Zimmer Biomet Holdings Inc (ZBH) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. I would like to turn the call over to Bob Marshall, Vice President Investor Relations and Treasurer. As a reminder, today's call is being recorded. Mr. Marshall, you may begin your call.

Good morning, and welcome to Zimmer Biomet's third-quarter 2016 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. 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 a detailed discussion of these risks and uncertainties.

Also, the discussions during this call will include certain non-GAAP financial measures. Reconciliations of these measures to the most directly-comparable GAAP financial measures are included within the earnings release, which is available at our website at Investor.ZimmerBiomet.com. With that, I'll now turn the call over to David.

Thanks, Bob. This morning, I'll review our third-quarter financial results, as well as provide an overview of some of our new technologies and solutions, and the focused actions we're taking to drive sustainable growth. Dan will then provide additional financial details, and discuss our updated guidance.

Zimmer Biomet's third-quarter revenue performance was highlighted by the acceleration of our SET category, and ongoing strength in our Asia-Pacific region; however, consolidated sales were below our expectations on weaker than anticipated results from our large joint and dental categories. Overall, broad demand for our differentiated portfolio remained high throughout the quarter, particularly for our focused cross-sell products.

Variable commercial performances by our sales teams were in part caused by unanticipated supply constraints, related to our transitioning supply chain infrastructure. This resulted in shortfalls of needed implants and additional instrument sets, to fully exploit sales opportunities in key product categories.

In response to this challenge, we've accelerated work to enhance certain aspects of our supply chain infrastructure as we harmonize and optimize our sourcing, manufacturing and quality management systems. Through these efforts, we expect to improve our demand fulfillment in the coming months.

As a consequence of these supply constraints, we project fourth quarter sales results to be similar to those of the third quarter; however, as we look ahead, we remain confident in our ability to successfully reaccelerate our revenue growth in 2017. As I mentioned, demand for our expansive portfolio of differentiated and clinically proven musculoskeletal technologies, solutions and services has never been stronger.

Our global sales organizations remain stable, and have in fact achieved a third consecutive quarter of net personnel additions. These teams remain focused on delivering high-quality, personalized solutions to our customers and their patients.

To that end, during the quarter, we consummated a number of strategic external development transactions, to expand our musculoskeletal portfolio and capabilities, while continuing to deliver leveraged earnings per share. By joining together with LDR Spine in mid-July we now possess a leading position in the attractive global market for cervical disc replacement.

Additionally, our recently-completed acquisition of Medtech SA provides us with current brain and spine robotic technology, and positions us to identify and develop additional applications for the ROSA Robotics minimally invasive platform. This differentiated technology supports our strategy to offer the industry's most comprehensive range of intelligent instrumentation options.

Also, during the quarter, we acquired new clinical solutions that extend our reach across the continuum of care, spanning from state-of-the-art 3D range of motion simulation software, to an innovative tele-rehabilitation platform. These portfolio additions are designed to support healthcare providers in personalizing musculoskeletal treatment.

Importantly, these assets further strengthen our Zimmer Biomet signature solutions offering, which is designed to assist hospitals and medical practices to seamlessly transition to value-based healthcare models. With our end-to-end clinical services, proprietary technologies, and analytical tools, we're enabling healthcare providers to maximize productivity and patient engagement across the entire episode of care. As we have previously communicated, the rollout of Zimmer Biomet signature solutions comes at an opportune time, when an increasing number of healthcare providers are striving to comply with bundled payment models, by placing a greater emphasis on the quality and cost effectiveness of knee and hip replacement service lines.

Before I review the performance of each of our sales categories, I'd like to comment on third-quarter market conditions. We noted overall global market stability during the quarter. In addition we believe that while the US market demonstrated some softness during the summer months, it strengthened toward the end of the quarter. With regard to pricing, we experienced negative 1.9% of pressure,, which was in line with expectations and consistent with trends in recent years.

Against this backdrop, Zimmer Biomet delivered third-quarter consolidated net sales of $1.83 billion. This performance represented 3.5% of constant currency growth over the prior-year quarter, of which the recently acquired LDR Holding Corporation contributed 190 basis points. Embedded within these results, we achieved solid 6.4% top line growth in the Asia-Pacific region, while growing sales in the Americas by 3.7% and by 0.9% in the Europe, Middle East and Africa region.

Zimmer Biomet's knee business was flat on a global basis in the third quarter, reflecting positive volume and mix of 1.9%, and negative price of 2%. Our 2.6% sales growth in the Asia-Pacific region was offset by our results in the Americas, where sales decreased by 0.9%. Our knee revenues increased by 0.3% in the Europe, Middle East and Africa region, as compared to the prior-year quarter.

Despite continuing attractive growth rates during the quarter for Persona, the personalized knee system, our sales execution on this leading cross-selling opportunity was limited by the supply issues I just mentioned. The Oxford partial knee also delivered solid sales results during the quarter.

Additionally, we were pleased to announce the commercial launch of our Vanguard individualized design total knee replacement system. This first-of-its kind total knee construct supports our soft tissue preservation focus and market leadership, with independent medial and lateral polyethylene bearings that simplify soft tissue preservation and balance. We're committed to driving focused execution in support of stronger knee results in future quarters, with this exceptional portfolio.

Third-quarter hip sales grew by 0.6%, reflecting positive volume and mix of 3.0% and negative price of 2.4%. We grew revenues by a solid 5.9% in the Asia-Pacific region, while sales were flat in the Americas. Hip sales decreased by 1.4% in the Europe, Middle East and Africa region, compared to the prior-year quarter.

Within this overall performance, we continued to drive the sales growth of our Taperloc complete system, and Arcos modular femoral revision system, as well as offerings that leverage Zimmer Biomet's proprietary Vitamin E infused advanced bearing materials. We were also pleased with the commercial traction of the recently-introduced G7 dual mobility construct. We're well-positioned to build on these successes in future periods by leveraging the industry's most comprehensive range of hip solutions.

Turning to our SET category, we achieved a healthy 7.8% increase in global revenues, supported by solid results in all geographic segments. In our surgical business, we've been pleased with the ongoing progress of our growing specialized sales channel, and the commercial success of our diversified offerings for the OR suite. Our sports medicine results were once again driven by our proprietary subchondroplasty procedure, and Gel-One cross link hyaluronic injection. Similarly, our extremities business continued to leverage a market-leading upper extremities portfolio, including the comprehensive total shoulder system and in Nexel total elbow.

Lastly, we delivered ongoing improvement in trauma, with third-quarter sales being lead by our Affixus hip fracture nail system, and the NCB plating system. We expect that our SET product category will remain an integral component of our sustainable revenue growth platform, with innovative clinical solutions that meet the needs of surgeons, patients and healthcare institutions.

Dental sales decreased by 7.6%, which was below our expectations. Nonetheless, we achieved good performances from the 3iT3 implant system, and the recently-introduced aesthetic implant system. Looking forward, we expect to more fully capitalize on this and additional future product launches, as we enhance our multi-tiered offerings to address an evolving dental marketplace.

Our spine, craniomaxillofacial, and thoracic category sales increased by 23.9% on a constant currency basis in the third quarter, which represented approximately 1% organic growth. Following our recent LDR acquisition, we're making good progress with the initial phases of integration throughout our spine commercial organization. Among our spine offerings, we've been encouraged by the sustained revenue performance of the Mobi-C cervical disc prosthesis.

Last week, we announced that Mobi-C is now the most widely covered device for one and two level cervical disc replacement, by commercial health insurers in the United States. In addition, we also continued to deliver growth with the Vitality spinal fixation system.

We're well-positioned to continue to bolster the competitiveness of our spine business, with an expanded portfolio and strengthening sales channel. With regard to our craniomaxillofacial and thoracic business, we continue to be pleased with the ongoing strong sales growth of the Sternalock Blu and Sternalock 360 primary closure systems, as well as the OmniMax MMF system.

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

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

Our total revenues for the third quarter were $1.833 billion, an increase of 3.5% adjusted constant currency when compared to the third quarter of 2015, and 1.6%, excluding the contribution from the LDR acquisition. The net currency impact for the quarter was a positive 60 basis points, or $11 million on consolidated revenue results. We had an immaterial difference in billing days in the quarter, as compared to the third quarter of 2015.

Third-quarter revenue was below our expectations, primarily due to execution issues within our large joints supply chain, which led to a degradation in order fulfillment rates late in the quarter, as well as our performance in dental. As noted by David, customer demand was strong in the quarter, but certain aspects of our supply chain integration impacted our ability to effectively respond to shifting product mix, most notably within our knee and hip portfolios.

As a consequence, we underestimated demand for certain key cross-sell brands within our existing customer base, leading to a depletion of our safety stocks, and also affecting our ability to capitalize on new customer opportunities. We are working diligently to enhance our supply chain processes and execution, particularly in the areas of demand forecasting, global inventory tracking, and asset deployment systems, while we replenish our safety stock levels. However, these issues have some carryover effect into the fourth quarter, which I will address shortly in the context of our updated Q4 guidance.

Turning now to the balance of our third-quarter results. Our adjusted gross profit margin was 75.1% for the quarter, and 110 basis points lower, when compared to the prior year, due mainly to the impact of ASP declines, as well as lower foreign currency hedge gains, which we have been recently highlighting. The Company's R&D expense was 5.2% of revenue, at $95.6 million, reflecting investments from our recently-acquired businesses, as well as our Zimmer Biomet signature solutions program.

Adjusted selling, general and administrative expenses were $727.7 million in the third quarter, or 39.7% of sales, which was 40 basis points higher than the comparable period in the prior year. As anticipated, ongoing investments in our specialized sales forces and medical training and education programs, combined with the inclusion of our recent acquisitions, offset the benefit of SG&A cost synergies in the quarter. We remain on track to deliver cumulative net EBIT merger synergies of $225 million by the end of 2016.

In addition to the Biomet synergies, we are also laying the foundational elements for synergy capture in 2017 from our recent acquisitions. In the quarter, the Company recorded pretax charges of $355 million in special items, primarily related to the Biomet and LDR acquisitions. Including $181 million of non-cash amortization and inventory step-up charges as well as approximately $140 million of acquisition and integration-related expenses.

Adjusted third-quarter 2016 figures in the earnings release exclude the impact of these charges. 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 approximately $553 million, or 30.2% of sales, which was a decrease of 200 basis points when compared to the prior-year period, due to the reduction in gross margin, as well as expected impacts from acquisitions. Net interest expense and other non-operating expense totaled $94.6 million.

Adjusted net earnings were $362.4 million for the third quarter, an increase of 7.1% compared to the prior-year period. Adjusted diluted earnings per share increased 9.1% to $1.79 on 202.9 million weighted average fully diluted shares outstanding.

Our adjusted effective tax rate for the quarter was 21.1%, which reflects a year-to-date true-up to recognize the tax benefit associated with the noted product mix shifts coming from tax-efficient supply chain jurisdictions, as well as certain other items. Our year-to-date adjusted effective tax rate is 24%.

Operating cash flow for the quarter amounted to $353 million, which included $161 million of cash expenditures for acquisition costs, integration activities, and initiatives related to our synergy program. Capital expenditures for the quarter totaled $150 million, which included $94 million for instruments, and $56 million for property, plants and equipment.

Our free cash flow in the third quarter was approximately $202 million, compared to $16 million in the third quarter of 2015. Ongoing working capital initiatives and improvements are expected to keep the Company on track, with full-year cash flow generation of approximately $1.1 billion.

During the quarter, the Company repaid $200 million on our term loan, reflecting $700 million of debt repayment since the beginning of this year. Additionally, during the quarter, the Company consummated its new five-year $1.5 billion multi-currency senior credit facility along with a new $750 million term loan to finance the LDR transaction. As a result, gross debt increased by $550 million in the quarter.

I'd like now to review our guidance. As we look to the fourth quarter, revenue growth is expected to be in a range of 1.6% to 2.6%. Foreign exchange is estimated to decrease revenue by approximately 30 basis points.

Therefore, reported revenue is expected to be in a range of $1.960 billion to $1.980 billion. Fourth-quarter constant currency growth on a day-adjusted basis is expected to be in a range of 3.3% to 4.3%, or 1.0% to 2.0%, excluding the contribution from LDR.

On a similar basis, the Company had previously estimated revenue growth for the quarter in a range of 5.8% to 6.8%, or 3.5% to 4.5%, excluding LDR. As a reminder, we have one less billing day as compared to the prior year. Our fourth-quarter adjusted earnings per share on a fully diluted basis is now expected to be in a range of $2.08 to $2.13.

Turning to the full year of 2016, we now estimate revenue to be in a range of $7.630 billion to $7.650 billion, or an increase of approximately 27% on a reported basis, or 2.4% to 2.7% on an adjusted pro forma basis, in each case as compared to the prior year. The adjusted pro forma revenue guidance range is inclusive of approximately 110 basis points of contribution, related to the LDR transaction.

We now expect foreign currency translation to decrease full-year revenue in 2016 by approximately 30 basis points, compared to our previous estimate of 50 basis points, with the Japanese Yen strengthening against the US dollar, and a stabilized Euro, partially offset by the weakening British pound. Therefore, full-year revenue growth, excluding the impact of the LDR acquisition on a constant currency adjusted pro forma basis, is now expected to be in a range of 1.65% to 1.9%. Previously, the Company estimated full-year revenue growth to be in a range of 2.5% to 3.0% on a similar basis.

Turning to the full-year P&L, after updating our assumptions to reflect our recent performance, acquisitions, a lower expected tax rate, as well as foreign currency exchange rates and the associated operating margin implications, our full-year adjusted diluted earnings per share is now expected to be in a range of $7.90 to $7.95, an increase of approximately 15% over the prior year.

Our full-year reported earnings per share are expected to be in a range of $1.50 to $1.60, after giving effect to our year-to-date results, and anticipated special items in the fourth quarter. Special items are largely associated with non-cash amortization, costs incurred to capture net synergy targets, and acquisition integration expenses. Finally, please note that our guidance does not include any impact from other potential business development transactions or unforeseen events. With that, I'll turn the call back over to David.

Thanks, Dan. Although we were naturally disappointed with these third-quarter results, I want to reiterate our confidence in Zimmer Biomet's market-leading and diversified portfolio as a driver of sustainable long-term growth. We're fully focused on restoring product supply and positioning our commercial teams to deliver on high market demand as we enter 2017.

More broadly, we remain committed to creating meaningful partnerships, to drive efficiencies across musculoskeletal healthcare with innovative technology, services and solutions that improve the lives of patients.

And now, I'd like to ask Koreen to begin the Q&A portion of our call.

(Operator Instructions)

Well take our first question from Bob Hopkins with Bank of America.

First a question for Dan, and then a question David, for you. So Dan, first on just the quantification side. Can you give us a sense as to the impact of this sourcing supply issue on Q3 revenue growth, and the anticipated impact on Q4 revenue growth? And just maybe a sense of how long this will last into 2017 and just its, impact earnings outlook for 2017 growth?

Sure, Bob. First, with respect to the quantification of the impacts. As David said in his prepared remarks, as well as mine, very important to note that customer demand remains very strong, so that's a real positive, and our current supply chain not being fully integrated did hamper our ability to respond effectively to this shifting product mix.

And while not anticipated, we understand the root causes. We understand the fixes that are necessary, and we're highly confident in our ability to implement those changes. It will take several months to make those corrections.

In terms of sizing impact for the quarter, it's not a perfect science, but I would roughly anticipate or estimate that it be about 100 basis points of impact due to the supply issues in the third quarter. We have a very robust backlog of demand, and with respect to the impact in the fourth quarter, I would size that even slightly above that 1% impact.

Then just as a follow-up, to start, does this compromise your ability to grow earnings 10% in 2017? And then David for you, maybe just a little bit more color on when did the sourcing issue start to manifest, and maybe just describe a little bit more exactly what this is, is it only in knees, why only in the US? Just a little bit more detail would be really helpful. Thank you.

Sure. Bob the manifestation was really as the quarter progressed, and late in the quarter the signs became clear that we had a pretty significant product mix with the lack of visibility on a forward basis that allowed our supply chain to respond. Obviously, as we fully integrate on the operations front, we're going to have a much more agile supply chain, and be able to respond to these demands in a much shorter time period. As we are in our natural state now, we just did not have the ability or the foresight.

So part of this is forecasting systems, part of it is just operational execution and lead times for these products, but primarily driven by the large joint demand. If you think about the cross sell product categories, you're going to be aligned with the biggest opportunities that we had, and probably on the forecasting side, the most significant under-estimation was the demand for those same products with existing customers.

So it caused us to have to step back and make sure that we're redoubling our efforts to service existing customers, and as we've referenced, that took away from some of the offensive opportunities that we have. But please don't construe that to be a lack of demand. We know that we have significant opportunities to gain competitive accounts and business, and as we restore the supply chain, we'll get after those opportunities and reaccelerate our top line momentum.

And Bob, just coming back to your 2017, I would just say that 10% earnings growth in 2017 off 2016 remains our goal.

How long does this last into 2017, Dan? And that's my last question.

I would see some tail effects into the first quarter of 2017, Bob.

Okay thanks, I'll let others jump in, thank you.

We'll move on to Matthew O'Brien with Piper Jaffrey.

Just to follow-up a little bit on Bob's question. Is it fair to say that this really is more focused in just a few areas within large joints, from a product perspective? And you were seeing such demand for those products that you just weren't able to meet that demand? And as you're integrating and seeing some of these sales disruptions, that was really the issue? Or was it more broad based across different products?

It was focused on the key cross-sell products very much. So if you think about the Persona system, the demand is very, very high for that system. The host of cross-sell product opportunities that we have on the legacy Biomet hip portfolio would be another significant example. And then the third category, I would say to a lesser degree, but still having an impact on the upper extremity side, the comprehensive shoulder system. So those are all market leading systems and the demand within existing customers, as well as competitive accounts is very, very strong.

And then as a follow-up, on the retention of business side of things, as we get into 2017, and I know you said that demand has been really strong for the products, and you feel good about that. But just now that you've had this hiccup, how do you grab that momentum back that you were seeing, and feel comfortable you can get back to those market growth rates you've been talking about in 2017 and beyond?

Yes, we're actively working towards addressing the supply issues, and I would tell you that forward visibility of addressing those supply issues, combined with the known activities that we have and opportunities that we have for competitive accounts, gives us that plan, and the confidence as we enter 2017, that we'll reaccelerate the top line.

Great, thank you.

We'll move on to Mike Weinstein with JPMorgan.

Thank you. Pardon me, but I'm still struggling a bit with this. So David, explain to me why it wouldn't have been obvious until late in the quarter?

I think the lack of visibility we have with forecasting systems, as safety stocks were burning down, it just became a more profound issue as the quarter progressed. In retrospect, we looked back, and we can understand why some of those demand signals weren't as timely, but that's in retrospect. So we just got to a point, as the quarter progressed where we had to shift the limited supply, both inventory and instruments, to service existing accounts, and it took away from the offensive opportunities that we could capitalize on, Mike.

Okay and so I can picture that, that you're working down your excess supply and you get late in the quarter, and you're finding yourself short on product. But if the quantification is right, and if it was 100 basis points, that still suggests that overall, it would is have been right of what you were expecting to in the quarter. So is the quantification accurate, is there, do you think you would have been, call it 2.5% organic hadn't this happened? And if that's the case, it obviously wasn't your goal for the quarter, for the back half of the year.

Mike, this is Dan. I think the other component was the dental performance in the quarter being below our expectations, and at our expectation level, you'd be 3% or thereabouts plus, had dental performed to our internal expectations.

And I think also with respect to the supply chain just to indicate, or give a little more color on the fixes that are coming along, we've been integrating all of the back office functions. The supply chain is extraordinarily complex; however, importantly, we do have new tools coming online at the beginning of this quarter, with integrated global inventory, data warehouses which did not exist in that part of the visibility fix that we lacked.

We had some interim processes in place, that in hindsight, were not as robust as we needed them to be. We also have integrated demand planning tools and production planning tools coming online next quarter. So those are the key foundational elements of the supply chain, that are coming online and critical to the fix.

Got you, and then Dan, just one question on the financial side. The tax benefit that we saw this quarter that got you to the EPS numbers, what should we assume on tax going forward, is that sustainable?

Well, Mike, so we're at 24% year-to-date. Embedded in our fourth-quarter guidance is a tax rate that is just slightly below that, and we absolutely believe that to be sustainable. And as we've discussed, we see a path to further reduce that over the coming years.

Understood, thank you.

We'll move on to David Lewis from Morgan Stanley.

Good morning. I just had a few quick questions here. Dan, just thinking about the fourth quarter, to follow on to Mike's question. We think about the fourth quarter guidance versus our expectations as down 2 points, and the supply chain was 1 point. So the incremental point of organic growth compression in the fourth quarter, is that conservatism, continuation of the dental trends? Can you just square the fourth quarter, like you just did in the third?

Sure David, the 1% was the Q3 impact. The Q4 impact, as I said, is going to be above that. So think of that probably closer to 2% impact to the fourth quarter. So I'd say that's the quantification on the top line impact from the supply chain issues.

Okay and two more quick ones. Dan, in the third quarter, obviously margin was very important to the story. You seem confident 10% is the goal for next year. Gross margins were okay in the third quarter, but obviously SG&A spending was higher. So could you talk again why third-quarter margin compression was so severe, and what the implications are for the fourth quarter?

Sure. I would say that in the third quarter, the SG&A margin which decreased, or SG&A increase as a percentage of sales, 50 basis points. You have to keep in mind the LDR acquisition and the impact of that.

So as David said, we're very pleased with the top line acceleration of Mobi-C. At the same time, we've inherited that cost structure, and as the team looks to integrate LDR and Zimmer Biomet Spine, you'll begin to see leverage come from that integration. That's not in the third quarter. You'll start to see that in the fourth quarter, and certainly more significantly as we progress through 2017.

So that leverage from integrating our acquisition is a big contributor to the growth in operating margin next year, combined with our other growth investments that we've been making during the course of the year, the medical training and education, the specialized sales forces which are driving that SET growth that David described, and then further investments in our signature solutions platform, which David described as well, all of which are critical to long-term sustainable growth.

One quick one for David. I'm sorry to keep jumping back on this horse, but was this a situation where you have a Zimmer business and a Biomet business, you have initiatives to shift that mix, and you -- so for example, if the Zimmer knee and Biomet knee at the end of the quarter, more physicians than you expected preferred one knee over the other? I hate to oversimplify this, but I'm trying to give investors a sense of how this could happen, and how it could happen quickly.

And related David, I'd say, obviously supply chain and manufacturing were critical parts of this merger. What could you say to investors to give them the confidence that you really feel this is an isolated issue? Thank you. I'll jump back in queue.

Sure, David. It is very much the case, where we underestimated the degree to which existing customers were ultimately going to be desirous of some of these key focus brands, and for the reasons that we've outlined and the fixes that we have in place to address those issues that Dan just referenced, we're highly confident that we're going to be able to address those supply chain deficiencies, and be able to get after the offensive opportunities, with a new competitive business and accounts.

So I guess what I would want to focus you on, as well, David, is that demand is a terrific problem to have. We're disappointed that we didn't foresee that demand because, it has taken us away from being able to run the kind of offense that we would otherwise be able to run, but these aren't product gap issues. We've got an incredible portfolio, and in the natural state of one of these integrations, a complex integration, wish we would have foreseen this.

We've got the right fixes in place to get after it. The supply chain will respond, and we'll get back into an offensive mode as the months progress here, and have a high degree of confidence in the team's capability to select the opportunities that are out ahead of us.

We'll move on to Larry Biegelsen with Wells Fargo.

David, I heard you talk about accelerating growth in 2017. When do you expect to be back to market growth, and that 4% target I think you laid out earlier this year? And I had a follow-up, thanks.

We absolutely foresee at or above market growth in 2017. As Dan said, there's likely to be a little bit of a carryover effect of the supply challenges at the beginning of the year, but we would see the year progressing quarter to quarter throughout 2017, and accelerating growth, in light of the fact that we will have these supply issues behind us. And we'll provide specific guidance beyond that, Larry, when we get to the January call.

Perfect, and then on dental. Could you give us a little bit more color on what the issues were? I know you had a recall in the past, and you're supposed to return to growth in the second half, I think in 2016. So when do you expect to return to growth there?

And in the past you explored strategic alternatives for dental. Can you talk about whether that is still strategic for Zimmer Biomet? Thanks for taking the questions.

You're welcome. We believe that there are good value creation opportunities within the dental market. As we've referenced in the past, strategically, each of legacy Zimmer and Biomet have been focused on the so-called premium market, and we have significant opportunities, and we're working to develop the strategies and then execute those strategies increasingly to get after those various market segmentations, including the value segment.

As the business stands now, commercial execution is key. I would tell you that we had a pretty stable Q2 to Q3 performance within the Americas, and had some drop off outside the United States, and so the team is very focused on shoring up the commercial execution on a global basis.

We have a terrific regenerative portfolio for cross-sell opportunities, and we would expect to see sequential improvement. I would anticipate that we get into a growth mode, but not before 2017. So we expect to see improvement sequentially from Q3 to Q4, and then get into a growth mode as we enter 2017.

Thanks for taking the questions.

Moving on to Matt Miksic with UBS.

So I had one question on the Medtech robot platform, and then I'm sorry to say, one follow-up on this inventory issue. But on Medtech, David, you mentioned positioning you to potentially explore other applications over time. Can you talk a little bit about where and when, and how long something like that you think would take, particularly on the large joint side, if that's something that you're thinking about? And then as I mentioned, I have a follow-up.

The development of any applications for us, Matt, on the minimally invasive technologies and soft tissue preserving technologies and the broader portfolio of intelligent instrumentation is going to be driven by proven clinical benefit in a cost efficient way, that also addresses the providers' capability throughput fronts. And so those are really the three pre-conditions.

Any anatomical site is fair game for that, but our broad portfolio of intelligent instrumentation puts us in a position to be able to bring the right technologies, and converge the right technologies, whether those are pre-operative planning, integrating into an inter-operative execution set of technologies in an optimized way. So this is a piece of the portfolio we think it will become an increasingly important piece of the portfolio, but just a piece of the portfolio, and we want to bring the right tool to address the issue in a cost-effective way.

So as far as forecasting that out, we would expect to continue to drive the convergence of these innovative technologies, in the operating periods to come, Matt. And we would give updates at appropriate points when applications are developed and gotten to the point where we are doing limited launches, moving towards full launches of those other applications. Right now, the ROSA Robotics technology is focused on brain and spine applications.

Okay, so this isn't one of your competitors had a total knee application they were working on and talking about, probably for I don't know, a couple of years before it finally began to reach the market. Should we not expect that plan to lay out the pipeline for us a little bit?

You shouldn't expect this to layout our internal innovation pipeline, that's right, Matt.

Okay that's fair, I think I get that. So on the not to beat a dead horse on this supply chain issue, but I don't think we've ever -- I'm trying to think of an example that we have seen like this in orthopaedics, and you've managed through a number of large launches and ebbs and flows between preferred products before. Maybe -- I remember, there was something about before the Biomet deal, there was something that you were tackling on your supply chain to lean out working capital, get more efficient.

I don't know if this has anything to do with greater reliance on pre-op planning and the visibility that gives you into supply chain, but is this an unfortunate consequence of some of your efforts to get more efficient? And one step forward and we'll expect one step back and two steps forward? Or just some color would be very, very helpful on how we got here.

I understand your question, Matt, and I would tell you that it's much more simple than that. This is much more simple in regard to appropriate forecasting, and having forward visibility. So the system fixes and infrastructure that Dan referenced earlier during the call, are the solutions here.

It isn't driven at all by any innovative go-to-market or demand signal transformation, nor is it driven by any consolidation of portfolios in the form of rationalization. So I wouldn't want people to misconstrue that yes it's a complicated operation because these are large product lines and manufacturing facilities, but there isn't anything other than blocking and tackling that fixes this problem, and we know what we need to do to address it.

Okay, thank you.

We'll move on to Joanne Wuensch with BMO Capital Markets.

You were able to quantify the tail wind or the impact in the third and the fourth quarter, you commented that it's going to roll into the first quarter. How should we think about that quantification, and is there an all-clear signal where we don't have to worry about this anymore?

We wouldn't expect it to accelerate as we move into next year, so I think that quantification that we provided as far as the Q4 impact would be the high watermark, and expect it to dissipate as we move into and through 2017, Joanne.

Okay, and then you did mention if I recall, that the average selling prices or the price pressure may have been somewhat higher than normal during the quarter. Could you please address that?

We just have a little bit of an uptick, but consistent with expectations, primarily as far as the geographic segments go in the Americas and Asia Pacific, but nothing that we didn't anticipate coming into the year, nothing that we didn't anticipate even coming into the quarter. Part of that Asia-Pacific uptick is obviously the bi-annual adjustments in Japan.

Okay, thank you very much.

Matt Taylor with Barclays has our next question.

So I just wanted to understand from of your customers' point of view. Basically supply issues, so basically they're asking for an implant like Persona and you have to tell them they have to wait a few weeks? Or can you help us characterize that, so that we can assess the impact on your customers? What's the risk that you lose anybody because of the supply issue?

That risk will be minimized. This is part of the reason that, as any of those signals were received back, we backed off of some of the offensive deployments, to make sure that we're taking care of the existing customers. So that's the priority. It's a good question and I would tell you that our entire organization is very focused on addressing any of those desires with the historic customers for the business, either legacy Zimmer or Biomet.

And then on the fixes that you have with forecasting and fulfillment, can you give us a sense of what are the long poles in the tent there? What to give some upside or downside to your expectations that this will be resolved in a few months?

Matt, this is Dan. I mentioned some of the fixes being a global inventory data warehouse. That is in user acceptance training as we speak, so we expect that to come on line in the coming weeks. That immediately gives us the global visibility to finished goods inventory levels around the US, and around the world. That's critical, so that comes online in the coming weeks.

So I think we're very low risk of that going poorly, based on the testing that's been done to date. The integrated demand planning tools come online shortly after the New Year, and based on the learnings over the past few months, needless to say, a lot of the focus on the process for that, and then the deployment of these tools.

We're deploying a proven tool, so confident that we're going to be able to get that up and running without a glitch. Importantly, over the past month, we've significantly ramped up production levels. But given lead times from vendors and production lead times, it just takes time to build inventory and replenish those safety stock levels. But all of the above, we're aggressively dealing with and have been for the past several weeks.

Great, thank you.

We'll move next to Richard Newitter with Leerink Partners.

Maybe just to turn away from the supply issues, for a moment, you mentioned some initiatives to try to tailor your solution a bit more to the bundled payments that we're seeing take hold, the CJR, you required this respond well business. Can you talk a little bit about how we can expect these types of solutions to just fit into your overall strategy? And how we should expect them to generate sales, or what the business model is there?

Sure, it would take the form of much broader and deeper partnerships with the hospital customers. And I would tell you, the discussions that we've had, which to date have been focused primarily on large academic institutions, have been very, very positive.

So we would enter into a deep partnership, that could include risk sharing in an appropriate manner, to optimize the quality of care for patients, and as well, address the economic pressures that are on these customers, as they get transitioned over to a more value-based system. To do that well, obviously it requires an end-to-end management of the episode of care, and that's where the patient engagement tools become so important.

Pre-hab is important, education, patient/surgeon communications, and obviously a really bright light has been shining as of late, because of CJR, on the post discharge costs that are incurred, and that's where the tele-rehabilitation, and leveraging technologies that load to a better patient outcome but do that in a cost-effective way can become so meaningful. So that product portfolio across the continuum of care, including these services and solutions, including our couple of decades of experience through our Exelero Consulting Services, that help lean out processes and ensure that the quality of care is raised, and it's done efficiently, and throughput is driven through these systems, is what signature solutions is all about.

And as I said, it's a message that's really resonating. I think that we're in a unique position, as we participate in over 1.5 million procedures across the globe, on just the large joint side alone, to understand what best practices can be transferred from one institution to another. And ultimately, with the appropriate structure, on an end-to-end basis, we're going to be able to, along with our hospital customers, draw data that will lead to continuous improvement and refinement of how the care is delivered.

So we love the opportunity. We think that we can be a big part of the solution for the hospitals going forward, and these deeper partnerships in the Zimmer Biomet signature solutions is the umbrella that allows us to bring those solutions to the customers.

Okay, and just one follow-up on LDR. I think, Dan, you had mentioned leveraging that acquisition into the fourth quarter more meaningfully into 2017, as a reason for confidence and operating profit growth through acceleration. My question just there is, what's your confidence level that you're going to be able to maintain the sales force in what always is tricky with spine acquisitions? And what level of confidence do you have we won't see any surprises for that business, to potentially alter that margin outlook? Thanks.

Sure, and we will do nothing to impede the momentum of Mobi-C. We can assure you that, the opportunity is really -- keep in mind that the Zimmer Biomet spine business, still in the process of being integrated, you bring LDR into that, and now we have an opportunity to further design the right work structure for robust growth and the right level of supporting infrastructure.

So it's really, you have to think about Zimmer Biomet and LDR all merging together from a back office perspective, and so forth. But we'll do nothing to impede the growth in the LDR portfolio, and then capitalize on the cross-sell opportunities that exist between the Zimmer Biomet portfolio with Mobi-C. Very exciting, and we're highly confident in our ability to drive that top line, while delivering on the integration and the synergies.

We have time for one additional question.

Thank you. We'll take that from Glenn Novarro with RBC Capital Markets.

Two questions. One back in September, you were on the conference trail, and you highlighted the FX headwinds for 2017 on the EPS line. So can you give us an update on the FX impact, in terms of EPS for 2017? And what are the offsets? And then I had a follow-up.

Sure, Glenn. The impact on 2017 is still the same. We've characterized that roughly in the neighborhood of a 4% headwind to EPS growth next year, and that's still the case. We continue to feel good about the Biomet synergies, which offset that. And then some of the other activities that we'll be driving to work towards that 10% goal that I described before, so nothing has changed in that regard.

Okay, and then just on the sales force, back at AAOS, there was a lot of chatter about the Zimmer reps and resumes out in the field. But Dave, I think on the call, you said that you were a net adder of sales reps this quarter. So, can you quantify that and where is this coming? Is it coming particularly in knees and hips? Thanks.

Sure, Glenn. We have been a net adder, as you said. In the first quarter of this year, in the second quarter of this year, and again, in the third quarter of this year, and it's across all product categories, Glenn.

There's a lot of focus, obviously consistent with as we've been talking about building out the specialized sales forces, and so the non-large joint categories as well have been recipients of the continuous build-out of the sales force. And I think that you're just beginning to see the signs of the productivity of those specialized sales forces, as evidenced by the continued improvement of the SET category. And that was global improvement, as is our build-out of the specialized sales force is very much a global offensive strategy.

So 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 fourth-quarter conference call. I'll turn the call back to you, Koreen.

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