Zimmer Biomet Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 15 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded today, May 3, 2022. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen only mode. I would now like to turn the conference over to Carrie Maddox, Senior Vice President, Investor Relations and Chief Communications Officer.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's Q1 2022 earnings conference call. Joining me today are Brian Hanson our Chairman, President and CEO EVP and CFO, Suki Apadhyay and COO, Yvonne Tornos. Before we get started, I'd like to remind you that our comments during this call will include forward looking statements.

Speaker 1

Actual results may differ materially from those indicated by the forward looking statements due to a variety of risks and uncertainties. Please note, we assume no obligation to update these forward looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward looking statements. Additionally, the discussions on this call will include certain non GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP submit a note, financial measures is included within our Q1 earnings release, which can be found on our website, zimmerbiomet.com.

Speaker 1

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

Speaker 2

All right. Thanks, Carrie, and thanks to all of you for joining us this morning. I'm going to talk briefly about our Q1 see performance and our revised expectations for the full year, I'm also going to spend a few minutes talking about our recent innovation and our key drivers for long term growth. And then after Then I'm going to turn it over to Suki, who will get into more details on the quarter, but also very importantly, our full year guidance update. And then we'll close out the call with your questions, of course.

Speaker 2

So let's get started with Q1. We had a strong quarter, well above our own expectations and obviously above external expectations. And the primary reason for that level of overachievement was stronger than anticipated COVID recovery in the quarter, particularly when we looked at the back half of the quarter. And to In EMEA in China, the impact on overall procedure cancellations has been minimal at least so far. And inside of that, we saw a very strong performance in large joints And in particular, our knee franchise, while our set recovery lagged our core recon business at this point.

Speaker 2

We know it's still early in the year, But based on what we saw in the quarter and really current trends into Q2, our confidence in 2022 growth has definitely increased. And as a result, we are raising and tightening our full year guidance. Now there are clearly a number of headwinds that we are facing, supply challenges, to Russia, Ukraine, but given our revenue dependence on elective procedures, COVID recovery outweighs those headwinds And that's why even in the face of these challenges, we're able to raise our outlook for the year. Okay, so turning the page a bit outside of external influences on Our business, our strategy is working and our underlying business is very strong. Our new product pipeline continues to deliver.

Speaker 2

We're adding more innovation and value to our ZB Edge ecosystem. If you were AAOS, you saw our recently launched Walk AI. This is Zeebe's 1st AI based solution. We also showed recently launched functionality for Mymobility platform. This is under the umbrella of our exclusive partnership with Apple.

Speaker 2

Our ROSA robotics momentum continues to be very strong and the early feedback on Persona IQ even though it's in limited We also continue to drive significant demand and traction with Persona Revision in our knee franchise with Avanir complete in our hip franchise a signature 1 planner and shoulder and our new product pipeline remains very strong with additional product launches planned for 2022, a discussion, especially across our knee and set portfolios. We're also continuing to reshape our business and accelerate ZB's transformation. That means of course streamlining and modernizing our operating model, but also focusing on making ZBA best and preferred place to work in a trusted partner. Just in Q1, we scored 100% on the Human Rights Campaigns Corporate Equality Index. We made Forbes Best Large Employers list And we were named one of the most innovative companies by Fast Company for our ROSA robotics platform.

Speaker 2

We have also prioritized our environmental, social and governance or to submit a review of our financial results, we have committed to key environmental standards, delivered on social giving pledges to set DE and I standards and long term goals in this area. And we've enhanced our overall reporting of ESG progress internal to our own team to start spin of Zimby on March 1, that was ahead of schedule and certainly is a part of our active portfolio management strategy. So in summary, to Even though there are real macro headwinds that we will have to manage and I have confidence in our team to do so, the recovery, to the shift in recovery really in COVID is the bright spot we've been waiting for and we're excited about and has certainly changed our view of see the full year, okay. And with that, I'm going to turn the call over to Suki for a deeper dive into Q1 and our revised expectations for

Speaker 3

the full year.

Speaker 4

Okay, Suki?

Speaker 5

Thanks and good morning everyone. We had a good quarter driven by faster than expected recovery of elective procedures giving us the confidence to raise our see full year revenue and earnings per share outlook. Let's turn to our Q1 results and how that translates into our updated full year financial guidance. Unless otherwise noted, my statements will be about the Q1 2022 and how it compares to the same period in 2021. And my commentary will be on a constant currency and adjusted continuing operations basis.

Speaker 5

Please note, we have changed our geographic revenue reporting to U. S. And international, And we released a Form 8 ks last week to provide unaudited recasted financial information related to our Zimvi spin off Net sales in the Q1 were $1,663,000,000 up 3.9% on a reported and 6.8% on a constant currency basis. As previously guided, selling days contributed about 130 basis points of tailwind in the quarter. Revenue was driven by continued execution Along with stronger and faster than expected COVID recovery across most markets, with the largest uplift in the U.

Speaker 5

S. After a significantly pressured January, recovery ramped through the quarter with improvement in February and a strong rebound in March. On a consolidated basis, March grew versus pre pandemic levels and that recovery has continued into April. To submit. U.

Speaker 5

S. Sales grew 5.8 percent driven by strong recovery as COVID cases subsided and elective procedures returned. By the end of the quarter, U. S. Cancellation rates have returned to pre pandemic levels and procedure volumes were above 2019.

Speaker 5

International sales grew 8.1% driven by strong growth across Europe and we saw continued recovery despite COVID surges in certain European markets and China. Turning to our business category performance in the Q1. As a reminder, China to be about neutral to overall revenue growth for the full year. And so far, the 2022 impact is broadly in line with our original expectations. Assist you with a question on the call.

Speaker 5

While we don't expect a material impact from VBP on full year 2022 growth, we do expect there to be fluctuation by quarter. In the Q1, we saw about a 200 basis points to 300 basis points of pressure across our global knee, hip and SET segments, Which we expect to be broadly offset through the next three quarters, with the majority coming in the 4th quarter. Global knees grew 11% with U. S. Knees up 11 a 7% and international knees up 10.1%, driven by solid commercial execution, continued traction for Persona Revision, robotics pull through and strong knee procedure recovery across most markets.

Speaker 5

Global hips grew 4.5% with U. S. Hips up 3 point 3% and international hips up 5.6%, driven by recovery in both primary and revision hip procedures And we're seeing positive early traction on ROSA Hip. The Sports and Extremities and Trauma category increased 1.8%, driven by strong performance in CMFT, sports medicine and upper extremities. And finally, our other category grew 11.5%.

Speaker 5

Moving to the P and L. For the quarter, on a continuing operations basis, we reported GAAP diluted earnings per share of $0.35 compared to GAAP diluted earnings per share of $0.92 in the Q1 of 2021. This decrease was driven primarily by an unrealized investment loss due see a decline in the value of our investment in SimV and higher litigation related and restructuring charges. On an adjusted basis, diluted earnings per share from continuing operations of $1.61 represents an increase from $1.55 in the Q1 of 2021. The increase was largely driven by higher sales and lower interest expense.

Speaker 5

Adjusted gross margin was 70.6%, Lower than the prior year as expected due to VPP and higher input in manufacturing costs, which were partially offset by higher volumes and better mix. Our adjusted operating expenses were about $735,000,000 up from the prior year driven by higher investments in R and D. Our adjusted operating margin for the quarter was 26.4%, down versus the prior year, but ahead of expectations and driven by higher revenue. The adjusted tax rate was 16.1% in the quarter, in line with our expectations. Now turning to cash and liquidity.

Speaker 5

Operating cash flows from continuing operations were $360,000,000 and free cash flow totaled $223,000,000 for the quarter. We reduced our debt by about $650,000,000 excluding the effects of foreign currency and ended the Q1 with cash and cash equivalents of about $435,000,000 Our improving financial performance in tandem with our ongoing debt reduction continue to strengthen our balance sheet. Moving to our updated financial outlook for 2022. While we continue to manage through macro headwinds related to foreign currency, Russia, Inflation and supply chain challenges, a faster and stronger COVID recovery in tandem with a positive Q1 give us the confidence to raise and tighten our financial guidance. Against this backdrop, our current expectations for the full year are as follows.

Speaker 5

On a constant currency basis, we now expect to grow 2% to 4% versus 2021, with an expected foreign currency headwind of approximately 3 50 basis points. This translates into a reported revenue growth projection in the range of negative 1.5 percent to positive 0.5% versus 2021. Note that the selling day tailwind that we saw in the Q1 will be fully reversed in the Q4 with no material full year selling day impact. Adjusted operating profit margins continue to be in the range of 26.5% to 27.5%. This assumes inflationary pressure of about 150 basis points versus our original estimate of about 50 basis points.

Speaker 5

Of the incremental 100 basis points of pressure, a half will hit 2022, but be offset by expected higher revenue speak to the Q1 of 2019, adjusted diluted earnings per share is now expected to be higher at $6.65 to 6.85 COVID recovery we experienced in 2021, but we do expect revenue to grow in the low single digits over the Q2 of 2021 and to exceed pre pandemic levels for the full quarter. In summary, we expect that the environment will remain dynamic, But we believe the pace of recovery, our continued execution and the strength of ZB's underlying business fundamentals position us well to improve our financial outlook. With that, I'll turn the call back over to Carrie.

Speaker 6

Thanks, Suki. Before we start

Speaker 1

the Q and A session, just a reminder

Speaker 6

With that, operator, may we

Speaker 1

have the first question please?

Operator

Thank you. Ladies and gentlemen, at this time, we will now begin the question and answer session. One moment please for the first question. Our first question comes from Joanne Wuensch with Citi.

Speaker 7

Good morning and thank you for taking the question. Very nice quarter. A I'd be interested in your view of what's happening at the hospital level. We've been hearing all season about staffing headwinds, about CapEx spending headwinds,

Speaker 2

Got a bar sitting next to me, we're actually here traveling to Europe, so we take the opportunity to get out and start Q2 strong. What I would say is that, yes, we are definitely still seeing pressure from the staffing standpoint and we actually even today We expect that to continue throughout the year. When I think about the quarter itself, whether it be COVID or staffing or the combination of the 2, it was pretty tough in January. Got better obviously in February and it was really, really good in March. Actually March was a month that we had growth over 2019.

Speaker 2

So true growth of our pre pandemic levels and we're seeing that continue into April. So all positive from that perspective, but we do expect to That staffing pressure will continue to be a challenge throughout the year, just not as intense I think is what we thought when we started the year. But, Yvonne, you're out there more than I am

Speaker 4

in the U. S. Maybe you could also. Yes, absolutely. Thank you, Brian.

Speaker 4

So I concur. It remains a headwind. What I will tell you is that In the U. S, we have seen our cancellation rates. So the cases there also be the cases that get canceled every week to starting to look Pretty much similar to those cancellation rates in 2019.

Speaker 4

In the past, most cancellations were patient related, so fear and anxiety a In the early acute staffing challenges, day 20.1, it was mainly staff driven, staffing driven. Another fact that we're seeing that it's time to look more or less. The problem is not getting worse, but it has remained a problem. Less probably in Europe than other markets in the U. S, but it remains a challenge in the U.

Speaker 4

S.

Speaker 6

Joanne, was your follow-up about capital and the capital markets net pressure?

Speaker 7

Yes. Yes, capital purchasing. Thank you.

Speaker 2

So, I'm having a hard time hearing her for some reason. I don't know if maybe Carrie, you could repeat the question. I couldn't hear it.

Speaker 6

A Sure. Brian, Yvonne, Joanne was asking about capital purchasing and what we're seeing on those trends.

Speaker 4

Yes, I can see that question as well. So Primarily, we sell capital in 2 businesses, our surgical business and obviously robotics in our knee and hip platform. A We've not seen anything that tells us that, that is a shortage of capital. What the strategy for the quarter has been more around placement than selling robots. A But on the surgical side, we're not seeing a challenge.

Speaker 4

We're not seeing that we've seen less fluidity than in Q4. So I'm actually pretty optimistic in terms of where we are when it comes to capital allocation from a hospital standpoint. But again, as I mentioned, we're doing more placements than sales in the quarter. We did more placements Thanks for the question.

Speaker 7

Thank you.

Speaker 6

Thanks, Joanne. Lauren, can we go to the next question, please? Us.

Operator

Our next question comes from Travis Steed with Bank of America.

Speaker 8

Hi, good morning. Thanks for taking the questions and congrats on the good quarter. I Appreciate the colors on the margin pressures, but just want to make sure it's clear how we're thinking about how these pressures flow through to 2023. It sounds like 50 basis points of incremental pressure at this But also curious if you have any offsets like pricing. It was kind of noticeable that you didn't put pricing in the press release this quarter for the first time.

Speaker 8

So curious how you're thinking about that?

Speaker 5

Yes, sure. Hey, Travis, this is Suki. Thanks for the question. I'll start and then maybe turn it over to Yvonne are going to be roughly 150 basis points of a headwind on margins this year. Our original estimate back on the Q4 call was 50 basis points.

Speaker 5

So we think we're somewhere in the additional 100 basis point range from where we originally were. And we were seeing that to grow post our call, but it really started to accelerate with the war in Ukraine. And I don't think that's inconsistent with what you're hearing really across the support this sector and probably in other industries as well. Now, the way this works is, part of that pressure, about half of that will hit this year. A But given the way we account for costs and variances and given the higher level of inventory that we to a sense of that incremental 100 will find its way into next year.

Speaker 5

I would say that the key challenges that we're seeing, a again, very consistent across the sector from a supply chain standpoint. 1st, freight is higher, commodity costs are higher, energy The biggest culprit within that is our commodity costs. The good thing is we're starting to see some stabilization sit around that, we do still see some higher costs related to stainless steel packaging materials like plastics and resins and of course Titanium, which we're doing a lot of spot buys to secure our safety stocks and supply chain. But what we're hearing from our supply chain organization is that's starting to stabilize. Now, The environment is still very dynamic, so we'll keep you posted as the year progresses.

Speaker 5

But the good thing is that the largest headwind that we've got It feels like it's beginning to stabilize a bit. Inside of that, from a pricing standpoint, we did see a slightly better quarter this quarter on from a see the team is putting in place to better control pricing erosion year over year. And some of that I think is just a little bit still opportunistic because with The continued COVID headwinds that we saw in the beginning part of the quarter, that results in lower volumes, that then results in lower rebate thresholds for some of our customers. And so That sort of helps a tailwind on our pricing, probably temporarily while our volumes are more muted. But maybe Yvonne, you want to talk a little bit about what a significant impact on the pricing environment and our ability to offset price or pass price pressure onto the end markets.

Speaker 4

A Absolutely, Suki. Hey, Travis. Ivan here. So as Suki alluded to, the normal price erosion is around 200 to 300 basis points. We did achieve better price reduction in the quarter.

Speaker 4

Some components of that are sustainable. Others, they remain to be seen. What I will tell you is that we got governance today in the U. S. To I'm trying to in Europe and APAC that we didn't have in the past.

Speaker 4

As we see our vitality index or percentage of sales coming from new products, We see that as a tailwind. And again, we'll see how that develops in quarters to come. And from an incentive standpoint, for the first time, we will have very clear incentives to assist you in our commercial organization to maintain or gain price. So we're not making a commitment to do any better than the true to 300 basis points given that a large percentage of the to But certainly we have the plans and the governance that we didn't have before. So fingers crossed on that one.

Speaker 8

I appreciate all that color. And Suki, one follow-up on China. Just want to make sure we're modeling that correctly. It sounds like it was 200 to 300 basis point Headwind to total company organic growth this quarter, but that comes back in Q4. And if you just look at China volume with the shutdowns, I'd love to hear to how that's playing out in Q2 and the recovery there from a volume perspective?

Speaker 5

Yes. So the China volumes have clearly been negatively impacted because of some of the COVID surges that you've been hearing about. It's most acute in Shanghai. We did see earlier in the quarter some additional lockdowns in other cities. The good thing is, to revenue of the entire company and Shanghai inside of China is just a relatively modest fraction.

Speaker 5

So a While we're still seeing pressures specifically in that province, I think it's manageable and somewhat moderated. Again, broadly beyond Shanghai, we're seeing stabilization to improvement. We just have to keep a very close eye on China Excuse me, on Shanghai, but the way you're thinking about the impact of VBP is correct.

Speaker 8

Okay. Thanks for taking

Speaker 2

a I might just add some commentary there. It's interesting because even though there's a lot that's happening that's different than expected in China, The overall impact to the quarter was about what we expected and even into an outcome and into Q2. So for different reasons, But the fact is, even though we're seeing lockdowns in Shanghai and disruption as a result, we're also seeing delays in VBP implementation and those are almost balancing each other. So while certainly China was still a headwind for the quarter, from a top and bottom line standpoint, it was pretty much in line with what we expected even though for just different reasons. Assistance.

Speaker 8

Great. Thanks, Brian and Tuki.

Speaker 6

Thanks, Travis. Lauren, can we go to the next question, please?

Speaker 9

Maybe start with market share and I want to just ask you the question. I know it's hard to tell the trends given the last couple of years, but as we look at 3 year CAGRs and just try to make sense of what's going on in the U. S, it's actually not very clear that you are consistently gaining share. And I'm trying to think about this in the context of to The 600 or so roses at least that you have in the field, I'm sure that's a little bit higher now. And just trying to understand if there are offsets there or how you're thinking about market share in the U.

Speaker 9

S. For knees in particular, but knees and hips because the data doesn't strongly suggest that you're gaining share.

Speaker 2

Yes. So I'll take that and then I'll pass it over to you, Ron, if you want to talk about some specifics. But it probably all depends on how you're to your data because I would I'd probably argue the different outcome. The fact is it's choppy, to It's really choppy and we're looking at this thing in every different way you can sequential growth versus the previous quarter. We're looking at it versus prior year versus to 2019 because that was your last good year.

Speaker 2

We're looking at it on a stack basis, you name it, we're running the analysis to get a sense for what we're doing. What I've said always is that I don't really trust any given quarter, but I do look at trends. And almost any which The way I slice it, I do see us moving in the right direction. And of course, I also see things that you can't see in our own business. And the combination of the trends that I'm seeing, looking at it a lot different ways and also just the things that I see in my own business, I feel very confident that we're moving in the right direction and we're doing the things that we need to do to be able to drive attractive growth.

Speaker 2

A So the big one that I look at is vitality index. We had almost no vitality in the business. We've doubled that in the last few years and that continues to move north. We've got a very strong pipeline of products. So to me, when I think about that performance, it's clear.

Speaker 2

I think the transformation is real. A And the good news for us is that as COVID and staffing issues start to clear and continue to clear that the reported performance that we have as a business is finally going to start reflecting to We actually know what's happening in the business, but what gives us a lot of confidence again is the innovation. So maybe Yvonne, you want to talk about some of the innovation that gets you excited?

Speaker 4

Yes, absolutely. And Amit, I look forward to the day where we have objective market share data because I also to Also different from another statement on market share. But that said, I'm beyond excited about what we got in store. So some of the products that we keep talking about, Ross, you mentioned 600 robots at place. Obviously, the number is higher now.

Speaker 4

We're getting strong penetration in key accounts, support both in the hospital setting and in the outpatient setting, we have 2 indications, plenty of indications to come. Revision has already been launched in the U. S, to continues to grow at unprecedented rates. It's putting primary needs as well along the way. CVS to spend an hour talking about all the things that you probably saw in the Academy in Chicago, whether it is WorkAI, MAM Mobility, 2, 3 configurations, but we will have the largest Number of enrollments this last quarter, cementless needs penetration is also in the teams and that's before we launch a new form factor device at the end of this year, us Which is going to give us breaking the category.

Speaker 4

So that's just the mix. And I'm on you, we launched 6 products in the last 2 years. As you look into hips, We are performing strongly with Avineer Complete, Direct Anterior or Revision platform. We don't talk enough about that, but it's also performing very well. A In SAID, CMFT, Sports, MIM and Trauma are doing well.

Speaker 4

We got some noise with Trauma early in the year, but we got new launches and new product launches to come. To And just a ton of stuff coming from a data and technology standpoint. So I don't know if we're looking at the same data when it looks to market share, but what I do know is that as you look at the innovation story to submit a new quarterly dividend, I'm pretty confident that we're going to remain above market

Speaker 9

Thanks for that color. Yes, we'd love to know specifically if you do have the data to The U. S. Knees and hips what your data says, I'm sure it's better than ours. But the second follow-up would be for you, Brian, just on capital allocation, assist how you're thinking about M and A post the spin now and in this particular environment, if you want us to be thinking about natural limits to kind of the size a deal you'd be looking at and how you're thinking about adjacencies versus whiteboard opportunities, just any color would be super helpful.

Speaker 9

Thanks so much.

Speaker 2

Yes, yes. So maybe I'll kind of start kind of top line and then I'll hand it to Suki to talk about capital allocation and our current focus there. A But yes, for sure M and A and Active Portfolio Management is a big part of what we define as Phase 3 of the transformation. Assist you with a quick reminder, we started this whole journey in Phase 1, which I'm just going to define as kind of the hearts and minds, in other words, kind of mission and culture focus, a significant upgrading in talent at the leadership team level to make sure we have the right people to transform the business and then stabilizing just a number of significant issues around quality compliance, a Phase 2 was more around a true long term strategy making sure that we're shifting to innovation versus remediation a And really changing the kind of innovation we were focused on and then augmenting our structure and operating mechanisms to ensure that we truly do drive execution and accountability to the strategy. In the Phase 3, it's kind of where we are and kind of to your question.

Speaker 2

We are looking to transform the portfolio of the company. Now COVID has hampered our ability to do that to put pressure on the business, we haven't had as much firepower. But the fact is, we have made decisions here that are moving the needle. Number 1, We've got the spin of the dental and spine businesses, which we think is the right thing for both businesses. And although they've been smaller, just because we haven't had the firepower, we've done acquisitions to be able to build scale in attractive spaces, but for sure we will continue to focus on active portfolio management, acquiring companies that can drive weighted average market growth for us in our mission centric.

Speaker 2

I'm not going to get into specifics on where we would focus because as you probably know it's pretty competitive a there right now for assets, but this is something that we absolutely will focus on in Phase 3. The good news is as we continue to see stabilization in the market, We're going to be able to continue to buy down debt, which is important to us and eventually increase the firepower to do this. But Suji, maybe I'll just turn it over to you to talk about current capital allocation.

Speaker 5

Sure. Thank you, Brian, and thanks Amit for the question. So, our focus has been very consistent in ensuring that we continue to pay down debt sustain our investment grade and just a little fact point here. Since 2019, we've paid down almost $3,000,000,000 of debt and that's in the backdrop to pandemic that's had significant pressure on our financial performance. So it speaks to the strength and durability of our cash flows as But when you combine that priority as capital allocation together with improving financial performance a specific question, it really does start to set us up pretty nicely for more strategic optionality, as Brian talked about, with active a sense of portfolio management, I think in a bigger way enables us to look at opportunities to accelerate the top and bottom line growth of the a while diversifying it as well, and I think all of those things are very credit positive.

Speaker 5

And so while we will probably take more of a front foot in that active portfolio management a category as Brian talked about, especially now coming off the spin and quite frankly, the organization has got now more bandwidth, Having undertaken and gotten that very heavy lift behind us, we will undertake that active portfolio management with an eye towards maintaining our investment grade ratings. So, a great rating. So, feels good to start to turn the corner on that and to know that all of our hard work in delevering the balance sheet,

Speaker 6

assistance. Thanks for the questions, Amit. Lauren, can we go to the next question please?

Operator

Our next question comes from Jeff Johnson with Baird.

Speaker 10

Thank you. Good morning, guys. Maybe going back to Travis's question, Suki, just on gross margins, I think you're clear on the 50 basis points that's being capitalized and will come out next I think the way Travis phrased it and kind of I was hoping to hear an answer to was, are there offsets to that or should we just assume that that 50 basis points that comes out next year is kind of how we should think conceptually about gross margin being down 50 basis points next year then? Thanks.

Speaker 5

Yes. The team is actively looking and always looks at offset to any headwinds, whether current year, future years, etcetera. So I think it's too early to tell exactly what next year's gross margin will look like, but all things being equal, we've got that added headwind. The team is looking at both from a supply chain standpoint, more faster structural changes across our a significant amount of capital, we're looking at potential procurement and category savings through procurement to potentially offset those headwinds. And I think you heard about Yvonne talking about price.

Speaker 5

We're making some nice, I think, durable headway into improving our price discipline and our price performance. A We're going to continue to actively look for some offsets to that headwind. But right now, it's just too early to tell to say exactly What that 50 basis points ultimately translates to in 2023.

Speaker 10

Yes, understood. And then I think you guys are pretty Clear on kind of the R and D spending, things like that, but where are we on a recovery and spend on things like conference attendance, doc training, corporate travel, things like that? Are we at a level now that is Back to normalized and just kind of grow off that or is there kind of a recapture that still has to happen there?

Speaker 5

I would say we've definitely increased a Since 2021 and obviously since the depths of the pandemic, I think there's likely a little bit more room to go of the new product launches that we've got coming up, we want to make sure that we're investing appropriately from a commercial perspective to make sure that those launches are successful. I I don't know, Yvonne, if you want to say anything else there, but I guess the key takeaway there, we'd expect to see a modest increase as we move forward.

Speaker 4

Just assist me very quickly here, Jeff. I will tell you that the fact that the Vitality Index is 2x what it was 3 years ago tells you that we're having a slowdown from an R and D perspective. To Within R&D, as you know, you got 2 components, which is sustaining engineering and then new product introductions. And the number of new product to in 'twenty one and 'twenty two is dramatically different than in past years. And as we get into 'twenty three and 'twenty four, it's even higher.

Speaker 4

So definitely no cuts when it comes to true innovation. And then relative to MedEd, that's another area that we try not to cut, Might have done some adjustments throughout the pandemic, but I will tell you we are full force globally when it comes to MedEd. So R and D and the right components R and D and MedEd

Speaker 6

assistance. Thanks, Jeff. Lauren, can we move to the next question in the queue, please?

Operator

Our next question comes from Shagun Singh with RBC.

Speaker 11

Thank you so much for taking the question. So your Q1 ex FX revenue results in 2022 guidance implies lower quarterly growth for the balance of the year, so what's assumed in your guidance beyond Q1? How should we think about the cadence of it? Perhaps you can touch on both revenue and EPS. Any color on Q2 will be helpful.

Speaker 11

And then just as a follow-up on portfolio management, how are you thinking about your diversification strategy that you previously alluded to? A It seems like a lot of these procedures, at least on the recon side, are coming in from the ASC. So any color there would be helpful. Thank you.

Speaker 2

So, why don't you start with the cadence of growth as much color as you want to provide there. Obviously, we're not providing quarterly guidance, to But you can give more color there and then I'll talk about the diversification. Yes.

Speaker 5

So you're right. The forward looking based on our increase in our guidance range on ex FX, the midpoint now being at 3% versus the former at flat year over year, but given our Q1 would suggest lower ex FX growth rates for the remainder of the year. And that's primarily due to, as we previously discussed, much tougher comps as we move through the rest of the year. The Q1 of this year, We were of course comparing against the Q1 of 2021, which had a very, very deep COVID impact. And so it wasn't unexpected that you'd see a much better Q1 than the rest of the year.

Speaker 5

So it's really comp related on the rest of the year as to why that growth rate is lower than the Q1. As we think about cadence of revenue growth as we move forward, we would expect that we already talked about see the 2nd quarter being in the low single digits on an ex FX basis and the 4th quarter based on normal seasonality, We would expect the Q2 to be stronger than the Q3 and then of course the Q4 to be the strongest quarter a sense of the remainder of the year, very consistent with our former, seasonality that you saw last year and to support the 2019 and we would also expect earnings to follow that same suit and as revenue gets stronger, so will the operating margin. So earnings are expected to follow in that same cadence as revenue.

Speaker 2

Great. And on the concept of diversification, when we certification when we think about active portfolio management, it's definitely still there. Clearly we want to make sure that we're diversifying our business and we think about it really in 3 ways. To It's not just product segment diversification. Clearly that's an area of concentration for us because there are faster growth categories that we play in that we want to build scale in, But also geographic expansion just to make sure that we're taking advantage of fast growth areas in the world and the settings.

Speaker 2

You referenced ASC, that's an attractive to we've actually already acquired Ares to build our scale in that setting and we built commercial infrastructure to pursue ASC as well. A So we look at it for sure in diversification to drive weighted average market growth, but we don't just look at it via product, not just by geography, not just by setting, but all three of those.

Speaker 11

Thank you.

Speaker 6

Thanks, Jagan. Lauren, can we go to the next question in the queue?

Operator

Our next question comes from Drew Ranieri with Morgan Stanley.

Speaker 12

Hi, thanks for taking the question. Just on your set business for a moment. I appreciate that it lagged in the Q1, but just trying to get a better sense of how that progresses through the rest of the year. I think you mentioned in your prepared remarks that there's some new products coming later this year, but maybe go into a little bit more detail there, How are you thinking about your set market or set growth from a business perspective? Thank you.

Speaker 2

Yes. Maybe just quick top line and then Yvonne, maybe you could speak to some of the things you're seeing inside of SET. 1st and foremost, it is an area that we're very interested in. To sit

Speaker 5

in, not all the sub segments

Speaker 2

are set or created equal for us. There are certain categories that we're investing more heavily in because they're more attractive. We think we've got a better chance to win. A And quite frankly, we really do believe that we've got scale that we can continue to move forward. So not all equal, but certainly an area of overall concentration for I would say that you're going to continue to see some pressure in the next couple of quarters.

Speaker 2

A lot of that comes from the fact that we still have pressure in BVP and

Speaker 5

a And then I think as

Speaker 2

you get to the end of the year, particularly some of those new products being launched, you might have an opportunity to see some of that move in the right direction. A But just make no mistake, SED is an important area for us. We've put commercial infrastructure in place. We've acquired technologies in the space. We continue to innovate in the space and we will continue to focus and set.

Speaker 2

I don't know if you had anything else, Juan. Maybe just

Speaker 4

a couple of quick things here, Drew. So in the category, as I mentioned earlier, sports is doing very well. The acquisition and integration of Reliance continues to go very nicely here in the U. S. And in Europe.

Speaker 4

We've seen an increase in penetration a On Signature 1, we are now integrated in shoulder with My Mobility, which is the integration of CBH components into the shoulder platform. Comprehensive in shoulder is growing a in the strong teens globally. So sports and upper extremities are doing very well. CMFT, the integration of A and E is also going very well, continue to gain share on weak trauma, spread on closure, where we have some headwinds, as it was referenced by Suki in the prepared remarks, is with trauma, primarily because of headwinds in APAC, but also in the U. S.

Speaker 4

And timing with some contracts. But overall, the category with The exclusion of Trauma right now is going really, really well. And as I mentioned in a different forum, we got more product launches in this segment In 2022, at the end of 2022 and 2023, now we have had since 2015, 2016. So the innovation story is there as well. So things are on track.

Speaker 12

Got it. Thank you. And then just on robotics, I think I heard you mention that there was a stronger it was a stronger quarter on placements than capital, but can you just talk about whether you expect that trend to continue through 2022? What drives it? Is it just the hospital spending environment or are you doing a new sales strategy with how to place robotics.

Speaker 12

Thank you.

Speaker 4

Yes, absolutely. Thanks. So it's very fluid. It's very customer centric. We get the option of the placement.

Speaker 4

We obviously get the option of selling the Rosa and then sometimes we do a hybrid. In 2021, we did more sales than we anticipated given some of the macro dynamics. Assistance as we enter 2022, we see an opportunity for placement that delivers better financial returns. We do more than that. That said, we still are selling robots.

Speaker 4

And as I answered earlier, we're not seeing any clear headwind today That capital is not available for those robots, both in the hospital setting and in the ASC.

Speaker 6

Assistance. Thanks Drew. Lauren, can we go to the next question?

Operator

Our next question comes from Matthew O'Brien with Piper Sandler.

Speaker 3

Morning. Thanks for taking the questions. Brian, your comment on recovery, I thought was interesting. As we look at the market as far as a separate procedures go, we come up with kind of $1,000,000,000 to $2,000,000,000 of deferred orthopedic revenue globally over the last couple of years. If we get to maybe a third of that here in 2022, I know you can't get to all of it because of staffing headwinds, but given your market share position, can't this be kind of 100 to 200 basis points of tailwind to the top line?

Speaker 3

Is that what you're trying to communicate this to assist you today as far as what kind of impact of the business we should expect this year from the backlog?

Speaker 2

Yes. So to submit a question, please. To be clear, the backlog, we still believe there's got to be a backlog. I mean, just the fact is there's been no fundamental shift in the disease state itself and there has to be a backlog just to given what's happened over the past couple of years, but what we're not trying to state right now given our guidance is that we expect a big part of that backlog or really any of that backlog to influence our numbers, we're just saying that we believe as we get to the back half of the year, we're going to get to a normal environment, to not making assumptions about capitalizing or benefiting from backlog. We do believe at some point it has to come through, but a We believe at this point, it's not going to be some kind of a massive impact that comes quickly, you're just going to have capacity issues associated with that.

Speaker 2

We do believe it should be a tailwind, but we think it's going to happen over years, not months or quarters would be our view on it. But just to be very clear, we're not a suspecting that as a part of our guidance right now in backlog recovery.

Speaker 3

Okay. Thanks for that. And then maybe Suki, because I know you monitor this pretty closely on the ROSA side of things, you've been placing a lot of systems over the last couple of years. Maybe talk a little bit about that pull through revenue that you're going to get on the implant side and where we are in that cycle. Is it going to be a meaningful contributor to the knee business here in 'twenty two or is it more kind of spread

Speaker 4

out over

Speaker 3

the next couple of years? Thanks.

Speaker 5

Yes. Probably,

Speaker 2

and he's looking Probably better maybe even have Yvonne talk about that because I mean that realization of pull through is now. I mean it's happening. So maybe Ivan,

Speaker 4

maybe you want to speak to that. Yes. Maybe I won't give too many details because you never know who's listening, but the facts are that penetration of cementless to associated with ROSA, it's already in the teens. The pull through and a large component of the new performance in Q1 is ROSA related. The 600 plus robots that we place, roughly 50%, if not 60% of those in the U.

Speaker 4

S, around half of those are in competitive accounts. We've seen meaningful revenue coming from those areas. And all of that is in the early innings. As we get into the additional launches on HEAP, As we get into other modalities of ROSA Knee, we got several in innovation pipeline. We're going to continue to see a nice pull through there.

Speaker 4

A Cementless is one of the elements of pull through as is regular needs. And then obviously, you had a disposable and another component. CBH, many, many accounts It gets contracted as part of the ROSA placement or sale, and that's another source of revenue. So again, we don't disclose the revenue with robots, But I will tell you that is above expectations so far. Thank you.

Speaker 2

A Sorry to step on here, but I figured that was more of a commercial discussion versus a financial one. Is that what you

Speaker 4

were going to ask for Smithy or you want to change the answer

Speaker 6

Lauren, I think we're ready for the next question in the queue.

Operator

Our next question comes from Ryan Zimmerman with BTIG.

Speaker 13

Thanks for taking the questions. Good morning. A couple for me. When you think about 23% and The Streets, I think modeling about maybe 3% growth or so, and there's a lot of puts and takes this quarter. We've now shed Spine and Dental.

Speaker 13

Brian, when you think about the business segments, I mean, and the growth rates and Shagun was going to ask this from a pacing perspective, but I I love your perspective from a business segment perspective. What's accretive to growth? What's dilutive to growth now, when you look out on the business? And I think we know the answer to this, but it'd be helpful I think to walk through where you think the growth rates could be for knees and hips versus set etcetera. And then my second question, I'll just ask it now.

Speaker 13

Suki, you may have spoken to this before, but just help us understand any dis synergy assumptions post spin on Zynvi?

Speaker 2

Okay. Yes, so I'll start and then obviously we can transition to Suki. We're feeling really good a The funny thing is when you think about knee, most people think about it and rightly so, pretty slow growth market. But in reality, there's more innovation entering the knee space than we've ever seen before. We've got our us, our competitors all focused on a data, robotics and other forms of technology and share wallet opportunities that we just haven't seen in the past.

Speaker 2

So even though one might view that as a relatively so growth market, a I actually see it as a real potential to see some acceleration in that market growth. I feel very confident that we can grow well in need because of all the shots on goal that we have. But I also think all boats will float here. I mean they're really raised because you've got a lot of technology entering the space and what we've seen is that it's being digested. To And so when I think about that, what are the implications?

Speaker 2

If you have the same number of procedures being done, but you're getting more share of wallet for every procedure That drives up the entire space. And usually when you bring innovation as Ivan was alluding to earlier, we have vitality in the space, it also drives better pricing stability to sign longer term contracts when somebody converts for instance to ROSA, they usually don't come right back and try to knock you down from a pricing perspective. So Vitality a really does drive stability in pricing as well. So I think even in a space like that, that you might not believe would be attractive for overall revenue growth, I do believe it is sustainably an attractive area for us to invest and grow and it's very profitable for us as well. Set is pretty obvious, the categories of set that we're concentrating on are attractive market growth that everybody knows.

Speaker 2

We believe we have an ability to win to and we'll continue to scale in those areas. So pretty much across the board when I look at large joints or set, I see them as attractive markets given the technology that we're bringing to bear.

Speaker 4

Suki?

Speaker 5

Yes. Hey, Ryan. On your question related to the suspend and I believe it was on dissynergy. So if you look at the recasted financials that we put out Last week, you would see that overall we see operating margin accretion of about 190 basis points from the transaction, which is a little bit better than our original a sense of further validation of why we entered into that transaction. Inside of that, that would then supply and suggest about $40,000,000 to $50,000,000 of stranded costs remaining with Zimmer Biomet.

Speaker 5

A summary going into next year and we kind of just see that as part of our overall operating base as a potential source of opportunity for future efficiency. So Hopefully, that gets to your question on where we see and how we size the synergies. But make no mistake about it, we're going after those as

Speaker 6

assistance. Thanks, Ryan. Lars, we have another question in the queue.

Operator

Our next question comes from Mike Matson with Needham and Company.

Speaker 12

Morning. Thanks for taking my questions. I wanted to ask one on Persona IQ. I know you made some brief comments on it, but maybe you can give us a more detailed update And then is this something that could be material to your knee growth this year or next year in terms of adding

Speaker 4

to submit a question,

Speaker 2

please press star. Yes. So we're lucky to have Yvonne on the call today to Obviously, I'm close to this. He is extremely close to Persona IQ, not just what we have in knee, but also the future view of where we could take IQ and smart implants. But I would say we're in limited launching.

Speaker 2

As we've said, we're going to do this right. We're going to take our time.

Speaker 4

We're going

Speaker 2

to make sure that we learn what we need to learn to so that when we need full launch, we launch well. But the early stages of this is very attractive. And what's interesting about it, he's going to get into IQ itself. What's What's interesting about it, it's also driving traction for the organization just because it's innovative. Even people that are not ready for They're just saying, I'm not quite ready for it yet.

Speaker 2

They're looking at us differently. They're looking at Zimmer Biomet as an innovative player to in the space and most people want to be linked to an innovative player, someone's going to change the space. And so even those customers that didn't want to come to us support IQ, we're getting interest for them just to move to Ready to Persona. So it's almost got a halo effect because it's so unique in the marketplace. To But Ivan, I'll pass it to you.

Speaker 4

Yes, absolutely, Mike. So first things first, we are on track with limited market release. I'm not a friend of doing limited market releases. I like to do full force launches. But on this one, given the complexity and given the disruption in the market, to I want to talk about the number of hospitals that have been on boarded, but it is significant.

Speaker 4

The patient pipeline is also significant above our expectations. We're collecting data across the board on Mobility, range of motion, we've got literally thousands of days of data track. The platform, PersonaIQ is now fully integrated with Samba Mobility and the rest to see the CDS ecosystem, we have not seen any surprises when it comes to the qualified data that we're tracking. And most excitingly, to We got a technology roadmap that is going to go beyond these. So already got design agreements for cementless, for shoulder and other categories.

Speaker 4

On On the second part of your question, I'm not going to comment on whether it's material or not. I will tell you it is material for patients and then the logic should prevail if it is material for patients. So, So far so good, very excited. I look forward to the next question. Okay, thanks.

Speaker 4

And then just

Speaker 12

as a follow-up, I wanted to ask one on ASCs. To how do you feel your position competitively in the ASC sector? And do you think your growth in ASCs was Faster than your growth in hospitals.

Speaker 4

I mean, it seems like it

Speaker 12

is for the overall market, I guess, from what we've heard, but

Speaker 10

a Yes, I can take

Speaker 4

that one as well. So pleased with where we are with the ASC. Clearly, we started later than others in this environment, Given our strong position in hospital settings, in patient, outpatient and whatnot, but we put a plan together around 4 key components, making sure we have the right portfolio, the right people, The right partnerships and the right contracts. On the product, we don't have time. We fill the gaps on basic things like booms and lights, a discussion on visualization towers, we launched ASC friendly innovation around robotics.

Speaker 4

We have increased our CMS So I think that the portfolio is second to none, especially now that we added the Sportsman and whatnot. So Strong on the product angle. On the people aspect, we didn't used to have a dedicated structure, dedicated commercial structure and contracting structure on the ASE setting. We have it now. It's fully dedicated.

Speaker 4

We got a large group of people that each and every day get up and think only about the ASC. On the partnership angle, we got key relationships with kid centers in the U. S. We're developing technology together that is applicable to ASC. We're doing a ton of medical education together with these key centers.

Speaker 4

I mean, around contracting is not a day. We got an owner of all ASC contracts. We are very disciplined around the governance in those relationships, particularly in pricing. So I think the plan is working well. We're growing faster than expected.

Speaker 4

I'm not sure these days we're growing faster or not than the others, but the ASE performance in Q1 was above our expectations. As we think about the rest of the year, I think we're in a good position to continue to grow. Great. Thank you.

Speaker 6

Assistance. Thanks Mike. Lauren, I think we have time for maybe 1 or 2 final questions.

Operator

We'll take our next question from Robbie Marcus with JPMorgan.

Speaker 14

Great. Thanks for taking the question. Maybe I could ask the SET business was the slowest grower this quarter. It's a 25% of sales and we don't get geographic breakout or segments there. I was hoping if you could walk us through So are the different components and any geographic differences to point out, just given that a lot of your competitors called out extremities And sports medicine as positives this quarter.

Speaker 14

Thanks.

Speaker 2

Yes. Maybe, also maybe the chance to But the fact is we did have a pretty significant headwind. So when you look at the difference in regions, the most challenging region that we have was Asia specific and a big part of that as we all know is the trauma VBP and the weight that that's having on the overall segment. Outside of that, when we look inside of set, I would say the same thing. Our upper extremities business did very well.

Speaker 2

The innovation is helping us drive our performance there, but also the focus that we have. To sports did very well as Yvonne talked about before and that happened both U. S. And Europe. And when you think about our CMFT business, we continue to see traction a not just because of the acquisitions that we've had, but also because of the now what I would define as organic growth from those acquisitions.

Speaker 2

And again, the focus that we have commercially in CMFT. So those are kind of the bright spots that we have and those are across all regions. But the big headwind for us is in trauma, a A lot of that being in Asia Pacific.

Speaker 4

I guess if I add to what Brian is saying, I'll be saying the same thing with a different accent. So I want to extend myself, to excited about the dedicated channel in key geographies in Europe and the U. S. Primarily and the innovation that is coming later in the year Going into 2023. So sports is going well, Extreme is going well, again, some noise with Trauma, but 203 key components to outperforming very nicely and they're about to perform even at a faster pace.

Speaker 4

Thanks, Robbie.

Speaker 9

And are

Speaker 14

you guys willing to give any ex to China growth rates for extremities and trauma.

Speaker 2

I think you could probably just read from what Sookie said and I think to It was in your prepared remarks, Suki, but 200 to 300 basis points of headwind is what you could look at in the quarter on the global business as

Speaker 4

a result of China.

Speaker 14

Great. And maybe just one quick follow-up for me. As you think about China, that's a country with a The difficult pathway forward with the no COVID policy, I just want to make sure, are you assuming continued pressure from lockdowns

Speaker 2

The reason for the range that we have in the guidance is to make sure that we're accommodating risk or opportunity in places like China. A So it's already calculated in the range that we have. What I would tell you is again we've been a little bit lucky there. Sometimes it's okay to be lucky rather than always just good. A solution which helps us from a pricing standpoint and they've offset each other.

Speaker 2

And so at this point in time even though the mix of how we're getting to the revenue and the bottom line that we to assume you will get in China, it's changed, but the overall impact is about where we thought it would be. So I guess all that to say, even if we see continued lockdowns, As long as we see continued delays in PPP, they seem to be offsetting each other.

Speaker 6

A Thanks, Robbie. I think we're at 9:30, so we probably need to wrap there. Lauren, thank you so much. Brian, don't know if there's any closing remarks from you or any other members of the team. I'll pause there just to see if you'd like to make any comments before we wrap up on this end.

Speaker 2

Assistance No, I think the nice thing is we captured a lot of what we wanted to say via the question. The fact is it was a good quarter. It feels good to have it. And I think probably the most important thing even though there's a lot of challenges that everyone is talking about right now that we're going to have to deal with, that we're going to have to manage through and I have to submit the team can manage through those. The difference now is it's the same challenges for everybody where we've been disproportionately impacted by COVID.

Speaker 2

And so If I had to select, I would take the challenges that we currently have in place and their impact to the business versus continued COVID impact. And so that's the positive process that's been kind of a light at the end of the tunnel that we've been waiting for, which is COVID receding. And I truly do believe as it does recede and it continues to recede that the actual performance that we see in the business will begin to be reflected in the performance that you see in the business. So With that, we'll go ahead and end the call.

Speaker 6

Thanks, Brian, and thanks everyone for joining. Of course, if you have any other questions, please feel free to reach out to the IR team at any

Operator

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

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Earnings Conference Call
Zimmer Biomet Q1 2022
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