Suky Upadhyay: Yeah. I think Ivan said it really well in his opening remarks. We had a good start to the year and it was great to see the better than expected performance and revenue. We saw very good flow through all the way to the bottom. So I love the discipline that we’ve got throughout the company. I would say this just reinforces and gives us more conviction in the guidance range that we provided earlier this year.
Vik Chopra: Thank you.
Keri Mattox: Thanks, Vik. Katie, can we go to the next question in the queue?
Operator: Thank you. We’ll go next to Rick Wise with Stifel.
Rick Wise: Good morning and we’ll miss you, Keri.
Keri Mattox: Thank you.
Rick Wise: I’ll ask my question and my follow-up at the same time. Ivan, obviously, on the new product front you have all these new introductions. OsseoTi, HAMMR, the Robotics Shoulder. But — and all of them sound like they’ll be meaningful and I assume it will help pricing, will help gain share, will help leverage your fixed costs, your operating costs. But I was just hoping you’ll focus in particular on the implications of the Z1 launch. You highlighted the product several times. Is this the linchpin product that you’ve been missing to make your Hip portfolio more credible and to bring your business up to more industry norms? And my second — my follow-up is related to all that. It relates to margins. Suky, I mean, I heard what you said about gross and operating margins.
But again, when I think about all these introductions, I assume better pricing and margins and share and leveraging. Why should I believe you on everything you just said about the margin outlook? Thank you.
Ivan Tornos: Thank you, Rick. I’ll cover the Hip question and then we’ll proceed with the interrogation of Suky here when it comes to the margin. One product is not what’s going to win the battle here, right? It is a category of products. We’ve been very transparent that we’ve not done great when it comes to Hips over the last three years or five years and essentially it’s driven by three product categories. The first one is direct anterior stem, what is known in the market as a triple tapered stem and it was a deficiency that we had. Z1 solves that and it does it in a differentiated way. Now, with this 510(k) approval, we compete with the two other large orthopedic companies in direct anterior. The second category was a surgical impactor.
It drives efficiency. It drives accuracy in how you treat the cases. It integrates with the rest of the procedure. You need certain levels of power as you do in that Hip surgery. So that is a surgical impactor and we have that with HAMMR. Fully launched. We’re going to run that up. And the third thing that we needed was to have navigation. We got two modalities of navigation. Obviously, we got ROSA Hip and we are the only company with a 510(k) FDA approved mixed reality technology in our partnership with Hip Insights. So again, it’s not just Z1. It’s the full portfolio. Direct anterior stems, surgical impactors and some sort of navigation. So I do believe, we do believe with a high degree of confidence that we’re going to regain our position in Hips.
Still remain the number one hip company in the world and I think that this portfolio accelerates our growth journey moving forward.
Suky Upadhyay: And hey, Rick, it’s Suky. Always good to hear from you. On the margin front, I know the past isn’t always indicative of the future, but I will just — it is a good validation and proof point, I think, in our situation. With both 2022 and 2023, we were able to expand operating margins quite significantly, I would say, even in the backdrop of a pretty hostile inflationary environment. And so, again, kudos to the entire ZB team. In 2024, we expect to do it again. And here’s what I would say. We’re doing it across the entirety of the P&L. First, through revenue growth and leverage of our fixed costs. Secondly, we’re making improvements in COGS at a rate that we’ve not done before, through inventory reduction, site optimization, reductions in E&O.
Three, we’re even getting more efficient inside of R&D, looking at, hey, do we really need all this sustaining and how can we rationalize some of our portfolio, migrate our customers to better products, get rid of some of these products, which then reduces the amount of sustaining engineering, which we can then mix shift into NPI. We’re getting it through SG&A. We’re getting it through better allocation of capital and reducing our cost of debt. The beauty of that is when you have multiple shots on goal to improve operating margins, even if things go unexpectedly from a macro perspective or micro perspective, we have other levers to continue to help us pull margins as we move forward. And so the thing I’ll leave you with for the rest of the company is throughout the entirety of the P&L and we feel confident about where we’re going.
And quite frankly, and I love what Ivan ‘s bringing, he’s bringing this owner-operator mindset to the company. He’s got the company thinking not just about topline, but all the way through cash, cash being king and I think that’s really driving a culture change within our company as well. So I’m optimistic on where we’re going, Rick.
Rick Wise: Thank you so much.
Keri Mattox: Thanks, Rick. Katie, we can go to the next question in the queue.
Operator: Thank you. We’ll go next to Pito Chickering with Deutsche Bank.
Imron Zafar: Hi. Good morning. This is actually Imron Zafar in for Pito. First question is on ROSA, obviously, a strong first quarter there. Can you talk about placement trends in the quarter by site of care, hospital versus ASC, and then also competitive dynamics for worst joint orthopedic robots?
Ivan Tornos: Absolutely. Thanks for the question. So let’s start with the global picture, if you will. Very excited in terms of where we are overall with ROSA. So globally, ROSA is becoming the preferred robotic option in many markets outside of the U.S. Here in the U.S., we’re approaching around 20% penetration of ROSA in cases. As you saw in the quarter, we had a large amount of ROSA sales, which is encouraging because that means in the other category, that’s encouraging because that’s a future stream of need pull-through. About a third of all the installs that we do in the U.S. go to an ASC environment, which again is not a surprise given the fact that ROSA does drive easier preplanning. You don’t need to do a CT scan.
It’s very surgeon-centered, so it’s very controllable. And we continue to see that there is a high degree of preference for ROSA in those higher volume accounts. So net-net, everything in the right direction in terms of penetration, where we are gaining traction in key markets around the world and a lot of dynamic that we’re seeing here in the U.S. ambulatory, surgical-centered environment. Thanks for the question, Pito.
Imron Zafar: Okay. And just as a quick follow-up…
Ivan Tornos: Imron, sorry.
Imron Zafar: Just as a quick follow-up, can you remind us what the site of care mix is for shoulder recon hospital versus ASC?
Ivan Tornos: So we’re starting to see a dynamic in where cases are moving to the ASC for shoulders given the CMS change. I would say today probably around 60% to 65% of the cases shoulder are now done in the ASC, but that’s moving pretty rapidly given the change of reimbursement. And we got a strong position both in the inpatient and outpatient as well as the ASC. But I would say net-net is around 60%, 65% to 35% in terms of that mix.
Imron Zafar: Okay. Thank you very much…
Keri Mattox: Thanks, Imron.
Ivan Tornos: Thanks, Imron.
Imron Zafar: … and best of luck, Keri. Thank you.
Keri Mattox: Thanks. Thank you. Katie, can we go to the next question in the queue?
Operator: We’ll go next to Caitlin Cronin with Canaccord Genuity.
Caitlin Cronin: Great. Thanks for taking the questions. Just touching a little bit further on ROSA and strength in the Other line. Suky, did you say that you expect lower growth in this segment through the years?
Suky Upadhyay: It was a little bit choppy there, Caitlin. Sorry, did you asked it’s — you asked something about Other. Could you repeat the question?
Caitlin Cronin: Oh! Yeah. Apologies. Did you say that you expect lower growth in the segment throughout the year?
Suky Upadhyay: Yeah. Yeah. So we had a pretty strong quarter in our Other category, primarily driven by ROSA capital. So we saw good installs and we saw a higher mix of sales versus placements, which drove a higher level of dollar revenue in that quarter. The good news is we saw a lot of new placements and new ASCs, which is exactly where we want to see ROSA’s position and the capital sales were very good. We also love placements because that comes with a longer term commitment. Our expectation is that we’ll step down from what you saw in the first quarter as we move throughout the year and that’s been assumed in our guidance reiteration. Thank you.
Caitlin Cronin: Got it. Okay. And then any updates on…
Keri Mattox: Katie…
Caitlin Cronin: Persona? Oh! Sorry.
Keri Mattox: Go ahead with the follow-up. Go ahead. Yeah. Go ahead with your follow-up.
Caitlin Cronin: Okay.
Keri Mattox: The line is kind of choppy. Go ahead.
Caitlin Cronin: Okay. Apologies. And any updates on the Persona IQ rollout?
Ivan Tornos: Yes. Thank you, Caitlin. It’s moving in the right direction. I will say, as of late, things are accelerating, both from an innovation and a commercial execution standpoint. So on innovation, we did receive recently the 510(k) approval for, didn’t make it to the press release for the study, so that’s the shorter stem version of Persona IQ, which has been a gating factor for some surgeons that don’t use the longer stem. So that’s an innovation update right there. The other piece that is gaining traction is the launch of what we call recovery curves. This is a platform that only Persona IQ has. It interconnects the data of the stem with a dashboard that, in a very objective way, can quantify how patients are doing in comparison to other patients with similar dynamics.
So those are two innovation updates that are moving in the right direction. In terms of the execution and commercial journey, we got what we need. We got the right designs. We’ve been talking about value proposition. It’s been resonating. We are in some of the largest teaching institutions and we continue to be committed to the journey. So very excited about Persona IQ. Thank you for the question.
Keri Mattox: Yeah. Thanks, Caitlin. Katie, we can go to the next question in the queue.
Operator: We’ll go next to Mike Matson with Needham & Company.
Mike Matson: Yeah. Thanks. So I just want to ask one about kind of what the guidance implies for second quarter revenue. You’re saying you expect to be at the low end of the mid-single digits, so sort of like 4% in the first half. Based on what you did in the first quarter, that applies kind of like 3.5% constant currency growth, but you have the 1.5% selling day benefits, so that applies like 2% kind of underlying growth. Is that — is my math right there and I guess why do you only expect 2% growth in the second quarter?
Suky Upadhyay: Yeah. Hey, Mike. Directionally, the way you’re thinking about it is right. I wouldn’t quite go as low as that. But look, quarter-to-quarter, there’s going to be choppiness. Based on timing, contracts, et cetera. We had a great start to the year. We continue to believe and reinforce our guidance and still believe that the first half is going to land as we expected when we initially gave guidance. So nothing in particular about the quarter of note, but just the overall cadence. That’s how we expect first half versus second half to play out for this year.
