Q4 2020 Zimmer Biomet Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet fourth quarter 2020 earnings conference call. If anyone needs assistance at any time during the conference. Please press the star of followed by the zero as.
As a reminder, this conference is being recorded today that'd be where he said 2021.
Following today's presentation, there will be a question and answer session. At this time all participants are in a listen only mode.
If you have a question. Please press the star followed by the one on your push buttons on.
I would now like to turn the conference over to Kerry Maddox Senior Vice President Investor Relations and Chief Communications Officer. Please go ahead.
Thank you operator, and good morning, everyone. I Hope you are all well and safe welcome to Zimmer Biomet quarterly earnings Conference call. Joining me virtually today are Brian Hanson, our president and CEO and CFO Suki, if I die.
Before we get started I'd like to remind you that our comments. During this call will include forward looking statements actual results may differ materially from those indicated by the forward looking statements due to a variety of risks and uncertainties.
Please note we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. In addition to the inherent limitations of such forward looking statements.
Additionally, the discussions on this call will include certain non-GAAP financial measures reconciliation of these measures to the most directly comparable GAAP financial measures is included within our earnings release.
Of note to all call participants we provided updates via two press releases issued this morning, and we have also posted an investor presentation to our website Zimmer biomet dot com with that I'll now turn the call over to Bryan Bryan.
Alright, great. Thanks, Carey and I also want to say thanks to everyone for joining us on the call here. This morning as you saw from our announcements earlier today, you know clearly having a few updates that we want to fill you in on and I'm looking for it to a very productive call. This morning.
Just given the backdrop of Covid, let me just start by saying that I certainly hope that all of you are doing well staying safe and continuing to as much as it's frustrating I'm sure by now continuing to social distance and where your masks I think at this point, we're all pretty good out of it so let's make sure that we continue to do it and all of the ZB team members joining the call. This morning <unk>.
Meaning at a later time.
Let's turn on thinking about you as well I just want to say thanks. Thanks for everything that you do have done and will do actually to continue to follow our protocols to keep yourself safe obviously the answer of your teammates safe and as a result of that continue to deliver for our customers on our patients to move our mission forward.
Continue to be very proud of everything this team has accomplished against a significantly challenging backdrop in 2020. So proud of you I'm glad to see what you've been able to do and I'm looking forward of what you can do in 2021.
All right. We're in 2021, and there's going to be challenges. We've seen already you know early on in 2021 of it but I'm confident that we're ready to deal with the challenges of ZB and I'm pretty confident that we're going to see some real opportunities for 'twenty and 'twenty, one as well and there's just a lot of updates that I want to share with you today, but I'm going to keep my comments to a minimum as possible.
Really want to make sure that we have time for you to get into a little more detail on Q4, and then ultimately say, how that's going to translate into 2021 and I'm not going to give too many specifics on 2021, but he will give you some color on what we're seeing from Q4 and again the impact we think that's going to have on 'twenty and 'twenty, one and want to make sure that the lead time for questions as well okay. So for today on I'm, just going to kind of keep at the three main.
Topics. The first is really how we're continuing to navigate COVID-19.
We continue inside of that to ensure that we're executing against our strategy. The second one of its really going to talk about the ongoing transformation of the company, who really are of making sure that we're moving forward with active portfolio management and obviously, we're taking the next steps there with the planned spinoff of our spine and dental business. So we'll talk a bit about that.
And the third of all want to make sure that we again I touch upon our long term growth strategy and how it positions us to drive growth obviously as the company, but also value for you and the value for us and so let's start again navigating the challenges in executing here on the short term. There's just no doubt the COVID-19. Unfortunately remains a challenge coming out of Q4, we're seeing the pandemic.
Pressure in the searches continue and frankly, the worsen across pretty much all of our regions and markets. There's clearly more of lockdown measures that we're seeing throughout Europe middle East and Africa, two of far lesser extent, but still impacting Asia Pacific as well and certainly on the Americas. We're all seeing it in the U S may be different by state, but we're clearly seeing increased pressure.
As a result of surges in the pandemic. So all of that is kind of the backdrop that we saw coming out of Q4, you know of.
Fortunately this pressure you know and the corresponding decline in elective procedures grew throughout Q4 and actually was worse at the end of December and at this point, we expect that increase in pressure will continue throughout Q1 at least it will impact all three of our regions as a matter of fact, we're actually seeing this probably increase in pressure.
Coming out of Q4, so we would expect Q1 to be a little more challenging than even what we saw in Q4, but even given that backdrop I'll say that I'm optimistic.
Sounds crazy to say, what I said, but to say that I'm also optimistic but the best thing to the approved vaccines.
We're currently rolling those out around the world. We do believe the vaccines are going to change the COVID-19 dynamic and we're going to see positive impact as a result of it as soon as we start to see the surge of stop we see the impact of Covid and the we're confident that the recovery is going to mean that the normal patient flow is going to start again, and we're gonna have the pull through effect of of <unk>.
Risible patient backlog, that's been created over the past number of quarters, we expect that when that recovery occurs we're going to see a period of what I would define as normal market growth augmented by deferred procedures that will be coming in as well and we're gonna be ready for that and we're excited about that so as much as it was going to be a little rocky in the short term and potentially even more challenging than what we saw on the fourth quarter, we see of.
At the end of the tunnel and that's a good thing. The big question is when does that kind of happened and we know the vaccine is going to have the impact. The big question is when and that's certainly going to be the key variable we're gonna be looking at as we try to predict what 'twenty 'twenty one of its gonna look like so why would you say you know against this backdrop of Covid, but what is clear to US is we can't control when the bad.
Scenes allow the sort of just to stop of what we can control inside of that is how we execute how we execute our strategy and I have confidence we're going to continue to moving forward you know our core business is strong our execution is on point al just the momentum around our key commercial launches of programs continues to be strong and I'll say the overall, our commercial confidence is better.
Other than it has ever been so oh, let's get the few examples of this not I can say it all day long, but unless we talk about it actually a reflection of the numbers who cares. So let's first start with Rosa knee. Obviously this is something that everyone is going to be paying attention to certainly I am and I know, we said, we're going to hit between two to 300 cumulative placements by the end of 2020, obviously.
You know the we were in that range as of Q3, So I'm happy to report that not only did we achieve that goal. We achieved the high end of that goal and I would tell you that the momentum is strong coming into 'twenty 'twenty. One Q4 was actually our strongest quarter as of the date of launch of Rosa knee. So we've had some pretty strong quarters in the past Q4 was our best and we were on the high end.
Of the goal that we set for the year and as I said before with some of the new launches that we have coming specifically associated with the Uni I feel pretty confident the 'twenty 'twenty. One is going to continue to show that kind of resilience and strength of Rosa knee on the percent of revision side again. This product continues to be a very successful for US. We are now show that in Q4, we actually.
You had the strongest quarter over quarter growth that we've seen since launch we did realize our 2020 expectations of $100 million on gross revenue and almost $40 million of net of cannibalization of revenue during the year and I would just tell you that that's just the beginning because persona revision serves as a really compelling tip of the spear of product for our commercial team once we get persona.
The revision in we've got an opportunity the hunt for the typical primary knee as well. So we're very excited about that launch and it continues to be strong on the hip side, how the near complete continues to be a strong one for us even in the pandemic of continues to beat our expectations and if I just look at Q4, specifically, we grew about 30% over Q3.
Again, even with the increased pressures of the pandemic in Q4, so very excited with what we're able to do with Avenir complete and we expect good things to continue with this product throughout 2021 and as you. Obviously you know we also expect at the end of 2021 to launch the Rosa hit, which again gives us a lot of confidence in the hip category for our business and then finally for signature one.
We demonstrated this again strong sequential growth with the registration is up nearly 25 per cent in Q4 over Q3, and we expect utilization to continue to expand significantly in 2021 was really the goal of having more than 60% of our shoulder procedures using pre surgical planning and that's important for a lot of reasons. It remember the pre surgical planning creates stickiness with the.
<unk>, but it also enhances our ability to get more guides and augments using the procedure, which can really take up the ASP for that procedure. So again exciting stuff with signature one plant or as well. So all in we continue to execute you know we continue executing for the team.
Day, where we're showing up every day the way, we're showing up in the market and frankly versus our peers gives me confidence in our business as does our continued innovation in our product launches of what we're gonna see more this year, some pretty pivotal innovation that we're going to see this year as I mentioned before we're gonna see Rosa partial knee, we're gonna see Rosa hit and we're also going to see the first smart implant persona.
You launched this year, so definitely exciting for us from an innovation standpoint in 2021.
And that leads me to really my second topic. This morning, you know we continue the transformation of the D. That's been the the goal of since I got here you've heard me talk about our three phases of transformation. The first was the hearts and minds and the execution challenges that we had in the very beginning that's what we talked about a lot in the beginning of the second phase of this was really building a more robust of longer term strategy.
Making sure that we brought innovation to the market and getting our execution strength, we're clearly well into that phase and third is our portfolio of transformation and that's the goal of active portfolio management. The change the complexion of the organization. So that we can have better goal of sustained mid single digit growth.
I have to say that we're squarely positioned in phase III now as well and as you've seen by our recent announcement, we're going to continue to move. This forward, we have the portfolio management strategy and the process in place and have built a pretty strong capability to move us forward in this area in the late last year, we executed a number of smaller but still important M&A deals to fill.
The little gaps and to better position us in the higher growth areas that we do believe we have a right to win and just this morning, we announced our intent to spin off of our spine and dental businesses now ultimately, creating we believe two independent publicly traded companies, both Zimmer biomet and the new company called Newco that are going to be better positioned separate actually.
We believe by separating out these businesses, we're going to create two stronger companies to companies that are going to be better positioned to meet customer needs and improve patient lives.
Ultimately and very importantly, deliver greater value to you our shareholders.
To give you a bit more detail on why we believe this is an opportunity for value creation and really why do we think of delivers value for both of the GB of Newco first of all all of the transaction increases our management focus and resource prioritization and we truly do believe for both companies. We think about newco and we think it's going to thrive as an independent company, we've prioritized capital.
The allocation to pursue strategies and growth opportunities and truly investments in satisfying the dental that has not been of focused for ZB. It will absolutely be of focus for newco and for Zimmer Biomet. The transaction is an important next step in our transition into a more streamlined company with sharper focus and greater and more optimized resource.
Asian towards innovation in those core businesses that we are committed to that are profitable for us where we see attractive markets with a right to win in those markets of the market leaders.
The second thing is it's going to drive increased growth and efficiency for both companies. We really do believe that and simply put we expect that these two companies with their simplify the operating models and just reduce complexity and increase focus we will be able to grow revenue margin and earnings per share faster than they would if we remain combined as one company and so he's going to talk more about this.
Specific financial impact that we expect in just a few minutes, but just know it's positive for both organizations financially speaking as we separate the organizations.
It's going to enhance the value creation for our patients you know of providers and all of our key stakeholders, including our own team members. This is the next step in GBS transformation and it underscores our commitment to ensuring long term priorities remain aligned with shareholders' best interest.
Drive the business forward to meet customer needs and advance our mission to alleviate pain and improve the quality of life for people around the world. We think we can do a better as two separate organizations.
Okay. So that's the backdrop of the spin and today, obviously, it's just day one in terms of announcements around this process you can absolutely expect that we're going to continue to provide updates as we move forward as newco take shape and as we move towards the transaction close which we're currently expecting to be around mid 2022. Okay. So we're confident in the steps we're taking in.
Our ability to keep executing and in our overall ZB strategy and that brings me really to the third and really the final topic that I have for these remarks, and it's our plan to drive long term growth and ultimately as a result of that deliver increased value for you and to do that we remain fully committed and confident in the these long term growth and margin expansion of expert.
Patients you know in fact, the spinoff transaction that we're going to do over the next year serves the derisk, if not accelerate our path to that 4% to 5% growth rate, we've talked about and of our 30% operating margin profile by the end of 2023 and to get there to be able to deliver on both of those we're going to have to be committed to our priority growth areas and we've talked about these in the past.
I'm going to remind you of them again, the key area of concentration for us would be knees hips and set if we think about needs first and foremost we need to be able to grow above market rates here and we're going to continue to focus on the fastest growth submarkets of needs for us that's gonna be robotics data and informatics smell of some revision we feel we have plenty of innovation and momentum here to continue to.
The growth sustainably above market rates of knee from a.
I had perspective, it's a little less ambitious in the beginning of we just said the we need to grow at market in the short term with the idea that over the long term, particularly after the Roes that hit is launched that we will grow above market and hip as well and I can tell you based on our performance so far the Roes the hip application being launched in later in 2021 and the Avenir complete momentum that we have we feel confident we're going to.
You have to do that as well and as far as that goes we just want to grow at market if not the higher end of market and to do that we're going to focus on the most attractive sub elements of set for us and that's for US again gonna be sports medicine extremities. Those are key areas of concentration for us that we're going to invest internally, we're going to look for extra on ways to build scale and we're going to build commercial infrastructure.
Well.
Alright, that's the only close by saying that I continue to be more confident about <unk> future than ever I know, what I say is that a lot recently, but I really do feel the momentum right now I truly believe that we are well positioned for success and that our strategy is absolutely working nor of transformation is well underway and our proven ability to rise the challenges.
And face adversity, I think has prepared us well for navigating the current environment and it really for that matter of any environment in front of us and I just want to again say thanks to the entire ZB team for you.
Focus on our mission, our strategy and how we show up and execute every day is unmatched. It's what makes ZB and what makes me confident that we're going to continue to deliver.
I'm going to turn the call over the city for more financial details of the quarter and also looking for okay. Okay.
Thanks, and good morning, everyone.
Before jumping into the details I'd like to summarize the quarter as one where we made significant progress across a number of strategic and operational fronts. All of the backdrop of heightened market pressure, while revenue and profitability were challenged due to the pandemic, we executed extremely well against the things we can control positioning ourselves to win for the eventual market.
And beyond that.
For this morning's call I'm going to focus on two topics first our Q4 results, including commentary on the Covid impact and what we're seeing so far in Q1.
Second how V. P is positioned for long term growth specifically, how we believe the spinoff transaction. We announced this morning is expected to impact us post execution.
Moving forward unless otherwise noted revenue and P&L commentary will be on a constant currency or adjusted basis.
Net sales in the fourth quarter were 2.085 billion of reported decrease of one 9% of constant currency decrease of three 7% versus 2019, we.
We did not experience of any material day rate differences in our year over year comparisons.
Our consolidated the regional results were inline with expectations. Despite deepening pandemic pressure on global electric procedures as we exited the year, while the market soften through the quarter execution remained strong across all regions.
Beginning with the Asia Pacific The region grew 2% versus Q4 2019 with growth across all three of our largest markets of Japan, China, and Australia New Zealand.
While COVID-19 pressure on elective procedures increased towards the end of the quarter of the impact is less pronounced on what we're seeing in EMEA and the Americas. We are excited about the uptake we're seeing on Rosa in the region and with the solid performance across our knee and hip businesses.
As expected the immediate region was hardest hit by COVID-19, decreasing 17, 5% versus 2019 with all subregions in decline.
Searches in the virus, leading to policy actions in government lockdowns negatively impacted elective procedures across the region.
Lastly, the Americas region was about flat decreasing <unk>, 3% compared to 2019, driven by continued COVID-19 headwinds in Latin America in tandem with a softening in the U S market.
The U S was flat despite increased pressure on elective procedures.
Performance was buoyed by continued strong demand for recent innovative product introductions strong execution of our commercial organization and some favorable impact related to the order timing and year end purchases.
Some accounts increase their buying patterns to utilize remaining 2020 budgets.
Turning to our business performance for Q4 the.
The global knee business declined four 8% negatively impacted by the ongoing pressures in EMEA of however, the U S knee business continued to grow increase of one eight per cent and Asia Pacific knee business returned to growth increasing two 9%.
Overall execution was strong with continued momentum for persona Rosa knee.
Our global hip business decreased three 4% again, driven by declines in EMEA of both U S. Hips and APAC has continued their growth trends of increasing one four and one 3% respectively.
Sports extremities and trauma sales declined three 3%, that's the spine and C. M. S. T continued to deliver better execution, increasing <unk>, 8% and finally, our other category was down nine 3%.
Moving to the P&L, we reported GAAP diluted earnings per share of $1 59, and adjusted diluted earnings per share of $2 on 11 cents of.
Additional details on our GAAP results can be viewed in our press release issued this morning.
On an adjusted basis with revenue down three 7% EPS was down about 10% driven by a lower operating margin and a higher share count, which more than offset the favorable tax rate in the quarter.
Lower adjusted operating margin was driven by lower revenue and an expected year over year decline in gross margins.
Adjusted gross margin was 71, 3% sequentially better than Q3, but lower than Q4 2019.
Versus the prior year favorable geographic mix was more than offset by lower volumes ongoing pricing pressure and the impact from prior period deferred costs.
Opex was down versus the prior year as we implemented several cost containment initiatives as part of our response to the pandemic. In addition to the realization of our transformation programs that were ultimately reinvest it back into R&D and commercial infrastructure to help drive consistent above market growth in priority areas.
Based on our performance versus market over the recent quarters, our reinvestment of efficiency savings is translating into strong returns.
The Q4 adjusted tax rate of 15% was better than the previous year due to geographic mix of income and certain discrete benefits in the quarter related to recent audit settlements.
Turning to cash and liquidity in the quarter.
Free cash flow total $329 million higher than the same period in 2019, driven by better working capital and lower capital expenditures.
And we utilize better than expected cash flow to pay down of $250 million of debt ahead of schedule ending the year with cash and cash equivalents of approximately $800 million.
Now moving to 2021.
Due to the ongoing uncertainty related to COVID-19, and its impact on elective procedures, we will not be providing full year financial guidance. At this time, we recognize that this is challenging for you as you build the 'twenty. One models. However, we will reserve financial guidance until we have more certainty around the outlook of the lesser procedures relative to COVID-19 searches and related VAT.
<unk> seen adoption.
We strive to be credible and transparent and to that end I will provide additional quarterly details and broader full year shaping as an interim measure.
So far through January we've seen COVID-19 pressure continuing to intensify from the end of December.
Based on what we've seen so far in the quarter and in tandem with our latest estimates for procedure cadence. We project. The Q1 revenue will be down in the low single digit to mid single digit percentage range versus Q1 2020.
Now, we have optimism and confidence that we'll see a positive vaccine impact on elective procedures. This year and once we do we expect the lack of procedure volumes to return to pre pandemic levels and the sizable patient backlog to serve as a tailwind to underlying market growth.
As we turn to the P&L, we expect that the impact of COVID-19 on sales volume will put pressure on adjusted operating margin and earnings leverage until we return to consistent pre COVID-19 revenue levels and growth rates as I just discussed.
Despite this near term pressure our confidence in the market recovery in the longer term financial profile of the company is driving continued investment into priority areas of the business.
We expect that adjusted gross margin for stabilized in 2021 with quarterly margin levels broadly in line with what we saw on the back half of 2020.
We could see some fluctuation from quarter to quarter, depending on the number of variables, including volume price foreign currency mix and other drivers that can change results over time.
Regarding operating expenses sequentially versus the fourth quarter of 2020, we expect non commission spending of Q1 to be modestly lower with increases in future quarters Opex investments as the impact of the pandemic abates.
We expect the interest expense to increase from the mid single digit versus 2020 as the benefit from lower debt balances more than offset by the renewal of net investment hedge positions.
Our tax rate is expected to be modestly higher than the full year 2020 rate and could fluctuate over the year as a result of variability the geographic mix of income due to the pandemic also we are not projecting any material U S corporate tax reform to be implemented in 2021.
We projected for full year share count in 2021 will continue to increase modestly versus Q4 of 2020, and we are not planning for any share buybacks of the year and in <unk>.
Terms of capital allocation, we remain committed to maintaining our investment grade rating and are planning to pay down an additional $500 million of debt in 2021.
Now lets turn for today's announcement related to our intent to spend the spine and dental businesses into an independent publicly traded company.
The transaction will be structures of tax free distribution of newly issued newco shares for ZB shareholders as Brian mentioned, we believe that this tax efficient transaction, which is expected to close in mid 2022 subject to certain conditions will drive greater focus for each company with enhanced prioritization of capital allocation.
While accelerating growth and providing the platform for greater shareholder value.
In terms of the Newco financial profile 2019 of 2020 pro forma revenues totaled approximately $1.0 billion to $2 billion and 897 million, respectively and is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion.
We expect newco to have a financial profile generally in line with its peer group and the capital structure supportive of innovation and investment over time.
Importantly, the transaction will empower newco to pursue a more focused investment and execution strategy.
The <unk> delivered 2019 of 2020 pro forma revenue of $6 96 billion and $6 128 billion respectively.
For post spin CEB the transaction is expected to deliver an improved growth profile with the accretion to our revenue growth of approximately 50 basis points over the course of our five year strategic planning period.
We also expect that it will expand our adjusted EBITDA and operating margins on a pro forma basis by approximately 125 basis points.
With that you should have even greater confidence in our operating margin expansion goals.
We remain committed to at least 30% adjusted operating margins by the end of 2023 and with this transaction, we have the opportunity to accelerate the timing of that goal.
<unk>, we will continue to balance margin acceleration against the investment opportunities to accelerate durable top line growth.
Ultimately this transaction provides greater optionality to invest more on the business, while delivering our leading margin profile and that's an incredibly powerful lever.
And the terms of capital structure post spin, we will prioritize proceeds towards debt paydown to maintain our investment grade rating.
For truly excited about this transformational opportunity to increase value for our investors and we'll continue to provide more details as execution of the span of progress.
To summarize while the pandemic continue to pressure our growth and earnings profile in the quarter, we made substantial progress on many fronts, including very strong performance versus the market.
Progress on our efficiency programs that enable the increased investment for growth.
Free cash flow generation that was ahead of revenue growth strengthening of our balance sheet through early pay down of debt integrating our strategic and accretive tuck in M&A deals and positioning ourselves to execute the spinoff of our spine and dental business as a platform for greater value.
I'm truly proud of what the ZB team accomplished in the quarter and throughout 2020.
With that I'll turn the call back over to Kerry.
Thanks, Susie before we start the Q&A session. A reminder to please limit yourself to the single question and one follow up so that we can get through as many questions as possible during the call with that operator may we have the first question.
Okay.
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 Steven Lichtman with Oppenheimer <unk> company.
Thank you and good morning.
Bryan as you continue in our phase three obviously accelerated with today's announcement I was wondering if you could provide your latest thoughts on capital allocation are you still targeting tuck in larger deals.
Any color would be helpful.
On the follow up on Covid.
Okay, Yes.
I'll just briefly answer your first question and then I'll pass it over the city, but yeah. The our capital allocation strategy remains the same we do want to look at tuck in acquisitions that we think would have lowered the synergy of risk and even though we have a right to win in the space and that's what we're going to continue to do this does not change that.
So if you want to give maybe a little more color of just overall on the overall capital allocation strategy.
Sure. So we made good progress even in the backdrop of the parents out of in 2020, if we're going to continue to make progress on strengthening our balance sheet and creative firepower of moving forward.
I set my earlier remarks, we are we expect to pay down about $500 million of debt of maturing debt this year and as cash flows improve as the as the virus.
Throughout 2021 that will increase and expand our opportunity firepower on.
<unk> for for continued tuck in M&A so.
Again, consistent with how we've talked about previously for our priority is to maintain investment grade to pay down debt Delever and our second priority from a capital allocation standpoint is to continue to grow the topline and bottom line from.
For accretive strategic tuck in M&A. This now gives us even greater focus on.
Through our for our spin transaction.
Great and then just on the on Covid, where do you think the sizes of deferred procedures is that you know we've talked about in the past I know, what's the kind of.
The number to tease out obviously, the any comments there would be great. As we you know hopefully the market conditions improve as improve as the year of goes on.
Yes. It is.
Fantastic question truthfully in the one that we track quite of bit tried to estimate I would just tell you that without being able to be a fine point to it. It's hundreds of millions of dollars is the way the we view it and Thats what gets us pretty excited about the fact that the end of the pandemic and our view is on the horizon. The once that occurs and we've got a heck of a.
Backlog that we need to work through now the timing of when you work the weighted based on capacity capabilities in different markets and those types of things, but but we feel it's very sizable and we're excited to start working through it.
Okay.
And we'll take our next question from David Lewis with Morgan Stanley.
Good morning, and thanks for taking the questions just the two for me and I'll start strategically on the on the spin of Brian.
A lot of times of spin, we create a lot of value for multiple arbitrage between the two assets. We even finished on Matthew my sense is the multiple spread won't be that wide here. So the real value creation for Zimmer as sort of the next year goals or grow faster. So when you say 50 bps of the growth. Brian does this does this get you to 4% to 5% growth faster.
Can we be talking about can you just kind of gets you to a higher wind are of higher structural growth range.
At some point for us at the end of the LRB quick follow up.
Yeah. So for US we just think about growth rate, we're kind of sticking to that for years to 5% that we've been talking about but what we should look at here is debt you should have greater confidence obviously in our ability to do that and potentially be on the higher end of that range.
That is a key focus for us and really the significant value for us is that ability to focus whenever we talked before about getting the 45 per cent you had a number of variables associated with one of those variables, even though we didn't have the same level of investment in these businesses was that they had to grow at least at the lower end of market.
And over time, if you're not investing appropriately in businesses that there is risk in that so we've eliminated that risk as we spin these out and we've unlocked value for cinco, because ultimately or newco, because ultimately they're going to invest more intently in those businesses. So it provides value on both ways.
Go ahead on your second question.
Sure I'm sorry, Brian can we think about at our conference you suggested maybe 4% to 5% growth as possible of the next two years of could you are there any faster and then I'll ask my other question for Siggi Rich real quick so you feel.
Like a lot of focus this call on the U S. Knee number can you just give us any sense as it relates to the USD number what was the impact of those strategic deals are bulk purchase deals on the fourth quarter and how the Rosa contribution in the fourth quarter on a revenue basis look relative to the third quarter. Thanks, So much.
<unk>.
So if you're talking you're on mute.
Yes. Thank you Brian so thanks for the question David on.
On your first question relative to the year end in the U S number its not uncommon at the end of any quarter, especially at the end of the year and.
The higher sales and some potential timing favorability or headwinds for that matter in this quarter, we actually saw some incremental.
Uptake in our U S business.
Again, probably not different than what many other saw across our sector as many accounts for of utilizing their yearend budgets to bring on some product for us we look at it.
Modest benefit on the total company it was in the low single digits, but again it was something that was above our normal trend. So we wanted to make sure we called it out of again any impact of that might have into 2021 as reflected in the Q1 estimates that I've already provided so the overall still very very strong quarter for the company versus.
Versus market growth in knee and hip.
Second question relative to the Rosa, we did see a shift in the fourth quarter, especially with those expanded hospital budgets or remaining purchase I should say.
For dollar sales on installments than we've previously seen in Q2 and Q3 a year.
Year over year Q4 of last year, because this year.
On a major material headwind or tailwind.
On our overall growth numbers.
[noise], Inc, and operator can we have the next question. Please.
Thank you we'll take our next question from Larry <unk> with Raymond James.
Thanks, Good morning, everyone.
Just wanted to first.
Come back to the Spa.
Been off here I guess, what I'm really curious about is why is now the right time for for the spin off and.
Along with the Hawaii spin.
Versus the sales now come back for a second question.
Yes, so sort of the timing of it is it fits right into the phases of where we look at transforming the business you know for US. It was sequential we wanted to make sure of that phase one in our transformation was in great shape and it is phase two would need to be well underway before we'd want to take something like this on.
I think based on our performance over the last few quarters versus our competitors, it's pretty clear that basically was working quite well.
And now it's time for active portfolio management and in a time when we don't have as much capital to work with.
This is clearly one of the most significant ways that we can impact and influence the the portfolio on the positive way for both companies did you believe that so that's the the.
The why now.
And we're excited about you truly are we're excited about it for our organization and we're excited about it for newco and will be in the together for the next year year, and a half and even post debt. So.
So that's the.
That's from our views of the why now and we've looked at multiple ways to drive value with these businesses just know that this isn't the only option that we've looked at it.
Just given the number of options on the table. We felt that this was the most significant way we can drive value for our shareholders our businesses and our team members. So as that's the the reason for the spine.
Okay very good and then Brian.
Look.
You guys see it.
Increasingly well positioned.
And creating sort of the digital ecosystem in orthopedics set I think.
About it you've got pre surgical planning you've got robotics got my mobility, you've got for <unk>.
So maybe just talk about how you see that the product offering of evolving Zimmer on debt.
How the ecosystem.
Help them for the outcomes.
What are you thinking about sort of reimbursement for.
Persona of IQ for both of the implant and the remote monitoring aspect of it.
Yes.
So.
Won't get into specifics on reimbursement for percent of on Q, but we definitely see it as a very important piece of the puzzle when we think about the ecosystem that you're referencing and I would just say that we're taking it very seriously when we look at ecosystem versus just the simple implants, we've had a significant shift in our research and development dollars towards robotics towards David.
The dramatics to build that ecosystem, that's going to be meaningful for patients and for our customers alike, and I got to say theres a lot of excitement around that in our organization a lot of excitement from our customer base as well and the competency that we built over the last few years in this area is in my opinion second to none and where we don't have the competency we have been working with debt.
Partners that have pretty significant names like Apple and Youre going to hear more about those coming up as well. So we feel really good about where we are today and we feel.
My opinion any way that debt these ecosystems to be able to capture data before during and after the procedure.
Gonna be a significant benefit for patient outcomes and ultimately at some point when we pick up enough data and have the data available to us being able to have predictive analytics to be able to make better health care decisions before the surgery of course, that's really the intent. So we're very excited about it we've shifted dramatically dramatically the research and development in this area.
And we feel we're in right now versus our competitors.
Okay, great. Thank you.
Sure.
Our next question comes from Larry <unk>.
Send with Wells Fargo.
Good morning, Thanks for taking the question just on.
Two financial questions for me, probably both for <unk> the margins of the.
The spine and dental businesses, how do they compare to the new.
Your current Zimmer, you talked about them being similar to peers.
But there are a lot of different peers out there can you give us a little bit more color on the margins.
Of those businesses, please and I had one follow up.
Sure Good morning, Larry So.
So the first thing I would say we've provided some color on.
The pro forma accretion impact on on our remain co you get down.
On operating margins, which should give you good initial view is to.
What the new co margins could look like just stepping back on.
Overall, both of those businesses or spine dental and NR.
Well the healing business.
The gross margin profile, that's a little bit below the overall company average.
Say bone healing is actually a little bit above the company average, but really it comes down for the cost to serve.
For the spending levels on both of those businesses are much higher than the company average, which.
The overall drive the operating margin for both spine and dental lower.
Whereas the the Holdco is from from.
From a standalone basis.
So as we think about margin opportunity going forward and brokers business. We do think that there is opportunity to enhance margins.
On one will come through we believe the real opportunity to accelerate topline growth, which will bring some operating leverage to the business, but there's also opportunity for mix shift in potential efficiency, we're going to the existing cost structure. So.
Hopefully that gives you a little bit more color on how to think about margins in those businesses going forward.
That's helpful and then on the 2021 you gave some helpful color on Q1.
Revenue growth of <unk>, maybe you could talk about sales growth cadence through the year, just any reaction to consensus which assumes about 2% growth over 2019, I know you don't have guidance out there, but just directionally and an operating margin in the past set with you said they could come close to 2019, but maybe lag.
A bit on how.
Should we be thinking about that for full year 2021. Thanks for taking the question yeah, Yeah, absolutely. So so on first on revenue.
While we're not providing guidance just because there are a number of variables that are just the.
Really difficult to predict at this time.
And the level of credibility of confidence the first being you know.
Where is the trough in this most recent surge that we're seeing January February where does the Atlanta in Q1 with the fast uptake of look like post adoption of vaccine and then when do you ultimately return to normalized market growth and the potential tailwind from the from the deferred procedures.
So.
We're running a number of scenarios there are some scenarios, where absolutely as you can see a path to growth versus 2019, but again.
Those variables on.
Or at this point, just just too uncertain, but clearly I think just stepping back.
Once we do have adoption wide adoption of that vaccine, which we believe will happen at some point in 2021, we think that there is.
The real opportunity for us on some strong growth again once of the return to normalized market and on.
Our augmented by the tailwind.
But it's just too difficult to say what that cadence looks like at this time.
Regarding margins, you're absolutely right as the margins revenue continues to improve.
Throughout the year, which we believe it will once once we have good uptake with the vaccine the margin should follow the there may be a slight lag consistent with how we've talked about before as the catch up on certain investments.
But make no mistake, they will expand and if we do see the opportunity for significant margin expansion over time as we normalize our revenue uptake.
Thank you.
The next question.
Comes from Amit <unk> with Goldman Sachs.
Okay.
Hey, good morning.
I wanted to start on the U S market for knees and hips, and obviously with the dollars of yourself. There's a lot of noise. As you mentioned so just from an underlying basis I'm wondering what you think about market share. What do you think what happened to market share in the fourth quarter for you in both knees and hips in the U S from a ball.
<unk> perspective.
Yeah, Yeah. So what I would say is I try not to look at any specific quarter and draw too much of the conclusion.
Now, saying that I'd much rather have what we just saw on the fourth quarter were significantly above market growth that that always feels good but instead more look at of trend and if I. Just go back you know on let's call. It three quarters does that gives you more of a sense of how we're doing versus market.
About U S, which is probably the cleanest way to look at this because theres a lot of noise in the mix and everything else that people may have outside of the U S. If we just look at U S and we're somewhere in the neighborhood. When you just think about large joints of five to 600 basis points over the last three quarters above market above our key competitors.
<unk> is a little better than hips, but we're seeing outperformance in both knees, probably more of a 6% to 700 and hips more like five to 600 basis points better.
That's what I look at not a single quarter, but a combination of quarters and we're seeing that trend.
And by the way I fully expect us to continue that trend not talked about the innovation that is going to be pretty pivotal this year in both hips and knees and with the current momentum that we already have with the commercial prowess that we have as an organization and that innovation is still yet to come now my confidence level is pretty high.
And just as a follow up the focus on R&D as we look at just the absolute number.
The only went down.
If little on R&D in fiscal year on 16% for the year and that's the kind of separating from other companies in Med Tech analyst day.
Thanks for attending.
I'm wondering if you can give some color too where you made the cuts how you're prioritizing that debt budget and.
How does that impact your future product cadence.
Yes, I like to and the team likes to run the business. It's first and foremost always assessing how are you spending research and development dollars and then making mix shift spend to make sure of that youre spending the wisely and so on.
That's why you saw no not seeing research development increase you guys saw some slight compression there.
But it really was just to get straight on what are we going to spend our dollars on and we killed a lot of projects that just didn't have the returns that we expected and that's the key.
Now if you will whats youre going to see from here, though it was an increase for sure in research and development I always want to make sure that we're spending money wisely before we say, whether we're spending enough for too little.
Or do we need to spend more we have a real good deal now for what we should be spending money on debt, we're spending money in the disciplined fashion and we have a lot of things in the bolt on and now that we want to turn on so as we look forward you should expect to see increased spend in research development, but increased spend in a very disciplined way.
Hey, guys.
Yeah.
Yes.
Our next question comes from Bob Hopkins with Bank of America.
Well, thanks, and good morning, everybody.
I'll just take my two questions upfront in the interest of time.
So the first one is just to come back to something people have been asking me about it already but I was wondering if we could get just a little bit of a better sense.
For the impact of the bulk orders that you're calling out on Q4, specifically on U S from U S knees.
And again, the reason I ask that youre at the knee growth in the U S is so materially above of what we're seeing from from peers.
GAAP, which is very very wide this quarter, so any sense as to the quantification on USA from newest moves from the bulk orders would be great.
And then on the second question, which is on.
On the spin announcement Brian.
I don't think it's unfair to say the spine and dental or two relatively subscale businesses with not a lot of synergies between them. So I guess my question is why not sell them for the folks with scale. It just seem like that would be a lot cleaner.
So would love your take on that thank you.
Yeah. So first of all on on the.
The quarter itself again, we feel great.
About our quarter performance and I would say that.
When youre looking at this year in Covid in particular, there was a lot of money that folks had to spend when we always see in the fourth quarter, we see purchases that occur.
We see it every quarter, but fourth quarter in particular, so it's not abnormal to see it associated referenced before if I was going to try to put a number to it I'd say maybe on the two to 300 basis points of benefit that we saw for thinking about large joints.
It was important for us in a normal quarter, given this quarter differential between us and competitors not as material and I would be surprised quite frankly of others didn't see the same thing, but really the way that we just want to make sure we call it out as being transparent as we possibly can.
And that was the order of magnitude that we saw on the quarter as far as the <unk>.
Far as the the spin and having both the dental and spine together.
If youre going to spin the business you want to make sure that it has a reasonable amount of scale, obviously for it to be a viable publicly traded company and we feel that of 1 billion plus this kind of debt number although it does not obvious reasons that you would look at from the strategic standpoint that those businesses would be together from a commercial perspective, there is a lot of capability and knowhow and materials that are used.
For implants across dental as well as fine that debt there is some value.
So it was really more around the idea of scale and the importance of that scale and and utilizing those those those competencies of if you will on those raw materials that go across those two businesses and that that was the reason why respond both together.
Yeah.
Okay. Thank you.
Thanks, Tom.
Our next question comes from Joanne Wuensch with Citibank.
Good morning, everybody. Thanks for taking the question. So as you think about putting this out in the next 18 months, what do you need to prepare it doesn't accelerate tuck in acquisitions or anything in terms of spending set up the next company had from Kieran stand up things in a good position.
David.
Yes.
I'd say its generally business as usual for most of the organizations you know we're going to continue to focus where we have we've got pretty good.
The separation between businesses. So it's not going to be highly disruptive. There's a lot of work to be done you'll get it wrong for the spin to occur into the occur as effectively as we wanted to but it's not going to be disruptive to the two organizations because they're pretty again separate of today, but yes, we are actually increasing.
A significant amount of increasing spend in these businesses to get them of good tailwind coming into the spin itself.
And if there was small opportunities for us to spend capital over the next 12 months that would make sense to again to bolster that portfolio. We would certainly consider it in the same way that we would've beforehand, but we want to make sure that we're setting up newco to the for success and we're very close on a CEO to bring in and that person will bring leadership right out of the gate.
And so that's really the way we're looking at it if we can give them more and more money to spend to get things going and Thats what were going to do here in 2021.
Again, very small deals, but if there was things that we can do to again bolster their portfolio, we would do that as well.
On a quick follow up question for safety, how do you think about modeling over the coming quarters in terms of the sequential improvement starting with the for first quarter commentary. Thank you.
Yeah.
Okay.
Yeah, Hey, Joanne.
Yes.
Yeah, hopefully you can hear me now so as I said, it's difficult to predict at this point until we start to see a little bit more stabilization.
Some of our key of larger markets.
If you go back for the last year.
We're hopeful that this is a one for two months trough and we began to see a V shaped recovery as we did last year was in Q2, leading into Q3, if that happens in Q2, and we start to see stabilization of market growth in the back end of the year and then potentially that tailwind that we've been talking about with the.
FERC patients.
That's the present, a nice trajectory for us and one of those pathways for potential growth for this year, but it really is just too early to tell as we've done over of 2020, we will keep you updated as we learn more and as we understand how this impacts of crisis.
Thank you.
Yeah.
Our next question comes from Chris Pasquale with Guggenheim.
Thanks.
The first of all in for me of just hoping you could give us any more clarity on the timing of the new Rosa and hit the applications I think I heard you say late 'twenty one for hips, just trying to get a sense for whether either of those kind of really have an impact of this year.
Yes, we think both will have an impact this year, obviously the unit will be first debt will be in the first half of the year. That's one that we are very excited about we have a significant share of the uni market and we're excited to be able to bring robotics to that market.
And then it will be the second half of the year and even though the second half we still believe it'll have a an opportunity for us to buoy the hip number in the back half of the year.
Great. That's helpful. And then can you talk a little bit more about the performance of that.
How you see those in the Eagle Ford position heading into 'twenty, one I'm curious whether there was any notable differences between them in terms of how you finished the year. What are you seeing any opportunities within extremities in particular to take advantage of some of the disruption in that margin.
Yes, I mean for us.
<unk> set is not all created equal we talked about sports on the trend is being key focus upper extremities as the here on the now lower extremities will be more on the future and sports is the ear on the now with the recent acquisition that we did tuck in to fill in some product gaps that we have we feel good about about the all three of those areas and our ASC presence again with the tuck in.
<unk> that we recently did to give us more scale on the ASC and the contracted game that we put into place.
Not as fulsome yet is it.
Is the.
Hip or knee, but but it's getting there pretty quick so our confidence level side that we're going to see the growth rate that we need and set and it's going to be driven by sports is going to be driven by extremities and it's going to be driven by our presence in the ASC.
Yeah.
Yeah.
Thanks.
Yeah.
Well take our next question from Kyle Rose with Canaccord.
Great. Thank you for taking the question. So I'll ask my both of mine.
Front.
The first.
Brian you talked a lot about data and the ecosystem kind.
Ecosystem can you kind of just.
Help us understand how that translate relative to revenues or driving lower costs. I mean do you change the commercial model does it help you develop better technologies are needed that good long term outcomes, but I'm just trying to understand how this drives incremental growth longer term and then.
Obviously, you're having great success of Rosa robot placement of help us understand maybe utilization there and then maybe any benefits you are seeing with respect to price and mix on the actual implant, but thank you.
Yes, if you think about it we're trying to attack is the fact that 20% of patients from the knee right now are still not satisfied with the outcome that they have that's a pretty significant number and we truly do believe that the ecosystem is going to be able to help resolve that debt that disappointment in the knee procedure and that's good for everybody by the way as we move down.
On this path, we make those outcomes of better as a result of capturing the data and then making different decisions as a result of data.
That's going to allow us to get better outcomes and when that occurs you're going to have more patients get bold enough to move into the funnel because it's underserved today. There are patients that need of knee procedure that are afraid of the outcome are not confident as a result of it and then on entering the funnel. So as we can change that outcome and we believe we can and we're going to have more people I know of the bundle and that's good for the entire.
The market.
Just the way, we're thinking about the data and informatics and driving better outcomes over time.
As far as Rosa goes on.
Tell you.
I'm excited we got one application in a robotic system I think that's what people have to remind people of just one application <unk> got two more coming share, but it's one right now.
Mentioned in my prepared remarks debt, we were at the higher end of the yard.
The placement goal.
In 2020.
But what I would tell you is it in <unk>.
<unk>, we were above that number when I say of higher end actually net above 300 and the.
Quarter was significant and I think this is really important we play sort of a 115 units in the fourth quarter, which was just an outstanding performance by the team and what I love about that is that happen in concert with one of our other players in the marketplace. None of our competitors also having a record quarter in the.
The fourth quarter and that's good news because that tells you that orthopedics is open for robotics wide open for robotics and that tells you that you've got an opportunity for all boats rise as a result, so we truly do believe that the market is accepting of robotics, it's moving quickly its hitting the pivot point and it's going to be very accepting we believe as well.
The data and informatics that can come with it.
Yeah, and if I could just build on what Brian said.
There was the question earlier about the strength of of our U S number.
In recon and yeah, absolutely we had some benefit due to timing, but one of the great things about some of that benefit that we saw was really it came because of some stocking because of new accounts and account conversion.
And I think that's yet another proof point of the strength that we're seeing in our commercial execution and with our new products. So we had a really strong quarter no doubt in the U S will continue to see momentum for all of the products that Brian mentioned earlier.
That's just actually accelerated in the fourth quarter and now we've shown the consistently for a few quarters. So we're pretty excited about where this is leading into 2021 and even more excited about where that potentially is through recovery post recovery.
Thanks for the I think we have time for maybe one last question before we hit the 930 times.
Our next question comes from Pilar crime with true as Securities.
Great. Thanks for taking our questions for Tom.
One is on portfolio management, I mean, it sounds like you're continuing to do tuck ins, but the first is it fair to say you will now focus on these core areas in orthopedics and then second I'm curious do you think that of different portfolio of spine products with greater scale can be more synergistic with your order of business.
Or do you think they think that there are limited synergies between the spine and ortho markets overall, thank you.
Yes, so our strategy around M&A and how we would spend capital dollars to augment the portfolio is unchanged there of <unk>.
Certain categories that we've talked about in the past, where we believe we have a right to win that we have a brand recognition that gives us that right to win and there is a path for leadership as a result of that and they're profitable and those are really the main things. We're focused on how do we enter into spaces build scale faster growth markets, where we have a right to win and we have a pack of the leadership and a profitable business.
Yes.
And that wasn't the case for us for spine, but it doesn't mean that spine can't be of very attractive business interest not just not one that we would invest in to become a leader because there's other opportunities for us to spend on sports extremities for thoracic that are just more attractive markets and more profitable. So we would look at these as being better as a result of that as separate businesses versus.
The part of our portfolio.
And I don't believe and we certainly haven't seen that there is a real benefit in having even a fulsome spine business in concert with large joints are set we.
I just don't see a lot of contracting large contracts that the pull through either one of those businesses.
Great. Thank you.
Sure.
Okay.
Great I think that takes up to 930 EBIT like the thank you everyone for joining us on this morning's call of course of the IR team and of course.
The replay will be available today for any further questions I'm sure we'll be talking to all of you say, it's so much of it have a great day.
Thanks, Matt.
Thank you again for participating on today's call you may now disconnect.
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Hmm.
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