That— but, I guess I'm not getting that today. Yeah, thank you, Robbie. My name is Ivan Tornos. I'm the President and CEO of Zimmer Biomet. I've been with the company five years. I've been in this job 111 days and 2 hours, so I look forward to some questions later on. But before we get started, I do wanna thank you, Robbie, for hosting this session. I wanna thank, obviously, everybody for being here this morning. I wanna thank my team. We got about 10 people here from Zimmer Biomet. I wanna thank all of you for a great 2023, and for everything we're doing over the last five years, and most exciting, for everything that I know we can do over the next five, 10 years.
All right, I don't think I need to cover this slide unless you want me to, and I can mispronounce each and every word in this slide, or I can just summarize it by saying you know that any time you talk about forward-looking statements, there's some sort of risk associated with it, so that's disclaimer number one. And then disclaimer number two, there is non-GAAP data in this presentation. Hey, I know it's been quite a conference already. We've been here for a day and a half. To some of us, it probably feels like already a week. I'm sure you're fatigued. I'm sure that, like me, yesterday, you attended a couple of social events, so let me recap the entire presentation in a couple of bullet points.
This, to us, is probably the most important slide and the key takeaway, the end of the movie. This is not the same Zimmer Biomet. I'll say that again. This is not the same Zimmer Biomet that maybe you've been tracking over the last five, 10, however so many years. And what makes this company different today is two things that end up on a third thing, which is expectations. It's not the same Zimmer Biomet because the markets are different. Orthopedics is not what we believe a 2%-3% growth market. Combination of demographics, combination of the shift today I see here in the U.S., the access to technology, all kinds of elements tell us that today, orthopedics as a market is probably closer to 4% than 2%-3%.
On top of that, within the market dynamics, we at Zimmer Biomet have already increased our WAM GR from 3.5% to around 4%. Divested spine, divested dental, added two, three companies within CMFT, craniomaxillofacial and thoracic, added a couple of companies in our sports medicine business. So again, the market is no longer just low single digit. Historically it was. That's not the case today. Far healthier market, and no, it's not the backlog, and no, GLP-1s are not gonna kill this market. So that's key takeaway number one. Key takeaway number two is that internally, this company is in a different stage. If you go back to 2015, June 24, 2015, we merged Zimmer and Biomet. It was, it was quite an intense period. We ended up with four warning letters.
We had some compliance remediation to do. We had a lot of integration challenges. Those are behind. As of today, we have zero warning letters. We cleared the last one December 27th, 2023, right at the buzzer. We do not have any compliance challenges. We are in great standing with every key government agency. It's a different company. All the integration stuff is behind. So we moved from being in remediation stage to being on growth stage, and I think that's something that most people don't realize because they think, Hey, you've been growing 1%-2%. How are you gonna grow 5%, you know, over 2024 onwards? And the short answer to that question is, we moved from remediation to growth, and we'll talk about that later.
Because a different market profile, because the company's at a different stage, we're ready to make different commitments, and the commitments we're making, starting with the earnings call in Q3, and we'll continue to make, is that this company will have to always grow at least 100 to 200 basis points over market, already quoted the 4%. You can do the math. And we gotta do a better job, and we will do a better job in making sure that earnings is always growing faster than revenue, and free cash flow is always gonna grow faster than earnings. Not ready to make a commitment today on 2x leverage, you know, earnings to revenue.
I'm not gonna quantify today what free cash flow is gonna do, you know, versus earnings, but the expectation, the commitment, is that we will see leverage on earnings, leverage on free cash flow, growing mid-single digit or above. That's the most important slide in the deck. I'm gonna go quickly through the rest of the slides, and we look forward to the Q&A. All right, so now that we've seen the end of the movie, let's start with the very beginning. We've been in business for almost 100 years. So 1927, Warsaw, Indiana, a small but mighty town in northern Indiana. What defines what we do is the great mission statement of Zimmer Biomet. 13 words: alleviating pain and improving the quality of life for people around the world.
Bucket number two, we do believe that innovation is the competitive advantage. There's a few things that we do right, but as I think about the one thing, it's definitely innovation. We are first in many categories. We launched a lot of groundbreaking technologies. We are the only company with a smart technology in knees. We're gonna be first to market in shoulder robotics. We've done a lot of leading things when it comes to infection. We still have the number one market share position in Reconstructive. This is a leading company. Innovation is the key competitive advantage. Number three, we got close to 20,000 employees around the world. We operate in around 125 countries. I'm not sure that's an advantage. That's something we're evaluating.
Do we need to be in so many countries? What we do know is that in those countries that we're gonna participate, we're gonna be best-in-class. And yes, we are a Fortune 500 company. Revenue at the end of 2022, obviously, we haven't disclosed 2023 yet, was around $7 billion. Just as a proxy, and to make sure that we're all tracking, that we're moving in the right direction, in the year 2022, we actually—o ur growth profile was close to 7%, 6.6 to be exact, and, we did grow earnings that year, excluding FX, at 12%. So that's who we are. This is a slide that we've been covering for the last 5 years. It answers four key questions. The why— the what, the who we are, and the where we're going.
The why is the mission statement. I already mentioned those 13 words right at the center of the wheel. Who we are, culture-wise, we are a company that believes in focus to win. Again, not being all over the place. We believe we can disrupt tomorrow, shape tomorrow, through the introduction of groundbreaking technology, and we believe that we prioritize teamwork over other things. The guiding principles to the left, I won't cover those. And then three strategic outcomes: where we're going. We wanna be a best and preferred place to work. We wanna be a trusted partner, and then I highlighted top quartile performance, because when you think about the other strategic outcomes, I will say we are mostly there. We just, we just did our last engagement survey, and we achieved the highest engagement scores.
I don't know if we are the best and preferred place to work on Earth today, but I will tell you that we have the best engagement scores in the history of the company. Trusted partner, that's behind, and now it's all about delivering that top quartile performance. Throughout the last five years, we have had that status. We delivered TSR better than 75% of our peers. That is not our definition of winning. We wanna be top quartile each and every year. Three things you're gonna hear from us in today's presentation to deliver top quartile performance: we're gonna continue to leverage people and culture as a competitive advantage. We're gonna run the company like operators. That's about operational excellence, and operational excellence, to us, is not just Six Sigma, it's not just efficiency models.
It starts with a mindset where each and every associate truly thinks like an operator and an investor of the company, and beyond that is where we invest and how we invest, and we'll talk about that later. Then lastly, innovation, diversification. We're gonna continue to leverage innovation as a competitive advantage. We got 40 very meaningful new product introductions in the next 24 to 36 months. I look forward to the questions during Q&A. We did $7 billion, already mentioned, in 2022. With the guidance we gave at, in the Q3 call of $7.2-$7.5. You can do the math. It's somewhere around 8.2, 8.3 billion dollars.
If you look to the wheel in the left, two-thirds of our business is in Recon, one-third is in SET. I envision that that pie is gonna change. You'll see more diversification going into SET, and then geographically speaking, U.S. is around 58%, OUS is 42%. The markets, $43 billion is the sum of all parts. Large joint is $17 billion. We are number one in that category. I love to see my buddy from Johnson & Johnson, Aldo Denti, in the back. We are number one. We expect to remain number one in the category. Sports, next time you have to wear a hat, Aldo. Sports is $9 billion. It's a high-growth segment. We're number six. We don't expect to be number six for long.
Trauma and extremity is a bunch of stuff, but in the categories where we focus, we're number 2, number 3. And then lastly, CMFT, craniomaxillofacial thoracic, is an area where we allocated capital. We're number 1 in sternal, number 2 in rib. I love this segment. It's high growth, it's good margin. We're gonna continue to invest in this business. At the very south part of the slide, you see the historic (I wanna make sure that we understand this) historic market growth rates. I started the presentation talking about large joint. We don't believe this is 1, 2, 3% growth anymore. All right, 5 slides to go, and then we'll do the Q&A. I mentioned this company has gone from remediation to acceleration, from remediation to growth.
I don't wanna bore you with all the drama in the wild, but I do wanna leave you with a key takeaway. I've been in business, I've been in med tech for 30 years. I've never been part of a company with 4 warning letters, with the Department of Justice monitoring how you do commercial practices. I've never been in an integration that went as the one that Zimmer and Biomet went, and all of that is behind. All of that is behind. The focus in the past was about remediating all those issues and driving top-line growth. As we look at the next 3 years, it's a different story. It's about continue to leverage people and culture, as I mentioned. It's about operational excellence, innovation, and diversification, and we're gonna quantify that over the next 40 slides. Let's talk about people and culture.
I already mentioned highest engagement scores in the history of the company. The other data point I'm gonna give you is that back in 2018, our turnover rate, the people that were leaving the company, was around 23%. So think about running a business in where every year, one out of four, if not one out of five people, are leaving the company. Our turnover rates today, employee-wise, are in the low single digit. That's one very compelling data point. We've got a highly engaged team that loves what we're doing, believes in the company. I do believe that is a competitive advantage. Doesn't matter what I say, it matters what other people say.
And again, I'm not gonna do the victory lap here, but whether it's Fortune, Forbes, Newsweek, pick any of these magazines, they believe that Zimmer Biomet is a best and preferred place to work across different functions and across different areas of the company. On operational excellence, we have committed to 5%+, starting 2024. We have committed to earnings growth above revenue and free cash flow. Some of the things we're gonna be doing, we're gonna optimize our footprint, and this is something that already started. We're gonna accelerate in 2024. We're gonna do a far better job when it comes to commercial execution. Right products, right countries, right customers. Make sure that we are great in those categories. Make sure that if we're not great in those categories, we'll allow somebody else to take over those businesses.
On earnings per share, it's about asset optimization. It's about managing SG&A in a different way. I, I'm not proud to run a company with 42% OpEx. We are not gonna run a company with 42% OpEx moving forward. And on free cash flow, I, I'm not proud to be part of a company with 400+, 415 days on hand. We will do the things that we need to do around inventory management. Again, operational excellence is running the company top to bottom. Historically has been about revenue. Now it's gonna be about revenue, it's gonna be about earnings, and it's gonna be about free cash flow, and we're making very compelling commitments when it comes to the free cash flow profile over the next 5 years.
You cannot be operationally excellent today if you don't have a meaningful position in ASC. And again, you can read this slide better than I can pronounce it, but I will tell you, there is zero deficiencies when it comes to the ASC. We got what we need from a people standpoint. We got what we need from a portfolio standpoint. What we don't have internally, we can contract. There is this whole, I guess, thing going around that other companies are able to do better contracting because we have those capabilities. There is not a single capability that we lack in the ASC. Point in case, we got over 500 contracts with ASCs around the U.S. We're growing in the upper teens in the U.S. 10%-15% of our sales are in the ASC.
One of every three robots that we place is in the ASC. Every single week, we get a new contract in the ASC. Again, you can read the slide. I'm sure that this will come up in the Q&A. We're in a great position when it comes to the ASC environment. The third tier on top quartile performance, people and culture, operational excellence, number three, innovation and diversification. We had to shut down the innovation story in the remediation days. We're open for work. We launched 50 new products over the last three years. We got 40 more to come. Our Vitality Index is more than twice to what it was three years ago. We're making a commitment to increase that by 50%. I believe over the next 36 months, our Vitality Index will be solidly in the 20% of sales.
Again, for those of you who don't know what vitality index is, that's the percentage of gross sales coming from new products. Quantity matters, but quality matters more. These are gonna be new-to-the-world products in leading categories. We are one of the few companies that talks about vitality index, but also talks about what we call IPI, Innovation Profitability Index. Vitality Index is sales coming from new products. Innovation Profitability Index is gross margin dollars coming from new products. And early in the R&D cycle, we're asking the question: Are we solving a customer problem with this technology? Are we gonna be accretive from a margin dollar standpoint? And those do go in tandem. Our pipeline today is twice what it was in 2018, and we're partnering with best-in-class institutions to deliver innovation quicker to market.
So not only do we do research and development, we also do search and development, leveraging our balance sheet. A picture, my fellow Spaniard, Pablo Picasso, said, is worth a thousand words. I think this is the picture. You know, 40-50 new products in the back, 40-50 new products in the front. In 2024, we're committing to be the first company to launch shoulder robotics. Aldo, I hope you heard me loud and clear. We're gonna be the first company to launch a shoulder robotic system in the U.S. On top of that, we're gonna remediate some of the gaps that we have had in our hip portfolio, surgical impactors, next-generation hip robotics. We are gonna continue to leverage the fact that we are the only company in the market with mixed reality in hips.
Excited about Oxford Cementless Partial Knee. This is the Cementless Partial Knee that we've been commercializing in Europe for 10 years with a 60% market share. This will be the first PMA-approved product here in the U.S. Expect to launch that in the U.S. in the first half of 2024, and I do think that it's gonna be groundbreaking. Already got great growth on revision knees. Persona Knee, 2-3 years in market, close to $1 billion in gross sales. We continue to gain market share in this space. So again, I don't expect you to remember all these things, but I do expect you to remember the picture. Innovation is a competitive advantage for Zimmer Biomet.
So the sum of all parts, the best-in-class culture that we have with very compelling data points, high engagement, low turnover, operational excellence, innovation and diversification as a competitive advantage, a strong balance sheet, which can accelerate the journey on diversification, equals top quartile performance. We are committing to at least 5% next year, mid-single-digit growth, with earnings growth being faster than revenue and free cash flow dollar growth being faster than earnings per share. I know I went quickly. I look forward to Q&A. Started with a thank you, I want to close with a thank you. Robbie, the floor is yours.
Well, great. Maybe we could start with your last comment, 5% growth for 2024. And, you know, I'd say historically, people have looked at Zimmer Biomet's weighted average market growth as 3% plus. You have a lot of new product launches. Pricing has improved in the industry a bit over the past few years. Maybe just help us bridge, you know, where Zimmer Biomet was and how you get to the point where you can feel very confident putting out a 5% organic sales growth guidance for next year.
Sure. So first things first, we'll be giving official guidance in, I think it's February 8, 2024. Definition of winning, we're not doing 100 basis points above market, we're not winning. So when you hear our guidance, if that is not somewhere in the 5+, we're not winning. And, it's going to be very black and white in the definition. But again, specific guidance around top, bottom, and everything will come up on February 8. What gives us confidence? It really is slide three, the macro and the micro. This is a far healthier environment than it was over the last 3, 5 years, and it's not just backlog.
You know, we didn't even think of backlog as a meaningful contributor toward a 7-7.5 guidance for 2023 and the 5+ for 2024. I think it's the fact that younger patients are coming into the pie. The shift to the ASC is driving more cases in markets like the US. Standard of care changes are happening in other markets around the world. Definitely seeing sustainable pricing improvement. Back in 2018, in the US, we're losing 400 basis points of pricing in hips, 300 basis points in pricing in hips or in knees, rather. Around the world, price erosion was meaningful. Today, we're seeing 100-150 basis points. We're not going back. So the macro environment is far healthier.
On the micro side is those two things: innovation and commercial execution. You cannot launch 40-50 new products in 24-36 months and not grow 100 basis points of a market, unless they are the wrong products. You cannot have low turnover from a commercial standpoint and not drive 100 basis points. 100 basis points, by the way, to quantify, is $70 million. $70 million divided our sales force, it's not a lot of money. So combination of macro and micro reasons, we believe that that is the point of entry. Extremely confident. And by the way, we don't have the challenges from a supply standpoint we had before. We don't have the remediation challenges with the FDA we had before. We don't have all that drama that we used to have.
You know, you can look at growth on the top line two ways, right? You can launch new products with better pricing than the products they're replacing and gain share, and you can drive it organically. You could also be in better end markets and add it inorganically or organically into new growth markets. Maybe spend a minute on how you think about both of those.
Yeah.
You know, new product innovation versus external—
Sure.
Especially considering that your balance sheet is—
Yeah.
Probably in the best place it's been in, in years.
Again, repeating myself, the three things that I talked about: people, operational excellence, number three, diversification, innovation. Spot on what you're talking about, Robbie. So internally, we shifted our R&D dollars or innovation dollars to higher growth segments of the markets where we operate. Those 40 new products that I keep quoting, 80% of them are in categories that are growing 4%+. So already internally, there is a meaningful way to increase our WAM GR. As a matter of fact, we already have. Our WAMGR , prior to the divestiture of Spine, Dental, and the shift in R&D, was around 3-3.2. Today, our WAMGR , as we see here today, is closer to 4%. So innovation internally is already doing that. Externally, we're doing some partnerships are helping with that.
Then diversification is putting the balance sheet to work. We have a very strong balance sheet. Our net debt ratio, our leverage today is around 2.2. We got the credit rating that we need, a BBB with Moody's. Actually, our credit rating agencies are telling us to use the cash, and we are gonna use thoughtfully that cash to diversify into higher growth areas.
You know, something that's a little bit orthopedic, specific, but I would say med tech broadly overall, two things here. One is the backlog of patients that the disruption from COVID had on procedure volumes globally for several years, and then how that impacted first quarter 2023, with some, you know, very high growth rates for Zimmer Biomet, and across the industry. So how are you thinking about the size of the backlog today? How much of a tailwind and how durable is that to the top line? And then, I'll. Once you're done with that—
Sure.
I'll ask about first quarter.
Well, let me, let me start with the first part of the question or comment. So Q1 2023 was high growth. They comp both Omicron versus Q1 of 2022, so we are expecting that Q1 of 2024 is gonna be wonky. It's, it's not gonna be the same growth profile. As we think about the rest of the year, we don't count on backlog. I don't know how to quantify backlog. Maybe Aldo does. I don't know how to quantify. We run different models. What I will tell you, we don't think it's as meaningful as other people expect. You know, it's a capacity element. It's not that you can bring all those patients every quarter. So that's what I will tell you. We don't think—f irst of all, it's not part of this mid-single digit and above.
We do believe that it's gonna resolve itself, we say over two years, ending at the end of 2024. I don't know if I'm right or wrong, but it's not one of the key drivers of sustainable performance at mid-single digit or above.
Maybe asking the first quarter question a different way: Do you feel like you're in a difficult place to be able to comp first quarter, or do you think it should act, you know, from a sales to sales year-over-year, is more of a normalized, typical quarter?
It's starting to be more normal, but yes, it is gonna be more difficult. Sequentially, it's gonna be similar to other years, normal years, but Q1 of 2024 versus Q1 of 2023, it's gonna be tougher. Yeah.
Okay. Maybe just kind of in that same vein, we saw in 2023 a return to pre-COVID seasonality with a pretty sharp, you know, up in second quarter, down in third quarter, hopefully up in fourth quarter.
Yeah.
I would say what we've seen across some of your orthopedic peers that have pre-announced, it seems like fourth quarter was particularly healthy. I don't know if you want to comment on that, but how do you feel about-
Yeah, I—
Seasonality and the return to seasonality?
Sure. I would say we are back to normal seasonality. Obviously, for obvious reasons, I won't talk about Q4. We guided to be in the mid-single-digit range for the second semester. We guided what we guided for the rest of the year, 2023, 7.5%. I will tell you that volumes were healthy in Q4 of 2023, so I will say that things are back to normal for the most part.
Great. Maybe we could touch on Zimmer's ambitions for inorganic activity. You, you've kind of touched on it a little bit, but it's been years, I think, since we've had just external M&A from Zimmer Biomet. So I think it'd be healthy, both with you, what is it? 110 days and 2 hours in this seat.
That's it.
What's your view on how Zimmer Biomet can utilize M&A? And then—
Yeah.
Maybe, Suky, if you want to jump in, how you think about sizing and thoughts around financials.
Yeah. Let me start by saying we have done some M&A, and I think part of the problem is that we haven't been pretty vocal about the things we've done on CMFT. You know, we allocated $500 million in capital in this business, added a couple of companies that are growing at a meaningful rate. We bought a couple of companies in sports. So we've done some. We're going to be bold but not reckless. M&A continues to be the number one source of capital allocation. And we're going to do the right things at the right time. I'm not going to get bullied into doing a deal with the cost of capital being twice what it was 18-24 months ago. I'm sure that all of us are thinking about the same assets.
I'm sure that all of us have the same data around what are those higher growth markets. At the right time, at the right cost, we will do deals to diversify Zimmer Biomet. Things that we like, we like, sub-segments of Recon that are growing at a faster pace, and there's a lot in there. You know, within data, technology, solutions, navigation in hips and knees. A lot of stuff that immediately increases WAMGR in areas where we have a leading position. The second area is SET, and the third area is, ASC capabilities. In SET, you know, we like lower extremities, we like some elements of upper extremities. We continue to love CMFT. There is a lot of optionality in that regard.
Financially, what we said before, you know, deals that are tuck-ins up to $2 billion in acquisition price, that would be non-dilutive in year 2. They're going to be ROIC neutral within 5 years, 4-5 years. So that's kind of like the financial threshold. What I will leave you with, Robbie, is that we will do deals at the right time, at the right cost. We don't feel the urgency, the desperation of having to do a deal now because we haven't done a meaningful deal over the last 5 years. Suky?
Yeah, I would say, Robbie, the organic story is playing out just as expected. It's quite robust, in fact, and what that means is that we can be patient. When you can be patient, you can be disciplined about deals, and so that's how we think about it. Iván covered the key metrics that we look at financially. I would say from a sizing standpoint, you're right, the balance sheet's never been stronger. Probably in a low 2x net debt leverage ratio perspective. We're going to get even better as we move through 2024. So that gives us a lot of optionality. So if you think about 1-2 turns on that, at a $2-$2.5 billion adjusted EBITDA number, that's a significant amount of capacity.
Now, our view is not to use all that capacity and do a big, large transformational deal. In fact, we like more of the tuck-in type, profile, up to a mid-size deal that could be somewhere in the zip code of $2 billion purchase price. So that's probably the upper limit of where we'd go, somewhere around that $2 billion. But again, the, I think the focus is really on those smaller tuck-ins, which have played out really well for us so far.
Great. If I think back to the new product launch slide, there was a very crowded area in 2024+. You know, and new products can help with market share, they can help with mixed benefits, and they could also probably, down the road, help with more sustainable pricing benefits for Zimmer Biomet. So as we look out to 2024, specifically, what do you think are the most impactful new product launches, both from an overall share perspective and also from a revenue perspective?
Sure. Maybe I'll break down the question in three parts. I'll talk about hips, I'll talk about knees, and I'll talk about SET. I'll be careful how much I disclose here in this room today, but I'm really excited about Persona IQ, where we are in the launch of the only smart technology within knees and down the road in potentially in other areas. So we're moving from a limited market release in 2023 to a full market release in 2024. Really excited, as I mentioned earlier, around Oxford Partial Cementless, the only only PMA-approved product that will be in the U.S. market. It's a huge opportunity, especially in the ASC. Again, 60% market share in the European market in knees. Really excited about Persona OsseoTi.
This is our cementless platform that we launched, really launched, you know, second half of 2023. It's gained a lot of traction. It was a limited market release. It's going to be a full market release in 2024. Our cementless penetration is around 15%, 16%, something like that, in the U.S. Some of our competitors are in 60% range or above. We have a pathway to get there, and we gain 10%-15% ASP uplift, when we, when we do that. And by the way, that also pulls, ROSA, ROSA Knee. So those are four very compelling, opportunities, within knee. In hip, excited about surgical impactors, what we call HAMR, which drives efficiency and accuracy in an operating room.
It directly competes with other players who've done a great job in this space. I love the fact that we got FDA-approved mixed reality that continues to increase penetration and share. I love the upcoming launch of what we call a triple- tapered stem. I'm sure that most people don't know what a triple- tapered stem, but it's a very meaningful category within direct anterior, another gap that we had in the portfolio, and so forth and so forth. In SET, we will be the first robotic company in shoulder, driving accuracy and efficiency in shoulder cases. With CMS moving a lot of the cases from inpatient to ASC, having a shoulder robot that drives speed and efficiency is very meaningful, and when you are number one in that space, it's twice as meaningful.
I love the integration of Embody in soft tissue repair. I like where we are with Identity. I believe we're going to be launching a groundbreaking product in stemless shoulders, and there is a lot of different products in different categories within SET. So it's difficult to pick one area, but I do like the fact that it's quantity and quality of products going into 2024.
You know, maybe if I just think about Mako Shoulder, and should we think of this as a new launch that could drive an upgrade cycle? Is it an add-on? Is it going to drive new robots? And what's the site of care you think that'll most benefit?
I think it's very compelling. First of all, I don't think it's just an add-on. I think it's a category that is going to define how you do shoulder robotics. So I don't think it's just an add-on, you know, let's put more gadgets into the robot. I think it's going to impact surgical algorithms. I think it's going to define how you do shoulder surgery. So it's not something that is just trivial in many ways. I think the ASC is gonna benefit from this type of technology. I think inpatient will continue to gain adoption, but we are very excited about the speed, the accuracy that this technology can bring into an ASC.
By the way, what we like about ROSA Shoulder is that it's fully integrated with the rest of the ecosystem of Zimmer Biomet. So you're leveraging mobility, the data you get through Apple prior to the surgery. You get all the data collection in the procedure, and you're gonna continue to get data after the procedure. At some point, the technology we have in the smart implants can apply to shoulder, so it's a full ecosystem of data that we're getting here, so very meaningful.
From the outside, it's hard to see how Zimmer Biomet, and quite frankly, any of these companies in orthopedics are growing in the ASC, who's winning share, how it's helping the top line. I would say there's a general perception that Zimmer Biomet's not one of the winners in, the shift to the ASC.
Yep.
I know you strongly disagree. We've talked about it before, so maybe would just love to hear, you know, how Zimmer Biomet is doing in the ASC—
Yeah.
And how you view it moving forward to the overall company.
Yeah, I don't strongly disagree. I factually disagree. I think the data highlights that, you know, we're growing upper teens. I'm not sure that based on what I hear from our friends reporting, they're doing much more than that. So I think, we're all growing. It's hard to tell who's gaining share in one given quarter. So that's the answer to the first part. In terms of our position in the ASC, we're gonna do an analyst day, I believe it's May 29th this year. We're gonna do a full workshop on the ASC and the technology that we bring. What I can tell you is that I, I'm not aware of contracts that we're losing.
I'm not sure that we ever get in a position where we are having a conversation about you lack something here, so you're not gonna get this contract. Let me just remind everybody that the dynamics in orthopedics are quite simple. Most surgeons will use a knee, hip, or shoulder in inpatient, for the most part, will transfer that technology into an ASC. You're not gonna have two different sets, inpatient, outpatient. You're not gonna learn two different ways to do hips, knees, and shoulders. So if you have a prevalent market share in an inpatient/outpatient unit, likely that's gonna transfer into ASC. We got the contracts that we got, we got dedicated technologies, we got dedicated people, we got partnerships. So I factually disagree that we're losing market share in an ASC environment.
Suky, if I think about the commentary with EPS growth faster than revenue growth, you know, one of the things I think all multinational companies are dealing with next year is tax. Currency for most is a little bit of a headwind, let's say, you know, 100 basis points or less, something like that. You know, how do we think about, one, are those, you know, in the right ballpark? And two, how do we think about the other levers that you can pull to get EPS growing faster than sales?
Yeah. I think from a macro perspective, Rob, we're just starting with the top line. You know, the end markets are very healthy. Overall, we're seeing a weakening from an FX perspective of the US dollar quite recently. So based on current rates, we don't see it really as a material headwind or tailwind going into next year. And our supply situation continues to improve weekly, so we feel really good about all those macro elements. As you move through the P&L from an operating perspective, inflation is starting to normalize. We're not seeing prices come down of input costs, but we're not seeing them inflate to the same levels that we saw in 2022 and 2023 in most of the areas. So that's good news.
As you move further down from that, as you noted, we do see an increase or a headwind from a tax perspective because of Pillar Two, and we've quoted that that's about 150 basis points, 2023 versus 2024. All that being said, we feel very good about the ability to expand operating margins, grow earnings faster, and the way we're gonna do that really is, one, that revenue growth in that mid-single digits that Ivan talked about. It's just natural leverage to the bottom line. Secondly, we're running a number of efficiency programs that are much more accelerated now under Ivan's leadership, across supply chain, but also SG&A.
We're gonna give a lot more color about that when we give guidance, later this quarter, but where we stand right now, we feel very confident in our ability to do that.
Great. Maybe if I could push you a little bit on that, you know, if you could just size it up, you know, gross margin versus— I imagine you're probably not pulling out any from R&D, probably pushing a bit more in R&D rather than backing off.
Yeah. Yeah.
If I think about gross margin versus SG&A, you know, should I think of one more than the other?
Yeah.
Or are they split equally?
I think you would see it more in SG&A than in gross margin, as we're in 2024. We're really looking at some structural changes across the organization, thinking a lot differently about profitability across our business units as well as our markets, which is giving us actually a target-rich environment to reallocate resources to more important uses, and then also to drop some additional margin.
Maybe speaking of profitability, you cited you want to see free cash flow grow faster than EPS growth.
Yeah.
I imagine, you know, all the inventory levels can probably start to normalize a bit as supply chains improve. So maybe just talk to how much faster and, you know, same sort of thing-
Yeah.
The drivers of where that can materialize.
Sure. We're gonna give a lot more color, obviously, with our guidance on exactly what that looks like for the free cash flow number. But I'll tell you, the biggest area of opportunity now, having taken over supply chain, is around inventory reductions. And we think we can make a meaningful dent in that. We're right now exiting 2023 at over 400 days. We're gonna be well inside 300 days as we exit 2024.
One, maybe last question we can end on this topic here is: You now have such a robust ecosystem of planning and robotics and patient follow-up and patient preparation for surgeries. You know, is there any way for you to be able to monetize that and drive it as a separate revenue stream that will eventually, you know, be material to the P&L?
Yeah, so first things first. We are the only company that truly is getting data across entire episode of care, and there are two key ways to monetize. One, one is obviously at some point, for customers to pay for some of these offerings, and we have explored some of that. The other one is on the contracting side of things. We already have explored and have done some risk-sharing agreements. Because we get data before surgery, during surgery, and after surgery. We can quantify probability of readmission, we can quantify at some point things like infection complications, we can quantify length of stay, we can quantify cost. You know, what should be as a proxy, the cost of the entire episode of care? We can guarantee shortening that episode of care. It's a lot of models that we run in that regard.
We got a group out of Michigan Connected Care, that has got data scientists, and it's got chief revenue officers and people that are working full-time in this regard. Is it gonna be meaningful material? I do believe at some point. Are we ready to make a commitment today in that regard? No. But, I do like the opportunity we have on the data tracking and monetizing side of things.
Great. We're just about out of time here. I'll just scan the room, see if there are any questions from the audience. Yeah.
When you talk about your excellent programs that you're trying to accelerate next year, what role does digital play in that regard to strengthen both commercial, but also the supply chain?
If you could quickly—
Yeah. So the question was around leveraging digital AI, and I've got a minute left. Yeah, we're gonna do it in both regards. So we already have leveraged artificial intelligence in some of the things that we do around manufacturing, inventory management, and whatnot. Clearly, we're doing a lot on the commercial side, more on the commercial side than on the manufacturing side, but this is definitely an opportunity for us.
All right, great. We're about out of time. I wanna thank you very much—
Thank you, Robbie.
Thanks for listening.
Thanks, everybody.