Zimmer Biomet Holdings, Inc. Q1 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, May 2, 2024. Following today's presentation, there will be a question-and-answer session.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2024 Earnings Conference Call. Joining me today are Ivan Tornos, our President and CEO; and Suky Upadhyay, our CFO and EVP Finance, Operations and Supply Chain. 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 the actual results or future expectations change materially. Please refer to our SEC filings 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 Q1 earnings release which can be found on our website. With that, I'll turn the call over to Ivan. Ivan?

Thank you, Keri, and thank you, everyone, for joining the call here this morning. I'd like to start today the way that I typically do by taking a moment to recognize and show my gratitude to the 18,000 Zimmer Biomet team members across the globe, who each and every day work relentlessly in driving our mission forward. Simply put, I'm very proud of each and every one of you. Thank you for your dedication, commitment, resilience, and strong performance to start off this year 2024. It is truly this great workforce and the culture that we have here at Zimmer Biomet that gives us confidence behind the financial commitments that we're making. Given that we have a very robust Investor Day coming up in just a few weeks, I will keep my opening remarks short with the goal of moving quickly into today's Q&A session. I'll touch on three key areas briefly. First, I'm going to provide some general comments on the results in the quarter versus our own expectations. Secondly, I'll cover the drivers of the performance, and we'll touch on why we believe that these drivers are sustainable. And then lastly, I'll close with a brief summary on our progress against our three strategic priorities, which we have been discussing since day one, those being people and culture, operational excellence, and diversification innovation. Starting with the quarterly results, overall, we are very encouraged with our Q1 performance which was ahead of our own expectations, driven by healthy end markets, combined with strong execution across the organization globally. We ended the quarter continuing the momentum that we saw in 2023, delivering 4.4% constant currency revenue growth, while overcoming a sizable day rate headwind and facing rather difficult comps versus a year ago. In fact, it is reassuring to see that on a day rate-adjusted basis, our growth for the quarter was greater than 6% with several areas of the business and geographies contributing to such solid results. In addition to the sound revenue performance, we drove adjusted margin expansion and grew adjusted earnings even while our effective tax rate increased over 200 basis points. These results to start 2024 give us great confidence that Zimmer Biomet will deliver 5% to 6% constant currency revenue growth this year while driving sizable adjusted operating margin expansion. I am pleased to reaffirm our guidance for the year. Net-net, it's encouraging to see us exiting Q1 of 2024 with a revenue growth run rate in the mid-single-digit range, which is consistent with where we exited the second half of 2023. With new product introduction ramping later in the year, we like what we see in terms of sustainability in our growth trajectory which we have said all along will accelerate in the second half of 2024. Key drivers behind our Q1 results came from both a macro and micro standpoint, starting with macro factors or end markets, as we've been saying all along, remain very healthy, driven by high levels of patient demand due to demographic shifts. The continued shift we see here in the U.S. is also a tailwind and across the board in the industry, we've seen better surgical outcomes and technological advancements, which are driving more pace in demand. On top of that, we have improved pricing dynamics. Pleased to report that pricing in the quarter was about flat as opposed to the 200 to 300 basis points of price erosion that this space has seen historically. From a macro standpoint, the main enablers of our Q1 results were the adoption of ROSA technology globally, with a correlated pull-through of Persona Knee. We also saw some execution of growth drivers within S.E.T., particularly in shoulders, within sports medicine, and in our CMFT, craniomaxillofacial thoracic business in conjunction with rapid adoption of Persona OsseoTi, our cementless platform, which is quickly gaining share in the markets where we have launched the product. As we enter the second half of 2024, these new product introductions, as well as other new product entries, will become more meaningful from a revenue growth standpoint, with Persona OsseoTi entering then a full launch status, bringing higher realization from HAMMR or surgical Impactor, which we recently launched, and also gaining traction with ROSA Shoulder, which we started doing cases recently in the U.S. In addition to driving successful 2024 annual results, we are committed to the three strategic priorities that I outlined in my first earnings call as the CEO in November 2023. This no doubt will enable long-term success for the organization. I continue to repeat these three priorities at every Zimmer Biomet meeting around the world. They are resonating with the audience as the must-dos for the long-term success of the organization. Once again, these three imperatives are people and culture, number one; operational excellence, number two; and innovation and diversification, number three. I would now like to quickly provide you with an update on key progress across these three areas. Further detail will come during our May 29 Investor Day in New York City. First, in the area of people and culture, we continue to operate Zimmer Biomet with best-in-class engagement metrics and low employee attrition. We have been recognized across different areas when it comes to people and culture. Recently, we've been showcased in various publications including Newsweek, Great Places to Work, and Forbes. In the area of people and culture, it's worth noting also that our restructuring program, which we announced a quarter ago, has now been implemented almost entirely with no major disruptions to report. We have realized substantial benefits post this initiative, including cost savings earlier than initially expected as well as increased operational agility and enhanced accountability. In the second area of operational excellence, we've made robust progress in implementing our enhanced inventory management programs around the world. We're working intensely with third-party firms to develop a plan and are executing against that plan. We remain committed to a meaningful improvement in Days of Inventory on Hand in the year 2024 and in years to come. Again, more color in that regard during our Investor Day. In operational excellence, we have also established core initiatives around best-in-class product launches to ensure that these new product introductions gain traction sooner than expected and are launched better than we have in the past. This is critical for Zimmer Biomet as we continue to deliver a rapid cadence of product launches with plans to release more than 40 new products in the next 24 to 36 months. One final comment in operational excellence regarding pricing; we've made structural changes to further enhance the pricing strategy we've put in place over the last several quarters. Moving on to the third and final strategic priority. In innovation and diversification, we're making solid progress. We continue to see strong traction in key brands such as Persona OsseoTi, gaining share in the markets where we've launched. We've seen progress with ROSA. We continue to gain momentum with Signature ONE planning guides in the shoulder space, and we are excited about what we're seeing with our Embody soft tissue franchise. CMFT continues to deliver new product introductions, gaining share in the markets where we participate. We're also making significant strides in new products with a more focused pipeline that today, as of Q1 2024, has twice the dollar value that we had at the end of 2018. So the dollar value of the pipeline in innovation is twice what it was four or five years ago. It's worth reminding everyone that north of 80% of these products in the pipeline reside in markets growing above 4%, and many of them are accretive from a gross margin standpoint. We continue our commitment to innovate from a customer-centric standpoint, but also innovating to see incremental profitability and an increased Weighted Average Market Growth Rate (WAMGR). In addition to driving results in core markets, we're also focused on diversifying our portfolio into more attractive, faster-growth end markets with the goal of increasing our WAMGR. We have made significant progress over the past several years, balancing what it is today. This fact, in addition to the confidence around future free cash flow generation, gives us the optionality and the firepower to execute on the right deals at the right time that meet our internal hurdles from both a financial and strategic perspective. So again, there is a lot going on inorganically and organically with the size of the pipeline. While we have flexibility with the size of the deals to come, we continue to favor smaller tuck-ins to mid-sized deals, up to $2 billion in acquisition price that become EPS neutral within two years, and that from a Return on Invested Capital (ROIC) standpoint will deliver upper single-digit to low double-digit returns within five years. As I mentioned earlier, we're very encouraged with our Q1 performance, a quarter in which we grew 4.4% in constant currency, over 6% in day rate while overcoming a number of headwinds and difficult comparisons. The results from the first quarter 2024 give us strong confidence that in the year 2024, we will realize our guidance of delivering 5% to 6% in revenue, growing 100 to 200 basis points above market while achieving earnings growth faster than revenue and delivering free cash flow that exceeds earnings growth. This is the commitment we're making for 2024, and it's one that we're going to reiterate in our Investor Day for years to come. Before closing the call, I would like to announce that Keri Mattox has decided to depart from Zimmer Biomet at the end of May. Keri has been a trusted partner and a very close collaborator and friend on this journey and has enabled great things for Zimmer Biomet in her over four years here. She will be missed, and we wish her the best in her future endeavors. A search for a Head of Investor Relations position is in progress with a leading executive search firm, and we hope to announce Keri's replacement here very soon. Zach will continue to lead Investor Relations interactions for Zimmer Biomet, so a plan for continuity is in place. In conclusion, we are very proud of how far we have come as an organization and are even more excited about where we can go. We have strong confidence in the year 2024. We continue to make commitments and deliver on those commitments as evidenced by these results and the new product introductions commitment that we are realizing. I love the fact that we are impacting the lives of millions of patients worldwide, and I am inspired by the fact that my teammates are living the Zimmer Biomet mission of alleviating pain and improving the quality of life for people around the world. And with that, I'll turn the call over to Suky. Suky?

Thanks, and good morning, everyone. As Ivan mentioned, we had another good quarter driven by healthy end markets and solid execution across the organization. Overall, we remain on track to deliver on our 2024 financial guidance with mid-single-digit constant currency revenue growth, adjusted operating margin expansion, and over $1 billion in free cash flow. Assuming current market conditions, this financial profile is undoubtedly durable going forward. Moving to Q1 results, unless otherwise noted, my statements will be about the first 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 $1.889 billion, an increase of 3.2% on a reported basis and an increase of 4.4% excluding the impact of foreign currency. Additionally, we had a selling day headwind of about 200 basis points that impacted all regions and product categories at about the same level. Excluding the selling day impact, consolidated constant currency sales would have grown above 6%. U.S. growth was 3.7% and international grew 5.4%. Growth in the U.S. was driven by solid performance in RECON in our priority areas within S.E.T. as well as our other categories. Outside of the U.S., EMEA saw stronger-than-expected growth on a regional basis. From a portfolio perspective, growth outside the U.S. was primarily driven by our knee category. Global knees grew 4.3% in the quarter with the U.S. growing 2.2% and international growing 7.3%. Growth in our knee business continues to be driven by our Persona product portfolio and ROSA Robotics platform. We remain excited about the growth coming from new and recent product launches across the knee segment. Global hips grew 1.5% in the quarter with the U.S. growing 1% and international growing 2%. We remain focused on accelerating performance in the hip segment with key product launches that Ivan mentioned earlier. Next, the S.E.T. category grew 5.3%, led by our key focus areas of CMFT, upper extremities, and sports growing on average about low double digits. This strong growth was partially offset by the other subsegments within the category. Despite the choppiness within S.E.T., we remain confident this business will drive mid-single-digit or greater growth for the full year. Finally, our other category grew 12.2%, driven by continued strong ROSA sales. We expect growth in the other category will moderate lower as we progress through the rest of the year. In Q1, we reported GAAP diluted earnings per share of $0.84 compared to GAAP diluted earnings per share of $1.11 in the prior year. Higher revenue and a lower share count in Q1 2024 were offset by higher selling costs and expenses associated with our restructuring program. On an adjusted basis, we reported diluted earnings per share of $1.94 compared to $1.89 in the prior year. The step-up is primarily driven by revenue growth, accelerated savings pull-through from the restructuring program, and a lower share count, partially offset by higher interest expenses and taxes related to Pillar 2. Foreign currency was a headwind of about $0.04 in the quarter when compared to the prior year. Our adjusted gross margin was 72.9%, driven by higher manufacturing costs, which were offset by better pricing and lower royalties. Overall, gross margin was in line with expectations and with the prior year. Adjusted operating margin was 28.6%, slightly ahead of the prior year. The increase in operating margin was driven by higher sales and lower SG&A related to the restructuring program I referenced earlier. Net interest and other adjusted non-operating expenses were $49 million in the quarter, slightly higher than the prior year. Our adjusted tax rate was 18.5%, and we continue to project our full-year rate at 18%. Turning to cash and liquidity, we generated operating cash flows of $228 million, free cash flow of $91 million, and we ended the quarter with $393 million in cash and cash equivalents. Regarding our outlook for the rest of the year, we are reiterating our full-year guidance, including constant currency growth of 5% to 6% or 4.5% to 5.5% reported revenue growth with a 50 basis point currency headwind. Additionally, we continue to expect earnings to be between $8 to $8.15, and that we will generate between $1.50 billion to $1.1 billion of free cash flow. From a cadence perspective, we still expect constant currency revenue growth for the first half of the year to be at the lower end of mid-single-digit growth, while in the second half of the year, we expect to be at the upper end of mid-single-digit growth. As a reminder, Q2 and Q3 will each have about 150 basis points tailwind due to selling days, and the selling day impact for Q4 and for the full year is expected to be immaterial or less than 50 basis points. Regarding the P&L, we expect adjusted gross margin to be broadly in line with 2023 and slightly better than our original thinking due to less FX headwinds than originally assumed. Given the strength in the dollar, FX hedge gains are not as big a step down in 2024 as initially expected. Looking at gross margin, we expect Q1 to be the high watermark, followed by a modest sequential step down throughout the year. Overall, first half gross margins will be about 100 basis points higher than the second half as we continue to feather in capitalized inflationary costs from the second half of 2023. Turning to adjusted operating margin, we are pleased with the start to the year as our restructuring efforts are delivering slightly ahead of schedule. Overall, second half operating margins will be higher than the first half. We expect for the full year, at the midpoint of our guidance, that we will increase operating margins by about 80 basis points. In summary, Q1 was a good start to the year. We delivered results ahead of expectations and continue to feel confident in our 2024 outlook as evidenced by the reiteration of guidance. With that, I'll turn the call back over to Keri.

Thanks, Suky. And thanks, Ivan, for the kind words. It's been such a privilege to be part of the Zimmer Biomet team these 4.5 years, and I wish the team much continued success moving forward. Now 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 that we can get through as many questions as possible. With that, operator, may we have the first question, please?

We'll go first to Travis Steed with Bank of America.

Keri, great working with you, and good luck in your next endeavors. I guess, kind of high level, you guys have this algorithm, 5% to 6% revenue growth potential for some margin expansion and possibly kind of low double-digit EPS growth. I'm trying to think about how we should think about that algorithm over the long term. Is it more of a base case or best case? There's a lot of skepticism from the investor community on that algorithm. What's the Zimmer growth rate kind of on a sustainable basis in a normalized market? And then just the second question I'll go ahead and throw out too: any color on Q2 sequentially. It's usually down, Hips and Knees usually drop a little bit sequentially, but with some of the selling day stuff, I just wanted to ensure there wasn't any titration on Q2.

Travis, Ivan here. Thanks for the question. I'll touch on both components of your question, and I'll make sure that Suky speaks up here as well. Starting with the algorithm on revenue, EPS, and free cash flow. We're going to give more color at the Investor Day, but I will tell you today, as per the prepared remarks, this is a long-term commitment. It's not just for 2024; we aim to deliver revenue above market, EPS above revenue, and free cash flow above EPS growth. The drivers here on revenue are all about new product introductions. We're going to gain share by delivering innovation that matters. Most of the 100 to 200 basis points will come from new product introductions. Our pipeline is robust, with 40 new product introductions over the next 24 to 36 months, and our pricing dynamics and commercial execution will also contribute. Regarding EPS growth, we're doing things differently in terms of margin, including pricing and inventory management, along with allocation of OpEx. As for free cash flow, the primary driver is that we have run this company inefficiently concerning inventory management. We had over 400 days on hand with inventory, and we need better portfolio management. These are the critical drivers for sustainability.

Yes. I think Ivan summarized it well, so I'll just build some incremental points here. The mid-single-digit growth top-line profile, as Ivan mentioned, has a durable path to operating margin expansion and improvements in overall free cash flow conversion. If you look at our guidance this year, which is 6% to 8%, we feel confident in it. Excluding the step-up in tax rate at Pillar 2 and headwinds everyone is facing on interest and FX, the underlying growth on the bottom line is much better than our guidance, maybe 300 to 400 basis points better, which indicates a pathway to low double-digit earnings growth. We will provide more detailed color in the Analyst Day. We want to make sure we have the right investment profile to ensure sustainable growth.

Katie, can we have the next question in the queue?

We'll go next to Steve Lichtman with Oppenheimer & Company.

Congratulations on the quarter, guys. And Keri, it's been great working with you. I guess I'll first start on pricing commentary. That was notable. Ivan, can you talk about where the positive surprise came from on that front? Are the benefits of your efforts coming sooner? Any general comments on the pricing environment would be great.

Yes. We're very pleased, obviously, with pricing performance. Recall that in 2023, the second half of the year was flattish regarding price. In previous years, we experienced 300 to 500 basis points of price erosion, especially in the U.S. We implemented a structure and governance in place, and new product introductions are helping with category contracting. I wouldn't say there are any real surprises, but Europe may be doing slightly better than expected. Overall, we're at a point where pricing feels pretty predictable. We are confident about the strategy and governance we've implemented, though we won't commit to significantly better performance, we have a great outlook for the rest of the year. Suky, do you have any other comments?

Overall, we're in a more favorable environment compared to three or four years ago. The structural changes we're making internally have led to better price performance. I'm genuinely impressed and optimistic about the cultural change within Zimmer Biomet as I engage with distributors and field reps, who genuinely want to ensure we get the best possible value for our products. In Q1, we were roughly flat on pricing. I had initially anticipated a 100 to 150 basis points of erosion, but now believe we will be under 100 basis points of erosion for the full year. That being said, I don't expect that flat profile to continue due to some price increases from last year and contracts coming up that will create a little bit of pressure. Nonetheless, we're in a much better position than we were in previous years.

I just wanted to follow up on the ROSA shoulder regarding the initial launch and your outlook for the ramp this year.

Yes. Obviously, very excited about this product launch. We conducted the first cases at the Mayo Clinic a couple of weeks ago, and the feedback was very solid. The product offers a high degree of accuracy in cuts and visibility of anatomy. It is efficient from an instrumentation standpoint and fully interconnected with the rest of the CVH ecosystem. Case over case, the feedback indicates you achieve time efficiencies, so the learning curve is rather short. This is a meaningful product launch for the company, and I'm very excited about it. Thanks, Steve.

Larry Biegelsen with Wells Fargo.

This is Vik Chopra in for Larry Biegelsen. Keri, thanks for all your help and good luck. I have two questions. First, I wanted to understand what we can expect at your upcoming Investor Day at the end of the month. Will there be specific long-range plan goals for revenue? Or will it be relative to the market, for example, growth of 100 to 200 basis points above market? And then I had a follow-up.

Yes. We will cover how we plan to achieve our three financial commitments regarding the drivers of revenue, EPS, and free cash flow. We'll provide details on new product introductions and discuss our capital allocation strategy moving forward. It will be very robust.

The second question I had was you beat consensus EPS by about $0.07, but you didn't really raise the guidance on EPS. Can you provide some color on that?

Yes. Ivan articulated this well in his opening remarks. We had a good start to the year, and it was great to see better-than-expected revenue performance. The discipline we've maintained throughout the company reaffirms our guidance range provided earlier this year.

We'll go next to Rick Wise with Stifel.

We will miss you, Keri. I will ask my question and my follow-up at the same time. Ivan, obviously, you've mentioned all these new introductions; OsseoTi, HAMMR, the robotic shoulder, and all of them sound significant. I assume they will help with pricing, gain share, and leverage your fixed operating costs. However, I hoped you'd focus specifically on the implications of the Z1 launch. You've highlighted this product several times; is this the key product missing to make your hip portfolio more credible and bring your business up to industry norms?

Thank you, Rick. I'll address the hip question and then leave Suky to handle your inquiry on margins. One product alone is not going to win the battle. It is a category of products. We've been transparent about not performing well in hips over the last three to five years, primarily due to three product categories. The first is the direct anterior stem that lacked a triple taper stem in the market, causing a deficiency. Z1 remedies that in a differentiated manner. Now with this 510(k) approval, we can compete with the two other large orthopedic companies in the direct anterior space. Secondly, we required a surgical impactor, which drives efficiency and accuracy in treatments. It integrates with the overall procedure. Lastly, we needed navigation, and we're the only company with a 510(k) FDA-approved Mixed Reality Technology in partnership with HipInsight. It's not solely about the Z1; it's the entire portfolio, including the direct anterior stems, surgical impactors, and navigation capabilities. We firmly believe we're on track to regain our previous standing in hips. We currently remain the #1 hip company in the world, and I am confident that this portfolio will accelerate our growth journey.

And Rick, it's Suky. Always great to hear from you. Regarding the margin perspective, while the past isn't always indicative of the future, it's a good validation in our case. In both '22 and '23, we significantly expanded operating margins, even against a challenging inflationary environment. In '24, we expect to do it again across the entirety of the P&L. First, through revenue growth to leverage fixed costs. Second, through improved cost management at rates we haven't seen before, including inventory reduction and site optimization. We're becoming more efficient within R&D as well, rationalizing our portfolio, and migrating customers towards superior products. We're achieving better allocation of capital and reducing our cost of debt. Having multiple avenues to improve operating margins means that even if we encounter unexpected macro or micro challenges, we have other strategies to sustain margins. Our confidence is derived from our actions across the entire profit and loss statement.

We'll go next to Imron Zafar with Deutsche Bank.

This is actually Imron Zafar in for Pito. The first question is on ROSA. Obviously, a strong first quarter there. Can you talk about placement trends in the quarter by site of care, hospital versus ASC? And then also competitive dynamics for ROSA Joint orthopedic robots?

Absolutely. Thanks for the question. Starting with the global picture, we are very excited about ROSA's performance. Globally, it's becoming the preferred robotic option in many markets outside of the U.S. In the U.S., we're approaching around 20% penetration of ROSA in cases. In the reported quarter, we had substantial ROSA sales growth, indicating a future stream of revenue. About one-third of all installs in the U.S. are executed in an ASC environment, which reflects the growing preference for ROSA in high-volume accounts. Everything is trending positively in terms of our penetration, gaining traction in key global markets, particularly within the U.S. ambulatory surgical center environment.

Just as a quick follow-up, can you remind us what the site of care mix is for shorter Recon hospital versus ASC?

We're starting to see a dynamic in cases moving to the ASC for shoulders, which is driven by CMS changes. Currently, around 60% to 65% of shoulder cases are done in ASCs, but this is shifting due to reimbursement changes. We possess a strong position in inpatient, outpatient, and ASC settings, but the net mix stands at around 60% to 65% for inpatient and 35% for outpatient.

We'll go next to Caitlin Cronin with Canaccord Genuity.

Just touching a little bit further on ROSA and the strength in the other line, Suky, did you say that you expect lower growth in this segment through the year?

Yes. We had a strong quarter in our other category, primarily driven by ROSA capital. We had excellent installs and a higher sales mix relative to placements, driving higher dollar revenue in that quarter. The placements we achieved are ideal as they establish a long-term commitment. However, our expectation is that we will step down from the first quarter as the year progresses, which aligns with our guidance reiteration.

Any updates on Persona?

Go ahead with a follow-up. The line is a bit choppy.

Okay. Apologies. And any updates on the Persona IQ rollout?

Yes. It's moving in the right direction. I will say that things have accelerated recently, both in terms of innovation and commercial execution. We're thrilled to have received the 510(k) approval for the shorter stem version of Persona IQ, which has been a significant gating factor for some surgeons. Additionally, we launched our recovery curves platform, which is unique to Persona IQ. This integrates data from traffic management and features a dashboard that can objectively quantify patient outcomes in comparison to peers with similar profiles. Everything is trending positively for Persona IQ.

We'll go next to Mike Matson with Needham & Company.

Yes. I just want to ask one about the guidance implications for second-quarter revenue. You stated you expect to be at the low end of the mid-single digits for growth, which implies about 3.5% constant currency growth. However, with the 1.5% selling day benefit, you're looking at around 2% underlying growth. Is that correct? Why do you only expect 2% growth in the second quarter?

Yes, Mike. Your calculation directionally aligns. However, I wouldn't set expectations as low as that. There will inevitably be quarter-to-quarter variations due to timing and contracts. We began the year strongly and are confident in our guidance, which aligns with our original expectations for the first half of the year. Nothing specific to indicate in this quarter, just the overall cadence we project. Regarding OsseoTi, you mentioned it's gaining share. Is that due to converting competitive surgeons, or is it simply cannibalizing the cemented Persona?

We are indeed converting some of the legacy cementless platforms over to Persona OsseoTi, but a considerable portion of the business stems from converting accounts, so the strong U.S. knee performance for the quarter is a solid indication, especially noting that this occurred despite substantial comps. The expectation remains that as we ramp up the product launch, we will continue to gain market share. We're drawing from both existing and new accounts.

We'll go next to Vijay Kumar with Evercore ISI.

This is Sofia on behalf of Vijay. One quick question on gross margins and operating margins. Were there any one-offs in the first quarter on gross margins? You raised the guidance for margin, but maintained EPS. Is operating margin slightly down? How should we think about margins for the rest of the year?

There are always going to be some fluctuations both in gross and operating margin in any given quarter, but nothing material. We did better on gross margin than expected, and we saw positive flow-through to the operating margins. We're confident about our trajectory as the year progresses. We expect operating margins to increase in line with seasonality as revenue rises and savings from various programs materialize. We reiterated that the midpoint indicates an 80 basis point increase in operating margin, and we remain optimistic about that outcome.

Just one quick one on M&A. Any particularly interesting prospects in the pipeline that align with your portfolio?

Yes. We always have a robust pipeline. We'll discuss in further depth once we meet later in the month. We're focusing on three key areas for acquisitions: assets that are mission-centric strategically, in higher-growth segments of Recon, in high-growth areas of S.E.T., and in the ASC space, which aligns with both categories. We're open to larger deals but are currently favoring acquisitions under $2 billion that are EPS neutral within two years and expected to deliver high single-digit to low double-digit ROIC within five years. We have clear strategic and financial filters which provide optionality.

We'll go next to Robbie Marcus with JPMorgan.

Congrats on a good quarter. You talked about second-quarter expectations on top line, and you've addressed margin cadence thru the year. I’d like more specifics on operating margin, which you indicated would be higher in the fourth quarter. Can you confirm your confidence in that, along with any concerns you may have about consensus EPS projections for the second, third, and fourth quarters?

Sure, Robbie. Just a clarification: I didn’t mean to imply that the second quarter would have the highest operating margin; that honor will go to the fourth quarter, which coincides with the peak revenue. Regarding the sequencing within consensus estimates, we’ve provided solid guidance around first-half and second-half revenue. I’ve defined expectations for gross margins in the first half, second-sequence assumptions throughout the year. We're traditionally transparent, and I hope that provides clarity.

We'll go next to Chris Pasquale with Nephron.

Ivan, you mentioned that four points of your revenue growth this year will come from market gains, with 100 to 200 basis points of outperformance, which gets you to your 5-6% goal. In the first quarter, Recon growth was actually a bit better than that, and that’s a tough comparison to last year. Your performance in hips and knees fell below market expectations. While I appreciate your enthusiasm for the innovation pipeline and long-term growth, do you still consider your 2024 target achievable?

First of all, I wouldn’t classify our performance as below market. We can debate it, but I assure you we’re not below market as it currently stands. When discussing how we achieve the 5% to 6%, the formula remains focused on product introductions that ramp up later this year, and even more product introductions anticipated for 2025. Throughout my tenure here, I haven’t seen a poor portfolio. This isn’t the case anymore; we have no gaps in hips, and the knee portfolio is equally strong. We also expect growth to continue in S.E.T., as we’ve committed to mid-single digit or greater growth over the last three quarters, which we believe will remain steady. Our ongoing focus on innovation, improved execution, along with the 5% to 6% commitment stands firm.

Following up on OsseoTi. Can you clarify your cementless mix, and how you plan to close the gap with Stryker?

Closing out the quarter, we’re approaching 20% penetration on cementless in the U.S., similar to our robotics. We aim to match competitors’ 60%; while timelines will be discussed at the Investor Day, suffice it to say there’s significant upside and we’re excited about the journey ahead.

Thanks, Chris. Katie, I think we have time for one more question in the queue.

We'll go next to Shagun Singh with RBC.

It seems like uptake for orthopedic robotics stepped up for the market in Q1 or at least it was better than expected. Is there anything that has changed from a capital appetite standpoint, any reason you are seeing upfront sales versus operating leases? Additionally, in regard to M&A, you indicated wanting to be bigger and bolder; we haven't seen much of that yet. I understand the commentary on deal capacity of up to $2 billion and favoring tuck-ins, but could you detail how you plan to raise your weighted average market growth from 4%?

Starting with robotics and capital dynamics, I can share that we’ve observed increasing preference for robotics among ASCs. A new ASC opens almost weekly now, all wanting to incorporate robotics. Q1 indeed saw more outright purchases, bolstered by strong capital availability across key markets, making capital a non-factor. As for M&A, while we aspire to be bold, we want to mitigate risks. Therefore, we adhere to established strategic and financial benchmarks and will act when ready in alignment with them. We plan to combine organic and inorganic strategies to elevate our WAMGR. We will provide a more elaborate overview at the upcoming Investor Day, outlining how our pipeline continues to reflect favorable growth in key product segments, aiming for alignment. To conclude, I'd like to express my gratitude for being here in Warsaw, Indiana, today to celebrate our Founder's Day. Since May 2, 1927, we have pursued our mission to alleviate pain and enhance the quality of life for people worldwide. Nearly 97 years later, I can affirm that we are just getting started. It's exciting to observe Zimmer Biomet's progress, as our portfolio is robust, our commercial execution is strong, and we have solid assurance in our 2024 guidance. We are equally enthusiastic about 2025 and 2026 as we prepare to discuss our long-range plan. This sentiment resonates with our optimism for the future.

Thanks, everyone, for joining. If you have questions, please don't hesitate to reach out to the IR team. Thank you again for participating in the call this morning.

That will conclude today's call. We appreciate your participation.