Q2 2023 Zimmer Biomet Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the ZMRA Biomet second quarter 2023 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, August 1, 2023.

Following today's presentation, there will be a question and answer session. At this time, I'll participate in Thornalist and Only Mode. If you have a question, please press the star followed by the one on your push button phone. I would now like to turn the conference over to Cari Maddox, Chief Communications and Administration Officer. Please go ahead. Thank you, operator, and good morning, everyone.

Welcome to Zimmer Biomitz, second quarter 2023 earnings conference call. Joining me today are Brian Hansen, our chairman, president and CEO , EVP and CFO Sukhi Upadiai and COO Iván Tornovs.

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 filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements.

Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q2 earnings release, which can be found on our website, Zimmerbiomet.com. With that, I'll turn the call over to Brian . Brian Sammy

All right, thanks, Carrie, and thanks to everyone for joining us on the call this morning. You know, it's always good to be with you, but I would say it's even a little better and certainly more fun when we have great performance in the quarter. So we're pretty happy about the results that we get to discuss today. And I can tell you we're looking forward to the dialogue.

And I'll start things off as we normally do. I'll talk about our Q2 performance and the key drivers inside of the quarter. But I think also really important is to talk about the key drivers that we see continuing to move this business forward. And then Suki will walk us through the financial details of the quarter and importantly discuss how we are again. And then we'll talk about the key drivers that we see continuing to move this business forward.

raising our full year financial guidance. And then of course we'll close things out with the Q&A session. And we look forward to answering your questions and having a dialogue in that session. Okay, to kick things off, I'm just gonna take a step back which I've been doing now for the last handful of quarters. And I think deservedly so. Because I wanna say thank you. I wanna say thank you to each and every one of our team members around the world because it's your hard work.

It's your dedication to getting the job done that is moving this business forward. And I got to tell you that I'm proud to say that you have delivered another very strong quarter while once again making ZB a certified great place to work. And you've done all of this while improving our scores and as a result of that our rankings on the environmental, social and governance front. So I think simply stated we are doing well.

while also doing good. And that means for our team members, our patients, our customers in our communities, and even our planet.

So once again, I want to say thank you to our team for all that you do for ZB and to move our mission forward and most importantly for doing it together as one team. One ZB team.

Now let's talk about the second quarter, and I'm just going to say simply we delivered another strong quarter, again beating our own expectations. And that performance positions us to again raise our financial guidance on both the top and bottom line. And this is in the face of some pretty significant macro factors that are impacting us and the entire market.

You know, ongoing supply challenges are very real, and I'll talk about those in a minute, but also inflationary pressure, a tough labor market, and a geopolitical landscape that is putting pressure on everybody. But against that, I feel very confident about our pipeline, our execution, and the team's demonstrated ability to navigate these headwinds, which gives us confidence.

to increase our financial outlook. Okay with that said let's talk about the key drivers inside of Q2 and there were some positives and there were some negatives. I'll start with the positives and the most important one in my view is that our team's execution remains flawless.

We're seeing significant traction, probably the best we've ever seen with our new product innovation, and that paid dividends in the quarter for sure, but most importantly, is it pays dividends as we move this business forward.

And I would say that procedure recovery continued in the quarter, again showing no meaningful impact from COVID or staffing challenges. And that allowed for a tailwind from increased provider capacity, and that resulted in backlog pull-through in the quarter. In terms of headwinds, I would say that the team is doing a great job.

of managing the supply-constrained environment, but I would say that it is still very clearly a governor to our overall growth in the quarter and it continues to be a distraction for the organization. See, if I combine these things though, all in all, our momentum continues and it continues to grow. And I've said before, my confidence in this business, our confidence in this business, is as high as it's ever been.

And it's high for good reason. If I just look at the knee franchise alone, our innovation strategy is working. We now have four meaningful pillars inside of this business, all of which can drive pricing stability, mixed benefit, and competitive conversions. First let's look at the Rosa Robotic platform combined with our PreSonus Cementless Knee. This is a powerhouse combination that is and will continue.

to accelerate growth. And based on the traction we're seeing so far, we continue to believe that Rosa and Persona cementless together will enhance our robotics and cementless penetration from the current mid-team level to 50% or better, 5-0% or better.

The second pillar that we're focused on is persona revision. This provides meaningful conversion and mixed opportunities inside the revision category, but importantly it also acts as a powerful tip of the spear product for conversions in primary knees. And then third, it's just the overall shift of the ZB Legacy Knee Systems to our now fully rounded out persona portfolio.

And this is a meaningful mixed benefit that we can take advantage of that I would say is somewhat unique to our business. And then fourth, on top of all this, you know, we have the world's first and only smart knee, which is persona IQ. And I know this is still in limited launch, but already it offers surgeons on parallel data access and is attractive to patients.

Those patients who want more direct engagement with their care recovery. And we're taking on a similar approach to our hip portfolio where we continue to launch meaningful innovation again, giving us the opportunity for price stability, mixed benefit, and competitive conversions. And we have four pillars of focus here as well. First, it's Rosa and hip insight. These are technology shifts in robotics and mixed reality that are setting up the ZB hip portfolio

for greater adoption and growth. Second is the Avenir Complete. This is our current flagship product combined with G7, which gives us a very strong position in both the attractive direct anterior and revision sub-markets of hip. And then third, this position will be enhanced with work being done on a triple taper stem.

which will fully round out our direct interior approach portfolio. We believe this new portfolio combined with the G7, which is the most versatile acetabular component available, will be unmatched in the industry. And then fourth, Hammer. Now this is our upcoming full launch of an automated impaction system that builds on a proven need in the market.

and we fully expect that this launch will create surgical efficiencies while bringing personalized precision to each and every patient.

And then finally in set, we are being disciplined and targeting investment in our growth driver categories, upper extremities, sports, and CMFT, and each of these categories continue to perform. And given our momentum in these businesses and continued investment in innovation and dedicated infrastructure, we fully expect the set business to be a mid-single digit grower in a normal fashion.

we've called out that we have 40 planned product launches between this year and the end of 2025, with the majority in 4% plus growth markets. And that's important because these innovations will certainly drive near-term growth, there's no question about that, but also create better sustainability of that growth because of the markets they're in.

And with that, I'll turn the call over to Sukhi for a closer look at Q2 and our latest expectations for the remainder of 2023. Okay, Sukhi. Thanks and good morning everyone. As Brian noted, we had another excellent quarter. Our results were driven by strong end markets as well as strong execution across the entire organization. As a result, we are again increasing our full year financial outlook.

With that, let's turn to our results and updated full year guidance. Unless otherwise noted, my statements will be about the second quarter and how it compares to the same period in 2022, and my commentary will be on a constant currency and adjusted operating basis.

Net sales were 1.870 billion, an increase of 4.9% on a reported basis and an increase of 6%, excluding the impact of foreign currency. Additionally, we had a selling day headwind of less than 50 basis points in the quarter.

Overall, the business continues to benefit from a recovery of elective procedures driven by continued market normalization, including hospital staffing and procedure cancellations returning to pre-COVID levels.

We also benefited from some backlog recapture. While market momentum is strong, we continue to face certain macro challenges, including global supply chain pressures that muted performance across the business.

US growth of 5% continued to outpace our expectations and international growth of 7.2% was driven by strong performance in both EMEA as well as Asia Pacific. All regions benefited from continued recovery of elective procedures, backlog recapture as well as strong commercial execution and new product uptake.

Turning to our business category performance. Global needs grew 10.5% with US growing 9.8% and international growing 11.4%.

The strong performance and ease was driven by the four pillars that Brian mentioned earlier, centering on a very attractive persona portfolio combined with the benefits of our ROSA Robotics Platform.

Global hips grew 4.9% with US hips up 2.7 and international up 7.1%. Both regions posted good growth on the back of new product flow, execution, and market recovery.

Next, the SET category was down 30 basis points year over year. Inside of that, we saw continued strong performance from our three focus areas within the business segment.

As expected, we saw pressure from reimbursement headwinds within the restorative therapies business.

In addition, we experience more acute supply challenges within sports and trauma.

In the backdrop of this, we believe we will move beyond these headwinds, and this segment will rebound in the second half of the year.

Finally, our other category grew 6.5%.

Now moving on to the P&L.

In Q2, we reported GAAP diluted earnings per share of $1 compared to GAAP diluted earnings per share from continuing operations of 73 cents in the prior year.

The increase was driven by higher revenues combined with lower non-operating expenses due to ZIMV investment losses from the prior year that did not repeat, as well as lower spend related to restructuring costs.

These benefits were partially offset by increased investment in R&D and commercial initiatives to drive future growth.

On an adjusted basis, we reported diluted earnings per share of $1.82 or flat to the prior year.

Higher year-over-year revenues and better gross margins were offset by higher R&D expenses, increased investments into commercial infrastructure for new product launches, and higher interest expense.

Our adjusted gross margin was 72%, up 40 basis points from the prior year despite absorbing current year inflationary pressures as well as pressure from prior year that was capitalized and flowing into this year's P&L.

Favorable mix and FX hedge gains also help support the increase in gross margin.

Adjusted operating margin for the second quarter was 27.5%, down 50 basis points from the prior year.

We ended the quarter with cash and cash equivalents of $320 million. Our balance sheet remains strong, providing strategic and financial flexibility for future growth. Moving to our updated financial outlook for 2023. Based on another strong quarter of results, we are again raising our full year 2023 outlook. We are confident that we will continue to grow our top line above market rates and expand operating margin while continuing to reinvest in our business for future growth. We are increasing and narrowing our constant currency revenue growth range to 7% to 7.5% with an expected foreign currency exchange headwind of 50 basis points.

We are also increasing our adjusted EPS guidance range to $7.47 to $7.57. Additionally, due to certain FX-related pressures and higher interest rates, we now expect net interest and other non-operating expenses to be around $200 million for the year.

Our expectation around tax rate and total shares outstanding remain unchanged, and we continue to expect free cash flow to be in the range of 1 to 1.1 billion.

Our Q3 and Q4 revenue cadence expectations are unchanged.

While we expect momentum gained from the first half to flow into the second half of the year, recent and new sanctions on Russia may mute growth. And regarding selling day impact, we continue to expect Q3 to have a selling day headwind of about 150 basis points, while Q4 will have about 100 basis point tailwind. Overall, the net day rate impact for the full year is not meaningful. From a margin perspective, we expect Q3 to be our low watermark for the year, from both a gross margin and operating margin standpoint. While gross margin will have less variability from quarter to quarter.

We expect Q3 operating margin to step down sequentially between 150 and 200 basis points due to the normal seasonality of our business. We expect Q4 to step up significantly on a sequential basis, delivering our highest operating margin for the year.

Importantly, we remain committed to investing for future growth while delivering meaningful full-year margin expansion in 2023.

We're really pleased with how our team is navigating a challenging environment.

In summary, we delivered another quarter of excellent top line results, beating our expectations while managing very real supply chain challenges.

We are building on our early momentum through continued execution and are again able to increase our full year guidance.

We are also reiterating our confidence and expectation to be a 4% plus or even mid-single-digit top-line grower in a normalized market.

while delivering strong earnings. In short, our business has never been stronger.

stronger earnings. In short, our business has never been stronger. With that, I'll turn the call back over to Kerry.

Thanks Suki. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and one follow up so that 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 Travis Steed with Bank of America.

Hi, good morning, Brian and Suki. Nice quarter. I guess I'd start out with looking at the hips and knees in the quarter. I would think that these, you know, 2X the growth rate of hips this quarter backlog would be similar there. Is the elevated knee growth mostly the mix shift from some Elis and Rosa coming through?

and curious how much supply is limiting growth and hips and knees here and what you're assuming about that improving in the back half. Thanks Travis. What I think maybe I'll do because obviously Yvonne's here with us in as close to the action as any of us is so maybe I'll pass it to him to answer the question.

Thank you and good morning, Travis. I will say that the growth in these is mainly innovation. We continue to see great momentum with ROSA penetration, so a pretty dramatic increase in penetration in the US and core markets or US. The launch of Persona OSCIOTY or Cementes launch.

He's gaining great traction here in the US. In the prepared remarks, Brian mentioned how we plan to go from 15% to 1.5%.

to 5-0. I won't disclose where we ended Q2, but it was a significant uptake in that side as well. We did also see great momentum in the ASC. We continue to grow here in the US double digit in the ASC space. And yes, there was some backlog in key markets around the world.

We saw better backlog consumption in EMEA than here in the US, but nonetheless backlog loss was part of the performance.

And to the latter part of your question, certainly supply was a governor. I do believe, we do believe that in a normal environment with better supply, already very compelling growth rate could have been even higher. But all summarized backlog innovation and great commercial execution were the key drivers behind any performance.

Great, thanks for that. I guess looking forward to the sustainability of this kind of the plus and the four plus, and I think I heard the comment even mid-single digit growth, it sounds like even with some tougher comps, you're still confident in that, you know, seeing the plus and the four plus and then you know, assume that, you know, price is better, you got the mix-up.

Backlog is probably still laughing through 2024. Just kind of love to hear your confidence and kind of seeing the upside to that four plus.

Yeah, hey Travis, this is Suki. So, yeah, very perceptive on our comments. Yeah, you know, we've got confidence in our business in a normalized environment that we're going to be a four plus or, as I said, a mid single digit grower. You know, there's a few things. First, I focus on qualitatively, execution is incredibly strong.

Right now we've got, if you think about our WAMGR, weighted average market growth, continues to improve. That's been steadily improving, one by investing in R&D organically in higher growth submarkets, even within recon, but then in sports, extremity and trauma.

And then if you look at the M&A that we've been doing, it's been in higher growth markets and in sports, upper extremities as well as as well as CMFT. So overall, our weighted average market growth has been improving. Next, it's really around our innovation and what that innovation brings in terms of the ability to compete in the market.

what it brings relative to share of wallet as well as mix is all very positive as well. And then the last is our performance relative to market. I think we've demonstrated for a number of quarters now that we can perform at or better than market on a consistent basis. So really execution is the primary driver, why we've got confidence behind that. Secondly, you're also seeing some improving market dynamics.

One, we think that overall the patient dynamics are changing. You're seeing a lowering of the average age of our patients. That's expanding our overall market. Two, we think that they're getting more confident in the outcomes of recon procedures and sports procedures. Again, because the technology, the innovation is improving, we're bringing real value to the marketplace.

And I think the last thing is really the convenience and the comfort with the ASC setting is also helping to accelerate the overmarket. So the market dynamics are still early and preliminary, but the execution is very strong and very real. So we've got a lot of confidence qualitatively. And I think if you look at the back half of our guidance, the implied growth rate of being roughly about 5%, I think that's another proof point quantitatively that gives us that confidence.

with Truist Securities. Hi, thanks for taking the questions. Let me just looking at the margins. I'm trying to calibrate, you know, if we're kind of back to normalized levels, sustainably, what your normalized margin and margin improvement prospects are. You know, you did about 200 basis points of your operating leverage in the first quarter.

and you grew double digits on the top line. Now you're at about 100 basis points roughly in the back half and that's like you said a mid single digit implied growth rate on the top line. So can we assume like that those are basically the right level of operating leverage to correlate to.

you know, call it, you know, upper mid single digits, you're getting north of 100 basis points, something more on the lower mid single digits or upper low single digits, your 50 basis points plus operating leverage.

Yeah, so, so, first of all, thanks for the question, rich, you know, I'll just step back a little bit and just say, you know, if you go back to 2022. Even in a very challenging market with a lot of inflationary pressure, supply chain disruption, et cetera, we were able to grow our operating margins. As you look at 2023, you take our implied guidance.

it would suggest we're going to grow operating margins by almost another hundred basis points at the midpoint. So, I feel really good about what the company's been doing and inside of that, we've been doing that with very strong, as you see, mid single digit growth, very good gross margin performance. I'll break that down in just a moment. Offsetting continued challenges with inflationary pressures, but also inflating.

So very strong profile, good top line growth, good gross margin, offsetting the challenges and continuing to invest against the business.

So I do think our ability to sustain these very high, very attractive margins this year into the future is absolutely table stakes, but I also think that we're going to be in a position going forward in a normalized market where we're going to be able to expand margins from here.

So that's how we think about things. I won't try and break down between what level of revenue growth, how much margin expansion. There are a lot of factors that play into that. The big picture takeaway is we're at a really good level now. We're going to sustain that, if not grow that into 24 and beyond.

Okay, thanks. And just maybe feeding that into M&A, as we think about your M&A and Tuck-In strategy, how should we think of the prioritization of top line from Tuck-In M&A versus margin and earnings dilution trade-off? Let me know in the comments.

Yeah, so, you know, we kind of how to work around this as a leadership team and clearly what you see by looking at other companies in our sector is that valuations are correlated at a very high level to revenue growth. So.

understanding the ability to get our revenue growth at a higher rate. The mid-single digit is a great accomplishment given where the company was just three to five short years ago. And we're happy about the progress we made but we're not satisfied. And we believe that M&A investing into faster growth markets.

Absolutely is the right thing to do and ultimately will improve our overall weighted average market growth and the overall growth rate for the company. And then once you get there, you get natural leverage, the P&L starts to flow through and over time you start to get to a profile where you get very strong earnings growth well ahead of revenue growth. And so that's the profile that we're going for long term.

So that's how we think about M&A. The priority is going to be about accelerating the overall company's growth.

Thanks and congrats on the court. Thanks, Rich. Thanks so much. Katie, can we go to the next question?

We'll go next to Pito Chickering with Deutsche Bank.

Hey, good morning. I think I'm just taking my questions. Can we touch more into the SUT? You talked about strengths in three focus areas, but also supply challenges. What were those issues? Are they fixed at this point? And how should we be modeling the SUT in the back half of the year? And if the supply challenges are fixed, should we think about bolus in the third quarter?

Yeah, so, you know, a couple of things that inside the second quarter on SCT, one, we continue to work through some of the reimbursement changes in our restorative therapies business that we talked about a year ago. We believe we've now sunsetted those, so those shouldn't be a challenge as we move into Q3 and Q4 the rest of the year.

However, we did see some pretty acute supply issues, especially in our sports business, until electric-stent trauma, that muted growth. But underneath that are priority areas of sports, upper extremities, and CMFT all performed incredibly well. So we're happy with the continued progress in momentum.

we're making in those businesses. We do expect an inflection in the back half of the year for those for the SCT category as a whole to rebound. It's likely going to be stronger in the fourth quarter as we continue to work through the fluid situation of supply in the third quarter.

Okay, great. And then, look at the script. You talked about Russia muting growth. Can you walk us through how Russia can impact growth at this point and quantify the revenues and raw materials exposed to Russia?

So overall Russia is less than a percent of total sales on a full year basis. We became aware towards the end of the second quarter that new and unexpected sanctions were being placed on certain medical device products.

our products fell into that category. So we basically have to go back and reapply for licensing against all of our products. We don't think that that's going to be a governor in perpetuity, but at least for the third quarter it's going to create a bit of a headwind, potentially a little bit into Q4, worst case.

We think that that had wins roughly about 50 basis points in the back half of the year. And again, most of that will be felt in the third quarter. From a raw materials exposure, I think the biggest area and we've talked about this at length is.

Our titanium supplies coming out of Russia have been relatively stable. That's a good sign. But we also took the additional measure at the end of 2022 to create some redundancy and to find alternate suppliers, multiple suppliers outside of Russia. So we feel good about our titanium supplies.

Our titanium supplies coming out of Russia have been relatively stable. That's a good sign. But we also took the additional measure at the end of 2022 to create some redundancy and to find alternate suppliers, multiple suppliers outside of Russia. So we feel good about our titanium supplies. Great, thanks. Thanks, Peter.

Yeah, Katie, can we go to the next question in the queue? We'll go next to Jeff Johnson with Baird. Thank you. Good morning, guys. Congrats on the quarter. Kind of, I guess, we're kicking through all the segments here. So maybe if we just look at the other segment, that 6% growth, it was, you know, at least a nice step up from what we've seen kind of on a trailing 12-month basis. Maybe any insights there what drove that and just kind of how it's been going on.

Hey, Jeff, I'll take that again. I think the biggest driver was phone cement. Not surprising when you see the, the recon growth numbers in the second quarter to see a very good other performance, especially from bones. We also saw some good performance outside in surgical as well, which also creeped up.

You know, your last question inside of that was around Rosa placements versus outright sales. And consistent with prior commentary, we're seeing the majority of our Rosa placements or installments, I should say, being done through the placement strategy versus sales. So that trend continues.

Great, and then maybe just to follow up just on backlog. I know you don't guide on backlog and any high level comments though on how you're thinking about that backlog clearing in EMEA and what you saw in the US and just kind of comfort with that backlog still continuing to provide some tailwinds maybe over the coming year or two, thanks.

Yeah, definitely felt it in the second quarter as we talked about that helps offset some of the supply challenges that we had. We expect backlog to continue to contribute through the rest of this year. You know, it's always difficult to determine exactly how much was in any given quarter and to predict how much will come through. It's a little bit of a morphous, but we know that it's there and we're high confidence that it's gonna we're gonna.

Katie, can we go to the next question in the queue?

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

Good morning. Thanks for taking the question. Congrats on a nice quarter here. I'll ask a couple on the pipeline. Persona IQ, do you guys have what you need now for a full launch from a clinical data standpoint? And if so, what data are you going to promote and file for the label? And I had one follow up.

Absolutely, Larry, I'll take that one. First and foremost, we remain on track. We saw the limited market release. We've been saying all along that by January Q1 of 2024, we'll be ready for a full launch. And I will say that we're almost there in getting all the data. We're approaching a billion data points from multiple patients.

thousands of implants by now. And really we're answering three questions. Number one is to your point, what is the value proposition? Can we demonstrate a reduction in the length of the episode of Care? Can we bring objectivity to a range of motion matrix?

Question number two in the limited market release is how do we make the whole thing seamless? This is new to the world technology. It's got a home-based station, as you know. It involves the patient, it involves the surgeon, the caregiver, so wanna make sure that it's a best in-class experience and there are some things that we're working around. And then the third question, and I know this is near and dear to you, is who's gonna pay for the technology? To that end, we got the end tap kicking in at the beginning of October . You'll be pleased to know that we follow up with your question or antipity. Transitional pass through. We got a deadline of August 23rd to submit, and within the final stages, and evaluating what the submission could look like.

We're evaluating commercial pay year strategy as part of this limited market release. So we continue to think about the pay year as well. So with all of that said, the what, the how and the who will pay, I think we're gonna be in a good position to start to see a full market release by a January , if not late, Q1 2024.

Thanks so much for that comprehensive answer. Maybe another one for you on the robot for the shoulder application for the robot. I think you just confirm that you still expect to be first to market. And what still needs to be done and if you'll give any more color on the timeline, that would be great. Thanks.

capital letters that would be first to market in shoulder robotics. And beyond the speed to market, what I like is what the actual platform offers. Faster surgeries, more accurate outcomes, shorter recovery. So I love what we've seen. We've done our final validation labs with customers, both friends and family, customers, surgeons.

and also competitive surgeons, and the feedback has been outstanding. Beyond the platform dynamics that I mentioned around shorter recovery, faster surgery, I just love the integration that Rosa Sholder will have with the rest of the CVS ecosystem.

competitive surgeons and the feedback has been outstanding. Beyond the platform dynamics that I mentioned around shorter recovery, faster surgery, I just love the integration that Rosa Sholder will have with the rest of the CBH ecosystem. So more on that soon.

Thank you. Thanks so much, Larry. We'll go next to Ryan Zimmerman with BTIG. Hey, thanks for taking the questions. We all heard UnitedHealthcare's comments this quarter, it was evident in the results, but it was specific to Recon and Medicare.

I'm just wondering if you kind of parse out the procedure environment within SET. It's hard to see, you know, given some of the supply chain dynamics. I'm just wondering if you can speak to that environment relative to recon and your expectations for durability of, you know, its robustness, if you will, through the remainder of this year.

similar to the recon environment. Thank you Ryan, I'll take that one as well. So obviously it varies from region to region. What I will tell you here in the US, we saw greater backlog consumption coming from knees and hips.

It was actually quite the opposite in EMEA. When it comes to SEP, a lot of those cases here in the U.S. are done in an ASC environment. A lot of those cases are commercial payers, and it's been pretty consistent. But again, it varies quarter to quarter, geography to geography. We do believe that the backlog is going to be here for a while.

and I will see fluctuation given ASC, non-ASC in the US, and then again different variables outside of the US.

I think the key takeaway is that you just don't see as much impact on the set business as you do the recon business when you think about backlog.

Yeah, so, first of all, V. V. P. is is not a material driver for us at all in 2023. We, we sort of turned the corner on that between the end of 21 and 2022. So, we actually see China as a growth growth driver for us all be at a lower level. But we do believe that that that market has some very strong growth for us. I'd say free V. V. P. that market was growing in the low double digit ranges and we'd be surprised if we didn't return to that level. If not better.

Thanks, Ryan. Thanks. Katie, can we go to the next question in the queue? We'll go next to Mike Matzen with Neuteman Company. Yeah, good morning. Thanks for taking my questions. Back to the set business. So Brian called out the subcategory there that seemed to be the area of focus. But the things I didn't hear him mention.

other comments? Yeah, sure. I can take that as well. So I think sookie alluded to the trauma headwinds that we had in the quarter. We had some supply challenges. And obviously you got the comp in China. There's a year ago. Here in the US, there were some contracts that we lost about a year ago. We were going to be a university now, to those.

There were some product launches that were delayed at 22 and 23 that are coming out now. So I would say that moving forward, given the better coms of the U.S. and the contract capabilities now in the U.S., along with innovation, the trauma business is going to be in a better position. Foot & Ankle is being one of the businesses, frankly, within set that we didn't prioritize.

product launches that are going to make a difference in the space. So, all in all, I do think you'll see better performance, but that trauma for an ankle are not the key priorities within within set. Yeah, and it's clear, it doesn't mean that we don't see foot and ankle trauma and restorative therapies as potentially attractive markets. It just we want to be disciplined in the way that we're going to invest.

And if you look at the strap plans that we have for upper extremity, CMFD and sports, they're very attractive. So we're gonna focus our investment there. Now at the end of the day, the individual's running, put an ankle, trauma, or sort of therapies, put a plan in place that's attractive, they could become growth drivers. But today, we wanna differentiate those growth drivers to non-growth drivers, nothing against any of the categories. It's just the plan right now.

July of 2023, so you should expect that business to do dramatically better now.

All right, got it. And then just in terms of the supply chain issues, I don't know if it's possible, but is there any way you could quantify the impact either to your revenue growth and or your margin in the quarter? I think we'll try to stay away from quantifying. It's pretty challenging, actually, because when you talk about supply issues, supply

You always get feedback from the field on what could have happened if you had more supply and you've got to make sure that you're kind of sifting through what's real, what's not. But it's back to, it is a governor for us right now and that's probably continue to say it. What's important though is it's a macro challenge. There's not a company in orthopedics right now, there's not being impacted by supply challenges. So it's impacting everyone.

WOS just did a survey actually with surgeons asking this question and across the board, regardless of who they were using, they were experiencing supply challenges.

really important thing for us is that it's built into the guidance that Suki just provided. So that's key. But when I think about that growth driver, the impact it's having on our ability to grow, I think it's important to look at that. That means it's getting in the way of our team using new innovation to drive mixed benefit and competitive conversions.

We truly do believe if it was not a factor, we'd be getting more mixed benefit, we'd be getting more competitive conversions because the demand is there. So it's frustrating. We have great momentum in the business, great innovation, and supply is in the way of driving that growth. And we believe it's going to continue to be there for a period of time. Thanks Mike.

Okay, yeah Katie can we go to the next question with you? We'll go next to Robbie Marcus with JP Morgan. Oh Great, thanks for taking the questions and congrats on a good quarter.

Maybe I could start on margins. You know, if I take the third quarter and fourth quarter commentary that you provided, I have a little trouble getting to the high end of the range, so maybe just speak to some of the pluses and minuses there and what you need to get to the top of the range. And then the second question I'll just throw in as well.

You have a big gross margin benefit from currency in 23. There's a pretty wide range of operating margin expansion next year or contraction on the street. Any early thoughts into how we should be thinking about your ability to grow operating margins next year? Thanks a lot.

Yeah, sure, Robbie, great to talk to you. So one of the biggest drivers in the overall profile in the back half of the year, by the way, we do believe operating margin in the back half will be modestly better than what you saw in the first half. It's largely going to be driven by better revenue.

mostly coming from the fourth quarter. Fourth quarter is always our strongest from a dollar perspective from a sales view. The second thing is you're likely gonna see a step down in overall operating expenses from the second quarter. That was sort of our high watermark as we were dealing with a number of inflationary pressures, but quite frankly also investing.

pretty handsomely against things like R&D, which was up like 19% in the quarter, investing against commercial infrastructure in places like sports and upper extremities to continue to specialize that sales force as well as ASCs. So the two common combined things of higher revenue, lower OPEX as we move into the back end of the year is what's going to drive that.

we saw is that about 50 basis points on the full year that won't repeat into next year, that will be a headwind. But we're still confident that we can grow operating margins into 2024. It may not be at the same level of 100 basis points that you're seeing this year, but we do believe, as I said earlier, that we can take this sort of high-water mark that we are.

headwind, but we're seeing really great performance. It's not the headwind that it used to be for the company. And what's even more exciting about that is we're truly seeing very strong mixed benefit inside the company, and that's coming from our new products and the innovation into the marketplace, which is helping to offset that price erosion. So we think that that can be a tailwind for us.

Secondly, we continue to work aggressively on our site optimization in manufacturing and supply chain, which we think can generate some tailwind in cost of goods as we move forward. And then as you move through the rest of the P&L into SG&A, there's still ample opportunity with our global business services agenda that we just started a few short years ago.

We've got a completely different culture and mentality when we think about go to market and market profitability, where at one time it was, you know, revenue growth at all costs, and now it's all about revenue growth at the right profitability level and with earnings growing faster. And so there's just those cultural shifts and that discipline is also driving some really nice margins.

this high water mark 2023 and grow it into 2024.

into 2023 and grow it into 2024. Great, thanks a lot.

Thanks, Robby. Katie, can we go to the next question in the queue?

We'll go next to Rick Wise with STIFL.

Good morning. Maybe starting off with a couple of the key new product launches that you highlighted. Brian you said as you were talking about the four pillars of knee growth.

that ROSA plus the cementless knee launch were, that was your first comment, your first focus area, taking cementless from mid-teens to 50% over time. So related to that point.

Where are you in the rollout? When or are you even at full launch now or what's required? And how do we think about the acceleration of that launch over the next year or two?

Thank you. Yeah, thanks. Thanks, Rick. What I'd say first is just to make sure that I clarify. I'm saying that both ROSA and Cementless will move from the mid-teens to 50% plus, 50% plus. So not just Cementless. And they kind of do play off of each other. They benefit each other as you're trying to get.

I think as we exit 2023 and early 2024, we'll have as much supply as we need to meaningfully drive the penetration of cementless with the GOLO going from 15 to 50%. I won't say when 50% is going to happen.

But that's definitely the North Star. And with ROSA it's the same situation. We launched two platforms in me. We are about to launch ROSA partial this summer. A new and improved version of that. We're working actively on next generation total knee, which will be a meaningful launch going into 24. We got all kinds of CBH add-ons.

data technology solutions that are going to augment penetration there. But I would say net-net, both for the ROSAS and MENDLESS, and some of the peripheral launches around those two components, we are in the early innings.

Great. And Brian , if I could, for a second question, I would like to hear from you, your personal priorities. It seems like execution is going well. The, the, Yvonne's doing a great job and the team's doing a great job with the pipeline and execution and driving the business forward. Suki is taking the financial organization in a positive direction.

What are your priorities now as you look ahead to the next year or two? Are you focused on efficiency, portfolio? What are you thinking about and that we should hear about and ask about today? Thank you.

Thanks, Rick. I mean, I'll kind of tongue-in-cheek say we're thinking about everything, but obviously that doesn't get you anywhere if you don't focus. And we've been very clear.

from the very beginning that we had three phases of the transformation of this company. Phase one is always going to be alive, but we're in great shape. Phase two is kind of what you just said. We have a great innovation pipeline, we're executing from an organic standpoint, we feel very confident in that phase, and that works squarely in phase three as we've been saying. And the big focus for us is that portfolio transformation.

market growth forward. I can tell you we've already made great progress in the focus area here. We've already moved it north, but with the balance sheet strength we expect it to continue to move in the right direction. So that's an area of focus not just for me but for this entire team.

introductions and helping to offset even an improved price erosion profile.

[music].

Yeah.