Zimmer Biomet Q2 2024 Earnings Call Transcript

Presentation

[Operator]

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 7, 2024. [Operator Instructions]

I would now like to turn the conference over to Zach Weiner, Director of Investor Relations. Please go ahead.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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 CFO and EVP, Finance, Operations, and Supply Chain, Suky 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, zimmerbiomet.com.

With that, I'll turn the call over to Ivan. Ivan?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Thank you, Zach. 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 Biomet 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 Biomet, 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 Biomet 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 and then Suky 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 Biomet 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, we'll 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 Zimmer Biomet 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 US. It's worth noting that May and June here in the US were better than April. And in July, the US 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, outside the US business, has delivered above expectations. We saw a strong demand in the key markets across both Recon and the S.E.T. categories. So overall, very diversified, solid performance coming out of these markets. I love the fact that in Q2, in our second quarter, we continued 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 that 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 knees and hips company in key geographies, where we have a really high market share, as an example, the US or key countries of Europe and Asia Pacific. One example of this diversification journey has been S.E.T. We've been committing to growing S.E.T. at least mid-single digit 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 S.E.T. One area that I'll tell you we've made significant strides is within our hips portfolio. We did lose some market share in hips in the US and OUS markets over the last three years to five years.

And as I said over and over, this was due to lacking three key product items, direct anterior stems -- what we call triple taper stems, elegant navigation, and surgical impactors. As we sit here today, we have remediated those gaps. We have 510(k) approval for Z1 or triple taper stem. We are regaining market share already with HAMMR, 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 510(K) FDA-cleared 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 years or five years.

Moving from hips, we have developed and we are today the first and only robotic-assisted shoulder replacement platform in the world. The feedback on the cases we've done with ROSA Shoulder 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 Shoulder to be a very meaningful growth driver for Zimmer Biomet. We recently announced the partnership with THINK Surgical. This is going to provide our surgeon customers optionality across the robotic landscape. We have conducted extensive training with one voice on customer and the feedback on this partnership with THINK remains superb.

With this partnership, Zimmer Biomet is the only orthopedic company in the world that will offer both a handheld CT scan-based system in the TMINI, exclusive for Zimmer Biomet 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 quarters to eight quarters. From an earnings standpoint, we generated $2.01 of adjusted earnings per share in the quarter or a growth of 10%. This is in line with our long-range plan targets I 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 Biomet meeting around the world. The three priorities of 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 Biomet. I'm proud to share that Zimmer Biomet was recently named one of America's Best Midsize Companies to work for by TIME magazine. This reflects the strength in team member satisfaction and engagement, our 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 1.5 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, point in case, the super performance in S.E.T. But today, we're also thinking diversification from a geographic mix standpoint. We want to continue to invest in key markets outside of the US 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 our 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 Biomet mission of alleviating pain and improving the quality of life for people around the world.

With that, I'll turn the call over to Suky. Thank you.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

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 80 basis points, driven by gains in international that were partially offset by modest declines in the US. Our US business grew 3.5% and international grew 8.5%. Growth in the US 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 US growing 0.8% and international growing 11.5%. US 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 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 US 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 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 US 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 at another positive proof point through our LRP.

With that, I'll turn the call back over to Zach.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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?

Questions and Answers

[Operator]

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

[David Roman, Analyst at The Goldman Sachs Group]

Thank you, and good morning, everybody. I wanted just to start with the US 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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Thank you, David. Good morning. Maybe quickly here, 20 seconds big picture, and then I'll talk about the US. So big picture. It was a good quarter. We here at Zimmer Biomet deliver 5.6% ex FX. 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. S.E.T. performed 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 within S.E.T., 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 US 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 the summary to highlight the fact that unlike five years ago, we're not just a US knee-centric type of company. That said, relative to knees and the US 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 US, and these are solvable reasons. The first one is, we had a large amount of high volume surgeons -- Zimmer Biomet 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 our knee platforms, what we call limb salvage, which is part of knee revision cases. These are high ASP cases. And candidly, this didn't help the quarter. And then the third reason on why knees in the US was softer than expected is comps. We delivered knee growth of 10% -- almost 10%, 9.8% to be exact in Q2 of 2023, which was close to mid-single digit, and the US grew 5%. So comps didn't help. So in the background of those surgeons being out, supply constraints, the comps 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 US Recon performance is very strong. On the second part of your question, David, cementless continues to track very nicely. Candidly, I hope we can get more sets out. The adoption rate is very high. We are converting accounts and we hope to have cementless not just in the US, but outside of the US very soon. So that's the summary of what's happening here in the US.

[David Roman, Analyst at The Goldman Sachs Group]

Thank you for all the detail. It's super helpful. Maybe, Suky, 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?

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

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 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.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

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

[Matt Taylor, Analyst at Jefferies Financial Group]

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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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 US. 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 US and outside of the US. Outside of the US, 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.

[Matt Taylor, Analyst at Jefferies Financial Group]

Great. And just one clarification. So the issues you mentioned in the US, 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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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 yeah, market is healthy.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

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

[Drew Ranieri, Analyst at Morgan Stanley]

Hi Ivan and Suky, thanks for taking the questions. Maybe, Suky, 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 guide for the year, it still implies a significant step-up in the back half versus the first half. I guess, some of that would be growth in the 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 and I have to imagine you're going to be spending on FX, but just -- or 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?

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

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 happened 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 quarter, fourth quarter as well. So that's a pretty big driver of the overall free 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 Ivan talked about, we're actually stepping up our instrument capex around OsseoTi. 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. And so, we feel really good about that and we're actually putting more dollars against that. But outside of that, I think what you're seeing also is that 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.

[Drew Ranieri, Analyst at Morgan Stanley]

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.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Thank you, Drew. Very excited. So one word is optionality. Now Zimmer Biomet is the only company in the world with three different forms of navigation. With ROSA Hip, you got anterior today, robotic navigation, at some point soon 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 Biomet to regain some of those 200 basis points to 300 basis points of market share that we lost over the years.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

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

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

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.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

Hey, 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 B-15, 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 digit in the US, when it comes to enabling technologies, we grew double digit in Q1 and we don't expect that to slow down, and that's pull-through for implants.

[Joanne Wuensch, Analyst at Smith Barney Citigroup]

Perfect. Thank you so much.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Thank you, Joanne.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

Thanks, Joanne. Can we have the next question?

[Operator]

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

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Good morning. Thanks for taking the question. One for Ivan and one for Suky. I'll try to ask them both upfront. So Ivan, I'd love to hear an update on the status of Persona IQ, the launch and the short -- have you launched the short stem extension and how that could help and the TPT, we saw you applied for that. Just confident you'll get it and what that could mean for adoption of?

Just as my follow-up for Ivan on the gross margin here -- I mean, I'm sorry, for Suky. The gross margin was a little lighter than expected in Q2. What to assume 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, Suky, if I heard incorrectly your comments earlier. But thanks for taking the questions.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Hey, 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 what not. 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 US. 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 TPT didn't make sense.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

Yeah. 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. Just 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 international sales, which have a lower gross margin than the US. So it's really mix 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 mix component where the US was just much stronger from a growth perspective than the US for all the reasons that Ivan 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 I'm sorry for all the detail there, but I wanted to get it all out in sort of one compact commentary.

[Larry Biegelsen, Analyst at Wells Fargo & Company]

Thank you.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

We'll go next to Ryan Zimmerman with BTIG.

[Ryan Zimmerman, Analyst at BTIG Research]

Good morning. Thanks for taking our questions. I want to ask -- I'll ask both questions upfront. The first one I want to ask is around ROSA versus TMINI. And when you announced that transaction or you announced that partnership, I think there was some fear that TMINI could replace ROSA, at least in terms of how the stock reacted. And so, Ivan, if you could kind of talk about kind of how you think about adoption of those two options over time, where TMINI fits in terms of either setting of care or utilization? And does that kind of reflect the proportion of knees and hips that are done in an ASC versus hospital? And should we think of it that way?

And then my second question is just a follow-up to Larry's question on margins for Suky. Price was positive this quarter. But you did call higher manufacturing costs. And so, when do you turn the corner on higher manufacturing costs? Is that sometime in 2025 that we see that improve? And how durable is your pricing benefits? Thanks for taking the questions.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Hey, 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 US 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 US or capital sales for ROSA 16% in Q2. Overall, it was double digit globally. ROSA today is already outside of the US, 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, is one of the most meaningful ones. And as we the double penetration, you should assume that our knee and hip number and shoulder later in the year is going to continue to grow.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

Hey, Ryan, Suky. 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 to slightly up in the second quarter, and the US 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 in 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 give 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 '25, but rather, I'll refer back to our LRP in 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. All right. I feel good about the progress...

[Ryan Zimmerman, Analyst at BTIG Research]

Thank you, both.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

Yeah. 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.

[Ryan Zimmerman, Analyst at BTIG Research]

Thank you.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

We'll go next to Robbie Marcus with JPMorgan.

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Great. Good morning. Thanks for taking the questions. Two for me. First, outside the US, hip and knee 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? Is it different Europe versus Asia Pac? And did you see the same headwinds that you saw in the US with vacation days or supply constraints there?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Yeah. I'll take that, Robbie. Good talking to you here. So the volumes outside the US remain very strong, in particular in Europe, and within Europe, in the UK, 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 US 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 US. 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.

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Great. Maybe on...

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Do I get a follow-up?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Great.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

Go ahead with your follow-up.

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

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.

[Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain at Zimmer Biomet]

Yeah.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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 S.E.T. performing.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Robbie Marcus, Analyst at JPMorgan Chase & Co.]

Appreciate it. Thanks a lot.

[Operator]

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

[Jayson Bedford, Analyst at 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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Can you repeat the question?

[Jayson Bedford, Analyst at Raymond James]

Yeah. So I'm just wondering, relative to the beginning of the year, your 5% to 6% top line growth hasn't changed. But I'm just wondering, has the -- 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.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

No. We continue to S.E.T. and Recon performing the way that we anticipated early in the year. So again, some timing in Q2 with US Recon. But as we get into the second half, the expectation remains the same, is no one bigger than the other.

[Jayson Bedford, Analyst at Raymond James]

Okay. Fair enough. And just as a quick follow-up, Ivan, international was strong. You talked earlier about -- 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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

Yeah. Thank you. I would call it a more focused strategy. 15 countries today account for 93%, 95% of the overall market potential. In the past, we've been candidly all over the place. In the last two years, call it, 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 is being reallocated to those geographies. Our 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 US.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Operator]

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

[Josh Jennings, Analyst at 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?

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

All right.

[Josh Jennings, Analyst at TD Cowen]

Thanks for taking the questions.

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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 the US, and that development is in motion. And we also believe that to a certain segment of customers here in the US 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.

[Josh Jennings, Analyst at TD Cowen]

Thanks a lot.

[Zach Weiner, Director, Investor Relations at Zimmer Biomet]

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

[Ivan Tornos, Director, President & Chief Executive Officer at Zimmer Biomet]

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-point -- or actually 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.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Zach Weiner, Director, Investor Relations
• Ivan Tornos, Director, President & Chief Executive Officer
• Suketu Upadhyay, Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain

Analysts

• David Roman, The Goldman Sachs Group, Inc.
• Matt Taylor, Jefferies Financial Group Inc.
• Drew Ranieri, Morgan Stanley
• Joanne Wuensch, Smith Barney Citigroup
• Larry Biegelsen, Wells Fargo & Company
• Ryan Zimmerman, BTIG Research
• Robbie Marcus, JPMorgan Chase & Co.
• Jayson Bedford, Raymond James
• Josh Jennings, TD Cowen