Okay, welcome to this next session here at the Jefferies conference. I'm Matt Taylor, the U.S. Medical Supplies and Devices Analyst here at Jefferies, and I'm pleased to be joined by management from Zimmer for this session. In the center of the stage over here, we have Ivan Tornos, the CEO, and also Suky Upadhyay, who is the CFO. We'll have about a half hour of Q&A and fireside chat that I'll kick off. And most importantly, I just want to flag, if you haven't seen it, that Zimmer is out to terminate market share with its new Chief Movement Officer, Arnold Schwarzenegger. Couldn't be here today, but.
He may. He may come.
Maybe not.
He'll be back.
That's right. That's right. So just to kick things off, Ivan, I'd love for you to just talk a little bit about how Zimmer is evolving, because I think a lot of people remember the challenges that Zimmer had with Biomet. You've moved beyond those. So maybe talk about what you're doing now that you've been able to move beyond some of the quality issues in terms of driving growth and fostering more and more rapid innovation.
Yeah, absolutely. And first things first, Matt, thank you for hosting this. And good afternoon, everybody. Hey, Zimmer Biomet is a different company. And I'll try to keep my answer here somewhat brief, but it is a different company. Go back to 2015, we merged two iconic companies, Zimmer and Biomet. At the time, number one, number four in orthopedics, if not number five. We expected things to go well. It didn't go well. When you think about the three or four key ingredients that make up a company: strategy, operations, culture, and value creation for you investors, we got most of them wrong. On the strategy front, we speculated that being bigger, just for the sake of being bigger, was the way to go. Without thinking about elements of product leadership, it didn't work out.
Becoming a bigger company resulted in us getting four FDA warning letters, a monitorship with the Department of Justice, complexity around allocation of capital, both internal and external. It was a challenge. We'll talk later about where we are today, strategy-wise. Operationally speaking, it was a nightmare. Beyond the remediation of quality, beyond the remediation of the portfolio, the monitorship with the Department of Justice, we ended up with something like five, six days of backorder. We created a manufacturing footprint that made no sense whatsoever, and we paid for those consequences. We increased our COGS dramatically. We embarked on a journey of inefficiencies, not a well-run company, and then from a cultural standpoint, we ended up probably demotivating a lot of internal employees, and then the fourth vector on value creation, it was, it has been, it's been a choppy journey.
When you think about strategy, operations, culture, and financial returns, it was not the merger that we anticipated. We started to recover, and along came COVID. By 2019, we're growing around 1% from decliner, decliner being flat around the year 2019. We started to turn the corner, and then COVID hit in March of 2020. And for a company like ours that does so many elective surgeries, that was definitely a challenge. Fast forward 2021, 2022, 2023, and now 2024, soon to be 2025. I'll talk about the financials, and then I'll briefly talk about those four vectors on strategy, operations, culture, and value creation. So 2021, we delivered growth of 10% constant currency revenue, with EPS growing around 12%. In 2022, we did the divestiture of Spine and Dental. So the numbers are somewhat choppy, but nonetheless, we grew 6.5% constant currency.
In 2023, last year, we delivered adjusted EBITDA growth of 9.5% on revenue growth of 7.5%. And then this year, 2024, prior to the ERP challenge, which is now behind, midpoint into 2024, we're delivering 5.5% constant currency growth. So it's a different revenue profile from 2015 to 2019, as you think 2021 through 2024, soon to be 2025. Quickly touching on those four buckets: strategy, operations, culture, and value creation. On strategy, what I will tell you is that we have a laser-focused strategy in terms of the problems we're trying to solve clinically around safety, efficiency, and best-in-class clinical outcomes. When it comes to the places where we want to be, we are laser-focused on customers, countries, and what portfolios we need to focus upon and how we move from a lower growth market environment to a higher growth market environment.
And then on priorities, every single member of my organization is talking about people and culture, innovation and diversification, and operational excellence. So the strategy is very clear. When it comes to operating the company, I will tell you this company today is run by operators. In the past, it was all about revenue for the sake of whatever. Today, we're thinking revenue, EPS, free cash flow. I can truthfully tell you that the governance that we have today at Zimmer Biomet is like nothing I've seen in my 30 years in med tech. On the culture and talent front, we have the highest engagement scores in the history of the company, now two years in a row, in spite of the challenge we've been having.
And then on the fourth and final vector on value creation, certainly there is work to be done, but we are so confident on the strength of the balance sheet. We are so confident on our ability to generate revenue and EPS that recently we committed to returning two-thirds, 65% of all the free cash flow that we generate to our investors. And that's in the form of dividends, in the form of buybacks, and then doing some strategic M&A. So a bit of a lengthy answer, but I think that sets the tone, Matt, for who we are today versus who we were back in 2015.
Great. Maybe just to S.E.T. the backdrop, could we review your LRP guidance and maybe just talk about the health of the end markets? We've been seeing some very healthy end markets kind of across orthopedics post-COVID. And I think investors wonder, is that a bolus or is this sort of the new normal? So maybe you could comment on that.
It is the new normal, by all means. So we spend a lot of time and, frankly, a lot of money trying to crack the answer on, hey, why are these markets growing 4%-5%? Is this pent-up demand? We partner with a company called IQVIA. IQVIA is part of IMS, so it's the data company that tracks all pharmaceuticals. We also run some retrospective analysis to look at commercial claims, CMS claims in the U.S. And what we can tell you all factually here today is that for the last six quarters, that's a year and a half, we have not seen any meaningful impact coming from a backlog going back to COVID, with the exception of two countries.
Ironically, one of them is the one that we are in today, the U.K., that is backlog given Brexit, NHS, and some other elements, and Japan, where you still have some backlog. Other than that, in the U.S., there is no backlog, and if you look at the waiting list here in Europe, you can tell that they are dramatically lower than in the year 2020-2021, so the growth that you see today is not pent-up driven, is not backlog driven. The health of the market, we peg it at 4% to 4.5%. Some of our competitors think it's 5%. It's driven by four things. One is the rapid explosion of the ASC shift in the U.S. 40% to 60% of cases will move into an ASC. In 2019, 2% of our sales came from the ASC. Today it's 15%.
With the shift to the ASC, there is a double dipping effect. It's not like cases are moving to an ASC, but hospital HOPD units are remaining idle. There are cases, complicated cases going to hospital units, older patients, revisions, patients with comorbidities and whatnot. There's a lot of patients going to an ASC. So there's a double dipping effect. That's factor number one, the shift of care. Number two is truly innovation. Innovation is not just us here at Zimmer Biomet. Innovation is innovation that comes from Johnson & Johnson, Stryker, Smith & Nephew, and other players. The disruption we've seen in orthopedics in the last four years is making episodes of treatment shorter, timing surgery shorter, rehab time being quicker. Now there is a higher appetite, if you will, as a patient to come and embark on the journey. That's number two.
Number three is absolutely pricing, which is sustainable. We deliver price-positive performance in Q3. We guided flat to 50 basis points for 2024. For three years, pricing has been moving in the right direction. Not every quarter, every year has been price-positive. But definitely, definitely we've seen price as a durable element of the market growth currently for the time to come, and then the fourth and final ingredient behind the durability of these end markets is actually demographics. The whole thing about baby boomers is real. 10,000 to 12,000 patients are turning 65 years of age in the U.S. We've been waiting for this moment for a while, and I think the reality is that element is here now.
If you take a look at orthopedics, but you also take a look at cardio, general surgery, urology, bariatric surgery, I mean, we take a look at all med tech spaces, they're all growing. So it can't be that all of a sudden there's just backlog in every one of these specialties, right? Strokes are up in 2024 versus 2019. I don't think that COVID created a backlog in strokes. People say, "I'm not going to have a stroke in 2020. I'm going to wait till 2024." So clearly, the baby boomer element is a factor as well.
Great. Maybe we'll give Suky a shot here. Could you talk about the updated 2024 guidance and generally your approach to setting guidance and maybe touch on the ERP issue and how that's been?
Yeah. Sure. Happy to do it. And thanks for having us, Matt. First, I'll start with some facts. So we started out the year 2024 top line at ex-FX 5%-6%. And as we moved through the second quarter, we were delivering right in that range, I think almost 5.5%. Then, of course, we hit the speed bump with the ERP, which I'll come back to. But that adjusted our guidance down. We came out as soon as we knew that that could potentially be a material impact. And we ultimately revised down to top line of 4.25%-4.75%, which implies the fourth quarter will be somewhere around 3%-5% ex-FX. Halfway through the quarter, we still feel confident in that full guidance range. So we feel pretty good.
Going back, if you actually look at our commitments back to 2021, 2022, 2023, we've, I think, for just about every single quarter, met or beat our expectations. So as we think about this year, as we think about going forward, I don't think a lot's going to change fundamentally about our guidance. But we clearly understand what investors are looking for: stability, the ability to continue to beat and raise. And that's, of course, going to inform how we think about guidance moving forward. As it relates to the ERP, we're really proud of the team's tremendous progress. We initially thought that the impact could be up to about 100 basis points of revenue impact in the second half of the year.
And we, on our third quarter call, came back and said, "Hey, look, we think it's going to be less than that because we were able to respond more quickly." We continue to put near-term, long-term fixes in. We're seeing really high volumes in the fourth quarter, as you would normally expect in the fourth quarter, a very seasonal business, all of that demand being met by supply. So we feel really good about the remediation actions that we put in place. And that continues to give us even greater confidence that we're going to be completely out of this by the time we exit this year.
Worth noting that all shipping levels today are at pre-ERP implementation levels. In that regard, we have normality.
And so maybe just a continuation of that question, any spillover effect from ERP next year? Maybe remind everybody what the LRP guidance is and the approach that you took there.
Yeah. So our LRP said through 2027, yeah, 4%-6% ex-FX top line. We said that you should expect earnings to grow at least one and a half times the revenue growth rate and that free cash flow would grow at 100 basis points faster than earnings. And we still feel very confident in that. As it relates to the ERP and the impact on that, like I said, we don't believe that there will be any shipping interruptions as we move into 2025. There's going to be some headwinds and tailwinds related to the ERP. And of course, on the broader macro scale, there's going to be a lot of headwinds and tailwinds. So of course, we're not going to give guidance yet in 2025. We'll do that in the first quarter of next year as we normally do.
But you should think about, hey, look, there could be some tailwinds relative to some comp in the second half, also some recovery of cases that may get pushed into 2025. But at the same time, there could be some headwinds related to, hey, we had a number of new products that were expected to be up to ramp and flowing in a very robust way by this point that will get pushed out to 2025. So there's going to be some puts and takes into next year. And again, we're going to come back with that guidance in the first quarter, but still feel very confident in that 4%-6% top line over our LRP.
Maybe we could double-click on innovation a little bit. It's going to be hard to cover 50 products, but could you talk about a few of the bigger ones? I think cementless and robotics, maybe one or what you're doing on the hip side?
Yeah, lock the doors and I'll cover 48. How's that? Look, it's an exciting time here at Zimmer Biomet. So we have committed to launching at least 50 new products in the next 30-36 months. What I like is not just the quantities, the quality of the products. Many of these are first-to-market products around smart implants, shoulder robotics, anti-infective platforms, different designs in hips and knees, and just a lot of great technology. I'll limit my answer to what we got in knees, in hips, and maybe in enabling technologies and S.E.T. So in knees, there are four products to remember. Here in the OR there in the U.S., we are in full launch mode for Persona OsseoTi, which is our cementless knee.
As a reminder, we're not able to compete in this category, which is about 40% of all knees done in the U.S., and our number one competitor has 60% penetration. Just going from 20% to 50% is a huge opportunity in the U.S. alone. So that's Persona OsseoTi. Second product to remember is a Persona IQ. About four weeks ago, we launched the shorter stem version of Persona IQ. The feedback has been outstanding. We are seeing greater adoption with the longer stem. And as we get into 2025, that is going to be a full launch. Really excited to bring a product from Europe to the U.S. called Oxford Partial Cementless. This is the only PMA, pre-market approval product in the partial cementless category that will be in the U.S. So the competitor barriers are very high.
With the explosion of the ASC environment, which we discussed, we believe there's going to be a major tailwind. And lastly, yesterday or this morning, I'm lost in time, we sent the press release about Persona Revision, which is a product that generated north of $2 billion in gross sales over the last four years in the U.S. That product is coming to Europe. So those are four key products in knees. Going quickly here in hips, we lost over the last, call it, 5 years-7 years, around 200 basis points-400 basis points of market share in hips because we're lacking three products. We didn't have a triple-tapered stem, which is critical for Direct Anterior procedures. We are in active full launch of Z1, a triple-tapered stem. We did not have a surgical impactor to compete in the category. And we have it now. It's called HAMMR.
And then lastly, we didn't have comprehensive navigation. We have it now through ROSA Hip, as well as the acquisition of OrthoGrid. So full portfolio in knees, full portfolio in hips. No excuses behind losing market share in those two categories. And then the third bucket in S.E.T., we'll take forever, but we got the most robust sports medicine portfolio in the history of the company. We don't have any gaps in our CMFT, cranial, maxillofacial, thoracic business. And then on technology, in addition to the acquisition of OrthoGrid, we got a partnership with Think Surgical for small footprint handheld robotics. We have three ROSA launches in the next 18 months. So no gaps in that space either. So again, high quantity of products, high quality of products, and no gaps in the portfolio moving forward.
Great. I wanted to also go back to your ASC strategy. You touched on that as one of the key growth drivers. I think some investors might be surprised that you've gone from 2% to 15% and also are a leader in the ASC area. Maybe talk about your strategy and how that's contributing to your growth.
Yeah, we are the number one reconstructive ASC company in the U.S., factual statement. Different people define ASCs in different ways. Some include med-surg, some include other areas, endoscopy, neuro, whatever. But when it comes to knees and hips, we are the indisputable number one company. Our strategy is anchored on what we call the three Ps, products, partnerships, and people. On the product side of things, we had gaps. We didn't have a sports medicine portfolio. We did not have a cementless knee. We didn't have a robot until 2019. We didn't have small robotics. We didn't have a lot of staff. So we got the full portfolio today. On the partnership side of things, some of our competitors do a much better job than we do on storytelling. They talk about category leadership. We have it all. So do we. We have booms and lights.
We have a partnership with beds, wheelchairs, if you want them. We have an exclusive partnership with CBRE, the world's largest commercial real estate entity. We can design an ASC for you, soup to nuts. If you need access to capital, we have that as well. One of the biggest problems in the ASC environment is the sterilization complexity. You have to sterilize products. It requires real estate. It requires know-how. We have an exclusive partnership with STERIS. We also have other vendors, and we partner that as well. I can go on and on, but the partnership is there, and then the third P is people. We didn't have dedicated contracting people. We didn't have incentives in place for people to sell in an ASC environment, and today we have that as well. When it comes to products, no gaps. When it comes to partnerships, no gaps.
When it comes to people, we have the largest sales force in the history of the company, both from a contracting and selling standpoint in the ASC environment.
Great. Suky, I'll pivot back to you. Let's talk a little bit about margin trajectory, and as you've talked about in the future, getting at least 30 basis points of margin expansion. Talk about the sources of that going forward.
Yeah, sure. So let's first start with, we have a relatively high margin, operating margin inside of our sector. And if you look at 2024, based on our implied guidance, even after the ERP announcement, this will be the fourth consecutive year where we increase operating margins and at not an insignificant level. And that's even in the backdrop of hyperinflation over the last couple of years. You're right. We have committed to at least 30 basis points of operating margin expansion on average per year through our LRP. The main sources are really around, first and foremost, our revenue leverage. Growing mid-single digits, as we said, as part of our LRP, with a relatively large percent of our cost base being fixed or semi-fixed, gives us a tremendous amount of leverage there just alone in generating operating margin expansion.
We do expect gross margins to be largely stable through the planned horizon with some near-term headwinds that we've talked about because of FX, but operationally, relatively stable to what you saw in 2024 and 2023, and then perhaps on an operational basis, growing towards the latter part of the strat plan or the LRP as we continue to consolidate and optimize our plant footprint, footprint network. And then within SG&A, there are still at 43% OPEX, still some target-rich areas, some of the back-office opportunities inside of our sales organizations globally, sustaining engineering, which could be optimized by offshoring a fair number of activities, and then continued leverage of our Global Business Services for back-office operations like finance, IT, HR, etc.
Those are the building blocks that give us confidence in that 30 basis points, which actually is a little bit less than what we've been doing consistently now for the last four years.
And a big element of that and your growth could be pricing. So I wanted to double-click on that. It's been so much better than it was a few years ago with pricing this year flat to up potentially. And your LRP has 100 basis points of degradation a year. So maybe talk about why that could be conservative and the factors that are contributing to better pricing today.
Yeah, you're right. So prior, pre-pandemic and into the early part of 2020s, we were generally at about 200 basis points to 300 basis points of price erosion per year, which had a not insignificant impact on gross margins, as you can imagine. Over the last couple of years, we've made tremendous progress in bringing that inside of 100 basis points. And actually, year to date in 2024, we're positive. In the fourth quarter, we were, sorry, third quarter, we were positive. And that's why we revised our guidance upwards for pricing. Our LRP, I think prudently, conservatively says that we would see or expect to see 100 basis points of pricing erosion per year. The reality is internally, we've got an ambition to do much better than that. There's really three levers around that.
One, from a market standpoint, innovation is being rewarded, and we're bringing a lot of innovation to market. Also, inside the market, we're seeing that the bigger players are being rational about pricing. They're all trying to catch up with the hyperinflation they've had to deal with on input costs over the last couple of years. And again, we're seeing some rationality there. Number two, just our systems, our processes, our governance, our incentives are just so much smarter than they ever were at Zimmer Biomet, where the idea of just growing top line for the sake of top line is no longer accepted. It has to be top line in service of EBITDA and cash flow. And that's brought a whole new culture to how we price. And what we found is that actually our pricing is a lot more elastic than maybe we originally thought.
And the third is we're taking opportunistically price increases maybe where we haven't in the past. We've seen some hyperinflationary environments in some emerging markets, and we're taking price up to match that. Now, that may not be consistent and durable over time depending on where inflation goes, but those are the three levers that lead us to believe that pricing will consistently be better than where it historically has been. And I'm going to hold out ambition that we can do better than that 100 basis points per year.
Great. Well, I think we're right on time. So, I'll thank you guys for your time and thanks a lot for your interest in Zimmer Biomet, and great update on the story. Thank you.
Thank you.
Thanks, everybody.
Thank you.