Zimmer Biomet Holdings Inc (ZBH) 2016 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.

Thank you, Hannah.

Good morning, and welcome to Zimmer Biomet's fourth-quarter 2016 earnings conference call.

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

Before we start, I would 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 on our website at investor.

ZimmerBiomet.com.

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

Thanks, Bob.

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

Dan will then provide additional financial details and discuss our 2017 guidance.

As we reflect on 2016, our accomplishments reinforce our confidence that Zimmer Biomet remains well positioned to maximize long-term value creation for our stockholders.

Throughout the year, we made strategic investments to further broaden and diversify our musculoskeletal portfolio, including the introduction of more than 50 new clinical technology solutions and services.

These commercial introductions have both enhanced our core offerings and expanded our presence across the full continuum and episode of care.

Investments in our spine business in 2016 have added differentiated technology, such as the Mobi-C Cervical Disc Prosthesis, which positions us to increase our share in the $10 billion global spine market.

Among other exciting additions, we also strengthened our presence in sports medicine, with the strategic acquisition of Cayenne Medical, which has expanded our offering of soft-tissue repair and reconstructive solutions to address the $18 billion S.E.T.

market.

And importantly, as we noted in mid-December, during the fourth quarter, we continued to make progress towards enhancing and improving our supply chain and manufacturing and quality systems.

We anticipate continued progress towards the replenishment of safety stocks on key cross-sell products throughout the first half of 2017, which will position us for accelerated top-line growth during the second half of the year.

Looking ahead, we remain committed to clinically relevant innovation and commercial excellence as key drivers of our growth.

We'll continue building out our specialized global salesforces in 2017 to capture growth opportunities in attractive market categories.

To that end, we look forward to expanding the release of Zimmer Biomet Signature Solutions in 2017.

This integrated offering is the first suite of end-to-end services uniquely designed to enhance patient outcomes in musculoskeletal procedures while capturing perioperative efficiencies and care episode cost savings.

And as part of Zimmer Biomet Signature Solutions, we will remain focused on the expansion and enhancement of our industry-leading intelligent instrumentation options, which in 2016 were utilized in nearly 100,000 procedures worldwide.

Before I review our performance, I'd like to briefly comment on fourth-quarter and full-year market conditions.

During 2016, global musculoskeletal markets exhibited stability, with a slight acceleration in the fourth quarter.

With regard to pricing, we experienced negative price pressure of 2% for the fourth quarter and 1.5% for the full year, consistent with our expectations and prevailing trends over the past several years.

I would also like to note that we had approximately one less billing day in the quarter compared to the fourth quarter of 2015, which reduced our consolidated growth by approximately 140 basis points.

The billing day differences varied by geographic segment, with the Americas and Europe, Middle East, and Africa regions each having one less billing day.

There was essentially no impact in the Asia-Pacific region.

The impact of this billing day difference is not reflected in the growth rates I will be providing by segments and category.

During the fourth quarter, we drove improved top-line growth across our portfolio, finishing the year with a revenue performance more in line with our original expectations for 2016.

Our solid performance was supported by the reacceleration of our core knee and hip categories, as well as the ongoing strength of our S.E.T.

category in Asia-Pacific sales region.

Consolidated net sales were $2.013 billion for the fourth quarter, an increase over the prior-year period of 4.4%, including approximately 230 basis points of contribution from the recently acquired LDR Holding Corporation.

Our performance in the US accelerated by 320 basis points on a comparable basis relative to the third quarter, which supported a 5.3% sales increase in the Americas over the prior-year period.

In the Asia-Pacific region, we also delivered 5.3% quarterly sales growth, and our revenues increased by 1.5% in Europe, Middle East, and Africa.

Full-year sales for 2016 were $7.680 billion, an increase of 3.4% over 2015 constant currency adjusted pro-forma results, which included approximately 110 basis points of contribution from LDR.

Zimmer Biomet's knee business grew sales by 1.8% in the fourth quarter, reflecting positive volume and mix of 3.7% and negative price of 1.9%.

These results were supported by contributions from each of our sales geographies, led by the Asia-Pacific region, which delivered solid 5.2% revenue growth over the prior-year period.

Our Europe, Middle East, and Africa region grew sales by 2.9% over the prior-year period, and sales increased by 0.6% in the Americas region.

Importantly, focused execution within our knee supply chain and commercial teams during the quarter allowed us to make progress towards meeting the significant market demand for Persona, The Personalized Knee System.

In addition, we continued to achieve sales growth across our complete portfolio of knee solutions, highlighted by the exceptional performance of our Oxford Partial Knee system and solid results for our Orthopaedic Salvage System.

Going forward, we will continue diversifying our knee offerings with differentiated new technologies to further complement this market-leading portfolio.

Hip sales increased by 2.9% in the fourth quarter, including positive volume and mix of 5.2% and negative price of 2.3% Our Asia-Pacific region delivered noteworthy hip growth during the quarter, increasing sales by 7.1% over the prior-year period.

We grew sales by 2.4% in the Europe, Middle East, and Africa region and by 1.7% in the Americas.

Our improved hip growth was highlighted by the ongoing strength of our G7 acetabular system, including the successful expanded introduction of the G7 Dual Mobility Construct, as well as the Taperloc Complete Hip Stem and the Arcos Femoral Revision System.

We were also pleased by market demand for hip constructs that leverage our proprietary OsseoTi Porous Metal Technology and Vitamin E-infused advanced bearing materials.

As we continue working to accelerate our global hip performance, we remain bullish on our broad and clinically proven portfolio of personalized hip solutions.

Our S.E.T.

business completed a noteworthy 2016, with solid fourth-quarter results delivering a 6.6% year-over-year sales increase.

Our surgical business has continued to benefit from our growing emphasis on salesforce specialization.

In sports medicine, demand for our proprietary subchondroplasty procedure and Gel-One Cross-Linked Hyaluronate injection remains strong.

Our upper extremities portfolio also continued to deliver growth, with increased demand for the comprehensive total shoulder system and the Nexel Total Elbow.

And in trauma, our progress throughout the quarter and full year were supported by the steady sales performance of versatile and trusted solutions, such as our NCB Periprosthetic Femur Plating System, AFFIXUS Hip Fracture Nail System, and DVR Crosslock Distal Radius Plating System.

We believe our global S.E.T.

business will continue to meaningfully contribute to our long-term growth.

Our dental category sales decreased 8.6% compared to the prior-year period.

We're working to improve our dental performance in 2017.

The global dental implant market remains an attractive opportunity, with a mid-single-digit growth rate profile.

We will remain focused on innovating and repositioning our dental portfolio, including the commercialization of multi-tiered offerings for the evolving global marketplace.

Spine, Craniomaxillofacial and Thoracic sales increased by 29.1% for the fourth quarter, with stable underlying Spine performance in total and continued growth in CMF and Thoracic.

Within our spine business, the Mobi-C Cervical Disc Prosthesis continued to deliver excellent sales growth in the quarter.

This highly differentiated product is now the most widely covered device for one- and two-level cervical disc replacement by commercial health insurers in the United States.

We've also been pleased with the ongoing acceleration of our innovative Vitality Spinal Fixation System, an all-inclusive pedicle screw platform for complex thoracolumbar procedures.

As we finalize the integration of the commercial channel in 2017, we believe our spine teams will be well positioned to capitalize on these and other promising opportunities among our competitive spinal offerings.

Turning to Craniomaxillofacial and Thoracic, this business completed the year on another quarter of solid growth.

Our SternaLock Blu and SternaLock 360 primary closure systems continued to drive growth, as well as the RibFix Blu Thoracic Fixation System.

In 2017, we look forward to introducing differentiated expansions to our Craniomaxillofacial and Thoracic portfolio.

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 2017 financial guidance.

As David discussed, we were pleased with the sequential improvement of our global large-joint business, along with continued steady performance by our S.E.T.

business, which posted 8% constant-currency day-rate growth.

While product supply constraints remained, our performance in the quarter reflects excellent coordination and execution by our operations and commercial teams to effectively deploy inventory and instrument sets to fulfill strong demand from our existing customer base.

We were also able to deliver an incremental $10 million of international tenders and distributor stocking orders that had previously been forecasted for the third quarter.

Transitioning now to the balance of our fourth-quarter financial performance, our adjusted gross profit margin was 74.6% for the quarter, which was 100 basis points lower when compared to the prior-year adjusted results.

The decrease was driven by the impact of fewer gains from our cash flow hedging program due to unfavorable year-over-year contract effective rates, as well as average selling price declines, offset in part by a reduction in the medical device tax expense recognized in the quarter as compared to the prior-year period.

Selling, general, and administrative expenses were $756 million in the fourth quarter, at 37.6 % of sales, a 20-basis-point increase compared to the prior-year period.

As anticipated, ongoing investments in our specialized salesforces 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.

I am pleased to report that we met our commitment of delivering cumulative net EBIT merger synergies of $225 million by the end of 2016.

In the quarter, the Company recorded pretax charges of approximately $523 million in special items, primarily related to the Biomet acquisition and integration-related expenses.

Adjusted fourth-quarter 2016 figures in the earnings release exclude the impact of these charges, which include $243 million of non-cash amortization inventory step-up and brand rationalization charges, $145 million related to integration activities, a net $53 million of debt extinguishment costs, and $38 million of quality remediation expenses.

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 was $650.7 million, or 32.3% of sales, a 140-basis-point decrease when compared to the prior-year period, due to the lower gross margin rate as well as the expected impact from acquisitions, somewhat offset by Biomet cost synergies.

Net interest expense and other for the quarter totaled $94.5 million, consistent with expectations.

Adjusted net earnings were $434.1 million for the quarter, an increase of 1.3% compared to the prior-year period.

Adjusted diluted earnings per share increased 2.4%, to $2.14, on 202.5 million average outstanding fully diluted shares.

Excluding the unfavorable impact of foreign currency, adjusted diluted earnings per share increased approximately 6% in the quarter.

Our adjusted effective tax rate for the quarter was 22% due to a favorable mix of geographic earnings and profits as well as some discrete items.

Our reported effective tax rate for the quarter was negative103% due primarily to favorable discrete items.

The Company had approximately 200.6 million shares of common stock outstanding as of December 31, 2016, a decrease from 202.7 million shares outstanding as of December 31, 2015.

Operating cash flow for the quarter totaled $627 million, an increase of 42% over $441 million in the fourth quarter of 2015.

This result includes $105 million of cash expenditures for acquisition integrations and initiatives related to our synergy program.

Free cash flow in the fourth quarter was $478 million, which was $167 million higher than the fourth quarter 2015.

Our full-year free cash flow of $1.1 billion was in line with our guidance.

Capital expenditures for the quarter totaled $149 million, including $94 million for instruments and $55 million for property plant and equipment.

During the quarter, the Company repaid $310 million in total on our term loan and certain of our outstanding US dollar senior notes, bringing the year-to-date repayment total of Biomet acquisition debt to $1.01 billion.

Our gross leverage ratio at December 31 was 3.8 times.

I would like to turn now to our guidance.

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

Additionally, I will review our guidance for operating and free cash flow in 2017.

Moving now to our market assumptions for 2017, we believe that musculoskeletal markets in which we participate will grow approximately 3%, similar to 2016 when global market conditions remained relatively stable.

With regard to price, we forecast a decline of approximately 2%, consistent with the range experienced over the last several years.

As David mentioned earlier, we expect to make substantial progress in remediating supply constraints during the first half of this year as we prioritize production for key cross-sell brands, clear our back orders, and restore safety stocks.

As part of our effort to implement certain regulatory compliance enhancements, we are making operational process improvements in one of our major production facilities.

As such, effective products may experience temporary and occasional distribution delays while we implement and validate these enhanced processes and generate the necessary supporting records.

Our continued progress towards restoring full supply, expected during the second quarter, will enable our commercial teams to service existing customers and also resume executing against the full potential of our broad and diverse portfolio.

As such, we expect constant-currency year-over-year revenue growth to improve as we progress through 2017, particularly in the second half of the year.

Now turning to our guidance for the full year, we estimate revenue growth to be in a range of 2.2% to 3.2%.

Foreign exchange is expected to decrease revenues by 1.5%, primarily driven by the strengthening US dollar.

Taken together, constant-currency revenue growth is expected to be in a range of 3.7% to 4.7%, inclusive of 120 basis points of contribution from the LDR transaction.

In dollar terms, revenues are expected to be in a range of $7.855 billion to $7.930 billion.

Regarding Biomet net EBIT synergies, we remain confident in realizing our cumulative target of $350 million by mid-2018, with approximately $310 million of cumulative net benefit achieved by year-end 2017.

This reflects $85 million of incremental synergies in the 2017 P&L, compared to 2016.

As you move down the income statement for 2017, assuming currency rates remain near recent levels, we expect our adjusted gross margin rate to be approximately 75%.

This takes into account the impact of approximately 100 basis points of lower year-over-year effective rates on our foreign-currency hedges, in line with our recent disclosures.

This headwind is expected to be partially offset by net synergy benefits and cost of goods, along with the full annual P&L benefit realization from the suspended medical device excise tax.

The incremental benefit to gross margin during the year is estimated at $30 million, which we are reinvesting in R&D, our quality excellence initiative, and other programs to drive longer-term growth opportunities.

We expect R&D expense for the year to be approximately 4.5% of sales to support our goal to drive differentiated innovation across the continuum and episode of care.

SG&A is expected to be approximately 37.5% of sales, compared to 38.2% in 2016, as we continue to realize efficiencies from our synergy initiatives and also further leverage expected revenue growth.

Assuming interest rates remain near recent levels, we expect net interest and other expense to be in a range of $335 million to $340 million.

This incorporates our planned debt repayments throughout 2017 and the benefits associated with our balance sheet activity during 2016.

We anticipate an adjusted effective tax rate to be approximately 22.5%, which represents a reduction compared to the 23.5% rate in 2016.

This reduction is driven by projected manufacturing and sales geographic mix, as well as the realization of several tax integration initiatives expected during the year.

We anticipate the full-year diluted weighted-average shares outstanding to be approximately 204 million shares, including the impact of anticipated dilution from employee equity programs.

The Company is not forecasting or intending to repurchase shares during 2017.

Pretax non-cash intangible amortization is expected to be approximately $600 million for the full-year 2017.

Additional charges included estimated inventory step-up of $50 million and special items of approximately $530 million.

Therefore, including these charges, our full-year diluted earnings per share are expected to be in a range of $4.37 to $4.67.

Excluding these charges, full-year adjusted diluted earnings per share is expected to be in a range of $8.50 to $8.68.

This represents an adjusted earnings-per-share growth of between 7% and 9% over 2016.

Adjusting for foreign exchange, adjusted earnings per share growth is expected to be in a range between 12% and 14%, which compares to 17% growth in 2016 over 2015 results on a similar basis.

Turning to cash flow, we anticipate 2017 operating cash flows to be in a range of [$1.75 billion to $1.9 billion].

Significant areas of investment included in our operating cash flows are $310 million of outflows in support of our Biomet synergy program and other acquisition integration activities, as well as approximately $170 million of cost to harmonize and optimize our supply chain and manufacturing and quality systems.

Total capital expenditures for the year are expected to be approximately $500 million, inclusive of instrument capital of $330 million.

Free cash flow is therefore expected to be in a range of $1.25 billion to $1.4 billion.

Our guidance assumes that we will continue to delever our balance sheet with planned repayments during 2017, exiting the year with a leverage ratio that keeps us on pace toward our goal of approximately 2.5 times at the end of 2018.

The Company anticipates that substantially all of its free cash flows will be used to facilitate our deleveraging goals alongside maintaining our dividend program.

Regarding guidance for the first quarter, we estimate revenue growth to be in a range of 2.4% to 3.4%.

Foreign exchange is expected to decrease revenues by 1.3%.

Taken together, constant-currency revenue growth is expected to be in a range of 3.7% to 4.7%, inclusive of 220 basis points of contribution from the LDR transaction.

In dollar terms, revenues are expected to be in a range of $1.95 billion to $1.97 billion.

The first-quarter revenue estimate contains approximately 150 basis points of headwinds from our supply constraints.

However, as I noted earlier, we expect this headwind to abate as the year progresses.

Therefore, estimated constant-currency growth rate for the second half of the year is expected to be in a range of 3% to 4.5%.

Also in the first quarter, we expect gross margin and operating expense margin ratios to be similar to those embedded in our full-year guidance.

Our adjusted effective tax rate in the quarter is expected to be approximately 23%.

Diluted shares outstanding are estimated to be in a range of 203 million to 203.5 million shares for the quarter.

Pretax non-cash intangible amortization is expected to be approximately $150 million.

Additional charges include estimated inventory step-up of $20 million and special items of approximately $150 million.

Therefore, including these charges, diluted earnings per share are expected to be in a range of $0.91 to $1.01.

And finally, excluding these charges, we expect adjusted earnings per share to be in a range between $2.08 and $2.13.

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

Thanks, Dan.

In 2016, Zimmer Biomet continued to enhance our leadership position through the execution of a consistent strategy that emphasizes growth through innovation, in addition to commercial and operational excellence and disciplined capital management.

Guided by these priorities, Zimmer Biomet is uniquely positioned to drive long-term growth and value for our stockholders, while delivering life-changing clinical solutions that meet the unique needs of patients, providers, and healthcare systems.

And now, I would like to ask Hannah to begin the Q&A portion of our call.

(Operator Instructions)

David Lewis, Morgan Stanley.

Good morning.

David, I want to start with a key question, which is the fourth-quarter performance and some of the third-quarter disconnect.

I think in the third quarter, you said your hope was to stabilize your share in the first quarter and get back to market growth in the second quarter, but by our math, you basically held share in the fourth quarter, but there were some tenders and maybe some third-quarter pull through.

Can you talk about this notion of getting back to in line with market growth by the second quarter even though you did a little better in the first quarter, and your confidence in getting there over the next couple quarters?

Then I have a couple of follow-ups.

Yes.

We had executed well in the fourth quarter.

The communications and coordination between the supply chain operations logistics leaders and teams and the commercial channel, David, was very well done in the quarter.

That obviously led to a strong performance sequentially from Q3 to Q4 in some key areas.

The large joint reconstructive business improved in a significant way.

Closed the gap relative to market in the case of knees.

Probably exceeded market on a global basis in the case of hips.

S.E.T.

continued to perform very well.

Asia-Pacific continue to perform very well also.

There is about a $10 million tender that otherwise would have landed in our Q3 numbers, but for the supply challenges ultimately was fulfilled in Q4, so you can adjust those two quarter numbers as well as a relevant jump-up going form Q4 into 2017 accordingly.

And then also, it appears that the market stepped up, round numbers, 100 basis points in large joints.

And obviously, with our share of the large joint market, that redounded to our benefit in the fourth quarter.

So I would think of our Q1 guidance as being a consistent performance, subject to the market and the tender adjustment that I just mentioned in Q4 as we enter 2017.

And we continue to make progress on the supply front, so that's going to position us to replenish the safety stocks in some of these key cross sell brands in the first half of the year and position ourselves for accelerated growth in the second half of the year.

Okay.

Very clear, David.

Any maybe just two quick follow-ups.

The S.E.T.

franchise for you, that was the real highlight in the back half of 2016.

Can you talk about your confidence in S.E.T.'s momentum in 2017 and the perhaps ability for spine to start to show that kind of momentum?

And then for Dan, just on non-GAAP adjustments, they were a little heavier in the fourth quarter.

Can you just talk to us about charges in 2017 relative to 2016 and the ability to generate free cash expectations?

And I will jump back in queue.

Thanks, David.

I'll take the first question.

The S.E.T.

business performance, as you said, improved sequentially from the beginning of 2016 through the end of the year, and when you adjust for billing days in the case of the fourth quarter, that performance is around 8%.

So we did have a really nice performance of the second half of the year.

We think that is sustainable as it relates to the S.E.T.

businesses.

Strong product portfolios by virtue of the combination of Zimmer with Biomet [scaled] allows us to build out specialized salesforces, which we began in 2016 in earnest, and we'll be continue in 2017.

And then a strong pipeline of products, all of that augmented by some of the bolt-on acquisition deals that we did, such as Cayenne, in 2016.

So we like the runway, and it's important to note that when you add up the markets that those businesses serve, it is about an $18-billion portion of the $50-billion musculoskeletal market, so it will be a growth driver into the future for us.

And we are just as optimistic as we complete the commercial channel integration in 2017 of the LDR acquisition, that we are going to be in position with a much stronger spine portfolio to position that business similarly going forward.

And then David, in terms of special charges for 2017, in my prepared remarks, I talked about just over $500 million of cash special items which would be outside of the amortization and inventory step-up.

The biggest components inside of that would be continued spend related to the Biomet integration, our synergy program, as well as the integration of our 2016 acquisition.

So think of that in the neighborhood of about $300 million in 2017.

That will substantially step down in 2018.

And then the other component in 2017 is tied to the quality remediation program, which has about $170 million of spend associated with it in 2017.

Okay.

Thank you very much.

Mike Weinstein, JPMorgan.

Thank you.

And I hope you guys are having a good morning.

I wanted to start, if we could, just on the cadence of expectations in 2017.

I think you laid it out pretty much as we were expecting, although I think I would say it's a little bit better.

The first quarter, effectively, you are guiding to 1.5% to 2.5% organic, and then the expectation is that you get to 3% of 4.5% in the second half of the year.

So number one, do I have that right?

And then second, on the second quarter, do we assume that the 150-basis point headwind that you've highlighted in the first quarter from the ongoing supply constraints would be fully resolved?

So how do we think about 2Q?

Thanks.

Okay, Mike.

First, you have the first-quarter correct, so excluding LDR, 1.5% to 2.5%, ex-FX as well.

So that's correct.

And the 3% to 4.5% growth in the back half of the year does obviously reflect acceleration as a result of the supply improvements.

I characterize the second quarter as having some residual supply impact, but not as much as the 150 basis points that we have in the first quarter.

So some improvement as we progress through Q2.

We're not giving the sales range for Q2, but you can expect an acceleration in Q2 relative to Q1.

Understood.

Then the second topic I think that everybody would like to touch on would be the Warsaw facility and the 483s.

David, you made some indirect reference to it.

Could you just talk about the efforts there including the expected spend in order to help resolve some of those issues in 2017?

Sure, Mike.

Obviously, the manufacture and distribution of the highest quality products is the top priority for our organization, and as part of the integration in our ongoing quality excellence efforts, even apart from the integration, we have been and continue to work to harmonize and optimize our manufacturing and quality systems.

So the observations that came out of the recent inspection in Q4 in the Warsaw North facility -- it's a legacy Biomet facility -- those matters are ones that we take very seriously.

We have submitted our written response to the Form 483 observations and developed immediately and are already executing remediation plans to fully address those issues.

Those -- that work will continue into next year.

And I would tell you that the reference that Dan made to some of the expenditures include our efforts to harmonize and optimize those quality systems and fully address those observations.

So that installment is part of the $170 million that Dan referenced for 2017, and as I said, that work on a broad basis, that facility included, but not exclusively that facility, will continue on in 2018.

So that $170 million to optimize the supply chain in the cash flow, how much of that runs through the P&L?

Mike, what we are doing is, to the extent we are incurring remediation expenses, that's running through as a special charge.

To the extent we are making permanent investments in the quality infrastructure and manufacturing overhead infrastructure, that's running through the adjusted P&L.

Understood.

Makes sense.

I'll let some others jump in.

Thank you, guys.

Bob Hopkins, Bank of America Merrill Lynch.

Thanks for taking my question.

Can you hear me okay?

Yes, Bob.

Good morning.

Good morning, David.

Two questions.

I wanted to follow up on Mike's question, but before that, I wanted make sure that I ask David a bigger-picture question heading into AAOS this year because obviously, there's been a lot of discussion in the marketplace around Stryker's Mako robotic system.

I just wanted to get your updated views on robotics for total knees.

Has your opinion on the need for Zimmer Biomet to have a robotic knee changed since last year's AAOS?

I just wanted to get an update from you on that topic since it's such a point of interest for investors.

Yes, Bob.

We continue to make significant investments and be very engaged in the development of intelligent instrumentation.

We started that journey over 10 years ago with the acquisition of ORTHOsoft.

As I reference in my prepared remarks this morning, in 2016, our portfolio of intelligent instrumentation were deployed in nearly 100,000 cases.

So that includes signature, patient-specific instruments, our iASSIST technology, our eLIBRA technology, et cetera.

Last year's acquisition of Medtech with their ROSA robotics platform adds just another tool in technology to our kit.

And to the extent that there are other anatomical sites that technology could be applied to in a manner that satisfies three key conditions in our view -- improves the quality of the outcome, enhances the efficiencies from a cost standpoint, and drives throughput patient volume through those providers' ORs -- then those would be applications that we would look to develop and commercialize off of that ROSA platform.

So you can rest assured that to the extent that those conditions are satisfied though our internal development, that any other anatomical site would be serviced with that technology.

And going forward, as I said I think that these technologies are going to be big difference makers.

I think the reproducibility and enhancing the patient outcomes and patient satisfaction levels are going to be well served.

And what I just described is all underneath the broader end-to-end set of services and suite that we refer to as Zimmer Biomet Signature Solutions, and I would point you to this year's Academy in March because we are going to have a further unveiling of those offerings as we move into a broader commercial launch of the Signature Solutions platform.

So two quick follow-ups.

One, just to clarify, so does that mean that you are developing a robot for total knees?

And then the other followup I wanted to ask was just back on the original question.

I just wanted to get your view, David, on just generally, how comfortable are you that the 483 won't lead to further regulatory action?

And is that $170 million all -- should we view that as all incremental capitalized spending addressing this issue, or are there other things captured in that $170 million.

Thank you.

So on the former -- obviously, Bob, if we have in internal development project in a specific area, we will reveal that when it makes sense from a competitive standpoint and we are appeared to be in the marketing of any application or technology.

So that will come with time to the extent that there is a launch and an application in that particular anatomical site.

We are comfortable that we have the right remediation plan, the right quality excellence plan that we're engaged in executing.

No one can give absolute assurance as to what follow-on activities may come from any agency, but we believe in the plan.

We are communicating openly with the agency and will continue to do so until all those issues are fully addressed.

And the spend category, it's part of a broader quality system and operation harmonization effort, but there is a significant amount of spent on that particular site within that number.

Great.

Thanks for taking the questions.

You are welcome.

Matt Taylor, Barclays.

Good morning.

Thanks for taking the question.

The first thing I wanted to just follow up on was looking at the spending that you are making around the programs with regards to harmonizing and optimizing the supply chain.

Could you just reconcile how that compares to your disclosures at the end of the third quarter?

And you talked about a few things that were necessary to really catch up in terms of supply and harmonize your ability to demand forecast and really prevent issues that happened in the third quarter from happening again.

So I'm just trying to discern, A, how the implementation went, and then B, what's new or what is the new learning and spending area that's occurred over the last 90 days since your prior initiatives were started.

Sure, Matt.

This is Dan.

First, with respect to Q3, the Q3 impact had nothing to do with the remediation activity in North Campus.

So the Q3 supply issue was, in fact, a combination of supply chain integration.

We talked about the lack of an integrated demand planning and production planning system combined with a significant mix shift of key cross sell brands, and that disconnect of supply and demand resulted in the Q3 miss.

We've continue to make excellent progress on implementing better processes and tools to enable a best-in-class supply chain.

We are not complete yet, but we are making good progress with that.

St that was really the Q3 issue.

Embedded in our Q4 guidance, we did contemplate some impact from the FDA inspection, and as David described, we have now submitted our responses.

We've quantified the cost to remediate that.

We will update our disclosures accordingly.

We had disclosures back in November as well as December with respect to that FDA inspection, and we will update our disclosures in our periodic filings.

So the $170 million, as David just said, is substantially -- there is a substantial element of that that's tied to that remediation, and that will continue into 2018.

Okay.

I didn't get -- I think that's clear.

And then secondly, we you talk about the revenue progression through the year, you mentioned once you have close to full supply in Q2, you can start to execute on the portfolio again.

I'm wondering, after the shortage and having to service your existing customers and not go after new ones, how much does that hamper your ability to capture some of that share in future periods?

And maybe you could talk a little bit about once your supply is fully free, how you think you'll do relative to some of the other competition out there.

I'm highly confident, Matt, in our ability to compete as we restore those safety stocks.

Some of those product lines will get to that position sooner rather than later.

Some of them, that pushes out deeper into Q2.

Just as a general matter, we would see in the weeks and months ahead the beginnings of that prospect funnel filling back up and then ripening into competitive conversions as we enter the second half of the year.

So it really is a continuum as opposed to snapping the line at the end of Q2 and only then beginning to redevelop and refill that competitive funnel of opportunities.

So as we look forward, Dan's references to some of the improvements that have already been implemented, that's really outside of the North Campus supply challenges.

We have seen pretty significant improvement.

Those product lines are already in a position where we can go after competitive business.

And as we do the further work, the North Campus and restore that supply, we're going to be well positioned for the second half of the year.

The thing I would tell you just in a reiteration in response to your question is we have supreme confidence in our ability with this combined product portfolio as well as some of the new product launches that have taken place in 2016 and are in the initial stages of launch here in 2017 to do very well in the marketplace across all of these categories.

Great.

Thanks for the color.

Josh Jennings, Cowen and Company.

Good morning.

Thanks for taking the questions.

I was hoping you could just possibly give an update on the stability of the salesforce and just looking at making sure that the attrition rates have been normal and that the hiccup in Q3 and the supply constraint didn't lead to any abnormal attrition rates.

It did not.

We continued to be a net adder on the salesforce side, Josh, through the end of the year.

Had a lot of success throughout 2016 in building out the specialized salesforces and saw a lot of stability in those salesforces across the globe.

So nothing unusual by the way of natural attrition rate, and ongoing hiring been netted to a positive position through the third quarter.

Fantastic.

Thanks for that update.

And just follow-up question.

Just on the organic growth trajectory in the back half, just hoping, Dan, you could possibly parse out the LDR contribution, and clearly, there's an acceleration, but with LDR turning into organic growth, that's a nice contributor, I assume, in the second half and then heading into 2018.

But if you could just talk about that LDR transition in organic growth and the contribution there in the second half, that would great.

Thanks again.

Sure, Josh.

Certainly, the LDR portfolio has been performing extremely well, and Mobi-C in particular driving solid growth.

We do expect that growth to continue through -- in the foreseeable future.

It is a very exciting product.

It is a meaningful contributor to our spine portfolio.

We've been breaking out the impact of the acquired revenues, and we do expect that to move the needle on a combined Zimmer Biomet spine basis for many periods to come.

So in the back half of the year, that contribution is in the range of 100 basis points, roughly.

I think it's a real door opener for the rest of the Zimmer Biomet spine portfolio, and we are very excited about it.

We are very excited about the sustainability of Mobi-C growth, the cross sell opportunity as we continue to integrate those salesforces.

The teams are excited to have that in our bag -- the full bag, and we view that as a terrific growth driver in the $10-billion spine market.

Glenn Navarro, RBC Capital Markets.

Good morning, guys.

Two questions.

One, Dave, you talked about the market accelerating in the fourth quarter.

Is there anything that you could point specifically that led to the acceleration?

Was it just heightened seasonality?

Some have thought maybe there would be a pull forward of cases in December because patients think they may be losing their insurance with the repeal of reform, so any specific commentary that you can give us.

And does this create, for example, a bigger hockey stick in the fourth quarter of 2017?

And then a follow-up.

Sure, Glenn.

It's yet to be determined, honestly.

I think that it is the case that we saw strong demand in Q4, and if anything, accelerated demand in the final month of the quarter.

Only anecdotal evidence at this point is to what created that demand.

I think that full employment, obviously, contributes to it.

I think it would be premature to determine that this is an enhancement to the seasonality of the business.

As much as anything, it could be just the way the holidays fell in December creating more productive second half of December operating weeks across the globe.

And we've seen that where the holidays fall in the middle of the week breaking up each of those two final weeks of the year on the large joint side for these elective procedures.

Seemed to be the case on the spine side as well.

But it led to a really robust demand in the month of December.

I think that it's smart for us all to let this year play out before we draw a conclusion about whether the seasonality is shifting even in a more profound way into Q4 because of high deductibility plans and higher co-pays, et cetera, along with theories that are out there.

And then the fourth quarter of this year will just be a hockey stick because of the easy comps?

Correct?

Well, the fourth quarter of this year, obviously, will be up against more challenging comps to the extent that there was anything that was unique to 2016 along with the description that I just provided.

I think in our case, we are going to be well positioned because we have replenished stock and we're in a better position to -- with secure cross-sell product lines and safety stocks rebuilt to go after the offensive opportunities that we have, Glenn, so we are looking to accelerate the top-line growth in the second half of the year, but not so much based upon prior comps.

Okay.

Lastly, pricing was very stable from 3Q to 4Q in knees and hips, and I know there is always the concern about CJR impacting pricing.

So maybe provide some color as to why pricing is staying so stable, and any concerns from CJR as it continues to get rolled out over the next 12 months?

We never have expressed significant concerns as to what impact CJR may have on pricing.

As we've said all along, we feel like the dynamics have already been in place that lead to -- in instances if there is an outlier high price regression to the mean for that price and greater transparency of pricing across the nation, and frankly, across the globe.

So I don't think that the CJR implementation has changed those dynamics.

If anything, our experience in 2016 seems to be consistent with that, and obviously, we are forecasting similar pricing impact in 2017, Glenn, so we don't see any significant impact flowing from CJR in that regard.

Okay, great.

Thank you.

You are welcome.

Joanne Wuensch, BMO Capital Management.

Thank you for taking the questions.

Couple of things.

Can we pull apart a little bit the impact of the FX hedges in the fourth quarter and what exactly you are guiding for for the impact in 2017?

Sure.

The impact in the fourth quarter, Joanne, was 100 basis points on -- it was about $20 million year over year of a decline in the fourth quarter.

Next year, we characterize that as 100 basis points of headwind on total gross margin rate, so I think you can do the math on the magnitude of that impact year on year.

And my final two questions.

One is, in Washington, there is a lot of interesting things going on, but as it relates to your business, is there anything you want to draw our attention to?

And the second one also is with AAOS coming up, what should we be looking for there?

I'll maybe grab a couple of topics that we're obviously paying attention to.

ACA repeal and replacement, we are paying a lot of attention to that.

The obvious benefit that is out there is a full repeal of the medical device tax.

We're in the second year of the suspension at this point in time.

We get the question oftentimes, Joanne, as to whether or not we would expect some kind of a volume declined to the extent that the ACA was repealed and not fully replaced, and that's an access-to-care question, obviously.

All along, our measurements would indicate that volume might have been positively impacted by 10s of basis points, and so we don't see that as being a significant risk to our volumes going forward.

And another question that we get oftentimes is CJR and what happens in that regard with any potential reforms or repeals of the ACA.

We think those end-to-end episode-of-care reimbursement models, whether it's in a public or private setting, are innovation and a go-to-market strategy that is probably here to stay in some form.

One can speculate as to what the specific form might be as it relates to Medicare in the United States.

But our Signature Solutions offering is geared towards enhancing patient outcomes and driving efficiencies in the implementation or delivery of that care across the entire episode of care.

I would point you to that particular area of our exhibit space at the Academy in reference to your second question because we have a lot of exciting announcements and a lot of incredible progress and significant customer interest and demand for that set of offerings.

So please join us at the Academy in March, and we'll walk you through and get a little bit more granular with you about what we are intending to do in 2017 by the way of an installment there.

Joanne, maybe with respect to tax reform, certainly, the details are very limited at this point in time, but based on our review of what is being proposed, the Company's ongoing US operations we believe would experience a net tax benefit by virtue of the reduction in US corporate income tax rates.

And then even factoring in the border adjustment, when we look at our US revenues, the sources of that reduction were a slight net exporter, meaning we produce more in the US sold in the US relative to what's imported for sale in the US.

Thank you very much.

Thank you.

Larry Biegelsen, Wells Fargo.

Good morning.

Thanks for taking the -- putting me in.

Just two quick ones here.

David, could you help -- or sorry.

Could you help bridge the Q4 growth to that Q1 guidance?

So adjusting for the tender, you did about 3% in Q4.

The guidance is 1.5% to 2.5%.

Why the deceleration in Q1?

And just to be crystal clear, you talked about occasionally some distributor delays that would end in the second quarter.

Just trying to understand -- is that due to the 483 at the Warsaw facility?

And just lastly, David, how do you want us to think about Dental return turning to growth?

How will that progress through 2017?

Sure, Larry.

On the first of those, the reconciliation to the midpoint of Q1 the guidance of 2% is just as you described.

You can think about it in the big-picture manner as 0.5 of that reconciliation relating to the tender and a point -- 100 basis points relating to the market step-up in Q3 to Q4 and a reasonable market expectation growth rate for Q1.

So 100 basis points plus the 50 basis points is the right way to think about that 3.5 to the midpoint of 2.0% for Q1, Larry.

Next question was --

I'm just trying to separate out the Q3 issues that you had and the 483 at the Warsaw facility.

You talked about in your prepared remarks, I think, occasionally having some distributor delays, but you'd have full supply in the second quarter.

Are those distributor delays related to the 483 at the Warsaw facility, and you expect that to be completely -- you don't expect any impact from the 483 on your supply after the second quarter, or will you be back to full supply in the second quarter?

I'm just trying to parse out the 483 from the issues in the third quarter because it sounds like they are different issues.

And then the last one, David, sorry for the long question, but just dental, just the progression there.

Sure.

As it relates to the North Campus and Warsaw operations, there are a mix of matters that are contributing to the supply challenges coming out of the North Campus, including remediation to fully address the observations that are articulated in the form 483.

So your reference to the product flow, it is manufacturing logistics, the distribution of those products that come out, and in an abundance of caution, the application of these interim controls as we are revalidating certain processes is what leads to some of that choppiness.

Now, product is flowing out of the facility.

We're going to continue to be in a hypercare state in an abundance of caution until those revalidations are completely executed.

That will take some time, but as the months progress in the first half of the year, we expect the distribution of those products to even out and those safety stocks to be rebuilt, and that positions us to grow those important product lines in the second half of the year.

As it relates to dental, we continue to be attracted to that market, as I referenced.

We see the market as one that had the opportunity to grow mid single digits.

It is a bit higher growth in some of the so-called value subsegments of the market.

We historically have not had any significant presence in that market.

We need to develop one, and we are repositioning the broad product portfolio that we have by virtue of the combination to do a better job of getting after that market opportunity, and we expect to make progress in 2017, but look for that to show up in improved top line second half of the year and as we exit 2017.

Thanks for taking the questions, guys.

You're welcome.

We have time for one additional question.

Bruce Nudell, SunTrust.

Good morning, gents.

I'm just looking at your revenue guidance.

It's actually tight, so from the midpoint to top and bottom, it's about 0.5%.

Could you just put that in context of your expectations for the hip and knee market, which is about 60% of revenues, and your share position in it as well as the continued strength in S.E.T.?

Bruce, maybe just to clarify the range--

Yes, it just seems like you have a pretty tight revenue range.

And it looks [slightly], so it must presume pretty -- like that almost 3% hip and knee market and maybe a little but under market growth, and continued strength in S.E.T.

Are those reasonable assumptions?

Yes, they are reasonable assumptions for the first half of the year with an acceleration contemplated in the second half of the year.

As Dan referenced, an assumption that the overall musculoskeletal market roundabout 3% in 2017.

We are obviously guiding below that in the first half of the year and at or above that in the second half of the year with our 3% to 4.5% guide for the second half of the year.

So that's the progression that we see.

And I do think that with the portfolio that we have, that we would expect as we get into the second half of the year to accelerate even in large joints to above market grown rates and then have that further augmented by continued good performance coming out of S.E.T.

and the beginnings of a realization of the opportunity that we have and have described in the spine market as well.

Perfect.

And just back to Bob's question about Mako.

Amongst the major players worldwide, you have a 40% knee share.

So clearly, very important franchise to you guys.

And my presumption is Stryker is going to do local studies where they show (inaudible) to Stryker implants done freehand with Mako, improved range of motion, and after the case, less blood loss, less pain, better stability, better discharge rates.

What are you guys doing with your intelligent instrumentation and perhaps even your robotic programs to be ready to counter that individual site type of data that is likely to emerge from the Stryker effort?

Good question, Bruce.

I would just point you back to the Personalized Solutions and Signature Solutions efforts, and we will walk through in a very comprehensive way the interconnectivity of early patient engagement, optimize perioperative practices that include the use of our intelligence instrumentation devices in a manner that is consistent with the surgical philosophies that different surgeons may subscribe to, and then all the way through telerehab services to optimize the patient outcome and drive down the cost of the delivery of care.

And we're really excited about this portfolio.

We think that this is the set of strategies that we've assembled that is going to be responsive to both patient demands, provider demands, and healthcare systems around the globe and believe it's a very comprehensive response.

Perfect.

And just to sneak one in, selling days in 2017?

I think overall, they wash out consistent with 2016.

Thanks so much.

Thank you, Bruce.

With that, I would 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.

I turn it back over to you, Hannah.

Thank you again for participating in today's conference call.

You may now disconnect.