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

Thank you. Good morning and welcome to Zimmer Biomet’s Third Quarter 2017 Earnings Conference Call. I am here with our Interim CEO and our CFO, Dan Florin. Before we start, I would 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.

Reconciliation to these measures to the most directly comparable GAAP financial measures, are included within the earnings release found on our website.

In addition to the earnings release issued this morning, we have also posted a quarterly presentation on our website at investor.zimmerbiomet.com, to supplement the content we will be covering this morning. With that, I’ll now turn the call over Dan..

Thank you, Matt. Our third quarter results fell short of our expectations, driven by external and internal factors. These factors included softened domestic market conditions, the impact of the hurricanes and the Indian knee price reduction, as well as the pace of our supply recovery and the related delay in sales recapture within our U.S. business.

We know that Zimmer Biomet can and must perform at a higher level and significant work continues to ensure that we deliver on our commitments to our customers and our stockholders. During today’s call we will provide our insight into what drove the sales and production shortfalls within our U.S. business.

In addition to our detailed plans to get our performance back on track, we will also provide an update on our production and sales recapturing initiatives to improve our near and long term results with respect to our U.S. business. Finally, we will discuss U.S. market conditions and our global performance by product category.

First, I want to take a moment to acknowledge the communities affected by the devastation of hurricane Harvey, Irma and Maria. We are thankful to report that all of our team members in the affected regions are safe. During the third quarter our revenue was impacted by these storms, resulting in approximately $5 million of headwind.

Regarding our production at our Puerto Rico facilities, where we primarily manufactured some hip and trauma products, like many, we have encountered problems of mainly consistent power causing a more gradual return to full production than originally anticipated.

Given the continued instability of infrastructure in Puerto Rico and current safety stock levels, we now expect some minor sales disruption in the fourth quarter and into 2018. Additionally, the government of India initiated a significant knee price adjustment during the quarter.

This action has caused much disruption in the India market, resulting in a headwind of $5 million for the third quarter. Turning to our results, we achieved net sales of $1.818 billion excluding approximately 30 basis points of contribution from the LDR Holding Corporation acquisition.

Third quarter 2017 revenues decreased by 1.1% from the third quarter of 2016, representing a decrease of 1.5% on a constant currency basis. Our results were negatively impacted by approximately 130 basis points due to having one less billing day through the quarter.

On a constant currency basis, our Asia Pacific sales increased by 5.2%, while sales in the Europe, Middle East and African region decreased by 0.4% and sales in the Americas decreased by 3% compared to the prior year quarter. Let me now take you through our plans in greater detail.

During the third quarter we made good progress in the execution of our quality remediation plan at the Warsaw North Campus and we remain on track to achieve the key milestones laid out in our Form 483 responses provided to the FDA in December 2016.

These efforts will continue through 2018 as we have previously highlighted and will remain a key focus of our entire company.

On the production front at our Warsaw North Campus, we achieved lower than anticipated production output of several key brands due to inconsistent yields from certain more complex manufacturing prophecies, as well as increased attrition beginning in August among our temporary direct labor workforce in Warsaw.

This resulted in third quarter output being below our targeted level. . Reaching targeted and consistent output for certain manufacturing prophecies has proven difficult due to the added quality compliance measures, including in-process monitoring implemented as part of our remediation plans.

Given these challenges we have accelerated our planned dual sourcing strategy for the previously mentioned manufacturing processes, which we expect will provide additional capacity starting in the second quarter of 2018.

Within the current manufacturing environment we continue to make ongoing engineering process improvements, including targeted investments into equipment and key technical expertise to improve process constancy and output.

As it relates to staffing, we have implemented new strategies to provide resource stability for the Warsaw North plan, including temp to direct hiring, to ensure we attract and retain the required skilled labor in Warsaw. We remain intently focused on resolving these challenges.

For brands not impacted by the previously described process complexity, we expect to clear back orders and replenish safety stock consist with prior expectations, resulting in full supply by the end of the fourth quarter.

For those brands attached to the more complex processes, we expect both backorders and safety stock levels to improve over the coming quarters, achieving full supply on all products during the second quarter of 2018. I would now like to turn to our sales recapture program in the United States.

The production shortfall is directly impacting our ability to fully meet case demand and go on offence. During the third quarter we continued to experience low inventory levels across key brands within our knee, hip and S.E.T categories.

Supply is the foundation to enable our sales recapture program and as supply improves, we expect the logistical burden on our sales forces to decrease, allowing us to better serve all of our customers and go back on offence.

During the interim, our sales forces has focused on products that have not been impacted by temporary supply challenges, such as our market leading Persona Knee System, which recorded strong growth during the quarter. We also launched our Persona Partial Knee System, which is realizing positive momentum due to encouraging market acceptance.

In addition, we have enhanced our customer engagement and responsiveness with chartered internal teams to ensure customers are bring appropriately communicated with as we work through production and supply initiatives. We also continue to make investments into our specialized sales forces and sales rep incentive programs to accelerate growth.

Our global commercial organization and team members worldwide have shown tremendous resiliency and I am proud on their hard work and dedication. We know what we need to do and our team is working diligently to achieve our objectives.

While the pace of our production and sales recovery has not met our expectations, I am encouraged by my interactions with many of our surgeon customers who continue to place their confidence in our portfolio, our pipeline and our people.

As I alluded to earlier, a number of factors in the Musculoskeletal Market have impacted our results, including the previously mentioned effect from the hurricane and the knee price action by India. Further, we saw moderate step-down in knee and hip procedural volumes in the United States.

Based upon those who have already reported, we estimate that third quarter U.S. Knee and hip market to be flat to positive 1% on a day adjusted basis, which was lower than our expectations. These quarter-to-quarter market fluctuations appear to have driven by U.S.

insurance dynamics causing more variability in the timing of procedural volume and contributing to our lower than anticipated third quarter sales. We view these market fluctuations as temporary and believe underlying market demographics point to a sustainable global knee and hip market growth rate up between 2% and 3%.

With regard to pricing, we experience negative pressure of 2.1% during the third quarter. Turning now to performance by product category, as a reminder the growth rates I quote are on a constant currency basis and have not been adjusted for the 130 basis point impact from one less billing date during the quarter.

Our third quarter knee sales decreased 1.7% from the prior year quarter, reflecting positive volume and mix of 0.8% and negative price of 2.5%. We continue to drive strong knee growth in the Asia Pacific region, where we generated approximately 4% constant currency sales growth, inclusive of the effects of the price action in India.

We were also pleased with our sales results in the Europe, Middle East and Africa region. In the Americus our knee franchise was impacted by a softened U.S. market, as well as the headwinds I mentioned earlier related to supply shortfalls, which limited our ability to accelerate revenues.

As we continue to work aggressively on resolving these near term challenges, we remain focused on a number of important development products to drive future growth.

As I mentioned earlier, in September we announced the launch of the Persona Partial Knee system, which provides us with the ability to participate in the important fixed bearing segment of the partial knee market and complements our clinically trusted Mobile Bearing Oxford Partial Knee.

The Persona Partial Knee also represents our first significant jointly developed new products since the Zimmer Biomet combination.

We also continue to make steady progress towards the planned launch of our Persona TM Tibia Cementless Knee and the clinical evaluation of our Persona Revision system in the second half of 2018, as well as the clinical evaluation of our ROSA robotics platform for knee replacement application.

In addition to these development projects, after reaching the milestone of over 500,000 Persona Knee procedures, our knee teams showcased the clinical success and versatility of our Persona Knee system to hundreds of surgeons at a global webcast surgical education event.

The webcast was very well received and provided continued optimism for the future success of our Persona platform. Third quarter hip sales decreased 1.7%, reflecting positive volume and mix of 0.8%, a negative price of 2.5%.

While we continue to achieve solid sales of our G7 Acetabular System, our Taperloc Complete Hip Stem and Arcos Modular Femoral Revision System; our hip performance remained challenged by supply constrains.

As we focus on fully restoring production levels and closely engaging with accounts impacts by the temporary supply disruption, we will continue to pursue improved growth across our comprehensive hip portfolio, along with several important development projects.

Now turning to our S.E.T product category; revenue increased by 1.1% over the prior year quarter. Our specialized sales forces delivered solid sales of our Gel-One and Subchondroplasty treatments, as well as our Quattro Link Knotless Anchors, the A.L.P.S. Total Foot System and our IntelliCart System for fluid waste management.

Our surgical team had another quarter of strong execution and sales growth as a result of their dedicated sales channel and broad product offering. However, our overall S.E.T sales growth was challenged due to supply constraint that limited our ability to drive offense within our Sports Medicine, Extremities and Trauma portfolios.

We remain focused on restoring supply levels across the entire range of our S.E.T offerings. In addition, we plan to introduce several new products in 2018, including our comprehensive Shoulder Augmented Baseplate, as well as a Stemless Shoulder offering, which we expect to be important growth catalyst.

Our third quarter dental sales decreased by 4.4%. We continue to restructure our dental sales organization, specifically in some key Western European markets, which we expect to positively impact sales performance in 2018.

Our dental business remains focused on executing both commercial and portfolio initiatives to shape the business for sustainable long term growth. Revenue from our Spine, Craniomaxillofacial and Thoracic category increased by 0.3% over the prior year quarter.

We continue to belief from sales of our market leading Mobi-C cervical disc, however our spine performance came in below our internal exceptions due to near term revenue dis-synergies related to the commercial integration of our U.S. spine sales force.

We are working diligently to mitigate these disruptions and to enable optimal cross selling through increased training and investment into working capital.

Among our Craniomaxillofacial and Thoracic offerings we achieved another solid quarter of growth, supported by sales of our Trauma One Plating System and SternaLock Blu and SternaLock 360 primary closure systems, as well as our RibFix Blu Thoracic Fixation System.

I will now turn to our third quarter financial details before providing additional information related to our fourth quarter sales and earnings guidance.

Our adjusted gross profit margin was 73% for the quarter and was 210 basis points lower than the prior year period, due primarily to lower gains from our cash flow hedging program, additional manufacturing costs at our Warsaw North Campus manufacturing facility and the impact of price declines.

Gross margin was lower than anticipated, due primary to regional and product mix of our third quarter revenues. Our R&D expense was 5% of revenue at $91 million, a slight decrease from the same period in the prior year.

We continue to prioritize R&D spending on what we believe are the most impactful programs, including our important knee programs, our robotic applications novel case fulfillment approaches and Zimmer Biomet Signature Solutions among others.

SG&A expense was $695 million in the third quarter or 38.2% of sales, 150 basis points lower than the comparable period in the prior year and consistent with 2017 trends.

In the quarter we recorded pretax charges of $328 million in special items, which include $188 million of non-cash amortization, inventory step-up and a good will write-off related to one of our small non-core businesses. Special items also included $50 million of quality remediation expense and $90 million of integration expense and other items.

Our diluted earnings per share for the quarter were $0.48 versus $0.78 in the prior year period. Adjusted third quarter 2017 figures in the earnings release exclude the impact of the special items that I just mentioned.

Adjusted operating profit in the quarter amounted to $542 million or 29.8% of sales, which was 40 basis points lower when compared to the prior year period, driven by the previously described gross margin decline, partially offset by SG&A improvements.

Our adjusted effective tax rate for the quarter was in line with our expectations at 23.2%, an increase of 210 basis points from the third quarter of 2016.

Adjusted diluted earnings per share for the quarter decreased 3.9% from the prior year period or negative 0.6% excluding the impact of foreign exchange to $1.72 on 204 million weighted average fully diluted shares outstanding. A reconciliation of reported net earnings to adjusted net earnings is included in this morning’s press release.

Operating cash flow for the quarter amounted to $463 million, which reflects $111 million of cash expenditures, primarily for quality remediation initiatives and integration activities. Free cash flow in the third quarter was $344 million, $142 million higher than the third quarter of 2016.

During the third quarter the company paid down $490 million from our term loan and increased our borrowings by approximately 21.3 billion yen for our Japanese loan vehicle. Therefore when combined with our activities for the first half of 2017, gross debt reduction during 2017 has been $950 million. I’d like to turn now to our updated guidance.

As a result of the previously described pace of supplier recovery of certain key brands manufactured at our Warsaw North Campus facility and the related impact on sales recapture, primarily in the U.S., we are adjusting our fourth quarter and full year revenue and earnings outlook.

For the fourth quarter we expect revenues to be in the range of $2.10 billion to $2.50 billion, which includes approximately 175 basis points of favorable foreign exchange impact.

On a constant currency basis, our growth rate is expected to be in a range of negative 1.8% to positive 0.2%, inclusive of a 20 basis point contribution from selling day impact compared to the prior year period. Therefore, our billing day adjusted constant currency growth rate is now expected to be in the range of negative 2.0% to 0%.

For the full year 2017 our estimated revenue growth is now expected to be in a range of 1% to 1.5% over the prior year. Foreign exchange is now expected to increase revenues by 0.1%.

Taken together, constant currency revenue growth over 2016 is expected to be in the range of 0.9% to 1.4%, inclusive of 120 basis points of acquired revenue from the LDR acquisition. In dollar terms, our full year 2017 revenues are expected to be in a range of $7.760 billion to $7.800 billion.

Our expected dollar range is down from our previous guidance range of $7.800 billion to $7.870 billion, with favorable foreign exchange partially offsetting the reduction in our constant currency growth rate.

Turning to EPS, the earnings flow-through from our lower sales expectation will again have a disproportionately negative impact on our fourth quarter profitability due to the regional and product sales mix, which is only partially offset by favorable currency adjustments versus our previous outlook.

Additionally, we continue to invest in critical areas such as specialized sales forces, sales incentive programs, core R&D initiatives, including the knee and robot projects previously mentioned and sales support cost to maximize customer engagement.

We will also continue to incur incremental manufacturing and distribution costs, primarily in the Warsaw North Campus facility.

These increased manufacturing costs are expected to continue to have a negative impact on gross margin throughout 2018, until we implement our dual sourcing strategy and more efficient and automated manufacturing and quality control processes. Our fourth quarter projected EPS is in the range of $0.94 to $1.08.

After the elimination of amortization, inventory step up in special items, our adjusted EPS is expected to be in the range of $2.08 to $2.14. This guidance assumes the fourth quarter effective tax rate of approximately 23.5%. As a result, full year earnings are now estimated to be within a range of $3.80 to $3.93.

Special items for 2017 are estimated at approximately $1.260 billion. This is an increase of $25 million from our previous guidance, which is driven by the previously mentioned goodwill write-off, partially offset by lower integration costs.

We expect investments in our quality remediation program for 2017 to be consistent with previously stated amounts. We expect our full year adjusted effective tax rate to be approximately 22% as we continue to execute important initiatives that will benefit our future effective tax rate.

Excluding the impact of amortization, inventory step up and special items, we are reducing our full year 2017 adjusted earnings per share guidance to a range of $8.01 to $8.07. This EPS range represents approximately 0.5% to 1.5% growth over the prior year or 4% to 5% growth when excluding the impact of foreign exchange.

We expect free cash flow to be in the range of $1.125 billion and $1.225 billion. We expect to continue prioritizing our free cash flow in the fourth quarter towards debt repayment, continuing our path towards reduced leverage.

Finally, please note our guidance does not include any impact from other potential business development transactions or unforeseen events. Before we move on to our Q&A, I want to provide an update on our board search to select our next CEO.

The process is ongoing and our board continues to make good progress, as it is committed to a thorough and timely search process. In closing I’d like to reiterate that we are not satisfied with our current results.

Looking forward, we are focused on addressing our production challenges, to allow for greater sales recapture and to enable our sales teams to go back on offence. We will also continue to leverage Zimmer Biomet’s diversified portfolio and a strong pipeline.

The new products scheduled for release over the coming 18 months provides further optimism for getting our performance back on track and improving our growth profile. With that, I’ll open it up to questions..

Thank you, sir. [Operator Instructions] Our first question comes from Bob Hopkins with Bank of America..

Thanks and good morning. So it seems to me looking at this release these are our two big changes. One is the remediation supply issues taking longer and the second one is just that the U.S. market is weaker.

Before I get to those two, which will be my two questions, I just wanted to clarify, in the third quarter what was your organic growth, organic revenue growth adjusting for selling days, LDR and weather. I just want to make sure I have that number, because it’s not 100% clear from the release..

Sure Bob. So on a constant currency day adjusted basis backing out the LDR contribution its negative 0.2% and we described in the release or in my prepared remarks rather, that the impact of the India knee price cut and the hurricane impact is about, call it 50 basis points. So adjusting for that, call it a 0.3% Q3 performance..

Okay, great, thank you. I’m sorry if I missed that in the slide or something. So the two things I really wanted to focus on was one, on the remediation supply side, your pushing back your guidance for when you think it will be completely behind you.

What is the one main reason why you are doing that? One main reason for the adjustment and can you quantify what you think the supplier issue, how much its impacting growth right now?.

You know Bob as I said in my prepared remarks, the production output in the third quarter fell below our expectations, which means we did not make progress on reducing the backorder that we expected to, and really as I said, the drivers being a level of process inconsistency in certain core manufacturing or complex manufacturing processes, as well as the increased attrition in the temporary workforce.

So a combination of those two factors led to the shortfall in [Audio Gap] production output.

So I described what we’re doing about that and in terms of the impact of that on the Q4, you know the point I would make is that our prior Q4 guide assumed we’d be entering the quarter in a healthier supply situation and we had order of magnitude 200 to 250 bps of comp adjusted acceleration in the fourth quarter, really predicated on the assumption of having the supply to go on offense.

So that’s the biggest driver of the takedown in Q4..

Okay, I’m sure someone will follow-up on the attrition question, but I wanted to get your views on the U.S. hip and knee market.

Most of the folks that have reported so far has seen a little bit of weakness, but your calling out a couple of specific things and reasons why you think the market is slower and I was wondering if you could just develop that a little bit more, because some of the growth rates we’re seeing are you know growth rates that are, the week as its seen in sometime.

So could you just kind of go in a little more detail on what you think is going on with the U.S. hip and knee market. Thank you..

Sure. So based on what’s been reported we estimate the Q3 U.S. knee and hip market was somewhere between flat to 1% on a day adjusted basis in Q3, which was below our expectations. Our expectations had been more in the 2% to 3% range. Q3 is always the slowest from a seasonality perspective and has been the least predictable over the past several years.

So we view this as more of a quarter-to-quarter demand dynamic as opposed to any systemic change in the outlook for hip and knee performance and market growth in the U.S. So we continue to believe that 2% to 3% global knee and hip market growth rate is sustainable and you know based upon underlying demographics.

So we’re not concerned about the ebb and flow quarter-to-quarter. We still believe in the long term tail of demographics and 2% to 3% global U.S., global hip and knee market growth rate..

Okay, great. Thank you very much..

Our next question comes from Mike Weinstein with JPMorgan..

Thank you, and maybe I’ll just pick up of where Bob left off there. So the comment in the prepared remarks about U.S.

insurance dynamics impacting the end market growth, what are you referencing there?.

Well, I think it’s just what we’ve seen Mike is a lot of volatility quarter-to-quarter and I am referring to you know the higher prevalence of high deductable plans, which tends to cause people to have elective procedures on later in the year. It’s just more difficult to predict. I don’t think we have enough data points..

This is nothing, but [Cross Talk] impacting the third quarter..

That’s correct..

Okay.

And then could you spend Dan just a couple of minutes on the dual sourcing strategy and what you’re doing there?.

Sure. So I’m referring to a number of more complex manufacturing processes that are in the North Campus, where despite a lot of excellent work by the engineers and that work continues, it’s obvious that we need more capacity on these particular production lines.

For obvious reasons I don’t want to get into the weeds on what exactly those processes are, but in fact what we are doing in addition to optimizing inside the four walls of the North Campus, which we’ll continue to do, we’re also looking on the outside, a combination in our current network or with vendors, they add capacity for those particular production activities.

So that’s what we mean by dual sourcing. So we’re accelerating that timeline to look for additional capacity that we need and that increased capacity should also as we continue to make improvements on the processes lead to more process and output consistency..

Okay, and then last item on your comment on the CEO search, I recognize there is a limitation just to what you can say.

You wanted to add anything relative to your thoughts on timing?.

No Mike, I would just say that you know as you can appreciate, I am not going to provide specific detail on the board’s process, just that the process is ongoing and our board continues to make good progress and as we’ve always said, we’re committed to a thorough and timely search process..

Understood, thank you..

You’re welcome..

Our next question comes from David Lewis with Morgan Stanley..

Good morning. Dan you just – a few quick ones here. Just starting this kind of fourth quarter guidance and getting a sense of how conservative you think that number is, it still implies by our math some acceleration in the momentum in the business into the fourth quarter and that has not happened in several quarters.

So can you just give us a sense of what drives that underlying momentum acceleration into the fourth quarter and I have a couple of quick follow-ups..

Well as I said before David, the prior guidance assumed much more significant acceleration predicated on full supply. What our Q4 guidance is not assuming is any of the Q3 market softness spilling into the Q4. In other words, our Q4 guidance is assuming a U.S.

hip and knee market based upon historical seasonality Q3 to Q4, so we’ve not layered that expectation on top. So I think the underlying guide in Q4 is assuming similar production levels to Q3, a market that’s tied to historical seasonality and the type of progress on these non-affected brands that I described in my prepared remarks.

In other words we are making progress on certain products coming out of the North Campus, which helps – put that in the hands of the sales force to drive some growth and then the last part would be, you know we’re very excited about the Persona Partial Knee and that will continue to have impact in the ensuing quarters..

Okay, but if the market does not get better in the fourth quarter, this guidance theoretically could be at risk, said another way..

Well, our assumption about the U.S. hip and knee market for Q4 is a 2% to 3% type year-on-year market growth..

Okay, that’s very helpful. And then Dan, just two questions around earnings. The first question is cost dynamics in the quarter. If I take your revenue reduction for the fourth and I assume a pretty good drop through, you know you get kind of – you know $0.20 is the reduction for the fourth quarter roughly.

I get kind of half that from a high margin product sales drop through. Is the other half coming from the cost of higher employee wages to keep them in their seats and the dual sourcing? Is that a decent way of thinking about it. It’s sort of half increased cost and half about the top line drop through..

You know the drop through on the sales is more than what your modeling, you know because the take down from the prior guidance is focused on the U.S. market, so that EBIT drop through on the mix of sales is more significant than the half that your describing. You know I’d probably put of the takedown between the organic sales and the FX change.

You know inclusive of the mix I just described that’s about in the neighborhood of $0.12 of the take down and the balance being tied to incremental cost of goods, the combination of higher production costs and inventory charges tied to the North Campus performance..

Let me clarify the organic component of the take down David is around $65 million, but the offset of the FX benefit around $20 million..

Okay, that’s very helpful. And then Dan I know its early, but if we think about it, there’s a lot of consternation about what the 2018 could be last quarter and is it a decent way of thinking about next year? Do you still believe this business; you know A can grow modestly in 2018.

Can you leverage the business growths 1% next year? Is that a decent way to think about core earnings growth? One way I am thinking about it is if the core business grows 1%, you lever earnings 1% and you get currency, you kind of come out at $8.20, $8.30 for next year.

I just wondered if you just think about how this business can grow over the next 12 months. Thanks so much..

You know David, I’d say that we are going to provide 2018 guidance in early 2018. We have to see how the year closes and then go through our normal process, taking into account production, sales trends, gross margin etcetera and the investment needs and form thoughts more fully on 2018.

I think it’s important to point out that gross margins will continue to be pressured until we increase our U.S. sales growth and optimize the production of the products that are currently produced in the North Campus.

So we have planned to do both of those things, but in terms of the gross margin profile, you know if you look at the gross margin profile in the back half of this year as revised, I think that’s the right way to think about gross margin rate for next year. We’ll continue to drive value creation programs across the enterprise.

First and foremost top line growth is at the top of the list..

Okay, thank you very much Dan..

You’re welcome..

We’ll go to Chris Pasquale with Guggenheim..

Thanks, good morning. Alright Dan, you never mentioned the close of the deals during the quarter but the legacies in your portfolio continues to struggle a bit there.

How close do you think we are seeing that segment turnaround? Is it just a matter of lapping the impact of some rep turnover or do you need something else like new product flow to get it going in?.

Sure Chris. You know first we’re very excited and continue to be very excited about the Mobi-C product line. In addition we expect the recent enhancements to our vitality system and the future robotic spine application to be key enablers to future spine momentum.

Certainly the recent results have been impacted by the market on the one hand, but probably more so the sales disruption and the channel integration. So you know at this point in time we continue to evaluate and I would say fine tune our sales structure to make sure that we’re positioned for long term spine success.

I think we have the portfolio that we need. We have a lot of talent in the sales channel and we’re going to continue to look to fine tune that and make sure that we’re getting that type of performance that equals the potential that we have..

Okay. S.E.T. was such a bright spot last year and has taken a couple of steps back. I know that the Warsaw North issues are a big piece of that. But can you talk about the outlook for the business heading into next year and maybe in particular focus on that stem of shoulder launch.

How that compares to the competitive product that’s on the market today and how you think about that market opportunity?.

Sure. So year-over-year growth slowdown was attributable to more difficult comps, but also really for the first time seeing the cumulative impact on momentum due to supply constrains. So we’ve been describing that from the North Campus. There is certain Biomet Sports Medicine, upper extremities and trauma products that come out of the facility.

Importantly Chris S.E.T. remains a strategic growth driver for the company. It’s a very important exciting market for us. We’re clearly focused on improving supply first and foremost in shoulders, sports med and trauma. We’re continuing to invest in specialized sales forces in the S.E.T. category.

I think the results of surgical are an excellent proof point of what that can do from a performance perspective and then you’re right, the launch of the new products in 2018, that includes the Stemless Shoulder, as well as the Comprehensive Augmented Baseplates.

So you know we’re the market leader in shoulders and getting the Comprehensive Augmented Baseplates out into the markets, an important addition, and we’re very excited about the Stemless Shoulder. We think that’s going to compete very nicely with the other stemless products that are out in the market. Next question..

We’ll take our next question from Kristen Stewart with Deutsche Bank..

Hi, thanks for taking the question.

Just going back to the gross margin question and gone looking ahead to 2018, how long do we think that or how long do you think that the gross margins will continue to be pressured by some other costs?.

Kristen, sure, sure. The gross margin pressure, the two contributors here in 2017 relative to prior guidance are the sales mix that I was describing earlier, less U.S. sales than expected and then secondly the production costs and related inventory costs out of the North Campus. So the sales mix will improve as we accelerate U.S. growth.

The cost of goods from the North Campus as I described is going to persist through 2018 and frankly until we’re, as I described, until we’re into a more automated environment with validated processes and more process consistency in combination with the added capacity.

Those are the elements that are needed really to drive improved costs and more consistent output..

And to add on that, you know our expectations on what we have communicated previously, that program and the positive benefit on gross margin would start translating into benefit in 2019 and 2020..

Okay, and I appreciate you don’t want to give any sort of color on 2018 in terms of the specific guidance, but are there any other puts and takes that you can give us just to help frame 2018 at this standpoint?.

Kristen as I said, I really want to see how we close Q4, see what kind of momentum we have exiting the year and then monitor the progress that we’re making on our dual sourcing strategy and the engineering improvements inside the North Campus.

That will inform our view on production output, which is so critical to getting full supply into the hands of our great sales force to drive growth. So I’d rather wait until our guidance early next year..

Okay, that’s fair. Thank you..

You’re welcome..

Our next question comes from Steven Litman with Oppenheim..

Thanks. Hi guys.

First of all, I was wondering if you could just frame for us about what percent of the recon business falls into the more complex products that are still supply constrained versus those that you feel that you are in a better position from a supply perspective?.

Steve I – you know without getting into the exact quantification of that, I would tell you that a lot of the brands that come out of the North Campus, which of course is you know a Biomet facility, a lot of those brands were in fact faster growing product lines and it stands knees, hips, sports extremities and trauma.

So it’s a significant facility for Zimmer Biomet. The complex processes without getting into the weeds on what those exactly are do impact a significant number of those brands and I think that the quantification of that is apparent in the impact it’s having on our performance and our revised guidance..

Okay, got it. And then Dan just a couple of products for next year. Can you talk to how much you think not having cementless has also impacted knee growth and how that may be important for the back half of next year? And then I know on Rose, obviously a lot of talk about getting into knees, but you’re not really fully rolled out in spine yet.

Is that also targeted for mid to back half of next year?.

Sure.

We’re very excited about the pipeline for 2018 and we’re excited about what percent of partial knee will do for us in 2018, we’re excited about getting the cementless Persona out and we’ve had a competitor talk about cementless being as much as 20% of their knee mix that comes at a nice price point, so we’re very excited about getting that out into the market middle of next year and we think that product will perform very well and then we’ve also talked about getting the Persona revision system out into the market.

So a lot of really important Persona product launches next year. On the ROSA side we’re on the knee application. Continue to make progress in accordance with the timeline that we’ve described before and then keep in mind that the Medtech where the platform is currently approved for brain and you know we’re very excited about that opportunity.

So our craniomaxillofacial business, which is one of our best performing divisions in the company continues to drive good growth. It’s under very capable leadership and that same leadership is overseeing the brain and spine ROSA development program. So on the ROSA Spine, the expectation is middle of next year to be out in the market.

We think that product and application will compete very favorably with the other spine robotic systems that are currently in the market..

Okay, thanks Dan..

You’re welcome..

Our next question comes from Matt Taylor with Barclays..

Hey, good morning, thanks for taking the question.

I guess the first thing I wanted to circle back on was when you are talking about normalized 2% to 3% market growth here in Q4, can you comment on whether you are seeing that through the first month of the quarter or are you seeing any continued insurance dynamics or other soft spots that would cause the Q4 market growth to be lower?.

Matt, our 2% to 3% U.S. market assumption is based upon historical norms. So what I was describing before is that we stuck with that assumption about the market and did not add on top of that the softness in Q3. So I’m not going to comment on inter-quarter months, but I’d say at this point the 2% to 3% U.S.

knee and hip growth is the right way to think about it based on historical norms..

And just to add to that Matt is usually the big bowl of some procedures pushes into November and December, so near term read is obviously difficult, but there is no indication that we are aware of that, that’s pointing to something other than what we communicated..

Okay and then when we think about the improvements that you can make going forward to your ability to produce some of these key brands, you talked about 2Q ’18 as being really the turning point when you’d be able to have full supply.

So can you just clarify it, does that mean that if you are going to really take until the third quarter for you to go back fully on offence or can we see that kind of early in the second quarter? I just wanted to get little bit more specific on the timing..

Yeah Matt, from a timing and recovery perspective, it’s a rolling recovery okay.

So during Q4 here we’ll be making continued progress on certain brands; Q1, Q2 we’ll continue to make progress and that incremental progress is critical and meaningful, because what means is that our sales force can then gradually move away from being the case logistics people that they have been to more higher trust that the products will be there and then going on offence and not only servicing existing accounts, but going after new business that we know is out there for us.

So it’s a rolling improvement. Some brands will continue to get healthy through Q1. My comment about Q2 was in the vein of having full supply ready to go on offence across all brands with our engineering improvements and duel sourcing strategy contributing to that pace of recovery.

So you know, that’s the comment relative to Q2 and that sets us up well for thereafter..

Okay, thanks very much guys..

Our next question comes from Kaila Krum with William Blair..

Hey guys, thanks for taking our questions. First, I got this to start off; what percentage of your surgeon customers today would you say are waiting on the sidelines sort of prior to a complete supply recover here? Is it 20%, is it a third, is it as much as half; just any sense for that would be helpful..

Sure. You know I spent a fair bit of time in the field over the past quarter and continue to be impressed by the talent of our sales force, the belief of our sales force and our surgeons with respect to Zimmer Biomet.

That’s critical and gives me confidence that over time as supply recovers, that we are going to get the accelerated growth that we know is out there and I’m confident that we are going to deliver on that. It is the case that surgeons are frustrated.

They believe in Zimmer Biomet, they believe in their sales rep and you do have instances where we are able to fully supply surgeons and it is the case that you have other surgeons that are sitting on the sidelines waiting for the full range of SKUs available across our product family before they entrust their business act to us.

So that’s where our focus is. I’d also add that the lack of full supply tampers our ability to bring on new surgeons at the top of the funnel so to speak. So we know the ticket is full supply, that’s why we are focused on it and as that supply picture improves I have no doubt that our sales team will run with that and make good progress..

Okay, thanks, that’s helpful. And I guess just, you said we are going to reach supply stability by the end this year with a portion of the products and the rest by the second quarter of ’18.

I guess what sort of visibility do we have into that recovery at this time, and what gives you confidence in that statement made?.

Well, with the guidance takedown that’s embedded in our Q4, it tells you that production is the biggest barrier.

So our assumption about production output for Q4 is that production is similar to Q3 levels and what gives us confidence on the recapture, which again is more of a exiting this year and gradually through next year, is tied to what I was describing before in terms of the interactions with surgeons and our sales force and their beliefs in the portfolio.

So we know what we need to do.

Its tied to production of the North Campus, but it’s also you know our team is executing very well with Persona and I mentioned good growth in the quarter on Persona; I mentioned the educational event that we did on Person where we had hundreds of surgeons attending that, demonstrating the versatility of both the implants and the instrumentation of Persona.

So I know that our sales team is going to make a lot of progress with the Persona platform. And then on the production side of the house, the key is really as I described process consistency.

So reducing the variability in those processes, getting redundant capacity out to either vendors of elsewhere in our network as duel source capacity; that’s a combination of those two areas..

Thanks guys..

You’re welcome..

Our next question comes from Matthew O'Brien with Piper Jaffray..

Thanks for taking the question and good morning. Just for starters on the guide down for Q4 by my math, you know net of currency its about $40 million guide down. I’m assuming a majority of that is related to these complex products that you can’t manufacture.

So first of all, is that math about right and then secondly, is that roughly what we should expect in Q1 as far as the headwind that would will face in that business, maybe tapering down a little bit and then tapering down even more into Q2 next year..

So Matt, the Q4 takedown, you have the right net number. I think organically the number is north of that. The organic takedown as Matt mentioned before is more like $65 million with some favorable currency in the range of $20 million. So it’s the organic takedown is north of the 200 basis points.

And you know I’d say the organic take down of 300, call it, call half of that being tied to supply and lack of offence.

We also had dialed in Q4 guidance, prior guidance and acceleration in spine and as I mentioned before, we’ve removed that from the guidance based on current performance as we need to drive improved performance in the sales channel and then to a lesser extent the impact being the India knee price, which we expect that to be a drag on Q3 as well..

And as the manufacturing push out goes, Dan how comfortable are you with you know the timeline that you’ve laid out now of Q2 next year being you know completely finished with this issue and how, you know all inclusive or how broad is the plan that you put in place to ensure that that will be the definitive moment where all this issue is behind you from a production perspective, be it the duel sourcing etc.

and then how does FDA fit within that timing?.

Well Matt, we as I said in my prepared remarks, we continue to make good progress on the quality remediation in the North Campus. So we are very much on track with the remediation plan that we laid out for the FDA at the end of last year. So we feel really good about our progress there.

You know it’s been roughly a year since the FDA inspected the facility. We don’t know exactly when FDA will come back in, but we will be prepared for them when they do.

With respect to the production recovery and the timeline, you know operating this plant under the manual interim process control environment leads to greater variability and inherent risk that’s associated with the output and it is what it is. What I am confident about is that the engineers are focused on the right areas for improvement.

We brought in technical experts from the outside to help in that regard and we are also working closely with outside vendors who have certain capabilities, speculative confidence that they are going to be able to help drive that added capacity. So that’s what gives us the confident to lay out the timeline that I just laid out Matt..

All right, thank you..

You’re welcome..

Our next question comes from Bruce Nudell with SunTrust Robinson Humphrey. Bruce, we are unable to hear you. Please check your mute function..

Hi Dan, could you hear me know?.

Yes Bruce, good morning..

Yeah, good morning. You know post the Zuk divestiture, you had about 39% just in share. It looks to be about 36% now.

Just given any lingering issues with supply that caused permanent customer defections, and perhaps sales force defections as well as a lack of a robot, where do you think you guys will add some tone, and you know how much of that is due to the lack of a robotic solution?.

You know Bruce I would say that based on the early, well both the limited release and now the full release of the Persona Partial Knee systems, we are extremely confident in that platform and I personally talked to surgeons who have used the makeover for Uni Knees and are excited to use the Personal Partial Knee system.

Those are surgeons that have had excellent success with the Personal Primary System and our excited about using the Personal Partial Knee. So we believe that we will win back market share that we lost as a result of this divestiture..

And you know but just more broadly, where do you think you know knee share will stabilize and where will you kind of – how much of that 39% did you get back..

Well our efforts, you know we have internal goals to recover all of the loss business of Zuk. We have again – the feedback is very positive on the Persona Partial Knee.

So as we have full supply across all of our knee systems, we are in a good spot with Personal Primary, but as we get healthier on Vanguard and as we launch the cementless Persona and the Revision knee, our goal is to first and foremost get back to market growth. You know we’ve been seeding share; that needs to stop.

Supply in the pipeline into the hands of the sales force will enable that and first and foremost we are focused on closing the gap to market, then putting up a string of quarters at market growth and then above market growth thereafter.

So it’s a whole string of things that we know we need to execute on better and that will lead to market share gains..

And I guess my follow-up is, you know this is the first time I’ve heard the company talk about expectations for the worldwide major joint market at 2% to 3%; it was always closer to 3%.

I’m sure that wasn’t taken lightly, and how does the impact the boards perceptions, the necessity to move away from hips and knees?.

Well, to win Bruce for Zimmer Biomet we need to perfume in hips and knees and that, you know our performance in hips and knees in the Asia Pacific region has been excellent and that performance in Asia Pacific is really driven by the team and they’ve not been as dependent on the North Campus products as much as the U.S. markets.

But the team has done extraordinarily well and we expect them to continue to do so. The EMEA growth in the quarter for knees was quite good. So the 2% to 3% I would just tell you that we are still of the belief this is an attractive market. The demographic tailwinds are real, so we are committed to growing hips and knees.

For us to win, we need to perform really well there. At the same time, we’ve talked a lot about the S.E.T category; you know 21% of our sales mix today, why we are very excited to continue to perform there.

It was hampered by supply this quarter, that will improve over time and we’ll look to continue both organically and inorganically to add to the S.E.T bag. It’s a critical driver for us and last piece being spine, so my comments about spine and our potential to drive accelerated performance there.

So it’s really across the portfolio where we need to perform..

Thanks so much. Bye..

All right Lauran, we have time for one last question..

We’ll go to Joanne Wuensch with BMO Capital Markets..

Thank you very much for talking the question.

Could you qualitatively discuss what’s going on with the sales force? How you are thinking about keeping them in place motivated and making sure that they see there is a turning point in this process?.

Absolutely Joanne. I mentioned the amount of the time that I’ve personally been spending in the field and that includes direct time with our sales leadership for the orthopedics business and as well as a good piece of our spine sales force. So in a nutshell, we continue to post them regularly on the updates with respect to supply.

On top of that, we are placing a tremendous focus on all of our team members on supporting our sales channels globally. I think importantly we’ve seen relatively stable levels of attrition; so a net neutral performance from a headcount standpoint of the channel in the United States here in Q3.

So I think that is indicative of a sales force that continues to believe in Zimmer Biomet, continues to believe in our products and our pipeline and a lot of high touch with them and communication will be necessary as we continue to move forward. So I believe we got the best sales force in the industry.

We need to fully equip them with all the tools they need to win, that’s where our focus is..

Thank you and as for my second question, it’s going to sound so mundane given everything going on. SG&A was nicely down as percentage of revenue year-over-year.

Are there still expense synergies to be had by the combination of these two companies?.

Joanne, we’ve described here in 2017 synergies in the neighborhood of $225 million, and leading to $310 million cumulative, okay. So you know that, the integration synergies are on track through 2017. So as I described we’ll continue to look at other value creation opportunities across the enterprise.

We know that first and foremost it starts with top-line performance and acceleration. And then last bit on SG&A, you know our SG&A percentage includes the depreciation of our instrument placements, which is part of obviously a growth investment for us, so we continue to invest in the working capital and instrumentation necessary to drive growth..

Okay, thank you very much..

So, thank you everyone for your attendance today and we look forward to speaking with you on the fourth quarter call. Thank you..

Thank you again for participating in today’s conference call. You may now disconnect..