Q2 2024 Zimmer Biomet Holdings Inc Earnings Call

Speaker Change: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet second quarter 2024 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero.

Speaker Change: As a reminder, this conference...

Speaker Change: Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's second quarter 2024 earnings conference call.

Speaker Change: Joining me on today's call are Ivan Tornos, our President and CEO , and CFO and EVP, Finance, Operations and Supply Chain, Suketu Upadhyay.

Speaker Change: Some of which are forward-looking non-GAAP financial measures.

Speaker Change: 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?

Yvonne Tornos: Thank you, Zach, and thank you, everyone, for joining today's call. Good morning. I would like to start the way that I usually do, by taking a quick moment to show my sincere gratitude to the north of 18,000 Zimmer Biomed team members across the world

Ivan: who each and every day go above and beyond in delivering on our mission, elevating 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.

Speaker Change: Recall those commitments were driving revenue growth at least at mid-single-digit growth rates.

Speaker Change: The third thing in the agenda, we'll close with our strategic priorities, those being people and culture, operational excellence, and innovation and diversification.

Zimmerbaum: The second quarter of 2024 now marks the tenth consecutive quarter in which Zimmer Biomet has grown mid-single-digit or above.

Zimmerbaum: 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.

Zimmerbaum: It's worth noting that May and June here in the U.S. were better than April . And in July , the U.S. Recon business actually delivered mid-single-digit growth.

Zimmerbaum: So chopping is 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

Speaker Change: Our OUS international business, after the US business, has delivered above expectations. We saw a strong demand in the key markets across both Recon and the SED categories. So overall, very diversified, solid performance coming out of these markets.

Speaker Change: I love the fact that in Q2, in our second quarter, we continue to deliver excellent performance in our other category. This category is primarily focused on enabling technologies, primarily ROSA.

Speaker Change: We saw a strong demand for ROSA, growing double-digit in the business, and we also saw a strong demand in enabling technologies and navigation systems.

Speaker Change: One example of this diversification journey has been SET. We've been committing to grow in SET at least mid-single digit.

Speaker Change: So nice growth in OTHER, nice growth in INTERNATIONAL, and nice growth in SET.

Speaker Change: One area that I'll tell you we've made significant strides is within our HIPPS portfolio.

Speaker Change: And as I said over and over, this was due to lacking three key product items. Direct interior stems, what we call triple tapered stems.

Speaker Change: As we see here today, we have remediated those gaps. We have 510K approval for Z1 or triple tapered stem.

Speaker Change: We are regaining markets here already with HEMR, or surgical impactor, and today we have the most comprehensive navigation in hip arthroplasty.

Speaker Change: So, we have the most comprehensive suite of solutions in navigation, in direct anterior stems, and in surgical impactors, not to mention...

Speaker Change: Having the best core implant technology with products like G7 and Avenir Complete. So the expectation is to grow again above market when it comes to hips and regain some of the market share that we lost over the last three to five years.

Speaker Change: Moving from HIPPS, we have developed and we are today the first and only robotic assisted shoulder replacement platform in the world.

Speaker Change: We expect to see an acceleration of those cases, and in 2025, we expect Rosasolder to be a very meaningful growth driver for Zimmer Biomet.

Speaker Change: 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. We've done voice on customer and the feedback on this partnership with Think remains superb.

Speaker Change: With this partnership, Zimmer Biomet is the only orthopedic company in the world that will offer both a hand-held

Speaker Change: CT scan base system in the T-mini.

Speaker Change: Exclusive for Zimmer Biomet Platform, as well as a simplified CT scanless robotic system in our current form factor of ROSA for total knee arthroplasty.

Speaker Change: We're excited about the optionality, and we're also excited about the fact that we continue to innovate at a very fast pace when it comes to ROSA. And we're expecting to launch at least three new ROSA modalities in the next three to eight quarters.

Speaker Change: 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.

Speaker Change: As I said in my opening, people and culture continues to be a key competitive advantage for Zimmer Biomet.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: We want to continue to invest in key markets outside of the U.S. where we see an opportunity to deliver sustainable revenue and profit growth.

Speaker Change: 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

Suki Upadhyay: are leading 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 Suki. Thank you.

Suki Upadhyay: Our results for the quarter provide increased confidence in our 2024 full year guidance, which includes 5-6% constant currency revenue growth and $8.00 to $8.15 in adjusted earnings per share. I'll provide more color on guidance shortly.

Suki Upadhyay: 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.

Suki Upadhyay: Our international business continues to perform well, driven by NE and SET, with continued strength in emerging markets.

Suki Upadhyay: Global needs grew 5.5% in the quarter with U.S. growing 0.8% and international growing 11.5%.

Suki Upadhyay: International continues to benefit from Rosa Robotics as well as our Persona family of implants.

Suki Upadhyay: Global HIPs grew 2.8% in the quarter with the U.S. growing 1.8% and international growing 3.7%.

Suki Upadhyay: 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.

Suki Upadhyay: Next, the SET category grew 7.3%, led by our key focus areas of CMFT, upper extremities and sports.

Suki Upadhyay: growing on average high single digits.

Suki Upadhyay: All other categories grew mid-single digits on average, giving us confidence in our ability to drive mid-single digit growth, or better, from SET through the second half of the year.

Suki Upadhyay: 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.

Suki Upadhyay: 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.

Suki Upadhyay: 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.

Suki Upadhyay: Adjusted operating margin was 28.5%, up 100 basis points from the prior year.

Suki Upadhyay: The increase in the operating margin was driven by higher revenue and lower OPEX as a percentage of sales as a result of our restructuring program.

Speaker Change: Turning to cash and liquidity, we generated operating cash flows of $369 million, pre-cash flow of $251 million, and we ended the quarter with $420 million of cash and cash equivalents.

Speaker Change: Aligned with our capital allocation strategies, we repurchased $95 million of shares in the second quarter.

Speaker Change: regarding our outlook for the rest of the year.

Speaker Change: We are reiterating our full year constant currency revenue growth guidance of 5 to 6 percent, but given further strengthening of the U.S. dollar, we are updating our reported revenue growth to 4 to 5 percent, and now expect 100 basis points of currency headwind for the full year.

Speaker Change: which should impact Q3 more than Q4.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: As usual, we expect operating margin to be higher in Q4 than Q3, driven by higher revenue.

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

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

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

Speaker Change: As I noted in my prepared remarks, this is the 10th quarter in a row, growing mid-single-digit or above, and we're pleased with the double-digit growth in adjusted EPS. Set perform above expectations, third quarter mid-single-digit or above.

Speaker Change: Enabling Technologies, which is robotics primarily, grew double-digit in Q2, it grew double-digit in Q1. The U.S. grew, robotics grew 16% in the quarter, so it's strong in that regard.

Speaker Change: That's it. Relative to needs and the U.S. performance, look, David, I'm not pleased with the quarter. It was softer than expected. And what I will tell you is that there are three main reasons why we did not do better in the U.S. And these are solvable reasons.

Speaker Change: The second piece is that we have some challenges from a supply standpoint when it came to one of four knee platforms.

Speaker Change: What we call limb salvage, which is part of knee revision cases. These are high ASP cases, and candidly, you know, these didn't help the quarter.

Speaker Change: And then the third reason why needs in the U.S. were softer than expected is comps. We deliver need growth of 10%, almost 10%, 9.8% to be exact, in Q2 of 2023, which was close to mid-single digit, and the U.S. grew 5%.

Speaker Change: So COMS didn't help. So in the background of those surgeons being out.

Speaker Change: 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. We hope to have Cementless not just in the U.S., but out to the U.S. very soon. So that's the summary of what's happening here in the U.S.

Suki Upadhyay: Thank you for all the detail. It's super helpful. Maybe, Suki, just a quick follow-up for you on the P&L. Can you help us think about the kind of interplay here between the benefits you're seeing from the restructuring, and I think you had talked about

Speaker Change: Where are you in the progress with respect to the restructuring benefit and then at the same token that level of reinvestment that you had contemplated when you introduced the restructuring back in February ?

Speaker Change: First of all, good morning, David. Thanks for the question.

Speaker Change: 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.

Speaker Change: at least from a timing perspective. Still expect to generate $200 million in a run rate, but it's happening probably a little bit faster than we originally expected. That's definitely contributing to operating margin expansion. You see that in the second quarter where we're up 100 basis points year over year. So very nice progress there. And that's in the backdrop of continuing to invest in R&D.

Speaker Change: as well as in certain areas across commercial.

Speaker Change: Additional complement in our technology components of recon and other parts of commercials. 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.

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

Speaker Change: You know calling out the opportunity to move back into a share taking position over the next couple years and tying that back to the Analysts Day goal.

Speaker Change: 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, HEMR, midpointing to Q2, and the adoption has been great so far.

Speaker Change: We have the quantity that we need. We got the commercial plans in place, so that should be another driver. And the third leg here was to have elegant navigation systems.

Speaker Change: and we got three of them. This morning we announced the acquisition of OrthoGrip. That should close later in the year. It's one of the fastest growing navigation platforms in the U.S.

Speaker Change: So I would say the combination of triple tapered stems, surgical impactors, and three different modalities of navigation put us in a position to regain market share in the U.S. and outside of the U.S.

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

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

Speaker Change: 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

Speaker Change: is typical in our business.

Speaker Change: The three building blocks are really, you have a lot of headwinds in the first half of the year related to rebates from the previous year, fourth quarter that you have to pay in the first quarter, bonuses and different levels of incentive payments that happen in the first half. So there are certain headwinds that typically happen in the first half that don't repeat in the second half.

Speaker Change: In addition, in the second half, you're going to have improved EBITDA.

Speaker Change: through growth, as you pointed out, but secondly, a pretty meaningful improvement in working capital, specifically around inventory.

Speaker Change: Broadridge strategy, we want to be a company that delivers faster better solutions and navigation and then maybe out of that and again in the Big picture. These will enable zimmer biomet to regain some of those two or 300 basis points of market share that we lost over the years.

Speaker Change: Thanks drew can we have the next question Katie.

Speaker Change: Thank you we'll go next to Joanne Wuensch with Citi Bank.

Joanne Wuensch: Good morning, and thank you for taking the questions.

You mentioned somewhere in the script several new Rosa robots that you expect over the next three to eight quarters.

Speaker Change: Remind us of.

Joanne Wuensch: How many are several and which those are and how we should think about those launching over essentially the next two years and I'll throw one or an air force UK. How do you think about the revenue contribution from those robots ramping.

Speaker Change: Hey, John Good to talk to you. Good morning, I think I said over the next four to eight quarters, but that if it is three let's keep it too for a we're not going to get into a lot of details given competitive reasons, but the one that we are committed to launch is a posterior application for some of the O U S markets where posterior ease.

Speaker Change: Improving and how durable is your pricing benefits thanks for taking the questions.

Speaker Change: Hey, Thank you Ryan look T, meaning is not going to replace Rosa just like our also greed is not going to replace Rosa is all about having a breadth of portfolio.

Speaker Change: <unk> offers see discounting with some shortages lag and sea <unk> is the only haynesville robotic platform, which.

Speaker Change: Which is something that in an ASC environment surgeons seem to lag.

Speaker Change: What I will tell you is that that we are deeply committed to Rosa pointing case, all these new platforms and indications we're going to be launching over the next four to eight quarters.

Speaker Change: Pointing case the commitments, we made at Investor day of doubling our penetration.

Speaker Change: From somewhere in the 20% of all U S knees.

Speaker Change: Robotically Rosa to 40 per say in the next three years.

Speaker Change: We're also continues to be one of the fastest growing platform Zimmer biomet.

Speaker Change: We grew again in the U S or capital sales for rose, 16% in Q2 overall it was double digit globally Rossa today is already outside of the U S.

Speaker Change: Leading robot platform.

Speaker Change: Number one in Asia Pacific.

Speaker Change: Fast growing in EMEA.

Speaker Change: We're very pleased with where we are Russell.

Speaker Change: But we know we need to have optionality.

Speaker Change: We like our chances when it comes to that.

Speaker Change: Yeah.

Russell: Okay fair enough and just as a quick follow up.

International was strong you talked earlier about or you stressed geographic diversification, a little unclear or you're entering new markets, where you're allocating more resources to certain geographies. Just if you could expand on the on the stressing.

Speaker Change: Stressing of geographic diversification.

Speaker Change: Yes, Thank you I I wouldn't call it a more.

Speaker Change: More focused strategy 15 countries to they account for $93 95%.

Speaker Change: Yeah, we don't market potential in the past we've been candidly all over the place and in.

Speaker Change: In the last two years Collyn, we refocused our 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.

Speaker Change: Our commercial infrastructure has been modifying those countries and the way that that we function in those countries is different. So that's that's what we're doing outside of the U S.

Katy: Thanks, Jason Katy can we go to the next question. Please.

Speaker Change: We'll go next to Josh Jennings with TV Cowen.

Josh Jennings: Hi, good morning, Thanks for taking the question a multi part on the hip franchise and the recovery here.

Josh Jennings: May have missed some of this in your answers in prepared remarks, but just wanted to focus in on Rosa hip.

Josh Jennings: Just can you help us think through where robotic assistance penetration is for total hips.

Josh Jennings: Do you think Zen.

Josh Jennings: Zimmer is Rosa platform is.

Josh Jennings: Holding its own or are you maintaining share in that channel and then it's just worth a good acquisition could you integrate that technology into the into the Rosa hip application.

Speaker Change: <unk> alright, thanks for taking the call sure.

Speaker Change: So I'll start with the question on when there wasn't a hip is performing the penetration is double digit.

Speaker Change: It continues to meet the expectations that we had.

Speaker Change: We believe that we need to have a rosa post steroid application to gain market share outside of the U S.

Speaker Change: And that development is in motion and we also believe that to a certain time segment of customers here in the U S. They'll want a less expensive faster lighter application.

Speaker Change: Sure.

Speaker Change: By order of the grid is going to be a good mortality, but so far or expectations have been that may without rosa, but navigation in general.

Speaker Change: Thanks, a lot.

Josh Jennings: Thanks, Josh.

Speaker Change: Thanks, everyone for the questions. This morning, I'll turn it over to Ivan for some closing remarks.

Ivan: Well I'd like to close the way that I started with gratitude I'm very thankful to all the Zimmer Biomet team members, Florida the progress are siloed.

Speaker Change: As I alluded to earlier in the call. This is the 10th quarter in a row, where were growing mid single deductibles.

Ivan: Pleased with the quarter delivering close to a five point or actually five 6%.

Speaker Change: Revenue with double digit EPS.

Ivan: We've proven that we can make commitments and even those commitments.

Ivan: The fact that we have a diversified portfolio with under pain on one segment in one country is so well diversified sustainable performance and what we will tell you is that we are more confident than ever that that we will deliver in the guidance that we reaffirmed today.

Speaker Change: So thanks to everyone for joining the call and I look forward to the next update.

Speaker Change: Thank you again for participating in today's conference call you may now disconnect.

Speaker Change: [music].