Q1 2021 Zimmer Biomet Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2021 earnings conference call if anyone needs assistance at any time during the conference. Please press the star followed by the zero.
As a reminder, this conference is being recorded today may four 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 button zone.
I would now like to interest.
Turn the conference over to Gary <unk>, 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 first quarter 2021 earnings conference call. Joining me virtually today are Brian Hanson, our president and CEO and CFO Siggi had yet before.
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.
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 Q1 earnings release, which can be found on our website Zimmer biomet dot com with that I'll now turn the call over to Bryan Bryan.
Alright, great. Thanks, Gerry and I also want to say thanks to everyone for joining us this morning for our call.
Before we actually get into the Q1 numbers and our guidance I just wanted to take a second to say that I certainly hope that all of you and your families are continuing to stay safe. We're obviously very pleased to see that so many people now have access full access to the COVID-19, vaccinations and net adoption has been pretty strong. So far now of course, we'd like to see this even.
More broadly on a worldwide basis, but it certainly feels like we're making really important progress toward moving forward and ultimately as a result of that moving hopefully on from the pandemic now it's not over I think all of us realize that but but I for one feel more optimistic than ever that we're coming out I think on the other side of COVID-19 and with.
That much better days ahead.
And I guess with that probably its a good lead in to our Q1 call Q1 was a stronger quarter than we initially expected and I'm pretty excited to discuss it with you on whenever you have a good quarter. Obviously earnings calls there were a lot more fun. So clearly we're excited about this one and I'm going to try to keep my remarks relatively brief you on this way and I know you're kind of laughing at that because it's not always easy for me.
To do that on their try to keep it brief and that'll give you an opportunity to walk you through what you're really interested in which is the financial results for the quarter and really how that translates into our expectations for the full year 2021 guidance and I also want to make sure that we leave time for questions. Obviously, so I'm just going to stick to really three topics as a result number one I want to talk about the COVID-19 recovery just briefly.
And our execution inside of that recovery and then <unk> ongoing transformation on our progress against that and that would be the second topic in your third topic would just be around our long term growth strategy, just reiterating our position there and how we believe that's going to drive value for our shareholders and stakeholders overall, so let's start with navigating COVID-19 and how we're executing inside of it.
It clearly is not over just as I stated I mean is it going on I'm very confident we're going to continue to have surprises ahead and disruptions ahead, but based on what we saw at the end of Q1 and what we're seeing in the beginning of Q2 and coupling that with just the pace of vaccine Rollouts right now we're clearly moving in the right direction I don't think anybody can argue against that and is that.
Shift toward what I would define as more stability and I know, it's on a relative basis can you talk about stability here, but that shift towards more stability really enabled us to give you. The full year 2021 financial guidance now inside of that guidance, there's going to be some important assumptions about trends in recovery timing that underpin our outlook and so if he is going to get into more of that in just a few minutes, but overall feel.
Good feels good to have better insight into the broader market and greater confidence in what the rest of 2021 should look like for our business now as we start to return to a more normal environment I'm going to put normal environment in air quotes given the situation right now, but when that happens we expect that part of what we'll see is a pretty significant tail.
Wind from the day backlog of patients that is built up over the last year or more now how fast that happens how fast we work through that backlog, especially across certain regions is something we're going to have to pay attention here you got to watch on track, but we absolutely believe that the vast majority of those patients you put off and I'd like to procedure will come back into the funnel.
And that's going to provide a significant tailwind well into 2022 and I for one cannot wait for that tailwind and I can tell you. The E V is ready for them. They are ready for those patients and we're ready to be able to help our customers care for those patients speaking of being ready.
I've said to you before the things that <unk> was able to directly control over the past year I truly think the team has executed against I'm very proud of the Z B team for how they stood up on delivered against a backdrop of a whole lot of things that we're absolutely out of their control.
And I know I talk a lot about the importance of our talent our mission our culture here at <unk> and I can tell you that each were absolutely critical for us in 2020 and continue to be in 2021, and well beyond and with that in mind. We've made some additional changes to our leadership team here very recently, we've added a chief transformation officer again to help us with all the transfer.
Formation that we're going to continue to have as an organization, we've appointed a new chief Human resource officer to help US move our talent agenda forward one of the key areas of focus for me as we move forward as an organization and promoting saying each group President of Asia Pacific. He's now going to have some responsibilities of certain projects O U S. He brings a real disciplined execution.
<unk> mindset and you can absolutely help us outside of Asia Pacific and then expanding upon touring as his role as the Chief operating officer with the added leadership now of EMEA, which is a region that he has had deep responsibility for on the past and knows very very well and I know it can bring us value in that region.
So I can tell you. There is continued focus on talent and development is not just contained to the executive ranks our entire ZB organization is hyper focused on our people on really getting the right team members in the right roles and giving them the tools and support and really the opportunities to drive their performance to develop an excel and it's working I can tell you is this focus on talent.
Working in I believe it is going to continue to set us apart from the competition and in addition to the foundation built by our team members our mission our culture, our core business momentum is stronger than ever the team's execution continues to be on point and our market momentum is building our commercial confidence is higher than ever and I can share I know we are very excited about.
R&D innovation pipeline that we still have coming on.
That's an important part of our revenue growth throughout Q1, and even in recent weeks, we've hit key milestones with our Zigbee products and our innovation.
The application for partial knee now is available for Rosa was just approved by the FDA. We've actually already had our first procedure using that application last week with very good results and this is just a you know the latest addition to our Rosa Robotics program our platform here and it's also another launch inside of our Z be edge suite of integrated digital.
And robotic technologies again, something we truly do believe will set us apart from the competition. So if I just look at Rosa overall on the quarter, we continued to see strong market demand and traction with our Rosa platform. The Q4 performance was fantastic and that continued right into Q1, both in the U S and internationally and our forward looking robot.
Ex pipeline is very robust and I can tell you that given our market share in partial knee. The partial application is only going to serve to bolster that going forward for persona revision. Another strong performance. This continues to move forward and in Asia in an amazing way Q1 was ahead of our expectations and it is another example of a tip of the spear product that we have debt as we make the.
<unk> of revision, we also have the opportunity to go after the standard knee business as well so again still exciting opportunities there for revision and then our signature on planner for shoulder procedures again demonstrated a very strong sequential growth from Q4 will actually up 65% over Q4, when we look at registrations again, it's a pretty significant move and again this provides that stickiness.
As with our customers in that procedure, but it also provides a mixed benefit wherever that debt pre surgical planning is used and as we come into Q2 and the rest of 2021 ZB has additional innovation, that's coming and it's pretty exciting innovation with our anticipated launch of persona IQ and also Rosa hip later in the year after day for persona IQ the <unk>.
Feedback from evaluating surgeons has been very positive and I can tell you that they are interested in being able to capture data from inside the body and this is unique and not been able to do this before and then ultimately remotely monitoring those data and the hope would be that using that information to change the way that we care for patients. So the excitement around this.
Very strong from our surgeons and we can tell that the momentum is going to be strong when we do get regulatory approval. So all that to say the momentum on the innovation front is real here at G. B. This will allow us multiple shots on goal across a number of innovations again with multiple robotics launches continuing success with persona revision persona IQ new.
<unk> of my mobility, and just really the broader <unk> ecosystem to drive mix benefit for sure, but also competitive conversions and ultimately we really believe change the way that we care for patients change the treatment paradigm for patients that's really what it's about it's about driving the mission of this organization truthfully it to remove pain from page.
Around the world and improve the quality of their life and we truly do believe Z be edge can help us do that.
Okay. So let's move to the second topic that I have for you. This morning, and that's the continued transformation of ZB and you've heard me talk about the three phases of transformation you know the first was winning the hearts and the minds of the organization of the team members and really dealing with the execution challenges that we had debt. We spent a lot of time on on the first year and then second was moving to that longer term firm strat.
<unk> for the organization that will drive innovation and really building the structure around that strategy and the operating mechanisms to ensure that we move it forward and then third you know where we are now is the portfolio transformation and truly that is where we sit that are squarely where we're positioned today in phase III. These three phases, and we have ZB portfolio management strategy and process input.
And we have definitely built out our capabilities to move forward in this space. We're focused on what we're going to define as mission centric M&A that is wanger accretive that would absolutely increase our weighted average market growth and does not and does not disrupt our best in class margin profile and as you've seen we've moved this forward already with selective tuck in.
Missions that we did last year and that really does illustrate the strategy at work and those deals were smaller no question. There are smaller and they're relatively immaterial when it comes to the initial revenue that we acquired but there absolutely designed to fill portfolio gaps and better position us in high growth markets those high priority markets and Submarkets, where ZB has a path to leadership and.
We believe our right to win in markets like Sports Medicine, ASC and in the sternal closure market for us and each of these deals gives us a GAAP billing and we believe differentiated product portfolio to drive growth and that's important to growth, but also drive additional confidence in our S. E T business category and of course inside of this active.
Portfolio management phase, there's a plan to spin off transaction of our spine and dental business that we discussed back in Q4 that process of creating two independent even stronger companies is on track. It's early days, obviously, but it is on track and as you saw from our Q1 results. We do not believe it's causing distraction or disruption in our business.
In fact, it's more the opposite we've seen significant energy in the business is kind of a gelling in the business as a newco team starts to come together under CEO of offer jamali and they begin to build out their own strategy and our focus. So again, it's early days, but we're very happy with the progress so far of the spin alright. So that brings me to my third and final topic. This morning really around.
Our Z V plan to drive long term growth and ultimately deliver value as a result of that growth and I can tell you that we remain fully committed and confident in <unk> long term growth and margin expansion expectations, We said before and we'll say it again that the spin off of Newco actually serves to derisk and potentially accelerate our path to mid single digit growth and a <unk>.
Best in class, 30% operating margin profile by the end of 2023, and we're confident that throughout this process and as we achieve this growth and margin profile. We're also going to have the flexibility to reinvest for growth and that is a key thing for us we've got to continue to be disciplined, but ultimately invest for growth in this business and that's what we will continue to do that.
To get these growth levels and to achieve our top quartile performance at T. S. R, which I think you probably remember is one of our strategic pillars, and we're going to continue to execute in our priority growth areas and just as a reminder, that means that we expect to drive above market growth sustainably in knees, we plan to grow hips consistently at market, but then later this year above market rates.
When we launched the Alrosa hip application and we expect to stabilize first and foremost, but also drive focus and then ultimately to that focus drive our set business at the higher end of market rates. There. We're also very focused on driving change for ZB, a real evolution of the company from our metal and plastic provider of implants to a leading med tech.
So think of us as a high tech company that happens to be in Med Tech.
The XE brand that we're looking for that brand evolution of this company and I can tell you that already more than 70% of our product development dollars are being spent in this area are being spent on Z be edge that ecosystem of connected technologies now we're always going to be an implant company and that's the center of the universe for this company, but <unk> Chico system around it is the way that we.
Can differentiate ourselves versus the competition and we're already we have exclusive relationships to help us here, we have relationships already with Apple and several other tech companies that we truly do believe will drive future innovation that will delight, our customers and ultimately benefit patients and I believe fundamentally that the shift is coming not only for us. This.
Technology shift not only for us, but for the entire market that we play in debt and I truly do believe that the technology advancements potentially can reshape the growth curve of these markets I'll say that again I think the technology advancements that we're seeing and the value. They bring can reshape the growth curve of the markets that we play in and I think very importantly also change the care.
Paradigm for our customers and their patients.
Alright, let me close by saying that I continue to be highly confident in the ZB team and in our business momentum I truly believe that we are well positioned for success in our strategy is working on our transformation is well underway and I am excited about the value that we can drive for our shareholders on a go forward basis I truly am.
And before I hand, it off to <unk> I just wanted to take a minute to say thank you truly thank you to the entire ZB team Europe vigilance and dedication to our safety protocols over the past year or so has been absolutely critical and your focus on our mission our strategy and really just how you show up and execute every day.
Unmatched in my view it truly is unmatched you are what makes us ZB, yeah, I truly believe that in what makes me confident.
He is as you know that we can absolutely continue to deliver on all fronts.
And so with that I'm going to turn the call over to Sookie, He's going to give you more financial details on the quarter on obviously, most importantly, our expectations looking forward okay sake.
Thanks, and good morning, everyone.
As Brian mentioned, our underlying fundamentals remain strong as does our confidence in our outlook for this morning's call I've got a focus on three topics first our Q1 results, including commentary on the impact of COVID-19 second how that translates into our full year 2021 financial guidance that we provided this morning and third how <unk> is positioned.
For long term growth in 2022 and beyond.
Going forward unless otherwise noted by statements will be about Q1, 2021, and how it compares to the same period in 2020 and my revenue on P&L commentary will be on a constant currency or adjusted basis net.
Net sales on the first quarter were $1 $847 million a reported increase of three 6% in constant currency increase of 80 basis points versus the same period in 2020.
It's important to note that we had one fewer selling day, resulting in approximately 150 basis point headwind to consolidated revenue growth.
Overall consolidated and regional results were better than our initial expectations as vaccine adoption continued to ramp up and pandemic pressure eased across most markets in March versus January and February.
First the Americas increased 1%, we continue to see variability by country and while the region wasn't declines for most of the quarter a sharp increase in U S procedures in March drove regional growth.
As expected the EMEA region was hardest hit by COVID-19, decreasing 10, 3% with all Submarkets in decline, while we did see some recovery or decrease in COVID-19 pressure as we move through the quarter.
Submarkets continue to operate under recently enacted restrictions and actions that are limiting the near term recovery of elective procedures. So we're continuing to monitor uptake very closely and expect that recovery in EMEA will lag other regions by one to two quarters.
Lastly, Asia Pacific grew 15, 5% with solid year over year growth across our three largest markets overall, we've seen a stabilization around COVID-19 cases in searches in the region, but we continue to see some significant delays and recovery across India and other smaller markets.
Turning to our business performance in Q1 before jumping again, let me call out that we've updated our product category reporting to provide visibility into newco and to align products to categories based on how we internally evaluate performance of those businesses.
Also we have adjusted our historic reporting of revenue for these changes to assist in year over year comparisons.
First our Rosa Robotics capital revenue has been moved from the nice category to the other category.
And our disposable revenue associated with robotic knee procedures have been moved from the other category into the knee category. This will allow us to more clearly indicate to investors the growth of our base knee business and sets us up for reporting once we launch Rosa hip which is currently expected in the second half of 2021.
We've also broken out our global spine and dental revenues this quarter in conjunction with Newco reported and as a result C. M. F. T is now included within S. E T.
The global knee business declined five 2% versus Q1 2020 negatively impacted by ongoing pressure from COVID-19 inside of that we continue to see strong momentum for Posada and frozen me on.
Our global hip business increased <unk>, 3%, both the Americas and Asia Pacific continued their growth trends, increasing 0.9%, an 11.2% respectively.
We continue to see strong demand and favorable feedback on the Avenir complete hip with adoption from both gold and platinum accounts.
Sports extremity and trauma increased seven 2% driven by solid growth in upper extremities trauma at C. M F T and S. E. T. We continue to see strong surge in registrations of the signature one surgical planning system for soldier procedures.
Our dental and spine segment grew nine 6% fueled by outpace recovery, especially in dental new products and better commercial execution also drove growth in the quarter with strong contributions from implants and digital solutions in our dental business. After a mobi C. A tether within spine.
Finally, our other category was down 2.5% as mentioned earlier this quarter. Our other category includes a contribution of Rosa knee capital sales.
Moving on to the P&L.
In the first quarter, we reported GAAP diluted earnings per share of 94 cents and adjusted diluted earnings per share of $1 71.
Our reported GAAP diluted earnings per share were up significantly when compared to our reported GAAP diluted loss per share of $2.46 last year the.
The increase in year over year GAAP earnings was driven by higher revenue in the current period in tandem with prior year goodwill a product liability related charges.
On an adjusted basis EPS was up about 60 basis points, driven by higher revenues with operating margins down slightly compared to 2020, and a higher share count the adjusted tax rate of 16% in the quarter was better than expected driven by the realization of excess stock compensation benefit and other smaller discrete items.
Turning to cash and liquidity overall operating cash flows were $247 million net free cash flow totaled $137 million per the first quarter, we paid down on an additional $200 million of debt and ended the first quarter with cash and cash equivalents of $724 million. We continue to make good progress with another quarter of Delevering.
The balance sheet.
Moving to our full year outlook and financial guidance.
While we continue to see pressure due to the global pandemic vaccine rollout and adoption is approaching meaningful levels translating into a reduction of infection searches and hospitalizations in most markets.
This increased stability gives us greater confidence that we'll return to normalized market growth in our key markets within the year and also began to see deferred patients reenter as an added tailwind.
As a result today, we provided financial guidance based on our latest expectations and that is underpinned by two key assumptions.
<unk> current vaccine adoption trends continue to strengthen driving a decrease in the number of new COVID-19 cases through 2021, and second hospitals increased capacity to work through some portion of patient backlog this year.
Against that backdrop, our current expectations for full year 2021 financial results, our reported revenue growth of 14% to 17% versus 2020 with an expected foreign currency exchange tailwind of approximately 150 basis points.
Adjusted operating profit margins of 26, and a half to 27, 5%.
And adjusted tax rate of 16% to 16, 5% adjust.
Adjusted diluted earnings per share in the range of $7.60 to $8 <unk>.
And free cash flow of 900 million to $1 $1 billion inside of that guidance, we expect to see seasonality in revenues in 'twenty, one that begins to resemble pre COVID-19 cadence.
Definitely our investments in R&D in key commercial initiatives will increase throughout the year. However, we do expect operating margins to improve as we exit 2021 as a result of higher revenues.
Net interest expense is expected to step up about 5% versus 2020, and we expect fully diluted shares outstanding to be about 211 million shares for the full year.
Of course, we will continue to update you on market dynamics and financial expectations as we move through the year, Let me now turn to our long term growth profile we continue.
To expect our structural organic revenue growth rate to accelerate to the mid single digit range with adjusted operating margins of at least 30% as we exit 2023, where cash.
Confidence in our expectation as a result of the following proof points first we've been delivering consistent strong performance versus the market.
Second we have the best new product pipeline in the company's history that will complement an already robust portfolio and third our global team members continue to ramp up execution across our strategic priorities. In addition, our previously announced transformation initiatives are progressing well and the addition of a chief transformation officer has the potential.
We will drive even greater investment opportunity for growth, while maintaining a leading margin profile to.
To summarize we are pleased with our better than expected revenue performance in Q1.
While we anticipate our prepare for ongoing short term market uncertainty due to COVID-19 and remains sensitive to ongoing challenges in a number of markets from a financial standpoint, we believe the worst of the pandemic is behind us and look forward to improving results as we execute on our strategy with that I'll turn the call back over to Kerry.
Thanks, Susie before we start the Q&A session. Just a reminder to please limit yourself to a single question and one follow up so that we can get through as many questions as possible during the call with that operator may we have the first question. Please.
Right.
Thank you ladies and gentlemen at this time, we will now begin the question and answer session. One moment. Please for the first question.
We will take our first question from Mike Matson with Needham <unk> company.
Hi, Good morning, Thanks for taking my questions I guess I wanted to start with the backlog that you mentioned.
If your sales were down about 12% in 2020 does that equal around 12 does that growth.
The 12% or around 1 billion for the backlog and then.
Where do you think the.
Capacity is abundant surgeons and hospitals to dress that how much have you factored into your guidance for this year.
Yeah. So thanks for the question. So I would say, it's not as simple math is that but but it's but it's pretty close right I mean, because you've got to remember a certain portions of our business would not have patients that would have a disease state.
Can use to Europe.
It's a debt to deal with and so not all of our revenue that is linked to procedures that have been deferred.
But if I take those that are and we also have a kind of a percentage that we would assume will drop out of the funnel. We still have a very sizable backlog of hundreds of millions of dollars, maybe not quite the number you're referencing but the math logic makes sense when you Peel out some of those other pieces now.
On a relative to the cadence or speed at which we're going to digest those those patients.
It is difficult to predict I mean, we've never experienced anything of this size and magnitude and global impact and so.
So I don't know that I have a perfect proxy to determine how quickly. We can we can actually work through that backlog of patients, but my general feeling is if you look at just historical views of this although much smaller in different it's usually 12 to 18 months you typically work through a backlog funnel.
My guess is it will take at least that long given the size and the magnitude of the.
Backlog that we're talking about here and it's going to be different no I was going to be different depending on where you are on the world certain places in the world will move that backlog through much faster.
The places that will go a lot slower because the incentives are not there to be able to digest again that patient flow as quickly. So again I guess the takeaway as it should be a very large.
Backlog of patients that will be pretty substantial dollars for us to be able to take advantage of as a tailwind, but the timing of that the speed at which we worked through it.
Not sure yet.
Thank you.
Our next question is from Bob Hopkins with Bank of America.
Oh, great. Thank you and thanks for taking the questions.
I appreciate those prepared remarks, Brian there's a lot to unpack on there, but for now I'll keep my questions a little bit short term just given how confusing it environment. It is when Stryker reported they said their hip and knee results for April were kind of already rebounding to up mid single digit year over year and I'm, just curious directionally, if you're seeing sort of a.
Similar thing here in the first part of the second quarter.
Maybe what I'll do is toss that one over to him just lucky.
You're going to get more color around either guidance here. It's what we're seeing going forward is it just because you want to take that one.
Sure Hey, Bob Good morning, So before I get into Q2, I think it's important to reflect on Q1 for a moment.
Versus 2020, we were definitely were off Im sorry, I, just just under 100 basis points versus the prior year.
Better than our commentary earlier in the quarter, where we expect it to be down low to mid single digits and that was really because of a sharp uptake as I talked about in March primarily in the U S and we saw greater stabilization faster stabilization in Asia Pacific net we expect that that more than offset.
On a lingering headwinds were below expectations for EMEA.
Versus 2020 things get a little bit choppy because of the comparisons to prior year on COVID-19, but if you look at Q1 versus 2019.
We were down that implies about 8% and as we exited March we were also down.
Versus 2019, now our guidance moving forward when compare to 2019 assumes sequential improvement in growth rate in Q2, Q3 and Q4.
So far as we've entered into Q2, we've got confidence in that shaping for Q2.
We expect to exit the second quarter.
At about 2019 levels not for the whole quarter, but as we exit and inside of that we expect Asia Pacific to be above Q2 of 2019, the Americas about flat to slightly up in EMEA continues to lag and again the early start that we've seen so far in the second quarter.
Gives us positive proof points on confidence that we'll see that sequential step up in the second quarter.
Okay. That's helpful. Thank you and then just for a quick follow up can you give us an update on the timing for pursuing the IQ and your thoughts there in the U S on timing of that approval on launch.
Yes sure.
We're actually waiting for the FDA approval right now we're ready to go.
We're prepared and ready to launch we worked your commercialization strategy did a really nice job on a couple of ex team here and getting a third party engagement to do a comprehensive survey of what we could expect upon commercialization price points.
I'll be willing to pay for it.
You see people work for the data capture and using that data from our reported.
Patient monitoring perspective, so I think we're really well prepared for commercialization, but at the end of the day.
Can't do anything until you get the FDA approval. So that's what we're waiting on and when we get that we'll be we'll be moving forward my guesses.
We'll be able to launch this over the next handful of months, but what I would just size this right.
Is a unique launch for US is first of its kind.
We're going to take our time were going to do a limited launch this year I Wouldnt expect material revenue in 2021, the full launch it really come towards the end of 2021 or 2022, where we really want to make sure that we're concentrating on few customers going deep with those customers really understanding the data capture and the value that it brings and then from there going in a more widespread way now.
We pick up information quickly.
Our confidence level grows more quickly than we were expecting then you could see a difference. This year then went on predicting right now, but I would think about it as launched this year, obviously more limited.
Way, we would do that launch and then a more aggressive launch more full launch as we come into 2022.
Great. Thanks, Brian Thanks, Ricky.
Yes.
Our next question comes from Jason <unk> with Northland capital.
Hi, Thanks for taking the question maybe a follow up on per person on IQ you actually mentioned I think 70% of your innovation pipeline as it is.
Data driven I assume person person on IQ as part of that I'm. Just curious in terms of how you see that playing into the marketplaces is simply share gains.
P gains and then related to that if you look at traditional ortho implants, because they take about a year or so before they really impact. The revenue line is that the kind of timing I mean, you kind of lay that timeline out per persona Iq.
Some of the other products on the pipe should we expect it takes about a year or so plus gestation before it really matters I guess.
Well for us.
So I think it matters right out the gate.
Sure maybe I'll look at this is first of all absolutely.
He was part of that spend that I talked about for the ecosystem will take about CBD edge. It is a very unique part of it too and as I said in my prepared remarks.
Got it.
This is where our bread and butter is for sure, but we want to do is we want to elevate beyond that to make sure that we've got an ecosystem around it and IQ, although extremely important in that is a variable in the overall equation you still got non mobility that connect with with our IQ, which would connect with Rosa and ortho Intel is kind of a backdrop to that.
And would allow us to be able to collect data on a patient before surgery and <unk> post surgery, and there'll be able to use those day to ultimately to change the way we care for the patient and that's what's so exciting about it.
You can't really compare this to a typical knee implant or another impact and the timelines might take up to drive real traction on materiality in the market because it's that unique.
Is it is it really is a connection point to this broader capability that just does not exist today. So it'll be interesting to see what we've got a pretty pretty ambitious plans that we have in front of us and the feedback so far from our evaluating surgeons has been very strong and just generally in the marketplace. This desire to have data and be able to use the day to day.
Had better insights to be able to provide the free care better care is real.
And ultimately what we're so excited about is as we collect data right out of the gate were first to market, obviously with the smart implant.
But as we collect data we will stay out of half folks because that data is really where the magic is the implant. Its interesting you can listen to it right away, but as you collect a certain amount of data over a period of time that is actually what is the insights that are going to matter in the future and so that gives us an opportunity to stay ahead and so we're very excited about it it is part of that R&D spend.
And we believe that it has the opportunity to have a bit of ramping curve than in a typical and Frank just because it's 70.
Okay, and then just a quick follow up you guys mentioned in your guidance is prefaced on the fact, the idea that the hospitals are going to be able to increase capacity I guess have they indicated that month's COVID-19 clears theyre ready to basically double up or what have you and should we assume that is something that really happens towards the third late.
Third fourth quarter.
When when we might see that bump.
Yeah.
Yes, so what I would say is that really varies depending on which customer you're talking to are part of the world. We're talking to them in but it looks like you maybe you could just provide a little more color on that just to give a view of how we're thinking about the back half and in our view of how much backlog or not come through in the back half.
Yes, sure Bryan. So Q2 again, we expect to be sort of a transitional quarter as we get into the back half of the Europe guidance assumes sort of normalized growth rates to historic levels or 19 levels.
Inside of that.
We would expect if you looked at sort of the midpoint of our guidance range that first of all.
We expect COVID-19 to continue to later in many markets.
Within the second half of the year, but broadly offsetting that will be some additional capacity that comes through hospital systems in other markets. They basically net that out.
And that's not on comment we saw that in the third quarter of last year. When you look at our results.
As COVID-19 will stabilize and you saw hospitals actually increase their capacity.
To bring that backlog through so again at the midpoint of our range, we kind of assume.
That lingering COVID-19 is out there in certain markets, but that's offset by additional capacity in other markets. So net net.
You're effectively keeping your backlog steady force the bottom end of our range, we assume that COVID-19 has a bigger impact on that backlog pull through on at the upper end of our range, we assume that backlog capacity more than exceeds the COVID-19 pressure.
That we expect to see through the second half of the year. So that's kind of how it again.
Did see those proof points in the third quarter of last year and as we expect to see.
So through this year on the backlog, we expect it to resemble very much what we saw the third quarter of last year.
Very helpful. Thank you very much.
Our next question comes from Jeff Johnson with Baird.
Thank you good morning, guys.
Wanted to go to the spine in the dental segment, if possible I don't think I heard specifics on one versus the other other than dental kind of led that growth. So Brian any any way to break that out for us and then in the cervical disc space you called out <unk> you are seeing some good traction from a 10% competitor in the space you've got a new two level approval.
From another competitor just what's your outlook on the cervical disc side that would be helpful as well. Thanks.
Yes, absolutely.
I won't give specifics between the two businesses, but just know that both businesses did better than we expected in the quarter dental definitely was the stronger of the two but but we know we're excited about seeing that progress was a big important quarter for us because remember this is really the first full quarter with the organization new.
About the spin you know really understood the spin and there was always that risk obviously, when you announce something like that that there could be some disruption.
And as you can tell we're not seeing disruption if anything we're actually seeing momentum which is great.
I would tell you on the surgical decide.
I like the idea of others entering the market because ultimately I truly do believe the cervical disc is a better way to go on infusion and so if we have more people entering the space talking about it I think we've got an opportunity to convert more of the business. That's out there today infusion that's really the target.
Can increase the size of the cervical market. That's a good thing for everybody a good thing for patients.
For the for the overall business and it's an area we're going to continue to focus on how we're going to make sure that we shore up the customers that we have today, but we're going to continue to sell and proactively get conversions another big opportunity for us in spine as each other.
It really is a unique technology for us it helps scoliosis patients sitting in a way that they cannot get otherwise and that product is on fire.
Great job and it's extremely mission centric to the organization. So that just kind of gives you a general overview again happy with both businesses dental was stronger in the quarter, but spine did well as well.
Fair enough and then maybe a quick follow up on IQ.
Any any timelines on actual reimbursement pathway on the monitoring side, just how to think about.
That getting reimbursed and is that really going to be the rate limiting factor uptake of that product or do you think you debt without monitoring reimbursement still sell the IQ product. Thanks.
Yes, I think I think it would be nice to have for sure and in reality it already exists.
We believe that it will be something that people will be able to access, but we're going to make sure that we get smarter on that topic and help our customers understand that that would be debt as well. We don't believe it's the the requirement, though for uptake I really do believe that people see this as an opportunity to capture the data and through the data to be able to provide better care.
Couple of things that I would say about that is this is just the beginning.
At a very strong relationship with Canary.
It's a relationship that will go on for many many years.
And it's not just Inc.
It's going to be for hit is going to be for shoulder theres going to be a whole pipeline of technologies that will launch. This is just the beginning of the beginning.
If you will for sensors and this idea of a closed loop.
Being able to have my mobility applications in each of the areas that we play having smart implants, as well, having rosa applications, having that ortho and until that connects the dots across those and that is something that you know that GBS ecosystem that we're going to use in each of the areas that we play so we're pretty excited about.
So I guess I'd have to say it.
The remote patient monitoring reimbursement is it is a great thing to have and I think it's warranted, but it is not the reason why we believe we're going to get uptake on this we truly do believe its a day to capture and what that data tells us it's going to drive it.
Thank you.
Sure.
Our next question comes from Robbie Marcus with JP Morgan.
Oh, great Congrats on a really nice quarter, maybe just two quick ones for me.
One you did the restatement and I think it helps give us a little more clarity, but there was a bit of movement out of knees and into other and other <unk> I was wondering if you could give us any sort of net number on what Rosa was and then I'll just ask the follow up as well.
Really strong operating income results, but free cash flow on operating cash flow came in a bit lower than I was thinking any color there and how that should progress over the year.
<unk>.
So I'm thinking maybe I'll toss that one over to you and then and then maybe I'll just follow ups.
Yeah sure so on the restatement.
First of all good to talk here Ravi we did do interest by a little bit more color into whats happening in our base knee business. So you've captured the moving parts correctly, we provide a lot of detail.
What those comparisons are we're not going to break it down much further.
There are additional questions. After this our IR team is happy to go through any additional quarterly breakdown.
But overall, we think that.
That's a good move, especially in the backdrop of what we hope are going to be some expanding and growing indications for Rosa robotics. So this will help clarify what's actually happening in those underlying indications relative to the base business and capital sales.
Cash flow.
Overall operating cash flows were about $245 million.
With free cash flow at about $145 million.
Was a little bit lower than that.
That we had last year remember that first quarter is seasonally lower than other quarters throughout the year, that's primarily because we had a lot of big payments will happen in the first quarter around prior year rebates as well as our employee bonuses or a number of all the things that happened in the first quarter, that's seasonally make that number lower in this quarter two key things one is <unk>.
Built some excess inventory so working capital was higher we do see a market recovery coming later this year and we want to make sure that we've got.
Sufficient supply to meet that market demand. So one we think that that was the right move secondly from a working capital standpoint receivables were a bit lower than expected. If you remember we had a pretty low fourth quarter of last year that income or that cash comes in the first quarter of this year on because of those lower sales youre seeing less cash receipts.
In the first quarter of this year, so again not out of expectation for US first quarter is generally lower and those are some of the moving parts inside of an inventory being a bigger piece because we are excited about the the recovery that's going on.
We will as you can see from our guidance expect ex the Hawk and overall cash flow through the rest of the year I'd say, it's more biased towards the second half of the year and it's really predicated on two things higher earnings relative to greater sales in the back half of the Europe, you've talked about on our revenue guidance and the second thing is we would expect to see some improvements in working capital.
<unk> and bringing those inventories down through the rest of the year as we work down that inventory. We built this year in anticipation of the of the market recovery. So hopefully that gives you some additional color on free cash flow.
Yeah, that's great. Thanks for the color.
Yes.
Our next question comes from Matt Taylor with UBS.
Hi, Thanks for taking my question I wanted to ask you more about your recovery assumptions I think you mentioned that.
Expected Europe or EMEA.
Trail and recovery by a couple.
A couple of quarters can you talk about what's informing that view and when you mentioned areas taking longer to go through the backlog or is that also Europe slash EMEA.
Just quickly maybe hit that backlog recovery and then turn it over to you.
You know Europe is typically one just based on the health care model. There that is a little slower to work through backlog. The incentives just are not the same as you have in say the U S. For instance, so we would expect that to be a little slower in capturing the backlog, but interestingly enough just because it's running behind probably will have one of the big.
<unk> backlog as a percentage right. If you look at the overall backlog versus the revenue on that in that region and it will likely take the longest to work through just based on what you just said but.
Outside of that maybe you could provide more color on our thinking on why we believe it's going to be lagging behind.
Yeah, I think you summarized it well Brian is it's amazing the vaccination rates are a bit slower than we had originally expected outside of that outside of EMEA. We also expect a few markets.
Throughout Latin America, as well as the Asia Pacific to continue to lag just based on so far is the vaccination trend that we've been seeing.
Hopefully the vaccinations began the vaccines begin to rollout.
As robustly as they have in the U S globally, but until then we expect.
COVID-19 to continue to have a lingering impact on less procedures.
Okay, Great and then just wanted to ask on on Hips, you talked about the Rosa hip launch later in the year end debt potentially driving you to your goal of above market performance can you talk about how.
Sharp you expect an inflection to be and how quickly that can happen or any color on how much you think you can outgrow the market once you have that application.
Yes. Thanks.
It's interesting because I referenced that for sure, but actually if you go back three or four quarters, you're probably already in a share taking mode for hit so just wanted to share that I give a compliment to the team there.
Our complete has been a great launch, but just the portfolio that we had before when she gets fly out of the way that team is really executing well. So I don't want to discount. The fact that if you do look at the last three or four quarters and you look at the other players in the market, we've done well versus versus the overall market.
The confidence, though in sustaining that goes up with a Rosa hip application. So it's more of the confidence in being able to sustain what's already happened to potentially bring it further.
And our goal here would be able to launch that in the back half again. The good news is we have a lot more experience with Rosa now on to our confidence level to go more to an almost an immediate full launches there so you're going to see a lot less time spent in limited launch for either partial or Rosa and we did.
That'd be a nice tailwind.
For some time to come.
Thank you.
Well take on that will take our next question from Richard <unk> with SVP Leerink.
Thank you.
My first question I think I think I heard you mention when you were talking about persona Iq outside.
How excited you are about.
The platform there and that you know.
You guys had a multi year kind of.
Strategically with coronary, including hip and shoulder. My understanding was you were only exclusively for now.
Partnered on knees, but.
It's all day change and are you guys.
More exclusively focused now on other areas as well.
Yes.
We've done a lot of work with bill and team over at Canary, Great Great team over there by the way just really good people and we've.
We've solidified.
Very long term relationship basically perpetual.
With proprietary use of the technology in all areas that we play all areas that we place. So we are excited to be able to start to work on a very robust pipeline of technology. We've got to look at miniaturization, we gotta look at battery consumption and we've got to look at different form factors that would allow us to use the <unk> sensor.
In other implants, and and that's something that we're going to be heavily concentrating on.
So it's much broader than just.
Bring on long term and the two organizations work really well together and we're excited about the opportunity.
Great Congratulations on that just to follow up on Rosa.
Thanks for the revenue contribution commentary.
Alright, I guess more philosophically we've seen.
Robotics update.
Your competitor just be slower.
It's a little bit different type of value proposition I'm curious one.
What are you seeing on mind share.
A mindset shift amongst the customer base with respect to how they are perceiving robotics in hips debt.
Suggest good runway for you as you're launching or different from what maybe your competitor experienced earlier on in their launch of the hip and or is there something that Rosa does specifically with robotics.
Okay.
Sure.
I think it's probably a little bit of both potentially I mean, if I think about it the way I would think about this in here you've.
<unk> got pretty good outcomes right now it's different and you still have most people they get hit procedure that debt ultimately feel like.
I don't even remember, having it because it functions pretty well, whereas a knee as we always talk about a <unk>.
20% of patients that are a little frustrated with the outcome because they don't get exactly what they expected but.
But on the hip side because of that most surgeons don't want to disrupt.
There their flow right. They don't want to take more time to do a procedure and the key things that we do for Rosa perspective is to try to keep that debt surgeon flow that procedure flow pretty consistent with what they're used to and not as a result of that change the amount of time. It takes to do a procedure and I think that'll be a very important.
[noise] differentiator here, we're not going to change the time needed to do this a couple of other things that will be different about this is it is a pin list application of robotics that will be the first that will see in and hit where you don't have to place. These pins basically drilling to the the bow on that the lag to be able to have the robot noteworthy.
You know what the body space, so thats going to be unique to us. The other thing that we're going to focus on here is the application out of the gate is going to be per direct anterior approach, which we know is the fastest growth subcategories hip right now and it's a challenging procedure because you don't have great visualization and its difficult as a result of debt placement right, we're going to make both of those things easier through the rows.
<unk> net we have so we think we have a.
On your complete implants, we think with this rose application not taking more time to be able to do this depend on this application and being able to allow people to see where they cant see in place to pick up where they need to place. It is going to be a big deal. That's what we're betting on.
Thank you very much.
Sure. So Lauren I think we have time for maybe one or two final questions.
Thank you. Our next question comes from Steve <unk> with Wolfe Research.
Good morning, guys, you've got guys on price sticker shock.
Just a quick one on signature one planner that was a meaningful sequential uptick.
And so I was just wondering if you could talk about that relative to your targets and then also if you could.
Speak to robotics.
Rosa robotic placements in the quarter and maybe I know you said they were strong, but maybe if you could detail a little bit on the geographic trends there that you saw.
Thank you okay.
So maybe maybe I'll start quickly with that we had a we had a really strong quarter again as I referenced pretty similar to what we saw in Q4 of last year.
I'm going to be a little cautious there because those are two exceptional quarters and I feel very confident in our pipeline, but I wouldn't necessarily say that that becomes a new trend.
Great great quarters for sure.
And again the pipeline is strong.
I'd say that my confidence level is extremely high that the overall placements. This year will definitely be more than last year, but I. Just don't want people to think that those quarters are going to be every quarter from here on out even though the pipeline is pretty strong at this point is from a geographic mix standpoint, we continue to see really good traction O U S. So I've been very pleased with.
Asia Pacific in particular, but also Europe middle East and Africa. So it's been a good distribution around the world of robotic placements, which is one of the key things we wanted to concentrate on so a really strong quarter. The pipeline is very strong partial in road zipper going to help us with debt, obviously and debt.
This is Paul.
The debt.
On the signature on plainer, yes.
I did about it until every single procedure uses pre surgical planning. We're not finished we truly do believe it is a better way to care for patients. If you don't know what you're getting into relative to the anatomy. How can you be as prepared as we should be to be able to do the procedure. So we want to make it easier for a surgeon to be fully prepared for that patient knowing what they're going to deal.
With when they are in surgery and pre surgical planning allows that to happen right and the real benefit to US is debt number one we fill the mission of the organization because we are going to do a better procedure. We believe that number too we get that side of our benefit of mix.
More revenue per procedure, because if you know the anatomy challenges you're going to be dealing with youre, probably going to be able to get augmented habits on them and you're going to be able to debt.
To ensure that you've got guys that.
And that's that's incremental spend.
Opiate spend but incremental spend and the procedure. So that's the benefit for us, but just know that no matter what the increases that we talked about on a quarterly basis sequentially until we get 100% penetration we're absolutely not finished there.
Great. Thanks, so much.
Thanks Lisa.
And I think we have time for one final question.
Our final question comes from Peter Chickering with Deutsche Bank.
Good morning, guys and thanks for squeezing me in here.
When I look at the strong first quarter and back into the implied EPS guidance the rest of the year.
In line with Street expectations.
You bet. Thank you mentioned <unk> was a transition quarter or so are there any inventory pull forward a reasonable impact they can have a large impact on <unk> EPS estimates in which case.
<unk> EPS comes down in the back half of year goes up or how the street generally modeled on the cadence of 2021 and the right way.
Yes, I think so Pete.
Thanks for the question one of the comments I made earlier in my prepared remarks are about the seasonality, we're going to start to see that resemble more pre COVID-19 cadence than what we saw in 2020. So we would expect again Q2 to resemble that of Q2 and Q4 tend to be our stronger quarters from a revenue perspective, you tend to see.
A little bit of seasonality and a dip in the third quarter and we think that that's the same shaky for this year, perhaps not as pronounced as you would see in a underserved pre COVID-19 environment, but again beginning to resemble what we what we experienced in 2019. So hopefully that gives you a little bit more on shaping up our revenue and our P&L cadence as we move through the year.
Great.
Maybe.
Oh go ahead go ahead.
I'm sorry.
A quick follow up question for you on Rosa.
The breakdown between sales on leases in the first quarter and I assume lease revenues are now located in the other revenues how much lease revenue was there on the first quarter. Thanks, so much.
Sure.
Yeah, we don't provide specific breakdown of the next but just know that we've got multiple ways that you can place robotics.
Flex based on what the customer demand or need is.
And we don't we usually don't give any specific.
Relative to what we did with Rosa in a specific quarter, but again I'll just I'll just reiterate the fact that debt it was a positive quarter for us.
And it was a big benefit and again the most important thing is it really the quarter that these are place.
It's the tailwind that they create on a go forward basis, because now you've got an opportunity to be able to build revenue around those those robotic system and what we do when we place these you'd get a commitment to a competitive conversions, but what we're finding is we're tracking this is that whatever we thought we were going to get we actually get more and a lot of times, it's not even.
And then E business and other businesses that just kind of come to it it's almost a halo effect that occurs in other product categories. So so it's always important to concentrate on and obviously what happens in the quarter, but more than anything it's the annuity value on this that occurs post debt placement.
I'm just going to say, maybe with a quick close here I know, we get a price back over to you to close it out but I just want to make sure that debt I refocus a little bit of attention I know that there is a ton of focus right now on.
On trying to predict the exact moment that the pandemic is behind us and as a result of the impact on 2021, and it's important building, but we're spending a lot of time on it too but in reality.
Kind of a short term thinking right now where I'm spending more of my time on the organization is spending more right now on this what does this look like post the pandemic when it truly is fully behind us.
Think of it in a few ways number one right on the obvious thing is youre going to have a backlog of patients that's kind of buoy the market growth for some period of time, I've said before I cant predict the amount of time, but theres clearly going to be at least a year or more.
Backlog debt when the pandemic is gone is going to be able to debt. It just kind of extraordinary growth in the marketplace and that's exciting although not obviously sustainable beyond that but you're on the things that we're looking at now that you really give us a view that we could potentially be reshaped the curve of these large joint growth markets.
And did things for us kind of threefold in the way I think about it is there's no question.
The technology Revolution is happening in orthopedics, we're going to help drive it but others are doing it as well and when that occurs you are going to get a mixed benefit youre going to see revenue premiums for every procedure. As this technology is adopted and if you think about that over a five year period of time as you get higher adoption that clearly has an opportunity to <unk>.
But the growth rates of the market now we've got to do it.
Did you actually get it done it doesn't happen, but the fact is we at least see a pathway through technology advancements to be able to bend the curve of these growth markets.
It does to my view could do is that theres. Some theres some hurdles associated with having this type of an ecosystem is connected ecosystem and that's going to create barriers to entry.
This space, where there really wasn't a lot before and that gives you the byproduct benefit of longer term contracts deeper relationships with your customers and probably better pricing stability, so those or something else that we're looking at with this technology and I think the third one I think very important.
Now as we get better outcomes for patients and their confidence level goes up for these procedures I truly do believe Europe patients on the sidelines today that should be getting the procedure, but are fearful of it when you start to hear better outcomes more technology, you may see some of those patients out of the funnel. So again all of these things are potential building blocks as we think about the future of orthopedics. It can.
This space much more attractive we've got to deliver on.
No guarantees, but we got to make sure that it happens, but that's where we're focusing our attention now to make those things a reality. So I wanted to leave you with those thoughts because that's an exciting future I believe orthopedics, Carrie I'll turn it back to you.
Thanks, Brian I'm sure, we'll be talking to many of you today per calls and follow up questions. If you do have then please don't hesitate to reach out to the IR team.
Always available over phone or email.
I'll turn it back over to you to close out.
Thank you again for participating in today's conference call you may now disconnect.
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