Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Chief Communications and Administration Officer. Please go ahead.

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; and EVP and CFO, Suky 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 and 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?

All right. Thanks, Keri, and thanks to everyone for joining us on the call this morning. It's always good to be with you. But I would say it's even a little better and certainly more fun when we have great performance in the quarter. So we're pretty happy about the results that we get to discuss today, and I can tell you, we're looking forward to the dialogue. And I'll start things up, as we normally do, I'll talk about our Q2 performance and the key drivers inside of the quarter. But I think also really important is to talk about the key drivers that we see continuing to move this business forward. And then Suky will walk us through the financial details of the quarter and importantly, discuss how we are again raising our full year financial guidance. And 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. And I will tell you that I'm proud to say that you have delivered another very strong quarter, while once again making ZB a certified Great Place to Work. And you've done all of this while improving our scores and as a result of that, our rankings on the environmental, social and governance front. So I think simply stated, we are…

Thanks, and 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. And my commentary will be on a constant currency and adjusted operating basis. Net sales were $1.870 billion, an increase of 4.9% on a reported basis and an increase of 6%, excluding the impact of foreign currency. Additionally, we had a selling day headwind of less than 50 basis points in the quarter. Overall, the business continues to benefit from a recovery of elective procedures driven by continued market normalization, including hospital staffing and procedure cancellations returning to pre-COVID levels. We also benefited from some backlog recapture. While market momentum is strong, we continue to face certain macro challenges, including global supply chain pressures that muted performance across the business. U.S. growth of 5% continued to outpace our expectations and international growth of 7.2% was driven by strong performance in both EMEA as well as Asia Pacific. All regions benefited from continued recovery of elective procedures, backlog recapture as well as strong commercial execution and new product uptake. Turning to our business category performance. Global Knees grew 10.5% with U.S. growing 9.8% and international growing 11.4%. The strong performance in Knees was driven by the 4 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 U.S. Hips up 2.7% and international up 7.1%. Both regions posted good growth…

Thanks, Suky. 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 Instructions]. We'll go first to Travis Steed with Bank of America.

Good Morning Bryan and Suky. Nice quarter. I guess I'd start out with looking at the Hips and Knees in the quarter. I would think that knees 2x the growth rate of hip this quarter, backlog will be similar there. Is the elevated knee growth, mostly the mix shift from cementless and ROSA coming through? I'm curious how much supply is limiting growth in Hips and Knees here and what you're assuming about that improving in the back half?

Thanks, Travis. Well I think maybe I'll do because obviously, Ivan is here with us and as close to the action as any of us. So maybe I'll pass it on him to answer the question. Ivan?

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 core markets OUS. 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%, 1-5 to 5-0- I won't disclose where we are in Q2, but it was a significant uptake in that side as well. We did also see great momentum in the ASC. We continue to grow here in the U.S. double digit in the ASC space. And yes, there was some backlog in key markets around the world. We saw better backlog consumption in EMEA than here in the U.S., but nonetheless backlog was part of the performance. And to the latter part of your question, certainly, supply was a governor. I do believe -- we do believe that in a normal environment with better supply or already very compelling growth rate could have been even higher. But all summarize backlog, innovation and great commercial execution were the key drivers behind the knee performance.

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

Yes. Travis, this is Suky. So yes, very perceptive on our comments. Yes, we've got confidence in our business in a normalized environment that we're going to be at 4 plus or, as I said, a mid-single-digit grower. There's a few things. First, I focus on qualitatively execution is incredibly strong. Right now, we've got -- if you think about -- our WAMGR, weighted average market growth continues to improve. That's been steadily improving, one, by investing in R&D organically in higher-growth submarkets even within recon, but then in sports, Extremity and Trauma, and then if you look at the M&A that we've been doing, it's been in higher growth markets in Sports, Upper Extremities as well as CMFT. So overall, our weighted average market growth has been improving. Next, it's really around our innovation and what that innovation brings in terms of the ability to compete in the market, what it brings relative to share of wallet as well as mix is all very positive as well. And then the last is our performance relative to market. I think we've demonstrated for a number of quarters now that we can perform at or better than market on a consistent basis. So really execution is the primary driver why we've got confidence behind that. And secondly, you're also seeing some improving market dynamics. One, we think that overall, the patient dynamics are changing. You're seeing a lowering of the average age of our patients. That's expanding our overall market. Two, we think that they're getting more confident in the outcomes of recon procedures and sports procedures, again, because the technology, the innovation is improving, we're bringing real value to the marketplace. And I think the last thing is really the convenience and the comfort with the ASC setting is also helping to accelerate the overall market. So the market dynamics are still early and preliminary, but the execution is very strong and very real. So -- we've got a lot of confidence qualitatively. And I think if you look at the back half of our guidance, the implied growth rate of being roughly about 5%, I think that's another proof point quantitatively that gives us that confidence. So again, thanks for picking up on that. And those are the things that give us confidence.

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

Maybe just looking at the margins, I'm trying to calibrate if we're kind of back to normalized levels sustainably, what your normalized margin and margin improvement prospects are? 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. So can we assume like that -- those are basically the right level of operating leverage to correlate to call it, 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, you're 50 basis points plus operating leverage?

Yes. So first of all, thanks for the question, Rich. I'll just step back a little bit and just say, 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. So we feel really good about what the company has been doing. And inside of that, we've been doing that with very strong, as you've seen, 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 '22 that capitalized into this year, which we've talked a lot about, while still investing against the business for future growth, right? So a very strong profile, good top line growth, good gross margin, offsetting the challenges and continuing to invest against the business. So I do think our ability to sustain these very high, very attractive margins this year into the future is absolutely table stakes, but I also think that we're going to be in a position going forward in a normalized market, where we're going to be able to expand margins from here. So that's how we think about things. I won't try and break down between what level of revenue growth, how much margin expansion. There are a lot of factors that play into that. The big picture takeaway is we're at a really good level now, we're going to sustain that, if not grow that into '24 and beyond.

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

Yes. So we know how to work around this as a leadership team. And clearly, what you see by looking at other companies in our sector is that valuations are correlated at a very high level to revenue growth. So understanding the ability to get our revenue growth at a higher rate. The mid-single digit is a great accomplishment given where the company was just 3 to 5 short years ago, and we're happy about the progress we've made, but we're not satisfied, right? And we believe that M&A, investing into faster-growth markets absolutely is the right thing to do and ultimately, we'll improve our overall weighted average market growth and the overall growth rate for the company. And then once you get there, you get natural leverage, the P&L starts to flow through and over time, you start to get to a profile where you get very strong earnings growth well ahead of revenue growth. And so that's the profile that we're going for long term. From an M&A standpoint, our first priority is that revenue growth and that diversification of the company into faster-growth markets. That may come with some near-term dilution, but 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 2 years. So that's how we think about M&A. The priority is going to be about accelerating the overall company's growth.

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

Can we touch more into S.E.T. You talked about strength in 3 focus areas, as process of supply challenges. What were those issues? Are they fixed at this point? And how should we be modeling S.E.T. in the back half of the year? And if the supply tunnels are fixed, should we think about bolus in the third quarter?

Yes. So a couple of things that inside the second 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 a year ago. We believe we've now sunsetted those. So those shouldn't be a challenge as we move into Q3 and Q4, the rest of the year. However, we did see some pretty acute supply issues, especially in our Sports business and to a lesser extent, Trauma. That muted growth. But 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 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 on supply in the third quarter.

Okay. Great. And then in the script, you talked about Russia getting growth. Can you walk us through a Russia could impact growth at this point and quantify the revenues and raw materials exposed to Russia?

Sure. So overall, Russia is less than 1% of total sales on a full year basis. We became aware at the end of -- towards the end of the second quarter, that new and unexpected sanctions were being placed on certain medical device products. Our products sell into that category. So we basically have to go back and reapply for licensing against all of our products. We don't think that, that's going to be a governor in perpetuity, but at least for the third quarter, it's going to create a bit of a headwind potentially a little bit into Q4 worst case. We think that, that headwind is roughly about 50 basis points in the back half of the year. And again, most of that will be felt in the third quarter. From a raw materials exposure, I think the biggest area, and we've talked about this at length -- our titanium supplies coming out of Russia have been relatively stable. That's a good sign. But we also took the additional measure at the end of '22 to create some redundancy and to find alternate suppliers, multiple suppliers outside of Russia. So we feel good about our titanium supplies.

We'll go next to Jeff Johnson with Baird.

Kind of, I guess, we're ticking through all the segments here. So maybe if we just look at the Other segment, the 6% growth that was 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?

Yes, sure. Jeff, I'll take that, Suky again. I think the biggest driver was bone cement, not surprising when you see the recon growth numbers in the second quarter to see a very good other performance, especially for bone cement. We also saw some good performance outside in surgical as well, which also creeped up. Your last question inside of that was around ROSA placements versus outright sales. And consistent with prior commentary, we're seeing the majority of our ROSA placements or installments, I should say, being done through the placement strategy versus sales. So that trend continues.

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

Yes, definitely felt that 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. 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 it's going to -- we're going to continue to see it through the back end of this year and likely through 2024.

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

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

Absolutely, Larry. I'll take that one. First and foremost, we remain on track 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. And I will say that we're almost there in gain on the data. We're approaching 1 billion data points from multiple patients thousands of implants by now. And really we're answering 3 questions. Number one is, to your point, what is the value proposition? Can we demonstrate a reduction in the length of the episode of care? Can we bring objectivity to a range of motion metrics? Can we demonstrate better gate performance given better technique, better surgery? Can we compare 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. So that's question number one. Question number two in the limited market release is how do we make the whole thing seamless? This is new to the word technology. It's got a home base station, as you know. It involves the patient, involves the surgeon, the caregiver. So we want to make sure that is a best-in-class experience, and there are some things that we're working around. And then the third question, and I know this is near and dear to you is who's going to 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 TPD, transitional pass-through. We had a deadline of August 23 to submit. We're in the final stages of evaluating what the submission could look like. We're evaluating commercial payer strategy as part of this limited market release. So we continue to think about the payer as well. So with all of that said, the what, the how and the who will pay, I think going to be in a good position to start to see a full market release by January, if not late Q1 2024.

Ivan, thanks so much for that comprehensive answer. Maybe another one for you. On the Robot -- for the shoulder application for the Robot. I think you just confirm that you still expect to be first to market and what need -- what still needs to be done? And if you'll give any more color on the time line? That would be great.

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 would be first to market in Shoulder Robotics, and beyond the speed to market, what I like is what the actual platform offers. Faster surgeries, more accurate outcomes, shorter recovery. So a lot 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 just love the integration that Russia shoulder will have with the rest of the CDH ecosystem. So more than that soon.

We'll go next to Ryan Zimmerman with BTIG.

We all heard United Healthcare's comments this quarter. It was evident in results, but it was specific to recon on Medicare. I'm just wondering if you can kind of parse out the procedure environment within S.E.T.? It's hard to see given some of the supply chain dynamics. I'm just wondering if you can kind of speak to that environment relative to recon in your expectations for durability of its robustness, if you will? Through the remainder of this year, similar to the recon environment.

Ryan. I'll take that one as well. So obviously, it varies from region to region. What I will tell you here in the U.S., 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 U.S. are done in an ASC environment. And other cases, are commercial payers, and it's been pretty consistent. But again, it varies quarter-to-quarter, geography to geography. We do believe that the backlog is going to be here for a while, and we'll see fluctuation given ASC non-ASC in the U.S. And then again, different variables outside of the U.S.

I think the key takeaway 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.

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

Yes. So first of all, BBP is not a material driver for us at all in 2023. We sort of turned the corner on that between the end of '21 and 2022. So we actually see China as a growth driver for us, albeit at a lower level, but we do believe that, that market has some very strong growth for us. I'd say pre-BBP, that market was growing in the low double-digit range. And we'd be surprised if we didn't return to that level, if not better.

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

Back to the S.E.T. business. So Bryan called out kind of the subcategories there that seem to be the area of focus. But the things I didn't hear a mention were lower extremities, i.e., foot and ankle or trauma? So can you maybe just comment on why those were kind of left out of the comments?

Yes, sure. I can do that as well. So I think Suky 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 we lost about a year ago. We're anniversarying out of those. There were some product launches that were delayed, '22 and '23 that are coming out now. So I will say that moving forward, given the better comps or 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 has been one of the businesses, frankly, within S.E.T. that we didn't prioritize. We wanted to prioritize upper extremities, SportsMed 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. So all in all, I do think you'll see better performance. But trauma, foot and ankle are not the key priorities within S.E.T.

Yes. And 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 -- and the -- if you look at the strat plans that we have for upper extremity, CMFT and Sports, they're very attractive. So we're going to focus our investment there. Out at the end of the day, the individuals running foot and ankle, trauma or restorative therapies, put a plan in place that's attractive, they could become growth drivers. But today, we want to differentiate those growth drivers to non-growth drivers, nothing against any other categories. It's just the plan right now is very attractive in those 3.

And just on restorative therapy, that was 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.

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

I think we'll try to stay away from quantifying, it's pretty challenging, actually, because when you talk about supply issues, you always get feedback from the field on what could have happened if you had more supply and you've got to make sure that you're kind of sifting through what's real, what's not. But 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. AAOS just did a survey actually with surgeons asking this question and across the board regardless of who they were using, they were experiencing supply challenges. Really important thing for us that's built into the guidance that Suky just provided. So that's key. But when I think about that growth driver, the impact it's having on our ability to grow. I think it's important to look at that. That means is getting in the way of our team using new innovation to drive mix benefit and competitive conversions. We truly do believe that it was not a factor. We'd be getting more mix benefit, we'll be getting more competitive conversions because the demand is there. So it's frustrating. We have great momentum in the business, great innovation and supply is in the way of driving that growth. And we believe it's going to continue to be there for a period of time.

We'll go next to Robbie Marcus with JPMorgan.

Congrats on a good quarter. Maybe I could start on margins. If I take the third quarter and fourth quarter commentary that you provided, I have a little trouble getting to the high end of the range. So maybe just speak to some of the pluses and minuses there and what you need to get to the top of the range? And then second question, I'll just throw in as well. You have a big gross margin benefit from currency in '23. There's a pretty wide range of operating margin expansion next year or contraction on The Street. Any early thoughts into how we should be thinking about your ability to grow operating margins next year?

Sure, Robbie. Great to talk to you. So one of the biggest drivers in the overall profile in the back half of the year, by the way, we do believe operating margin in the back half will be modestly better than what you saw in the first half. 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 sales view. The second thing is 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 margin expansion improvement versus the first half. 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 will be a headwind, but we're still confident that we can grow operating margins into 2024. It may not be at the same level of 100 basis points that you're seeing this year. But we do believe, as I said earlier, that we can take this sort of high watermark that we are in operating margins that continue to enhance that as we move into 2024. What are some of the building blocks? One, pricing is…

We'll go next to Rick Wise with Stifel.

And maybe starting off with a couple of the key new product launches that you highlighted. Bryan, you said as you were talking about the 4 pillars of Knee growth that ROSA+ 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 2?

Thanks, Rick. What I'd say first is just to make sure that I clarify. I'm saying that both ROSA and cementless will move from the mid-teens to 50% plus, 5-0 percent plus. So not just cementless. And they kind of do play off of each other. They benefit each other as they're trying to get adoption in the marketplace. But speaking specifically to cementless, maybe I can pass that to you.

Yes, 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 a goal of going from 15% to 50%. I won't say when 50% is going to happen, but that's definitely the North Star. ROSA is the same situation. We launched 2 platforms in Knee. We are about to launch ROSA Partial this summer, a new and improved version of that. We're working actively on next-generation total knee, which will be a meaningful launch going into '24. We got all kind of ZBEdge add-ons data technology solutions that are going to augment the penetration there. But I would say net-net, both for ROSA, cementless and some of the peripheral launches around those 2 components, we are in the early innings.

Great. And Bryan, if I could, for a second question, I would like to hear from you your personal priorities. It seems like execution is going well. Ivan did a great job, and the team is doing a great job with the pipeline and execution and driving the business forward, Suky is taking the financial organization in a positive direction. What are your priorities now as you look ahead to the next year or 2? Are you focused on efficiency portfolio? What just -- what are you thinking about and that we should hear about and ask about today?

Thanks, Rick. I mean I'll kind of tongue-in-cheek say we're thinking about everything. But obviously, that doesn't get you anywhere you focus. And we've been very clear from the very beginning that we had 3 phases of the transformation of this company. Phase one 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. And now we're squarely in Phase 3, as we've been saying, and the big focus for us is that portfolio transformation that will leverage our balance sheet. And the balance sheet is strong and strengthening us 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 moved it North. With the balance sheet strength, we expect it to continue to move in the right direction. So that's an area of focus, not just for me but for this entire team.

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

Hi good morning...

Do we still have you?

I think he got electrocuted...

No, Josh, we hope you are okay. Katie maybe we can go to the next one in the queue, and then hold Josh back if he dials back.

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

I guess -- I apologize if I missed this, but what was the impact of price in 2Q and of your expectations around price changed at all?

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 for the first half of the year. We would expect in the second half or somewhere to be between 100 to 150 basis points of erosion. We're seeing really good traction there 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.

Okay. Great. And then just secondly, on the supply challenges, are these new issues or the kind of legacy carryover issues? And 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?

I'll start by saying that we have not seen anything new. All along, there were really 3 buckets that summarize the problem, materials, labor and sterilization, augmented with, frankly, just put demand plan on aside because the demand that we felt kept getting better and better and better. Sequentially, we've seen improvement. We've seen better forecast accuracy on the demand side. And then as we think about labor, at the Tier 1 level, our labor capabilities are much better than before. We're hiring people in our sites. When you think about sterilization, we had the right strategies, materials continue to be a challenge, but again, it's much better than before. So I would say improvement versus the past. And sequentially, we continue to see improvement across both supply and demand.

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've put great planning around that, as demand continues to be strong, it's going to delay supply recovery. And so 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.

Thanks so much, Jayson.

We'll go next to Kyle Rose with Canaccord.

Suky, on -- just circling back on gross margins, strong in 2023, obviously, you walked through some of those benefits. I guess just help us understand maybe how much of an impact inflation in the supply chain has been on underlying gross margins? I mean I understand the positive tailwinds that you've outlined earlier. But how much have you truly been offsetting? And I guess just trying to understand how much -- when you talk about supply chain challenges and increased unit costs and wages, are we still -- is there a potential to see a second shoe drop? And I'm just kind of trying to understand as inventory turns flows through the business if and when we'll actually ever see that impact through the P&L? And then secondly, let's talk about returning to a normalized operating environment. I think we all understand it's been a dramatic 3 to 4 years. But I guess just -- when is it fair to start thinking about when we will be in that more of a normalized operating environment, whether it's supply challenges the industry is facing, staffing challenges. Just how should we think about actually getting step back to that mid-single digits?

Yes, sure. Kyle, thanks for the question. So first, on gross margin, from an inflationary standpoint, recall that we have about 100 basis points from '22 that's capitalized and hitting our P&L this year, and we're seeing that come through, 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, [indiscernible] 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 shift 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. 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. So these are a couple of elements that are also flowing into the P&L. By the way, we're offsetting those and investing into business while increasing operating margin for this year. So 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 '22 into '23. It will be much more modest. And like I said, I think we have more levers to help offset that as we move into 2024. But again, I'm not going to give guidance on 2024 and exactly what gross margin or operating margin looked like. But there are some moving parts there. That will be potentially another modest headwind. But again, we have a number of tailwinds to help offset things 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. But 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.

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

We'll go next to Matt Miksic with Barclays.

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

Yes. So the margins in the low 30% range. I'm not sure what you're referring to there, Matt. Maybe just out there the merger of Zimmer and Biomet. But since then, those margins were obviously impacted by a lack of investment in supply chain, commercial infrastructure, et cetera. So again, I don't know that, that's the right reference point -- what I can tell you is that 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. So feel good about where we are and where we're headed moving forward. Sorry, your second question?

Sure. Just a 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 -- it's a pretty small percentage of total maybe 1%, less than 1% of your total implants a year. And I just want to get a sense of at what level do some of the data start coming through? Is it a couple of thousand implants? Is it 300 to 500 implants? When do you expect seeing some of the results you mentioned earlier in the call?

Yes. 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've 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 going to 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.

Thanks, Ivan, and 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.

Just maybe a quick summary to on what -- but you were just talking about Suky, 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 going to have backlog that we're going to have to pay attention to. We would deem backlog is 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. And the second one is supply. That is going to be neutral to positive because as we continue to see supply benefits that will create a tailwind for next year. So those are pretty big variables that would tell us that we don't have a normal year in 2024, but they're offsetting. So that's the reason why we think 2024, even though "not normal" could look a lot like a normal year from a growth perspective. I just want to make sure that, that's clear. And then just going to sum it up, first of all, thanks again for joining us this morning. And 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. And 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 3 of the transformation. And 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. And when supply gets out of the way, that will even happen more. So we're very excited about it. And I've been doing this long enough to know when the 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. Okay. With that, I'll go ahead and close it out, and thanks for joining us.

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

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