Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomets second quarter 2024 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, August 7th, 2024. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listening mode. If you have a question, please press the star followed by the one on your push button phone. I would now like to turn the conference over to Zach Wiener, Director of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. Welcome to Zimmerbaum at the second quarter 2024 earnings conference call. Joining me on today's call are Von Tornos, our President and CEO, and CFO and EVP, Finance, Operations, and Supply Chain, Sugi Upadhyay. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Please refer to our SEC filing for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our second quarter earnings release, which can be found on our website, ZimmermanBioNet.com. With that, I'll turn the call over to Yvonne. Yvonne?

Thank you, Zach, and thank you, everyone, for joining today's call. Good morning. I would like to start the way that I usually do, by taking a quick moment to show my sincere gratitude to the north of 18,000 Zimmer Biomed team members across the world who each and every day go above and beyond in delivering on our mission, alleviating pain and improving the quality of life for people around the world. That's what you and I get to do each and every day, and you're doing an unreal job in bringing this mission into action. Thank you for your commitment to Zimmer Biomed. Thank you for your tireless work And thank you for the very strong performance so far in this year, 2024. We are now past the midpoint in the year, and we're growing 5% after having delivered strong performances in 2023, 2022, and 2021. So the trend is real, the performance is there, and I'm deeply proud of the work that you're doing daily. As I've said countless times, the Zimmer-Baume workforce and our culture here is truly one of our key competitive advantages. In today's call, I'm going to give some opening remarks, then Shuki will cover financials, and then, as always, we will leave ample time to answer your questions. The agenda for today, first, I'll cover some perspective on the quarter. Secondly, I'll discuss the drivers of our performance and why we are even more confident than ever in our updated full-year guidance for 2024 and why, already looking into 2025 and beyond, we're also very confident that we'll continue to deliver on the long-range plan commitments that we outlined at the end of May at our first ever Zimmer-Ballamette Investor Day. Recall those commitments were driving revenue growth at least at mid-single-digit growth rates, driving EPS at 1.5 revenue growth, and driving free cash flow growth at least 100 basis points above our EPS commitments. The third thing in the agenda will close with our strategic priorities, those being people and culture, operational excellence, and innovation and diversification. Starting with our Q2 results, we continue to be very encouraged by our global performance. In the second quarter of this year, 2024, we grew 5.6% on a constant currency basis. And with that, we have now closed the first half of 2024, growing 5%. Worth noting that this 5% is versus very tough comps in the first half of 2023. The second quarter of 2024 now marks the 10th consecutive quarter in which Zimmerman has grown mid-single-digit or above. So again, a trend in the making that is real, and we're very confident that this performance will continue, if not will accelerate, as we continue to move our business forward. Against the backdrop, in the quarter, we did see some weakness early in the first half of the quarter in the U.S., It's worth noting that May and June hitting the U.S. were better than April. And in July, the U.S. recon business actually delivered mid-single-digit growth. So choppiness through the first half of the quarter and then an improvement through the second half, which has continued with very strong performance through the month of July. Our OUS international business, after the U.S. business, has delivered above expectations. We saw a strong demand in the key markets. across both recon and the set categories. So overall, very diversified, solid performance coming out of these markets. I love the fact that in Q2, in our second quarter, we continue to deliver excellent performance in our other category. This category is primarily focused on enabling technologies, primarily ROSA. We saw a strong demand for ROSA, growing double-digit in the business, And we also saw strong demand in enabling technologies and navigation systems. As we have been saying for quite some time, we want to be more than just a leading, reconstructive Nissan Hips company. In key geographies, we have a really high market share. As an example, the U.S. or key countries of Europe and Asia-Pacific. One example of this diversification journey has been set. We've been committing to growing SET at least mid-single digits. And Q2 of 2024 is now the third quarter in a row in where we are growing mid-single-digit or above, a trend that we expect to continue towards the end of 2024 and moving into 2025 and 2026. So nice growth in other, nice growth in international, and nice growth in SET. One area that I'll tell you we've made significant strides is within our HIFS portfolio. We did lose some market-sharing hits in the U.S. and all U.S. markets over the last three to five years. And as I said over and over, this was due to lacking three key product items. Directed tier stems, what we call triple-tapered stems, elegant navigation, and surgical impactors. As we see here today, we have remediated those gaps. We have 510K approval for Z1 or triple-tapered stems. We are regaining market share already with Hemer or Surgical Impactor. And today, we have the most comprehensive navigation in hip arthroplasty. Not only do we have ROSA Hip, we also have the only 510k FDA clear augmented mixed reality hip navigation platform via a partnership with our colleagues at Hip Insights. And now, we have also signed and announced an agreement to acquire OrthoGrid that is going to give us a leading position in navigation using artificial intelligence devices. So we have the most comprehensive suite of solutions in navigation, in direct anterior stems, and in surgical impactors, not to mention having the best core implant technology with products like G7 and Avenir Complete. So the expectation is to grow again above market when it comes to hips and regain some of the market share that we lost over the last three to five years. Moving from HIBs, we have developed and we are today the first and only robotic assisted solder replacement platform in the world. The feedback on the cases we've done with ROSA solder continues to be very compelling. And as we enter late Q3 and early Q4, we expect to see an acceleration of those cases. And in 2025, We expect Rosa Solder to be a very meaningful growth driver for Zimmer Biomed. We recently announced the partnership with Think Surgical. This is gonna provide our surgeon customers optionality across the robotic landscape. We have conducted extensive training. We've done voice on customer and the feedback on this partnership with Think remains superb. With this partnership, Zimmer Biomed is the only orthopedic company in the world that will offer both a handheld CT scan-based system in the T-mini, exclusive for Zimmer Biomed platform, as well as a simplified CT scan-less robotic system in our current form factor of ROSA for total knee arthroplasty. We're excited about the optionality, and we're also excited about the fact that we continue to innovate at a very fast pace when it comes to ROSA. and we're expecting to launch at least three new ROSA modalities in the next three to eight quarters. From an earnings standpoint, we generated $2.01 of adjusted earnings per share in the quarter, or growth of 10%. This is in line with our long-range plan targets outlined at our investor day in May. Inside of the strong performance through the first half of the year, The team continues to execute on the three strategic priorities that I keep outlining in each and every earnings call and at every Zimmer-Bauman meeting around the world. The three priorities are people and culture, foundational to everything that we do, operational excellence, and innovation and diversification. As I said in my opening, people and culture continues to be a key competitive advantage for Zimmer-Bauman. I'm proud to share that Zimmer Bauman was recently named one of America's best midsize companies to work for by Time Magazine. This reflects the strength in team member satisfaction engagement or revenue growth profile and the turnaround of the organization now behind us. On the second imperative, operational excellence, we continue to expect to grow constant currency revenue at least at mid-single-digit level with adjusted earnings per share growing at least one and a half times revenue, and free cash flow growing at least 100 basis points faster than earnings. It's a commitment that we're making not just for 2024, but also for the long-range plan 2025, 2026, and beyond. This is a mindset that continues to proliferate throughout the organization. We pay people on delivering towards such commitments. We have trained people to deliver on those commitments, and the trend, as I've repeated a few times in my opening remarks, is in the making. In the past, when it comes to innovation and diversification, it's been very much portfolio-centric, moving from lower growth markets to higher growth markets, putting in case the super performance instead. But today, we're also thinking diversification from a geographic mix standpoint. We want to continue to invest in key markets outside of the U.S., where we see an opportunity to deliver sustainable revenue and profit growth. We're encouraged by the sound performance that we've seen in our OUS business, and we expect to continue to accelerate growth in these markets without compromising or margin performance. In conclusion, we are very proud of how far we have come as an organization in terms of the financial progress, the innovation progress, and the commercial execution. Our second quarter results are another proof point that we make commitments and deliver on those commitments. and we fully expect that the trend is going to continue for the balance of the year and beyond. We're confident in our guidance for the year, and we love the fact that we're impacting the lives of millions of people, and I'm deeply inspired every day in knowing that my teammates and I are living the Zimmer Biomed mission of alleviating pain and improving the quality of life for people around the world. With that, I'll turn the call over to Shuki. Thank you.

Thank you, and good morning, everyone. As Yvonne mentioned, Q2 closed a solid first half of the year for Zimmer Biomet with XFX revenue growth of 5% in the first half and operating margins well ahead of the prior year. Our results through the quarter provide increased confidence in our 2024 full-year guidance, which includes 5% to 6% constant currency revenue growth and $8 to $8.15 in adjusted earnings per share. I'll provide more color on guidance shortly. Moving to the second quarter results. Unless otherwise noted, my statements will be about the second quarter of 2024 and how it compares to the same period in 2023. And my commentary will be on a constant currency and adjusted operating basis. Net sales were $1.942 billion, an increase of 3.9% on a reported basis and an increase of 5.6%, excluding the impact of foreign currency. As a reminder, we had a day rate tailwind that impacted all businesses and regions at about the same level. Pricing at a consolidated level was 80 basis points driven by gains in international that were partially offset by modest declines in the U.S. Our U.S. business grew 3.5% and international grew 8.5%. Growth in the U.S. was driven by our SET and other categories. As a reminder, our other category includes our surgical business, as well as enabling technologies such as rows of capital sales. Our international business continues to perform well, driven by knee and SET, with continued strength in emerging markets. Global knees grew 5.5% in the quarter, with U.S. growing 0.8% and international growing 11.5%. U.S. growth was impacted by softer sales in the first part of the quarter, with improvement in utilization and growth as we move through the second half. We continue to see strong uptake of Persona Osseotai and remain optimistic that the recent robust ROSA installs will continue to drive, pull through, and share of wallet opportunities. International continues to benefit from ROSA robotics, as well as our Persona family of implants. Global HIPs grew 2.8% in the quarter, with the U.S. growing 1.8% and international growing 3.7%. While our HIP business has lagged the broader market due to key portfolio gaps, we have made significant progress with new product introductions and are excited to get back on the offensive in early 2025 when these products and technologies are fully in market. Next, the SET category grew 7.3%, led by our key focus areas of CMFT, upper extremities, and sports, growing on average high single digits. All other categories grew mid-single digits on average, giving us confidence in our ability to drive mid-single digit growth or better from SET through the second half of the year. Finally, our other category grew 11.3% in the quarter and continues to be driven by strong demand for ROSA systems and other enabling technologies. Turning to our P&L, we reported GAAP diluted earnings per share of $1.18 compared to GAAP diluted earnings per share of $1 in the prior year. Higher revenue combined with lower R&D, effective tax rate and share count, more than offset expenses associated with our restructuring program. On an adjusted basis, we delivered diluted earnings per share of $2.01 compared to $1.82 in the prior year, representing over 10% growth. The step-up was primarily driven by revenue growth, improved operating margins due to savings pulled through from our restructuring program, and a lower share count, partially offset by a higher tax rate. Adjusted gross margin was 71.6%, about 40 basis points lower than the prior year, driven by higher manufacturing costs, partially offset by better pricing and lower royalties. Adjusted operating margin was 28.5%, up 100 basis points from the prior year. The increase in operating margin was driven by higher revenue and lower OPEX as a percentage of sales as a result of our restructuring program. Net interest and other adjusted non-operating expenses were $45 million in the quarter, and our adjusted tax rate was 18.2%. Turning to cash and liquidity, we generated operating cash flows of $369 million, free cash flow of $251 million, and we ended the quarter with $420 million of cash and cash equivalents. Aligned with our capital allocation strategies, we repurchased $95 million of shares in the second quarter. Regarding our outlook for the rest of the year, we are reiterating our full-year constant currency revenue growth guidance of 5% to 6%, but given further strengthening of the U.S. dollar, we are updating our reported revenue growth to 4% to 5%. and now expect 100 basis points of currency headwind for the full year, which should impact Q3 more than Q4. We still expect to generate between $8 and $8.15 in adjusted earnings per share, despite this greater FX pressure, and $1.05 billion to $1.1 billion in free cash flow. Our tax and interest and non-operating expenses expectations remain unchanged. When thinking about the cadence through the second half of the year, due to normal seasonality, Q3 typically is the lowest revenue quarter from a dollar perspective, with Q4 being the highest. From a margin standpoint, we still expect gross margin to step down sequentially as the year progresses, while operating margins should expand by more than 50 basis points year over year. As usual, we expect operating margin to be higher in Q4 than Q3 driven by higher revenue. In summary, Q2 closed a positive first half of the year, giving us continued confidence in our ability to meet our full-year outlook at another positive proof point through our LRP. With that, I'll turn the call back over to Zach.

Thanks, Suki. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one brief follow-up so we can get through as many questions as possible during the call. With that, operator, may we have the first question, please?

Thank you. We'll go first to David Roman with Goldman Sachs.

Thank you, and good morning, everybody. I wanted just to start with the U.S. knee business and appreciate the comments around the month-to-month fluctuations in growth, but maybe you could just take a step back and help us think through the impact of the conversion to cementless and cementless robotic. How is that tracking, and how should we think about the way that shows up in reported numbers?

Thank you, David. Good morning. Maybe quickly here, 20 seconds, big picture, and then I'll talk about the U.S. So, big picture. It was a good quarter. We here at Zimmer Biomed delivered 5.6% XFX. As I noted in my prepared remarks, this is the 10th quarter in a row, growing mid-single-digit or above. And we're pleased with the double-digit growth in adjusted EPS. Set perform above expectations, third quarter mid-single-digit or above. I'm pleased to report that for the first time in a while, every single business we think set, and there are six of them, actually grew, which is something we didn't see before. Enabling technologies, which is robotics primarily, grew double-digit in Q2. It grew double-digit in Q1. The U.S. robotics grew 16% in the quarter, so strong in that regard. And as we announced this morning, we did close the gaps in HIPs that we had, which frankly is one of the reasons why we lost market share. Just throwing this summary to highlight the fact that unlike five years ago, we're not just a U.S. knee-centric type of company. That said, relative to knees and the U.S. performance, look, David, not pleased with the quarter. It was softer than expected. And what I will tell you is that there are three main reasons why we did not do better in the U.S., and these are solvable reasons. The first one is we had a large amount of high-volume surgeons, high-volume surgeons that were out of the territory for a variety of reasons. We hosted large medical education events, and we did have a large group of surgeons that were not performing surgeries in the quarter. The second piece is that we had some challenges from a supply standpoint when it came to one of four knee platforms. what we call limb salvage, which is part of knee revision cases. These are high ASP cases. And candidly, you know, this didn't help the quarter. And then the third reason why knees in the U.S. was softer than expected is COMS. We deliver knee growth of 10%, almost 10%, 9.8% to be exact, in Q2 of 2023. His was close to mid-single digit, and the U.S. grew 5%. SO COMBS DIDN'T HELP. SO IN THE BACKGROUND OF THE SURGEONS BEING OUT, SUPPLY CONSTRAINTS, THE COMBS DIDN'T HELP OUT. WHAT I WILL TELL YOU IS THAT THESE THREE ELEMENTS HAVE GOTTEN RESOLVED. AS WE MOVE OUT OF THE QUARTER AND SITTING HERE JULY BEHIND US, THE U.S. RECON PERFORMANCE IS VERY STRONG. ON THE SECOND PART OF YOUR QUESTION, DAVID, SEMENLESS CONTINUES TO TRACK VERY NICELY. CANDIDLY, I HOPE WE CAN GET MORE SETS OUT. THE ADOPTION RATE IS VERY HIGH. We are converting accounts. We hope to have some in, not just in the U.S., but also the U.S. very soon. So that's the summary of what's happening here in the U.S.

Thank you for all the detail. It's super helpful. Maybe, Suki, just a quick follow-up for you on the P&L. Can you help us think about the kind of interplay here between the benefits you're seeing from the restructuring? And I think you had talked about planning to reinvest some of the savings. Where are you in sort of the progress with respect to the restructuring benefit? And then at the same token, kind of that level of reinvestment that you had contemplated when you introduced the restructuring back in February.

Yeah. First of all, good morning, David. Thanks for the question. Just to remind everyone, we talked about or announced our restructuring program at the early part of this year. We talked about $200 million of run rate savings as we exit 2025. I would say where we are right now is we're slightly ahead of that overall trend. at least from a timing perspective. Still expect to generate $200 million in a run rate, but it's happening probably a little bit faster than we originally expected. That's definitely contributing to operating margin expansion. You see that in the second quarter where we're up 100 basis points year over year. So very nice progress there. And that's in the backdrop of continuing to invest in R&D as well as in certain areas across commercial, whether that's building specialized sales forces across SET, additional complement in our technology, components of recon, and other parts of commercial. So we are, as I would say, just summarizing, going a little bit faster than expected on the savings program, and we're in line and on track with that reinvestment plan.

Thanks, David. Can we go to the next question, please, Katie?

Thank you. We'll go next to Matt Taylor with Jefferies.

Hi, guys. Thanks for taking the question. I guess I just wanted to ask you more about the HIP progress that you're expecting, you know, calling out the opportunity to move back into a share-taking position over the next couple years and tying that back to the analyst day goal. So I guess I'll ask the question as to when you expect this to really start and how we should measure your progress against the share gain goals, and are there inflection points along the way that we should be looking out for in your HIP business?

Thank you, Matt. The short answer is we have already started. So again, July, so far so good when it comes to HIP recovery. We launched our surgical impactor, Hemer, midpointing to Q2, and the adoption has been great so far. As you heard from us, we will be launching our triple tapered stem, that's Z1, which is going to enable share regaining in direct interior. That's going to get launched late in Q3, early Q4. We have the quantity that we need. We got the commercial plants in place, so that should be another driver. And the third leg here was to have elegant navigation systems, and we got three of them. This morning we announced the acquisition of OrthoGrip. That should close later in the year. It's one of the fastest-growing navigation platforms in the U.S. So I would say the combination of triple-tapered stems, surgical impactors, and three different modalities of navigation put us in a position to regain market share in the U.S. and outside of the U.S. Outside of the U.S., we're going to be launching a second generation of robotics, hip posterior robotics, and that's another driver of share regaining. So we're very confident about where we are today, and we will get the share back.

Great. And just one clarification. So the issues you mentioned in the U.S., you're basically saying those are temporary related to the surgeons being out, the supply issue, not a change in the market or something else bigger happening?

The market is very strong. By now, all of us have reported. So you see that the market growth rates remain above pre-pandemic levels. So nothing relative to market. And again, I just want to emphasize that the two or three things that I talked about, The large volume surgeons being out of the territory, we saw in July a recovery. On the revision constraints, those are largely solved. And again, that's one portion of our platform. And again, so far so good. So yeah, market is healthy.

Thanks, Matt. Katie, can we have the next question?

We'll go next to Drew Ranieri with Morgan Stanley.

Hi, Vaughn and Sookie. Thanks for taking the questions. Maybe, Sookie, for you to start, Just you've talked more, you've talked about growth and margin improvement, and increasingly so about free cash flow. But when we kind of look at your, your guide for the year, it still implies a significant step up in the back half versus the first half. I get some of that would be growth and a leverage opportunity that you kind of talked about, but Is the environment supportive enough to see kind of a meaningful working capital improvement? And especially with all these new products coming, I have to imagine you're going to be spending on CapEx. But just how do you kind of get to your free cash flow guide and your plans on using that cash this year?

Yeah. First of all, good morning, Drew. Thanks for the question. There are really three building blocks. to the growth in free cash flow from where we start here in the second quarter, or third quarter, I should say. And by the way, the asymmetry between first half and second half of free cash flow is typical in our business. The three building blocks are really, you have a lot of headwinds in the first half of the year related to rebates from the previous year, fourth quarter, that you have to pay in the first quarter, bonuses and different levels of incentive payments that happen in the first half, So there are certain headwinds that typically happen in the first half that don't repeat in the second half. In addition, in the second half, you're going to have improved EBITDA through growth, as you pointed out. But secondly, a pretty meaningful improvement in working capital, specifically around inventory. We've already seen that inventory improve from second quarter versus first quarter, and we're going to continue to see that sequentially improve in the third, fourth quarter as well. So that's a pretty big driver of the overall pre-cash flow generation and step up into the second half of the year. Relative to where we're prioritizing, we continue to prioritize in making sure that we've got the right assets and the right level of investment on our organic business. As Yvonne talked about, we're actually stepping up our instrument capex around Osseotai. Demand, quite frankly, has outstripped our original expectations, which is a great thing. And we're now catching up on getting those sets out into market. So we feel really good about that. We're actually putting more dollars against that. But outside of that, I think what you're seeing also is that, you know, we bought some shares back in the second quarter aligned to our overall capital allocation strategy, which we outlined on our investor day. So overall, feel good about where we're headed for cash for the full year. You will see a second half step up typical in every year. And we're going to continue to prioritize our organic investments. And then from there, our capital allocation remains balanced between M&A and return of capital to shareholders.

Thanks again. Yvonne, maybe just over to you quickly on the orthogrid acquisition. Can you just talk a little bit more about how this supports the overall large joint strategy and maybe how you think this platform could evolve over time across the portfolio or care settings and maybe eventually into the SEP business? Thanks for taking the questions.

Thank you, Drew. Very excited. So this one word is optionality. Now, Zimmer Biomed is the only company in the world with three different forms of navigation. With ROSA HIP, you get anterior to the robotic navigation, at some points from posterior as well. With OrthoGrid, we have AI surgical guidance. It's a lighter, faster option for some of the surgeons that want to use a non-robotic option. And then the third vector here, as you know, we have a partnership with HIP Insights, which is the only FDA-approved mixed reality navigation. And that pretty much gives the surgeon x-ray vision over the patient's anatomy, instruments, and implants. So again, a different modality, which some customers seem to like. So we got three different ways to do navigation, and that appeals to pretty much every customer in that regard. The broader strategy, we want to be a company that delivers faster, better solutions, and navigation is an enabler of that. And again, in the big picture, this will enable Zimmer Biomed to regain some of those true 300 basis points of market share that we lost over the years.

Thanks, Drew. Can we have the next question, Katie?

Thank you. We'll go next to Joanne Wench with Citi.

Thanks. Good morning, and thank you for taking the questions. You mentioned somewhere in the script several new ROSA robots that you expect over the next three to eight quarters. Could you remind us of how many of several and which those are and how we should think about those launching over essentially the next two years? And I'll throw one more in there for Suki. How do you think about the revenue contribution from those robots ramping? Thank you.

Hey, Joanne. Good to talk to you. Good morning. I think I said over the next four to eight quarters, but if it is three, let's keep it to four. We're not going to get into a lot of details given competitive reasons, but what we are committed to launch is a posterior application for some of the OUS markets where posterior is more prevalent than anterior. As you know, we're going to get into full launch mode for ROSA Solder later in the year. And again, so far, the voice of customer is being superb. We want to get, at some point, a different version of ROSA. We're launching two different ROSAs for NIS. One is going to be late this year, early 2025. We call it ROSA V15. which has different levels of workflows, smart positioning. It's got a different auto-balance procedure, and it will be a platform that is going to deliver a kinematic aligned top of knee. In 2025, at some point, we will have a ROSA CT scan base for some of our ROSA users that like that type of device. So those are four or five examples of what's coming here again over the next four to eight quarters. In addition to ROSA, we have the partnership with Think Surgical, We got, as I just mentioned, very comprehensive navigation systems. In terms of the revenue contribution, we don't really give details on that. What I will tell you is that we're growing today in a Q2 double-digit in the U.S. when it comes to enabling technologies. We grew double-digit in Q1, and we don't expect that to slow down, and that's pulled through for implants.

Perfect. Thank you so much.

Thank you, John. Thanks, John. Can we have the next question?

We'll go next to Larry Beagleson with Wells Fargo.

Good morning. Thanks for taking the question. One for Yvonne, one for Suki. I'll try to ask them both up front. So, Yvonne, I'd love to hear an update on the status of Persona IQ, the launch, and the short, you know, have you launched the short STEM extension and how that could help? And the TPT, we saw you applied for that. Just confidential, get it, and what that could mean for adoption. I'll just ask my follow-up for Yvonne on the gross margin here. I'm sorry for Suki. The gross margin was a little lighter than expected in Q2. What's assumed for the full year? Did you say that gross margin steps down as the year progresses? So Q3 lower than Q2 and Q4 lower than Q3. And is gross margin still expected to be in line with 2023? I think that was the prior guidance. So I apologize, Suki, if I heard incorrectly your comments earlier, but Thanks for taking the questions.

Thank you, Larry. First part of your question on Persona IQ, we remain excited. The adoption is speeding up. We should see some acceleration in the second half of 2024, part of the new product contribution for 2024, and in a more meaningful way in 2025. We've now crossed 3 billion data points around range of motion, mobility, and whatnot. We launched what we call Recovery Curves, which enables the opportunity for us to cross-reference how certain patients are performing versus others. We're going to be having a data discussion with payers so that we can engage in some risk-sharing type of agreements. So, again, leveraging the data. On the stubby part of your question, we're going to be launching that at the full launch at the end of 2024. So, we got the approval. The design is ready to go. The sets are ready to go. And again, that's part of the acceleration in the second half of 2024, more meaningfully in 2025. We've now signed agreements, partnerships with some of the major hospitals around the U.S. And then in terms of TPT, we did look at it. We engaged a third-party consultant. We pulled the TPT application because it didn't make economic sense. It didn't make as much economic sense as we thought. And again, we believe there are different, better ways to monetize the technology. We still have NTAP, but TPTD makes sense.

Yep. Good morning, Larry. On your questions on gross margin, I think actually you largely got it right, but let me just step back and go through it for you. This year over year overall, we expect gross margins to be in line with 23, but potentially slightly down. That's the new element there, and that's largely driven by the mix of our business. We're just seeing much stronger growth. international sales, which have a lower gross margin than the U.S. So it's really mixed related. But again, in line to potentially slightly down. In the second quarter, you're right. It was a little bit lighter than our expectation. Again, back to that mixed component where the U.S. was just much stronger from a growth perspective than the U.S. for all the reasons that Yvonne spoke about. Even in the backdrop of that, Larry, we still managed to expand operating margin by 100 basis points and grow earnings quite nicely. On the cadence, you got it right, and it's consistent with everything that we provided earlier this year, which is to say gross margin will step down sequentially in the second half versus the first half. And you should see that also Q2 to Q3, Q3 to Q4 sequentially down. The primary driver of that, again, going back to our earlier comments from this year, are really around the inflationary pressure we saw in third-party manufacturing costs in 2023 that got capitalized and are now feathering into the P&L throughout this year. So that's the driver of the cadence there. But again, I'll just revert you back to the backdrop of all that is we do still expect to see meaningful operating margin expansion for the full year, and we do expect to see operating margin in the second half step up versus the first half. again, driven by the restructuring program, despite the sequential lowering of gross margin. So, sorry for all the detail there, but I wanted to get it all out in sort of one compact commentary. Thank you. Thanks, Larry.

Katie, can we have the next question, please?

We'll go next to Ryan Zimmerman with BTIG.

Good morning. Thanks for taking our questions. I want to ask, I'll ask both questions up front. The first one I want to ask is around ROSA versus T-mini. And, you know, when you announced that transaction or you announced that partnership, I think there was some fear that T-mini could replace ROSA, at least in terms of how the stock reacted. And so, you know, Yvonne, if you could kind of talk about kind of how you think about adoption of those two options over time, where T-mini fits in terms of either setting of care or utilization, and, you know, does that kind of reflect the proportion of knees and hips that are done in an ASC versus a hospital? And should we think of it that way? And then my second question is just to follow up to Larry's question on margins for Sukey. Price was positive this quarter, but you did call it higher manufacturing costs. And so, you know, when do you turn the corner on higher manufacturing costs? You know, is that sometime in 2025 that we see that, you know, improve? And how durable is your pricing benefits? Thanks for taking the questions.

Hey, thank you, Ryan. Look, T-Mini is not going to replace ROSA, just like OrthoGrid is not going to replace ROSA. It's all about having breadth of portfolio. T-Mini offers CT scanning, which some surgeons like, and T-Mini is the only handheld robotic platform in the world, which is something that in an AAC environment surgeons seem to like. What I will tell you is that we are deeply committed to ROSA, putting in case all these new platforms and indications we're going to be launching over the next four to eight quarters, putting in case the commitments we made at the investor day of doubling our penetration from somewhere in the 20% of all U.S. needs done robotically with ROSA to 40% in the next three years. ROSA continues to be one of the fastest growing platforms here at Zimmer Biomed. We grew again in the U.S. or capital sales for ROSA 16% in Q2. Overall, it was double-digit globally. ROSA today is already outside of the U.S., the leading robot platform, number one in Asia-Pacific, fast-growing in EMEA. And again, we're very pleased with where we are with ROSA. But we know we need to have optionality, and we like our chances when it comes to that. In terms of the revenue contribution of robotics, it's one of the most meaningful ones. And as we develop penetration, you should assume that our knee and hip number and shoulder late in the year is going to continue to grow.

Hey, Ryan. It's Suki. Good morning. Thanks for the question. Let me start with price, and then I'll go to your question on manufacturing costs. So price, as I noted in my earlier commentary, we were positive 80 basis points in the second quarter, and that marks overall a positive pricing first half for the company. I think it's probably the first since I've been here. The way that breaks down is we saw really strong performance in EMEA. APAC was about flat, slightly up in the second quarter, and the U.S. was down year over year on pricing. But overall, a very good quarter. That's a combination of a number of variables. One, a more favorable environment. Two, we're getting greater discipline in analytics and governance around pricing and a better culture, I would say, around pricing. And the third is we saw some one-time benefits, especially in EMEA, that helped drive that positive performance in price for the second quarter. Our outlook for the full year on price, originally I started out the year saying that we thought we'd be about 100 basis points. I would say now we're going to be somewhere flat for the full year to potentially down 50 basis points. And the reason why that flip is in the second half is because some of those one-time benefits that we saw in EMEA in the second quarter We don't expect to repeat at the same level or intensity in the second half. So that's a little bit about price. Definitely seeing much better improvement and performance this year. And we think a large part of that is going to run into 2025 because a large part of our business is contracted. So again, we'll get more color on 25 when we get to that point, but really happy about the trend that we've got going here on pricing in 2024. Relative to manufacturing costs, yeah, manufacturing costs are higher this year, again, because of the capitalization for 2023. I'm not going to give specific guidance into 2025, but rather I'll refer back to our LRP and our investor day, where we talked about operational stability in gross margin over the LRP. That, in fact, implies that we should start to see operational stability in manufacturing costs. through that LRP. But again, as we continue to progress through 24 and into 25, we'll provide more color on that. But I feel good about the progress. Yep, I feel good about the progress the team's making on manufacturing costs. And I will say we're finally starting to see some stabilization in overall inflation, both on raw materials as well as third-party manufacturing costs. So glad to see that inflection. Thank you. Thanks, Ryan. Katie, can we have the next question?

We'll go next to Robbie Marcus with J.P. Morgan.

Oh, great. Good morning. Thanks for taking the questions. Two for me. First, outside the U.S., HIP and E came in pretty strong today, even when factoring in the currency headwind versus consensus. So maybe you could speak to the trends you're seeing there as a different Europe versus Asia pack and Did you see the same headwinds that you saw in the U.S. with vacation days or supply constraints there?

Yeah, I'll take that, Robbie. Good talking to you here. So the volumes outside of the U.S. remain very strong, in particular in Europe and within Europe and the U.K., where we know there is a prominent backlog. So market dynamics are very healthy, more in EMEA than APAC, but very healthy overall. One of the biggest drivers of growth out of the U.S. is robotics. I mentioned that earlier in my answer to Ryan, I believe. We continue to see fast adoption of ROSA in key markets out of the U.S. We are the number one platform in Asia Pacific. We continue to drive adoption in key countries like Japan, as well as Australia and New Zealand. We have accelerated persona growth, moving from next-gen to persona in these key geographies. So it's a combination of market dynamics and great commercial execution. That's the answer there.

Go ahead, Robbie. Sorry.

Oh, do I get a follow-up?

Sorry. As I say, the U.S. dynamics that I mentioned are relative to the U.S. You mentioned surgeons being out of the territory. That is very, very focused in one month, in one quarter within the U.S. So this is not a dynamic that we saw outside of the U.S. I wanted to answer your second question.

Great. Maybe on SET, you talked about all of the segments grew. Maybe you could just give us a little color into each of the segments there, how they grew, and sort of the trends you saw. Thanks a lot.

Yeah, thanks, Robbie. I won't get into a lot of detail here. What I will tell you is that the growth drivers, those being CMFT, sports, and shoulder are growing either upper single digit or double digit. And the other three, foot and ankle, trauma, and restorative therapies are growing at different levels, but all of them growing. So the challenge we've had with RT reimbursement-wise, that's behind. So great to see all six businesses within set performing.

Thanks, Robbie. Katie, can we go to the next question?

Thank you. We'll go next to Jason Bedford with Raymond James.

Good morning. Thanks for taking the questions. I guess first, I appreciate you don't guide by segment, but maybe within your 5% to 6% organic revenue growth guide, has your internal thinking changed with respect to growth in the different segments?

Can you repeat the question?

Yeah. So I'm just wondering, You know, relative to the beginning of the year, your 5% to 6% top-line growth hasn't changed, but I'm just wondering, has your view on segment growth changed at all? Meaning, is SET now a bigger contributor than you thought at the beginning of the year, et cetera?

No, no. We continue to see SET and RECON performing the way that we anticipated early in the year. So, again, some timing in Q2 with U.S. recon. But as we get into the second half, the expectation remains the same. There's no one bigger than the other.

Okay. Fair enough. And just as a quick follow-up, Yvonne, international was strong. You talked earlier about or you stressed geographic diversification. I was a little unclear. Are you entering new markets? Are you allocating more resources to certain geographies? Just if you could expand on the stressing of geographic diversification.

Yeah, thank you. I would call it a more focused strategy. Fifteen countries today account for 93%, 95% of the overall market potential. In the past, we've been candidly all over the place. And in the last two years, Colin, we refocused the strategy to those key markets that matter the most. And I won't go through every one of those countries. but it is 15 countries. So OPEX and CAPEX has been reallocated to those geographies, or commercial infrastructure has been modified in those countries, and the way that we focus in those countries is different. So that's what we're doing outside of the U.S.

Thanks, Jason. Katie, can we go to the next question, please?

We'll go next to Josh Jennings with TB Cowan.

Good morning. Thanks for taking the question. a multi-part on the HIP franchise and the recovery here. I may have missed some of this in your answers and prepared remarks, but just wanted to focus in on ROSA HIP. Just can you help us think through where robotic assistance penetration is for total HIPs? Do you think Zimmer's ROSA HIP platform is holding its own? Are you maintaining share in that channel? And then is this worth a grid acquisition? Could you integrate that technology into the ROSA HIP application down the line? All right. Thanks for taking the call.

Sure. So I'll start with the question on whether ROSA HIP is performing. The penetration is double-digit. It continues to meet the expectations that we had. We believe that we need to have a ROSA posterior application to gain market share outside of the U.S., And that development is in motion. We also believe that to a certain segment of customers here in the U.S., the one, a less expensive, faster, lighter application, surgical AI by ortho grid is going to be a good modality. But so far, our expectations have been made with ROSA HIP and Navigation General. Thanks a lot.

Thanks, Josh. Thanks, everyone, for the questions this morning. I'll turn it over to Yvonne for some closing remarks.

Well, I'd like to close the way that I started with gratitude. I'm very thankful to all the Zimmerbaum and team members for the progress. As I alluded to earlier in the call, this is the 10th quarter in a row in what we're growing mid-single-dealer or above. We're pleased with the quarter, delivering close to 5.6% SFX revenue with double-digit EPS. We've proven that we can make commitments and deliver those commitments. I like the fact that we have a diversified portfolio. We don't depend on one segment in one country. It's a well-diversified, sustainable performance. And what we'll tell you is that we are more confident than ever that we will deliver in the guidance that we reaffirmed today. So thanks to everyone for joining the call, and I look forward to the next update.

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