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

Good morning, everybody. We'll go ahead and get started here. Welcome to Tuesday, 45th Annual Goldman Sachs Healthcare Conference. Very pleased to welcome the management team from Zimmer Biomet, Ivan Tornos, President and CEO; and Suketu Upadhyay, EVP and CFO. Thanks for joining us. And I have -- I go all days with questions, as Ivan pointed out to me ask a lot of [ multilayer] questions . But obviously, if those in the audience have question, feel free to wave at me and I'm happy to get to you as well. There were sort of 3 things that I was hoping to cover in our kind of discussion this morning around strategy, business performance and capital allocation.

So maybe I'll start kind of on the strategy side. You just had the first Zimmer Analyst Meeting which I was trying to think if you were telling the truth that it was actually the first analyst meeting going back through my brain and didn't remember any so. As you kind of reflect on the meeting, what were your key takeaways and maybe take into account some of the feedback you've gotten as well.

Yes, absolutely. Good morning everybody. And thanks for hosting this, David. I guess a small infomercial, it's great to have you back. And I mean this sincerely, you bring in a level of rigor analysis and insight to health care that definitely is needed. So great, great to have you back. We had our very first official Investor Day in New York, a couple of weeks ago. We've never done one at Zimmer Biomet. So I'll tell you the good, the bad and the ugly. The good, it was very well received. First time that as a company, we highlighted what is the strategy, what are the problems that we solve, what are the key competitive advantages, if you will, of Zimmer Biomet. And a couple of key messages that I believe resonated with the audience are these are different markets, this is a different company. And I've said this over and over, but once you put the data in front of investors, they get it. These are different markets. This is not a 3% growth market. This is not a backlog in this market. There are different dynamics, demographics, technology, that support pricing to support this markets being 4% or above WAMGR wise. And it's a different company. And again, this is not just a tagline. At the Investor Day, we showed 2 slides that showcase Zimmer Biomet in 2018, all the challenges that we had. I'm not going to repeat the messages but FDA, Department of Justice, paying down debt, no innovation and then Zimmer Biomet in 2024, a different company from an innovation and an operational standpoint. So that was message number 1, better markets, better company. Number 2 is innovation. And it's a beautiful story. We're at the forefront of a great cycle from an innovation standpoint. We're going to be launching 50 new products over the next 30, 36 months. And it's not just a quantity of products, it's the quality of products. I mentioned in New York that historically we've been a competitive centric type company. Candidly, we're trying to catch up with some of the competitors in the market. We had to deal with remediation. So we're laid in cementless, we're laid in robotics, we're laid in different categories of set. That's behind -- now it's about leading from the front and launching new-to-the-world technologies. We are the only company with shoulder robotics. We are the only company at [ $3 ] billion in the room with such smart implants. We got unique and differentiated platforms in cementless. I can go on and on and on. Innovation is a competitive advantage. And then the third message is now that we're down paying debt, now that we are confident on the financial profile, we're ready to commit to things that we couldn't commit before. Revenue growth, mid-single digit, EPS growth at 1.5% leverage and then free cash flow to grow 100 basis points above EPS. When you look at the 3-year plan in front of us, that gives around $4 billion to $5 billion in free cash flow. We have the optionality of giving at least 65% of that back to shareholders while being able to do M&A, which we know we need to do. So that's the good. The ugly, I do think that some of the feedback is still, people are confused. I don't think people realize that innovation is really the competitive advantage of Zimmer Biomet, I'm getting questions on this. We're not going to talk about those. But I will tell you, overall, the message resonated in New York.

Excellent. And maybe while you bring up the strategy in business development piece, we could go a little deeper on Rachel's presentation around M&A. And what were you hoping that we took away from that? And how should we think about M&A and your capital allocation priority scheme?

Rachel, our Head of Strategy and BD, covered a lot of things, but I would say 2 key themes to summarize the presentation. Number one, we committed to M&A, smart M&A. We got the firepower. We have the pipeline of assets. And at the right time, we will do M&A because number two, we know we need to diversify our portfolio, something that we've been talking about for a while. And at the right time, the right deal, without doing anything reckless, we will diversify Zimmer Biomet. And the aspiration is to get to a 5% WAMGR. Today, WAMGR, a weighted average market growth rate profile is around 4%. And we have an ambition to get to 5%. If you ask what time line, I'm not going to answer. But there is a very clear pathway to get there.

And maybe going one step further on the M&A side and reflecting on some of the time I spend on the operating side of the company that hadn't done M&A and then had ambitions to do M&A. Can you maybe talk about the infrastructure you're putting in place to manage that entire continuum from target identification to optimizing price to integration? And what are the resources behind that?

So I would say, David, that we learned a lot because of the deal that we did back in 2014. So we call that Zimmer bought Biomet, $14 million -- $14 billion back 9 years ago. Likely, we're not ready to do something of that size, didn't have integration capabilities. We didn't have know-how. We didn't have a dedicated infrastructure. Fast forward 9 years later, we have all of the above. We learned tremendously from that deal and now we're not going to be doing a $14 billion deal, but integration is complex, whether you do $1 billion, $2 billion or you do $14 billion. So today, we've got dedicated people around the world that are doing anything from early upstream marketing, understanding deals, negotiating deals. And then obviously, when the time is right, integrating deals. We got great examples. We cover what we did in CMFT, allocated $0.5 billion of capital over the last 3, 5 years, acquired 3 companies, it was flawless -- the integration was flawless.

Okay. And CMFT, I was sitting there, I said, "Oh, who were -- my mind saying, who are they going to buy? And I'm thinking is a heart-lung machine company out there bigger than your $2 billion to kind of push that one off the list? Like were you presenting that as an example of an area of your capital allocation? Or are you intending to communicate that as a strategic area of prioritization?

Seems like a leading question. Yes, and I will not be telegraphing what company I'll be buying to the world. It's an example of one thing that we have going on, which is optionality. Again, you asked me earlier, maybe what are things that investors still don't get about Zimmer Biomet? The way we've been telling the story for years, you're thinking that we are just an orthopedic company. We sell a bunch of hips and knees and the markets may not be great. We're more than that. We are an orthopedic company for sure. We have technology in data solutions within recon that is high growth. We have a business called craniomaxillofacial thoracic, which we call on cardiac surgeons, 300 sales reps in the U.S. We have all kinds of platforms in ASC. We have a lot of stuff going on. So this was just a business case to illustrate that one pathway to elevate WAMGR from 4% to 5% is by investing in this business, which by the way, we have invested in this business. And if you look at that portfolio, there's all kinds of optionalities, all kinds of deals you can do that get you to the 5%. So just a business case.

And maybe the last one on strategy before we go into the business, I want to touch on the partnership that you announced this morning as well when we talk about robotics. But the ASC, this is one thing that when I was last following the space was not an area of -- it was a theoretical area of conversation. Now I think it's a reality. Can you just talk to us about the operational mechanics around how you compete in the ASC, how contracting works, Stryker talks about. We can do everything on Stryker Paper from a contracting perspective, which simplifies things. How do you work competitively in that environment? And how does the partnership dynamic not slow you down?

So let me share some data points on results, and then we'll talk about what it takes to win in the ASC. We continue to deliver growth in the upper teens here in the U.S., in the ASC, close to 15% of our sales are coming from the ASC. We continue to gain accounts every day from an ASC perspective. I don't know we're #1 in terms of growth or #2 depends on the quarter, but let me be very clear. This is not one area where we struggle. So that's the end of the movie. What do you need in ASC, we call it a 3P as impeded model. You need products, you need people, you need partnerships. I start with products. What happens in the ASC is something that gets transferred from inpatient, outpatient in 70% of the cases, in knees and hips. It's not like Dr. Roman is using a knee in an inpatient unit and then tomorrow that Dr. Roman goes to an ASC and then you switch your technique that you've been doing for 15, 20 years, your instrumentation, your know-how, you're transferring that. So you've got to have best-in-class products. We are the #1 company in knees. We're the #1 company, hips. I like those statistics because they're transferring to an ASC. Now ASCs do more than knees and hips. They're doing sports, they're doing foot and ankle, they're doing all kinds of other cases. So you got to have category leadership. You've got to have the full bag. And I will tell you, we do have a full bag. So with your product checked on that. Some instances, and this is not a large percentage of cases, some ASCs want to have more than just basic products, they want to partner with a company in sterilization, they may want to have wheelchairs, they may want to have booms and lights. Here's where the partnership is coming to play. Most people don't realize we have an active partnership with legacy Hill-Rom, part of Baxter in where we can negotiate all of the above, beds, wheelchairs, booms and lights. If you came to the academy in San Francisco this year, you saw that we had those products in a boost. And then the third thing you need is people -- dedicated people, dedicated contracting people, people that each and every day just call on ASCs. And we got that as well. So on the 3 Ps on products, number one, in hips and knees, [ full bag ] on S.E.T., on partnerships. There is not a single deal candidate that I've lost because I didn't have a product because I have those partnerships, we have those partnerships, and we've got dedicated people which we didn't have 5 years ago.

Excellent. Well, I appreciate that Dr. Roman referenced that if you saw my high school transcript in physics, chemistry and biology, you would never ever want that. But maybe we could turn it over to robotics for a second here. I don't know if I misheard this at the analyst meeting. I think one of the presenters made a comment that 90% of hip and knee implants done by orthopedic surgeons under 40 are done on a robot. Was that a market comment or an HSS kind of...

HSS. Yes. If 90% of all robotic procedures were done robotically, there'll be a different financial profile for the company, for our companies, for us, for Stryker and everybody else.

I think it is people -- surgeons under 40.

Yes, given...

Given the scenario.

Yes. Now that sound Dr. Ast talking about himself on HSS.

Got it. Okay. So maybe, okay, contextualizing that. Where are we in robotic penetration?

Yes. I'll give you the global, I guess, statistics or maybe start with the U.S., penetration of robotics is somewhere overall, somewhere in the 20%, 25% range. Stryker clearly is the market leader. They've been doing this, MAKO started in Fort Lauderdale in 2007. Stryker acquired MAKO in 2014. As I mentioned earlier, we got late to the party in 2019. So they have the #1 position and #1 penetration. We're #2 and growing. Our penetration for ROSA today is somewhere near 20%. As you heard at the Investor Day, we're making a commitment to get the number to 50% or double the number, 40% by the end of the strapline period, so call it, 2027. You mentioned the announcement from this morning. I like the optionality that we have from a robotics standpoint. We are now the only company in the U.S. that has a hip application, a total knee application, a partial knee application, a shoulder application. And as of this morning, we have an exclusive agreement with THINK Surgical. We also have the only handheld robot for total Knee, which by the way, I think is -- we think it's a competitive advantage in an ASC environment you were asking me about. On top of that, we got at least 3 new indications for ROSA that we plan to launch over the next 2 to 3 years. We just finished validation for our next-generation total knee platform with ROSA. But when it comes to robotics, I love the fact that we're #2, growing fast, taking share in an ASC environment. And from a category leadership standpoint, we got what we need in an in-patient unit as well as ASC with the optionality of having a handheld robot.

And maybe it's a good opportunity to go into a little bit more detail on the partnership. You announced this morning, what is a handheld robotic system? What does it do -- how does it fit in the portfolio?

I'll try to keep it simple since you failed chemistry in high school. But essentially, a handheld robot is a small unit. It's a portable unit, right? There may be some physicians that like the smaller print -- footprint. I'm not sure that's the key advantage. What a handheld robot offers is more efficiency, more speed in doing cases in an operating room in an ASC environment. What a handheld robot does is that you don't have to spend the same amount of time preparing for cases. This one is image based. So CT scanning and whatnot. So you got surgeons who like CT scans, you like -- surgeons that don't like CT scans. Now Zimmer Biomet is the only company that can do both of them. CT scan, non-CT scan. But if I were to deliver one key thing on the handheld robot is efficiency and speed in an operating room and a smaller footprint for some surgeons who prefer that.

And is there any sort of like case segmentation, you use ROSA for more complex, more invasive cases? Do you use the handheld for more...

It's really optionality. It's really optionality. I don't know, we do thousands of cases per day and thousands of surgeons prefer different things. So I'm giving you the optionality of you, CT scans, non-CT scan. You want to take a smaller footprint, I have that for you. You want to use ROSA, which is image less, CT scan less, I have that for you. You like being in control of the case, I have that optionality because it's really optionality.

And then maybe turning to the implant side. Once arms around is the -- just sort of the mix premium opportunity within your portfolio? I think you have 2 layers. One is the conversion to cementless and the second is the conversion to robotics. Maybe the 2 are additive to each other. Just help us think through the opportunity there?

Yes. This is basic math. And you asked me earlier, and I didn't give you a robust answer in terms of things that maybe investors are not picking quickly. Every time we move from doing a cemented knee to a cementless knee, which by the way, is the trend, given the fact that cases are moving to ASC. We pick 10% to 15% on mix, rather, right? And the same thing happens with robotics. Every time that we move from nonrobotic cases to robotic cases, that's another 10% to 15%. 1/3 of all cases, that are done today in robotics also do a cementless knee and that grows. It's kind of like a double whammy when you get the 30%...

You get both.

You get both. Okay. And again, I'm going to say it again, we are # 2 or penetration for cementless knees in the U.S. is less than 20%, and so is a robotic penetration. At the Investor Day, we committed to moving robotic penetration for ROSA from that number to 40%. And cementless penetration knees from less than 20% to 50%. So start compounding the 10% to 15% ASP uplift, it becomes a snowball pretty quickly.

And maybe you could talk about the partial knee opportunity on ROSA. I think you said first quarter of next year in the U.S. is when you'd have...

Partial knee is already in market.

In the U.S...

In the U.S. And then is going...

Or is the Oxford product you said in the first quarter of next year...

Yes. So you're talking about Oxford Partial Cementless is the -- it will be once we get here in the U.S. It will be the only PMA-approved partial cementless knee in the U.S. It's a product that has 60%, 6-0 market share in Europe. So again, going back to the ASC that is one very unique product that you have.

And that's like the Gold Standard Biomet, Oxford...

That is the gold standard.

You need to have more...

We have more data on that knee than probably any other knee. So I'll take it -- update on that one.

One of tailwinds that we've talked about here, how do we contextual -- that you put up in Q1, and I think we all appreciate the selling dynamics. But it would seem like all these factors should be producing growth higher than that?

Yes. Yes. Thanks for the question. So as you mentioned, day rate matters. So our day rate growth in Q1 was north of 6%. So 4.4% constant currency, 6% and change day rate wise. [indiscernible] started talking about is future looking, right? We didn't have in Q1. Obviously, Russia showed that in full [ motion]. We didn't have in Q1, still won't have in Q2 Oxford Partial cementless. We didn't have in Q1 or Surgical Impactor, which we launched midpoint in Q2. We didn't have in Q1 or Z1 Triple Taper Stem. So there's a lot of products that are getting launched throughout the rest of 2024. That's why for the entire year or for the entire time, we've been saying you should expect the year. I know that some of us don't like it to be probably in the low side of mid-single digit for the first half and the upper side of mid-single digit in the second half because of all these new product introductions. All of that said, look, I've been doing Orthopedics now here 5.5 years. I was with the [indiscernible] in Europe 15 years ago. Orthopedics is not linear. It was not linear before. It's not linear now. With this shift going to the ASC, you will see volatility. It's not going to be a linear every quarter, you're delivering 6%, 8% growth and you repeat. It doesn't happen. We had a great Q3 2023 and Q4 was not probably what some of us expected. Q1 is back what it was. And as we look at the rest of the year, we are confident we're going to deliver the guidance that we gave, but it may not be a perfectly linear equation throughout the rest of every quarter for the strapline -- was that a lengthy answer...

No, no. I think it's very clear. I think one of the things that obviously ends up getting into focus is the pace at which a lot of these things happen, which is you talked about the 20% to 50% penetration. We've gone from 0% to 20% in robotics and MAKO had early success, but really didn't take off until Stryker put it sort of the distribution and capital muscle behind it. So if it's taken us 10 years to get 15 to 20 points of penetration, does it take another 10 years to double? Is the rate of change accelerating? Like how do we think about the change...

I think -- we think it's going to accelerate. Why is it going accelerate 2, 3 drivers. Number one, the movement to the ASC is definitely a way. Number two, and this is unique to Zimmer Biomet, we launched our cementless platform 2 quarters ago, right? Stryker has done a nice job in doing the combi -- by the way, we learned from them doing the combination of MAKO plus Triathlon. We got a combination going as of right now. I go back to your question on Q1. We didn't have all the sets for Persona OsseoTi, right. So I think that's a unique to Zimmer Biomet. And the third driver of why this should accelerate is the fact that there is a lot of clinical evidence out there that supports that you get an accuracy and you're getting best-in-class clinical outcomes with robotics, whereas 9 years ago, there was skepticism around that. No. I will say that the penetrations will increase at a more rapid pace. That's why we're not shy in saying that we should be able to double the penetration of robotics within the next 36 months.

That's super helpful. And that's a good, I think, opportunity to talk about ROSA Shoulder because this is a -- I think, unique opportunity and probably one of the better reflections of the change in your positioning versus some of your competitors, you're first to market here I appreciate that you want to go through an LMR and make sure the product is achieving your objectives and when it hits commercialization. But when do you move to full market release, how do you make sure that you're sufficiently ahead of new competitors that come to market? And how is this reflected in your outlook for the year?

So short answer is second half of 2024 is when we go into a full market release, probably more in Q4 than Q3, but in the second half of 2024, you should see ROSA Shoulder pickup. We're doing cases every day. We're validating the story. We like what we see, already thinking about next generation of ROSA Shoulder, iteration rather. But second half of 2024 is when you should see more impact coming out of ROSA Shoulder.

And that's all reflected in I think you said mid-single digits or better growth in...

In the higher range of upper single digit for the second half of 2024.

Okay. And that's really that the ROSA Shoulder contribution...

One of them. But the story here is that we have a lot of short-term goals. When we gave guidance in -- when was it, January at JPMorgan and officially in our February call, we talked about 5% to 6%. Some people were skeptic. I'm not sure that those were skeptical of the guidance, realize that this is not a one product show. ROSA Shoulder, Triple Taper, Surgical Impactors, full launch of Persona OsseoTi, next generation robotics. This is before the partnership that we signed up on the site, full portfolio for the ASC. I mean, I can go on and on. So no, this is now ROSA Shoulder that is going to get us from 4% to 6%, it's the combination of all these products.

Okay. And then maybe turning to the P&L a little bit. One of the things that is -- I appreciate it's a balancing dynamic for you is you have all these launches, you're also committed to earnings leverage. But given the opportunity to play offense here, why not go more aggressive on OpEx in the short term if you can produce visibility to the higher end of that 4% to 6%. Like how -- talk about the focus from short-term [ learning ] -- and long-term opportunities..

I'll put -- we'll put Suketu to work, but just 2 quick sentences here. And this came up in New York. We have what we need. Let's not forget, this is a company Zimmer Biomet, that we've been in business almost 100 years. We still have 43% SG&A. We do 5% of sales in R&D. Within R&D, 60% of it is around new product development. So we got the dollars that we need to innovate at the pace we're innovating. And we got pretty significant efficiencies within SG&A around the channel and whatnot. So it's not like we have to throw more dollars to execute on the 50 new product launches. But Suketu, why don't you take that?

Yes. So thanks for the question, David. Just stepping back, just a couple of data points. If you look at and you assume we deliver on our guidance for this year, from 2022 through 2024, we have expanded operating margins by roughly about 200 basis points, give or take. That's in the backdrop of stabilized gross margin. And we've been able to do that through SG&A efficiency, okay? In the backdrop of that, we've been delivering not only margin expansion, but we've launched over 50 products in that time period. We've increased our WAMGR by about 100 basis points. We've improved internal capabilities and competencies in a number of areas, and we've performed at or better than market. So I think we've already demonstrated that we're able to find those efficiencies and still drive innovation and performance relative to market. And the question is, well, how do you do that? And I think there's 3 key building blocks. One is, when we think about OpEx moving forward, sales leverage is a big driver for us with operating margin expansion. Not all OpEx grows every year. You have a pretty significant component that's fixed or semi-fixed. As your revenue is growing up, you're getting a lot of leverage through that. Secondly, there are still efficiency areas within our company that we're going to drive at 43% SG&A. I still believe it's target-rich. We outlined what some of those areas are. We still have a very high cost to serve in a number of areas throughout our channel. We probably spend more in sustaining engineering than NPI than I'd prefer, quite frankly. There's opportunity to continue to leverage G&A through our shared service platform that we created over 3 years ago and a more simplified structure where we can better allocate resource with a BU, business unit structure versus a regional structure. Those all present opportunities for us to continue to drive efficiency. So again, number one is you've got sales leverage on fixed cost; two, you have a number of sales efficiency -- excuse me, operating efficiencies that you can drive. And then 3 is mix shift. We're getting better every year under the construct of, hey, defend, develop and drive and we're going to allocate towards develop and drive versus defend. An example of that, we have a restorative therapies business, primarily hyaluronic acid, Gel-One. We went through some reimbursement challenges back in 2023, which we talked about. Well, guess what, the growth outlook for that business is now diminished and the margin profile has also diminished. It's still a very attractive business, but not a growth driver. So guess what? That's not going to get as many sales reps and marketing dollars as they used to. Those dollars are now going to go to ASC contracting. They're going to go to Z1. They're going to go to all the new product introductions. So we feel that we're appropriately sized, we're appropriately invested. In fact, we've got more room for opportunity for efficiency and still drive the topline.

And do you care to offer the breakdown between fixed versus variable costs and G&A versus S&M?

I'm not going to get into those details because it can fluctuate from year to year, so I don't want to put a static. I would say, of the OpEx, so between R&D, SG&A, I would say, at least 25% of that baseline is fixed or semi-fixed.

Okay. And then G&A versus sales and marketing?

We're not going to get into that component because it's murky sometimes what you consider G&A versus selling and [ their rationalization ].

Maybe we'll talk about the gross margin for a second because I know this is not the best forum to do math, but I think it's important. So it is one of the areas where we got a lot of questions around the trajectory of gross margins and what I think investors and quite frankly, I am struggling with is, if I think about a roughly $8 billion top line, if you grow that 5% on an FX-neutral basis, that produces $400 million of new revenue. That should fall through at higher than the corporate average gross profit on an incremental basis. But then you talked about 25 to 50 basis points of year-over-year declines in gross margin, so -- which I think would be roughly $30-ish million. So it's -- if I say the $400 million flows through, it's 75% for argument's sake, that's $300 million. And then you lose the $30 million, it would still seem like there's room for gross margin expansion. So like how do we look at that and say...

I love the way you think because these are the same arguments I give my business unit leaders. So let me just step back and go through a couple of data points that we put out there in New York the other week. One is, we said underlying gross margins will be stable in the early part of the LRP and growing as we exit the LRP and beyond.

Maybe we want this piece by piece. So why is that the case?

Yes. So let's start with stable because there's another component, which is non-operational around FX which sunset [indiscernible] underlying. So just start with underlying. Every year, although our pricing erosion is getting better, you still think a historical pricing erosion of 100 to 200 basis points on the topline translates to about 50 basis points of gross margin erosion. Secondly, you have inflationary pressure, which over the last couple of years, has been a significant challenge and continues to be a challenge, quite frankly, in some areas. That's roughly about 50 basis points of erosion year-over-year. Every year, you face that wave coming at you. If you think about it, that's about 100 basis points on an $8 billion top line, that's $80 million of operating costs that you have to offset every year. We're at a -- finally at a position now where we can offset that $80 million through some pretty big structural programs such as site optimization and closure, reductions in E&O, volume increases, as you just touched on, the ability to reduce fixed-type overheads. So these are all programs that we have underway to help offset that $80 million of headwinds that we have every year. So it's not just the marginal drop-through on the revenue growth, you have to offset that pricing and inflationary pressure as well. And so again, that's where we're at the point where we haven't been historically in a position to offset those costs. That's why gross margin is declined. But over the last 3 years, we have been able to stabilize that. And that's what we're saying as we drive more structural programs, we'll be able to increase that gross margin over time.

And the gross margin is like the hardest line to move, it's only moving pieces in it. But so some of the programs you're putting into place effectively to summarize that, you're starting to see the benefit now, and that's what allows you to keep underlying gross margins flat in light of those sustained dynamics. The benefit of those as your business continues to grow and those benefits accrue, you start to see an improvement in the outer years and the sort of, I don't know how best to put in accounting related headwinds. I mean sort of it's not cash, I know...

They're non-operational...

The non-operational headwinds start to moderate. So the optics of the P&L look different...

Absolutely, as we're exiting for it. And we'll continue to break that down for you as we go through the LR period, how much is actually FX hedge noise versus underlying performance, which we feel really good about.

And as you think about giving an LRP, I think, firstly, I think most would say the 4% to 6% is very reasonable. And unlike some other LRPs, you see sometimes where it's lower in the first year and higher in the last year, I think you're saying pretty consistent over the course of that period. But on the gross margin side, it seems like 2026 is a long way away were you're trying to manage the consensus numbers there to make sure people were clear on the dynamic or how conservative is the outlook here?

The overall outlook or the...

Gross margin specific.

Look, I think based on what we know today, I think it's relatively fairly cold. We're going to continue to push our teams to do better. That's how we operate.

Any questions in the audience as we kind of get close to wrapping up here -- -- think the partnership. Well, we can -- we have the distribution agreement to do it in an inpatient, outpatient or ASC. We believe it's going to be much more of a competitive advantage in an ASC, but definitely, we're going to deploy it in both sides of care. And maybe then wrapping up just on the capital allocation side. We talked a little bit about it earlier, but this is an industry where top line growth seems to be paramount for driving valuation, how do we think about just the different moving pieces here. You have the 65% commitment to return cash to shareholders through buybacks and dividends. You talked about the $2 billion. I know it's not a commitment to a deal size, but there's a rough frame of reference. Should we interpret this as Zimmer has substantial flexibility? And here are some of the things that we might do with that free cash flow. But over time, our focus is on driving -- shifting the WAMGR, shifting the product portfolio...

I think simply said, our capital allocation priorities have shifted from debt paydown and strengthening the balance sheet to maintain strong investment grade. Now, I think, a well-balanced mixture of return of capital to shareholders for near-term value creation while maintaining ample M&A firepower to continue to grow the top line.

Okay. We've been saying for at least the last 2 years, that #1 priority is M&A, net of paying debt and it is. We do need to change our WAMGR. But also for the last year or 2 years, we've been saying, we're not going to be reckless. We're not going to be jumping at a deal that may not make financial sense. So we do have that optionality and we'll act on it once we're ready.

Okay. Excellent. Well, we have about 40 seconds left, so maybe Ivan, I'll turn it back to you to just kind of wrap...

I'm not going to give any political speeches here in the way. I don't feel like I got to say something very compelling. I just said that I'm really proud of the turnaround of this company. And those of you who have been following Zimmer Biomet for the last 6, 7 years, you know this is a totally different company. Very proud of the team, very excited about the present, very excited about the future. Innovation is our competitive advantage. It's the competitive advantage here at Zimmer Biomet. And I do think that you're going to see exciting things coming out of CV, excited about the year. Finally, it seems like we're having a normal year and where we don't have all kinds of variables. So really looking forward to closing this year strongly.

Excellent. We really appreciate your time. Thank you for making the trip to Miami and thank you for your kind words as well, and we'll look forward to continuing to follow Zimmer's progression here.

Thank you for not asking any multilayer questions. Much appreciate it, David.