Zimmer Biomet Holdings, Inc. Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2024 Earnings Conference Call. As a reminder, this conference is being recorded today, August 7, 2024. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to Zach Weiner, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's second quarter 2024 earnings conference call. Joining me on today's call are Ivan Tornos, our President and CEO; and Suky Upadhyay, CFO and EVP, Finance, Operations, and Supply Chain. Before we get started, I would 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, zimmerbiomet.com. With that, I'll turn the call over to Ivan. Ivan?

Thank you, Zach. Thank you, everyone, for joining today's call. Good morning. I would like to start by expressing my gratitude to the over 18,000 Zimmer Biomet team members around the world, who every day go above and beyond in fulfilling our mission of alleviating pain and improving the quality of life for people globally. This is what we get to do every day, and you are doing an incredible job in making this mission a reality. I appreciate your dedication to Zimmer Biomet, your relentless effort, and your strong performance so far this year. We have now passed the midpoint of the year and are growing at 5%, following strong performances in 2023, 2022, and 2021. The trend is real, the performance is solid, and I am immensely proud of the work you undertake daily. As I've mentioned many times, the Zimmer Biomet workforce and our culture are key competitive advantages for us. In this call, I will start with some opening remarks, followed by Suky who will present the financials. As always, we will leave plenty of time for your questions. The agenda today includes my perspective on the quarter, a discussion of our performance drivers, and our updated full-year guidance for 2024. Looking ahead to 2025 and beyond, we also feel very confident about fulfilling the long-range plan commitments outlined during our first-ever Zimmer Biomet Investor Day at the end of May. Recall that these commitments include driving revenue growth at least at mid-single digit rates, driving EPS at 1.5 times revenue growth, and achieving free cash flow growth that exceeds our EPS commitments by at least 100 basis points. Lastly, we’ll address our strategic priorities, which are people and culture, operational excellence, and innovation and diversification. Starting with our Q2 results, we are very pleased with our global performance. In the second quarter of 2024, we achieved a growth of 5.6% on a constant currency basis. We closed the first half of 2024 with a 5% growth rate, which is noteworthy given the challenging comparisons from the first half of 2023. The second quarter of 2024 marks the 10th consecutive quarter that Zimmer Biomet has experienced mid-single digit growth or higher. This trend is real, and we are confident that this performance will continue, if not accelerate, as we advance our business. In the quarter, we noted some early weakness in the U.S. market, but May and June showed improvements over April. In July, the U.S. Recon business recorded mid-single digit growth. We experienced fluctuations in the first half of the quarter but saw improvement in the latter half, which has continued into July. Our international business, outside the U.S., has performed above expectations, driven by strong demand in key markets across both Recon and the S.E.T. categories, showcasing a diversified and solid performance. In Q2, we delivered excellent results in our other category, which focuses on enabling technologies, particularly ROSA. Demand for ROSA grew by double digits, alongside robust interest in enabling technologies and navigation systems. As we've stated before, we aim to be more than just a leading company in reconstructive knees and hips in key markets like the U.S. and Europe and Asia Pacific. A testament to our diversification journey is seen in S.E.T., where we have consistently grown at least mid-single digits for three consecutive quarters. This growth trajectory is expected to persist as we approach the end of 2024 and transition into 2025 and 2026. We have also made significant improvements in our hips portfolio. Over the past three to five years, we lost some market share in hips, mainly due to lacking three key product items: direct anterior stems, advanced navigation, and surgical impactors. Today, we have addressed those gaps with 510(k) approval for the Z1 triple taper stem, regained market share with the HAMMR surgical impactor, and now offer the most comprehensive navigation solution in hip arthroplasty, including ROSA Hip and the only 510(k) FDA-cleared augmented/mixed reality hip navigation platform in partnership with Hip Insights. Additionally, we announced our agreement to acquire OrthoGrid, further positioning us as a leader in navigation technology using artificial intelligence. Our aim is to exceed market growth in hips and regain lost market share. Furthermore, we are proud to be the first and only company worldwide to offer a robotic-assisted shoulder replacement platform. Feedback from our cases with ROSA Shoulder has been overwhelmingly positive, and we anticipate an increase in cases as we approach late Q3 and early Q4. By 2025, we expect ROSA Shoulder to be a significant driver of growth for Zimmer Biomet. Our partnership with THINK Surgical will provide our surgeon customers with more options in the robotic landscape. We have conducted thorough training and our feedback on this collaboration has been exceptional. With this partnership, Zimmer Biomet will be unique in offering both a handheld CT scan-based system in TMINI and a simplified, CT scan-less robotic system with our current ROSA for total knee arthroplasty. We are excited about the options and our continued fast-paced innovation with ROSA, aiming to launch at least three new ROSA modalities in the coming three to eight quarters. From an earnings perspective, we generated $2.01 in adjusted earnings per share, representing a 10% growth, in line with our long-range plan targets outlined at our Investor Day in May. Throughout the first half of the year, the team has executed our three strategic priorities consistently: people and culture, operational excellence, and innovation and diversification. As I mentioned earlier, people and culture remain a key competitive advantage for us. I am pleased to share that Zimmer Biomet was recently recognized as one of America's Best Midsize Companies to work for by TIME magazine, showcasing our strong team member satisfaction and engagement, alongside our revenue growth profile and organizational turnaround. Regarding operational excellence, we expect to achieve constant currency revenue growth at least at mid-single digits, with adjusted earnings per share growing at least 1.5 times revenue, and free cash flow growth exceeding earnings growth by at least 100 basis points. This commitment is not only for 2024 but also extends into our long-range planning for 2025, 2026, and beyond. This mindset is embedding itself throughout the organization, as we reward individuals for delivering on these commitments. In the past, our innovation and diversification strategies focused on portfolio shifts from lower-growth to higher-growth markets, exemplified by our success in S.E.T. Today, we are also emphasizing geographic diversification, investing in key markets outside the U.S. where we can achieve sustainable revenue and profit growth. We are encouraged by the strong performance in our international business and expect to continue this growth without sacrificing margin performance. In conclusion, we are very proud of our financial progress, innovation advancements, and successful commercial execution. Our second-quarter results affirm that we make commitments and fulfill them, and we fully expect this trend to continue for the remainder of the year and beyond. We are confident in our annual guidance and thrilled that we are positively impacting millions of lives. Each day, I am inspired knowing that my teammates and I are committed to the Zimmer Biomet mission of alleviating pain and enhancing quality of life for people across the globe. With that, I will turn the call over to Suky. Thank you.

Thank you, and good morning, everyone. As Ivan mentioned, Q2 closed a solid first half of the year for Zimmer Biomet, with ex-FX 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 $8.00 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 up 80 basis points, driven by gains internationally 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 S.E.T. and other categories. As a reminder, our other category includes our surgical business, as well as enabling technologies such as ROSA capital sales. Our international business continues to perform well, driven by knee and S.E.T., with continued strength in emerging markets. Global knees grew 5.5% in the quarter, with the 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 OsseoTi and remain optimistic that the recent robust ROSA installations 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 S.E.T. 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 S.E.T. 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 pull-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 in 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 $8.00 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 and another positive proof point through our LRP. With that, I'll turn the call back over to Zach.

Thanks, Suky. 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. I'll give a quick overview before discussing the U.S. performance. Overall, it was a good quarter for Zimmer Biomet, with a 5.6% increase excluding foreign exchange. This marks the tenth consecutive quarter of mid-single-digit growth or higher, and we are satisfied with the double-digit growth in adjusted EPS. Our S.E.T. segment performed better than anticipated, achieving mid-single-digit growth or more. I’m pleased to mention that every business within S.E.T., which includes six divisions, grew for the first time in a while. Our enabling technologies, primarily robotics, showed double-digit growth in both Q1 and Q2. In the U.S., robotics grew by 16% in the quarter, which is a strong performance. We also addressed the gaps in hips that previously contributed to our lost market share. Unlike five years ago, we are no longer just focused on the U.S. knee market. However, regarding knee performance in the U.S., I am not satisfied with the quarter as it was weaker than anticipated. There are three main factors contributing to our underperformance in the U.S., and they are fixable. First, many of our high-volume surgeons were unavailable due to various reasons, including participation in significant medical education events, which limited surgeries performed during the quarter. Second, we faced supply issues with one of our knee platforms, specifically limb salvage, which affects knee revision cases and has a high average selling price, negatively impacting our quarter. Lastly, the year-over-year comparisons were challenging. We achieved almost 10% growth, specifically 9.8%, in Q2 of 2023, which was closer to mid-single digits, while the U.S. growth was 5%. Thus, these factors—surgeon availability, supply constraints, and difficult comparisons—did not work in our favor. However, I can confirm that these issues are being addressed as we transition out of the quarter. The performance of U.S. Reconstruction is currently very strong. Regarding your second question on cementless technology, it continues to track well. We hope to increase the number of sets available as the adoption rate is high. We are making headway in converting accounts and aim to introduce cementless solutions not only in the U.S. but also internationally soon. That summarizes the current situation in the U.S. market.

Thank you for the detailed information. It's very helpful. Suky, I have a quick follow-up for you regarding the P&L. Can you provide some insights on the relationship between the benefits you're experiencing from the restructuring and the reinvestment of some of those savings? What is the current status regarding the benefits from the restructuring, and how does that align with the level of reinvestment you had planned when the restructuring was introduced back in February?

Yes. 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, we're slightly ahead of that overall trend, at least from a timing perspective, still expect to generate $200 million on 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 S.E.T., 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, calling out the opportunity to move back into a share-taking position over the next couple of 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 was we have already started. So again, July, so far so good when it comes to hip recovery. We launched our surgical impactor HAMMR midpoint into Q2 and the adoption has been great so far. As you heard from us, we will be launching our triple taper stem, that's Z1, which is going to enable share regaining in direct anterior. That's going to get launched late in Q3, early Q4. We have the quantity that we need. We got the commercial plans in place. So, that should be another driver. And the third leg was to have elegant navigation systems, and we got three of them. This morning, we announced the acquisition of OrthoGrid. 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 taper 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, 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 soft, and again, that's one portion of our platform. And again, so far so good. So yes, market is healthy.

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

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

Hi, Ivan and Suky. Thank you for addressing the questions. Suky, to start with you, you've mentioned growth and margin improvement, and increasingly about free cash flow. However, when we examine your guidance for the year, it still suggests a significant increase in the second half compared to the first half. Some of that may relate to the growth in the leverage opportunity you've mentioned. Is the environment conducive enough to achieve meaningful improvement in working capital, especially with all these new products being introduced? I assume there will be expenditures on FX and CapEx as well. How do you plan to reach your free cash flow guidance and utilize that cash this year?

Yes, good morning, Drew. Thank you for your question. There are three main factors contributing to the growth in free cash flow as we progress from the second quarter into the third. It's important to note that the disparity in free cash flow between the first half and the second half is common in our industry. The first factor involves the challenges faced in the first half of the year, such as rebates from the previous fourth quarter that need to be paid in the first quarter, along with bonuses and various incentive payments that occur during this period. These challenges are usually not present in the second half. Secondly, in the second half we expect to see improved EBITDA driven by growth, as you mentioned. Additionally, there will be a significant enhancement in working capital, particularly regarding inventory. We've already noticed an improvement in inventory levels from the second quarter compared to the first, and this trend is expected to continue into the third and fourth quarters. This will play a substantial role in driving overall free cash flow as we advance into the second half of the year. In terms of our focus, we remain committed to ensuring that we have the appropriate assets and investment levels in our organic business. As Ivan highlighted, we are increasing our capital expenditures for our OsseoTi instrument. Demand has exceeded our initial expectations, which is encouraging, and we are now working to fulfill the demand by getting those products to market. We are optimistic about this and are allocating additional resources to it. Furthermore, we have repurchased some shares in the second quarter in line with our capital allocation strategy outlined on Investor Day. Overall, we are confident about our cash position for the entire year. You can expect a typical step-up in the second half, and we will continue to prioritize our organic investments. Our capital allocation strategy will remain balanced between mergers and acquisitions and returning capital to shareholders.

Got it. Thanks, Suky. And Ivan, 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 S.E.T. business? Thanks for taking the questions.

Thank you, Drew. I'm very excited. The key concept here is optionality. Zimmer Biomet is the only company globally with three different forms of navigation. With ROSA Hip, we currently have anterior robotic navigation, and posterior navigation is coming soon. OrthoGrid provides AI surgical guidance as a lighter, faster option for surgeons preferring a non-robotic alternative. Additionally, our partnership with Hip Insights gives us the only FDA-approved mixed/reality navigation, offering surgeons enhanced visualization of the patient's anatomy, instruments, and implants. This variety in navigation methods appeals to a wide range of customers. Our broader strategy aims to deliver faster, superior solutions, with navigation playing a crucial role in that goal. Ultimately, this will help Zimmer Biomet recover some of the 200 to 300 basis points of market share we have lost over the years.

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

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

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 quarters to eight quarters. Could you remind us of how many is 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 Suky. How do you think about the revenue contribution from those robots ramping? Thank you.

Hi, Joanne, good to talk to you. Good morning. I think I said over the next four quarters 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 interior. As you know, we're going to get into full launch mode for ROSA Shoulder later in the year. And again, so far, the voice of customer has been super. We want to get at some point a different version of ROSA. We're launching two different ROSAs for knees. One is going to be late this year, early 2025. We call it ROSA B15, 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 type 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 quarters to eight quarters. In addition to ROSA, we have the partnership with THINK Surgical. And 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, end of Q2 double digits in the U.S., when it comes to enabling technologies, we grew double digits in Q1, and we don't expect that to slow down, and that's pull-through for implants.

Perfect. Thank you so much.

Thank you, Joanne.

Thanks, Joanne. Can we have the next question?

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

Good morning. Thank you for the opportunity to ask a question. I have one for Ivan and one for Suky, and I’ll ask them both at once. Ivan, I would like an update on the status of Persona IQ, including the launch and the short stem extension, and how these developments might aid in adoption. Additionally, I noticed you applied for TPT; I am confident that you will obtain it, and I’m curious about its potential impact on adoption. For my follow-up, Suky, the gross margin in Q2 came in lower than anticipated. What do you project for the full year? Did you mention that gross margin is expected to decrease throughout the year? Specifically, will Q3 be lower than Q2 and Q4 lower than Q3? Is it still anticipated that gross margin will align with 2023, as previously indicated? I apologize if I misunderstood your earlier comments, Suky. Thank you for addressing my questions.

Hi, thank you, Larry. Regarding your question on Persona IQ, we are very encouraged by the increasing adoption. We expect to see further acceleration in the second half of 2024, with significant contributions from new products in 2024 and even more in 2025. We have now collected over 3 billion data points related to range of motion and mobility. We introduced Recovery Curves, which allows us to compare patient performances. We will be discussing this data with payers to explore potential risk-sharing agreements. As for the other part of your question, we plan to fully launch at the end of 2024. We have received approval, and the design and sets are ready. This will contribute to the acceleration in the latter half of 2024 and more significantly in 2025. We have also secured partnerships with several major hospitals across the U.S. As for TPT, we assessed it with a third-party consultant and decided to withdraw the application because it did not make economic sense as we initially thought. We believe there are more effective ways to monetize the technology. We will still pursue NTAP, but TPT is not viable.

Yes, good morning, Larry. Regarding your questions about gross margin, you mostly have it right, but let me provide some additional context. Year-over-year, we expect gross margins to align with 2023, but potentially be slightly lower. This change is primarily due to our business mix, as we're observing significantly stronger international sales, which carry a lower gross margin compared to the U.S. So, it's really a mix issue. In the second quarter, as you mentioned, the results were somewhat lighter than we anticipated, again due to the mix where the U.S. growth outperformed international growth for various reasons that Ivan discussed. Nevertheless, we managed to expand operating margins by 100 basis points and achieve solid earnings growth. You noted correctly that the cadence is consistent with what we've communicated earlier this year, indicating that gross margins will decline sequentially in the second half compared to the first half and from Q2 to Q3 and Q3 to Q4. The main reason for this is the inflationary pressures we faced in third-party manufacturing costs this year, which have now been integrated into the P&L. Despite the sequential decline in gross margin, we still anticipate significant operating margin expansion for the full year and expect operating margins in the second half to improve compared to the first half, driven by our restructuring program. Apologies for the lengthy detail, but I wanted to cover everything in one comprehensive statement.

Thanks, Larry. Katie, can we have the next question, please?

We'll go next to Ryan Zimmerman with BTIG.

Good morning. Thank you for the opportunity to ask questions. I have two questions to pose right away. The first pertains to ROSA in comparison to TMINI. When you introduced that partnership, there seemed to be some concern that TMINI might take the place of ROSA, particularly in light of the stock's reaction. Ivan, could you discuss your perspective on the adoption of these two options over time, how TMINI fits into various care settings or utilization? Does that correlate with the ratio of knees and hips performed in an ASC compared to a hospital? My second question is a follow-up to Larry's inquiry regarding margins for Suky. There was positive pricing this quarter, but you did mention increased manufacturing costs. When do you anticipate seeing an improvement in those higher manufacturing costs? Will that be sometime in 2025? Additionally, how sustainable are your pricing advantages? Thank you for addressing my questions.

Hi, thank you, Ryan. Look, TMINI is not going to replace ROSA just like OrthoGrid is not going to replace ROSA. It's all about having breadth of portfolio. TMINI offers CT scanning, which some surgeons like, and TMINI is the only handheld robotic platform in the world, which is something that, in an ASC environment, surgeons seem to like. What I will tell you is that we are deeply committed to ROSA, point in case, all these new platforms and indications we're going to be launching over the next four quarters to eight quarters, point in case, the commitments we made at the Investor Day of doubling our penetration from somewhere in the 20% of all U.S. knees done robotic with ROSA to 40% in the next three years. ROSA continues to be one of the fastest-growing platforms here at Zimmer Biomet. We grew again in the U.S. our capital sales for ROSA 16% in Q2. Overall, it was double digits globally. ROSA today is already outside of the U.S., the leading robot platform, number one in Asia Pacific, fast growing in EMEA. And I think 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 is one of the most meaningful ones. And as we double penetration, you should assume that our knee and hip number and shoulder later in the year is going to continue to grow.

Hi, Ryan, Suky. Good morning. Thanks for the question. As I mentioned earlier, we saw a positive pricing increase of 80 basis points in the second quarter, marking a favorable first half for the company, likely the first since I joined. Looking at the breakdown, EMEA performed strongly, APAC was flat to slightly up in the second quarter, while the U.S. experienced a decline in pricing compared to last year. Overall, it was a good quarter due to several factors: a more favorable environment, improved discipline in pricing analytics and governance, and better pricing culture. Additionally, we had some one-time benefits in EMEA that contributed to the positive price performance in the second quarter. For our full-year pricing outlook, I initially projected an increase of about 100 basis points, but now I anticipate it will be flat or potentially down by 50 basis points. The adjustment is due to the expectation that the one-time benefits seen in EMEA in the second quarter won’t recur in the same manner during the second half. We are certainly witnessing significant improvement in performance this year, and we believe a large part of this trend will carry into 2025 since a substantial portion of our business is contracted. We will provide more details on 2025 when the time comes, but we are pleased with the pricing trends for 2024. Regarding manufacturing costs, they are indeed higher this year due to the capitalization for 2023. I won’t provide specific guidance for 2025, but I will reference our Long-Range Plan from Investor Day, where we discussed expectations for operational stability in gross margin. This suggests we should start to see more stability in manufacturing costs going forward. As we continue into 2024 and 2025, we will share more insights on that. Overall, I feel positive about the progress we are making.

Thank you, both.

Thanks, Ryan. Katie, could we have the next question?

We'll go next to Robbie Marcus with JPMorgan.

Good morning. Thank you for your questions. I have two. First, outside the U.S., the performance in hip and knee has been quite strong today, even when considering the currency challenges compared to consensus. Could you share your insights on the trends in these regions? Is there a difference between Europe and Asia Pacific? Did you experience the same challenges there, such as vacation days or supply issues, that you encountered in the U.S.?

Yes, I'll take that, Robbie. Good talking to you here. So the volumes outside the U.S. remain very strong, in particular in Europe, and within Europe, in 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 outside 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 outside 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 NexGen to Persona in these key geographies. So it's a combination of market dynamics and great commercial execution. That's the answer there.

Thanks, Robbie. Katie, could we have the next question? Go ahead, Robbie. Sorry.

Maybe on S.E.T., you talked about all of the segments grew. Maybe could you 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.

Yes. 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 digits or double digits. 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 S.E.T. performing.

Thanks, Robbie. Katie, could we have the next question?

We'll go next to Jayson 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?

Yes. So I'm just wondering, relative to the beginning of the year, your 5% to 6% topline growth hasn't changed. But I'm just wondering, has your view on segment growth changed at all? Meaning, is S.E.T. now a bigger contributor than you thought at the beginning of the year, et cetera.

No, no. We continue to see S.E.T. 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, is no one bigger than the other.

Thanks, Jayson. Katie, could we have the next question, please?

We'll go next to Josh Jennings with TD Cowen.

Hi, 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 good acquisition? Could you integrate that technology into the ROSA Hip application down the line?

All right. 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 the U.S., and that development is in motion. And we also believe that to a certain segment of customers here in the U.S. that want a less expensive, faster, lighter application, surgical AI by OrthoGrid is going to be a good modality. But so far, our expectations have been met with ROSA Hip and navigation in general.

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

Well, I'd like to close the way that I started with, gratitude. I'm very thankful to all the Zimmer Biomet team members for the progress. As I alluded to earlier in the call, this is the 10th quarter in a row where we're growing mid-single digit or above. We're pleased with the quarter, delivering close to 5.6% ex FX revenue, with double-digit EPS. We've proven that we can make commitments and deliver on 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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