really have a lot of text leverage, but you're still significantly higher than peers.

Yes.

We are.

And driving -- the elements necessary to drive our tax rate down, frankly, first and foremost, begins with where you manufacture your products.

So with the merger, we have an opportunity to take a fresh look at our sourcing strategy in that regard, as well as where intellectual property is housed and so forth.

That's why there is no quick fix to do that.

But we do see a roadmap to drive the tax rate down.

It's something that we were successful with on legacy Biomet, and there's opportunity here on Zimmer Biomet to drive the same type of reduction.

It will just take some time.

Okay.

Thanks a lot, guys.

With that, I'd like to thank everyone for joining the call today and for your continued interest and support for Zimmer Biomet.

We look forward to speaking with you on our first-quarter conference call, which is scheduled for 8.00 AM on April 28.

I'll turn the call back to you, George.

Thank you, Sir.

Ladies and gentlemen, thank you again for participating in today's conference call.

You may now disconnect.