Q2 2021 Zimmer Biomet Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet second 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 August Baird's 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 1 on your push buttons on.
I would now like to turn the conference over to Kerry <unk> Senior Vice President Investor Relations and Chief Communications Officer. Please go ahead.
Thank you operator, and good morning, everyone I hope, you're all well and safe and welcome to Zimmer Biomet second quarter 2021earnings conference call. Joining me today are Brian Hanson, our chairman, President and CEO, and EVP and CFO Siggi, 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.
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 Q2 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, Gary and thanks to everyone for joining us for our I'll call. This morning, as we're all aware obviously given the news recently you know Covid is still very much with us and we're watching it very closely as you can imagine, but given that even we've seen some real progress since our last call and I think that's obvious to ebb.
Everybody and the World has not returned to normalcy, yet, but travel is returning and we have more team members and our offices and I am personally looking forward to attending the double AOS meeting and about a month and San Diego. So really looking forward to that meeting we have a lot of great technology that we're going to be able to showcase there and just really happy it's going to be a person.
And finally, I want to think and that same day and thank our team again for their dedication to safety and really just across the board their commitment to making all of our ZB manufacturing facilities and offices are safe as we possibly can you. You know you are team members are the driving force for this progress that we've seen.
And our own facilities, and certainly and our communities as well.
Also want to say that hope and our Investor community that you are continuing to stay safe and have been hopefully able to travel over the last few months to see family and friends. This is a opportunity for us to take advantages from travel as we begin to turn to more of a normal environment and of course, not there yet and we know this isn't happening and consistently anyway and <unk>.
All regions, but overall, we are encouraged and we're doing our part to keep this moving forward and every single day, we are supporting our customers and patients that they serve and we're doing this safely obviously, but this is a big focus for us as a mission driven organization to be there for our customers. So they can complete the procedures that they.
And we can make sure that the patients receive the care that they deserve and with that I think it is a good lead in to our Q2 call today I'm just going to spend here in the beginning just a few minutes on a couple of quick remarks, and then I'm going to turn it over and just sucking who's going to get right into a deep review of our Q2 results and I think most importantly, our 2021 guidance.
View on a go forward basis.
And then I'll come back to close out the call with some updates on our active portfolio management and product and pipeline highlights I'll wait to do that after he provides the guidance information. So just to set him up a little bit you know overall, let me just say that our performance in the quarter improved meaningfully from the first quarter of this year and that.
And was pretty much across all regions and product categories and and as recovery from the global pandemic continued to take hold we saw that and recovery and our procedures also moving the right direction and while we certainly anticipate some ongoing COVID-19 pressure. We currently think it's going to be manageable by hospitals, and we expect that the recovery will continue to build sequentially.
Throughout the second half of 2021 again not out of the woods, yet, but we do believe thanks to the hospital's ability to better manage these COVID-19 patients and the vaccine rollout continuing we believe it'll be manageable through the back half of the year again, moving and the right direction and with that I'm going to turn it over to <unk> for our financial update and then I'll be back with you and a few minutes.
To close out the call before the Q&A.
Thanks, and good morning, everyone on this morning's call I'm going to discuss our Q2 results walk through the updates we've made to our full year 2021 financial guidance and provide color around our current expectations for third and fourth quarter.
Moving forward unless otherwise noted my statements will be about the second quarter 2021, and how it compares to the same period and 2000 and 'twenty and my revenue and P&L commentary will be on a constant currency adjusted basis.
Also I'll provide constant currency revenue growth versus 2019, as we think that is a more relevant comparison for this quarter.
Net sales and the second quarter were $2.0 billion to $7 billion and reported increase of 65, 3% and an increase of 16, 7% on a constant currency basis versus the same period in 2020.
Compared to the second quarter of 2019 net sales were flat on a constant currency basis, and we do not have a material impact from selling days.
Overall consolidated and regional results were slightly better than the expectations. We provided on our last quarterly call with growth versus 2019, and the Americas and Asia Pacific and <unk>.
Much of improvement and EMEA.
For the quarter, the Americas increased 68, 3% or up 1.9% versus 2019.
We continue to see variability by country within the region with the U S growing $66.2 per cent or 3.3% versus 2019.
EMEA grew 85% or down 7.3% versus 2019 with continued COVID-19 pressure being a factor and we did see improvement and EMEA as we move through the quarter and we expect that trend to continue through the back half of this year.
Lastly, Asia Pacific grew $24.4 per cent or 2.8% versus 2019 in spite of some unexpected headwinds.
While the region has been largely stable and recent quarters. It was impacted late in the second quarter by channel inventory contraction and our knee and hip categories within China and advance of the rollout of volume based procurement or V. P.
In addition, we saw a resurgence and increase of COVID-19, and a number of markets, including Japan. Despite these headwinds the region continued to post growth.
Turning to our business categories.
The global knee business increased 72, 2% were down 6.3% versus 2019.
And the U S knees increased 77% or was flat versus 2019.
While we are seeing sequential improvement and a recovery of procedural volumes and large joints.
Path back to normalized market growth is taking a bit longer than most expected.
Still we continue to be encouraged by the team's execution and ongoing strong momentum for persona Rosa knee.
Our global hip business increased 39.9% or down 2.8% versus 2019, and a U S hip grew 46.6% or up 3.1% versus 2019.
Strong demand and favorable feedback continues for the Avenir complete hit with continued adoption from both gold and platinum accounts.
The sports extremities and trauma category increased 53 per cent or up 10, 8% versus 2019, driven by solid growth and sports medicine and C. M S T and upper extremities.
We continue to see strong surge and registrations of the signature 1 surgical planning system for solar procedures.
Our dental and spine category grew 69, 4% or up 8% versus 19 fueled by recovery and dental.
New products and better commercial execution drove growth in the quarter with strong contributions from implants, and digital solutions and our dental business.
Finally, our other category grew a 105.5 per cent or up 7.5% versus 19.
This reflects the ongoing demand for Rosa robotics, and strong capital purchases and the quarter.
We saw improvements both sequentially and versus Q2, 2020 and units sold as well as increased revenues from software due to the launch of our partial knee application.
Moving on to the P&L.
For the quarter, we reported GAAP diluted earnings per share of <unk> 67 assets.
Our reported GAAP diluted earnings per share were up significantly when compared to our reported GAAP diluted loss per share of $1 and the second quarter of 2020, the increase and year over year GAAP earnings was driven by higher revenue offset by a horrible life spending levels and I P. R D investments within the quarter and.
In addition, the second quarter of 2020 at sub 1 time GAAP charges that did not repeat.
Alright, and adjusted basis diluted earnings per share of $1.90 was significantly higher than the prior year driven as expected by the recovery of elective procedures since the pandemic trough and the second quarter of 2020.
Adjusted gross margin was 71, 7% and in line with expectations are.
Our adjusted operating expenses of 923 million stepped up sequentially versus the first quarter due to higher variable selling expenses related to higher sales and increased discretionary spending to support investments and commercial infrastructure and innovation through R&D.
Improved revenue performance and stable gross margins more than offset higher spending to drive 26 point to operating margins a slight improvement over the first quarter of this year.
The adjusted tax rate of 16, 5% and the quarter was in line with our expectations.
Turning to cash and liquidity.
For the quarter operating cash flows were $453.9 million and free cash flow was robust at $358.7 million and we ended the second quarter with cash and cash equivalents of just over $1 billion.
We continue to make good progress on deleveraging the balance sheet and expect to make another $300 million and debt repayments and the third quarter.
Moving to our financial guidance.
As noted on this morning's press release, we have updated our full year 2021outlook.
We are tightening our guidance range to better reflect our year to day performance and a more informed view of the potential impact of Covid.
There's some key assumptions that underpin our 2021 financial guidance, we assume no worsening of elective procedure trends due to COVID-19 and that procedure volume recovery continues and the second half of the year.
But recovery may not be linear by region and or byproduct category.
We also expect to see seasonality impact the third and fourth quarter as we have observed in prior years.
With the narrowing of our guidance range. We are now expecting reported revenue growth to be 14.5 to $16.5 per set versus 2020.
With the impact of foreign currency unchanged at about 150 basis points of a tailwind for the full year.
On a constant currency basis compared to 2019, we expect Q3 to growth sequentially over Q2 and for that improvement to continue and the fourth quarter.
Turning to the P&L are.
Our adjusted diluted earnings per share is now and the range of $7.65 to $7 and 95 says and we have narrowed our adjusted operating margin projection to be $26.5 to 27 per cent for the full year.
Our updated EPS guidance reflects our performance to date, our expectation of improved growth and the second half and that discretionary operating expenses remained consistent with Q2 through the balance of the year.
While operating margins are expected to decline sequentially and the third quarter in line with lower sales revenue and steady investment levels versus the second quarter. We expect overall second half operating margins to be stronger than first half operating margins.
Our adjusted tax rate projection is unchanged at 16 to 16, 5% for the full year.
And finally, our free cash flow estimates remain in a range of $900 million to $1.1 billion.
We will continue to update you on market dynamics and financial expectations as we move through the remainder of the year.
To summarize our performance in Q2 was slightly better than our expectations that we have communicated to you through the second quarter, while we anticipate some ongoing COVID-19 pressure, we have more confidence and our momentum on the recovery and our ability to execute against that backdrop.
With that I'll turn the call back over to Brian.
Alright, Thanks, Sookie and and I'm Gonna and now just hit 3 topics before we move to Q&A first I want to talk about execution and some of the product and pipeline and highlights that we have under that category.
Second I'm going to talk about our progress against active portfolio management, which is a big effort for US obviously and then there is innovation and insider and innovation, how we believe we're gonna be able to drive attractive long term growth that ultimately will deliver value to you our shareholders.
So let's start with our teams execution and I've said this before and I'll continue to say that the things that <unk> was able to directly control over the past year year and a half the team has executed against the delivered against and I'm very proud of the team for doing that during a time of significant turbulence around them and in Q2 and the recent weeks we've had.
Key milestones with ours E V products and our solutions you know Rosa for partial knee was approved back in April as we've talked about before and our first patient surgery was actually performed early in the quarter and we've continued to see good traction with that technology, so far and great feedback so far and it's important for us because partial knees and I think.
Most of you know is a market where Z b has a sizable market share position. So we're very excited about the possibilities here and not just from a revenue standpoint, but also the potential impact for patients and the surgery area.
And then if I just look at Rosa overall, we did see another strong quarter and Q2 of market demand and traction with Rosa total knee as well with placement momentum broadly continuing across the world not just in the U S, but internationally as well and that's important and I want to see strength and the U S. But we want to see that O U S and we did get to see that kind of mix again.
In Q2, we also saw capital expenses for our customers being much stronger in Q2 and as a result of that we saw a shift back to upfront sales of Rosa. So more of those happened in Q2's, and what we would typically see and again that just speaks to the strength of capital budgets and people's desire to acquire and that way, but what.
Is clear is that there is a real focus for hospitals to be bringing in robotic systems for their oars, whether they buy them outright or they get them through other arrangements either way that momentum net demand is very real and Rosa continues to be a cornerstone and 1 of the key ones of our Z be edge suite of connected solutions and our forward looking robotics pipeline is going to be <unk>.
Boston as result of that because it's a big part of our strategy. So we're getting a lot of enthusiasm on what that will mean in coming years in terms of expansion of indications and overall robotics penetration for ZB.
Also in the quarter, we saw revision continue which very strong momentum again. This is a great tip of the spear product for us where we can go in and get competitive conversions and revision, but also use those competitive conversions for access to the typical total knee as well for that surgeon. So very exciting not just on the revision side, but also opening the door to.
A much larger opportunity to get their you know their typical and D conversion as well. We're also excited about adding another key variable to our Z be edge portfolio of connected technologies and that is our persona IQ, which will be the first and only smart implant on the market and we certainly still have to get FDA approval on that and we're working diligently with them.
2 to help with any information they need to move that forward and we're certainly hoping to receive approval and a relatively short term, but ultimately again that time line is up to the F D a and and it's important for us because it takes the persona implant, which is that known and trusted design and and implant and it combines it with Canary Medicals tubular.
Tension, which has the sensor technology and it and a combination of those 2 things will now inside the body give us an opportunity to measure the range of motion of that patient step count walking speed and and other mobility metrics that we believe are going to be indicators of post surgery progress. So again, helping us close the loop and those connect.
Technologies that we have and Z be edge, so more to come when we hear back from the FDA, but once we do get that approval. We would look to limited launch the technology for a quarter or 2 and then post that timeframe move into full launch.
Okay. So let's move to my second topic that is on active portfolio management and our efforts around active portfolio management, we have the Zee Vee portfolio management strategy in place we have the right process in place and we have definitely built our capabilities to move this forward over the last year and a half to 2 years. So we're excited about this phase of the organization.
<unk> and we're focused as we said before on mission centric M&A that is wham growth accretive. So in other words weighted average market growth accretive to the organization and you've seen US move this forward already with the selective tuck in acquisitions that we did late last year that really illustrate our strategy at work and these are smaller deals again tuck in size deal.
Deals that were designed to fill portfolio gaps and better position us as an organization and high growth high priority markets like sports Medicine, ASC and sternal closure, where we truly do believe we have a right to win and.
Attractive markets with strong profitability.
And of course, there's the planned spin off transaction of our spine and dental businesses that is fully underway and on track now and we continue to be encouraged by the energy and the momentum around newco as CEO of Alpha Jamali builds out his team and refined and corporate strategy and we believe creates 2 independent and even stronger company.
That is going to maximize value for not just our customers, but also for you our shareholders.
Alright, and that brings me to the last topic that we have before we move to the Q&A and that's going to be around innovation and and really inside of innovation, how we see our ability to drive attractive long term growth that will ultimately deliver value to all of our stakeholders, including you. Obviously our shareholders. We are focused on evolving ZB from.
I would define as a metal and plastic provider of implants into a leading med tech innovator and we have a lot of shots on goal across a number of programs to do this including a number of robotics launches over the near term smart implants and that we have today, but also the technology roadmap that we have and smart implants new.
Aldi with my mobility, and really just the broader E. B edge ecosystem of those connected technologies that are going to help us drive mix benefit and share of wallet benefit, but also competitive conversions.
And I've mentioned before.
More than 70% of our new product development investment is directed towards E. B edge and those connected technologies inside of E. B edge and our exclusive partnership with Apple continues to be productive and collaborative and we forged several other tech alliances that we know we're going to drive future innovation that will be.
Benefit patients and I believe this fundamental shift is coming for <unk> and for our core markets with technology advancements potentially changing the care paradigm for patients and the future and that's really what our focus is.
So the momentum is real on the innovation front and we think it will ultimately allow us to drive long term growth that is very attractive to us and to you.
And most importantly, it also gives Z b the chance to really change the lives of patients around the world.
Alright, and let me close by saying that I continue to be highly confident in the Z b team and and our business momentum you know while there continues to be uncertainty due to the global pandemic debt, we cannot control I truly believe that we are ready and well positioned for success and our strategy is absolutely working and the transformation of <unk>.
Our business is well underway and I'm excited about the value we can drive for our shareholders on a go forward basis and I also want to make sure that I take the time to thank the entire Z b team and your dedication to safety is critical and your focus on delivering on our mission is unmatched and you do a daily I remain incredibly proud of what we're accomplishing.
Wishing and what we're accomplishing together and with that I'm going to turn it back to carry for our Q&A session Gary.
Thanks, Bryan before we start the Q&A session. Just a reminder to please limit yourself to a single question and 1 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.
Thank you ladies and gentlemen at this time, we will now begin the question and answer session and our first question comes from Josh Josh Jennings with Cowen.
Good morning, Thanks for the update and thanks for taking the questions.
Brian I was hoping you could just share.
Oh internally your team has been tracking.
<unk> U S hip and knee market share and any breakout of.
So the progress and that's noble and revision segments would be helpful. And then as you think about your revenue growth acceleration journey post spin do you envision and the introduction of enabling and sensor technologies driving positive mix shift and.
And expanding or accelerating U S knee and hip Lam grew up into the mid single digits or how do you see the U S large joint markets growth evolving and then.
And the next coming years, thanks for taking the questions.
Yeah, no problem, Josh and start.
Start maybe with the second part of your question, because I would say beyond sensors.
We define and ZB edge, which is these interconnected technologies that actually do pull data from the patient journey, we really do believe that those technologies, including robotics sensors and the body my mobility ortho Intel and so on and so forth.
Well, absolutely bend the curve when it comes to growth rate and knees and hips and other areas as well because we would proliferate those beyond just knees and hips.
I do believe that that technology, which is being absorbed by that you know folks orthopedics right now it does provide us an opportunity to enhance our growth rate as an organization are 2 reasons, 1 because I do believe that we can get that share of wallet benefit were mixed benefit per procedure and 2 I really do believe it sets us up to take.
Share from the competition, because it's unique to us.
And yes. It is on the second question that I see that as being able to enhance our growth rate.
And when I think about you know the share I'm pretty focused on this as you would imagine you know this is something that in a turbulent market.
Got to pay attention to it and when I think about the last 5 quarters that we've seen we just had the abnormally large spreads between the top and the bottom player and large joints and speaks to just a very turbulent market that we're experiencing because of COVID-19.
And inside of this you know ultra focused on share gains or losses.
Because you know the very thing that would tell us whether we're performing well versus our competition because the market itself. It is difficult to understand and I'm focused on this and irregular times, but I'm ultra focused on it during turbulent times and that said you know and the normal market.
And not to get too excited or depleted based on any individual quarter performance. There's just too many variables inside of an individual quarter, particularly now, but what I do is is to take a look at a rolling 4 quarters and that's the way we do it every time, we see results out.
And when I think about the rolling 4 quarters, particularly prior to Q2, you know we we definitely took share in our large joint market. You know we didn't beat every competitor every quarter, but every quarter over the 4 quarters preceding Q2, we were ahead of market and both knees and hips and that obviously gives us confidence as we move forward.
Really try to look at it with the data that's provided from the major companies that is public to all of us and a good track that over a 4 quarter rolling period to determine whether we are we're not taking share and I do believe that even though it's been positive for us over those 5 quarters I do believe the technology that we're launching is going to enhance that going for.
Yeah.
Yeah.
Our next question comes from Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question.
Brian.
And although both of my questions and into 1.
Back to Europe prior comments here on on not share gains where system market.
But I guess the sweetest.
Focus more on near term sequential trends here and why.
I would zimmer.
Perhaps be seeing different trends versus your peers. I think you made some comments about the backlog burn and being a little bit slower etcetera, maybe put that and perspective for us and my second and second question is Europe.
And your Roes and I think.
1 of the key advantages of the system the ease of use the higher throughput.
Given there is a backlog are you seeing increased factions there are customers appreciating this.
Speed advantage of Rosa.
And what does that translate to a total installed base or share gains perhaps for Zimmer.
Yes, and maybe I'll start with the Rosa throughput and and as you probably remember we spent a lot of time thinking about the desired characteristics of Rosa and 1 of the primary things. We wanted to focus on is to make sure that we did not disrupt the surgical flow and certainly did not want to add time to the to the surgical procedure and that has benefited us. There's no question, but I mean to me it would.
And matter, whether we're in a COVID-19 environment or a non COVID-19 environment that is something that our surgeons are pursuing and and they very much. Appreciate the fact that it's not disrupting the flow and it's not it's not really a dramatically increasing any of the other times you do procedures.
So that is a benefit for us for sure and again I don't think it really matters, whether you're in a COVID-19 environment and not that they should.
The benefit.
1 of the things relative to the share gains that you talked about and and our view on backlog.
I don't know that our outlook and what we've described is really any different than anyone else, who plays and large joints like US you know with such a significant share position and it seems pretty consistent with you know to me anyway, if I think about the deferred patients.
And just say that like most people at this point.
That just becomes more challenging now as time continues to be added to the equation and it just it.
It's just unprecedented right now and what we're dealing with just given how long. This has gone on it and we were just too many variables and my view.
Size this appropriately and I think anyone would probably say this now but that said, we still believe that theres been no structural shift and a disease state and that's what we've been saying all along and as a result and that Theres got to be a sizable deferred patient population out there and well.
We originally analyzed what we thought would happen with that deferred debt deferred population, we looked at Q3 of last year.
And we assume that when you know based on what we saw in Q3 that way and the vaccine was available you would have a pretty significant reported deferred patients relatively quickly and again, that's what we saw and parts of Q3 last year. When the virus was subsiding. So we just assume that would happen. This year now fast forward today, you know the vaccines here and we've got more current data and more data points that are playing out.
Right now.
And this doesn't seem to be materializing for anybody and <unk>.
As such your current thinking with debt deferred patient demand will likely come at a more gradual pace and and probably be more consistent over a longer term period of time as a result.
That's really what we're contemplating and by the way.
And when you think about the midpoint of the revenue range that we just provided the implied range for the back half of the year and access the top of that range as I think most people would say we would need to see a change and the current pacing of the net recoveries. It. So in other words you'd have to see it reflect the increase in deferred patient demand that would also be matched by capacity increases to get to desktop and of the range.
Hopefully that helps you.
No that's helpful. Thanks, guys.
Thanks P J our next.
Our next question comes from Anthony Petrone with Jefferies.
Thanks, Hope everyone's doing well and and maybe just a quick follow up on on backlog is it is it safe to sue and Brian that.
And that it's still sort of at least 700 million opportunity and you know and that that perhaps could certainly extended to 2020.2 book, but maybe even beyond a bit it sounds like perhaps that's where he headed and then a few quick follow ups on on persona Iq.
It does sound to us from our checks that there is pent up demand for the sensing capability.
So a few questions here do you need to be standardized on Z be edge to take full advantage of the implantable recorder.
And we'll persona IQ actually drive additional surgeon reimbursement overtime. Thanks again.
Sure. So maybe I'll start with with the backlog just because it's maybe a simpler answer I guess I don't want to try to size. It because I think it's gone on too long and and as I said before I just I just do.
On the how they look at this unprecedented situation. They tried to put aside and do it all I would say is that based on our assumption of no structural change and disease day, that's gotta be big.
And I'll just leave it at that but on a I don't want to try to size it.
And yes. It you know my current thinking just based on the data points that are available to us is that it's likely going to be a slower roll.
And that the deferred patient group coming in and that would indicate that this should take a while for us to work through it.
And is it any time book, but that's the data points that we have right now relative to argue the.
Glad that you're hearing there's pent up demand because certainly we're feeling that as well and we're getting excited about the launch depending on that we still obviously cannot market and technology, because we don't have that the approval, but we do believe that that should be coming soon.
And yeah, we're excited about it but you do not actually need to have the pool ZB edge infrastructure to take advantage of it what we would like to see people do.
Is to have my mobility and the persona IQ combined because we believe the combination of the data collection and between those 2 is extremely beneficial, but you don't really even need that but that would be the goal for us to have that move in concert and it would be able to have them and mobility in concert with the the.
And the IQ and plant and.
And we do feel that all the components are there for remote patient monitoring and that's the whole idea behind this through my mobility through Ikea was to be able to remote patient monitor and and as a result of that he put provided you'll be able to make decisions on what you do or don't want to do with the patient and so.
So we believe that we have what would be required for a search and to get.
And reimbursement for RPM. So that's the way we're looking at today at the end of the day you know that's not our decision on whether it happens or not but we do believe we have the components to make that available to surgeons.
Thanks again.
Sure.
Our next question comes from Steven Lichtman with Oppenheimer.
Thank you hi, guys.
My 2 upfront and Brian you talked about the momentum sequentially and Rosa and obviously, we saw that and our reported numbers as we think about the implant pull through opportunities can you give us a sense of what percent of placements or go into accounts that are competitive accounts or ones, where you have low share and then sue could just as a follow up on.
Gross margin and the first half it.
Ran ahead of the second half of 2020 do you see upside to your original expectations for 2020.1 on gross margin, which I think was to be about in line with the second half of last year. Thanks.
Great.
And I'll go out and start with the the Rosa question and then I'll pass it off to you I would just say that yeah. We're again, we're excited about the traction we're seeing and as and the way I look at this it's not just the traction that we're seeing with Rosa I'm excited because there seems to be a significant openness and orthopedics for technology.
And that's that's really important I think for 2 major reasons, 1 because I truly do believe the technology is going to change the care paradigm for patients youre going to get better outcomes. As a result of it and when you have that happened and I believe more patients and until that Pedro the funnel, because they're going to have higher confidence and the procedure and remember there's still 20 per cent of knee patients that are not happy with the.
Got it and if we can reduce that through technology I believe you've got patients sitting on the side that we'd entered the thought which is good for everybody.
And included so I'm very happy to see momentum and the Rosa and I'm, even happier to see technology adoption and orthopedics overall and what we think about our our placements. It's interesting because we focus in 2 major areas, where we spend most of our time and platinum accounts and gold accounts.
And and both of those would just be very large accounts. The difference between the 2 would be platinum we have a higher share position and a gold and we have a lower share position, but those are the 2 areas that we concentrate mostly with E D edge and Rosa now what's interesting about that though is even when we go into that platinum account. It's very rare that we would have a homogeneous you know Lee.
Usage and the account so even when we get a platinum customer that is using us and need to move into Roes that we typically get competitive conversions to Rosa because you have competitive surgeons in those accounts and of course and gold accounts you get the same thing so it's on.
Almost every placement that we have very rarely otherwise provides an opportunity for us to get a competitive conversion.
And that helps with the way we're thinking about Rosa.
Yeah, and I see it and its still good morning.
Youre right when we talked about gross margin for 2021, we talked about it being stable to back half of 2020 like you said it may not be the same for each quarter. Because there are a lot of variables that impact gross margin, but.
And what we said broadly that it would be in line or or stable and that comes off with many years of declining gross margin. So it's a good first step in and actually seeing that stability.
First half Fortunately was a little bit better than the back half of last year and so we're encouraged by that we.
We expect the second half of this year to be pretty much in line with the second half of last year. So very consistent with how we've previously guided when you average those 2 together the first half of this year being a little stronger and the second half being in line that would suggest that the full year should be slightly better than what we saw on the back half of last year. So we're encouraged by what we're seeing there.
I do want to just think and and recognize the supply chain team as well as the commercial team for a lot of great efforts on our cost down initiatives.
Looking more strategically at <unk>, and really looking for opportunities to become more efficient and.
And our cost of goods just overall, so seeing some good progress so far so we're encouraged and and that's how we thought about and and that's what's baked into our guidance moving forward.
Great. Thank you guys.
Our next question comes from Larry <unk> with Wells Fargo.
Good morning, Thanks for taking the questions I just wanted to make sure I'm understanding and the second half revenue guidance and cadence you know when I look back before 2020, the last 5 or 6 years. You know Q3 is typically down about 6%.
And Q4 is typically up about 11% sequentially quarter over quarter based on your comments earlier I thought I heard you say Q3 would be down maybe 3%, but Q4 would be up call it 14% to 15% to kind of get to your midpoint of your guidance.
It's better than kind of we have historically seen can you comment on July trends and.
And am I right to think that you expect a little bit better seasonality and.
The second half of 2021 versus what you've typically seen thanks for taking the question.
Yeah, Yeah, absolutely. So my comments earlier on the call will really versus 2019, and so that's kind of where I'll I'll play for this for this answer.
We do expect to see seasonality on an absolute basis Q3, generally tends to be lower in absolute sales solve and Q4 and.
And we expect that to play through for the second half of this year as well.
We do expect versus 19, where Q2 was about flat as we mentioned earlier for the third quarter to step up and as you suggest that that is a little bit better and what we've seen historically, but it really underpins the continued recovery, which ultimately underpins our guide for the back half of the year and then again for that to step up.
And again sequentially in Q4 again all versus 2019 so.
That's how we currently see it and again, it's pretty much based on that continued recovery.
That we've already seen in Q2, what we've seen early on in Q3, we're not going to talk about individual or specific months as we move through the rest of this year.
But so far what we've seen and July underpins and supports what we've what we've provided earlier today.
Okay.
And some some color to that and how you do it Larry.
You know what I think about what you just referenced that we've got it you know pretty pretty significant assumption and our guidance range that said COVID-19 pressure doesn't get worse and and the recovery built through the second half, but we didn't just assume that there are some proof points that we're seeing and that might speak to your question, Larry maybe a little more you know there's really really.
2 things that we're seeing that would give us confidence and that assumption and the first 1 is that even with the recent virus surges that are all over the news I mean, you can look at the news and Eddie.
And during the day and not see something about the buyer surge, but it doesn't seem to be translating into the same significant revenue disruption that we've seen in the past and that's certainly not helping us, but does not translate and get to that same set of revenue disruption. We've seen in the past so and I believe that's likely because they've got more vaccines out there, obviously, which is impacting the way.
People feel when they get when they get sick, but also I just think that hospitals seem to be managing this patient population and better in the second kind of proof point for us when we thought about this as you know on assumption inside the guidance range is that the vaccine is available I mean, let's face it it's available globally anywhere anybody who wants it can get it and I truly do believe even though it stalled a bit.
Certain parts of the World I do believe as people get more Asia educated on the Delta Berry and the risk associated with that that may be a good motivator for people to come in and that had been waiting to actually get the vaccine and so those are kind of the proof points that we have that gives us confidence that we should see that continued debt.
And recovery in the back half.
Thanks, Brian.
Sure.
Our next question comes from Chris Pasquale with Guggenheim.
Yeah.
Thanks.
2 questions just trying to understand some of the other pieces and the quarter a little bit better first can you quantify at all the impact of the China inventory drawdowns and it does seem like Asia Pacific was the source of the shortfall versus consensus and hips and knees. This quarter. So it'd be great to just understand the magnitude is there a little bit better and then can you put any numbers around the Rosa.
Contribution this quarter and the other revenue line was a big upside driver just be helpful to know how much of that came from increased system volume versus that shift and the preference between placements and up from purchases for your customers.
Yes, it's who maybe 61 and why don't I take a shot at the Roes that piece and then I'll pass it to you on on the BP impact.
But on the Rosa side, I, probably don't want to speak specifically to the dollar amount, but but obviously it was it was a big enough ships for us to talk about it so that might help you kind of size. It in your mind, but what I would tell you is that the way I think about it is and the normal quarter. What we would typically see is better than 50 per cent of our placements.
Being done through a long term contract, which is that we actually like that because it does like us to the customer and it usually has a competitive pull through commitment as a result of that arrangement and in this quarter. We just saw that flip.
The higher than 50 per cent move to upfront purchases, which is which is different than what we've seen in the past what I don't know for sure is if that's going to continue I mean, clearly they were budgets that were available to people and they collect those budgets that could continue and I'm happy either way we place a rosa.
And we're going to be very flexible with our with our customers as we go forward and make sure that we know we're there to support them.
Our preference as I've said in the past is those long term contracts, but I'll take it upfront sale as well. So so hopefully that helps on the road and side and then and then I'll pass it to you on the PPP impact.
Yeah sure Thanks, Brian Hi, Chris Good morning, Yes.
As we noted.
Pacific sales were impacted in the quarter.
Back to 2 things 1 is that edp and impact that we talked about which is essentially some distributors taking some inventory contraction ahead of PDP and the second was we did see some searches late in the second quarter and some of our larger markets like Japan, and Australia, and New Zealand that also slowed.
Some of our growth down and that hit pretty much across both of those DVT as well as the slowdowns and in our recon business.
But it was encouraging that despite those headwinds that.
And that we were able to manage through that and actually grow the region a little bit ahead of expectations and we would expect that that growth to continue in the and the back half of this year.
Guarding China EVP.
For competitive reasons, we're not going to size that it was a contributor but not the only contributor and that performance and Asia Pacific as I mentioned.
I think the important thing is how do we think about this going forward.
We've looked at DDP and on a number of scenarios based on what we know at this time again the final rules pricing and volumes are expected to be issued for a let's call. It another few months, but that timing has been shifting around so.
And it could continue to shift but based on what we know today, we don't expect there to be a material impact from inventory change going forward.
And that's what's represented in our and our guidance moving forward, but again, we're going to learn a lot more about GDP over the coming months and we'll update you as we learn more but again it was great to see that Asia Pacific did grow through that and I would say also fundamentally within China, we're seeing very strong demand and so obviously that was the first <unk>.
<unk> impacted by Covid.
COVID-19, and it was the first market to recover and we continue to see good strength and progression in that in that market and as you know, we're a leader within China and expect to maintain that leadership position as we move forward.
Yes.
Well take our next question from Matt <unk> with credit Suisse.
Hey, good morning, Thanks for taking the questions.
And 1 on MCT and just to follow up on on Rosa, but good so.
On S T.
Brian or or or <unk>.
You could provide some color on sort of the components within that.
And that business.
And was driving some of the strength at least upside to our estimates.
<unk> extremities was it.
Sports is a little smaller but was that where you saw some of the strength and as I mentioned, the 1 follow up on on road.
And so.
Yeah, you know that that's 1 of the highlights that I saw on the quarter. You know clearly we are heavily penetrated and we think about our overall revenue and large joints and and I think everybody has been saying and recognizing there are large joints you just been a little slower to recover then and some of the other categories that we have and.
And what I've been very happy to see our strength in and said it and we believe that that's going to continue through the back half of the year.
Across the board we show we showed good performance and standouts for Us where sports.
The upper extremities business for sure with solid trauma was solid for us and of course, when we look at R. R.
C N S T business, our thoracic business was quite strong as well. So so we're we're excited to see that the tuck in acquisition that we did and CMS T is playing out the way we expected and then some of the acquisitions that we did that were really just product launches and filling out gaps that we had and sports and also on the ASE, they're also providing benefits.
Right now and that wasn't that was the whole idea right to fill out that product portfolio. As a result of that have a fight and have a right to fight and win and that's playing out right. Now. So we're feeling good about the strength and probably have more confidence now and that being able to continue on a go forward basis, just given what we have and the portfolio. So very happy to see that strength and set and we would we would.
<unk> debt to continue.
That's helpful.
Brian and and just to follow up on on Rosa So.
I don't think.
Many of the other folks.
Put and robots into the field or seeing the kind of shift back to capital that you're seeing it seems like it's been pretty stable and I'm wondering maybe if you could talk a little bit about.
And the mix of accounts, maybe the mix of ASC is or the larger centers and if there is if there is any change and the mix that might be driving some of that progress for per cash payment versus commitment to long term contracts. Thanks.
Yeah, sure and really no no dramatic shift and may even if I think about U S. O U S. For instance, we typically do it's not always exactly this way, but if I look at the number of quarters and and just kind of aggregate them. We typically do kind of a 70.30 split U S. O U S and that was that was pretty consistent and this quarter.
For US again, we did see that shift we believe that it's mainly because people have more budget right now on the capital side I don't see a share in our customer base that drove it.
Nothing that just stands out for me, it's just more that there was capital available.
Like the flex the capital when they have it and some customers just don't want the long term contractual obligation, bringing a piece of capital and they just rather buy it and so I think that's really the culprit and theres nothing beyond that that I've seen that will certainly pay attention to it as we go forward, but nothing that was disruptive and any way relative to mix that would've changed that debt.
That change and and placement.
Thanks for the color.
Sure.
Our next question comes from Rick Wise with Stifel.
Good morning to you both.
Brian maybe just to start.
And with M&A, you, obviously highlighted that M&A remains a top priority.
And.
Alright, I heard you about the <unk> accretive and.
And you listed some areas.
How do we think about the next 612.18 months do you feel like you have a lot of targets do you feel like you have a lot of opportunities do you feel like you're moving faster.
And the points, you mentioned about robots, and smart implants et cetera et cetera.
Do we envision that it's more about acquiring and enabling technologies or incremental technologies that enable you to achieve that or no you don't.
You're ready for something larger freestanding to accelerate.
And I'll ask Matt and then I'll ask my second question.
Okay, maybe just quickly here and I'm going to pass it to <unk> because at the end of the day, the M&A strategy and it's only as good as the funding for it. So so so you know obviously, we're both focused on moving this forward, but let me maybe pass it to Sydney and you can give you the same color I would on what we're looking for from an M&A.
And what but also give some color on how we're feeling about our firepower there.
Yeah, absolutely. So we continue to build out I think and attractive pipeline potential tuck in targets.
Very consistent from what Brian said earlier about things that are mission centric, where we have a right to win strategically makes sense financially are strong and have a low level of synergy disruption and very consistent with sort of the deals. We did at the back end of 2020, which so far through the integration process. We're very pleased with how those are.
And progressing.
And we're going to continue to look at opportunities very similar to those and.
The good thing is our firepower continues to build and.
And with the recovery of the pandemic, we're seeing our EBITDA improved significantly we've turned the corner on the second quarter of 2020, which was a cliff for US as you know a trough if you will on EBITDA and with a rolling 12 month EBITDA number as we sunset the second quarter of 2020, we're seeing a pretty big step on.
And our EBITDA number and a nice improvement and our overall leverage ratio when you combine that with the debt pay down and we've done so far that debt paydown and we're committing to on the back half of this year and the over $1 billion on the balance sheet, we feel we're in a stronger position.
Then we have been for the last.
15 months to execute on that tuck in M&A strategy, and so feel really good about where we are and how we're moving forward on that I would also say.
Another big component of that is our standard transaction, we're really pleased with how the teams and progressing on that.
We've made significant process progress with our tax private letter ruling.
Progress with our carve out financials.
And our 10 S, which we hope to file and the not too distant future with the SEC on a private basis.
Good progress from Farquhar and formulating our go forward strategy and building out his team. So just overall really really impressed.
With how the team has handled this in the backdrop of also integrating those transactions. We did at the back end and versus last year, so that muscle that capability that we've been building over the last couple of years is is really playing out to our benefit right now.
Gotcha, Thank you Oh.
Go ahead, Brian.
Yes, and just to say you know and you.
We're right on 2 areas, where we're spending a lot of time right now and when we look at targets and are pulling that go Pam targets would be around enabling technology and Great example of that is what we did with Canary and that relationship and that's been created and that's going on and then obviously spin out IQ for me, but also sensors and other areas of the body as well and then.
We'd be looking at near Adjacencies and very much like what you've seen recently from us and supports the ASC thoracic areas that we feel confident we have a right to win that they're accretive to our overall weighted average market growth and from a profitable.
Those are the things that we're looking at today and it's like you said, it's the firepower opens up and will begin to flex that firepower and in those areas.
I was just as a follow up I was reflecting Brian on your comment about specifically about revision, where you said revision carefully now opening the door to competitive conversions and I was reflecting just that.
Maybe you could flesh out your commentary.
And I get it that revision specifically will help.
But so a person on IQ so all of the continuing rollout of Rosa et cetera et cetera.
Just my question is.
As we reflect on the next.
612, 18 months, what should we imagine what are you thinking about is the biggest driver of competitive conversions and share gain is it. These incremental products is that the totality of everything is it something about execution, just trying to understand where you would have us focus and thinking about that kind of.
Thank you so much.
Perhaps you can you hear me Okay, yes, what I would tell you is that there that's kind of the beauty of the situation and why like confidence is high that we're going to continue to see share gains as we have over the last 4 quarters, but it and that's because we just have so many shots on goal.
Think about knee and particular, we already have Rosa out and that's getting great traction Rosa partial was just launched persona revision has been out for a while but the momentum is still very strong and there is debt spinoff opportunity to get the typical total knee and.
You still have my mobility driving conversions do you have any of the launch of persona IQ yet so all of these give us an opportunity.
To create a differentiated environment for our customer and provide the opportunity for not only that share gain or mixed mixed game, but but also competitive conversions and specifically on the revision and the reason why I bring it up is typically and somebody's practice, you get about 10% of the overall revenue associated with with revision and it's.
More like 90% coverage from your typical total knee and many times, we use that revision is the tip of the spear to convert a surge and that is a competitive surgeons because they love the revision system and that gets us in the house that day to try to pursue that much larger portion of the business, which is your standard knee. So that's why I keep going back to that we have.
<unk> dollars now we're paying attention to where we have a revision customer that is using a competitive total knee system and that gives us a great opportunity and kind of a hunting ground to go to to get those conversions, but it's certainly not the only area that would give us the opportunity to take share it's pretty much all of these.
Thank you so much.
Sure Laura we probably have time from maybe 1 more question.
Up next we have Matthew O'brien with Piper Sandler.
Good morning, Thanks for squeezing me in here, so Brian just a little bit more on the knees side of things.
And when I look at your numbers I know, what youre, saying about over the last several quarters are trending the right direction, but when I looked at the last 2 it seems like things have flattened out a little bit if not Europe.
Down a little bit on the knees side in.
In terms of share and so I'm, just wondering especially on the U S.
And that's actually down versus 19 here in Q2 are there things that are impacting us specifically because you are the biggest player on the market or are there some higher volume accounts that are on vacation or you and bigger COVID-19 hotspots.
More training on the partial knee side that has slowed things down a little bit for you guys versus what we've seen from some of your peers.
You know it's so it's so hard to say, that's what I was referencing before when I when I look at share gain or loss I never look at and spend too much time on a specific quarter, even when things are typical but it needs Crazy times. So many things can impact your performance versus the market share.
And I try not to get too worked up about any given quarter. It could be I mean, the fact is share right now and a specific part of the country per instance can be meaningful.
And 2 whether you do better or worse and that the competition because that particular particular state or county could be challenged by COVID-19 more than others. So there's always those things that could impact a specific quarter. That's why when I look at over a 4 quarter period of time that usually eliminates.
Those hotspots and and that's why I feel more confident and we're comfortable with more of that trend, which and through that trend basically eliminates the noise. If it is put air quotes around the noise of the specific quarter.
It's why I still feel confident that we're in good shape that we have all the shots on goal that we should continue to take share, but hey, I'm disappointed and I look at the quarter I don't really care. What the reason is I want to win every single quarter and this 1 we didn't.
But again I would look more at the trend and take more from that on the prediction of share taking in the future and I would just say in a nutshell I believe that we're gonna be net share takers.
That's helpful. And then just really quickly on Rosa placements I think you mentioned more a better trend line on the <unk> side. So can you just talk a little bit about what you're seeing internationally as far as Rosa placements go and then here in the states Theres been some talk about some moving into <unk> and just.
Just in terms of Rosa placements and what are you seeing in terms of where these things are going higher volume accounts.
And that youre getting into inpatient and or even in the ASC or even on the ASC side of things. Thanks.
Yeah. That's that's a nice thing I feel really good about our distribution and we're taking advantage of momentum and the AFC AFC absolutely loves the fact that we're and efficient robotic system that they're all about efficiency and the and the ASC. So there's been a benefit for us there for sure.
We've seen it and the hospital as well we've seen it around the globe and Europe, Middle East and Africa, as well as Asia Pacific. So I'm, just very pleased with the distribution of the technology across pretty much all sites of care and around the globe and and again, we focus our attention not always but let's call. It 80 plus percent of it.
Time, and those larger accounts, we're spending our time and those gold and platinum accounts, because that's where the big payback is if you're going to spend the time. So again. The distribution has been has been good I mean, it's been across settings across region and we've been focused on the larger accounts for sure.
Thank you.
Sure.
Great question, and I think that brings us to at 930, Brian I'll turn it back over to you just for any closing remarks before we wrap up.
Yes, Thanks, Garrett and I Wouldnt mind, making a couple of comments here and.
First of all set thanks for spending time with US here. This morning, I just want to say and I think this is probably obvious to everybody.
And we certainly have an outsized dependence on elective procedures versus really any of our med tech peers or competitors, particularly large cap companies. You know, we're just an outsized impact there and as a result, you know, we're very sensitive to COVID-19 ebbs and flows and and we spend a lot of time as you would imagine analyzing sitting and we try to remain prudent and.
And our expectation setting as a result and because.
Because we've seen it we've seen it firsthand that COVID-19 can move our business pretty rapidly given that dependence on elective procedures and this has been what was reflected in the updated guidance and why our implied range for the back half is still pretty wide. Because you know again, there are things that can happen and you can move us up or down pretty rapidly because of that dependent on elective procedures now relative to <unk>.
To specifically and so if you said this before even with some of the unexpected challenges that we had in the quarter, Hey, we delivered better than expected results, which I think speaks to 2 very important things number 1 and then.
This is more short term, but it is important though the recovery from Covid is moving and the right direction now, it's definitely not happening and the way we anticipate it and I don't think it is for anybody, but but it's moving and the right direction Nonetheless and in the 2 and I think this is important not just for now but the long term our team continues to execute and deliver against the things we can control and.
Both of these things, we're deeply considered and our updated guidance and this gives us companies debt continued recovery through the back half of the year is going to happen and.
And we see a path to end 2020 at 4% to 5% organic growth at 4% to 5% we've been talking about without the need for any material benefit from clearing the deferred patient 2 and like I said, given where we started just a few years ago and with Covid and between with very flat to negative growth with consistent share losses as a company I for 1 and soup.
We're proud of the team for putting <unk> and this position and I look forward not just talking about it but delivering it for you our customers and our patients. Okay with that we'll go ahead and end the call and we'll look forward to talking to you again soon thanks so much.
Thank you again for participating on today's conference call you may now disconnect.
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