Zimmer Biomet Holdings Inc

NYSE:ZBH

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, ladies and gentlemen. And Welcome to Zimmer Biomet First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, April 26, 2018. Following today's presentation there will be a question-and-answer session. At this time, all participants are in listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Cole Lannum, Senior Vice President of Investor Relations and IRO. Please go ahead, sir.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thank you and good morning. Welcome to Zimmer Biomet's First Quarter Earnings Conference Call. Joining me today is our President and CEO, Bryan Hanson as well as our CFO, Dan Florin.

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 forward-looking statements due to a variety of risks and uncertainties. Please note that 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.

Also, the discussions during this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within the earnings release found on our website zimmerbiomet.com.

In addition to the earnings release issued this morning, we have posted a quarterly presentation on our website to supplement the content we'll be covering on this morning's call.

With that, I'll now turn the call over Bryan. Bryan?

[Bryan Hanson, President and CEO]

Thanks, Cole, and thanks to everyone for joining us on the call this morning. Since joining Zimmer Biomet, one of my highest priorities has been keeping a robust dialogue with all of our key stakeholders.

That's why I've spoken with roughly 5,000 of our global team members through a number of valuable forums, including meeting with almost 20% of our regional distributors in the field.

In addition, I've had pleasure of sitting down individually with more than hundreds of our surgeons and other customers around the globe. These discussions have highlighted our present opportunities, helped to clarify some of our key challenges and have helped to confirm our priorities for 2018. A lot of my takeaways for these interactions have been positive.

I feel better, for example, about this daily progress we're making on supply recovery and quality remediation. Though we still have more work to do in these critical areas in order to further mitigate risk.

In addition, I'm even more confident in the enthusiasm and commitment of our global teams, including our best in class sales organization, along with the continued commitment that our customers have to Zimmer Biomet.

That said, I'm also gaining better clarity on our inefficiencies, as well as a much deeper understanding of where the organization needs to improve. Some examples of this include gaps in our demand planning, portfolio management and resource allocation processes, as well as a lack of manufacturing automation. Addressing these and other areas of potential improvement represent a critical priority for the entire Zimmer Biomet team.

Based on all the input I've received over the past four months, it's clear to me that Zimmer Biomet is well positioned to move back into positive market share growth. That said, it's also clear to me that this will likely be a two year turnaround.

As an organization, we will define success in this process is consistently delivering topline growth at market rates or better with the ability to expand margins commensurate with that growth rate. We believe our end markets are currently growing at approximately 3%.

My interactions with our stakeholders have also highlighted their capability gaps we need to address within the organization. I've raised this important issue with the board on behalf of the entire leadership team to ensure Zimmer Biomet has the right capabilities in place at all levels of the company.

To that end, I'd like to discuss some of the recent additions and changes I've made to the leadership team since I joined. Since I'm sitting across Cole right now, I'm going to start with him. We've welcomed Cole Lannum as Senior Vice President of Investor Relations, as I'm sure many of you know.

In addition, Ken Tripp recently joined Zimmer Biomet from Cardinal Health and has assumed the role of Senior Vice President of Global Operations and Logistics. I'm also pleased to announce that Rachel Ellingson, the former Head of Strategy for St. Jude, will be joining us as the Senior Vice President of Strategy.

I've also been augmenting our reporting structure to encourage a more inclusive and responsive organization that is more deeply in tune with the needs of the business. Consequently, the following individuals now report directly to me.

Aure Bruneau, who is Group President of our Spine and CMF businesses, Pedro Malha, who is the Group Division Head of our Dental business, and Angela Main, our Chief Ethics and Compliance Officer. I'm excited about the changes we've made over the past four months, and I will continue to focus on ensuring that we have the right capabilities and leadership in place.

I would now like to provide you with an update a number of the priority areas I've outlined in our fourth quarter call. These include enhancing Zimmer Biomet's culture, our ongoing quality remediation, our supply recovery efforts, new product launches to complete our portfolio and our investments to drive growth.

Turning first to our culture building efforts. We want to ensure that Zimmer Biomet is and will continue to be a great place for our team members to work. We have, therefore, continued to conduct a strong cadence of engagement activities over the course of the first quarter, which will positively impact both our corporate teams, as well as our global sales organization.

As an example, during the quarter, we redrafted the company's mission and guiding principles, which define our collective goals and values as a combined company. These will be rolled out to our entire global organization as part of our ongoing efforts to drive stronger culture of one Zimmer Biomet.

As part of that effort, during the first quarter we conducted a comprehensive workforce survey to give us insight into how we performed in many areas of employee engagement. This information will allow us to focus our attention on areas that matter most to the organization, and importantly because we want to be a metric-driven organization in everything we do, this will provide a baseline to ensure the actions we take are actually improving engagement.

We recognize that building a cohesive company with winning culture is a continuous process, and we are committed to receiving feedback and taking action to improve in this area.

On the quality front, while we don't usually provide this level of detail regarding FDA inspections at our manufacturing sites, I can confirm that earlier this week the FDA concluded an inspection at our Warsaw North Campus.

By way of background, the FDA last inspected this facility in late 2016 and we're currently in the process of executing against our approximately two year remediation plan.

As a result, we were expecting the FDA to conduct this re-inspection to evaluate the progress we're making in addressing these previous From 483 observations. In this latest inspection, the FDA issued additional observations and will submit our formal response over the coming weeks.

As part of our ongoing quality remediation efforts at the Warsaw North Campus, we'll focus intently on addressing these new observations. This latest inspection confirmed that quality remediation progress has been made, but we still have work to complete, and we're obviously, not satisfied with the current state of our quality system at the Warsaw North facility.

Unfortunately, there is no quick fix, but our team is working tirelessly to make the necessary improvements. We take these matters very seriously and remain fully committed to the comprehensive quality remediation effort at the Warsaw North site and we'll continue to keep the FDA updated on our progress. This will remain a top priority for the company.

In the areas of supply recovery, we remain focused on restoring appropriate supply of key brands within our knee, hip and S.E.T. categories. Our operations teams continue to increase production levels of these brands and we remain confident that we have the right activities in place.

At this time, we believe we're still on track with our goal of restoring supply in substantially all of our key brands by the beginning of the third quarter.

On our fourth quarter call, I commented that I believe these supply recovery milestones represented more risk than opportunity. Sitting here today, I'm more confident in that time line that we do need to continue to execute at a high level. As I monitor our progress, my confidence comes from three important factors.

First, our supply recovery efforts have continued on-schedule and without interruption over the past quarter second. Second, we've also de-risked some of our key recovery milestones as time has progressed. And finally, we will benefit from the recent additions of high level leadership and operations.

That said, there's still a number of critical risk elements we absolutely need to manage. These include ensuring we receive consistent volumes from external automated suppliers in the second quarter and beyond, continued talent retention and stability at our Warsaw North Campus facility and very importantly, successfully executing our ongoing quality remediation plan at the Warsaw North Campus, including fully addressing all observations from the FDA inspections.

In summary, on a supply momentum [ph] thus far and my confidence level is higher than a quarter ago, but we clearly still have risk and have to sustain our intense effort.

In the area of new product innovation, we have been focused on addressing gaps in our portfolio with products such as the Persona Partial Knee, the Persona TM Tibia Knee and the Persona Revision Knee.

Earlier this month, we are also pleased to receive the FDA clearance of the next generation ROSA robotics Brain application. This clearance represents the first in a series of regulatory and commercial milestones in the rollout of the ROSA robotics portfolio, including a total knee application we plan to introduce via a limited launch by the end of this year.

Additionally, in the important shoulder reconstructive space, during the quarter, we announced the first surgical case utilizing our recently FDA cleared Comprehensive Augmented Baseplate. In addition to the first U.S. surgery utilizing our Sidus Stem-Free Shoulder.

We have been receiving positive feedback on the products we have already launched and we are confident that the commercial introductions plan for the second half of the year will be drivers of future growth.

And at this time, absent any unexpected development, we believe we are on pace to meet our time to market projections for those products. As a reminder, we do not expect to have full launch of these products, including the Persona Revision Knee and the ROSA Total Knee Application until mid 2019. At which time, our sales team should be able to truly go on offence.

Finally, we have mentioned to you before, we have taken proceeds from the U.S. tax reform legislation and have begun making investments into areas that will drive growth in the business. Generally these investments fall into two major categories.

First, we have made specific investments in R&D, both in terms of new product development, as well as enhancements to the commercialization efforts of new product launching this year. The second area of investment is in the commercial organization, where we continue to invest in the expansion and specialization of our sales channel.

Clearly there is still a lot of hard work in front of the Zimmer Biomet team, but I am very proud of the team's efforts to date and its daily progress that we have made in executing against our key priorities thus far.

In a moment Dan will review our first quarter results, as well as our full year 2018 financial guidance. Broadly speaking, I want to emphasize that although we are currently seeing negative year-over-year sales growth, we do expect to accelerate our topline performance to market growth rates or better over the next 18 to 24 months. We will continue taking the necessary actions to close our gap to market and drive sustained shareholder value.

Again, this include successfully driving our ongoing quality remediation efforts, restoring the supply of impacted products, equipping our sales force with a new products to get back on the offensive and executing on our ongoing investments to drive revenue growth.

Now I'm going to turn the call over to Dan. Dan?

[Dan Florin, CFO]

Thank you, Bryan. Net sales totaled $218 [ph] billion in the first quarter, an increase of 2.3% over the prior year period, with a decrease of 1.5% on a constant currency basis. These results reflect the impact of one less billing day in the quarter.

On a similar basis, in the Asia Pacific region, we increased sales by 2.6%, while our America sales decreased by 2% and our Europe, Middle East and Africa sales decreased by 3%.

As expected, our adjusted gross profit margin came in at 72%, which was 320 basis points lower than the prior year period due to continued incremental manufacturing and inventory costs primarily at our Warsaw North Campus facility, as well as the impact of price declines and the negative year-over-year impact of foreign currency.

In the quarter, we recorded pretax charges of $267 million in special items, which included approximately $100 million of cash outflows for quality remediation, business integration and other items. The non-cash charges primarily related to intangible amortization.

Our diluted earnings per share for the quarter were $0.85. Adjusted first quarter 2018 figures in the earnings release exclude the impact of the special items that I previously mentioned.

Our adjusted operating profit in the quarter amounted to $572 million or 28.3% of sales. Our adjusted effective tax rate for the quarter was 20%. Adjusted diluted earnings per share for the quarter were $1.91 on 204.6 million weighted average fully diluted shares outstanding. A reconciliation of reported net earnings to adjusted net earnings is included in this morning's press release.

Operating cash flow for the quarter amounted to $490 million, inclusive of the previously mentioned cash special items and our free cash flow was $403 million. Free cash flow exceeded our expectation, primarily due to the timing of certain capital expenditures and accounts receivable collections.

Please note that in March, we borrowed $400 million under our revolving credit facility and issued $750 million of senior notes. The $1.150 billion in proceeds were used to repay senior notes on April 2. Due to the timing of these events, we have temporarily higher-than-normal cash and debt balances as of March 31. Our net debt of approximately $9.3 billion at March 31st is approximately $270 million lower than December 31, 2017.

I'd like to now turn to 2018 guidance. In our press release this morning, we highlighted a number of guidance items, which should help you and your modeling as you think through 2018 and beyond.

We expect full year reported sales to increase between 1.5% and 3.5%. Note that these numbers include a positive impact from foreign exchange of between 200 and 300 basis points, which will be more favorable in the first half of the year compared to the second half. Excluding the impact of foreign exchange, we expect our operational growth to be approximately flat, turning slightly positive in the back half of the year.

Looking at profitability, we expect operating margin to be between 27.5% and 28.5%. It is important to note that while we are pleased with the progress we are making in the consistency and volume of production from our Warsaw North Campus facility, we continue to incur increased levels of manufacturing and quality cost in that plant.

As a reminder, a significant amount of these costs become capitalized into the inventory base and released to the P&L as that inventory is sold, meaning that the gross margin headwind will continue for about a year after those costs are incurred.

Further, over the past 18 months, the operations team has been solely focused on quality remediation and supply recovery and not focused on driving productivity initiatives.

Other items impacting our operating margins include the growth investments funded by U.S. tax reform and the incremental expense from our incentive compensation programs compared to the prior year. It is important that you take these items into account as you model 2018 and beyond.

We expect our adjusted tax rate to be between 18.5% and 19.5% for 2018, and we expect adjusted diluted earnings per share to come in between $7.67 and $7.80 per share. For 2018, we expect free cash flow generation to come in between $1.1 billion and $1.3 billion with the majority of that being used for debt repayment in 2018.

As you think about your models, I want to help you with a couple more items. You should expect interest expense to come in at approximately $300 million, significantly below last year as we are benefiting from the continued reduction in our debt levels. In addition, weighted average fully diluted shares outstanding should be slightly above the average levels you see in the first quarter.

To summarize, our focus in 2018 is on continued progress and quality remediation and supply recovery, as well as launching several key new products and investing in programs to drive topline growth.

While our operating margin is pressured this year for the reasons I've outlined, we expect modest margin expansion in 2019 and we are committed to further expansion in the future as our topline accelerates.

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

[Bryan Hanson, President and CEO]

Thanks, Dan. While our first quarter performance continues to reflect supply related headwinds, as well as our ongoing quality remediation work, we remain deeply confident in the foundation of our business. And while there is some ongoing risk and much work remains to be done, we continue to be pleased with the steady progress we are making in these areas.

With that, I'll turn the call back to Cole, who will take us into Q&A.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Bryan. Before the Q&A session, I would remind you to please limit yourself to a single question with a brief follow up if needed. Feel free to put yourself back in the queue if you have further questions and that will us to get to as many people as possible.

With that, operator, may we please have the first question?

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from Isaac Ro with Goldman Sachs.

[Isaac Ro, Goldman Sachs]

Good morning, guys. And thank you. Wanted to focus on the gross margin commentary, could you give us a sense of trajectory, you know, your prior quarter guidance had called for, I think, 72% to 73%. You're at the low end of the range of that prior guidance range this quarter.

Should we expect the gross margin trajectory to decline as the year progresses, because I just want to make sure we reconcile that to score up with the EPS guidance that you just gave us? Thank you.

[Dan Florin, CFO]

Sure, Isaac. So in January, we did give a range of 72% to 73% on the gross margin. So today, while we're not providing specific gross margin guidance, we did provide guidance on operating margins, which does provide some indication that the gross margin rate remains under pressure throughout 2019 and that's really due to two factors, as I said on the prepared remarks.

The first one is we've been incurring the elevated production costs in the North Campus since early 2017, and these elevated costs will continue through this year even after supply is fully recovered.

These costs are capitalized into the inventory base and flow through the P&L as the inventory is sold. So we began seeing these costs in the P&L in the second half of 2017 and will continue through this year and also into next year.

The second element is the lack of productivity initiatives that I described, so we're not getting any offset against pricing declines, for example. So those headwinds will continue through the year and I think that it's fair to assume that the gross margin will stay under pressure relative to the - what we posted in Q1.

[Isaac Ro, Goldman Sachs]

Okay. I understood. Thank you.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Isaac. Next question please.

[Operator]

Our next question comes from Amit Hazan with Citigroup.

[Amit Hazan, Citigroup]

Great. Thanks, good morning. So just curious what's your assessment of the U.S. hip and knee market in the quarter? So far I realized not everyone has reported, but just in terms of growth and more importantly what are you assuming for U.S. market growth in hips and knees in your 2018 guidance? Thanks.

[Dan Florin, CFO]

Sure, Amit. This is Dan. So consistent with our expectations based on what we've seen from one competitor and ourselves, we believe the U.S. large joint market decelerated by about 100 basis points relative to the Q4 growth rate.

Of course, we won't know the full market model until everybody reports. I would characterize it as the U.S. market was down a bit more than we expected. The U.S. hip market declined a little less than expected, but in the aggregate about what we expected. So we pegged the U.S. hip and knee market about 1% during Q1 compared to just over 2% in Q4.

I think that it's important not to get too concerned about quarterly fluctuations. If you look over the past three years the U.S. knee market has average about 3% growth and the hip market about 2% growth. So nothing in Q1 surprised us and we continue to view the market as quite stable.

[Amit Hazan, Citigroup]

So just to confirm then on that second part…

[Dan Florin, CFO]

Go ahead.

[Amit Hazan, Citigroup]

Yeah, on the second part of my question then, are those the growth rates that you're assuming for the year basically in your guidance. Is it the last three year trend?

[Dan Florin, CFO]

At this point, Amit, we're assuming similar growth rates to what was seen in 2017.

[Amit Hazan, Citigroup]

Thanks.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Amit. Next question please.

[Operator]

We'll take our next question from Glenn Novarro with RBC Capital Markets.

[Glenn Novarro, RBC Capital Markets]

Hi, thanks. Good morning, guys. Bryan, can you provide a little bit more color on the new 483 observations at the North Campus received. And do these new observations in any way impact the supply recovery that sounds like you're still on track to get back to normal by the beginning of 3Q? Thanks.

[Bryan Hanson, President and CEO]

Yeah. I mean, no problem, Glenn. So first of all, what I would say is I doing want to get into obviously too much detail relative to the 483s. But I will tell you this. Obviously, this is brand new. We just got the outcome this week, so this is hard off [ph] to press. And we're still working through the information where we see from the FDA. And believe, we're not just looking at this internally, we also have our external advisers taking a look at it with us as well.

But what we know now, based on what we see today, we obviously felt comfortable giving you the FY '18 guidance that we just gave you. And inside of that guidance, obviously, we have some assumptions around when we're going to see supply recovery and we feel comfortable with those.

That said, I think this is really important that I say this, you know, for us the primary focus will always be patient safety. If at any time, we think that we're putting patients at risk, which, obviously we don't, but if we do, that we're going to take the right actions to make sure we take care of those patients.

I do want to just maybe take a second though and just pull up a little bit. When I think about our FY '18 guidance and really the color we're putting in place for 2019, it's not just quality remediation, it's a variable. That is clearly one of the variables we considered, but it's also just supply recovery for any reason.

Timely product launches that we need to have and get those to scale, which we define as full launch is very important. And I really do believe we're going to need to see a shift in the culture and the engagement of this organization.

So just no, it's not just the quality remediation we're taking into account. All of those variables, risks and opportunities and that really has what guided us through the guidance we just gave you.

[Glenn Novarro, RBC Capital Markets]

And can you just as a follow-up, can you give us at least a number of observations you received. Were they less than the last time, any additional color? Thanks.

[Bryan Hanson, President and CEO]

I think the only the color I'd provide is really we want to work through these and keep in mind it's fresh. It is less than the previous time the FDA was in. But to me it doesn't matter, In fact is we have observation, at any level of observations I want to take them extremely seriously.

We don't mess around when it comes to quality. Any observation is not a good thing, and we are going to tackle it as aggressively as we would even if that was more. It doesn't matter if it's less or not to me, I want to tackle these things extremely aggressively.

[Glenn Novarro, RBC Capital Markets]

Okay. Great. Thanks, Bryan.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Glenn. Next question please.

[Operator]

Our next question comes from Kristen Stewart with Deutsche Bank.

[Kristen Stewart, Deutsche Bank]

Hi. Thanks for taking my question and thanks for the updated schedules within the press release, they are really helpful. I just wanted to touch on some of the color that you had from the 2019 comments. I want to make sure I understand those correctly.

So if I'm hearing you are right, we should continue to see gross margin pressure extending into 2019 as some of the capitalized costs are realized through the P&L. And then you had also commented, I believe that you do expect to see some operating margin expansion.

So maybe just touch on how much - how you're thinking about the reinvestments there and the commitment towards seeing operating margin expansion in 2019? Thanks.

[Dan Florin, CFO]

Kristen, this is Dan. So we're obviously not giving guidance here for 2019, I want to make that quite clear. But I do think it's fair to assume that cost of goods productivity is not a driver of operating margin expansion in 2019 for the reasons that I described.

So the drivers of modest operating margin expansion as we think about them today really starts with acceleration and sales growth, particularly our expectation that U.S. sales growth would accelerate. And with that sales growth acceleration we would expect to see some favorable product mix impacting gross margin.

We also expect while we're making the investments here in 2018 that will start to bear fruit on the topline and we should be able to drive slight SG&A leverage without hurting our ability to invest into the business for growth.

So given the potential of modest operating margin expansion, some financial leverage, I would tell you that we would be disappointed if we didn't have some amount of earnings per share growth in 2019.

[Bryan Hanson, President and CEO]

And Kristen remember too though part of the message today on 2018 for which we are giving guidance is that those operating margins need to come down from where the street is right now. Once the street gets those into the appropriate realm, that's based off of which Dan is talking about we think we're going to expand.

[Kristen Stewart, Deutsche Bank]

Okay. That's helpful. I'll jump back in the queue.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thank you very much Kristen. Next question please.

[Operator]

We'll take our next question from Larry Keusch with Raymond James.

[Larry Keusch, Raymond James]

Okay. Thanks. Good morning, everyone. Bryan, you mentioned in your prepared comments that you've been out on the road meeting stakeholders. I guess I just wanted to get some impressions of sort of what you're hearing from customers you indicated you met with surgeons. And I guess, along with that, how do you set the sales force morale and retention at this point and things that needs to be done to make sure that, that organization stays in place?

[Bryan Hanson, President and CEO]

Yeah. I'd say - I've been really pleased with the amount of connections that I have been able to make in a relatively short period of time, not just with the customer base and surgeons, but also with the commercial teams as I've already referenced.

And I got to say, of course, it could be who my sales organization is spending to, but the surgeons that I'm talking to and there is been quite a few of them as I mentioned feel very confident about our business. They are frustrated that we're in our own way, obviously. But there's a real commitment to this business. There is a real sense that we do have the right product portfolio as we've combined Zimmer and Biomet with the new products coming as well.

So I get this real desire to seize Zimmer Biomet win in a real comfort level and confidence in the product that we already have. So that's what I'm feeling from the surgeon customer base.

I don't want to diminish the fact that we're disappointing them, and we are, and I hear about that as well. But what my general sense is that people are committed to us, and we are not seeing more churn than we would typically see from our surgeons.

Now we're also not on the offense because we have the product supply issues, so even though we're not losing as many more surgeons than we typically would, we're also not feeling the funnel with new surgeons because we're not in the offense. So I just want to be pretty clear on that.

From a sales perspective, I'd say just a fact that I've been in the field around the world visiting with our either direct reps or distributor reps, there is a comfort level that I'm going to be paying attention in the senior leadership team, as a result of that will be paying attention to them.

And even just that attention alone seems to have an extra skip in the step of the commercial organization. And I do get a lot of emails, a lot of text messages when the folks that I talked to, they are saying that they are energized more than they have been in the past.

I also do believe from our retention standpoint, we're so close now to supplier recovery. We're so close now to this new culture that we want to bring to Zimmer Biomet. It would be crazy for people that have hung this long to leave now. So that's just my general feeling on it.

[Larry Keusch, Raymond James]

Okay, great. Thanks very much. I appreciate the thought.

[Bryan Hanson, President and CEO]

No problem, Larry.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thank you, Larry. Next question please.

[Operator]

The next question comes from David Lewis with Morgan Stanley.

[David Lewis, Morgan Stanley]

Good morning. I got two related questions, both kind of around cost and levers. The first thing is for Dan, the second for Bryan. So Dan, for us today the single best biggest incremental information, sort of incremental investment, I wonder if you just talk about what's new over the last three months from either the operating investments or reinvestment of the business and non-GAAP spending and sort of the pacing of the next several quarters?

And then for Bryan, thinking about the profile this business, I think your commentary base suggest you get back to market growth around 3% by 2020, 18 to 24 months from now. When you get there, what's the commitment to leverage earnings for this business? What's your philosophy around leverage earnings and what investors can expect? Thanks so much.

[Dan Florin, CFO]

Okay, David. First on the investments, so I think you're referring to taking the benefit of tax reform and reinvesting in the business. So, really two categories of investments, and I can tell you that there's really not much of that in the Q1 results. So part of the margin, the operating margin pressure on the back half is because we're investing above the line, but we're getting our benefit below the line.

And the investments in the business, as Bryan said in his prepared remarks, our focus really in two areas. The new products, so both products that are in the pipeline, as well as the new products that we're launching and making sure that we get the full value as we launch those new products.

And then the second investment is in the commercial organization. And for competitive reasons, we're not going to get into the specifics of what those investments are, but just know that we're going to invest in the commercial channel.

I think the second part of your question really has to do with the cost of goods and as I described before, we continue to incur those elevated costs in the North Campus. Those began in 2017. And as I said in my prepared remarks, that will continue to be a drag in the P&L through next year.

And it is not the case that one supply is fully restored, as those costs go away. I think it's important to people understand these are mainly variable cost to produce parts out of the North Campus. And those variable costs are elevated because of what we had to do in terms of interim process controls and additional inspection because of the 483s.

So those costs are there in the North Campus, and over time, we're going to drive productivity initiatives. Certainly, the addition of key operations talent from Ken Tripp who has a track record of delivering productivity across the network, and be very focused on that. The first and foremost, of course, is quality remediation and supplier recovery.

[Bryan Hanson, President and CEO]

And I think on that just - kind of draft of what Dan just said. Just recognize that when supply recovery occurs, it doesn't mean that we get an immediate drop in cost in Warsaw, I just want to make sure if that's clear because to continue to operate in Warsaw in any way, shape or reform even when supply recovery is in place is still going to be elevated.

As we said, we're going to get to tackling those costs and reducing them but because of the capitalization, you don't get full effect of those cost reductions for 12 months. But we will be something we're absolutely going to be concentrating on, but I just want to make sure it's clear. Those elevated costs don't go away just because of supply recovery happens.

So David, on your second question, I just want to be clear, absolutely. I mean, we're in the game to drive leverage in the P&L. At the end of the day, we have aspirations to be a top quartile performer and total shareholder return. And to do that, you've got to have revenue growth for a certain level and you absolutely got to be able to tie leverage in the P&L. That will be a focus for the organization.

I do want to make sure that I provide some clarity though around - when I talk about 18 to 24 month turnaround, what does that mean? I think first and foremost, is I've already said, it means we will consistently, I think, consistently is a really important word here, deliver growth rates at or above the market that we're playing. Our weighted average market growth, we say right now is about 3%.

Now to me consistently means I want to do it for the full year. So 2020 is that fiscal year that I feel we're going to get that accomplished. Two things kind of inside of that that I think are really important takeaway.

First one is, if everything goes right and our job as leadership team is to try to make sure it goes right, we will absolutely have the opportunity to have quarters before 2020 at or above market growth. I just wouldn't consider that consistently until we get it for full year and I think that first full year, as I said, is 2020.

I also want to say that once we do these short term things to stabilize the business, I want to quickly get to active portfolio management. Hiring Rachel is the first step in that direction, but believe me, it is high on my mind, I'm not a very patient person around the type of thing.

So I don't want to make sure that we get to active portfolio management with the intent of acquiring businesses or potentially divesting businesses that will allow us to increase our weighted average market growth.

First and foremost, those decisions have to be supportive of our mission, they have to - need all the financial metrics that we have, but we're going to be very focused on increasing the weighted average market growth of this business. So you can think about what I would say for sure, if we do the things that I want to do that 18 months to 24 months from now, the portfolio will not look the same.

And guaranteed one can assume that the moves that we make will increase our weighted average market growth and give us the potential to grow above 3% when we do that turnaround.

So I just wanted make sure I am very clear on that, that we've got the remediation stuff done, we've got to make sure that we get in place, but portfolio activity will be something we're going to be concentrating on.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, David. Next question please, operator?

[Operator]

We'll take our next question from Bob Hopkins with Bank of America.

[Bob Hopkins, Bank of America]

Thanks very much for taking the question and good morning. So I've got two questions. First, Bryan, sorry to harp on this, but I just wonder if you could explain a little bit more detail why you are confident the supply will be coming back beginning of third quarter despite the fact that you're talking today about additional FDA observations in the North Campus? Just what specifically increases your confidence?

[Bryan Hanson, President and CEO]

Yes, Good to talk to you, Bob. I would say, let me think if I am half ready, I absolutely feel more confident than a quarter ago and I'm really trying to gauge what I'm saying here versus the last time that I talked to everybody publicly on this. I do feel more confident, and there is basic reasons why and it sounds simple.

But every day that goes by that we don't have a mishap [ph] in the facility, it takes us off our schedule. And I'm going to say a material mishap because it happens all the time. But if we don't have a material mishap that gives me more confidence that we're moving in the right direction.

And just to put this into context, face value, every day that goes by that we don't have an issue, we burn down risk associated with the project time line, with the complexity of the project. And so just getting through the days without an issue burns down risk just by the very nature of moving through time because it reduces the complexity of the project and it gets us through these major project milestones.

I also feel and not that it has happened yet, because it's brand new, but I also feel that having key talent like Ken Tripp and the other people that will be coming into the organization is going to help us in this area.

And I would say not just with supply recovery, but I also think that as was mentioned before, really moving to that next phase, which is a very disciplined approach to removing costs from the entire footprint that we have in operations. We need to see that.

Now unfortunately, as we've already referenced, once you get to the point, there is a delay in realizing that benefit because the way it was capitalized. But the fact is we got to get moving. And so that new talent is going to help us with stabilization, but also get to the point we start to cost reduce.

And I would say this inside as well, I'm very pleased that Adrian Furey who was running operations with us before is staying with the organization. This is big win. Ken Tripp coming in, Adrian's moving with his family after an [indiscernible] back to Ireland. He's staying at a high level position within the organization with all the brainpower and capability that he has that is a big win for the organization.

Now the risk to this, right on the supply recovery piece and which you're calling out is not done yet, right. We've gotten the external suppliers moving. We've gotten through B&Bs. Remember before I was very worried about the process, the zero process of B&B, we're through that. But I still need to see consistent volumes coming from those automated suppliers.

And so far they are there, but every month that goes by that we have those, my confidence level grows. We've stabilized the workforce in Warsaw. But I'd say right now, we can't take our eye off the ball. Crazy as it sounds, this is a very difficult place to hang on the talent, the talent war in Warsaw is real and we need to make sure that we keep our eye on the ball and continue to keep folks in that factory.

And you just mentioned, the biggest thing that we've got to keep an eye on here is quality remediation. And although we're making progress, we're absolutely not there yet. The fact that we got additional observations tells us that.

So we need to be very vigilant in absorbing what the FDA has given us, ensure that we get on top of it and remediate. But that is a single biggest risk at this point, obviously, supply recovery. So I feel better about our position, there's no question about it, but I'm absolutely not naive around the risk that is still in front of us.

[Bob Hopkins, Bank of America]

Very helpful. Thank you so much for the detailed response. And then one quick product question as a follow-up, can you just talk a little about what happened to hips in EMEA this quarter and maybe a little bit on the shoulder launch side. Hips in EMEA seemed to be a little light, just - was there anything particular going on there?

[Bryan Hanson, President and CEO]

Not really, to be honest with you. As we have mentioned before, we thought we'd see a little bit of lightness in the U.K. That came to fruition. In general, we feel pretty confident. The fact is whenever we see after the first quarter and beyond is built into the FY '18 guidance we just gave. So our confidence level in the EMEA business is still there.

[Bob Hopkins, Bank of America]

Great. Thank you very much.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks Bob. Next question please?

[Operator]

Our next question comes from Matthew O'Brien with Piper Jaffray.

[Matthew O'Brien, Piper Jaffray]

Good morning. Thanks for taking the question. I'll ask both together, primary and then a follow up together here. So first of all, on the revenue guidance for the year, you just came off of your toughest comp of the year. And then as I look at the rest of the year on a two year stack basis, you're actually assuming things get even worse than what you saw here in Q1 constant currency.

Can you help us understand why that would get worse, given the new launches, et cetera? Are you just trying to ultra conservative, is there something on the sales force side that we need to be paying attention to?

And then as a follow-up, Bryan, you mentioned portfolio management given your background, bringing somebody from St. Jude, are you interested in going outside of the traditional musculoskeletal space as Zimmer Biomet has really focused on historically? Thank you.

[Dan Florin, CFO]

Matt, I'll take the first one. So first with respect to the constant currency revenue trajectory, in Q1, we had the billing day impact which was just over 100 basis points. So embedded in our guidance is some acceleration on a constant currency basis as we progress through the year.

I mentioned back half of the year turning positive. I think the main issue there as we talked about before is as the supply gets healthy in July, you know, that delayed effect of revenue acceleration. So our guidance assumes full supply by July, the impact of - a delayed impact of revenue acceleration and continued momentum in hips and then we get the cementless [ph] benefit as well.

So there is - our expectation is acceleration in the back half of the year. It is quite modest because of that delayed acceleration. Just know that we're driving hard to continue to outperform that, but we feel good about how the year is set up.

[Bryan Hanson, President and CEO]

I just want to just comment on that too. You mentioned is it just conservative, we really don't believe that. We think it properly balances the risk and reward that we have as we move into the back half.

Dan is 100% right, the more that I travel with our sales reps, I can definitively tell you, there is a lack of trust even with me and they feel connected to whatever may be. There is a lack of trust what we say relative to supply recovery.

And there is kind of objectivity and subjectivity. So objectively, we're improving array and we get supply recovery. We're going to be objectively be there. Subjectively, any slight miss that we've been normal course of businesses in supply is going to be exacerbated in mind of sales representatives, they're going to slow down.

So this risk of delay in driving revenue once the supply recovery comes is absolutely real. I've seen it every time we're talking to sales reps, just want to make sure that you hear that for me.

On the portfolio management side, here is my thoughts on this and I'll let train if it goes through here. We are going to do two things. Number one, we're going to concentrate on getting deeper position in areas that we already play that happen to be a more attractive from a market growth perspective, where we think we can bring value, and where we think we can bring value

So there's no question we're going to double down on areas we're already in, that are more attractive from the market growth standpoint and continue to increase our position there.

But we will certainly look at if the opportunities are right and if I feel the mission will hit the financial metrics areas that are outside of the spaces that we play to diversify business and bring our weighted average market growth rate up. I'm not solely committed to either one of those, we will do both.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks Matt. Next question please.

[Operator]

Our next question comes from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen, Wells Fargo]

Good morning. Thanks for taking the question. So Bryan, I wanted to focus my question on the new product introductions. So you're launching a lot of important new products, I think five to six new ones. So from your perspective, which of the most impactful and why? And I had specific questions on ROSA which the streets obviously hyper-focused on the total EMEA [ph] application.

So what's your confidence in the second half 2018 limited launch, what are the steps you need to get there? And I don't think you guys disclosed kind of cutting mechanism. Are you ready to kind of disclose at this point? Thanks for taking the questions.

[Bryan Hanson, President and CEO]

No, obviously, I'm not going to provide any more information on ROSA's feature set that Dan already provided for competitive reasons. But I do feel confident right now. I mean, there's nothing that's indicating that we won't get to limited launch by the end of the year.

Obviously as I referenced before, with an assumption that we do hit the time line there would be a time lag between that limited launch and full launch which should be more in the mid-'19 time frame. But we're feeling good about where we are in the process.

And let's face it, we have some history here. It's not like this is our first robotics system. We had one in the brain, we're going to move into the spine and also in the knee. So there is a theme that is confident in the area and has the history of being able to get products to market on time. So that's specific to ROSA.

So just in general, I don't want to pick a specific product out and say this is the most important. I think it is the combination of the products that we have and I kind of think about it when I pull back and give the product development and we spend a lot of money in R&D. We need to be productive with that money.

And I first like to look at do we have the right portfolio mix that we're going to bring into market. And I can tell you firsthand, as I've been out talking to our sales reps, as I've been out talking to our customers. I'm hearing directly from them that what's coming in the pipeline is exactly what they're looking at - looking for and we're going to delight our surgeon customers with this, but very importantly we're going to fill the product gaps that we have particularly in the knee space.

So when I think about knee I'm very excited about launching things like Partial, cementless, revision, all in Persona family, which I personally believe is the best knee implant in the marketplace. It really does give you an option to personalize the knee size for the patient. And that's just the whole premise behind the technology. So once we round that line out, will not only have the best implant, but we're going to have the full portfolio, particularly when ROSA key application comps.

I think the thing that I always wanted to squeeze and pause on is that you know, fact is we're not going to have that full portfolio because I really do think the full portfolio is what's important here, ready to go, fully and offense someday 2019 with an assumption that we had time line that we currently have with product launches.

I also don't want to discount the steps we're doing at S.E.T. now our S.E.T. business is a focus for us. So the Comprehensive Baseplate, Sidus Stem-Free Shoulder, jogger stitch in sports I mean, people aren't talking about that. That's an exciting product in sports and other products that we're going to launch, plus the specialization of that of our sales organization is going to be an opportunity for future growth for us as well.

So I'm excited about the product launch and activity we have in front of us. I just want to make sure that everybody enthusiasm is properly focused on that kind of mid 2019 as that real offense of goal mode.

[Larry Biegelsen, Wells Fargo]

Thank you.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks. Next question please.

[Operator]

We'll take our next question from Richard Newitter with Leerink Partners.

[Richard Newitter, Leerink Partners]

Hi. Thank you. I'm not sure if I missed it, but can you just update us on where you are with the ROSA robot on spine applications and the launch there? And then free cash flow into '19, you talked about earnings growth and some operations and capitalize cost that are going to flow through the P&L and take a little longer to materialize.

I guess, we should still though from a free cash flow standpoint, see some acceleration ahead of that kind of leverage to earnings growth. Is that the right way to think about it? And can 2019 be a meaningful free cash flow, kind of acceleration here? Thanks.

[Dan Florin, CFO]

Rich, let me take the free cash flow question first. So as I said, the guide for 2018 free cash flow is between $1.1 billion and $1.3 billion and our intention today is to use the majority of that to pay down debt. With that, what it will enable us to do is take our leverage ratio down from the year-end 2017 level.

Looking beyond 2018, our financial flexibility will increase as we continue to make progress and our free cash flow yield, particularly in the back half of 2019 and certainly, into the 2020, just based on earnings growth, but also based on a decrease in cash special.

So for example in 2017, our cash flows were about $0.5 billion. That comes down slightly in 2018 and then we expect that to come down even further in 2019. So I'd say the combination of earnings growth, better working capital management, we're already seeing that in the accounts receivable side and then a reduction in cash special, it's a combination of all that will increase our free cash flow yield.

[Bryan Hanson, President and CEO]

Great. And on the second question relative to the spine application of ROSA. First of all, you should think about it. What I'm excited about is being able to leverage the ROSA platform, not just in brain, not just in spine, but also in knee and potentially other places as well.

Knee is important because we're making significant investments in the robotic platform, and we will continue to do that. And as you have applications off of that platform that you can use, there's real value in return invested capital on that. So that excites me.

Brain, we just said was proved that activity right now. The community there couldn't wait for that. I'm very excited. It's a relatively small, but it is an important application of the technology.

Spine is pretty similar time frame to the knee application that I referenced. We're looking at around fourth quarter where we get limited launch as we move in 2019, will move into full launch and then I already talked about the knee application.

But again, I think the key takeaway here is each of these applications we believe will be beneficial in their individual areas with the fact that eventually, we can leverage the same platform for multiple applications is a real benefit.

[Richard Newitter, Leerink Partners]

Thank you.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thank you. Next question, operator, please.

[Operator]

Our next question comes from Robbie Marcus with JPMorgan.

[Robbie Marcus, JPMorgan]

Great. Thanks for taking the question. Bryan, as I hear your comments about whether or not you have the right portfolio going forward, the two businesses that stand out to me is underperforming are dental and spine.

So maybe you could give us your latest thoughts on how the dental business fits in at Zimmer. And then what you're seeing in terms of integration for LDR and spine and your outlook for the 2018 market? Thanks.

[Bryan Hanson, President and CEO]

Great. Thanks, Robbie. So first of all, let me just talk about dental. Obviously, when we think about any kind of portfolio moves, I'm sure that you know that we wouldn't talk about anything that's active or even contemplated, so I'm not going to speak specifically about dental as being the target or not being a target for divestiture.

I will say just broadly speaking, as I mentioned before, I'm very eager to move into the phase of active portfolio management. Rachel, again, being on the team is a perfect example of my aggressiveness to try to move in that direction. She is fantastic, by the way, if you haven't met her, I'm sure you will meet her over the coming months or a number of you will.

Our goal is to move into that active portfolio management and I don't want to give specifics on where we're going to go. But the whole intent is to drive initially the organization forward, is to ensure that we have the financial metrics that we need to jump, make sure we have jump those hurdles.

And we need to increase the weighted average market growth of this business, period whether this new divestiture or acquisition with the ultimate goal of driving increased shareholder value. That's really where we are. So I won't say anything more about any specific targets or anything else.

Relative to the spine business though, I'm committed to spine, I'm committed to spine. Do I like the performance that we have right now? No.

55:37[Audit Start]Here's what I would say, we have a great new team. I'm not just talking about Lori running that business now collectively spine and CMF and Thoracic.

We have a lot of leadership changes that we've seen in spine, all the way down to the sales leadership a number of new people have come in at a senior level of sales that are extremely capable and have a lot of history in spine that I think they're going to bring value.

So now not only do we have the right portfolio, I truly believe we have the right team. There's a lot of stuff we need to the right now with channel strategy, typically with the LDR acquisition, we're moving rapidly through that right now and any disruption that we think that will come from that is built into the guidance that we already gave you. But make no mistake, we are committed to spine, we have the right portfolio, we now have the right team, we have opportunity there.

[Robbie Marcus, JPMorgan]

Thank you.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Fantastic. Thanks. Next question please.

[Operator]

Our next question comes from Joanne Wuensch with BMO Capital Markets.

[Joanne Wuensch, BMO Capital Markets]

Good morning and thank you for taking the question. Can we revert back to S.E.T. a little bit? This strikes me as a business where the end markets are growing faster than hip and knee and yet I would love to understand how you get sort of back to that market growth rate and how much of the pressure that we're seeing right now is products versus sales force versus maybe something else?

[Bryan Hanson, President and CEO]

Yes. I mean, what I would say just, specifically is S.E.T., Sports, Extremities, Trauma subcategories of that are very attractive. We want to land on of those areas what are going to be a primary growth engines that we have as a business to make sure that we're doubling down relative to investment. We already see a lot of investment going into those businesses.

We're already seeing commercialization changes to be able to specialize, and we are fully committed to driving growth in those more attractive areas. So in don't want to give any more color than that. I don't think that there's any reason at all that in the areas that we concentrate, we can't get market and quite frankly, I don't see - because of our low penetration in those spaces any reason why we can't be above market growth in those areas.

[Dan Florin, CFO]

Yes, Joanne, I would just add that S.E.T. is a product group that has been impacted by the supply issues out of the North Campus. So inside of that, there's a number of fast-growing key legacy Biomet sports Medicine, Extremities, Trauma products that come out of that facility.

The good news is, as Bryan has said, we're restoring to full supply on those products as well and I think that bodes well for the future growth rate. But the end markets are very strong, supply is recovering, we're investing in specialization and good things to come in S.E.T.

[Bryan Hanson, President and CEO]

And really, even in certain categories today, growth rate is pretty good.

[Dan Florin, CFO]

Yeah.

[Joanne Wuensch, BMO Capital Markets]

As my follow-up, how do you define the market growth rate?

[Bryan Hanson, President and CEO]

For S.E.T. you mean?

[Joanne Wuensch, BMO Capital Markets]

Yes, please. Your hips and knees is 2% to 3%. Is S.E.T. 5% to 6%?

[Dan Florin, CFO]

Yes. I'd peg it in that 5% to 6%. It's unlike hips and knees given the number of players on S.E.T., it's less precise market model, but that's how we think about it, about 2x the growth rate of large joints.

[Joanne Wuensch, BMO Capital Markets]

Terrific. Thank you so much.

[Dan Florin, CFO]

There's certain categories in that, that are even higher, some lower, some higher, but in aggregate, I would agree to that by mid single-digits.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Joanne. Operator, we're coming close to the bottom of the hour. We're trying to get two more questions and really quickly if you guys can go fast. So next question, please.

[Operator]

We'll take Vijay Kumar with Evercore ISI.

[Vijay Kumar, Evercore ISI]

Thank you guys for squeezing me in. So maybe my two quick ones are, one, may be when you look at the organic growth guidance for the fiscal year, can you comment on the cadence because we had negative 150 bps in Q1 and I believe that has a days impact as well. So should we be thinking about positive organic by Q4 and that offset sort of what we're seeing in Q1?

And second assuming the positive organic, that continues into fiscal 2019. Should we be expecting margin expansion in 2019? Thank you.

[Dan Florin, CFO]

Vijay, with respect to the organic or constant currency growth rate projection for the balance of the year, I did comment that we do expect positive growth in the back half of the year compared to the negative growth in Q1 even on a day adjusted basis. That's the first point.

Second point, I commented that we do expect some modest operating margin expansion in 2019. And with that, our expectation is to see some amount of earnings per share growth in 2019 as well.

[Vijay Kumar, Evercore ISI]

Thank you, guys.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Thanks, Vijay. And operator, one last question, please.

[Operator]

And we'll take our final question from Raj Denhoy from Jefferies.

[Raj Denhoy, Jefferies]

Thank you. Bryan, maybe high-level question for you. As I'm sure you can appreciate the last couple of years is kind of been death by a thousand cuts for investors on Zimmer in terms of the earnings side, right? Now you've given us guidance, $7.60 to $7.80 this year, kind of modest operating margin expansion next year.

And so, I guess, what I'm trying to get at is your level of confidence in those numbers, in terms of this the bottom year? Can investors now expect that this is the base upon which are going to build or there's some risk in these numbers?

[Bryan Hanson, President and CEO]

Yes. Thanks, Raj, for the question, number one, and good to talk to you on the phone. Here's what we really try to do, this is the reason why we delay giving you guidance until now versus the beginning of the year. We really wanted to take the opportunity to go through all the things that need to happen to be able to get the 2018 guidance to be materialized.

And I think even more importantly than that, the things that need to happen to eventually to get to the turnaround that we referenced. And we're trying to be as balanced as we possibly can in that calculus.

I mentioned it before, you got to have quality remediation comp, you've got to have supply, can't have slippage on that if you do have slippage it can't be by much you got to translate that into revenue recovery as well. You've got to have new products on time and that scale and you've got to make changes in culture.

All those things have variability to them. And we've really try to take into account what level of variability we can have, theI impact those things will have on the business and then give you a balanced view of what we think we can do from a guidance perspective.

So it's a level that we can, we've given you what we truly do believe is a realistic view of what this business can do, not just in 2018, but also with the color we've given you in 2019.

[Dan Florin, CFO]

And Raj, let me add something, I think it's important we try to give you a lot of color on this. On the revenue side, we think people are pretty close, there might be some sequencing issues as Dan discussed on some of his color upfront, it is going to be accelerating throughout the year. We need to get some of the - these things behind us before we'll see some of that acceleration.

But the real thing that I think people need to work on and the reason, quite frankly, why the range was below where current consensus is on EPS was on the profitability side and operating margin.

I think we've given you a lot of color there, but there are at least some people on the street that are just too optimistic on the operating margin numbers, and they need to come down. Hope that helps.

[Raj Denhoy, Jefferies]

That super help. That's helpful. Appreciate. Thank you.

[Dan Florin, CFO]

Thanks, Raj.

[Cole Lannum, Senior Vice President of Investor Relations, IRO]

Okay. With that, folks, we're going to wrap up. I just want to say, first of all, I really appreciate the cooperation. We were able to get, by my count, 14 questions in on the call and I appreciate everyone cooperating and then trying to be quick on this, so we can get to as many as possible. From our standpoint, there will be a replay of this call later on today on our website. And if you have any follow-up questions, we will be travelling. But the best way to reach Derek, Bob, and myself is by email, so send us an email throughout the day. Enjoy the rest of your week. Talk to you soon. Bye-bye.

[Operator]

Thank you, again, for participating in today's conference call. You may now disconnect.