Robert Marshall - VP, IR and Treasurer David Dvorak - CEO Dan Florin - CFO.

Bob Hopkins - Bank of America Merrill Lynch Matthew O'Brien - Piper Jaffray Mike Weinstein - JPMorgan David Lewis - Morgan Stanley Larry Biegelsen - Wells Fargo Matt Miksic - UBS Joanne Wuensch - BMO Capital Markets Matt Taylor - Barclays Richard Newitter - Leerink Partners Glenn Novarro - RBC Capital Markets.

Good morning ladies and gentlemen. I would like to turn the call over to Bob Marshall, Vice President, Investor Relations and Treasurer. As a reminder, today’s call is being recorded. Mr. Marshall, you may begin your call..

Good morning and welcome to Zimmer Biomet's third quarter 2016 earnings conference call. I'm here with our CEO, David Dvorak and our CFO, Dan Florin. Before we start, I'd like to remind you that our discussions during this call will include forward-looking statements.

Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also the discussions during this call will include certain non-GAAP financial measures.

Reconciliations to these measures to the most directly comparable GAAP financial measures are included within the earnings release, which is available at our website at investor.zimmerbiomet.com. With that, I'll now turn the call over to David..

Thanks Bob. This morning, I will review our third quarter financial results, as well as provide an overview of some of our new technologies and solutions, and the focused actions we are taking to drive sustainable growth. Dan will then provide additional financial details and discuss our updated guidance.

Zimmer Biomet’s third quarter revenue performance was highlighted by the acceleration of our S.E.T. category, and ongoing strength in our Asia Pacific region. However, consolidated sales were below our expectations on weaker than anticipated results from our large joint and dental categories.

Overall, broad demand for our differentiated portfolio remained high throughout the quarter, particularly for our focus cross-sell products. Variable commercial performances by our sales teams were in part caused by unanticipated supply constraints related to our transitioning supply-chain infrastructure.

This resulted in shortfalls that needed implants and additional instrument sets to fully exploit sales opportunities in key product categories. In response to this challenge, we have accelerated work to enhance certain aspects of our supply-chain infrastructure as we harmonize and optimize our sourcing, manufacturing and quality management systems.

Through these efforts we expect to improve our demand fulfillment in the coming months. As a consequence of these supply constraints, we project fourth-quarter sales results to be similar to those of the third quarter. However as we look ahead, we remain confident in our ability to successfully reaccelerate our revenue growth in 2017.

As I mentioned, demand for our expansive portfolio of differentiated and clinically proven musculoskeletal technology, solutions and services has never been stronger. Our global sales organizations remain stable and have in fact achieved a third consecutive quarter of net personnel additions.

These teams remain focused on delivering high-quality personalized solutions to our customers and their patients. To that end, during the quarter we consummated a number of strategic external development transactions to expand our musculoskeletal portfolio and capabilities while continuing to deliver leveraged earnings-per-share.

By joining together with LDR Spine in mid-July we now possess a leading position in the attractive global market for cervical disk replacement.

Additionally, our recently completed acquisition of Medtech SA provides us with current brain and spine robotic technology, and positions us to identify and develop additional applications for the ROSA robotics minimally invasive platform.

This differentiated technology supports our strategy to offer the industry’s most comprehensive range of intelligent instrumentation options.

Also during the quarter we acquired new clinical solutions that extend our reach across the continuum of care, spanning from state of the art 3-D range of motion simulation software to an innovative telerehabilitation platform. These portfolio additions are designed to support healthcare providers in personalizing musculoskeletal treatment.

Importantly, these assets further strengthen our Zimmer Biomet’s Signature Solutions offering, which is designed to assist hospitals and medical practices to seamlessly transition to value-based healthcare models.

With our end to end clinical services, proprietary technologies and analytical tools we are enabling healthcare providers to maximize productivity and patient engagement across the entire episode of care.

As have previously communicated, the rollout of Zimmer Biomet’s Signature Solutions comes in an opportune time when an increasing number of healthcare providers are striving to comply with bundled payment models by placing a greater emphasis on the quality and cost effectiveness of knee and hip replacement service lines.

Before I review the performance of each of our sales categories, I would like to comment on third quarter market conditions. We noted overall global market stability during the quarter. In addition, we believe that while the US market demonstrated some softness during the summer months, it strengthened towards the end of the quarter.

With regard to pricing, we experienced negative 1.9% of pressure, which was in line with expectations and consistent with trends in recent years. Against this backdrop, Zimmer Biomet delivered third quarter consolidated net sales of $1.83 billion.

This performance represented 3.5% of constant currency growth over the prior year quarter of which the recently acquired LDR Holding Corporation contributed 190 basis points.

Embedded within these results, we achieved solid 6.4% top line growth in the Asia-Pacific region, while growing sales in the Americas by 3.7% and by 0.9% in the Europe, Middle East and Africa region. Zimmer Biomet’s knee business was flat on a global basis in the third quarter reflecting positive volume and mix of 1.9% and negative price of 2%.

Our 2.6% sales growth in the Asia-Pacific region was offset by our results in the Americas, where sales decreased by 0.9%. Our knee revenues increased by 0.3% in the Europe, Middle East and Africa region as compared to the prior year quarter.

Despite continuing attractive growth rates during the quarter for Persona, the Personalized Knee System, our sales execution on this leading cross selling opportunity was limited by the supply issues I just mentioned. The Oxford Partial Knee also delivered solid sales results during the quarter.

Additionally, we were pleased to announce the commercial launch of our Vanguard Individualized Design total knee replacement system. This first of its kind total knee construct supports our soft tissue preservation focus and market leadership with independent medial and lateral polyethylene bearing that simplify soft tissue preservation and balance.

We are committed to driving focused execution in support of stronger knee results in future quarters with this exceptional portfolio. Third-quarter hip sales grew by 0.6% reflecting positive volume and mix of 3.0% and negative price of 2.4%. We grew revenues by a solid 5.9% in the Asia-Pacific region, while sales were flat in the Americas.

Hip sales decreased by 1.4% in the Europe, Middle East and Africa region compared to the prior year quarter.

Within this overall performance we continue to drive the sales growth of our Taperloc Complete System and Arcos Modular Femoral Revision System, as well as offerings that leverage Zimmer Biomet’s proprietary Vitamin E-infused advanced bearing materials.

We were also pleased with the commercial traction of the recently introduced G7 Dual Mobility Construct. We are well positioned to build on these successes in future periods by leveraging the industry’s most comprehensive range of hip solutions. Turning to our S.E.T.

category, we achieved a healthy 7.8% increase in global revenues, supported by solid results in all geographic segments. In our surgical business, we have been pleased with the ongoing progress of our growing specialized sales channel and the commercial success of our diversified offerings for the OR suite.

Our Sports Medicine results were once again driven by our proprietary Subchondroplasty procedure and Gel-One Cross-linked Hyaluronate Injection. Similarly, our extremities business continued to leverage our market-leading upper extremities portfolio, including the Comprehensive Total Shoulder System and the Nexel Total Elbow.

Lastly, we delivered ongoing improvement in trauma with third quarter sales being led by our AFFIXUS Hip Fracture Nail System and NCB Plating system. We expect that our S.E.T.

product category will remain an integral component of our sustainable revenue growth platform with innovative clinical solutions that meet the needs of surgeons, patients and healthcare institutions. Dental sales decreased by 7.6%, which was below our expectations.

Nonetheless, we achieved good performances from the 3i T3 Implant system and the recently introduced aesthetic implant system. Looking forward we expect to more fully capitalize on this and additional future product launches as we enhance our multitiered offerings to address an evolving dental marketplace.

Our spine, craniomaxillofacial and thoracic category sales increased by 23.9% on a constant currency basis in the third quarter, which represented approximately 1% organic growth. Following our recent LDR acquisition, we are making good progress we the initial phases of integration throughout our spine commercial organization.

Among our spine offerings, we have been encouraged by the sustained revenue performance of the Mobi-C Cervical Disc prosthesis. Last week we announced that Mobi-C is now the most widely covered device for one and two level cervical disc replacement by commercial health insurers in the United States.

In addition, we also continued to deliver growth with the Vitality Spinal Fixation System. We are well positioned to continue to bolster the competitiveness of our spine business with an expanded portfolio and strengthening sales channel.

With regard to our craniomaxillofacial and thoracic business we continue to be pleased with the ongoing strong sales growth of the SternaLock Blu and SternaLock 360 primary closure systems, as well as the OmniMax MMF System.

With that, I will turn it over to Dan, who will continue this discussion in greater detail as well as review our updated revenue and earnings guidance.

Dan?.

Thank you, David. I will review our third quarter performance in more detail and then provide additional information related to fourth quarter and full-year 2016 sales and earnings guidance.

Our total revenues for the third quarter were $1.833 billion, an increase of 3.5% adjusted constant currency when compared to the third quarter of 2015, and 1.6% excluding the contribution from the LDR acquisition. The net currency impact for the quarter was a positive 60 basis points or $11 million on consolidated revenue results.

We had an immaterial difference in billings days in the quarter as compared to the third quarter of 2015. Third-quarter revenue was below our expectations primarily due to execution issues within our large joint supply-chain, which led to degradation in order fulfillment rates late in the quarter as well as our performance in dental.

As noted by David, customer demand was strong in the quarter but certain aspects of our supply-chain integration impacted our ability to effectively respond to shifting product mix, most notably within our knee and hip portfolios.

As a consequence, we underestimated demand for certain key cross-sell brands within our existing customer base leading to a depletion of our safety stocks and also affecting our ability to capitalize on new customer opportunities.

We are working diligently to enhance our supply-chain processes and execution, particularly in the areas of demand forecasting, global inventory tracking and asset deployment systems while we replenish our safety stock levels.

However, these issues have some carryover effect into the fourth quarter, which I’ll address shortly in the context of our updated Q4 guidance.

Turning now to the balance of our third quarter results, our adjusted gross profit margin was 75.1% for the quarter and 110 basis points lower when compared to the prior-year, due mainly to the impact of ASP declines, as well as lower foreign currency hedge gains, which we have been recently highlighting.

The company's R&D expense was 5.2% of revenue at $95.6 million, reflecting investments from our recently acquired businesses, as well as our Zimmer Biomet Signature Solutions program.

Adjusted selling, general and administrative expenses were $727.7 million in the third quarter or 39.7% of sales which was 40 basis points higher than the comparable period in the prior year.

As anticipated, ongoing investments in our specialized sales forces and medical training and education programs combined with the inclusion of our recent acquisitions offset the benefit of SG&A cost synergies in the quarter. We remain on track to deliver cumulative net EBIT merger synergies of $225 million by the end of 2016.

In addition to the Biomet synergies, we are also laying the foundational elements for synergy capture in 2017 from our recent acquisitions.

In the quarter, the company recorded pre-tax charges of $355 million in special items, primarily related to the Biomet and LDR acquisitions, including $181 million of non-cash amortization and inventory step-up charges as well as approximately $140 million of acquisition and integration-related expenses.

Adjusted third quarter 2016 figures in the earnings release exclude the impact of these charges. A full reconciliation of reported net earnings to adjusted net earnings is included in this morning's press release.

Adjusted operating profit in the quarter amounted to approximately $553 million or 30.2% of sales, which was a decrease of 200 basis points when compared to the prior-year period due to the reduction in gross margin, as well as expected impacts from acquisitions. Net interest expense and other non-operating expense totaled $94.6 million.

Adjusted net earnings were $362.4 million for the third quarter, an increase of 7.1% compared to the prior-year period. Adjusted diluted earnings per share increased 9.1% to $1.79 on 202.9 million weighted average fully diluted shares outstanding.

Our adjusted effective tax rate for the quarter was 21.1% which reflects a year-to-date true up to recognize the tax benefit associated with the noted product mix shifts coming from tax efficient supply-chain jurisdictions as well as certain other items. Our year-to-date adjusted effective tax rate is 24%.

Operating cash flow for the quarter amounted to $353 million, which included $161 million of cash expenditures for acquisition costs, integration activities, and initiatives related to our synergy program.

Capital expenditures for the quarter totaled $150 million, which included $94 million for instruments and $56 million for property, plant and equipment. Our free cash flow in the third quarter was approximately $202 million compared to $16 million in the third quarter of 2015.

Ongoing working capital initiatives and improvements are expected to keep the company on track with full year cash flow generation of approximately $1.1 billion. During the quarter, the company repaid $200 million on our term loan, reflecting $700 million of debt repayment since the beginning of this year.

Additionally during the quarter, the company consummated its new five-year $1.5 billion multi-currency senior credit facility along with a new $750 million term loan to finance the LDR transaction. As a result, gross debt increased by $550 million in the quarter. I would like now to review our guidance.

As we look to the fourth quarter, revenue growth is expected to be in the range of 1.6% to 2.6%. Foreign exchange is estimated to decrease revenue by approximately 30 basis points. Therefore reported revenue is expected to be in the range of $1.960 billion to $1.980 billion.

Fourth quarter constant currency growth on a day adjusted basis is expected to be in a range of 3.3% to 4.3%, or 1.0% to 2.0% excluding the contribution from LDR. On a similar basis, the company had previously estimated revenue growth for the quarter in a range of 5.8% to 6.8%, or 3.5% to 4.5% excluding LDR.

As a reminder, we have one less billing day as compared to the prior year. Our fourth quarter adjusted earnings per share on a fully diluted basis is now expected to be in a range of $2.08 to $2.13.

Turning to the full year 2016, we now estimate revenue to be in a range of $7.630 billion and $7.650 billion, or an increase of approximately 27% on a reported basis or 2.4% to 2.7% on an adjusted pro forma basis in each case as compared to the prior year.

The adjusted pro forma revenue guidance range is inclusive of approximately 110 basis points of contribution related to the LDR transaction.

We now expect foreign currency translation to decrease full year revenue in 2016 by approximately 30 basis points compared to our previous estimate of 50 basis points with the Japanese yen strengthening against the US dollar and a stabilized euro partially offset by the weakening British pound.

Therefore full year revenue growth excluding the impact of the LDR acquisition on a constant currency adjusted pro forma basis is now expected to be in a range of 1.65% to 1.9%. Previously the company estimated full year revenue growth to be in a range of 2.5% to 3.0% on a similar basis.

Turning to the full year P&L, after updating our assumptions to reflect our recent performance, acquisitions, a lower expected tax rate, as well as foreign currency exchange rates and the associated operating margin implications, our full-year adjusted diluted earnings per share is now expected to be in a range of $7.90 to $7.95, an increase of approximately 15% over the prior year.

Our full year reported earnings per share are expected to be in a range of $1.50 to $1.60 after giving effect to our year-to-date results and anticipated special items in the fourth quarter. Special items are largely associated with non-cash amortization, costs incurred to capture net synergy targets and acquisition-integration expenses.

Finally please note that our guidance does not include any impact from other potential business development transactions or unforeseen events. With that, I will turn the call back over to David..

Thanks, Dan. Although we were naturally disappointed with these third quarter results, I want to reiterate our confidence in Zimmer Biomet’s market-leading and diversified portfolio as a driver of sustainable long-term growth.

We are fully focused on restoring product supply and positioning our commercial teams to deliver on high market demand as we enter 2017. More broadly, we remain committed to creating meaningful partnerships to drive efficiencies across musculoskeletal healthcare with innovative technologies, services and solutions that improve the lives of patients.

And now I would like to ask Kareen to begin the Q&A portion of our call..

[Operator Instructions] We will take our first question from Bob Hopkins with Bank of America..

Hi, good morning.

Can you hear me okay?.

We can Bob. Good morning..

Good morning. So, thanks for taking the question.

First a question for Dan and then a question David for you, so Dan, first just on the quantification side, can you give us a sense as to the impact of this sourcing supply issue on Q3 revenue growth and the anticipated impact on Q4 revenue growth and just maybe a sense of how long this will last into 2017, and does this impact earnings outlook for 2017 growth?.

Sure Bob. First with respect to the quantification of the impact as David said in his prepared remarks as well as mine very important to note that customer demand remains very strong.

So that is a real positive and our current supply chain not being fully integrated did hamper our ability to respond effectively to this shifting product mix, and while not anticipated we understand the root causes, we understand the fixes that are necessary and we are highly confident in our ability to implement those changes.

It will take several months to make those corrections. In terms of sizing impact for the quarter it is not a perfect science but I would roughly anticipate or estimate that to be about 100 basis points of impact due to the supply issues in the third quarter.

We have a very robust backlog of demand and with respect to the impact in the fourth quarter I would size that even slightly above that 1% impact..

Okay.

And then just as a follow-up to start, does this compromise your ability to grow earnings 10% in 2017, and then David for you maybe just a little bit more color on when did this sourcing issue start to manifest and maybe just describe a little bit more exactly what this is, is it only in knees, why only in the US, just a little bit more detail would be really helpful.

Thank you..

I think Bob, the manifestation was really as the quarter progressed and late in the quarter the science became clear that we had a pretty significant product mix with the lack of visibility on a forward basis that allowed our supply chain to respond obviously if we fully integrate on the operations front.

We're going to have a much more agile supply chain and be able to respond to these kinds of demands in a much shorter time period as we are in international state now, we just did not have the ability or the force side.

So, part of this is forecasting systems part of it is just operational execution and lead times for these products but primarily driven by the large joint demand, if you think about the cross-sell product categories, you're going to be aligned with the biggest opportunities that we had.

And probably on the forecasting side the most significant underestimation was the demand for those same products with existing customers.

And so, it cost us to have the step back to make sure that we're redoubling our efforts to serve this existing customers and as we've referenced that took away from some of the authentive opportunities that we have. But please don’t construe that to be a lack of demand.

We know that we have significant opportunities to gain competitive accounts and business and as we restore the supply chain, we'll get after those opportunities and reaccelerate our top line momentum. And then Bob just coming back to your 2017, I would just say that 10% earnings growth in 2017 off of 2016 remains our goal..

Just how long does this last into 2017, Dan, and that's my last question?.

I would see some tail effect into the first quarter of 2017, Bob..

Okay. Thanks a lot for answering, thank you..

We'll move on to Matthew O'Brien with Piper Jaffray..

Good morning. Thanks for taking the question. Just to follow up a little bit on Bob's question.

Is it fair to say that this really is more focussed in just a few areas within large joints from a product perspective and you were seeing such demand for those products that you just weren’t able to kind of meet that demand and as you were kind of integrating and seeing some of these sales disruptions that, that was really the issue or was it more broad-based kind of a cross different products?.

It was focussed on the key cross sell products very much. So if you think about the Persona system, the demand is very high for that system. The host of cross sell product opportunities that we have on the legacy Biomet hip portfolio, would be another significant example.

And then the third category I would say to a lesser degree but still having an impact on the upper extremity side, the comprehensive shoulder system. So, those are all market leading systems and the demand within existing customers as well as competitive accounts is very strong..

Okay. And the as a follow-up. On the retention of business side of things, as we get into 2017.

And I know you said the demand has been really strong for the products and you feel good about that but just now that you have this hiccup, how do you grab that momentum back which you were seeing and feel comfortable that you can get back to those kind of market growth rates you've been talking about in '17 and beyond..

Yes. We're passively working towards addressing the supply issues and I would tell you that the forward visibility of addressing those supply issues combined with the known activities that we have on opportunities that we have for competitive accounts gives us that plan. And the confidence as we on our 2017 that we'll reaccelerate the top line..

Right. Thank you..

We'll move on to Mike Weinstein with JPMorgan..

Thank you. Pardon me guys, that I'm still struggling a bit this so.

David, explain to me why this wouldn’t have been obvious until in the quarter?.

Yes. I think that the lack of visibility that we have with forecasting systems safety stocks were burning down. It just became a more profound issue as the quarter progressed. In retrospect we look back and we kind of understand why some of those demand signals weren’t as timely but that's in retrospect.

So, we just got to a point as the quarter progressed where we had the shift to limited supply both inventory and instruments to service existing accounts and it took away from the offensive opportunities that we could capitalize on, Mike..

Okay. And so, sorry I can picture that that you're working down your excess by than you get late in the quarter and you're finding yourself short on product. But if the quantification is right and with a 100 basis points, that still suggests that overall it would have been light which you were expecting to do in the quarter.

So, is the quantification accurate, do you think you would have been call it 2.5% organic head in this happen. And that's the case that it's obviously wasn’t your goal for the quarter for the back half of the year..

Yes, Mike, this is Dan. I think the other component was the dental performance in the quarter being below our expectation. And at our expectation level, you'd be 3% or thereabouts plus, had dental perform to our internal expectations.

I think also with respect to the supply changes to indicate or give a little more colour on the fixes that are coming along. We've been integrating all the back office functions, the supply chain is extraordinarily complex.

However, importantly we do have new tools coming online beginning this quarter with integrated global inventory data warehouses which did not exist at that part of the visibility fix that we lacked. We had some interim processes in place that enhanced. They were not as robust as we needed them to be.

We also have integrated demand planning tools and production planning tools coming online next quarter. So, those are key foundational elements to the supply chain that are coming online and critical to the fix..

That and Dan, just one question on the financial side. The tax benefit that we saw this quarter that got you to the EPS numbers, just what should we assume on tax going forward to that's the same amount..

Mike, we're at 24% year-to-date. Embedded in our fourth quarter guidance is the tax rate that is just slightly below that and we absolutely believe that to be sustainable. And as we discussed, we see a path to further reduce that over the coming years..

Understood. Thank you, guys..

We'll move on to David Lewis from Morgan Stanley..

Good morning. I just had a few quick questions here. Dan, just to give the fourth quarter's sort of follow-on to Mike's question. We think about the fourth quarter guidance versus our expectations to sort of down two points. The supply chain is one point.

To the incremental point of organic growth depression in the fourth quarter is that conservatism continuation to the dental trends.

Can you just square the fourth quarter like you just did in the third?.

Sure, David. The 1% was the Q3 impact. The Q4 impact as I said is going to be above that, so think of that probably closer to 2% impact to the fourth quarter. So, I'd say that that’s the quantification on the top line impact from the supply chain issues..

Okay. And then just two more quick ones. Then the third quarter, obviously margins were important in the stories in top 10% is the goal for next year. Gross margins were okay in the third quarter but obviously SG&A spending was higher.

Can you just talk about again why third quarter margin compression was so severe and so what the implications are for the fourth quarter?.

Sure. I would say that in the third quarter, the SG&A margin which decreased or SG&A increased as a percentage of sale 50 basis points. You have to keep in mind the LDR acquisition and the impact of that. So, as David said, we're very pleased with the top line acceleration of Mobi-C.

At the same time we've inherited the cost structure and as the team looked to integrate LDR in Zimmer Biomet spine, you'll begin to see leverage come from that integration that’s not in the third quarter, you'll start to see that in the fourth quarter and certainly more significantly as we progress through 2017.

So, that leverage from integrating our acquisition is a big contributor to the growth in operating margin next year. Combined with our other growth investments that we've been making during the course of the year, the medical training and education, the specialized sales forces which are driving that SET growth that David described.

And then further investments in our Signature Solutions platform which David described as well all which are critical to long-term sustainable growth..

Okay. And then just one quick one for David.

David, I am sorry to keep jumping back on this horse but it's -- was this a situation where you have a Zimmer business and a Biomet business, you have initiatives to shift that mix, and you so for example the Zimmer knee and a Biomet knee, at the end of the quarter more physicians than you expected for one knee over the other, I hate to oversimplify this, but I'm just trying to give a dearth to the sets of how this could happen and how it could happen quickly.

And then related David, I would say how is your supply chain and manufacturing with critical parts at this merger. What could you say to investors that give them a confidence that you really feel this is an isolated issue? Thank you, I'll turn back in queue..

Sure, David.

It is very much the case where we underestimated the degree to which existing customers were ultimately going to be desirous of some of these key focus brands and for the reasons that we've outlined and the fixes that we have in place to address those issues that Dan just referenced for highly confident that we're going to be able to address those supply chain deficiencies and be able to get after the offensive opportunities with a new competitive business and accounts.

So, I guess what I would want to focus you on as well, David, is that demand is a terrific problem to have. We're disappointed that we didn’t foresee that demand because it's taken us away from being able to run the kind of offense that we would otherwise be able to run. But these aren’t product GAAP issues.

We've got an incredible portfolio and in the natural state of one of these integrations, a complex integration which we would of course seen this. We've got the right fixes in place to get after it.

The supply chain will respond and we'll get back, in offensive mode as the month's progress here and have a high degree of confidence and the team's capability to swipe the opportunities that are out ahead of us..

We'll move on to Larry Biegelsen with Wells Fargo. Please go ahead, sir..

Good morning. Thanks for taking the questions, guys.

Can you hear me okay?.

We can..

Great. David, I heard you talk about accelerating growth in 2017. When do you expect to be back to market growth and that 4% target that as you laid out earlier this year and I had to follow-up. Thanks..

Yes. We absolutely foresee at or above market growth in 2017 as Dan said. There is likely to be a little bit of a carryover effect of the supply challenges at the beginning of the year. But we would see the year progression quarter-to-quarter throughout 2017 and accelerating growth in light of effect that we will have these supply issues behind us.

And we'll provide this specific guidance beyond that, Larry, when we get to the January call..

Perfect. And then on dental. Could you give us a little bit more colour on what the issues were? I know you had a recall in the past and you were supposed to return to growth in the second half, I think in 2016. And so, when do you expect to return to growth there and in the past you explore strategic alternatives for dental.

Can you talk about whether that is still strategic or as in requirement? Thanks for taking the questions..

You're welcome. We believe that there are good value creation opportunities within the dental market.

As we've referenced in the past, strategically each of legacy Zimmer and Biomet have been focussed on the so called premium market and we have significant opportunities and we're working to develop the strategies and then execute those strategies increasingly to get after those various market segmentations including the value segment.

As the business stands now, commercial execution is key. I would tell you that we had a pretty stable Q2 to Q3 performance within the America's had some drop off outside the United States. And so the team is very focussed on showing up the commercial execution on a global basis. We have a terrific regenerative portfolio for cross sell opportunities.

And we would expect to see sequential improvement. I would anticipate that we get into a growth mode but not before 2017. So, we expect to see improvement sequentially from Q3 to Q4 and then get into a growth mode as we're on our 2017..

Thanks for taking the questions..

Sure..

Moving on to Matt Miksic with UBS..

Hi, thanks. So, I had one question on the Medtech Robot platform. And then I'm sorry to say one follow-up on this inventory issue. But on Medtech, David, you mentioned positioning you to potentially explore other applications over time.

Can you talk a little bit about where and when and how long something like that you think would take particularly on the large joint side if that's something that you're thinking about. And then as I mentioned I have a follow-up..

Yes. The development of any applications for us Matt, on the minimally invasive technologies and soft tissue preserving technologies and the broader portfolio of intelligent instrumentation is going to be driven by proven clinical benefit in a cost efficient way that also addresses the provider's capability on throughput front.

And so, those are really the three preconditions, any anatomical site is fair gain for that, but our broad portfolio of intelligent instrumentation puts us in a position to be able to bring the right technologies and converge the right technologies whether those are preoperative planning integrating and or interoperative execution set of technologies in an optimised way.

So, this is a piece of the portfolio we think it will become an increasingly important piece of the portfolio but just a piece of the portfolio and we want to bring the right tool to address the issue in a cost effective way.

So, as far as forecasting that out, we would expect continue to drive the convergence of these innovative technologies and in the operating periods to come at. And we give updates at appropriate points when applications are developed and gotten at the point where we're doing limited launches moving towards full launches of those other applications.

Right now, the Rosa Robotics technology is focussed on brain and spine applications..

Okay. So, this isn’t one of you competitors had a toning application they were working on and talking about probably for at about a couple of years before it finally began to reach the market.

Should we sit in a -- do we not expect that kind of plan to land us -- to the pipeline for us a little bit?.

You shouldn’t expect this to layout our internal innovation pipeline. That’s right, Matt..

Okay, that's fair. I think I get that. So, on the not to kind of speed that works on this supply chain issue, but it has I don’t think we've ever, I'm trying to think of an example that we see like this north be it. And you've managed to a number of large launches and ads and flows between preferred products before.

Maybe I remember there was something about before the Biomet the others, something that you were tackling as on your supply chain kind of been a lean out working capital get more efficient. I don’t know if this has anything to do with, greater reliance on preop planning and the visibility that gives in the supply chain.

But is this get -- is this sort of an unfortunate consequence of some of your efforts to get more efficient and one step forward and we'll expect to, one step back and two steps forward. Or just some colour would be very helpful on how this how we got here..

Yes. I understand your question, Matt. And I would tell you that it's much more simple than that. This is much more simple in regard to appropriate forecasting in having forward visibility. So, the system fixes and infrastructure that Dan referenced earlier during the call are the solutions here.

It isn’t driven at all by any kind of innovative go to market or demand signal and transformation, nor is it driven by any kind of consolidation of the portfolios in the form of rationalization. So, I wouldn’t want people to misconstrue that the, yes it’s a complicated operation because these are large product lines and manufacturing facilities.

But there isn’t anything other than blocking and tackling that fixes this problem we know we need to do to address it..

Okay, thank you..

You're welcome..

We'll move on to Joanne Wuensch with BMO Capital Markets..

Good morning.

Can you hear me okay?.

We can, Joanne. Good morning..

Good morning. Thank you for taking the question. You were able to quantify the tailwind or the impact in the third and the fourth quarter, the commenting that is going to roll into the first quarter.

How should we think about that quantification and is there an all clear signal where we don’t have to worry about this anymore?.

Yes. We wouldn’t expect it to accelerate as we move into next year. So, I think that that quantification that we provided as far as the Q4 impact would be the high water mark and expect it to dissipate as we move into in through 2017, Joanne..

Okay. And then it was mentioned if I recall, that the average selling price is or the price pressure may have been somewhat higher than normal during the quarter.

Could you please address that?.

Yes. We just have a little bit of a not pick but consistent with expectations. Primarily as far as the geographic segments go and the America's and Asia Pacific. But nothing that we didn’t anticipate coming into the year or nothing that we didn’t anticipate even coming into the quarter.

Part of that Asia Pacific uptick is obviously the biannual adjustments in Japan..

Okay. Thank you, very much..

You're welcome..

Matt Taylor with Barclays has our next question. Please go ahead..

Hi, thanks for taking the question.

Can you hear me okay?.

We can, Matt. Good morning..

Good morning. So, I just wanted to understand from your customers point-of-view, elevated the supply issue that basically they're asking for inventory like Persona and you have to tell them that they have to wait a few weeks.

Or can you help us characterize that so we can get the impact on your customers look the risk that you lose anybody because of the [indiscernible]?.

That risk will be minimised. I mean, this is part of the reason that has any of those signals we receive back we back off of some of the offense of deployments to make sure that we're taking care of the existing customers. So, that's the priority. It's a good question.

And I would tell you that our entire organization is very focused on addressing any of those desires with the historic customers for the business side of legacy, Zimmer or Biomet..

Then on the fixes that you have with forecasting in the moment. Can you give us a sense of, what are the kind of long holes in the tent there. I like to give some upside or downside to your expectation, that will be $3 in a two months..

Matt, this is Dan. If I mention some of the fixes being a global inventory data warehouse that is in user acceptance training as we speak. So, we expect that to come online in the coming weeks. That immediately gives us the type of global visibility to finish goods in inventory levels around the US and around the world.

That's critical to that comes online in the coming weeks. The so I think we're very low risk of that going purely based on the testing that's been done today.

The integrated demand planning tools come online shortly after the new year and based on the learnings over the past few months, needless to say a lot of focus on the process for that and then the deployment of these tools were we're deploying our approve tool. So confident that we're going to be able to get that up and running without a glitches.

Importantly over the past month, we significantly ramped up production levels but given lead times from vendors and production lead times that just takes time to build inventory and replenish those safety stock levels. But all of the above were aggressively dealing with and have been for the past several weeks..

Okay. Thank you..

We'll move next to Richard Newitter with Leerink Partners..

Hi, thanks for taking the questions. Maybe just to turn away from the supply issues for a moment. You mentioned some initiatives to try to tell your solution a bit more to the bundle payments that we're seeing take hold of the CJR. You acquired this respond well business.

Can you talk a little bit about how we can expect these types of solutions to just fit into your overall strategy and how we should expect them to generate sales or what the business model is there?.

Sure, we take the form of much broader and deeper partnerships with the hospital customers. And I would tell you the discussions that we've had which to-date have been focussed primarily on large academic institutions have been very positive.

So, we would enter into a deep partnership that could include risk sharing in an appropriate manner to optimise the quality of care for patients. And as well address the economic pressures that are on these customers as they get transitioned over to a more value base system.

To do that well, obviously, it requires an end-to-end management in the episode of care. And that's where the patient engagement tools become so important. Prehab is important, education, patient surgeon communications, obviously a really bright light has been shining as of late.

Because of CJR, the post discharge cost that are incurred and that’s where the teller rehabilitation and leveraging technologies that lead to a better patient outcome, but do that on a cost effective way can become so meaningful.

So, that product portfolio across the continuum of care including these services and solutions including our couple of decades of experience through our Accelero consulting services that help lean out processes and ensure that the quality of care is raised and it's done efficiently and throughput is drive through these systems is what signature solutions is all about.

And as I said, it’s a message that's really resonating. I think they were in a unique position as we participate in over 1.5 million procedures across the globe on just the large showing side alone to understand what best practises can be transferred from one institution to another.

And then ultimately with the appropriate structure on an end-to-end basis. We're going to be able to along with our hospital customers draw data that will lead to continuous improvement and refinements of how the care is delivered. So, we love the opportunity. We think that we can be a big part of the solution for the hospitals going forward.

And the deeper partnerships in the Zimmer Biomet Signature Solutions is the umbrella that allows us to bring those solutions to the customers..

Okay. And just one follow up on LDR. I think Dan, you had mentioned, leveraging that acquisition into the fourth quarter in a more meaningful in '17 as a reason for confidence and operating profit growth through acceleration.

I guess my question just there is, do you -- what's your confidence level that you're going to be able to maintain the salesforce in what always is tricky with spot acquisitions and what level of confidence do you have that we won't see any surprises kind of for that business to potentially alter that margin outlook. Thanks..

Sure. And we will do nothing to impede the momentum of Mobi-C.

We can assure you that the opportunity is really keeping mind that the Zimmer Biomet spine business still in the process of being integrated, you bring LDR into that and that and now we have an opportunity to further design the right or structure for robust growth in the right level of supporting infrastructure.

So, it's really you have to think about Zimmer Biomet LDR all emerging together in from a back office perspective and so forth. But we will do nothing to impede the growth. In the LDR portfolio and then capitalize on the cross sell opportunities that exist between the Zimmer Biomet portfolio with Mobi-C.

Very exciting and how the confident in our ability to drive the top line while delivering on the integration and the synergies..

Cray, we have time for one additional question..

Thank you. We'll take that from Glenn Novarro with RBC Capital Markets..

Hi. Two questions. One, back into the temper you guys were on the conference trail and you highlighted the FX headwinds for 2017 on the EPS line. So, can you give us an update on the FX impact in terms of EPS for 2017 and what are the offsets? And I have a follow-up..

Sure, Glenn. The impact on 2017 is still the same and we've characterized that roughly in the neighbourhood of a 4% headwind to EPS growth next year. And that's still the case. We continue to feel good about the Biomet synergies which offset that.

And then some of the other activities that will be driving to work towards that 10% goal that I described before. So, nothing had changed in that regard..

Okay. And then, just on the salesforce back at AAOS, there was a lot of chatter about the Zimmer reps and resume's out in the field. But Dave, I think on the call you said that you were a mid-adder of sales reps this quarter. So, can you quantify and where is this coming. Is it coming particularly in knees and hips? Thanks..

Sure Glenn. We have been a mid-adder as you said in the first quarter of this year, in the second quarter of this year and again in the third quarter of this year.

And it's across all product categories Glenn, if there is a lot of focus obviously consistent with as we've been talking about building up the specialize salesforces and so the non-large showing categories as well had be recipients of the continuous filled out of the salesforce.

And I think that you're just beginning to see the science of the productivity of those specialized salesforces is evidenced by the continued improvement of the SET category. And that was global improvement as is our build out of the specialized sale force, since it's very much a global offense and strategy..

So, with that, I'd like to thank everyone for joining the call today and for your continued interest and support for Zimmer Biomet. We look forward to speaking with you on our fourth quarter conference call. I'll turn the call back to you, Careen..

Thank you, sir. And thank you again for participating in today's conference call. You may now disconnect..