Zimmer Biomet Holdings Inc

NYSE:ZBH

Earnings Call Analysis

Zimmer Biomet's clear growth trajectory and confident 2024 guidance

Zimmer Biomet reported a 5.6% increase in constant currency revenue for Q2 2024, driven by robust international growth of 8.5%. U.S. sales rose 3.5%. The company saw notable demand for its ROSA robotic systems and expects continued momentum with new product launches. Despite higher manufacturing costs, adjusted EPS grew over 10% to $2.01, with operating margins up 100 basis points to 28.5%. Zimmer Biomet reaffirmed its full-year guidance, projecting a 5-6% increase in constant currency revenue and $8-$8.15 adjusted EPS.

Steady Growth Amid Challenges

Zimmer Biomet experienced a solid second quarter in 2024, delivering consistent growth. The company achieved a constant currency revenue increase of 5.6% compared to the same period last year. This marks the tenth consecutive quarter of mid-single-digit or better growth, showcasing the company's resilience even amid market fluctuations .

Diverse Portfolio and Geographic Expansions

Zimmer Biomet's growth trajectory is bolstered by its diversified portfolio and strategic geographic expansions. The company continues to transition from lower-growth to higher-growth markets and aims to enhance its presence outside the U.S. Key international markets have shown strong performance, particularly in knee and S.E.T. segments, driving higher revenue and profit margins .

Key Growth Drivers

The company’s U.S. business grew by 3.5%, while international growth was higher at 8.5%. In the knees segment, international sales grew significantly by 11.5%, partially driven by innovations like the Persona OsseoTi and increased adoption of ROSA robotic systems. Although the hip business lagged, new product introductions are expected to ramp up growth by early 2025. Meanwhile, S.E.T. (sports, extremities, and trauma) showed a 7.3% increase, driven by key focus areas such as CMFT and upper extremities which grew by high single digits .

Operational and Financial Highlights

In financial terms, Zimmer Biomet witnessed a 3.9% rise in net sales to $1.942 billion, after adjusting for foreign currency impacts. The adjusted earnings per share (EPS) increased over 10% to $2.01 from $1.82 in the prior year. Strong demand for ROSA systems and other technological innovations contributed to these results. Adjusted operating margins improved by 100 basis points to 28.5% due to higher revenue, lower operating expenses, and savings from restructuring programs .

Future Outlook and Guidance

For the remainder of 2024, Zimmer Biomet has maintained its constant currency revenue growth guidance of 5-6% but has adjusted reported revenue growth to 4-5% due to a stronger U.S. dollar. The company expects an adjusted EPS of $8 to $8.15 for the full year and free cash flow between $1.05 billion and $1.1 billion. Operating margins are expected to step up in the second half of the year, driven primarily by higher revenue and continued restructuring benefits .

Innovation and Technological Advancements

Innovation remains a cornerstone of Zimmer Biomet’s strategy. The company plans to launch multiple new ROSA robotic platforms over the next few years, including applications tailored for specific surgical practices. ROSA technology is already a global leader, with significant adoption in markets such as Asia-Pacific and EMEA. These advancements are expected to drive continued revenue growth and maintain Zimmer Biomet’s competitive edge .

Employee and Cultural Impact

Zimmer Biomet’s strong employee culture has been a critical factor in delivering consistent performance. The company was recognized as one of America’s best mid-sized companies to work for by Time magazine, reflecting high employee satisfaction and engagement. This positive culture underpins their strategic priorities and commitment to operational excellence and innovation .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 7, 2024. [Operator Instructions] I would now like to turn the conference over to Zach Weiner, Director of Investor Relations. Please go ahead.

[Zachary Weiner, executive]

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Second Quarter 2024 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our President and CEO; and CFO and EVP, Finance Operations and Supply Chain, Suky Upadhyay. Before we get started, I would like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note, we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC 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, some of which are forward-looking non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our second quarter earnings release, which can be found on our website, zimmerbiomet.com.

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

[Ivan Tornos, executive]

Thank you, Zack, 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 Biomet team members across the world 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 why you and I get to do each and every day and you're doing an real job in bringing this mission into action. Thank you for your commitment to Zimmer Biomet. Thank you for your tireless work and thank you for the very strong performance so far in this year 2024.

We are now past the midpoint in the year, and we're growing 5% after having delivered strong performances in 2023 and 2022 and 2021. So the trend is real. The performance is there, and I'm deeply proud of the work that you do in daily. As I said, countless times the Zimmer Biomet workforce and our culture here is truly one of our key competitive advantages. In today's call, I'm going to give some opening remarks, then Suky cover financials, and then as always, we will leave ample time to answer your questions.

The agenda for today, first, I'll cover some perspective on the quarter. Secondly, I'll discuss the drivers of our performance and why we are even more confident than ever in our updated full year guidance for 2024. And why already looking into 2025 and beyond, we're also very confident that we'll continue to deliver on the long-range plan commitments that we outlined at the end of May at our first ever Zimmer Biomet Investor Day. Recall those commitments were driving revenue growth at least at mid-single-digit growth rates, driving EPS at 1.5 revenue growth and driving free cash flow growth at least 100 basis points above our EPS commitments.

The servicing in the agenda will close with our strategic priorities, those being people and culture, operational excellence, and innovation and diversification. Starting with our Q2 results, we continue to be very encouraged by our global performance. In the second quarter of this year we grew 5.6% on a constant currency basis. And with that, we have now closed the first half of 2024, growing 5%. Worth noting that this 5% is versus very tough comps in the first half of 2023. The second quarter of 2024 now marks the tenth consecutive quarter in which Zimmer Biomet has grown mid-single digit or above.

So again, a training the making that is real. And we're very confident that this performance will continue, if not will accelerate as we continue to move our business forward. Against the backdrop, in the quarter, we did see some weakness early in the first half of the quarter in the U.S. 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. So choppiness through the first half of the quarter, and then an improvement through the second half, which has continued with very strong performance through the month of July. Our OUS international business outside the U.S. business has delivered above expectations, we saw a strong demand in the key markets across both Recon and the sale categories.

So overall, very diversified, solid performance coming out of these markets. And look the fact that in our second quarter, we continue to deliver excellent performance in our other category. This category is primarily focused on enabling technologies, primarily ROSA. We saw a strong demand for ROSA, growing double digit in the business, and we also saw strong demand in enabling technologies and navigation systems. As we have been saying for quite some time, we want to be more than just a leading reconstructive Knees and Hips company in key geographies where we have a really high market share. As an example, the U.S. or key countries of Europe and Asia Pacific.

One example of this diversification journey has been said. We've been committing to growing set at least mid-single digit and Q2 of 2024 is now the third quarter in a row where we are growing mid-single digit or above, a trend that we expect to continue towards the end of 2024 moving into 2025 and 2026. So nice growth in other, nice growth in international and nice growth in S.E.T. One area that I'll tell you, we've made significant strides is within our Hips portfolio. We did lose some market sharing Hips in the U.S. and all U.S. markets over the last 3 to 5 years. And as I said over and over, this was due to lacking 3 key product items, directed there stems, what we call triple taper stems elegant navigation and surgical impactors. As we sit here today, we have remediated those gaps. We have 510(k) approval for Z1 or [indiscernible] paper stem. We are regaining market share already with farmer or surgical Impactor. And today, we have the most comprehensive navigation in Hips hip arthroplasty. Not only do we have Rosa Hip, we also have the only 510(k) FDA clear augmented mixed reality Hips navigation platform via a partnership with our colleagues at Hips insights. And now we have also signed and announced an agreement to acquire Ortho Grid that is going to give us a leading position in navigation using artificial intelligence devices. So we have the most comprehensive suite of solutions in navigation, in direct anterior stems and in surgical in factors, not to mention having the best core implant technology with products like G7 and [indiscernible]. 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 3 or 5 years.

Moving from Hips, we have developed, and we are today the first and only robotic-assisted solder replacement platform in the world. The feedback on the cases we've done with rosa [indiscernible] continues to be very compelling. And as we enter late Q3 and early Q4, we expect to see an acceleration of those cases. And in 2025, we expect ROSA [indiscernible] to be a very meaningful growth driver for Zimmer Biomet.

We recently announced the partnership with [indiscernible] Surgical. This is going to provide our surgeon customers optionality across the robotic landscape. We have conducted extensive training with one voice on customer and the feedback on these partnership we think remains super. With this partnership, Zimmer Biomet is the only orthopedic company in the world that will offer both a handheld CT scan base system in the team meeting exclusive for Zimmer Biomet platform as well as a simplified C.T. scanless robotic system in our current form factor of ROSA for total knee arthroplasty. We're excited about the optionality, and we're also excited about the fact that we continue to innovate at a very fast pace when it comes to ROSA. And we're expecting to launch at least 3 new ROSA modalities in the next 3 to 8 quarters. From an earnings standpoint, we generated $2.01 of adjusted earnings per share in the quarter or growth of 10% this is in line with our long-range plan targets outlined at our Investor Day in May.

Inside of the strong performance through the first half of the year, the team continues to execute on the 3 strategic priorities that I keep outlining in each and every earnings call and every Zimmer Biomet meeting around the world. The 3 priorities of people and culture, foundational to everything that we do, operational excellence and innovation and diversification. As a [indiscernible] opening, people and culture continues to be a key competitive advantage for Zimmer Biomet. I'm proud to share that Zimmer Biomet was recently named one of America's best mid-sized companies to work for by Time magazine. This reflects the strength in team member satisfaction engagement, our revenue growth profile and the turnaround of the organization now behind us.

On the second imperative, operational excellence, we continue to expect to grow constant currency revenue at least at mid-single-digit level with adjusted earnings per share growing at least 1.5x revenue. and free cash flow growing at least 100 basis points faster than earnings. It is a commitment that we make in not just for 2024, but also for the long range plan 2025, 2026 and beyond. This is a mindset that continues to proliferate throughout the organization. We pay people on delivering towards such commitments. We have trained people to deliver on those commitments and the trend as I've repeated a few times in my opening remarks, is in the making.

In the past, when it comes to innovation and diversification, it's been very much portfolio-centric, moving from lower growth markets to higher growth markets. polling case, the super performance in set. But today, we're also thinking diversification from a geographic mix standpoint, when I continue to invest in key markets outside of the U.S. where we see an opportunity to deliver sustainable revenue and profit growth. We're encouraged by the sound performance that we've seen in our OUS business, and we expect to continue to accelerate growth in these markets with our compromising our margin performance.

In conclusion, we are very proud of how far we have come as an organization in terms of the financial progress, the innovation progress and the commercial execution. Our second quarter results are another proof point that we make commitments and deliver on those commitments, and we fully expect that the trend is going to continue for the balance of the year and beyond. We're confident in our guidance for the year, and we love the fact that we're impacting the lives of millions of people, and I'm deeply inspired every day in knowing that my teammates and I are leaving the Zimmer Biomet mission of alleviating pain and improving the quality of life for people around the world.

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

[Suketu Upadhyay, executive]

Thank you, and good morning, everyone. As Ivan mentioned, Q2 closed a solid first half of the year for Zimmer Biomet, with XFX revenue growth of 5% in the first half and operating margins well ahead of the prior year. Our results for the quarter provide increased confidence in our 2024 full year guidance, which includes 5% to 6% constant currency revenue growth and $8 to $8.15 in adjusted earnings per share. I'll provide more color on guidance shortly. Moving to the second quarter results. Unless otherwise noted, my statements will be about the second quarter of 2024 and how it compares to the same period in 2023, and my commentary will be on a constant currency and adjusted operating basis.

Net sales were [ $1.942 billion ] an increase of 3.9% on a reported basis and an increase of 5.6%, excluding the impact of foreign currency. As a reminder, we had a day rate tailwind that impacted all businesses and regions at about the same level. Pricing at a consolidated level was 80 basis points driven by gains in international that were partially offset by modest declines in the U.S.

Our U.S. business grew 3.5% and international grew 8.5%. The growth in the U.S. was driven by our S.E.T. and other categories. As a reminder, our other category includes our surgical business as well as enabling technologies such as ROSA capital sales. Our international business continues to perform well, driven by knee and S.E.T. with continued strength in emerging markets. Global Knees grew 5.5% in the quarter, with U.S. growing 0.8% and international growing 11.5%. U.S. growth was impacted by softer sales in the first part of the quarter with improvement in utilization and growth as we move through the second half. We continue to see strong uptake of Persona OsseoTi and remain optimistic that the recent robust ROSA installs will continue to drive pull-through and share of wallet opportunities.

International continues to benefit from ROSA robotics as well as our Persona family of implants. Global Hips grew 2.8% in the quarter with the U.S. growing 1.8% and international growing 3.7%. While our Hip business has lagged the broader market due to key portfolio gaps, we have made significant progress with new product introductions and are excited to get back on the offensive in early 2025 when these products and technologies are fully in market. Next, the S.E.T. category grew 7.3%, led by our key focus areas of CMFT, upper extremities and sports growing on average, high single digits. All other categories grew mid-single digits on average, giving us confidence in our ability to drive mid-single-digit growth or better from S.E.T. through the second half of the year.

Finally, our other category grew 11.3% in the quarter and continues to be driven by strong demand for ROSA systems and other enabling technologies. Turning to our P&L. We reported GAAP diluted earnings per share of $1.18 compared to GAAP diluted earnings per share of $1 in the prior year. Higher revenue combined with lower R&D, effective tax rate and share count, more than offset expenses associated with our restructuring program. On an adjusted basis, we delivered diluted earnings per share of $2.01 compared to $1.82 in the prior year, representing over 10% growth. The step-up was primarily driven by revenue growth, improved operating margins due to savings pull-through from our restructuring program and a lower share count, partially offset by a higher tax rate.

Adjusted gross margin was 71.6%, about 40 basis points lower than the prior year, driven by higher manufacturing costs, partially offset by better pricing and lower royalties. Adjusted operating margin was 28.5%, up 100 basis points from the prior year. The increase in operating margin was driven by higher revenue and lower OpEx as a percentage of sales as a result of our restructuring program. Net interest and other adjusted nonoperating expenses were $45 million in the quarter, and our adjusted tax rate was 18.2%. Turning to cash and liquidity. We generated operating cash flows of $369 million, free cash flow of $251 million, and we ended the quarter with $420 million of cash and cash equivalents.

Aligned with our capital allocation strategies, we repurchased $95 million of shares in the second quarter. Regarding our outlook for the rest of the year. We are reiterating our full year constant currency revenue growth guidance of 5% to 6%. But given further strengthening of the U.S. dollar, we are updating our reported revenue growth to 4% to 5% and now expect 100 basis points of currency headwind for the full year, which should impact Q3 more than Q4. We still expect to generate between $8 and $8.15 in adjusted earnings per share despite this greater FX pressure and $1.05 billion to $1.1 billion in free cash flow.

Our tax and interest and nonoperating expenses expectations remain unchanged. When thinking about the cadence through the second half of the year due to normal seasonality, Q3 typically is the lowest revenue quarter from a dollar perspective. with Q4 being the highest. From a margin standpoint, we still expect gross margin to step down sequentially as the year progresses, while operating margins should expand by more than 50 basis points year-over-year. As usual, we expect operating margin to be higher in Q4 than Q3, driven by higher revenue.

In summary, Q2 closed a positive first half of the year, giving us continued confidence in our ability to meet our full year outlook and another positive proof point through our LRP.

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

[Richard Newitter, analyst]

Thanks, Suky. Before we start the Q&A session, just a quick reminder to please limit yourself to a single question and 1 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? .

[Operator]

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

[David Roman, analyst]

I wanted just to start with the U.S. Knee business and appreciate the comments around the month-to-month fluctuations in growth. But maybe you could just take a step back and help us think through the impact of the conversion [indiscernible] robotic. How is that tracking? And how should we think about the way that shows up in reported numbers?

[Ivan Tornos, executive]

Thank you, David. Maybe quickly here, 20 seconds, big picture, and then I'll talk about the U.S. So big picture. It was a good quarter. We here at Zimmer Biomet delivered 5.6% ex FX. As I noted in my prepared remarks, this is the tenth quarter in a row, growing mid-single digit or above. And we're pleased with the double-digit growth in adjusted EPS. S.E.T. performed above expectations, third quarter mid-single digit or above. I'm pleased to report that for the first time in a while, every single business we think S.E.T., and there are 6 of them actually grew, which is something we didn't see before. Enabling Technologies, which is robotics primarily grew double digit in Q2. It grew double digit in Q1. The U.S. grew robotics grew 16% in the quarter, so strong in that regard. And as we announced this morning, we did close the gaps in hips that we had, which, frankly, is one of the reasons why we lost market share.

You throw in this summary to highlight the fact that unlike 5 years ago, we're not just a U.S. Knee centric type company. That said, relative to lease and the U.S. performance, look, David, not pleased with the quarter. It was softer than expected. And what I will tell you is that there are 3 main reasons why we did not do better in the U.S., and these are several reasons. The first 1 is we had a large amount of high-volume surgeons Zimmer Biomet, high-volume surgeons that were out of the territory for a variety of reasons. We hosted large medical allocation events, and we did have a large group of surgeons that were not performing surgeries in the quarter. The second piece is that we had some challenges from a supply standpoint when you came to one of our Knee platforms, what we call Knee salvage, which is part of new revision cases. These are high ASP cases. And candidly, this didn't end of the quarter. And then the third reason of why Knees in the U.S. was softer than expected, is comps.

We delivered net growth of 10%, almost 10%, 9.8% to be exact in Q2 of 2023. It was close to mid-single digit and the U.S. grew 5%. So comps didn't help. So in the background of the surgeons being out supply constraints that come help us. What I will tell you is that these 3 elements have gotten resolved as we move out of the quarter and see here, July behind us, the U.S. recon performance is very strong.

On the second part of your question, David, cementless continues to track very nicely. Candidly, I hope we can get more sets out, the adoption rate is very high. We are converting accounts and we hope to have cementless not just in the U.S. but outside the U.S. very soon. So that's the summary of what's happening here in the U.S.

[David Roman, analyst]

That's super helpful. Maybe, Suky, just a quick follow-up for you on the P&L. Can you help us think about the kind of interplay here between the benefits you're seeing from the restructuring? And I think you had talked about planning to reinvest some of the savings. Where are you in sort of the progress with respect to the restructuring benefit. And then at the same -- on the same token, kind of that level of reinvestment that you had contemplated when you introduced the restructuring back in February.

[Suketu Upadhyay, executive]

Yes. First of all, David, thanks for the question. Just to remind everyone, we talked about or announced our restructuring program at the early part of this year. We talked about $200 million of run rate savings as we exit 2025. And I would say where we are right now is we're slightly ahead of that overall trend, at least from a timing perspective, still expect to generate $200 million 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 as well as in certain areas across commercial, whether that's building specialized sales forces across additional complement in our technology components of recon and other parts of commercial. So we are, as I would say, just summarizing, going a little bit faster than expected on the savings program, and we're in line and on track with that reinvestment plan.

[Operator]

We'll go next to Matt Taylor with Jefferies.

[Matthew Taylor, analyst]

I guess I just wanted to ask you more about the hip progress that you're expecting calling out the opportunity to move back into a share-taking position over the next couple of years and tying that back to the Analyst Day goal. So I guess I'll ask the question as to when you expect this to really start how we should measure your progress against the share gain goals? And are there inflection points along the way that we should be looking out for in your Hip business?

[Ivan Tornos, executive]

Thank you, Matt. The short answer is we have already started. So again, July so far, so good when it comes to Hips recovery. We launched our Surgical Impactor HAMR, midpoint into Q2 and the adoption has been great so far. As you heard from us, we will be launching our triple taper stem, that's Z1, which is going to enable share regaining in direct anterior that's going to get launched late in Q3, early Q4. We have the quantity that we need. We got the commercial plans in place. So that should be another driver. And the third leg here was to have elegant navigation systems, and we've got 3 of them. This morning, we announced the acquisition of Ortho Grip, that will close later in the year. It's one of the fastest-growing navigation platforms in the U.S. So I would say the combination of triple paper stems, surgical impactors and free modalities on navigation, put us in a position to regain market share in the U.S. and outside the U.S. Outside the U.S., we're going to be launching a second generation of robotics, Hip posterior robotics and that's another driver of share regaining. So we're very confident about where we are today, and we will get the share back.

[Matthew Taylor, analyst]

Great. And just one clarification. So the issues you mentioned in the U.S., you're a as are temporary related to the surgeons being out the supply issue, not a change in the market or something else big are happening?

[Ivan Tornos, executive]

The market is very strong. By now, all of us have reported. So you see that the market growth rates remain above pre-pandemic levels. So in relative to market. And again, I just want to emphasize that the 2, 3 things that I talked about, the large volume surgeons being on the territory, we saw in July a recovery. On the revision constraints, those are largely soft. And again, that's one portion of our platform. And again, so far, so good. So yes, market is healthy. .

[Operator]

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

[Andrew Ranieri, analyst]

Maybe Suky for you to start. Just you've talked more -- you've talked about growth and margin improvement and increasingly so about free cash flow. But when we kind of look at your guide for the year it still implies a significant step-up in the back half versus the first half. I guess some of that would be growth and the leverage opportunity that you kind of talked about. But -- is the environment supportive enough to see kind of a meaningful working capital improvement? And especially with all these new products coming and I have to imagine you're going to be spending on FX, but just on CapEx. But just how do you kind of get to your free cash flow guide and your plans on that cash this year?

[Suketu Upadhyay, executive]

Yes. Thanks for the question. There are really 3 building blocks to the growth in free cash flow from where we start here in the second quarter or the third quarter, I should say. And by the way, the asymmetry between first half and second half of free cash flow is typical in our business. The 3 building blocks are really -- you have a lot of headwinds in the first half of the year related to rebates from the previous year fourth quarter that you have to pay in the first quarter, bonuses and different levels of incentive payments that happened in the first half. So there are certain headwinds that typically happen in the first half that don't repeat in the second half. .

In addition, in the second half, you're going to have improved EBITDA through growth, as you pointed out. But secondly, a pretty meaningful improvement in working capital, specifically around inventory. We've already seen that inventory improve from second quarter versus first quarter, and we're going to continue to see that sequentially improve in the third, fourth quarter as well. So that's a pretty big driver of the overall free cash flow generation and step up into the second half of the year. relative to where we're prioritizing, we continue to prioritize in making sure that we've got the right assets and the right level of investment on our organic business.

As Ivan talked about, we're actually stepping up our instrument CapEx around OsseoTi. Demand, quite frankly, has outstripped our original expectations and -- which is a great thing. And we're now catching up on getting those sets out into market. And so we feel really good about that. we're actually putting more dollars against that. But outside of that, I think what you're seeing also is that we bought some shares back in the second quarter aligned to our overall capital allocation strategy, which we outlined on our Investor Day. So overall, feel good about where we're headed for cash for the full year. You will see a second half step-up typical in every year, and we're going to continue to prioritize our organic investments. And then from there, our capital allocation remains balanced between M&A and return of capital to shareholders.

[Andrew Ranieri, analyst]

Got it. And Ivan, maybe just over to you quickly on the Ortho Grid acquisition. Can you just talk a little bit more about how this supports the overall large joint strategy? And maybe how you think this platform could evolve over time across portfolio or care settings and maybe eventually into the S.E.T. business?

[Ivan Tornos, executive]

Thank you, Drew. Very excited. So this 1 word is optionality. Now Zimmer Biomet is the only company in the world with 3 different forms of navigation with ROSA Hip, you got anterior today robotic navigation at some point soon, poster as well. with also grid, we have AI surgical guidance. It's a lighter, faster option for some of the surgeons that want to use a non-robotic option. And then the [indiscernible] here, as you know, we have a partnership with Hips insights, which is the only FDA-approved mixed reality navigation. And that pretty much gives the surgeon X-ray vision over a patient's anatomy instruments and implants. So again, a different modality which some customers seem to like. So we got 3 different ways to do navigation and that appeals to pretty much every customer in that regard. We -- the broad strategy. We want to be a company that delivers faster, better solutions and navigation is an enabler of that. And again, in the big picture, this will enable Zimmer Biomet to regain some of those 200 to 300 basis points of market share that we lost over the years.

[Operator]

We'll go next to Joanne Wuensch with Citi.

[Joanne Wuensch, analyst]

You mentioned somewhere in the script several new ROSA robots that you expect over the next 3 to 8 quarters. Could you remind us of how many is several and which those are and how we should think about those launching over essentially the next 2 years? And I'll throw one or in there for Suky, how do you think about the revenue contribution from those robots ramping?

[Ivan Tornos, executive]

Joanne, good to talk to you I think I said over the next 4 to 8 quarters, but if it is 3, let's keep it to 4. We're not going to get into a the details given competitive reasons. But what we are committed to launch is a posterior application for some of the OUS markets where posterior is more prevalent in that interior. As you know, we're going to get into full launch mode for ROSA Solder later in the year. And again, so far, the voice of customer has been super. We want to get, at some point, a different version of ROSA. We're launching 2 different ROSAs for Nic. One is going to be late this year, early 2025. We call ROSA [indiscernible] which has different levels of workflows, smart positioning. It's got a different auto balance procedure, and it will be a platform that is going to deliver a kinematic align type of me. In 2025, at some point, we will have a ROSA CT scan base for some of ROSA users that like the top of device. So those are 4 or 5 examples that was coming here again over the next 4 to 8 quarters. .

In addition to ROSA, we have the partnership with [indiscernible]. We got, as I just mentioned, very comprehensive navigation systems. In terms of the revenue contribution, we don't really give details on that. What I will tell you is that we're growing today end of Q2, double digit in the U.S. when it comes to [indiscernible] technologies. We grew double digit in Q1 and we don't expect that to slow down, and that's pull-through for implants.

[Operator]

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

[Larry Biegelsen, analyst]

One for Ivan, one for Suky. I'll try to ask both upfront. To Ivan, I'd love to hear an update on the status of Persona iQ, the launch and the short -- have you launched the short STEM extension and how that could help and the TPT we saw you applied for that. Just confident you'll get it and what that could mean for adoption of -- just as my follow-up for Ivan, on the gross margin here. I mean, I'm sorry, for Suky. The gross margin was a little lighter than expected in Q2. What's assumed for the full year? Did you say that gross margin steps down as the year progresses? So Q3 lower than Q2 and Q4 lower than Q3. And is gross margins still expected to be in line with 2023. I think that was the prior guidance. So I apologize Suky, if I heard incorrectly, your comments earlier.

[Ivan Tornos, executive]

Thank you, Larry. First part of your question on Persona IQ, we remain excited. The adoption is speeding up, also see some acceleration in the second half of 2024, part of the new product contribution for 2024 and in a more meaningful way in 2025. We've now crossed 3 billion data points around range of motion, mobility and whatnot. We launched what we call recovery curves, which enables the opportunity for us to cross-reference how certain patients are performing versus others. We're going to be having a data discussion with payers. So we can engage in some risk sharing type of agreement. So again, leveraging the data. On the stay part of your question, we're going to be launching that at the full launch at the end of 2024. So we got the approval. The design is ready to go. The sales are ready to go. And again, that's part of the acceleration in the second half of 2024 more meaningfully in 2025. We've now signed agreements, partnerships with some of the major hospitals around the U.S. And then in terms of TP, we did look at it. We engaged a third-party consultant. We pulled the TPT application because it didn't make economic sense or they make as much economic sense as we thought. And again, we believe there are different, better ways to monetize the technology. We still have [indiscernible] makes sense. .

[Suketu Upadhyay, executive]

Larry, on your questions on gross margin. I think actually, you largely got it right, but let me just step back and go through it for you. this year-over-year overall, we expect gross margins to be in line with '23, but potentially slightly down. That's the new element there, and that's largely driven by the mix of our business. We're just seeing much stronger international sales. which have a lower gross margin than the U.S. So it's really mix related. But again, in line to potentially slightly down. In the second quarter, you're right, it was a little bit lighter than our expectation. Again, back to that mix component where the U.S. was just much stronger from a growth perspective than the U.S. for all the reasons that Ivan spoke about. Even in the backdrop of that, Larry, we still managed to expand operating margin by 100 basis points and grow earnings quite nicely. On the cadence, you got it right, and it's consistent with everything that we provided earlier this year, which is to say gross margin will step down sequentially in the second half versus the first half. And you should see that also Q2 to Q3, Q3 to Q4 sequentially down. The primary driver of that, again, going back to our earlier comments from this year, are really around the inflationary pressure we saw in third-party manufacturing costs from 2023 that got capitalized and are now feathering into the P&L throughout this year. So that's the driver of the cadence there.

But again, I'll just revert you back to the backdrop of all that is we do still expect to see operating -- meaningful operating margin expansion for the full year, and we do expect to see operating margin in the second half step-up versus the first half. Again, driven by the restructuring program despite the sequential lowering of gross margin. So sorry for all the detail there, but I wanted to get it all out in sort of one compact commentary.

[Operator]

We'll go next to Ryan Zimmerman with BTIG.

[Ryan Zimmerman, analyst]

I want to ask a questions upfront. The first one I want to ask is around ROSA versus [indiscernible]. And when you announced that transaction or you announced that partnership, I think there was some fear that [indiscernible] could replace ROSA at least in terms of how the stock reacted. And so Ivan, if you could kind of talk about kind of how you think about adoption of those 2 options over time, where too many fit in terms of either setting of care or utilization? And does that kind of reflect the proportion of Knees and Hips that are done in an ASC versus a hospital? And should we think of it that way? And then my second question is just a follow-up to Larry's question on margins for Suky. Price was positive this quarter, but you did call it higher manufacturing costs. And so when do you turn the corner on higher manufacturing costs is that sometime in 2025, that we see that improve? And how durable is your pricing benefits?

[Ivan Tornos, executive]

Thank you, Ryan. Look, [indiscernible] it's not going to replace ROSA, just like OrthoGrid is not going to replace ROSA. It's all about having breadth of portfolio. [indiscernible] offers city scanning with some shortage like and [indiscernible] is the only handheld robotic platform in the world, which is something that in an as environment surgeons seem to like. What I will tell you is that we are deeply committed to ROSA, point in case all these new platforms and indications, we're going to be launching over the next 4 to 8 quarters. point in case the commitments we made at the Investor Day of doubling our penetration from somewhere in the 20% of all U.S. Knees don't robotic with ROSA to 40% in the next 3 years.

ROSA continues to be one of the fastest-growing platforms here at Zimmer Biomet. We grew again in the U.S. or capital sales for ROSA 16% in Q2. Overall, it was double digit globally. ROSA today is already outside the U.S., the leading robot platform, #1 in Asia Pacific, fast-growing in EMEA. And again, we're very pleased with where we are with ROSA but we know we need to have optionality and we like our chances when it comes to that. In terms of the revenue contribution of robotics is one of the most meaningful ones. And as we develop penetration, you should assume that 1 [indiscernible] and shoulder late in the year is going to continue to grow.

[Suketu Upadhyay, executive]

Ryan, it's Suky. Let me start with price and then I'll go to your question on manufacturing costs. So price, as I noted in my earlier commentary, we were positive 80 basis points in the second quarter, and that marks overall a positive pricing first half for the company. I think it's probably the first since I've been here. The way that breaks down is we saw really strong performance in EMEA. APAC was about flat to slightly up in the second quarter, and the U.S. was down year-over-year on pricing. But overall, a very good quarter. That's a combination of a number of variables. One, a more favorable environment, two, we're getting greater discipline in analytics and governance around pricing and a better culture, I would say, around pricing. And the third is we saw some onetime benefits, especially in EMEA that helped drive that positive performance. in price for the second quarter.

Our outlook for the full year on price, originally, I started out the year saying that we thought we would be about 100 basis points I would say now we're going to be somewhere flat for the full year to potentially down 50 basis points. And the reason why that flip is in the second half is because some of those onetime benefits that we saw in EMEA in the second quarter, we don't expect to repeat at the same level of intensity in the second half. So that's a little bit about price, definitely seeing much better improvement in performance this year. And we think a large part of that is going to run into 2025 because a large part of our business is contracted. So again, we'll give more color on '25 when we get to that point, but really happy about the trend that we've got going here on pricing in 2024.

Relative to manufacturing cost, yes, manufacturing costs are higher this year, again because of the capitalization for 2023. And I'm not going to give specific guidance into '25, but rather I'll refer back to our LRP and our Investor Day, where we talked about operational stability in gross margin over the LRP. That, in fact, implies that we should start to see operational stability in manufacturing costs through that LRP. But again, as we continue to progress through '24 and into '25, we'll provide more color on that. I feel good about the progress. Yes, I feel good about the progress the team is making on manufacturing costs -- and I will say we're finally starting to see some stabilization in overall inflation, both on raw materials as well as third-party manufacturing costs. So glad to see that inflection. .

[Operator]

We'll go next to Robbie Marcus with JPMorgan.

[Robert Marcus, analyst]

Great. Two for me. First, the outside the U.S. Hip and Knee came in pretty strong today, even when factoring in the currency headwind versus consensus. So maybe you could speak to the trends you're seeing there? Is it different in Europe versus Asia Pac? And did you see the same headwinds that you saw in the U.S. with vacation days or supply constraints there?

[Ivan Tornos, executive]

Yes, I'll take that, Robbie. Good talking to you here. So the volumes as of the U.S. remain very strong, in particular, in Europe and within Europe and the U.K., where we know that is prominent backlog. So market dynamics are very healthy, more in EMEA than APAC, but very healthy overall. One of the biggest drivers of growth out of the U.S. is robotics. I mentioned that earlier in my answer to Ryan, I believe, we continue to see fast adoption of ROSA in key markets outside the U.S. We are the #1 platform in Asia Pacific. We continue to drive adoption in key countries like Japan as well as Australia and New Zealand. We have accelerated persona growth moving from next gen to persona in these key geographies. So it's a combination of market dynamics and great commercial execution. That's the answer there.

[Robert Marcus, analyst]

Question?

[Ivan Tornos, executive]

Go ahead, Robbie.

[Robert Marcus, analyst]

Sorry -- do I get a follow-up?

[Ivan Tornos, executive]

Robbie, sorry. As I say, the U.S. dynamics that I mentioned are relative to the U.S., you mentioned surgeon pin the territory, that is very, very focused in 1 month in 1 quarter within the U.S. So this is not a dynamic that we saw outside the U.S. I wanted to answer your second question.

[Robert Marcus, analyst]

Maybe on S.E.T. You talked about all of the segments grew. Maybe you could just give us a little color into each of the segments there, how they grew and sort of the trends you saw?

[Ivan Tornos, executive]

Yes. Yes. Thanks, Roy. I won't get into a lot of detail here. What I will tell you is that the growth drivers, those being sports and shoulder are growing either upper single digit or double digit. And the other 3, for an ankle trauma restorative therapies are growing at different levels, but all of them growing. So the challenge we've had with RT reimbursement-wise, that's behind. So great to see all 6 businesses we think at performing.

[Operator]

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

[Jayson Bedford, analyst]

I guess, first, I appreciate you don't guide by segment, but maybe within your 5% to 6% organic revenue growth guide, has your internal thinking change with respect to growth in the different segments?

[Ivan Tornos, executive]

Can you repeat the question?

[Jayson Bedford, analyst]

Yes. So I'm just wondering, relative to the beginning of the year, your 5% to 6% top line growth hasn't changed, but I'm just wondering as your view on segment growth changed at all, meaning is set now a bigger contributor than you thought at the beginning of the year, et cetera.

[Ivan Tornos, executive]

No, no. We continue to see set and recon perform in the way that we anticipated earlier in the year. So again, some timing in Q2 with U.S. Recon. But we go into the second half, the expectation remains the same. There's is no 1 bigger than the other. .

[Jayson Bedford, analyst]

Okay. Fair enough. And just as a quick follow-up, International was strong. You talked earlier about -- or you stressed geographic diversification. I was a little unclear. Are you entering new markets. Are you allocating more resources to certain geographies? Just if you could expand on the stressing of geographic diversification.

[Ivan Tornos, executive]

I will call it a more focused strategy. 15 countries today account for 93%, 95% of the overall market potential. In the past, we've been candidly all over the place. And in the last 2 years, call it, we refocused the strategy to those key markets that matter the most, and I won't go through every one of those countries, but it is 15 countries. So OpEx and CapEx has been reallocated to those geographies. Our commercial infrastructure has been modified in those countries and the way that we focus on those countries is different. So that's what we're doing outside the U.S.

[Operator]

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

[Joshua Jennings, analyst]

Multipart on the Hip franchise and the recovery here. I may have missed some of this in your answers and prepared remarks, but just wanted to focus in on ROSA Hip. Just can you help us think through where robotic assistance penetration is for total Hips. Do you think Zimmer's ROSA Hip platform is holding its own? Are you maintaining share in that channel? And then is this worth a good acquisition? Could you integrate that technology into the into the ROSA Hip application down the line.

[Ivan Tornos, executive]

Sure. So I'll start with the question on whether ROSA Hip is performing. The penetration is double digit. It continues to meet the expectations that we had. We believe that we need to have a ROSA posterior application to gain market share outside the U.S. and that development is in motion. We also believe that to a certain segment of customers here in the U.S. the one less expensive, faster lighter application, surgical AI by OrthoGrid is going to be a good modality. But so far, our expectations have been made with ROSA Hips and navigation in general.

[Zachary Weiner, executive]

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

[Ivan Tornos, executive]

Well, I'd like to close the way that I started with gratitude. I'm very thankful to all the Zimmer Biomet team members for the progress. As I alluded to earlier in the call, this is the tenth quarter in a row where we're growing mid-single digit or above. We're pleased with the quarter, delivering close to 5-point -- or actually 5.6% FX revenue with double-digit EPS. We've proven that we can make commitments and derive those commitments. I like the fact that we have a diversified portfolio. We don't depend on 1 segment in 1 country. It's well diversified, sustainable performance. And what we will tell you is that we are more confident than ever that we will deliver in the guidance that we reaffirm today. So thanks, everyone, for joining the call, and I look forward to our next update. .

[Operator]

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