Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Good morning. Thanks for joining us at the 22nd Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the med tech and diagnostics equity research team at Needham & Company. With me, we have Zimmer Biomet CEO, Ivan Tornos, Executive Vice President and CFO, Suky Upadhyay, Senior Vice President, Investor Relations and Chief Communications Officer, Kerri Mattox. Instead of a standard presentation, we're going to do a Q&A fireside chat format. If you do have questions that you would like to ask, you could submit them electronically through the Needham conference website or you can feel free to e-mail them to me at [email protected], and I'll do my best to fit them in.

So with that, we're going to go straight into the questions. I want to start out with one on the orthopedics market. The recon market, i.e., hips and knees was really strong last year. We think the market grew about 8%, and that compares to kind of pre-pandemic growth of 3% to 4%. Just want to get your perspective on what you think is driving this growth? Are we -- is this really the pandemic backlog finally starting to come through here?

Yes. So good morning, Mike, and everyone. Thanks for having us great to be with you. I would say there are a number of parallels between '22 and '23. So I'll just kind of just jump right into this year relative to market and more specifically ZB. So if you go back to how we position guidance for this year, we talked about growth rates normalizing, but the elements inside of that growth rate being not quite yet normal, a number of variables. And I kind of put those variables into 2 buckets. One is those market factors which we don't necessarily control, but we have to continue to navigate and those things that we can control. And I would say in both of those situations, we're very pleased about how we're starting out the year. On the things that we control less of, so things like supply chain disruption, recovery, staffing issues, I would say all of those have turned out to be stable or improving, and the team is navigating those extreme well. And then on the execution, I've never been more optimistic about where ZB is going relative to innovation, commercial execution, discipline in our investment profile, so I'm really pleased with how we're starting the year. I'm very encouraged about where we're going in 2023, both top and bottom line.

Okay. Got it. And then just you mentioned innovation. So I want to dig into some of your newer products. So there were a few things that you highlighted at the AOS meeting a month or so ago. I guess, just starting in knees, you have launch the cementless knee featuring OsseoTI Keel Tibia , can you give us an overview of the product and the market opportunity here?

Sure, I'll take that one, Mike. Good morning. Thank you for having us. So before I do that, there's so much to talk about innovation, and it's a great time to be here at Zimmer Biomet. We've gone from being remediation mode 4 or 5 years ago to be in fully on innovation mode. I talk about percentage of time. but I just want to highlight a couple of things about innovation that I think you might have seen in the Academy. We did more than double our vitality index, the percentage of sales coming from new products. In 2022, we actually received the highest number of 510(k) approvals as compared to anywhere in the segment. As we think about the next 4 to 5 years, we see no less than 40 products being launched in the market. And while we don't disclose the pipeline value is twice what it used to be in 4, 5 years ago. So lots had happen here. Why I'm telling you all these data points before I talk about Persona OsseoTi. Yesterday, we're going to spend an hour talking about what we are going on in hips, in knees, in solders, in robotics, in surgical, CMFT, organic, inorganic. I mean we'll talk about that later. Now relative to a Persona OsseoTi, it is sort of cementless platform. As you mentioned, we launched that recently, very encouraging trends, early innings, but very encouraging trends in terms of adoption. Roughly 50% of our customers for Persona OsseoTi are competitive accounts. We've seen a meaningful percentage of cemented users. Those are customers who never use cementeless moving into Persona OsseoTi directly. And the trends that we've seen of the combination of ROSA and Persona OsseoTi are very inspiring as well. In terms of the actual product, I won't give you all the technicalities, but I'll leave you with 3 things that resonate in the market, stability, versatility and adaptability, if you will, we call anatomic design. So stability, clinical data, market data already, customer feedback is extremely stable. You see immediate mechanical fixation. Literally, Post-op , you can see that the system, the spike kill design is really fixating the device. And long-term data, the bench data that we have shown extreme biological fixation and what we call lower micromotion, the knee actually doesn't move. So that's the stability part. The versatility and this may be one of the reasons why customers are moving into a Persona OsseoTi so quickly is there as a surgeon you can decide all the way to the last portion of the case, whether you want to do cemented or cementless. And that is important for a new user. You may not feel 100% confident that cementless is the way to go. You can win until the end and make a decision there. And then the adaptability of anatomic design is about being part of the Persona family, you can customize the design for any and every patient. You use pretty much the same instruments that Persona, Persona uses or a Persona user is a seamless move into cementless. So again, stability, versatility, adaptability anatomic design are at compelling factors. But it's just a great product. And again, the feedback has been outstanding, so partial, very encouraging to see where we at.

And then, I would just building on what Ivan said, I would just say financially, it's equally attractive just from a mix shift perspective on ASP as well as EBITDA. So we're pretty excited about that. And when you put that cementless application together with ROSA, you've got a pretty powerful combination. So I think a lot more to come on that.

Okay. Can you give us an update on where your cementless knee penetration was prior to the launch? And kind of where you think it could go over time? I know you had a prior cementless knee that this is sort of replacing, I guess.

Sure, sure, sure. Absolutely. So maybe I'll start by again saying this is early innings, but we're in the mid-teens when it comes to cementless penetration. So trabecular metal has been the legacy design again, early in the launch, we've seen the uptake already, both from a penetration standpoint and the margin some financial upside that Suky was talking about. As we think about the note study , if you will, competitors are reporting 40, 50 -- north of 50% penetration, that's the standard for us. And I think there's going to be 2 catalysts happening here, maybe 3. Catalysts #1 is the new design that appeals to a large segment of cementless and cemented users. That's number one. Number 2 is Robotics. The reason why competitors have seen maybe a deeper penetration of cementless is because of the combo of our robot platform and cementless. Now that we have, I would call it, the optimal design as we see ROSA penetration increasing with this new design, that would be a catalyst as well. And then the third catalyst a driver in this equation and while we've been so both about where Cementless is going is the shift to the ASC. As we see more cases going into we see that cementless will increase as well. Time matters in an inpatient unit, but time is critical in the ASC. So those are the 3 reasons of why we feel so confident that this design, this platform can get into the 40% 50% -- A north of 50% penetration at the right margin, as Suky alluded to.

Okay. And then the prior trabecular metal knee cementless tibial component that you had, why was that, why wasn't that more successful and where the other advantages of OsseoTI I think it? I think you said at AOS, it's also a better cost profile for OsseoTi compared to trabecular metal as well?

Sure. I'm not sure, Mike, that I will call it, not successful. There are literally hundreds, if not thousands of customers using a TM. The technology has been around for a while, and you got thought leaders who will now switch from TM to something else because they love the design, high works and the clinical data associated with TM. That said, the fact that Persona OsseoTi has a different design, what we call a 4 spike keel tray . It matters that provides that short-term mechanical fixation that I mentioned earlier, and the longer-term biological fixation. It's a different design that gives you that [ IntraOp ] opportunity to decide to go cemented or cementless. We don't have that with TM. . There are different cost dynamics and margin dynamics and whatnot, that's more internal. But no, I wouldn't say that TM was not successful. So by all means, I think TM will continue to have a segment of users while [indiscernible] will generate a far larger pool of customers who wanted to use Persona OsseoTi.

Okay. But there's a cost advantage here or with the titanium one.

Absolutely. It's a cost advantage with a new design and a better margin profile.

Okay. All right. And then I want to move to Persona IQ. So this seems to be a really cool product. It's one of the first times I can remember Zimmer being first to market with some kind of advanced technology like this. at least in a long time. I think you've been in a limited launch. Can you maybe just give us an update on how the product has been received and when you expect to initiate a full launch?

Yes. You used the word cool. And I guess you are a cool company with a cool product when in the same week, you make it to the Steven Colbert show and the Wall Street Journal. The column on the future of everything. And actually, those are 2 accurate data points. We were in the Wall Street Journal last week and that is still in color, don't ask me how we got there, but we're there. . Beyond those anecdotal data points, yes, limited launch mode still. I would say we're doing a full clinical launch, generating all kinds of data points. We got close to 1 billion data points on a sizable amount of implanted units already. with that clinical launch, we're trying to validate 4 things. Number one, One is the value proposition of the device. Number two, what is the best way to monetize this device moving forward. Number three, what might be the best way to ensure that the customer has the best experience, how we sit at the base station, how we integrate everything to the rest of the data portfolio . And then the fourth thing, maybe results than usual glitches that happens. We have this level of complex technology. So that's what we're trying to achieve through the clinical trial. As we get into later in the year, we'll be ready to do a full commercial mode. And I tell you the fact that we're getting NTAP, new technology add-on payment from CMS. The fact that we've seen so many customers, key thought leaders wanted to jump on Persona IQ is extremely encouraging in terms of the groundbreaking capabilities on this platform. So more to come as we get late into the year, but so far, so good.

And I guess the sort of skeptical view of Persona IQ is it's a solution looking for a problem. In other words, there's not really a clearly defined use case and but yet it's being sold at a higher price. So how would you address this concern? And when do you think we'll kind of find that killer app for this device?

Sure. I'm not sure it's a solution looking for a problem. As a matter of fact, the data will point out that is not a solution looking for a problem. If you and I do -- you and I conduct a surgery, you and I go through a knee surgery the response that you'll give your surgeon, the responses I'll give the surgeon are going to be very subjective. Your level of pain may be higher or lower than what release. Same for me. The way you report how you work in post surgery is going to be different than me. The way that you think about the quality of your work, your gate, your speed and whatnot is going to be different. When the surgeon asks you how is your range of motion, you may say something that is not accurate. I may some is not accurate. So now multiply there is 2 data points you and I times millions of patients. What Persona IQ is bringing really objectivity to a subjective world. I've been made that close to a 3 decades and a lot of the feed by away from customers, from patients is highly qualitative. And Persona IQ is going to make this very quantitative. So that in itself is extremely based on centric, and it's going to bring a level of projectivity that it wasn't here before. That's from a business standpoint, from a precision standpoint, the ability of a surgeon to reengage a patient before it's too late is very meaningful. Through recovery curves through the data we're getting through Persona IQ, I as the surgeon can tell where Mike is moving in the right direction or not, whether care is going to fail before she actually fails. As a payer of provider, this is meaningful because it lowers the cost of re-admission, then the road potentially, this is something as we get the data, not there yet today. Persona IQ can identify loosening and infection. So there's multiple variables that tell you that this is truly a solution for a real problem. Killer app, as you call it, when we're going to get there. Again, we've got to go through the clinical before we get there. but moving in the right direction, we should be there sometime around late '23, not early '24.

Okay. Got it. And then I think your agreement with Canary Medical includes other types of orthopedic applications or implants. So -- do you -- can you tell us about your plans to expand the smart implant technology to other areas? I don't know if you could talk about timing or the specific implants that you're targeting with that?

Certainly, Mike. And obviously, for competitive reasons, I won't go into time lines or specific designs, but our vision in this journey is to bring data and smart devices across the entire portfolio. So to that end, we think in hips, we think in shoulder, and we think in different designs within these verticals. We do have that agreement. It's a great partnership with Canary Medical, and we're excited about what's to come in that space.

All right. And I guess just with regard to Canary Medical. Your partner with this external company, this could kind of become a key technology for Zimmer Biomet. At what point does it make sense either economically or strategically to maybe acquire Canary medical or ensure that it doesn't fall in the hands of competitors or something like that?

Did Bill Hunter, the CEO of Canary ask you to ask me a question or just take your question here today. Look, the partnership is working really well. The level or the way the contract is designed, I don't think there is a risk right now. I know there's not a risk right now this fall in the hands of our competitors. So right now, we are What we need to be and down the road, who knows. From a contracting standpoint, I think we have all the right conduits to make sure this is a sustainable partnership for the long term. So not worry about that. But so far, everything is working great.

All right. And then I want to move on to the hip side. So I think some of your newer products that includes G7 and Avenir Complete. Can you give us an overview of these products? And anything else that missing there that's new and exciting in the hip area?

Yes, Great to be talking about Hips once again because I think for the last 2 years, it's been all about robotics and knees. G7 and Avenir complete, as we mentioned, is part of our portfolio. It's much broader than that. I think we have -- now we have great platforms around ARCOS, revision systems, mixed reality, ROSA, hip and whatnot, but relatively G7 and Avenir. G7 is the only modular system in the market. that can be used seamlessly for primary and complex revisions. It is a comprehensive portfolio that has great data around joining stability is simple, it's efficient, and the key word for pretty much every device that Zimmer Biomet is customizable. Similar to Persona and knees, G7 is personalized, it's highly customized to patients. So we have reported so far close to 3 million system combinations using one instrument platform. So think about how elegant that is an operating room where you can use one instrument platform for different he designs for multiple patients. Relative to Avenir, it's been one of the fastest-growing products at Zimmer Biomet. We launched that right before the pandemic is a great solution in the direct anterior space. It is designed to deliver speed and efficiency in an operating room. It's got again, all kinds of stem lengths, highly versatile you've seen simple instruments. So again, speed, efficiency, effectiveness, solid clinical data in a growth space like it's the direct interior space. So again, those are 2 G7 and Avenir . 2 of a group of hip products that we're launching, along with surgical impactors that give us confidence that we're going to move -- we're going to continue to move in the right direction in the hip segment.

Okay. And I wanted to follow up with the direct interior approach. Can you just provide an overview of what that is, why it's important and how big of a part of the hip market that is right now and how big it could be? I think it's a less invasive approach for doing hip replacement, but maybe you can provide a little color there.

I think you did an awesome job in defining what it is, is by definition, you go from versus posterior is less invasive, is per more tissue, there is less pain associated is less complex surgery. So surgeons tend to like especially in the U.S., penetration of direct anterior has gone from somewhere in the 15% to depending on who you ask, Academy, hips, our customers, somewhere in the 40% to 50%. It is a solution that gets vastly utilized in an ASC setting with the growth of ASC that's going to continue to move there. And we play in a leading capacity in that space. For Robotics or ROSA robotics, which has that application, Avenir complete with a major force in a direct Anterior. So Suky answering your question, probably 40% to 50% of cases are growing and/or revenue in that space is pretty similar to that.

Okay. Got it. And then I do have a question that was e-mailed to me related to hips, I figure I'll just going to ask it now we're talking about hips. So I guess J&J this morning apparently noted some kind of supply issue in their hip business. Is this something you have heard about or were aware of just in terms of the competitive dynamics? And then is that -- could that be an opportunity for Zimmer to pick up some share if they have some supply constraints there?

So yes, we heard some of it in the U.S., anecdotally, and I don't want to really comment on a competitor's pain today, but clearly, we always have anybody to help patients that don't have a current solution, so they need to plan B. So we'll be ready. Certainly, supply these days is tough for everybody, but we'll be ready to provide a solution to patients when needed and when possible. But we did hear about it. So yes, absolutely.

Okay. Got it. And then the other product that you showed at AAOS was this power hip impactor. So can you maybe just explain the product, the market opportunity the timing, I can't remember if you gave us any specific timing on when you plan to launch that?

Yes. So let's start with the name I think it's a cool name. Second time I use the word cool. The name of the product is Hammer, like an actual Hammer. And what it is, is a substitute for mallet. So going back to you and I going through surgery. Before we're going through any surgery, now you're not going through a hip surgery, a surgeon, a hip surgeon will actually use a mallet a hammer about 1 million times throughout the career of the surgeon. So imagine that, imagine the potential injury, imagine the pain, imagine the life of a surgeon that is doing that. So that's point number one that you addressed with a surgical impactor. Less force that you needed like literally going a few hundred times per day per week going through the mallet. For the patient, it's a faster procedure. It's a more accurate procedure. The case is more efficient. Different surgeons, your surgeon is going to use different force than my surgeon that impacts the level of potential tissue damage. So that's what hammers does. It's a surgical impactor that is going to reduce potential injury for that surgeon is going to drive a shorter, better case. In our case, Hammer can actually help in place in the device. In our case, hammer -- I say in our case, because other competitive offerings don't have this, we can reduce or increase the for supply based on the anatomy of the patient based on the actual surgery that we're going to be undertaking. So those are some of the key characteristics. Around -- relative to your question, we're going to be launching the plan remains, as we mentioned, Academy, to launch around midyear. So far, the feedback has been outstanding within the final validation processes. And again, Academy in Vegas, if you were there, you probably noticed that the voice of customer feedback was very solid. So excited about it. More to come in summer time.

And is this a product that -- I guess, what's the kind of business model here? Is it just a capital sale? Or is this something that would be more like your conventional instrument where you kind of loan it out to customers that are used as a way to kind of leverage that into the implant sales?

Yes. Similar to robotics, optionality is the what comes to mind. In some cases, we'll sell the device. But more of them are now the idea is to place the device in a contractual agreement for a pull-through. So again, similar to robotics. And the emphasis going to be obviously on making sure that we service in existing accounts, in our biomet accounts. But there will be rather they get a big emphasis on bringing the device to competitive accounts in exchange for the hip pull-through.

Okay. All right. And then are there any other new products that I didn't mention that you're excited about that you'd like to talk about?

Here's what I have to be careful because I can spend an hour talking about innovation. 40 to 50 new products coming in. I mentioned cementless really excited. We talked about Persona IQ. Hipping side and other, I would call it, major discussion at the Academy meeting in Las Vegas. We are the only company with an FDA-approved platform using mixed reality in surgery, in hip surgery, literally bringing holograms of the patient anatomy into the case, driving speed, efficiency, accuracy with mixed reality. So HoloLens goggles that drive that opportunity. This is highly scalable. The potential is limitless. You can get integrated with robotics. At some point in some cases, you can even substitute robotics based on everything we've seen. So that is a meaningful product launch that so far, it's going really well. I like where we are, we've got a shoulder portfolio with identity, customizable implant, highly versatile. You can do inlay onlay cases, a ton of products in sports made by organic and inorganic means. Recently, we acquired Embody the collagen in plants, Rotator Cuff fast surgery and [indiscernible] , that's going really, really well early on. CMFT, there is all kinds of products on rep external. So again, we're going to spend an hour there. And ZBEdge , there is a ton in that regard, different applications in robotics, different data platforms, different versus our mobility. So I would say going back to excitement, truly, the innovation story is compelling. Several stuff going on, and I don't see today any major gaps from a portfolio standpoint. Anything that will limit to believe that we cannot compete in any of the given spaces where we participate. And I can tell you truthfully, Mike, that was not where we were 4, 5 years ago.

Yes. Okay. And then Zimmer Biomet also seems to be at the forefront of orthopedics when it comes to the data and AI. AI is getting a lot of attention these days generally in the tech industry and elsewhere. You branded your efforts here ZBEdge. Can you just give us an overview of the program, what it entails and how it differentiates Zimmer Biomet?

Sure. lot what we add. And I think you're right. We are leading this space. And what I like about what we call our ZBEdge portfolio, it's not a bunch of gadgets in a category. It's not an end-to-end solution. is what I call an into in solution. Everything is fully integrated. In our ZBEdge portfolio, every device either use this data from another device or feeds data to another demand. And that includes products data platforms, robotics and everything within the ecosystem. It's truly an integrated solution across Interrogation occur. It's not just in the operating room. . We engaged the patient in presurgical through mymobility. We engage the patient in the operating room. And we continue to engage the patient through mymobility , Persona IQ and other platforms to come for the long term. And the long term is really the long term. All of that is simplifying an application that -- or a platform, that's what we call OrthoIntel. So this is not the information. This is data that a surgeon can use. We are the only company that are of today that integrates every single platform. Only company I know that has an exclusive agreement with both Apple and Microsoft that is calling itself third time that I use the word. So again, we lead in this space. We've made bold commitments from an investment standpoint in this space. And I think still within early innings, but we're not slowing down. So really differentiate solution, Mike.

Okay. Got it. Another key part of Zimmer Biomet strategy has been portfolio management. So I want to talk a little bit about that. So I think there's one aspect here that everyone hears portfolio management, they think of acquisitions or maybe divestitures, but I think part of this may be underappreciated and that could be the part where you kind of reallocated your internal resources and investments to focus on higher growth and higher margin categories. So can you maybe just talk about what you've been doing kind of behind the scenes there in terms of reallocating resources to higher growth opportunities?

Yes. Maybe I'll take that one, Ivan. Mike, I think you characterized it well. We are clearly sort of Chapter 3 of our overall transformation journey, Chapter 1 being about mission talent culture, fixing the execution issues that play the company. Chapter 2 being really about innovation leadership, and I think you see the proof points with ZBEdge Chapter 3 now being about taking -- going on of entity well on active portfolio management. You're right, there's an organic and an inorganic component to that. On the organic side, some of the proof points there. We've launched over 50 products over the last 3 to 5 years. We expect at least 40 products over the next 3 to 5 years. And the vast majority of those products that we're launching are in categories that are growing well above our current lender, right? And so the whole idea in the notion here is that we're investing in subcategories with faster growth with very good profitability profile. And so that's really the strategy from an R&D perspective. We see that play out in as Ivan talked about, the most 510(k) submissions last year as well as approvals of all of our peer set. You see that in the improvement in our vitality index, which we expect to double yet again over our strat plan period. And it really comes about if you think about our subsegment within our traditional hip and knee business, we're looking at things that are really related to tech and data, and that's evidenced by our relationship with Canary with Microsoft with Apple. Beyond that, we start to look at our existing SET portfolio where we expect to double down from an organic perspective, but also from an inorganic perspective. And that's really going to be around CMFT around sports and upper extremities. We think that there's also good opportunities to continue to round out our portfolio in lower extremities. And then beyond that, while we may not be looking organically to divest beyond our existing portfolio. I think given the strength of our balance sheet, the strength of our execution, the stability in the markets we're seeing, we do think there could be, over time, a potential diversified beyond our existing portfolio. into spaces that offer, as I said, diversification, good growth, but also a potential platform to continue to roll into. So we're excited both organically as well as inorganically on our opportunities for active portfolio management.

Okay. And then within the SET business, you're in some higher growth markets already. I think you -- It's to me, it's still a lot on clear kind of which of those businesses you have dedicated sales teams and where you're kind of expanding those sales teams. So within SET if we kind of go to your sports, extremities, trauma, and then even extremities, if you kind of break that into upper and lower extremities, is do you have separate sales teams for each of those kind of businesses at this point or...

Yes, I can maybe cover that briefly here. So maybe start with defining set because I think that's a legacy acronym that no longer applies for our book of business. We have 6 businesses within SET. We got extremity shoulder. We got a sports medicine, we got on trauma. We got our foot and ankle. We got to restorative therapies and then we got our CMFT Craniomaxillofacial Thoracic. So again, 6 different businesses, 3 letters in the acronym, people get confused. We are over indexing. We're focusing primarily on 3 of the 6 businesses. Upper Extremities, sports medicine and then CMFT. That's not to say we're not doing anything in the other three but that's where the vast majority of time money and focus is going. In the areas where we need to be specialized, we already are specialized. In the areas where we need to invest and amplify the number of reps. Sports med is an example that's happening. Doubling even tripling the number of dedicated resources in that space. So I would say right now, given the portfolio additions, the focus, the specialization is there. And in the key businesses within SET, we have exactly what we need to compete. In parallel, we've created an ASC structure. We enlarge the number of people or we hired more people in the contracting side of the business to make sure that along with innovation, we got the right contracts. So I believe we're in a good position to compete in the areas that matter the most within SET.

Okay. Got it. And since we're still on portfolio management, someone did just submit a question about what areas you're kind of interested in? Would you be interested in things like outside -- you mentioned things outside of orthopedics. So like a cardiovascular peripheral et cetera type company.

Yes. So we're not going to get into therapeutic areas for competitive reasons. But there's some more obvious adjacencies to our existing musculoskeletal portfolio than others. So diabetes interventional cardiology are probably not high on the list. But the good thing is there are a number of strategic areas that you can get into beyond orthopedic that we think are quite attractive so...

Okay. Got it. And a couple on the international business. So I guess I'll focus mainly on China just because it's kind of been a sore spot for the industry, given all the VBP, value-based purchasing. Can you just remind us where you are with VBP and kind of when you expect that to be fully baked into the numbers?

Yes. We did a lot around VBP back in 2021. And so as we move through 2022, we effectively sunset the impact of VBP. So we expect '23 to be relatively clean from a VBP standpoint. We still think that, that was the right decision. We believe that China is a large high unmet need under penetrated market when it comes to orthopedics. And so our first step was really to ensure that we were in a position to win and grow in that space. So that business is performing as expected. We're now working on the second level of that overall strategy, which is to continue to work on margin improvement in that particular market. But so far, so good. We're happy with the results we've seen so far. And just as a reminder, China now represents low single digits as an overall revenue contributor and probably even less on a profit. So more room and opportunity for growth. But again, things are sort of transpiring as we expected.

And just given that the Korea price declines that we've seen there, I mean, you're still able to make attractive margins, and it makes sense to stay in that market?

Yes. I mean it's still a profit-making business for us. It is below the company average, no doubt. The team has got a strategy in place to improve those margins over the next 3 to 5 years. And so we'll just have to see how that journey plays out. I'm confident they will be able to improve margins. So we think, again, the strategy is playing out so far. And if things change, we certainly could relook at it and make a different decision. But again, things are playing out as expected so far.

Okay. All right. And I think we've got about 5 minutes left. So I've got to get to a few financial questions here. So maybe just with regards to inflation, I mean the kind of economic data, CPI, PPI, I mean, it's been coming down. It's still above normal levels or pre-COVID levels. But -- are you starting to see any of this in terms of your cost structure?

Yes. So there's a number of moving parts. And overall, we feel pretty good about how inflation fits into our original guidance for this year, things have been relatively stable. There have been some moving parts inside of that. We are still seeing a little bit of some spot buying that's creating a little bit of pressure. We're seeing pricing on from some of our contractors go up for a variety of reasons, but that's been largely offset by declines in energy costs. So right now, I said it's still early in the year. But overall, we're seeing things as relatively stable. If we do see things decline from a raw materials perspective, or continued declines on energy and freight, you could see that potentially provide a tailwind to overall cost of goods over time. But similar to the cost increase, the cost decrease will get capitalized. So you'll see a lot of that tailwind sort of towards the end of the year or into 2024, if it should happen. But the key takeaway right now is things are stable, and I think that's a good first step.

Okay. And then you mentioned pricing, your kind of vendor pricing, but your own pricing. I think you've been trying to raise prices to your customers. So can you maybe talk about that? And what if we ultimately get back to kind of normal inflation of around 2% do you think that the industry kind of reverts back to the typical price declines? Or do you think this could be more of a permanent favorable change from pricing for the industry?

Yes. where the industry ultimately goes on price -- it's always been incredibly competitive in a tough environment. In Medtech or in life-science, just in general. We put a number of things structurally in place that is going to improve our overall pricing performance from where we've been historically. We have seen that play out so far in the early part of 2023, which is great to see, and we're going to continue to drive that strategy. I think the more important thing for us is what we see in the marketplace is that if you improve outcomes, if you bring efficiency to the health care environment, you can still get value in your pricing. And so what's exciting is that our innovation, our portfolio and the ability to mix shift up into new products, that's where we think we've got a more exciting look, but make no mistake, we're definitely performing better on just the underlying price.

Okay. And then with regard to operating expenses -- and this will be my last question because we're almost out of time here. But can you leverage operating expense particularly if you -- if the industry returns to kind of a more normal growth or hips and knees are growing 3% or 4%, let's see consumers kind of like 4% or maybe 5% can you sustainably grow OpEx at a slower pace and drive leverage?

Yes. Absolutely. No, we're in that sort of normalized growth normalized market, 4% to 5%, let's call it, as an illustration on top line growth. With stable gross margins, we see the ability to grow expenses lower than revenue. That's how -- those are effectively the building blocks to our margin expansion story. And I'd tell you, the ability to mix shift our investments to the most important spots of our portfolio and our company, it's in our DNA. I feel very good about our ability to do that and therefore, our ability to grow expenses slower than revenue.

Okay. Great. I think we're at the 10:55 mark here, so we're going to have to wrap up. But thank you for coming to our conference. I hope you have some good news.

Thank you, Mike.

Great. Thanks, Mike.