Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, April 26, 2019. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Cole Lannum, Senior Vice President, Investor Relations and IRO. Please go ahead, sir.

Thank you. And good morning. Welcome to Zimmer Biomet’s first quarter earnings conference call. I'm joined by Bryan Hanson, our President and CEO, and our CFO, Dan Florin. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. And, of course. actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please note that we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements. Also, the discussions 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 the earnings release found on our website at zimmerbiomet.com. With that, I'll now turn over the call to Bryan. Bryan?

Thanks, Cole. And thank you to everyone for joining us this morning. I'm going to provide a quick overview of our first quarter results, followed by an update on our short-term priorities. Dan will then provide additional color on our overall financial performance for the quarter. First quarter results were slightly above our expectations and, probably more importantly, further supports our ongoing confidence that we are making real progress in reshaping the business and positioning ZB for success. We delivered solid revenue growth, with another strong performance from our Europe, Middle East and Africa and Asia-Pacific region and continued improvement from our Dental business, which has been gaining traction over the last few quarters. We also continue to meet our short-term operational goals on our roadmap to go on offense in the back half of the year. importantly, we made further progress in positioning the organization to durably deliver our weighted average market growth of 2% to 3% in 2020. Our short-term priorities for ZB remain unchanged. They are supply recovery, shifting to supply efficiency; quality remediation, moving to best-in-class quality; new product launches, shifting to providing customer-centric solutions; and continued optimization of our talent structure; and then, finally, relentlessly driving a winning One ZB mission and culture. And I'm going to spend a little bit of time giving you an update on each of these priorities. Relative to supply, during the first quarter, we continued to shift our focus from supply stability to initiatives aimed at increasing our overall supply chain efficiency. And as we stated, supply is not a barrier to meeting our financial commitments or stated turnaround timeline. We see continued progress in our ability to regain the full trust of our commercial organization as we move to offense and focus on winning new business. Two catalysts…

Thank you, Bryan. Our financial performance in the first quarter was a bit better than our expectations. Also, as noted in this morning's press release, our full-year 2019 guidance is unchanged from what we provided during last quarter's call. Net sales totaled $2 billion in the quarter, a decrease of 2.1% from the prior-year period, with an increase of 0.7% on a constant currency basis. As we noted in our January call, while there is no impact on our growth rate from billing day differences for the full year, the first half of the year has about a day of headwind which is offset in the second half. The billing date headwind in the first half is spread fairly evenly between Q1 and Q2, but in the second half, the majority of the benefit will be realized in Q3. As Bryan noted, we delivered solid results in our O-US region. Within the quarter, our Asia-Pacific team delivered another strong performance with 5.6% growth, while our Europe, Middle East and Africa team increased sales by 1.5%. Meanwhile, the Americas region declined 0.9%, which was in line with our expectations. Consistent with previous comments, we expect our year-over-year revenue growth to accelerate in the second half of this year, driven primarily by contributions from recently launched new products. Moving to the income statement, we reported a GAAP diluted earnings per share for the quarter of $1.20. After adjusting for special items, our non-GAAP adjusted diluted earnings per share were $1.87. A reconciliation of reported net earnings to adjusted net earnings is included in this morning's press release. Adjusted operating margin was 26.6%, which was in line with our expectations for the quarter and gives us confidence in our full-year guidance of 27% to 28%. Net interest expense was $58 million, reflecting continued benefits from debt paydown. In addition, gains from our ongoing cross currency swap program were particularly strong in the quarter. The adjusted effective tax rate for the quarter was 17.5%, which is in line with our expectations and full-year guidance range for 2019. Operating cash flow for the quarter amounted to $284 million and our free cash flow was $182 million. In the quarter, we paid $168 million related to a patent litigation matter, which we discussed during our fourth-quarter call. This payment was included in our full-year free cash flow guidance of $1.1 billion to $1.3 billion. During the quarter, we paid down $110 million of debt and we continue to expect to use the majority of our 2019 free cash flow to reduce debt throughout the remainder of the year. With that, I'll turn the call back to Bryan. Bryan?

Thanks, Dan. we moved into Q&A, I want to say again that I am pleased with the steady progress the team has been making, our level of confidence has never been higher and our team members are more focused and engaged than at any point since I joined the company. This quarter, we delivered solid growth in important categories and geographies, while driving steady progress against our short-term objectives. We will stay relentlessly focused on those priorities as we continue to reshape Zimmer Biomet and position the business to drive growth in the back half of this year and into 2020 and well beyond. And with that, I'll turn it back to Cole to get into the questions.

Thanks, Bryan. Before we start the Q&A session, I want to remind you again to please limit yourself to a single question with a brief follow-up if and only if needed. Feel free to put yourself back in queue. Afterwards, I promise we'll get through as many questions as possible that way. With that, operator, may we please have the first question?

Thank you, sir. [Operator Instructions]. We'll take our first question from Robbie Marcus with J.P. Morgan.

Good morning. And thanks for the question. Bryan, you hit on this a bunch of times in your presentation. I think for everyone who was at the AAOS analyst meeting that you held along with you and your team, it was pretty clear that Zimmer Biomet is making progress and you feel good about the business here. Can you just run through exactly what it is that gives you confidence here? Which of the business lines do you think is making the biggest progress forward? And how much of that confidence is driven by ROSA which, by all accounts, had positive physician feedback at the unveiling? Thanks.

Yeah. Thanks, Robbie. Yeah, I would agree. That's why stating it – and I think to your point, if you were there at the AAOS meeting, no matter who you were, it was palpable the level of energy that we had around our booth, around our technologies and just the general energy level of the team. So, it gives me increased confidence that we're absolutely heading down the right path. And I kind of break it down probably into two areas. The more objective side of things would be that we're delivering the financial commitments that we're making as a team. That's important, right? There was a lot of risk early on in this process. We've been burning down that risk and we've been delivering on our financial commitments. That is probably the most objective measure of whether or not the new culture that we're driving, the One ZB mission and culture is actually gaining traction. So, that would be the objective measure and that gives us confidence we can continue to do that. More from a, I guess, objective standpoint, we've done a lot of work around our primary focus areas. And I truly do believe that that's going to start paying dividends and we're feeling it already. You could feel it at the AAOS meeting. We are, every quarter that goes by, retiring risk associated with supply stability, with quality remediation and launching our new products. Obviously, you saw that again at the AAOS, ROSA being a big part of that. One ZB mission and culture, I know I talk about it a lot, but it's gaining traction. And I think it was very apparent at AAOS. People are feeling energized beyond a year ago. And I think the new talent and the structure that we put into…

Thanks a lot.

Thank you, Robbie. Next question please.

We'll take our next question from Matt Taylor with UBS.

Good morning. Thanks for taking the question. So, Bryan, I wanted to get some of your updated thoughts on ROSA. There is a lot of investor focus on that. You had a good showing at AAOS. And talk about a lot of leads that you generated. So, I don't know if you can comment on how some of those leads are converting or the interest you're seeing or any color on how we should expect this to roll out during 2019 would be helpful?

Yeah. Absolutely, Matt. So, we did receive a lot of leads. That was one of the things we're most excited about at AAOS. It was a dramatic change from a year ago at AAOS. We had less than 100 leads a year ago. And the AAOS this time, we had basically 2,000 leads. Now, the hard work begins. Once you get the leads, you've got to actually do the disciplined work to make sure that you're segmenting those leads and getting on top of them, which we are. And a decent portion of those were, as one would expect, on Rosa. So, I would just say, on ROSA specifically, since that's your question, it's obviously very early in the game. We just launched the product. We're just in limited launch. But I can just tell you, the initial response and just general interest level in the system is very positive, as positive as I've ever felt in a product launch. It's not necessarily a surprise to us. We had a specific development process that allowed significant engagement with surgeons along the way. I don't know if people are familiar with it, but it was the Agile method of development for the system. What this basically means is you do quarter sprints from a development perspective and each quarter you're bringing in surgeon partners to be able to look at what you've done, basically beat you up on what they don't like, and then could do another quarter sprint to make those corrections. What I like about it is you're getting constant surgeon feedback and you're also creating urgency every quarter because you're in a sprint every quarter. So, it's a great development process. So, I guess, what I'm saying here is it's not a surprise to us that it is…

Thank you for all the color.

Thanks, Matt. Next question please. Our next question comes from Pito Chickering with Deutsche Bank.

Good morning. Thanks for taking my question. You talked about having sort of price and mix issues relative to some competitors. If you look into 2020 and get back to 2%, 3% market growth, how much of that revenue is coming from positive mix shifts from new products like cementless knee or ROSA and how much of that cut [ph] is coming from capturing lost market share?

You want to make sure that I understand your question. You're asking how much of the revenue growth that we see on a go-forward basis would come from share gain, actual volume, procedure gain or mix shift? In other words, getting higher price points. Okay, I got you. Without getting too specific, what I would tell you is that when we think about the turnaround of the business, it's, obviously, multifactorial. We're going to have a bunch of different things that will drive it. But, definitely, one of the big variables associated with our driving revenue growth will come from revenue mix shift as a result of bringing new technologies into the market that are higher price point than previous technologies and/or add incremental disposable cost to the procedure because of the value that they bring. So, I'm not going to get into the specifics of what level of penetration we're going to get in robotics or cementless or those types of technologies and not even talk about the percentage of the overall growth. But just know that will be a material part of our growth on a go-forward basis. That mix benefit you get when you bring new technologies in. What we love about this is, with these technologies that bring real value for our patients and our customers, you don't have to have a new patient, you don't have to have – convert a new surgeon. You just need to have the same surgical procedure, with the same patient, with the surgeon you've always had upsold to better technology. And when that occurs, you get more share of wallet. You get more revenue per that procedure. And that is absolutely something that we're going to concentrate on. At the end of the day, it is the path of least resistance. There is less change that needs to occur in that path. So, it will be something that we concentrate on. At the same time – as I said, it's multifactorial – we're definitely going to pursue converting business. We're going to try to convert the other guy's business. But even if we stayed – I guess, the point is, even if we stayed in our swim lane, which is a pretty wide swim lane, by the way, we have a real opportunity to drive revenue growth just through that mix of revenue shift.

Great. Thanks so much.

Thank you, Pito. Next question please.

We'll take our next question from Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking the question. Bryan or Dan, I just want to go through the guidance, the first half versus second half. Some helpful commentary here. So, the guidance for the year, on a constant currency basis, 50 to 200 basis points. That's the range. You just did 70 basis points in Q1, inclusive of [indiscernible]. That includes 100 basis points of impact from days, the one half versus second half. Just looking at the comps, it feels like first half is going to be flattish organic. The days itself should give you guys, back half, at least 150 to 200 basis points, the first half versus second half. And should we be thinking about new product contribution over and above that. And as we think about new products, would you be giving us a system placement numbers on ROSA, et cetera, going forward? Thank you.

So, we're not going to give – just the last question first, I guess, we're not going to give a lot of detail relative to surgeon training, system placements, those types of things. Not because we don't want to divulge it to you, but more than anything, we just don't want to send any clear messages to our competition on the level of traction we are or not getting with that system. So, I just wouldn't expect that level of disclosure from us when we talk about robotics. When I think about the back half of the year, there's a couple of things that are happening when you move from first half to second half. The first half of the year, we have a negative headwind on the billing day, which we've talked about which is pretty evenly split between first quarter and second quarter that reverses in the back half. And as Dan mentioned in the prepared remarks, there's probably a little more benefit in the third quarter than the fourth quarter. But, certainly, that's a positive movement as we come into the back half as you referenced. We're going to continue to have bone cement headwind in the first half and we'll have that in the second half as well. Should start to wane more in the fourth quarter because you're going to have some of that already built into the comps from prior year, but that would be another element that we would consider in the back half. And then, when we move from limited launch to more full launch in the back half, that's obviously a benefit. So, yes, all three of those things, particularly on the billing day change and the limited launch moving to full launch, should be thought of, and included in, the expectations for the back half of the year. Remember, though, that all of this is captured in a very clear message that we're sending that, by 2020, we expect all these things to come together and allows us to deliver 2% to 3% which is our weighted average market growth in a consistent way. So, you can just kind of work the math on what we would need to be doing when we exit the back half of the year to be able to make that more predictable.

Thanks.

Thanks, Vijay. Next question please.

Our next question comes from Steven Lichtman with Oppenheimer.

Thank you. Good morning, guys. Bryan, again, I was wondering if you could talk a little bit more about the shift to manufacturing efficiency that's underway. What are the opportunities that you see to gross margin expansion? I know that you're targeting that more so in 2020 as the benefits flow through COGS.

What I might do is maybe just kind of hit the top-end view of the activity around it and then, Dan, if you want to provide color beyond that, no problem. We've talked a lot about this as an organization. We have not had a lot of focus unfortunately over the past few years on cost down, real discipline in margin expansion in our manufacturing facilities because we've been over-indexing on quality remediation, we've been over-indexing on making sure that we have supply. So, unfortunately, that's where the energy is going, not on disciplined cost-down in manufacturing. Now, as we brought the new leadership in to operations, we've been building that muscle and the function, actually adding people around operational excellence, to be able to get after those types of projects. That team really just got put into place at the end of 2018, just starting to get traction and get a pipeline of projects in the first quarter here in 2019. And the real goal is to look at the obvious – look at the obvious areas of opportunity to drive margin expansion. That's what they're focusing on. Just regular, good old fashioned cost down, looking at our suppliers to be able to drive efficiencies there. Eventually, we'll get into footprint consolidation, but that takes time. We'll get into value engineering and those types of elements as well. But we are finally getting more discipline around the team in place, the pipeline of projects to put in place to be able to get after margin expansion and the operating mechanisms to ensure that it occurs. Now, just to set the right expectations, this will take a while for those projects to get in to play, start to materialize and then capitalize into the gross margin impact that we have. Remember, it's a year or so of capitalization for us. But I'm excited to see the momentum. I'm excited to see the team in place. It's just going to take a while. First and foremost, we need to make sure that these projects begin to offset the headwinds. We have pricing pressure every year. We have raw material increases every year and these projects need to begin to offset those first and then get after actual margin expansion.

This is Dan. I guess what I would add to that, as Bryan was saying, gross margin is multifactorial, right? You've got pricing. You've got cost. You've got mix benefit. And in my prepared remarks, I talked about, in Q1, the foreign currency hedge gains that we experienced. So, when you think about our gross margin rate in 2019, we are going to see some benefit to that rate as a result of our foreign currency hedging program. You should expect, really because of that, to see our gross margin rate in 2019 to be slightly higher than 2018, again, really driven by that FX hedge gains. And we've talked a lot about investing in SG&A on the other side of that. So, it kind of offsets that elevated gross margin rate. With respect to – as Bryan was saying, the manufacturing cost, our manufacturing costs remain under pressure. Have a lot of confidence in the new team for getting after it. It will take time to spin up those programs and execute to those. And then, it will take time to come through the P&L. But, again, the message is the team is managing through that, and all of that is inside of our guidance.

Thanks, guys.

Thanks, Steve. Next question please.

We'll take our next question from Josh Jennings with Cowen.

Hi. Good morning. Thanks for taking the question. I wanted to follow up on Steve's questions just on margin expansion, but kind of moving down the P&L. I think, Dan, you committed to some level of margin expansion in 2020. I know we're a little bit early here to talk about 2020, but I was hoping you could just help us understand some of the puts and takes with that commitment as we get into next year. And just how dependent on volume growth is margin expansion in 2020 in terms of getting back to that average weighted market growth rate of 2% to 3% on the top line? Thanks for taking the questions.

Sure, Josh. We're obviously not going to give 2020 guidance here. We are confident that our operating margin expansion for 2020 is as real today as it was at AAOS when we mentioned it in prior quarters. And just know it will be a full program that looks at operating margin expansion. There is opportunity to continue to invest in the business, while driving margin expansion. So, I wouldn't get too hung up on the geography of that in the P&L. Just know that it's an area that we're focused on and we don't see it as mutually exclusive with growing the business either. Based on what we're telling you about top line acceleration back half of this year and our growth expectations towards our WAMGR in 2020, that gives us an opportunity to drive some leverage, but at the same time taking some productivity initiatives and driving those through 2020. I think the last piece I would say is there is a real opportunity in the spirit of the portfolio management that we've talked about of taking existing spending and just making sure it's pointed at the right places to drive our WAMGR out. And there is a nice opportunity to do that. So, we're focused on this in a big way as well as growing the business and delivering on our new product launches.

Thanks, Josh. Next question please.

We'll take our next question from Chris Pasquale with Guggenheim.

Thanks. Bryan, I was curious how the reception has been so far to Persona cementless. And is that a product that you guys expect to ramp relatively quickly because of the increased comfort surgeons have gotten with cementless implants over the past few years or do you think your customers are going to want to see more of a track record with that specific implant?

Yeah, thanks. So far, so good, I've got to tell you. Again, it's relatively early on still, but we're getting great traction. And I can think the fact that cementless is taking off with other companies, that's leading the path, if you will, and the confidence level is higher and the acceptance is higher as a result of that. Sometimes, it's okay to be second to the party because you get to take advantage of who got there first. And that is exactly what is happening. I do believe that people have immediate confidence with our cementless option because, remember, it's Persona, which they have grown to know and love, it's one of the best, most personalized knee systems you can get at a reasonable cost, is giving the anatomical correctness and the size options that you've got, but it also has Trabecular Metal, which has just been studied and known to have some of the best bone in-growth you're going to get with the material on an implant. So, it's a combination of those two things in the Zimmer Biomet that is giving people the confidence to move in that direction. So, we're as excited as we've ever been with cementless and we expect to continue to move down the path of getting conversions there. We haven't given specifics relative to the expected penetration of our cementless versus just the total knee, but we certainly believe that we've got a lot headroom there still.

Thanks.

Thank you, Chris. Next question please.

Up next, we'll go to Craig Bijou with Cantor Fitzgerald.

Great. Good morning. Thanks for taking the questions. Appreciate your comments on the supply side. And then, Bryan, looking ahead to 2020 and as the business continues to accelerate, I wanted to ask you, what's your level of concern or how should we think about potential risk that you'll have enough supply to meet the demand for, say, the four new products – four new knee products? And maybe, more specifically, as the industry is trending towards cementless, do you have any concerns if cementless ended up being 10% of your knees in 2020 that you can actually meet that demand?

So, I would tell you, just given some of the supply issues that we've had in the past, our discipline and operating mechanisms around ensuring that capacity planning is done appropriately is probably never been more acute or more focused. I personally have a weekly call with my team to talk about where we are with capacity planning, with the processes and how we're doing relative to certain metrics that we have in place on improving our service levels to customers. So, there's an intense focus, as one would imagine, on ensuring that we get it right relative to the forecast, that we get the demand planning signal correct in manufacturing facility and, ultimately, the capacity would be there. I feel very confident that we have the capacity planning in place with all new products to ensure that we can deliver on the financial commitments that we've talked with some headroom. We're not going to take the chance of not having that headroom. What I would tell you is that we still need to move to a better, more automated process. It's still pretty manual. That's one of the things from a systematic standpoint that we're doing this year, rolling out a more integrated business development planning process that will create a more automated, end-to-end demand planning process that we don't have today. But the level of work, attention from the senior-level parts of the organization on this demand planning process is probably more aggressive than I've ever seen anywhere for good reason, obviously.

Thanks.

Thank you, Craig. Next question please.

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

Thanks. Good morning, everyone. Bryan, I just wanted to touch on one item here sort of bit strategic. So, now that the business – there are signals in the business that is beginning to stabilize and I know you guys are always looking at all facets, but when is it appropriate to start thinking about getting active in M&A or portfolio pruning. Just trying to calibrate sort of expectations for when that really becomes a major focal point for you guys as I assume you're really not focused right now on just sort of stabilizing the business, getting supplied, getting new products out there. And then, just quickly, secondarily, I was just trying to get a sense of the impact of the bone cement in the first quarter. Really just trying to understand what the underlying constant currency growth of the business is.

I got you. So, I'm just going to hit the bone cement first because it's a shorter of the two. Bone cement was pretty much – even though the other category looked a little better than I think what some people expected, bone cement was right in the sweet spot that we had referenced, between that $10 million and $15 million. It was on the lower end of that, but it was in that range. The only reason why other looked a little better than that is because we had some literally other categories of other do a little better and offset it. But I would want you to continue to think about bone cement headwind in that $10 million to $15 million range. That would be an important key message there. When I think about this idea of more active portfolio management, I just want to make sure that I continue to say this because it's for me personally from a discipline standpoint and to my organization and a good reminder for you guys as well. We will be, what I always like to say, maniacally focused on our near-term objectives throughout 2019. We've laid those objectives out very clearly, that they are a part of 2018, part of 2019. I just don't want the organization to lose focus in those areas. It's very easy to start chasing other things because they're exciting, but we just need to be back to the basics, disciplined, delivering on supply, making sure that we get the quality movement that we need, transitioning the new products to more total solutions, driving that One ZB mission and culture, and ensuring that the talent structure begin to gel. Those will be the focus areas. At the same time, Dan alluded to this, we're not just…

Great, thanks.

Thanks, Larry. Next question please.

Our next question comes from Bob Hopkins with Bank of America.

Thank you very much. Just one quick question on ROSA. Really on the capacity front. I'll limit it to kind of 2019. So, I guess, the one question is, how much of a limiting factor is capacity. Just maybe qualitatively, can you give us here a sense of where you are on capacity for ROSA broadly. I am speaking for both total knee and for spine.

Yes. I would say that you are the best at extracting information that I don't want to give. I've got to prevent you [ph] ask a question. You've asked me this a few times. What I would tell you is that I probably – you said more than I already should relative to capacity on ROSA Knee, in particular. So, I probably won't speak any more to it because I don't want to send any clear messages to my competition. I think the simplest way to say is that I feel very confident that we have the capacity required to deliver the financial guidance we provided and absolutely to be able to deliver what we have provided you for 2020. And believe me, with the level of interest that we're getting in the ROSA system, particularly on the knee side right now, just given where we are in that launch process, we're putting a lot of effort into making sure capacity is not something that's going to keep us from taking advantage of that technology. Same thing for spine, by the way. The beautiful thing about the robotic platforms that we have is that they're very similar, whether it be brain, whether it be spine, whether it be the knee application, they're coming off the same line. So, we have the opportunity as we scale up to ensure that we have the capacity for all three of the robotic solutions that we provide. So, I guess, short story, robotic capacity is not going to be something – let's hope we're complaining about robotic capacity. That will be a good signal.

Great. Thanks, Bryan.

Thank you, Bob. Next question please.

Our next question comes from Rick Wise at Stifel.

All right. Good morning, Bryan. Can you maybe give us a little more color on the ortho market as a whole? I was curious, was first quarter – we have three big players reporting so far. Was first quarter market growth worldwide as you expected generally? Our read is that worldwide hip/knee market was in the 2-percent-ish range, maybe a tad slower than a year ago. So far, it seems like hips are growing faster than knees. Just wondering what that says about your view of the 2019 market backdrop as a whole and as you're thinking about the rest of the year. Thanks.

Yeah, absolutely. I've said it a lot and it is because I truly do believe it. I don't really put a lot of weight into what happens in a single quarter. There's just too many moving variables. It could be – for any organization, positive or negative comps, they could be running through with billing day differences. There's just a lot of things that could happen inside of an individual quarter. But just if I break it down based on the way we've analyzed it, I don't really see any material impact, up or down, to the quarter so far, the first quarter. And certainly, from our assumptions that we built into 2019 as we put on our guidance, we pretty much expect 2019 to look a lot like 2018 and 2017. There is always slight variation, obviously. But we're expecting 2019 to look pretty similar to 2018 to be honest now. Hoping we're wrong and the volume is better than that. That would, obviously, be a positive for us. But I'm not seeing anything that would indicate to me that we're going to see any kind of a material increase or decrease to volumes. They look pretty consistent to me.

Thanks.

Thank you, Rick. Next question please.

We'll take our next question from David Lewis with Morgan Stanley.

Thanks. Just one question from me. Bryan, I want to come back to ROSA. And I think you've been very clear that, competitively, we're not get the information we want as it relates to utilization, system number, things like that. I wonder if you could just share with us how you're going to sell the system, whether it's going to be usage based or capital sale? And I'll tell you the reason I ask. I think there is a lot of enthusiasm around ROSA. And to the extent that investors believe you're going to sell this as a capital sale, that's going to drive near-term revenue expansion for the business a lot faster than potentially a usage-based agreement and that's going to lead to a disconnect towards the back half of the year and into 2020. So, of all the details I think we need, the one that would be most helpful is how you're going to sell the system, capital versus usage, and any mix dynamics you can give us as it relates that or early feedback you're getting from customers as it relates to how they want to purchase the system would be super helpful. Thanks.

Yeah, absolutely. And, obviously, it's dynamic. It depends on the customer that you're speaking to. And we've been a little more transparent here, obviously. It's been pretty well noted that when you look at the robotic pricing, the list pricing that we have, it's over $1 million. That's been very clear. It's out there. At the same time, we're going to be – we're going to give a number of options for our customers to acquire a system. We're going to be flexible based on the business needs or requirements of that customer. You've got to remember that our primary focus is really to drive the robotic procedure. The capital sale is fantastic. Love to get it. Anybody would like to have that. It's a nice pop in the beginning. But driving robotic procedure adoption is the annuity that all of us want, right? It should be. It should be the most important thing. By doing so, I actually believe that we're going to increase the accuracy of the procedure for the patient and the surgeon, which is the obvious mission-centric reason for doing this. And then, we'll automatically, as a result of that, benefit from the mix benefit associated with the robotic case because of the disposable pricing and some of the halo effect you get on your implants. So, again, that will be our primary focus, is to push robotic procedure adoption. So, we're going to be flexible with our customers when it comes to making robotics attractive. At the same time, we're going to ensure that we capture the fair return for the value that we're providing. Let's face it, again, there's a benefit to coming second to market here. The market is clearly speaking to us. And it is clearly indicating that a premium is expected, should be expected for the value that robotics brings. And we're not going to let that premium go. We may be second to advance here, from my perspective anyway, but we have a great robotic system that's getting great reviews from our customers and we are going to make sure that we don't come in at a discount to the market. So, when you think about capital purchases from us and the price point that we have, we shouldn't be thinking about us because we're second coming in at lower than the market premium that already exists. I'd say the same thing for the disposables. We haven't given specifics here, but we truly do believe there is value in using robotics. The market is speaking to us, saying that they're willing to pay a premium. And one should expect that our disposable premium would be similar to what the market is bearing right now. We don't see any need to come in at a lower price point. We think we've got a competitive solution and we don't have to do that.

Thanks, David. Next question please, operator.

We'll take our next question from Larry Biegelsen with Wells Fargo.

Good morning. Thanks for taking the question. Bryan, I wanted to ask about a business that I don't think has come up on the call yet. That's the S.E.T. business. The questions around that are, one, what's the status of the Sidus stemless shoulder rollout and what are your expectations for that business? That's a higher growth segment of orthopedics. So, what are your expectations for that? Thanks for taking the questions.

Yeah. We've been happy with some of the progress that we're making in S.E.T. as a whole. Obviously, when you think about S.E.T., not all the subsegments of S.E.T. are created equal in our mind. One of the more attractive subsets of S.E.T. would be that upper extremity shoulder is – obviously, it's an area that we focused in the past. We have good market share and we expect to continue to focus. And the stemless shoulder that we have is an attractive option. We talked a lot about in the knee looking at robotics or cementless as an opportunity to increase share of wallet or get that revenue mix benefit even with the same patient, even with the same surgeon. The Sidus stemless shoulder is the exact same thing. We've got an opportunity to bring a unique solution or a better solution to our patient and to our customer and, as a result of that, get an increase in price point for that stemless shoulder. And, certainly, that is what we're doing. And the response so far to our technology has been very good. It's one of our major focus areas in the shoulder area and overall set and we're going to continue to focus on it. We're not going to give specifics relative to the penetration of it, but just know any area that we have that we can sell to get an upsell relative to the share of wallet we get in the procedure will be a concentration for us.

Thank you.

Thank you, Larry. Next question please.

We take our next question from Kristen Stewart with Barclays.

Hi. Thanks for squeezing me in and really excited that the call had no drops so far. Hope I don't jinx this. But I was wondering if you could comment at the outcome of the pricing dynamics in the quarter. It did look like pricing did dip down a little bit below the levels from 2018 that we saw. And I appreciate that there's always this volatility in price quarter to quarter. So, I don't want to make too much of anything over one singular point. But how do you just think about pricing going forward for the overall business? And how do you kind of think about that as you're looking ahead? At what level of gross margins do you think you can kind of come back at since – the hope would be, with all the cost initiatives that you're starting to work on, that obviously margins could potentially move higher. I just want to make sure that that's kind of how we should be thinking about it or is it just kind of running to standstill because of the price environment? Thanks.

Kristen, it's Dan. Pricing in the quarter, frankly, was right in line with what we expected. 2.6%, very consistent with where we've been in 2018 and 2017. 2018, in the fourth quarter, we did have that rebate adjustment in Europe that – so if look solely at Q4 of 2018, it's little bit of an artifact inside of that that lowered the price decline. But 2.6% for total ZB, very consistent with where we've been. So, there was nothing across products or geographies that was really out of trend. And we continue to view that as the price erosion going forward. Certainly, as Bryan was describing, the new products that we're launching come at price points. So, we're clearly going to be looking for positive mix on a go-forward basis. There's clearly that opportunity. But in terms of like-for-like price declines, in the aggregate, very consistent. I think with respect to pricing and gross margin, just a brief comment there. That is an annual headwind against gross margin. So, as Bryan was referring to, just to keep gross margin flat, you need to be taking aggressively cost out of your manufacturing cost base or you're losing ground. And as we get further into 2019 and start talking about 2020 and beyond, we'll provide more color. But the point there is you have to be aggressively taking cost out just to stay even. And we're going to look to drive positive mix as a benefit to gross margin over the long run.

Thanks, Kristen. Next question please.

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning, guys. Bryan, maybe back on geographical comment. Asia-Pac has been solid now for three years running for you guys. Just how do you feel about the consistency of that going forward? And is the way to think about the improving growth rate overall for the company that that holds steady and then the Americas growth is what kind of improves over the coming quarters as a mix driver of the improved growth? Thank you.

Yeah. So, what I would say, I'd like to see all geographies, all businesses improve. I don't care how good they are right now. I think there's an opportunity for us as we roll out new products, as we change the culture of the organization, as we change the discipline of the organization and kind of this accountability – extreme accountability culture we're trying to try drive. I think everybody can go up. So, I'll just state that right out of the gate. I think what I love most – and I'm just going to give a shout out to the Asia-Pacific team. That's the mentality of that team. Even with the performance that they have had, they're happy about it, but they're never satisfied. They've never satisfied with what they're delivering. It doesn't matter if it's over market growth. They're always looking for ways to be able to drive it even further. And that gives me confidence that that Asia-Pacific team will continue to deliver. You're always going to have quarters that are up and down, anomalies in the quarter. When I think about that APAC team, the leadership capability, their proven track record, I have confidence they're going to continue to deliver for us. At the same time, I have confidence that we're seeing that same level of traction across all of our businesses and regions. I truly do believe we're getting into a place now that gives us an opportunity for any one of our businesses or regions to be able to perform. And that's when success occurs when we have that durability across the businesses and we have that ability for one to help the other in a specific quarter. It's that balanced selling that will really drive the durability of our overall growth. So, I truly do believe that Asia-Pacific will continue to do what they've been doing, but I fully expect the other regions and businesses to do the same.

Thank you.

Thanks. Operator, we're getting close to bottom of the hour. Let's see if we can get at least a couple more quick ones in please. Next question.

Thank you. Our next question comes from Kyle Rose with Canaccord Genuity.

Great. Thank you very much for taking the question. I just wanted to circle back on ROSA here. And, I guess, just starting off, I guess, how would you characterize the low-hanging fruit, meaning interested accounts that want to buy a robot in the near term? And then, secondly, the other major robotic player that's frequently talked about robots in a competitive account, presumably at 40% market share for Zimmer. Some of those accounts that the competitive robots have gone into are probably historical Zimmer accounts. So, when I think about your first second year robot placements, you expect to see more de novos or new robotic customers? Do you expect to see competitive swap-outs or just accounts buying multiple different types of robots? How do you expect this market to evolve over the course of the next one to two?

Sure. What I would tell you, just first of all, our strategy is going to be, first and foremost, as we've done better account segmentation, is to focus on what we're defining as platinum accounts. And a platinum account would be – and there's more than 700 of them that we have just in the US alone, for instance. Platinum account is where it's a high-volume account. So, it's got be a very high-volume account where we have the largest share position in that account. Those will be the accounts that we go to first to be able to get a robotic position because, in the past, those very accounts, if they wanted to move towards robotics, it couldn't be us because we didn't have that solution set. So, when you do hear our competitor talk about placing in competitive accounts, those are probably the types of accounts that they're talking about. Our first goal is to make sure that we stabilize those accounts, we bring robotics in. And even where we have the lion's share of the business, there's still upside, we make sure that we get after that additional upside as well. So, the platinum accounts where we have high-volume, we have high share will be where we go first. Once we get through the limited launch and get into full launch, deeper into full launch, we'll be looking at gold accounts which should be high-volume accounts where the other players have more share than we do. And certainly be looking particularly in those accounts where the high share players don't have robotic solutions, that will be the next tier of our focus. The beautiful thing that we have here is that we've got very low penetration of robotics in overall surgical procedures today. So, anyone who has a good robotic solution and the implants to surround it, really has an opportunity to benefit from increased adoption of robotics. We think we're going to be able to differentiate because we're not just bringing robotics, we're bringing robotics with mymobility, which is that digital health platform backed by Apple. We're connecting that with Persona, which is a more personalized implant. So, we really do believe that kind of this connected ecosystem that we're providing is unique to us and will continue to benefit us or will start to benefit us.

Thanks, Kyle. Let's see if we can squeeze two more in here really quickly, operator. Next question please.

We'll go to Richard Newitter with Leerink.

Thanks for squeezing me in. Bryan, just a quick question to follow-up on the last one on robotics. How can you leverage your ROSA Brain robotic platform footprint, particularly on the spine side, now that you're approved in spine to kind of target accounts? Can you remind us what the installed base is for brain in the US and worldwide? And how does that potentially provide you leg in the door for robotics in spine in particular?

First of all, thank you for asking about ROSA Brain because that's where it all started. And it absolutely is a benefit and a catalyst to us when we think about the spine side. I was just in an account two nights ago having dinner with some folks. They were looking at bringing in three robotic solutions for the spine side of their business. We're not even thinking about us because we just got approval. They were thinking about two other players that are out in the marketplace. But I also found out that they were looking at bringing in a brain system as well. And so, when they found out that we have one unit that provides both the brain application as well a spine application, with small hardware changes and software changes, but one unit, it became very attractive to that individual. And they kind of stopped in their tracks, are now going to look at our solution to see if it's something they might want to move forward with, so this idea of leveraging ROSA Brain and its percent penetration in the neuro area is a real opportunity for us. I truly believe that we have over 100 units placed around the globe, something like 140 units placed around the globe. It is the gold standard when you're talking about robotics inside of neuro. And again, the beautiful thing about this is it was actually designed, the ROSA system, for brain. And the intense accuracy you need for brain is now also applying to the accuracy that we're getting because it was designed for that for both spine as well as for knee. When you think about spine in particular, active tracking in a spine procedure is really important. You're placing a pedicle screw in a spine procedure. And for whatever reason, that robotic system somehow gets unregistered with the patient, you put that screw in places you don't want it to go. With active tracking, whether you move the patient, whether you move the robotic system, the robotic system always knows where the patient is and you're going to place the screw where you're supposed to place it. That's a big deal. When I talked to this guy about this at dinner the other night, he was surprised to hear about the two applications and one robotic system and loved this idea of active tracking. So, again, I think we can absolutely take advantage of the fact that we have a combined system between brain and spine, and that's obviously the intent of the organization is to do that.

Okay, Rich. We're going to try to get one more question in even though we're past the bottom of the hour. This will be the last one. Last question please.

And our final question comes from Mike Matson with Needham & Company.

Hi. Thanks for squeezing me in. Looked like spine and CMF growth improved a little. Just wonder if you can comment on that. Is it spine? Is it CMF? Is it both? Thanks.

Yeah. Absolutely. If I look at that overall business, clearly, over the past few quarters, we've seen a little bit better strength. Strength is relative, obviously, given some of the performance previously, but certainly improvement. What I would tell you is that we still have work to do in the spine side of that group, still work-in-process is the way that I would define it. We're very enthusiastic about the new team, the new channel structure that we have in place. Some of the new technologies that we're going to be launching to differentiate ourselves would be spine, robotics, the ROSA robotics program and Walter which we have not talked a lot about today. But the combination of robotics in ROSA form and in the mini robotics in Walter, combined with our implants in devices, really does provide a unique solution for us. And we're excited about that. But the real driver of the growth that we've seen in that business has been CMF or craniomaxillofacial business. They've – just across the board. That team continues to execute. Very excited about what they're doing. But a big part of it, kind of the leading pieces in the cranial business is the ROSA Brain. I think people do forget that we have platforms across all three applications for robotics. And we are getting traction there. And the fact is, even though we have 140 units or so placed throughout the world, it's still significantly underpenetrated. And just to describe the benefit here, when you get a ROSA Brain procedure for an epileptic patient, you're going to place depth electrodes to find out where the seizure is happening in the brain. If you don't have a robotics system, if you don't have ROSA, that's a six-hour-plus procedure. It's extremely tedious. It's very complex. With ROSA, it takes it down to two hours or less. So, it is a dramatic change for patients and surgeons. That's why it's getting the adoption and we still have room to go. So, we're excited about that system. And as you previously referenced, it does give us a foothold in once we get a ROSA system in, the one ROSA unit to be able to leverage that to get spine in as well.

And thanks for that, Mike. And thanks for everyone. Like I say, we went a little bit over today because we had a lot of stuff we wanted to get out. I know it's been a long earnings week for all of you, so we appreciate your patience. So, thanks for joining us. Just a quick reminder, a replay of this call will be available later today. You can review it on our website at zimmerbiomet.com. And we'll be available to take questions. It will be a busy day. So, best way to reach us is via email. Have a great day. Have a great weekend. Thanks for participation. Bye-bye.

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