Zimmer Biomet - Q2 2023

Transcript

Operator (participant)

Good morning, ladies and gentlemen, welcome to the Zimmer Biomet second quarter 2023 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the 0. As a reminder, this conference is being recorded today, August 1st, 2023. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. If you have a question, please press the star followed by the 1 on your push-button phone. I would now like to turn the conference over to Keri Mattox, Chief Communications and Administration Officer. Please go ahead.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's second quarter 2023 earnings conference call. Joining me today are Bryan Hanson, our Chairman, President, and CEO, EVP and CFO, Suketu Upadhyay, and COO, Ivan Tornos. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note, we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures.

Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q2 earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Bryan. Bryan?

Bryan Hanson (Chairman, President and CEO)

All right, thanks, Keri, thanks to everyone for joining us on the call this morning. You know, it's always good to be with you, but I would say it's even a little better and certainly more fun when we have great performance in the quarter. We're pretty happy about the results that we get to discuss today, and I can tell you we're looking forward to the dialogue. I'll start things off as we normally do. I'll talk about our Q2 performance and the key drivers inside of the quarter. I think also really important is to talk about the key drivers that we see continuing to move this business forward. Then Sukhi will walk us through the financial details of the quarter and importantly, discuss how we are again, raising our full year financial guidance.

Then, of course, we'll close things out with a Q&A session, and we look forward to answering your questions and having a dialogue in that session. Okay, to kick things off, I'm just going to take a step back, which I've been doing now for the last handful of quarters, and I think deservedly so, because I want to say thank you. I want to say thank you to each and every one of our team members around the world, because it's your hard work, it's your dedication to getting the job done that is moving this business forward. I got to tell you that I'm proud to say that you have delivered another very strong quarter, while once again making ZB a certified great place to work.

You've done all of this while improving our scores, and as a result of that, our rankings on the environmental, social, and governance front. I think simply stated, we are doing well while also doing good, and that means for our team members, our patients, our customers, and our communities, and even our planet. Once again, I want to say thank you to our team for all that you do for ZB and to move our mission forward, and most importantly, for doing it together as one team, one ZB team. Let's talk about the second quarter, and I'm just going to say simply, we delivered another strong quarter, again, beating our own expectations, and that performance positions us to again raise our financial guidance on both the top and bottom line.

This is in the face of some pretty significant macro factors that are impacting us and the entire market. Ongoing supply challenges are very real, and I'll talk about those in a minute, but also inflationary pressure, a tough labor market, and a geopolitical landscape that is putting pressure on everybody. Against that, I feel very confident about our pipeline, our execution, and the team's demonstrated ability to navigate these headwinds, which gives us confidence to increase our financial outlook. Okay, with that said, let's talk about the key drivers inside of Q2, and there were some positives and there were some negatives. I'll start with the positives, and the most important one, in my view, is that our team's execution remains flawless.

We're seeing significant traction, probably the best we've ever seen with our new product innovation. That paid dividends in the quarter for sure, but most importantly, is it pays dividends as we move this business forward. I would say that procedure recovery continued in the quarter, again, showing no meaningful impact from COVID or staffing challenges. That allowed for a tailwind from increased provider capacity. That resulted in backlog pull-through in the quarter. In terms of headwinds, I would say that the team is doing a great job of managing the supply constraint environment, but I would say that it is still very clearly a governor to our overall growth in the quarter. It continues to be a distraction for the organization. See, if I combine these things, though, all in all, our momentum continues. It continues to grow.

I've said before, my confidence in this business, our confidence in this business, is as high as it's ever been, and it's high for a good reason. You know, if you just look at the knee franchise alone, our innovation strategy is working. You know, we now have four meaningful pillars inside of this business, all of which can drive pricing stability, mix benefit, and competitive conversions. You know, first, let's look at the ROSA robotic platform combined with our Persona Cementless Knee. This is a powerhouse combination that is and will continue to accelerate growth. Based on the traction we're seeing so far, we continue to believe that ROSA and Persona Cementless together will enhance our robotics and cementless penetration from the current mid-teen level to 50% or better, 50% or better. The second pillar that we're focused on is Persona Revision.

This provides meaningful conversion and mix opportunities inside the revision category, but importantly, it also acts as a powerful tip-of-the-spear product for conversions and primary needs. Third, it's just the overall shift of the ZB legacy knee systems to our now fully rounded out Persona Portfolio. This is a meaningful mix benefit that we can take advantage of, that I would say is somewhat unique to our business. Fourth, on top of all this, you know, we have the world's first and only smart knee, which is Persona IQ. I know this is still in limited launch, but already it offers surgeons unparalleled data access and is attractive to patients, those patients who want more direct engagement with their care recovery.

We're taking on a similar approach to our hip portfolio, where we continue to launch meaningful innovation, again, giving us the opportunity for price stability, mixed benefit, and competitive conversions. We have four pillars of focus here as well. You know, first, it's ROSA and HipInsight. These are technology shifts in robotics and mixed reality that are setting up the ZB hip portfolio for greater adoption and growth. Second is the Avenir Complete. This is our current flagship product, combined with G7, which gives us a very strong position in both the attractive direct anterior and revision submarkets of hip. Then third, you know, this position will be enhanced with work being done on a triple taper stem, which will fully round out our direct anterior approach portfolio.

We believe this new portfolio, combined with the G7, which is the most versatile acetabular component available, will be unmatched in the industry. Then fourth, HAMMR. You know, this is our upcoming full launch of an automated impaction system that builds on a proven need in the market, and we fully expect that this launch will create surgical efficiencies while bringing personalized precision to each and every patient. Then finally, in S.E.T., we are being disciplined and targeting investment in our growth driver categories, upper extremities, sports, and CMFT, and each of these categories continue to perform. Given our momentum in these businesses and continued investment in innovation and dedicated infrastructure, we fully expect the S.E.T. business to be a mid-single digit grower in a normalized market environment. Overall, we know we're very excited about our innovation momentum. You know, it's very real.

You know, remember, we've called out that we have 40 planned product launches between this year and the end of 2025, with the majority in 4% plus growth markets. That's important because these innovations will certainly drive near-term growth, there's no question about that, but also create better sustainability of that growth because of the markets they're in. This portfolio shift that we're seeing and the team's execution capabilities are clear signs that our ZB transformation has taken hold. I can tell you right now that we're not going to stop there. The goal is to continue to enhance our growth profile through our ongoing focus on active portfolio management, that is supported by our already strong and strengthening balance sheet.

With that, I'll turn the call over to Sukhi for a closer look at Q2 and our latest expectations for the remainder of 2023. Okay, Sukhi?

Suketu Upadhyay (EVP and CFO)

Thanks. Good morning, everyone. As Bryan noted, we had another excellent quarter. Our results were driven by strong end markets as well as strong execution across the entire organization. As a result, we are again increasing our full year financial outlook. With that, let's turn to our results and updated full year guidance. Unless otherwise noted, my statements will be about the second quarter and how it compares to the same period in 2022. My commentary will be on a constant currency and adjusted operating basis. Net sales were $1.870 billion, an increase of 4.9% on a reported basis. An increase of 6% excluding the impact of foreign currency. Additionally, we had a selling day headwind of less than 50 basis points in the quarter.

Overall, the business continues to benefit from a recovery of elective procedures driven by continued market normalization, including hospital staffing and procedure cancellations returning to pre-COVID levels. We also benefited from some backlog recapture. While market momentum is strong, we continue to face certain macro challenges, including global supply chain pressures that muted performance across the business. US growth of 5% continued to outpace our expectations. International growth of 7.2% was driven by strong performance in both EMEA as well as Asia Pacific. All regions benefited from continued recovery of elective procedures, backlog recapture, as well as strong commercial execution and new product uptake. Turning to our business category performance. Global needs grew 10.5%, with US growing 9.8% and international growing 11.4%.

The strong performance in needs was driven by the four pillars that Bryan mentioned earlier, centering on a very attractive Persona Portfolio combined with the benefits of our ROSA robotics platform. Global hips grew 4.9%, with US hips up 2.7% and international up 7.1%. Both regions posted good growth on the back of new product flow, execution, and market recovery. The S.E.T. category was down 30 basis points year-over-year. Inside of that, we saw continued strong performance from our three focus areas within the business segment. As expected, we saw pressure from reimbursement headwinds within the restorative therapies business. We experienced more acute supply challenges within sports and trauma. In the backdrop of this, we believe we will move beyond these headwinds and this segment will rebound in the second half of the year.

Finally, our other category grew 6.5%. Now, moving on to the P&L. In Q2, we reported GAAP diluted earnings per share of $1, compared to GAAP diluted earnings per share from continuing operations of $0.73 in the prior year. The increase was driven by higher revenues, combined with lower non-operating expenses due to ZimVie investment losses from the prior year that did not repeat, as well as lower spend related to restructuring costs.... These benefits were partially offset by increased investment in R&D and commercial initiatives to drive future growth. On an adjusted basis, we reported diluted earnings per share of $1.82 were flat to the prior year. Higher year-over-year revenues and better gross margins were offset by higher R&D expenses, increased investments into commercial infrastructure for new product launches, and higher interest expense.

Our adjusted gross margin was 72%, up 40 basis points from the prior year, despite absorbing current year inflationary pressures, as well as pressure from prior year that was capitalized and flowing into this year's P&L. Favorable mix and FX hedge gains also helped support the increase in gross margin. Adjusted operating margin for the second quarter was 27.5%, down 50 basis points from the prior year. While gross margin was up, this was offset by higher operating expenses due to increased investments in R&D, aligned to our plan to improve our vitality index through new product innovation, as well as higher commercial infrastructure costs to support new product uptake. Net interest in other non-operating expenses of $57 million was higher than our expectations and significantly higher than the prior year, due to certain foreign currency losses in the quarter, as well as higher interest rates.

Our adjusted tax rate of 16.3% was in line with expectations. Turning to cash and liquidity. Operating cash flows were $348 million, and free cash flow totaled $165 million. We ended the quarter with cash and cash equivalents of $320 million. Our balance sheet remains strong, providing strategic and financial flexibility for future growth. Moving to our updated financial outlook for 2023. Based on another strong quarter of results, we are again raising our full year 2023 outlook. We are confident that we will continue to grow our top line above market rates and expand operating margin while continuing to reinvest in our business for future growth.

We are increasing and narrowing our constant currency revenue growth range to 7%-7.5%, with an expected foreign currency exchange headwind of 50 basis points. We are also increasing our adjusted EPS guidance range to $7.47-$7.57. Additionally, due to certain FX-related pressures and higher interest rates, we now expect net interest and other non-operating expenses to be around $200 million for the year. Our expectation around tax rate and total shares outstanding remain unchanged, and we continue to expect free cash flow to be in the range of $1 billion-$1.1 billion. Our Q3 and Q4 revenue cadence expectations are unchanged. Q3 revenue dollars are expected to be sequentially down versus Q2 and in line with normal seasonality, and Q4 will be our strongest quarter on a dollar basis.

While we expect momentum gained from the first half to flow into the second half of the year, recent and new sanctions on Russia may mute growth. Regarding selling day impact, we continue to expect Q3 to have a selling day headwind of about 150 basis points, while Q4 will have about 100 basis point tailwind. Overall, the net day rate impact for the full year is not meaningful. From a margin perspective, we expect Q3 to be our low watermark for the year, from both a gross margin and operating margin standpoint. While gross margin will have less variability from quarter to quarter, we expect Q3 operating margin to step down sequentially between 150 and 200 basis points due to the normal seasonality of our business.

We expect Q4 to step up significantly on a sequential basis, delivering our highest operating margin for the year. Importantly, we remain committed to investing for future growth while delivering meaningful full-year margin expansion in 2023. We're really pleased with how our team is navigating a challenging environment. In summary, we delivered another quarter of excellent top-line results, beating our expectations while managing very real supply chain challenges. We are building on our early momentum through continued execution and are again able to increase our full-year guidance. We are also reiterating our confidence and expectation to be a 4%+ or even mid-single digit top-line grower in a normalized market while delivering strong earnings. In short, our business has never been stronger. With that, I'll turn the call back over to Keri.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

Thank you. We'll go first to Travis Steed with Bank of America.

Travis Steed (Managing Director and Senior Equity Research Analyst)

Hi, good morning, Bryan and Sukhi. Nice quarter. I guess I'd start out with looking at the hips and knees in the quarter. I would think that knees, you know, 2x the growth rate of hips this quarter, backlog would be similar there. Is the elevated knee growth mostly the mix shift from some and ROSA coming through? Curious how much supply is limiting growth in hips and knees here, and what you're assuming about that improving in the back half.

Bryan Hanson (Chairman, President and CEO)

Thanks, Travis. What I think maybe I'll do, because, you know, obviously, Ivan's here with us, being as close to the action as any of us. Maybe I'll pass it to him to, to answer the question. Ivan?

Ivan Tornos (COO)

Thank you, good morning, Travis. I, I will say that the growth in knees is mainly innovation. We continue to see great momentum with ROSA penetration, so a pretty dramatic increase in penetration in the U.S. and, and core markets for U.S. The launch of Persona OsseoTi, or cementless launch.... is gaining great traction here in the U.S. In the prepared remarks, Bryan mentioned how we plan to go from 15%, 15, to 50. I won't disclose where we end the Q2, but it was a significant uptake in that side as well. We did also see great momentum in the ASC. We continued to grow here in the U.S., double digits in the ASC space. Yes, there was some backlog in key markets around the world.

We saw better backlog consumption in EMEA than here in the US, nonetheless, backlog was, was part of the performance. To the latter part of your question, certainly, supply was a governor. We do believe that in a normal environment with better supply, our already very compelling growth rate would have been even higher. All summarized, backlog, innovation, and great commercial execution were the key drivers behind the, any performance.

Travis Steed (Managing Director and Senior Equity Research Analyst)

Great. Thanks for that. I guess looking, looking forward about the sustainability of this, kind of the plus and, and the 4, 4+, and I think I heard the comment, even mid-single-digit growth. It sounds like even with, with some tougher comps, you're still confident in that, you know, seeing the plus and, and the 4, 4+, and then I'd assume that, you know, price is better. You got the mix shift, backlogs probably still lasting through 2024. Just kind of love to hear your, your confidence and, and kind of seeing the upside to that 4+?

Suketu Upadhyay (EVP and CFO)

Yeah. Hey, Travis, this is Sukhi. Yeah, very perceptive on our comments. Yeah, you know, we, we've got confidence in our business in a normalized environment that, that we're going to be a 4+ or, as I said, a mid-single digit grower. You know, there's, there's a few things. First, I'd focus on, qualitatively, execution is incredibly strong. Right now we've got, if you think about our WAMGR, Weighted Average Market Growth, continues to improve. That's been steadily improving, one, by investing in R&D organically in higher growth submarkets, even within recon, but then in sports, extremity and trauma. Then if you look at the M&A that we've been doing, it's been in higher growth markets in, in sports, upper extremities, as well as, as well as CMFT. Overall, our weighted average market growth has been improving.

Next, it's really around our innovation and what that innovation brings in terms of the ability to compete in the market. What it brings relative to share of wallet as well as mix, is all very positive as well. The last is our performance relative to market. I think we've demonstrated for a number of quarters now that we can perform at or better than market on a consistent basis. Really, execution is the primary driver, why we've got confidence behind that. Secondly, you're also seeing some improving market dynamics. 1, we think that overall, the patient dynamics are changing. You're seeing a lowering of the average age of our patients. That's expanding our overall market. 2, we think that they're getting more confident in the outcomes of recon procedures and sports procedures, again, because the technology, the innovation is improving.

We're bringing real value to the marketplace. I think the last thing is really the convenience and the comfort with the ASC setting is also helping to accelerate the overall market. The market dynamics are still early and preliminary, but the execution is very strong and very real. We've got a lot of confidence qualitatively. I think if you look at the back half of our guidance, the implied growth rate of being roughly about 5%, I think that's another proof point quantitatively that gives us that confidence. Again, thanks for thanks for picking up on that, and those are the things that give us confidence.

Travis Steed (Managing Director and Senior Equity Research Analyst)

Great. Thanks a lot.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

We'll go next to Richard Newitter with Truist Securities.

Richard Newitter (Managing Director and Senior Equity Research Analyst)

Hi, thanks for taking the questions. We're just looking at the margins. I'm trying to calibrate, you know, if we're kind of back to normalized levels sustainably, what your normalized margin and margin improvement prospects are. You know, you did about 200 basis points of year-over-year operating leverage in the first quarter, and you grew double digits on the top line. Now you're at about 100 basis points, roughly in the back half, and that's, like you said, a mid-single digit implied growth rate on the top line. Can we assume, like, that those are basically the right level of operating leverage to correlate to, you know, call it, you know, mid - upper mid-single digits?

You're getting north of 100 basis points, something more in the lower mid-single digits or upper low single digits, your 50 basis points+ operating leverage?

Suketu Upadhyay (EVP and CFO)

Yeah. First of all, thanks for the question, Rich. You know, I'll just step back a little bit and just say, you know, if you go back to 2022, even in a very challenging market with a lot of inflationary pressure, supply chain disruption, et cetera, we were able to grow our operating margins. As you look at 2023, you take our implied guidance, it would suggest we're going to grow operating margins by almost another 100 basis points at the midpoint. We feel really good about what the company's been doing, and inside of that, we've been doing that with very strong, as you see, mid-single digit growth, very good gross margin performance. I'll break that down in just a moment.

Offsetting continued challenges with inflationary pressures, but also inflation from 2022 that capitalized into this year, which we've talked a lot about, while still investing against the business for future growth, right? Very strong profile, good top line growth, good gross margin, offsetting the challenges and continuing to invest against the business. I do think, our ability to sustain these very high, very attractive margins this year into the future is absolutely table stakes, but I also think that we're going to be in a position, going forward in a normalized market where we're going to be able to expand margins from here. That's, that's how we think about things. I, I won't try and break down between what level of revenue growth, how much margin expansion. There are a lot of factors that play into that.

The big picture takeaway is we're at a really good level now. We're going to sustain that, if not grow that, into, into 2024 and beyond.

Richard Newitter (Managing Director and Senior Equity Research Analyst)

Okay, thanks. Just maybe feeding that into M&A, you know, how, as we think about your M&A and tuck-in strategy, how should we think of the prioritization of, of top line from tuck-in M&A versus margin and earnings dilution trade-off?

Suketu Upadhyay (EVP and CFO)

Yeah. You know, we kind of how to work around this as a leadership team. Clearly, what you see by looking at other companies in our sector is that valuations are correlated at a very high level to revenue growth. Understanding the ability to get our revenue growth at a higher rate, you know, the mid-single digit is a great accomplishment, given where the company was just 3 to 5 short years ago. We're happy about the progress we made, but we're not satisfied, right? We believe that M&A, investing into faster growth markets, absolutely is the right thing to do and ultimately will improve our overall Weighted Average Market Growth and the overall growth rate for the company. Then once you get there, you get natural leverage.

The P&L starts to flow through, and over time, you start to get to a profile where you get very strong earnings growth well ahead of revenue growth. That's the profile that we're going for long term. From an M&A standpoint, our first priority is, is that revenue growth and that diversification of the company into faster growth markets. That may come with some near-term dilution, we're also going to be very conscious about driving P&L discipline and looking for accretion in a reasonable amount of time, let's say, within the first two years. That's how we think about M&A. The priority is going to be about accelerating the overall company's growth.

Richard Newitter (Managing Director and Senior Equity Research Analyst)

Thanks, and congrats on the quarter.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks so much. Katie, can we go to the next question?

Operator (participant)

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

Pito Chickering (Managing Director and Senior Equity Research Analyst)

Hey, good morning, and thanks for taking my questions. Can we take a touch more into SET? You talked about strength in three focus areas, but also some supply challenges. Yeah, what were those issues? Are they fixed at this point? How should we be modeling SET in the back half of the year? If the supply challenges are fixed, should we think about a bolus in the third quarter?

Suketu Upadhyay (EVP and CFO)

Yeah, you know, a couple of things that inside the 2nd quarter on S.E.T. One, we continue to work through some of the reimbursement changes in our restorative therapies business that we talked about 1 year ago. We believe we've now sunsetted those, so those shouldn't be a challenge as we move into Q3 and Q4 the rest of the year. However, we did see some pretty acute supply issues, especially in our sports business and to a lesser extent, trauma. That muted growth. Underneath that, our priority areas of sports, upper extremities, and CMFT all performed incredibly well, and so we're happy with the continued progress and momentum we're making in those businesses. We do expect an inflection in the back half of the year for those... for, for the S.E.T. category as a whole to rebound.

It's likely going to be stronger in the fourth quarter as we continue to work through the fluid situation of supply in the third quarter.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

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

Suketu Upadhyay (EVP and CFO)

Overall, Russia is less than 1% of total sales on a full year basis. We became aware, towards the end of the second quarter, that new and unexpected sanctions were being placed on certain medical device products. Our products fell into that category, so we basically have to go back and reapply for licensing against all of our products. We don't think that that's going to be a governor in perpetuity, but at least for the third quarter, it's going to create a bit of a headwind, potentially a little bit into, into Q4, worst case. We think that that headwind's roughly about 50 basis points in the back half of the year. Again, most of that'll be felt in the third quarter.

From a raw materials exposure, I think the biggest area, and we've talked about this at length, is, our titanium supplies coming out of Russia have been relatively stable. That's a good sign. We also took the additional measure at the end of 2022 to create some redundancy and to find alternate suppliers, multiple suppliers outside of Russia. We feel good about our titanium supplies.

Pito Chickering (Managing Director and Senior Equity Research Analyst)

Great. Thanks so much.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

We'll go next to Jeff Johnson with Baird.

Jeff Johnson (SVP and Senior Research Analyst)

Thank you. Good morning, guys. Congrats on the quarter. Kind of, I guess we're ticking through all the segments here. Maybe if we just look at the other segment, that 6% growth, that was, you know, at least a nice step up from what we've seen, kind of on a trailing 12-month basis. Maybe any insights there, what drove that and just kind of how we're seeing mix between leasing contracts and/or outright purchases on ROSA? Thanks.

Suketu Upadhyay (EVP and CFO)

Yeah, sure. Hey, Jeff, I'll, I'll take that. Sukhi again. I think the biggest driver was bone cement. Not surprising when you see the, the recon growth numbers in the second quarter to see a very good other performance, especially from bone cement. We also saw some good performance outside in, in surgical as well, with ROSA placements versus outright sales. Consistent with prior commentary, we're seeing the majority of our ROSA placements or installments, I should say, being done through the placement strategy versus sales. That trend continues.

Jeff Johnson (SVP and Senior Research Analyst)

All right, great. Then maybe just a follow-up, just on backlog. I know you don't guide on backlog and, you know, any high-level comments, though, on how you're thinking about that backlog clearing in EMEA and what you saw in the US, and just kind of comfort with that backlog still continuing to provide some tailwinds maybe over the coming year or 2? Thanks.

Suketu Upadhyay (EVP and CFO)

Yeah, definitely felt it in the second quarter, as we talked about. That helped offset some of the supply challenges that we had. We expect backlog to continue to contribute through the rest of this year. You know, it's always difficult to determine exactly how much was in any given quarter and to predict how much will come through. It's a little bit of amorphous, but we know that it's there, and we have high confidence that we're gonna continue to see it through the, the back end of this year and likely through 2024.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

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

Larry Biegelsen (Managing Director and Senior Equity Research Analyst)

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

Ivan Tornos (COO)

Absolutely, Larry, I'll take that one. First and foremost, we remain on track with our limited market release. We've been saying all along that, by January Q1 of 2024, we'll be ready for a full launch. I will say that we're almost there in getting all the data. We're approaching 1 billion data points from multiple patients, thousands of implants by now. Really, we're answering 3 questions. Number 1 is, to your point, what is the value proposition? Can we demonstrate a reduction in the length of the episode of care? Can we bring objectivity to our range of motion metrics? Can we demonstrate better gait performance, given better technique, better surgery? Can we compare the recovery curves, who does better post-implantation?

There's a lot of data we get in that regard, and we'll be filing some claims once we digest the multiple data points that we're getting. That's question number 1. Question number 2 in the limited market release is: How do we make the whole thing seamless? This is new to the world technology. It's got a home-based station, as you know. It involves the patient, it involves the surgeon, the caregiver. We wanna make sure that it's a best-in-class experience, and there are some things that we're working around. Then the 3rd question, and I know this is near and dear to you, is: Who's gonna pay for the technology? To that end, we got the NTAP kicking in at the beginning of October.

You'll be pleased to know that we follow up with your question around TPT, transitional passthrough. We got a deadline of August 23rd to submit, we're in the final stages on evaluating what that submission could look like. We're evaluating commercial payer strategy as part of this limited market release, we continue to think about the payer as well. With all of that said, the what, the how, and the who will pay, I think we're gonna be in a good position to start to see a full market release by January, if not late Q1, 2024.

Larry Biegelsen (Managing Director and Senior Equity Research Analyst)

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

Ivan Tornos (COO)

You know, I'd love to give you more color, but Bryan and Keri will shoot me. I will tell you that we remain convinced, capital letters, that we'll be first to market in shoulder robotics. Beyond the speed to market, what I like is what the actual platform offers. Faster surgeries, more accurate outcomes, shorter recovery. I love what we've seen. We've done our final validation labs with customers, both friends and family customer surgeons and also competitive surgeons, and the feedback has been outstanding. Beyond the platform dynamics that I mentioned around shorter recovery, faster surgery, I, I just love the integration that ROSA Shoulder will have with the rest of the CDH ecosystem. More on that soon.

Larry Biegelsen (Managing Director and Senior Equity Research Analyst)

Thank you.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks so much, Larry.

Operator (participant)

We'll go next to Ryan Zimmerman with BTIG.

Ryan Zimmerman (Managing Director and Senior Equity Research Analyst)

Hey, thanks for taking the questions. We all heard, you know, UnitedHealthcare's comments this quarter. It was evident results, but it was specific to recon of Medicare. I'm just wondering if you kind of parse out the procedure environment, within S.E.T. It's hard to see, you know, given some of the supply chain dynamics. I'm just wondering if you kind of speak to that environment relative to recon and your expectations for durability of, you know, its robustness, if you will, through the remainder of this year, similar to the recon environment.

Ivan Tornos (COO)

Thank you, Ryan. I'll take that one as well. Obviously, it varies from region to region. What I will tell you here in the US, we saw greater backlog consumption coming from knees and hips. It was actually quite the opposite in EMEA. When it comes to S.E.T., a lot of those cases here in the US are done in an ASC environment. A lot of those cases are commercial payers, and it's been pretty, pretty consistent. Again, it varies quarter to quarter, geography to geography. We do believe that the backlog is gonna be here for a while, and I will see fluctuation given ASC, non-ASC here in the US, and then again, different variables outside of the US.

Suketu Upadhyay (EVP and CFO)

I think the key takeaway-

Ryan Zimmerman (Managing Director and Senior Equity Research Analyst)

Okay.

Suketu Upadhyay (EVP and CFO)

you just don't see as much impact on the S.E.T. business as you do the recon business when you think about backlog.

Ryan Zimmerman (Managing Director and Senior Equity Research Analyst)

Fair, fair. That's, that's helpful, Bryan. Then, you know, we talked about Russia. Last year it was China and the impact of VBP. I'm just wondering if you could articulate specifically what the status is in China. We've heard from many of your peers, you know, China's improving. You know, what are your expectations for China growth, as we start to lap the VBP impacts?

Suketu Upadhyay (EVP and CFO)

Yeah, first of all, VBP is not a material driver for us at all in 2023. We, we sort of turned the corner on that between the end of 2021 and 2022. We actually see China as a growth driver for us, albeit at a lower level. We do believe that, that, that market has some very strong growth for us. I'd say pre-VBP, that market was growing in the, in the low double-digit ranges, and we'd be surprised if we didn't return to that level, if, if not better.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks, Ryan.

Suketu Upadhyay (EVP and CFO)

Thanks.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

We'll go next to Mike Matson with Needham & Company.

Mike Matson (Managing Director and Senior Equity Research Analyst)

Yeah, good morning. Thanks for taking my questions. you know, back to the S.E.T. business. you know, Bryan called out kind of the subcategories there that, that seem to be the area of focus, but the, the things I didn't hear mentioned were lower extremities, i.e., foot and ankle or trauma. you know, can you maybe just comment on, on why those were, you know, kind of left out of the comments?

Ivan Tornos (COO)

Yeah, sure. I, I can take that as well. I, I think Suki alluded to the trauma headwinds that we had in the quarter. We had some supply challenges, and obviously, you got the comp in China versus a year ago. Here in the U.S., there were some contracts that, that we lost about a year ago. We're anniversarying out of those. There were some product launches that were delayed, 2022 and 2023, that are coming out now. I will say that moving forward, given the better comps for U.S. and the contract capabilities now in the U.S., along with innovation, the trauma business is going to be in a better position. Foot and ankle is being one of the businesses, frankly, within S.E.T. that we didn't prioritize. We wanted to prioritize upper extremities, sports med, and CMFT.

That being said, I do think there is a couple of product launches that are going to make a difference in the space. All in all, I do think you'll see better performance, but trauma, foot and ankle are not the key priorities within, within S.E.T..

Suketu Upadhyay (EVP and CFO)

Yeah, and.

Mike Matson (Managing Director and Senior Equity Research Analyst)

Okay.

Suketu Upadhyay (EVP and CFO)

Just to be clear, it doesn't mean that we don't see foot and ankle trauma and restorative therapies as potentially attractive markets. It's just we want to be disciplined in the way that we're going to invest. If you look at the strap plans that we have for upper extremity, CMFT, and sports, they're very attractive. We're going to focus our investment there. At the end of the day, if the individuals running foot and ankle, trauma, or restorative therapies, put a plan in place that's attractive, they could become growth drivers. Today, we want to differentiate those growth drivers to non-growth drivers. Nothing against any of the categories, it's just that the plan right now is very attractive in those three.

Ivan Tornos (COO)

I'm just throwing out-

Suketu Upadhyay (EVP and CFO)

Okay.

Ivan Tornos (COO)

Restorative therapies. I know that was, I don't know, restorative therapies was part of your question, but we anniversary out of the reimbursement change July of 2023, so you should expect that business to do dramatically better now.

Mike Matson (Managing Director and Senior Equity Research Analyst)

All right, got it. Then just in terms of the supply chain issues, I don't know if it's possible, but is there any way you could quantify the impact, either to your revenue growth and/or your, your margins in the quarter?

Bryan Hanson (Chairman, President and CEO)

I, I think we'll, we'll try to stay away from quantifying. It's, it's pretty challenging, actually, because when you talk about supply issues, you always get feedback from the field on what could have happened if you had more supply, and you've got to make sure that you're kind of sifting through what's real and what's not. The fact is, it is a governor for us right now, and that's why we continue to say it. What's important, though, is it's a macro challenge. There's not a company in orthopedics right now that is not being impacted by supply challenges, so it's impacting everyone. WIS just did a survey, actually, with surgeons asking this question, and across the board, regardless of who they were using, they were experiencing supply challenges.

The important thing for us, though, it's built into the guidance that Suki just provided, so that's key. When I think about that growth driver, the impact it's having on our ability to grow, I think it's important to look at that. That means it's getting in the way of our team using new innovation to drive mixed benefit and competitive conversions. We truly do believe if it was not a factor, we'd be getting more mixed benefit, we'd be getting more competitive conversions because the demand is there. It's frustrating when you have great momentum in the business, great innovation, and supply is in the way of driving that growth. We believe it's going to continue to be there for a period of time.

Mike Matson (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks, Mike. Kate... Yeah, Katie, can we go to the next question in the queue?

Operator (participant)

We'll go next to Robbie Marcus with J.P. Morgan.

Robbie Marcus (Managing Director and Senior Equity Research Analyst)

Oh, great. Thanks for taking the questions. Congrats on a good quarter. Maybe I could start on margins. It-- You know, if I take the third quarter and fourth quarter commentary that you provided, I have a little trouble getting to the high end of the range. Maybe just speak to some of the pluses and minuses there, and what you need to get to the top of the range. Then, second question I'll just throw in as well. You, you have a big gross margin benefit from currency in 2023. There's a pretty wide range of operating margin expansion next year or contraction on The Street. Any early thoughts into how we should be thinking about your ability to grow operating margins next year? Thanks a lot.

Suketu Upadhyay (EVP and CFO)

Yeah. Yeah, sure, Robbie, great to talk to you. One of the biggest drivers in the overall profile in the back half of the year. By the way, we do believe operating margin in the back half will be modestly better than what you saw in the first half. That's largely going to be driven by better revenue, mostly coming from the fourth quarter. Fourth quarter is always our strongest from a dollar perspective, from a sales, from a sales view. The second thing is, you, you're likely going to see a step down in overall operating expenses from the second quarter. That was sort of our high watermark as we were dealing with a number of inflationary pressures, but quite frankly, also investing pretty handsomely against things like R&D, which was up, like, 19% in the quarter.

Investing against commercial infrastructure in places like sports and upper extremities, to continue to specialize that sales force as well as ASCs. So the two common, combined things of higher revenue, lower OpEx, as we move into the back end of the year, is what's going to drive that, drive that margin expansion improvement versus the first half. You know, as we look into 2024, you're right, we did talk about some FX hedge gains this year, which we sized at about 50 basis points on the full year. That won't repeat into next year. That, that will be a, a, a headwind, but we're still confident that we can grow operating margins into 2024.

It may not be at the same level of 100 basis points that you're seeing this year, but we do believe, as I said earlier, that we can take this, this sort of high water mark that we are in operating margins and continue to enhance that as we move into 2024. What are some of the building blocks? 1, you know, pricing is still a headwind, but we're seeing really great performance. It's not the headwind that it used to be for the company. What's even more exciting about that is we're truly seeing very strong mixed benefit inside the company, and that's coming from our new products and the innovation into the marketplace, which is helping to offset that price erosion. So we think that that can be a tailwind for us.

Secondly, we continue to work aggressively on our site optimization in manufacturing and supply chain, which we think can, can generate some tailwind in cost of goods as we move forward. As you move through the rest of the P&L into SG&A, there's still ample opportunity with our global business services agenda that we just started a few short years ago. We've got a completely different culture and mentality when we think about go-to-market and market profitability, where at one time it was, you know, revenue growth at, at all costs, and now it's all about revenue growth at the right profitability level and with earnings growing faster. There's just those cultural shifts, and that discipline is also driving some really nice margin expansion, both in the US as well as outside.

These are just a few levers that, quite frankly, we've been pulling on already. There's still room to go and why we feel confident that we can take this high-water mark of 2023 and grow it into 2024.

Robbie Marcus (Managing Director and Senior Equity Research Analyst)

Great. Thanks a lot.

Suketu Upadhyay (EVP and CFO)

Okay.

Keri Mattox (SVP, Chief Communications and Administration Officer)

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

Operator (participant)

We'll go next, next to Rick Wise with Stifel.

Rick Wise (Managing Director and Senior Equity Research Analyst)

Good morning. Maybe starting off with a couple of the key new product launches that you highlighted. Bryan, you said, as you were talking about the four pillars of knee growth, that ROSA plus the cementless knee launch were. That was your first comment, your first focus area, taking cementless from mid-teens to 50% over time. Related to that point, where are you in the rollout? When or are you even at full launch now, or what's required, and how do we think about the acceleration of that launch over the next year or two? Thank you.

Bryan Hanson (Chairman, President and CEO)

Yeah, thanks. Thanks, Rick. What I'd say first is just to make sure that I clarify. I'm saying that both ROSA and cementless will move from the mid-teens to, you know, 50% plus, 50% plus, so not just cementless. They kind of do play off of each other. They, they benefit each other as you're trying to get adoption in the marketplace. Speaking specifically to cementless, maybe I can pass that to you, Ivan.

Ivan Tornos (COO)

Yeah, I would say, I would say, Rick, that it's early innings, frankly, both for ROSA, as well as cementless. We are in what I think is not still a full launch for cementless, given some of the supply constraints. I think as we exit 2023 and early 2024, we'll have as much supply as we need to meaningfully drive the penetration of cementless, with the goal of going from 15%-50%. I won't say when 50% is gonna happen, but that's definitely the North Star. With ROSA is the same situation. We launched two platforms in me. We are about to launch ROSA Partial this summer, a new and improved version of that. We're working actively on next generation total knee, which will be a meaningful launch going into 2024.

We got all kinds of CDH add-ons, data technology solutions that are gonna augment the penetration there. I would say net-net, both for the ROSA, cementless, and some of the peripheral launches around those two components, we are in the early innings.

Rick Wise (Managing Director and Senior Equity Research Analyst)

Great. Bryan, if I could, for a second question, I always like to hear from you, your personal priorities. It seems like execution is going well. Ivan's doing a great job, and the team's doing a great job with the pipeline and execution and driving the business forward. The Suki's taking the financial organization in a positive direction. What are your priorities now, as you look ahead to the next year or two? Are you focused on e-efficiency, portfolio? Just what are you thinking about and that we should hear about and ask about today? Thank you.

Bryan Hanson (Chairman, President and CEO)

Thanks, Rick. Yeah, I mean, I'll kind of tongue in cheek say we're thinking about everything, but, but obviously, that doesn't get you anywhere if you don't focus. We've been very clear from the very beginning that we had 3 phases of the transformation of this company. Phase 1 is always going to be alive, but we're in great shape. Phase 2 is kind of what you just said. We have a great innovation pipeline. We're executing from an organic standpoint. We feel very confident in that phase, now we're squarely in phase 3, as we've been saying. The big focus for us is that portfolio transformation that will leverage our balance sheet. The balance sheet is strong and strengthening, just as I said in the prepared remarks, and that is the area of focus for us.

How do we continue to move our Weighted Average Market Growth forward? I can tell you we've already made great progress in the focus area here. We've already, we've already moved it north. With the balance sheet strength, we expect it to continue to move in the right direction. That's an area of focus, not just for me, but for this entire team.

Rick Wise (Managing Director and Senior Equity Research Analyst)

Great. Thank you.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks for the question, Rick. Yeah. Katie, can we go to the next question in the queue?

Operator (participant)

We'll go next to Joshua Jennings with TD Cowen. Hi, good morning. Thank

Suketu Upadhyay (EVP and CFO)

Josh, do we still have you? Like you got electrocuted.

Keri Mattox (SVP, Chief Communications and Administration Officer)

I know.

Suketu Upadhyay (EVP and CFO)

Hope Josh is okay.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Yeah, Josh, we hope you're okay. Katie, we can go to the next one in the queue, and then we'll Josh back in when he dials back.

Operator (participant)

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

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thank you.

Jayson Bedford (VP and Equity Research Analyst)

Good morning. Thanks for taking the questions. I guess I apologize if I missed this, but what was the impact of price in 2Q, and have your expectations around price changed at all?

Suketu Upadhyay (EVP and CFO)

It was about 1% erosion year-over-year in the second quarter. I think, in the first quarter, I think the average is somewhere around 1, 2 for the first half of the year. We would expect, in the second half for, you know, somewhere to be between 100 to 150 basis points of erosion. But we're seeing really good traction there, for, for the number of reasons that I've talked about at length previously. But again, I think the really exciting thing is we're starting to see that mix benefit come through from our new product introductions and, helping to offset even an improved, price erosion profile.

Jayson Bedford (VP and Equity Research Analyst)

Okay, great. Then just secondly, on the supply challenges, are these new issues or are they kind of legacy carryover issues? Then, Bryan, I think you mentioned that you expect this dynamic to continue for some time. Does the impact lessen with each quarter going forward, and any visibility as to kind of when these issues will abate?

Ivan Tornos (COO)

Yeah, I'll, I'll start by saying that we have not seen anything new. All along, there were really three buckets that summarize the problem: materials, labor, and sterilization, augmented with, frankly, just poor demand planning on our side because the demand that we saw kept getting better and better and better. Sequentially, we've seen improvement. We've seen better forecast accuracy on the demand side. Then as we think about labor, at the tier one level, our labor capabilities are much better than before. We're hiring people in our sites. When you think about sterilization, we have the right strategies. Materials continue to be a challenge, again, it's much better than before. I would say, improvement versus the past, and sequentially, we continue to see improvement across both supply and demand.

Suketu Upadhyay (EVP and CFO)

I mean, the challenge, it's a fixed equation, right? I mean, as you start to improve, as we would expect in materials, labor, and sterilization, because we put great planning around that, as demand continues to be strong, it's going to delay supply recovery. That's what we're seeing, is we're seeing a great dynamic, strength in the marketplace, better traction in our new innovation than we even expected, but that puts pressure on that equation, and it pushes the supply challenges out.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks so much, Jason. Yeah. Katie, can we go to the next question in the queue?

Operator (participant)

We'll go next to Kyle Rose with Canaccord.

Kyle Rose (Managing Director and Senior Equity Research Analyst)

Great. Good morning, everyone, thank you for taking the questions. Sukhi, on, you know, just circling back on gross margins, you know, strong in 2023, obviously. You walked through some of those benefits. I guess just help us understand, you know, maybe how much of an impact, you know, inflation in the supply chain has been on underlying gross margins. I mean, I understand the positive tailwinds that you've outlined earlier, you know, how much have you, you know, truly been offsetting? I guess just trying to understand how much, when you talk about supply chain challenges and increased unit costs and wages, is there a potential to see a second shoe drop?

I'm just kind of trying to understand as inventory turns, you know, flow through the business, if and when we'll actually ever see that impact, you know, through the P&L. Secondly, you know, lots of talk about, you know, returning to a normalized operating environment. Like, I think we all understand it's been a dramatic, you know, 3-4 years. I guess just when is it fair to start thinking about, you know, when we will be in, in that more of a normalized operating environment, whether it's, you know, supply challenges the industry is facing, staffing challenges, just how should we think about actually getting set back to that, you know, mid-single digits? Thank you.

Suketu Upadhyay (EVP and CFO)

Yeah, sure, Kyle. Thanks for the question. First, on gross margin, from an inflationary standpoint, recall that we have about 100 basis points from 2022 that's capitalized and, and, and hitting our, our P&L this year, and, and we're seeing that come through. That, that's happening. In addition, we are seeing some incremental inflationary pressure, new pressure, 2023, primarily related to continued spot buying with some raw materials around packaging, Tyvek, some of our metals that we use. But we're also seeing it in really the cost to serve. What do I mean by that? Really around the need to have to ship product a lot more than you might have to in a stable supply environment. That's one area of incremental inflation or higher costs that we're seeing.

The second is we've made the decision to actually pay incremental incentives to our commercial field sales force because we know how challenging it is out in the marketplace dealing with these supply challenges. We've been incredibly impressed with how they've been responding. These are a couple of elements that are also flowing into the P&L. By the way, we're offsetting those and investing in the business while increasing operating margin for this year. The company and the team have been incredibly disciplined in the backdrop of better revenue and still dropping very, very substantial operating margin expansion. As we move into next year, there could be some of this incremental inflationary pressure that we're seeing this year that makes its way into 2024. It's going to be nowhere near what we saw happen in 2022 into 2023.

It'll be much more modest. Like I said, I think we have more levers to help offset that, as we move into 2024. Again, I'm not going to give guidance on 2024 on exactly what gross margin and operating margin look like. You know, there are some moving parts there. That'll be potentially another modest headwind, but again, we have a number of tailwinds to help offset things. You know, returning to a normalized market, clearly, we're not there yet. revenue growth may look and feel normal, but the underlying dynamics are still not normal. We don't believe, at least standing where we are today, at least the beginning part of 2024, that we're going to be there. It's a long way away. We'll see where we get to in 2024.

Once we do get to that sort of normalized growth, we do believe that we can sustainably hit that 4-plus or mid-single-digit growth profile that I talked about earlier.

Keri Mattox (SVP, Chief Communications and Administration Officer)

All right, Katie, I think we might have time for one last question in the queue.

Operator (participant)

We'll go next to Matthew Miksic with Barclays.

Matthew Miksic (Managing Director and Senior Equity Research Analyst)

Hey, thanks so much for squeezing me in. Just, just a couple of follow-ups. One on margins, and, you know, I know there's been a fair amount of talk about on the call and, and, and progress, you know, in terms of driving leverage, commitments to leverage this year. I was wondering if we could sort of zoom out and, and think about where margins were pre-pandemic, you know, in that kind of, like, low 30s range. If you could remind us, is that, is that a target to get back to, and, and maybe the timeline for, for getting there? Then just one quick follow-up on on the the the Persona IQ, if I could. Thanks.

Suketu Upadhyay (EVP and CFO)

Yeah. The, the margins in the low 30 range, I'm, I'm not sure what you're referring to there, Matt. Maybe, maybe just at the, the merger of Zimmer and Biomet, but, but since then, those margins were obviously impacted by a lack of investment in supply chain, commercial infrastructure, et cetera. Again, I, I don't, I don't know that that's the right reference point. What I can tell you is that, you know, pre-pandemic to where we are now, we are expanding margins, operating margins, as we continue to drive top-line revenue growth and investment in the company. Feel good about where we are and, and, and where we're headed moving forward. Sorry, your second question was around?

Matthew Miksic (Managing Director and Senior Equity Research Analyst)

Persona IQ. Yeah, the IQ.

Suketu Upadhyay (EVP and CFO)

Ivan, you want to take that?

Matthew Miksic (Managing Director and Senior Equity Research Analyst)

Sure. Just to follow up on Persona IQ, I think the number, I think maybe that was mentioned earlier, was something like 1,000 implants. I mean, that's a pretty small percentage of, of total, you know, maybe 1%, less than 1% of your total implants a year. I just wanna get a sense of, you know, at what level do some of the data start coming through? Is it, is it a couple thousand implants? Is it 3,000-5,000 implants? When do you expect to start seeing some of the results you mentioned earlier in the call? Thanks so much.

Ivan Tornos (COO)

Yeah. Thank you, Matt. First and foremost, we don't disclose the number of patients, but I'll tell you, it's far greater than 1,000 patients. When are we done with the limited market release? I think we're about to complete that. The size matters more for certain claims than others, but I will tell you, we got enough of a sample size to be able to engage in a full market release by 2024. What's the expectation going forward? This is gonna be a flagship product for Zimmer Biomet. We plan to see meaningful penetration of this technology, first in knees, then in hips, and then at some point, in shoulders as well. What's the right penetration? Again, we won't disclose that, but given the unique technology, we will leverage this to the fullest.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks, Ivan.

Matthew Miksic (Managing Director and Senior Equity Research Analyst)

Great.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Matt, thanks for your question. I think we're almost at the bottom of the hour. I'll actually turn it over to Bryan, just for some closing remarks.

Bryan Hanson (Chairman, President and CEO)

Hey, just, just maybe a quick summary, too, on what, what you were just talking about, Suki. When we think about a normalized market, and we're saying 2024, in our view, is not going to be normalized for 2 factors. You're still gonna have backlog that we're gonna have to pay attention to. We would deem backlog as a neutral to potentially negative, depending on whether it stays the same or decreases. We don't think there's going to be an increase in it. The second one is supply. You know, that is going to be neutral to positive, because as we continue to see supply benefits, that'll create a tailwind for next year. Those are pretty big variables that would tell us that we don't have a normal year in 2024, but they're offsetting.

That's the reason why we think 2024, even though not normal, air quotes, could look a lot like a normal year from a growth perspective. I just want to make sure that that's clear. Then I'm just gonna sum it up. First of all, thanks again for joining us this morning. I think it's pretty clear in the way that we talk about the business right now, that we're not just excited about where we are as a company, but the future of this company, and I think that's really important. We've already made disciplined portfolio decisions that have increased the Weighted Average Market Growth of this business. That's already happened, and that gives us confidence in the growth of the organization, not just today, but in the future.

The balance sheet says that we're going to continue to be able to strengthen our position in those fast growth markets, and we will absolutely do that. That is phase three of the transformation. The innovation pipeline, as Ivan continues to talk about, is as strong as it's ever been, and that gives us the ability to drive mix benefit, pricing stability, and competitive conversions. When supply gets out of the way, that will even happen more. We're very excited about that. I, I've been doing this long enough to know when a team has got that skip in their step, and they've got the ammunition to be able to drive the performance of the business sustainably, and we are in that place. With that, I'll go ahead and close it out, and thanks for joining us.

Keri Mattox (SVP, Chief Communications and Administration Officer)

Thanks, everyone. We'll talk to you soon. Obviously, if you have any further questions, please don't hesitate to reach out to the IR team.

Operator (participant)

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