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

Good morning, and welcome to day 3 of the Citibank Healthcare Conference. I am Joanne Wuensch, the Head of U.S. Medical Technology Research. I am thrilled to have up here on the podium with me from Zimmer Biomet. Ivan Tornos and Suky -- I'm going to screw your last name.

You got this.

Upadhyay.

Very good.

How did I do? Okay? You can try Wuensch later. But anyway, so Ivan, we've been talking all year about the new Zimmer Biomet. And I would love for you to sort of just start the conversation right now and sort of saying what you've accomplished in your first year, plus as the CEO and a little bit about where you see it going.

Okay. So good morning, everybody. Maybe I'll bag it into maybe 3 key areas that I think we've done a remarkable job and maybe a couple of watchouts, things that we've got to do better as we enter the next year of the turnaround here at Zimmer Biomet. So early in 2024, late '23, we highlighted 3 priorities for the company, those being people and culture, having the right people in the right jobs within the right culture. Priority #2 is operational excellence, which is about delivering revenue at mid-single-digit revenue growth with earnings per share leverage of 1.5% of revenue growth and free cash flow being 100 basis points above the EPS growth. And then the third priority for the company, which is foundational for any medtech company was -- still is innovation and diversification. So those are the 3 key priorities. Quickly on those 3, I'll tell you, I would say it's pretty solid across the board. In the bucket of people and culture, we have the highest engagement scores in the history of the company. Our attrition rates, people leaving the company are at an all-time low. As a way of background back from 2015 through 2020, we're losing something like 20% of people every year. It was difficult to keep people engaged and morale was very low. So again, on the first packet of people and culture, high engagement, low attrition. In the back of operational excellence, we're going to talk about some of the channels here in a second, but Q3 was the 11th consecutive quarter in where we deliver mid-single-digit revenue growth. And that's the background of having an ERP challenge, which now is part of the past. So 4.1%, 4.2% revenue growth, which is mid-single-digit revenue. Nice EPS leverage and solid free cash flow conversion and growth versus 2023. And in the bucket of innovation and diversification, the third priority that we highlighted, we got the strongest pipeline in the history of the company. We double -- more than double the dollar value of the pipeline from 2019. And as we see here right now, we are about to launch 50 new products and so we'll get into that over the next 30 to 36 months. So again, in the area what is that you guys have done well, people and culture in the right direction, operational excellence, some challenges, but revenue, EPS, free cash flow, where it needs to be. And then innovation diversification, we are moving our WAMGR towards a 5% by 2027, and we are launching a ton of new products. Areas that we can do a better job, areas where I can do a better job, we cannot have operational challenges like this ERP debacle that we announced back in September. Again, that's behind. We are now shipping, our volumes are at pre-ERP levels. But that's another reminder that we still have some deficiencies when it comes to how we run the business. So that's definitely an area where we need to do a better job. And then the second thing I will highlight is, clearly, although we are delivering consistent mid-single-digit revenue growth, we have had inconsistencies when it comes to some of our commercial operations, primarily here in the U.S., where we see one quarter is good, the next quarter is not so great, and that's been happening for the last 5 quarters. So that's something that in 2025, we're going to be addressing and you are not going to be seeing those inconsistencies when it comes to the U.S. So those are the 2 key areas, I guess, on the side of things that we can do better, ERPs and U.S. commercial execution.

So let's pause just on ERPs because we've talked about it a lot over the last 90 days. You say it is behind you. Can you quantify the ultimate impact versus the expected impact and then comment on whether or not that will be there in 2025.

Yes. Let me make sure that I'm clear here. When I say it's behind, what I mean is that the shipping, the products that are leaving the factories, the warehouses, the speed, the volumes are the same as before the ERP malfunction. It's not 100% behind in the sense that we got to make the changes sustainable. We still have some glitches that we got to resolve, but it's not a headwind by any means as we exit 2024. And to answer the last part of your question, this is not something we're going to be talking about in 2025. So in that regard, it's fully behind. Back in September, we mentioned that the ERP malfunction challenge, whatever you want to call it, Joanne, was going to cost us around 100 basis points, 1% of annual sales for 2024, which essentially was -- essentially 200 basis points in the second half of 2024. Given the speed of recovery, given the great leadership, I give a lot of credit here to Suky, Suky runs operations. We now guided in Q3 that the annual impact would be somewhere around 60 to 80 basis points for the entire year. So roughly 30 to 40 basis points per quarter and we don't try to deliver in accordance with those expectations.

Okay. Is there something that takes it to the lower end of that 30% to 40% or the higher end?

We provided guidance in Q3. We're not going to get into commentary now in Q4.

All right. Let's step back for a second and talk about the global orthopedics market, which is stronger now than it was 5 years ago. And I want to think about the different components that's making a stronger market right now and the sustainability of those components.

Sure. Well, again, not being consistent in some key markets, we are delivering mid-single-digit revenue growth. If you look at our peers, they're also delivering healthy growth. Every data point that we track shows that this market is growing between 4% to 4.5%. Some of my peers think the market growth is around 5%. So let's call it 4% to 5%. We deem it very sustainable and the drivers of sustainability of this healthy market, start with the basics. Number one is demographics. Here in the U.S., every day, 10,000 to 12,000 people are turning 65 years of age or above, so the baby boomers. And you follow medtech, you look at cardio, you look at urology, general surgery, you definitely see the impact of these baby boomers. So every market seems to be healthier than it was just 5, 7 years ago. So demographic is number one. Number 2 is site of care. Here in the U.S., a large percentage of cases are moving to an ASC. In the case of orthopedics, as these cases move to an ASC, we are seeing what we call a double-dipping effect. Some younger, healthier patients are going to an ASC as some more complex older patients are going to an inpatient unit. So the number of cases per day is actually higher. And every data point that we're getting shows that these trends going to continue over a long period of time. So again, the double-dipping effect is another driver. The third key driver is the technology that we're bringing into the marketplace. I want to say we, I'm talking about all of us, frankly, Johnson & Johnson, Stryker, Smith & Nephew, obviously, Zimmer Biomet. We're bringing a very disruptive technology that is shortening the episode of care, that is making the time in surgery shorter, that is lowering readmission rates, that is lowering length of stay. So when you see a new standard of care, more patients are willing to enter the episode of treatment. And that's something that is driving a ton of volumes. So I will say those are the 3 key drivers. And obviously, the fourth key driver is pricing. We are going to end the year 2024 likely price positive. We guided flat to 50 basis points and I like the trends here. This has been a 3 years plus in where price erosion commitments have been beaten. As we look at the contracts over the next year or 2 years, we continue to foresee the prices move in the right direction. In our Investor Day, we guided to be up to 100 basis points of price erosion for next 3 years. I know that Suky and I aren't going to be happy losing 1 full percentage in price per year. So I like where pricing is going, and I think it's a sustainable market dynamic. So again, recapping ASCs, technology, demographics and pricing are the 4 key reasons of why we believe the price or the market is going to be growing 4% to 5%.

Why do you think price is positive now? I mean as a student of medtech, I've been watching price erosion across all sectors of medtech for years. And now all sectors are discussing positive price, what's changed?

I'll let Suky cover that and I'll elaborate.

There are some macro and some micro specific to ZB and our pricing. And you're right, Joanne, if you go back 3, 4 years ago, we were eroding price about 300 basis points per year. Last couple of years, it's been about 100 basis points. And as Ivan said, this year should be flat to maybe slightly positive. So a very good trend. One is just macro in the overall environment. The market continues to reward innovation and value brought to the patient and to the provider. And so if you think about things like our cementless application or robotics application, these are garnering ASP premiums in the marketplace because they bring real value. Two, in the backdrop of that, from a macro perspective, I think we're seeing the larger players be very rational around price. They're all -- we're all trying to catch up for the hyperinflation and the cost of inputs that we all observed over the last couple of years. You can't continue to give price up when you see inputs and raw materials going up at the levels they have been going. So one, the market is in a better place. Two, relative to ZB, we've implemented a lot more sophistication from a capabilities, systems, governance perspective. That's going to improve our pricing performance regardless of what the market is. And three, we're just getting a lot more smart about opportunistic areas. I gave an example last night, some investors in Turkey, where we had a significant devaluation of the Turkish lira. And normally -- historically, we probably would not have done anything on price and we would just absorb that. We're looking at it differently now and we're realizing that there's a lot more elasticity in our pricing environment. We're taking price up in those types of instances. So I do believe this more positive trend that we're seeing is durable. What it means year by year, it's tough to predict. I don't have a crystal ball. But definitely, I don't think in the near term or midterm, we're going back at a historical 300 basis points that we used to see.

Okay. Let's go back also to the site of care. ASCs has been a theme over the last couple of years. There is a stage pre-pandemic where it was a worry because it was thought maybe you'd get pricing pressure in the ASC, but that doesn't seem to be happening.

No, it's a good trend. We like it. And you're right, the price dynamics we see in inpatient HOPD, hospital outpatient and ASC are comparable. In some cases, actually, ASC is even better. And I think it goes back to fundamentals of health care economics. When you look at the bundle of care -- the orthopedic bundle of care, 15% is weak, the bad guys, pharmaceuticals, medical supplies, medical device companies. It's another 85% that is something else. And it's the things that I was alluding to earlier. Surgeries that are taking too long, right? New procedures that are taking an hour, 1.5 hours that can be done in 30 minutes with the same clinical outcomes. It's laboring efficiencies, whether it's inpatient or outpatient. It's the length of the episode of treatment. It's readmission rates that are very high and very punitive from a reimbursement standpoint, in the first 90 days post discharge, it's physical therapy dynamics, et cetera, et cetera. So all this innovation that we're talking about that is shortening the episode of treatment, driving efficiencies, those are very valuable. A lot of these ASCs are physician-owned. They're run by people that understand how to run P&O. So in the discussion of do I want to lower the price of an implant and potentially impact, a portion of that 15% or do I want to do 3 more surgeries per day because I'm lowering my time in surgery, I'm going to choose B. And again, in our field, orthopedics is the second highest contribution margin procedure in medtech. So we want to look at that 85% versus the 15%. So I think that's one of the key reasons why in an ASC space, you're not seeing price erosion being higher than in an inpatient HOPD.

Sounds right. I want to spend a little bit of time on ROSA and you have multiple different applications for ROSA. And so this is sort of a 3-part question. The first part, how are you viewing robotic uptake and applications? How are you viewing the different opportunities you have with the robot? And then the last one is sort of a bigger question, which is looking forward, how do you think about robotic surgery adoption and the contribution to your revenue? So a lot all wrapped up there.

A lot of questions. If I forget that 2 and 3...

It's a multipart one question.

Let's start with the macro picture. Very, very excited about robotics in general in orthopedics. Here in the U.S., the penetration, the use of robotics is around 19%, 1-9. So 81% of orthopedic surgeons in the U.S. are not even using a robot. So this is an all boats rise type of environment, right? We use soft tissue robotics, Da Vinci as a proxy, the opportunity is very high. It's a huge blue ocean. And by the way outside the U.S., the number is around 9%, 10%. So again, low penetration in the U.S., low penetration outside the U.S., a lot of new clinical and economic data, we believe adoption of robotics is only going to increase. Micro answer. We like the fact that ROSA has the broadest set of indications when it comes to orthopedic robots. We got brain applications. We are the first company to have a shoulder application in market, already hundreds of cases in shoulder robotics with ROSA. We've got a partial knee application. We've got a primary knee application. We got a hip application and we're launching 3 new ROSAs in the next 18 months, one that is going to be CT scan-based for those surgeons that like to do a CT scan prior to the procedure. We're going to be launching a ROSA posterior application. In the U.S., 40% of all hip surgeries are done via the direct anterior route. But as for the U.S., that has a different dynamic. It's mostly posterior. So we're going to be launching that as well. And they're going to be launching also the third launch in the next 18 months, it's going to be a new and improved faster customer interface ROSA application. So in addition to having the broader set of indications already, we're going to be launching 3 new ROSA indications. We have already installed 1,500 ROSAs over the last 4 or 5 years, and we plan to rapidly increase the number of installations over the next 3 years. On the second, third part of your question, look, we're not married to just robotics. We want to be the broadest navigation company in medtech. And that means optionality. We want to do robotics and I already spoke about all these different applications. But we also want to do mixed reality for that 80% of surgeons in the U.S. that don't believe in robotics. Don't want to have a large footprint of capital equipment. We are the only company in the U.S. that has 510(k) approve mixed reality technology, HipInsight. We also want to do light navigation software like OrthoGrid. I want to do more basic rudimentary navigation like iAssist. So it's not just that we believe we have a competitive advantage in robotics. We also have the broadest set of solutions when it comes to our navigation.

And where does artificial intelligence fold into this? Is it things that are driving the product? Or can you get an SAS type of business model going with it?

It's at the core, it's at the epicenter of our competitive advantage. No other company today in orthopedics, and you can fact check me on this one, collects more data than Zimmer Biomet. And we do that in a very disciplined way. We collect data prior to surgery through mymobility, the partnership that we have with Apple. That is data that goes right into the case. ROSA collects endless data points throughout the procedure. Persona IQ, which is the only smart implant technology, continues to gather data during surgery and then with the patient for life. And with those countless data points, we're able to engage in prediction. Prediction of potential infection, prediction of gait, prediction of range of motion. So we're already exploring things like resharing agreements. Can we guarantee that a certain patient, Joanne comes to the surgery given your Varus-Valgus dynamics, given your age, given your mobility, can we predict how your knee is going to perform? And can we actually then engage in some sort of guarantee with hospital system that a patient like Joanne is not going to get readmitted, a patient like Joanne, if it has physical therapy in a certain way, won't have to be back in the system. So a long-winded way to say that we're collecting a lot of data. We're already doing some prevention, some prediction. I would even exploring the economic side of the equation from a contracting standpoint.

Excellent. I know you've talked about, I think, it's 50 new products in the next 3 years, if my math is -- if I got it correctly.

You got it.

If you had to say 5 products that you're most...

Can I say 50.

You can't say 50. You can say 7. But what are the products that we should be really tracking over the next period of time?

Yes. So first of all, very excited, right? So 50 new products, 36 months, you can do the math. We're going to be busy for a while. I'll break the answer in knees, hips and maybe set technologies. So 4 categories, and I'll try to give it to 7. But in knees, we announced 3 new knee launches in the last 3 weeks. The most compelling is going to be still Persona OsseoTi, cementless platform for Zimmer Biomet is in full launch mode now. The adoption rates are very high. Every time we move a patient from cemented knees to cementless, we're getting 10% to 15% ASP closer to 15% than 10%. So mathematically, just doing this, we are the world's largest knee company, we do $2 billion in knee sales in the U.S., just moving a fraction of those knees to cementless. Mathematically, there's a huge tailwind for the company. The second one is going to be Oxford Partial cementless, so this is a knee system that just recently got approved here for the U.S. It is the only FDA-approved partial cementless knee in the U.S. It took 20 years for this technology to come from Europe over to the U.S. It's PMA-based. It's got the highest survival rates in Europe, 33,000 patients in the NJR, National Joint Registry in the U.K. with the highest survival rates of any knee in the space. So again, that's a transformational product. The third product in knees is going to be a Persona Revision going over to Europe Persona Revision got launched here in the U.S. 5 years ago. We've done close to $2 billion in gross sales over the last 5 years. That's new technology going to Europe. And then the fourth and final product in knees, and then I move on to hips instead is going to be Persona IQ, the short stem. Again, I mentioned we have the only smart implant technology in orthopedics. Adoption rate was somewhat low because we had the longer stem, 1.5 months ago, we launched what we call Persona [indiscernible]. It's a horrendous name, but it's great technology. It's a shorter stem that collects data on you -- the patient for life. So those are 4 very meaningful product launches out of many that would ramble through. In Hips, 3 products, triple-taper stem, Z1, surgical impactor and then navigation, which is OrthoGrid. In set, there is a bunch of products. So I won't go through all of them, but we're launching something like 10 different products in sports medicine over the next 3 years. We got a cadence of product launches in our CMFT business, craniomaxillofacial and thoracic, which is one of our highest margin categories. And then wrapping up this answer in technology. We have a lot of enthusiasm behind ROSA Shoulder. Not only is the first shoulder robot in the U.S., it's also the only robot that is going to be able to do anatomic and reverse surgeries, is able -- capable of doing resections of the glenoid and the humerus bone, is going to shorten the time of treatment, is going to potentially shorten the recovery rates. So we're really, really excited about ROSA Shoulder in addition to the 3 other robotic applications. I don't know that's 7, but you get a picture, there is a lot of innovation here at Zimmer Biomet.

And now these products slowly going out the door? Are we going to be able to track from throughout 2025? How do I think about the contribution of them to revenue?

Yes, we got to do a better job in really quantifying for all these product launches, what's the market size, what's the market growth, what is the adoption rate and what does this mean quarterly from a financial standpoint. So IR is going to be doing a more disciplined job in that regard. But to your question, how do these product launches work? It's somewhat gradual, right? It's not that you launch a product and immediately you convert in a ton of surgeons. You got to get the sets out there, the instruments out there. You got to do the medical education. But yes, when you have so much technology at some point, you see a bit -- a bit of a snowball effect. And we believe as we exit '24, you're going to see already some of that. As we enter '25, it's going to be meaningful. And we're really excited about the second half of 2025.

Okay. What's a bit amazing to me when you look back at the period of time of the Zimmer and the Biomet integration despite a ton of disruption, it wasn't that much market share loss, which means the market is very sticky. But at the same time, when I run numbers, you lost some market share particularly in hips. How do you think about taking that back?

Yes. It is a very sticky type of procedure. If you get trained on a certain orthopedic platform it's rare, they're going to be switching. That said, we did lose something like 300 to 500 basis points in hip market share here in the U.S. over the last, call it, 5 years, because we didn't have the platform. We had the technology, these 3 products that I mentioned. We didn't have a triple-taper stem that competes on direct interior. I mentioned earlier, this is 40% to 50% of all surgeries we have it now. We didn't have a surgical impactor. We lost some market share to Johnson & Johnson. We do have a surgical impactor now, and we are starting to see already market share gains. In Q3 of 2024, the U.S. delivered close to 5% growth in hips, and that's already the impact of new product introductions with navigation. So as we think about market share trends, we're going to continue to be the #1 company in Knees and the #1 company in Hips, we are going to start seeing more of a meaningful share capture, especially when it comes to Hips.

Okay. One of the areas that I think is not particularly well understood or even focus on is S.E.T. And there are 5 categories...

6.

6 categories. Thank you. Break that up for us please, and how do we think about which of those products are pay attention to this and which of them are like, yes, we're fine with that. It's more of a harvest mode maybe.

Yes. We got to do a better job in telling the story, and we got to do a better job in coming up with acronyms that make sense because S.E.T. means absolutely nothing. I don't even know we call it S.E.T It's 6 products, you got shoulder, upper extremities. We got a sports medicine, you got CMFT, which is craniomaxillofacial thoracic. So sternal closure and neuro products. And then you get our biologics business, which is restorative therapies, then you got our foot and ankle business, and then you got our trauma business. All-in said is growing. Last quarter grew upper single digit. We committed to growing at least in the upper range of mid-single-digit revenue. So can I believe that there is definitely upside to that number over the next 3 years. And there is a ton of products. We've got 3 growth drivers: sports, shoulder, upper extremities and CMFT. Those 3 categories are growing upper single digit, double digit. And that's where we are seeing the largest amount of innovation. The other 3 categories, foot and ankle, restorative therapies and trauma. Those are growing in most quarters. There are another 3 key growth drivers, but we're investing enough to get meaningful free cash flow. And it will take me an hour to go through all the new products that we're going to be launching there. By the way, every product launch in those categories is accretive to our WAMGR. So I mentioned earlier that our pipeline is twice the size than it used to be. 80% of our pipeline is going into set. So you continue to see our WAMGR moving from low 4s to 5% and a lot of it is going to be the innovation that we got in S.E.T.

Okay. One of the things which the company has been talking about for some time has been tuck-in M&A. You've been extremely clear, nothing transformational.

Yes.

What does tuck-in M&A mean for you? And how is your view today change versus maybe 12 months ago and what that may mean?

No, it has not changed. And I think maybe the perception -- look, again, many things that we have improved upon, but One of them is probably storytelling and when we say things. I think you heard Joanne, Zimmer Biomet talk about diversification for the last 5 years, ready to do M&A. We're not ready to do M&A, right? If you look at the last 5 years, we've been paying down debt. Post the merger of Zimmer and Biomet, our leverage ratio was somewhere around 4 on a net debt to adjusted EBITDA basis. It's not that we're going to be doing M&A. As we sit here today, our net debt to adjusted EBITDA ratio, leverage ratio is 2%, which is best-in-class. We got solid investor grade with all the agencies that matter and we have a very strong balance sheet. We have the optionality of doing M&A. And we're looking to do an M&A to diversify Zimmer Biomet further. We are going to do responsible M&A. We're not going to do transformational M&A. What is responsible M&A? Responsible M&A that is EPS neutral on year 2. We'll take minimal dilution in year 1, call it, 2% to 3%. We want to be under a $2 billion acquisition price, so that we don't need to incur debt at a level that we don't want to. It has to make sense strategically. So it's got to be revenue accretive from day 1. It has to go into the areas that move for WAMGR. It has to be in a call point that we understand very well. And again, there is all kinds of optionality there. What I want to leave you with other than no, we're not going to do transformational M&A is that we don't need to do M&A for us to deliver mid-single-digit revenue growth over the next 3 years as we guided in our Investor Day. I would like the optionality of being able to do M&A given the strength of our balance sheet.

Okay. And this leads me straight to thinking about other aspects of capital allocation, share repurchases and where you may or may not be thinking about a dividend.

Yes. So it does come down to capital allocation. The good thing for the company is we've pivoted from a focus of capital allocation towards debt paydown to now 1 that balances return of capital to shareholders and M&A. As Ivan said, we're in a very healthy spot from an investment-grade perspective. We're at BBB. We like where we are firmly in that spot, and we expect to stay there. So any capital allocation decisions we make it's going to be with a north star of maintaining our investment-grade rating. So that's point one. Now this pivot, as I talked about, to return of capital and M&A we've committed to returning at least 65% of our free cash flow generation over $1 billion per year in total free cash flow, 65% of that on average over the next 3 years as part of our LRP. The way to think about that is of that return of capital, we expect to maintain our dividends at the current level, which is about $200 million per year and the remainder of that 65% going to share buyback. And then the residual of that free cash flow will go towards things like tuck-in M&A. But that still leaves us even if you exhaust all the free cash flow when you're talking about a net debt leverage in the 2 range, adjusted EBITDA of $2.5 billion, you can safely go 1 turn to 1.5 turn on that very quickly, you've got a lot of capacity there to do M&A if something strategic and financially attractive came along. So I like where we are. We're in a very good space and -- but again, it's always going to be with that North Star maintaining that investment grade and very strong balance sheet.

And let's -- while we're on this topic, talk about operating leverage. And specifically, what brings gross margins up, what brings operating margins up?

Yes. So I think the building blocks are consistent with what actually we've delivered over the last 3 years, which is you've seen operating margins expand even in the backdrop of hyperinflation that we all observed over the 2022 and '23. And those building blocks are very stable and durable. One is revenue. If We're growing in the mid-single digits, our ability to leverage our fixed cost base both adds gross margin as well as operating margin expansion. So that's building block number one, I'd say it's probably the most important one. Number 2 is inside of that gross margin stability. We've been a company that post-merger of Zimmer Biomet gave up or eroded gross margin about 100 to 150 basis points consistently year-over-year except for the last 3 years, I said, hey, the first step to turning this around is to get stability and that's what you've seen in our gross margin line. It doesn't mean it's the same every year. There's some puts and takes, but largely, we've seen it stable. Our view is over the plan horizon, if you take out FX and the impacts of FX, that largely operationally gross margins will be stable to improving over the LRP. There's a number of variables that get us there. The next big building block is really around SG&A. We spend about 43% to OpEx. We have one of the best, most attractive operating margins in this sector. However, we also have one of the highest SG&As in the sector. And I think that there's a target-rich environment and things we can continue to do to improve that 43% over time. So the next big building block is in SG&A and efficiency. And then the last thing I think that adds to earnings is that pivot that we can now take from debt paydown to return of capital and our share buyback contribution into earnings per share. You put all of those together, plus about a -- just about a 1% dividend yield. I think it becomes a pretty attractive TSR story.

And how do you think about like certain things which orthopedics has been known for, for a long time is high inventory levels, having a salesperson in every operating room, stickiness of products, those types of things, to me, have always been sort of the sand in the gears that impacts the leverage. How do you want to unpack that?

Yes. So I think from a sales force deployment and somebody in the office, I think you're already starting to see efficiencies in that. As you're seeing a movement to ASCs, the ASCs just don't have, one, the bandwidth, the space, the time to have as many people in the operating room. So they're finding efficiencies and we're helping them find efficiencies through different solutions. So that is becoming better, too. They don't have the room also or the bandwidth from a sterilization point to have all this inventory. They just simply don't have the space. So we're finding operational efficiencies in partnership with the ASCs to deliver in a more efficient way. That's just one angle of it. The second is portfolio rationalization. Our objective is to get to 1 knee platform over the next few years. The ability to do that, rationalizing out older SKUs, older codes, also enables us to rationalize inventory, bring our working capital down, which then also has gross margin improvement. So it starts to build on one another. It starts to become a force multiplier. These are the things that get me excited because there's still a lot of runway and opportunity in front of us.

So when the 2 companies merged, there was this original thought process in my memory of keep it off. Don't touch anything. Let's just keep it. Where do you think you were at this stage of SKU rationalization, product rationalization, I mean I would just be curious, like we're near the end, we good or...

I'll let Ivan chime in, but my perspective is when you first came through the merger when I first joined the company, it was always hey, the sales reps are telling us, hey, we want everything, keep everything, keep this entire portfolio. I don't want to disrupt. We're now hearing from our sales force that has to manage all of these platforms and has to sell and market all these said, hey, we need to focus. So you're seeing actually a pivot at the ground level, which is exactly what's enabling us to go take this on in a more assertive and aggressive way. But I don't know, Ivan, if you've got...

I'll throw some color bias and data points. After the merger, we had around 800,000 SKUs. And if you were going to a website, post the merger, we said we wanted to be or we were in 125 countries. We divested dental, we divested spine. We've done a lot of portfolio cleanup, not enough. And today, our SKU number is pulling the 300,000 range. And no, we're not in higher than 25 countries. We are laser focused on 15 countries, 1-5, that account for roughly 90% to 95% of the revenue and EBITDA of the company. Even with our focus on 300,000 SKUs, our portfolio strategy and the geographic focus, -- we still have around 300,000 SKUs, and we operate with north of 414 days of inventory at hand. That is not best-in-class. So again, lots of kudos to Suky in terms of some of the inventory solutions that he's bringing in addition to marketing, to bring the number somewhere in the 300s. We'll exit 2024 already south of 400 that's not how you run a company with 350 days of inventory. So I think we are midpoint into the journey of the transformation of inventory, SKU reduction and everything in between.

Between the third quarter call and today, there's been this little election...

When did it happen?

We're done. But I'm curious what you're thinking might happen in the next we'll call it, next 4 years. I'm not even thinking it for whatever 180 days or something. But I am curious, the topics that we've been talking to people about are things like tariffs, potential changes in the FDA process, Head of CMS thoughts, I'd love them from you.

I mean, the short answer is who knows, right? But what I will tell you, obviously, I was in Washington DC yesterday, I met with the Governor Elect of Indiana, Governor Brown, I met with Senator Young. I met with a subcommittee on health care. I met with the orthopedic segment of AdvaMed, I got appointed the Chairman of that segment. And I think there is more tailwinds than headwinds. And again, speculation. We believe that from an ease of doing business, we're going to see less regulation. On the tariff front, look, 1%, 2% of our sales come from China, a fraction of our EBITDA comes from China. From a manufacturing standpoint, 2/3 of our manufacturing comes from the U.S., from Warsaw, Indiana. We do have some manufacturing in China, but that's single digit. Recall that we already went through 1 Trump administration, the 45th administration. And most of our products were part of the humanitary exception. Everything that we hear is that likely that's going to be the case, who knows. But today, we're not too concerned about tariffs in the China case. We don't have much volumes coming out of Mexico. What I heard is that a lot of the [ prioritization ] is going to be coming from Mexico versus China when it comes to that again, speculating, but this is what I'm hearing. We're not too concerned. And then look, there are tailwinds that nobody is talking about. I mean who knows what's going to happen with the corporate tax rate. The FTC likely is going to be a better environment from a deal standpoint. In terms of priorities for the HHS, medical devices so far has not been 1 area where you have heard a lot of noise. So we're going to be monitoring day by day what happens, not to concern about tariffs and actually, I'm feeling pretty hopeful in some areas.

Excellent. And on remaining minutes, when you and I are sitting here next year talking, what do you think we're going to be talking about?

No tariffs. Nothing I believe, controversial. At the end of 2025, I think you will see Zimmer Biomet growing mid-single-digit revenue. Seeing the true impact of all this great innovation that is taking years to put into the pipeline. You will see Zimmer Biomet, again, delivering solid earnings per share leverage at the tune of 1.5% as we committed, with solid free cash flow growth and conversion. So I think you will see -- we will see solid financial performance. At the end of 2025, I think you're going to see us thinking about even bolder innovation. A lot of the innovation over the last 3 years have been catch-up being candid. We had some disruption. So we had to catch up on cement as revision and whatnot. The products, the innovation that we're working on now is more customer-centric. So I think at the end of 2025, we're going to be sharing some exciting news about our innovation story. But yes, solid financial performance, solid innovation story, and I think 2025 is going be an outstanding year. We're closing a really good year of 2024 in spite of the challenges. And I think 2025 is going to be outstanding.

Excellent. Ivan and Suky, thank you so much for joining us.

Thank you, Joanne.

Thank you, Joanne.

Have a great day and holiday.