Q4 2021 Zimmer Biomet Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet fourth 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 that'd be worth seven to 2022.
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 phones.
I would now like to turn the conference over to Kerry Medics, 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 fourth quarter 2021 earnings conference call. Joining me today are Brian Hanson, our chairman, President and CEO , and EVP and CFO Susan <unk>.
Before we get started I'd like to remind you that our comments. During this call will include forward looking statements actual results may differ materially from those indicated by the forward looking statements due to a variety of risks and uncertainties.
Please note we assume no obligation to update these forward looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. In addition to the inherent limitations of such forward looking statements.
Additionally, the discussions on this call will include certain non-GAAP financial measures reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q4 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 this morning, I'm going to just give you an outline of how we want the call to proceed. This morning I'm going to spend the first part of the discussion it briefly talking about our fourth quarter results.
And I'm also going to spend a little bit of time talking about what we're seeing so far in 2022 I know, it's early but don't want to give you a sense of what we're seeing already and then just speak more broadly about our views of 2022 as a whole and then I'm going to turn it over to <unk> who's going to provide more detail on fourth quarter, and obviously more detail on our guidance going forward.
And then finally it will come back to me before we move to Q&A I, just got a few things I want to close out the prepared remarks with them, then well again jump into Q&A.
Okay. So first let's start with Q4 and I'm going to break this into really three categories. The first will be around COVID-19 impact in Q4, and how it compared to our expectations. The second will be around GBP impact and again, how that compared to our expectations and finally, just performance outside of those environmental impacts and how we performed there okay. So.
Let's take a step back first I think that will help it's just when we gave our updated Q4 guidance on our Q3 earnings call back in November we actually outlined our expectations around how COVID-19 and staffing pressure would likely impact our fourth quarter results and unfortunately, our assumptions largely played out in the quarter as you probably.
Remember, we felt that the pressure from the end of Q3 would continue into Q4 and thus the overall pressure from.
From Covid and staffing would actually accelerate from Q3 to Q4 and really the Big reason. This played out of course, we know now is because of the omicron surge that occurred towards the end of the fourth quarter.
And as many have already saved a lot of that impact truly came in December itself. So you know what's interesting about this surge, though is that even though the overall impact of Covid was about what we expected the way it manifested was different right. So ICU capacity was definitely a factor, but we did not see it as the <unk>.
Primary driver of cancellations of procedures during the quarter.
But we actually saw was more cancellations that occurred due to really either the patient or staffing member being diagnosed with COVID-19 or actually having been around someone with COVID-19 and they were quarantining as a result of couldn't show up for the procedure. So that was really the shift that we saw in the quarter. So the overall impact was about what we expected, but the way again it manifest.
And the numbers were slightly different okay. So transitioning from there to be B P. Remember again on our Q3 call. We discussed what we thought the impact of China hip and knee the BP would be in our fourth quarter results and we actually we were largely right on how that played out and so our expected headwind in large joints was in line.
And with the expectations that we had and also what we communicated to you. So that was pretty much in check when we think about large joints now what changed during the quarter actually even post the quarter was that on January 24th the Chinese government announced that it was formally nationalizing one of its <unk>.
<unk> trauma, BBB tenders and that was kind of new to us, but based on that confirmation from the Chinese government and really just our knowledge of how the BBB process will work from here, we did take a sales reserve in the fourth quarter, which obviously resulted in a negative Q4 impact to both our net sale.
And adjusted diluted EPS.
What I would tell you is that even though this trauma pvp adjustment came earlier than we anticipated it is pretty consistent with the overall scale of the impact and consistent with our expectations and what we've been talking about more recently.
I'd say looking forward. The good news is is we have a lot more visibility now we're a lot smarter on the topic and we understand what the impact of EVEP will now be on our 2022 business and that has been included in our guidance, which says he's going to talk about in just a minute. Okay. So now looking past the EVP and COVID-19 in the fourth quarter.
<unk> I'm very proud of the team when we focus on the things we can control the GBS business execution against a challenging backdrop has been strong.
Our strength of our team right now that kind of one ZB culture as is evident as it's ever been and I think more important than ever and the team has really been able to move our strategy forward. Even in these challenging times and a few proof points to be able to point out. The team was able to drive continued strong demand and momentum for Rosa and that is.
Globally, not just in the U S, but globally, we actually more than double the number of installed roses in 2021 versus our cumulative total at the end of 2020, it's a pretty significant jump up and again speaks to the momentum that we have in robotics in orthopedics and those roses are paying off in the fourth quarter. Those install roads has allowed us to reach 10%.
And total knee procedure penetration in the U S for the first time as a company that's a huge milestone for the organization and it's just the beginning of this Rosa journey for US. The team also delivered a successful limited launch of the world's first and really only smart knee. The persona IQ now. It's early obviously early days, we're in limited launch right now as I said, but to launch.
That he feels great. The feedback is good and we're looking forward to a full launch later this year and then finally and I think importantly, the team continues to execute and large joints across the board driving again above market performance in Q4 in the U S for both knees and hips versus 2019, okay. So let's transition from Q4 and talk about.
What we're seeing so far in early 2022, and I'm going to speak specifically about COVID-19 and staffing challenges what I would tell you is that the challenges that we saw in Q4 in particular in December are unfortunately, continuing into January and as a practice and I think prudently. So our team is continuing to build our financial model.
Those using what I'm going to call a recency bias in those models and as a result of that we're expecting that December and really now January pressure and Covid and staffing will continue through Q1. So we're basically saying is that overall, we anticipate that Q1 will likely be more pressured than Q4 was.
So what does that mean for our outlook for the full year again, we're going to follow the same approach were going to look at 2022 in a similar way actually in a very similar way in the way we gave guidance for Q4 2021 until we see a fundamental shift in the current state and what's happening today in the environment. We are projecting that the COVID-19 pressure will continue throughout the year and will be.
Actually follow a similar peak and valley trend that we saw in 2021.
I'm sure you can appreciate given that about 80% of our revenues come from elective procedures ZB must be highly attuned to this topic and trust me. We are we're highly focused in this area and that has been captured in our assumptions for guidance and with that I'm going to transition to certainly to give you again more detail on Q4.
Also our 2022 guidance okay.
Thanks, and good morning, everyone for this morning's call Im going to focus on three topics first our Q4 results, including commentary on the impact of Covid.
How that translates into full year 'twenty two financial guidance that we provided this morning and third I'll provide a brief update on our longer term outlook.
Moving forward unless otherwise noted my statements will be about the fourth quarter 2021, and how it compares to the same period in 2020, and my revenue and P&L commentary will be on a constant currency adjusted basis.
We've also provided changes versus the fourth quarter of 2019 or pre pandemic results as we feel it is an important comparison.
Net sales in the fourth quarter with 2.04 billion a reported decline of two 3% and a constant currency decline of 8% or down four 4% versus 19.
On a consolidated basis, we were about flat through November versus 2019 and declined in December due to the AUM across various search.
Expectations for the fourth quarter had contemplated the impact of China, Pvp in hip and knee and that was largely in line with expectations.
<unk>, we book the sales adjustment related to channel inventory for China, Pvp and trauma of approximately $30 million triggered in part by the Chinese government's announcement relating to a national trauma EVP, which was made on January 24th.
This adjustment was about a 650 basis point headwind to S. E T category growth at about 150 basis point drag on consolidated Q4 growth.
In short excluding the impact of the China Pvp on our S. E. T results the quarter was generally in line with the assumptions that we provided on our third quarter call. It broadly consistent with the midpoint of our implied fourth quarter guidance range.
The Americas declined one 5% in the fourth quarter down one 9% versus 2019 with the U S declining two 3% or down two four versus 2019.
The impact of Omicron late in the quarter at 10 am with lingering hospital staffing challenges drove lower regional results.
EMEA grew 17, 3% or down 3% versus 19, the regional experienced positive growth versus 19 earlier in the quarter, but quickly decelerated with the emergence of all the crop.
Lastly, Asia Pacific declined 17, 5% or down 15, 1% versus 19, driven primarily by price adjustments on channel inventory ahead of hip knee and trauma EVP as well as some negative impact from a spike in Covid cases, starting in December and markets like Japan and Australia.
Now turning to our business category performance in the fourth quarter.
The global knee business increased 4% or down three 9% versus 2019 with U S knees declining five 2% or three nine versus 19.
In the quarter, China, <unk> had a negative impact on knee growth of about 250 basis points.
Our global hip business declined two 8% or down 6% versus 19 with U S hips declining four 4% or 3% versus 19.
V BP impact on hip was about 700 basis points in the quarter.
Our sports extremity and trauma category decreased four 3% or down $6 two versus 19 the.
The sequential deceleration was due to a softer market due to COVID-19 and the impact of China National V BP and trauma as discussed earlier.
Excluding the impact of trauma Pvp in the quarter <unk> was growing low single digits versus 2020 and about flat versus 19 on an underlying basis.
The dental and spine category declined 3% or down three 8% versus 19 with dental posting growth in spine declining primarily due to continued pressure from COVID-19 .
Finally, our other category grew 14, 1% or up one 9% versus 19.
This category, we saw ongoing demand for Rosa knee as well as increased revenues from the launch of our Rosa partial knee and hip applications.
Moving on to our P&L for the fourth quarter, we reported GAAP diluted loss per share of <unk> 40 sets compared to a GAAP diluted earnings per share of $1 59 in the fourth quarter of 2020.
This decrease was driven primarily by lower revenue.
Extinguishment loss recognized on our bond tender offer litigation related charges and restructuring charges that we incurred in Q4 to continue to address pressures on revenue from Covid and the stranded costs associated with the spin.
On an adjusted basis diluted earnings per share of $1 95 represented a decline from $2 11.
In the fourth quarter of 2020 the.
The decrease was primarily from lower revenues intangible with lower gross margins due to COVID-19, and the impact of China Pvp in both recon and trauma, which were partially offset by targeted reductions in SG&A at a slightly lower tax rate.
In addition, FX was a modest headwind to earnings per share in the quarter.
Adjusted gross margin was 69, 1%.
Fourth quarter gross margin was pressured due to lower manufacturing volumes and the impact of China V BP.
For the full year adjusted gross margin was 77% and in line with prior commentary.
Our adjusted operating expenses of $882 million declined year over year inside of that we continue to invest in R&D and commercial infrastructure across priority areas like FCT robotics in data and informatics, which are being funded by accelerated improvements in efficiency across other areas of SG&A.
Our adjusted operating margin for the quarter was 25, 9% down versus the prior year, but in line with the prior quarter.
The adjusted tax rate was 14, 4% in the quarter.
Q4, and full year tax rates were favorable to our expectations due to some discrete one time items in the quarter.
Turning to cash and liquidity.
Operating cash flows were $366 million of free cash flows totaled $224 million with an ending cash and cash equivalents balance of just $480 million.
We continue to make good progress on de levering the balance sheet in the fourth quarter, we reduced debt by approximately 400 million, bringing the total debt reduction of 21 to approximately $900 million, excluding the effects of foreign currency on non U S denominated debt.
Moving to our financial outlook for 2022.
We are issuing 22 financial guidance based on the following key assumptions.
Colgate and customer staffing pressures are expected to continue throughout 2022.
We expect the Covid and staffing pressures that we saw in December to accelerate into the first quarter of this year with the first half of 2022 being more pressured than the second half.
We do not see try to BP has a material impact to growth in 'twenty two versus 21, but we expect variability by quarter with more pressure in the first half.
Furthermore, we anticipate completing the spin of our dental and spine businesses in the near term and as such the guidance. We're providing is only for remain co Zimmer biomet for the first quarter Z N V will be reported as discontinued operations and we expect to provide pro forma 2021 information for remain co honor around our first quarter earnings call.
<unk>.
While we do not have full P&L restatements available at this time for comparison, we've provided our unaudited net sales estimate of $6 87 billion for remain co Zimmer biomet.
Against this backdrop, our current expectations for the full year 2022 financial outlook, our reported revenue growth in the range of negative 4% position <unk> versus 2021 with an expected foreign currency exchange headwind of approximately 200 basis points. This translates to negative 2% to positive 2%.
On a constant currency basis.
Adjusted operating profit margin of 26, 5% to 27, 5% adjusted tax rate of 16% to 16, 5% adjusted diluted earnings per share in the range of $6 40 to $6 80.
Free cash flow of $700 million to $800 million.
Inside of that guidance, we expect Q1 revenue to be flat to up slightly versus the first quarter 2021, due to headwinds from COVID-19 and the impact of the BP being.
Being somewhat offset by the easier comp relative to the first quarter of last year, and a roughly 130 basis points selling day tailwind that will largely be reversed in the fourth quarter.
We expect approximately $160 million of net interest expense and approximately 212 million average shares outstanding for the year.
We remain committed to our investment grade rating and expect to pay down $750 million of debt maturing in the second quarter of this year.
Now turning to our longer term outlook.
With the zombie spin transaction nearing completion, we are also taking this opportunity to update our long term margin expectations.
Given the prolonged impact COVID-19 is having on our business. We are removing our target of at least 30% adjusted operating profit margin exiting 2023.
However, we do expect to improve margins over the long term as we will continue to make targeted investments in our business to enhance topline growth. While also accelerating cost savings to fund those investments.
In summary, the macro environment presents challenges, but our underlying business fundamentals remain strong as we continue to execute successfully against what we can control.
With that I'll turn the call back over to Brian .
Alright, Thanks, Sookie and before we move into the Q&A session I just want to spend a few minutes to talk about our broader corporate strategy and really importantly, our execution against that strategy you know when I joined Zeb, we looked very closely at.
Number one re imagining our corporate mission and culture, but also number two making sure that we transformed our long term strategy of the company and change the way, we think about innovation and that was really worried at CBS ecosystem has come from it so through that we prioritized R&D spend in robotics and data.
And we also tripled the number of CEB team members with robotics and data background. So that we have that competency to truly move the needle in this area and where we didn't want to build a competency we forged strategic partnerships with the likes of Canary to be able to drive traction in smart implants, but also with larger players like Microsoft and Apple to further enhance our.
Our data and robotics ecosystem and Hey, we're seeing results. Our vitality index is nearly doubled from 2018 to 2021 and I'm proud to say that our new product pipeline is stronger than ever and as a result of that we expect to increase our vitality index and additional 50% five zero percent over the Strat plan period.
But beyond innovation in our strategy. We're also transforming the company by modernizing and streamlining its operating model right. We're focused on accelerating and expanding programs to drive efficiencies in the company simplifying the company and using that cost savings to enable investment in the business for growth, but also positioning us to expand margins.
And that will absolutely continue.
And that reinvestment is working that reinvestment in our business for growth is working it is driving growth and I know that COVID-19 is hiding that growth, but if you go back in time before the disruption of Covid.
From zero percent growth in 2017 and believe me.
Remember this because I joined the company in December 2017, we went from zero percent growth in 2017, two of three 2% growth rate in Q4 of 2019 and that was the last full kind of pre COVID-19 quarter that we had and that was really just on the beginning end of that vitality index moving north just we're just getting traction.
<unk> index. So I would tell you that even though COVID-19 disruption is definitely muting our growth. There's no question that that's happening we are confident that we have the right strategy and we're executing against that strategy that we have a differentiated portfolio and that's even getting stronger because of our vitality index movement and our execution capability will allow us to pull that altogether so that.
We can get back on that growth trajectory as we see recovery from Covid.
Okay. So one last point that I want to make in our transformation and we will talk about active portfolio management. Today, we gave an update on our Zigbee spin progress and we're expecting to finalize the spin ahead of schedule on March one and I'm very excited about these in the Investor day to day Youre going to hear from its CEO of Alpha <unk> Maui and the team. He has put together I think there's going to be excited.
About what you hear and I can tell you that both vasa and I know that we are creating more shareholder value as two independent companies for ZB for remain co. We get increased focus we get enhanced revenue growth and we get margin accretion for <unk>, they get to prioritize the investment in their dental and spine businesses in a way that we would not have and.
That really enables them to build a stronger standalone business in those attractive markets of course, youre going to hear a lot more about zombie over the coming weeks, starting with the Investor day today, but outside of Zombie. We've also continued to move our M&A strategy and our partnership strategy forward, we've done almost 20 different transactions between M&A and partnerships.
To be able to enhance our position in faster growth categories, and we have I know much more to accomplish here, but even with the limited available capital that we had given the COVID-19 pressure, we're absolutely off to the right start. So as you can tell there's a lot happening at <unk>. There's a lot that we're proud of them and there's a lot that will absolutely continue to.
Fuel our transformation and ultimately help drive our mission and very importantly drive value for you so with that I'm going to turn the call back to Carrie and we will move to our Q&A session.
Thanks, Bryan 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.
Ladies 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 Josh Jennings with Cowen.
Okay.
Good morning, Thanks, Brian its suki for taking the questions.
Just wanted to start off on 'twenty, two 2022 revenue guidance and just make sure I understand the impact of GBP that you're baking into the range.
Usually break out guidance for specific regions, but anything you can do to just help us think about.
What's baked in for Americas, and EMEA versus Asia Pac into that down four to flat on a constant currency basis for 2022.
And then just a follow up on the operating margin guidance.
And just the trajectory I know you.
As these pressures are in place.
Taking another look at that.
30% target, but just as you're moving through these transformation programs and looking to reasonable profitability infrastructure smaller markets and in other areas of cost reductions.
You balance that with.
With the topline growth trajectory is there any risk that you're going to be impacting revenue growth in that over the next couple of years.
Pursuing these transformation program, thanks for taking the questions.
Yeah.
Yes, maybe I'll just start real quick on that last portion of it and then I'll pass it over to you Sir we actually.
Feel more confident in our ability to invest for growth in the business because of the transformation programs. The transformation programs are not specifically associated with R&D and investment in those key growth drivers for us. They are more focused on finding efficiencies that do not impact our ability to spend in those growth areas. So they really actually bring more confidence that will be.
I want to spend on the things that are actually going to drive growth in the future.
Outside of that I'm going to push it over to you for the other other questions. Yes. So Josh. Thanks for the question regarding revenue guidance. So we talked to some of the overarching functions in that guide on negative two two on an ex FX basis for the full year revenue is really around the concept of we expect COVID-19 to continue for the full year.
The impact of Covid on elective procedures and staffing shortages again to really be with us for the entirety of 2022 now what we're saying is broadly we would expect to see procedural volumes consistent with 2021 and that's in the backdrop of Covid actually accelerating in the first quarter right, where we expect the first quarter.
On an underlying basis to be down so we do expect to see some recovery in the <unk>.
In the later quarters within the year.
Specifically inside of that your question to BBB, we don't see GBP as a material headwind or tailwind at this time relative to large joints or trauma.
Given the charges that we've taken in the fourth quarter of 2021, now I would say that the cadence of that by quarter is going to be definitely different even though its not a full year headwind or tailwind.
It will definitely be more pressured in the first half of the year than in the second half of the year.
That's how we think about Pvp now.
Your other question was regarding how do we see regional performance in that flattish, but we're not going to comment on regional color at this time.
There's a lot more of that has got to play out relative to Covid and.
And the recovery by region before we're going to talk about that so we will give you more color as we get into the further into the first quarter, our first quarter call, but right now consolidated level, we expected at our midpoint to be about flat.
Thanks for those details.
Okay.
Our next question the line Vijay Kumar.
Our next question comes from Vijay Kumar with Evercore ISI.
Hey, guys. Thanks for taking my question.
My first one.
<unk> on the EPS guidance here.
The base of Zimbra X X the spin.
Just wanted to make sure I have the right number works out I'm getting to maybe something.
15 cents of earnings in 2019.
Six <unk> earnings on a comparable basis for last year fiscal 'twenty one.
No.
But can you just walk us through the bridge.
Fiscal 'twenty guidance.
Okay.
Okay.
What is the.
Cause that line from 19.
Volume.
P J I'm.
Sorry to interrupt but youre.
A little staccato youre not coming in really well. So we can't capture your question I don't know if maybe you can go on if you're on speaker or something maybe changed where we can't we can't hear you really well.
Okay.
Okay.
Okay.
Yes, Vijay it sounds like your line is just not a good connection maybe you can get back into queue, sorry about that.
You still there.
Hey, sorry, guys can you hear me now.
Much better much better go ahead.
Yes apologies for.
The bad connection, but Soo Kim maybe on this EPS guidance what is the comparable earnings in fiscal 19, and 21 I'm getting to 740 million of earnings of 715 bound or six 6% and 21, maybe walk us through the bridge from 19 of what caused the decline in euro and Euro versus 21, the guide implies flattish earnings.
That bridge would be helpful.
Yeah sure. So thanks for the question Vijay.
So first of all I'm, not really going to bridge back to 2019 by the time, we get through 2022 will effectively be in three years removed from that and in a COVID-19 environment. So it's really difficult to draw a lot of comparisons, but here's how I would think about how we arrived at our operating margin in our guide ultimately for EPS and so if you use 2021.
As a starting point we ended the year at 26% on adjusted operating margins from there we've got some tailwind and some headwinds starting with the headwinds.
<unk> been talking about incremental pressure coming in to 2022 really from two dynamics, one was the China of EVP and while the overall revenue impact will be roughly the same as what we saw in 2021, there is a greater margin impact in 2022, because the composition of that revenue down.
Side between the years is a little bit different the second headwind that we're seeing is really around inflationary input costs things like energy cost metals labor freight these are definitely being impacted and felt within our company. So if you put those two things together thats roughly about 100 basis points.
Maybe slightly more so using our 'twenty, one exit of 26% and those headwinds you would you would normally arrive at about a 25% adjusted operating margin for 2022. However, we do have some tailwind.
We have the spin and as we've talked about.
Prior to the spin, we said that that would be about 125 basis points accretive to operating margins, it's actually a little bit higher more like 150 basis points, even after netting out stranded costs and then we have another element we've been deploying some additional restructuring activities within the company because of the continued pressure of Covid.
That is going to be a tailwind of about 50 basis points. So when you add that spin accretion plus the other efficiency programs of 50 basis points. That's what gets you from an underlying 25% operating margin in 2022 up to a 27% at our midpoint. So hopefully that gives you the big building blocks again headwind.
Being GBP and input cost tailwind as being spin and other efficiency.
That's helpful. Just one last one.
What are you assuming for TSA. So I understand the stranded cost I think 70 75 million ish or there any offset from TSA, that's being assumed in the guide.
Yes, we will get some TSA.
Income.
We're structuring those are pretty much on our cost with a slight cost plus.
Because we do not see them as quarter, our business or recurring we're actually going to be non gapping that benefit. So we do not have any benefit in our earnings per share related to TSA income.
So just I mean, PSS should be equal to the stranded cost rate 70 fiber suki.
I wouldn't say, it's a complete one for one there P J it'll be substantially lower than those stranded costs.
That's helpful. Thanks, guys.
Thanks P J.
The next question in the queue.
Our next question comes from Robbie Marcus with JP Morgan.
Oh, great. Thanks for taking the question two for me, maybe I'll just ask them both upfront.
One.
As it relates to the guide you sort of touched on this it it's flat at the midpoint in a COVID-19 environment, Brian should we be thinking that closer to that mid single digit growth is off the table as long as COVID-19 environment still exists and then second question as I think about remain co how do.
We think about if theres any way to give us before the full pro forma as they're out gross.
<unk> was a bit disappointing in the quarter, how do we think about the components of operating margin.
In 2022.
Much more SG&A driven or are there gross margin improvements as well thanks.
Yeah.
Great. Okay. So I'll start with the question around Covid and our growth rate and I think it would probably be pretty obvious to most if we continue to see COVID-19 pressure and staffing pressure.
Kind of at the rate that we're seeing today, yes.
Yes, it would be very challenging obviously for the company to get to mid single digits that wouldn't be something that we think is possible in a an intense COVID-19 environment.
What we do believe is when koby gets behind us that we absolutely have the building blocks to get there, but in a COVID-19 environment, just given the pressure on electric procedures and given the fact that we have 80% of our revenue built into those elective procedures.
A pathway to get there.
And Ravi on your question related to the composition of the 27% adjusted operating margin in our midpoint.
It's going to be primarily driven by SG&A.
The way we see overall gross margin is as we've talked about in the prepared remarks, we ended 2021 at or about our guide which was roughly in line with the back half of 2020, so just below 71%.
From there into 2022 on adjusted gross margins, you've got of course, some headwinds tailwind.
The headwinds being the Pvp margin pressure I, just spoke about with Vijay as well as the input cost inflation that we're seeing again that I just talked about.
In addition, lower volumes will also be a slight headwind those will be partially offset by some accretion that we see related to the spin.
But net net I would expect gross margins year over year from 'twenty, one to 'twenty two to be down.
So the bulk of our improvement.
<unk> adjusted operating margins from 'twenty, one into 'twenty two.
Ken will be primarily driven through SG&A.
Great. Thanks, a lot.
Yes, Thanks Ravi.
Yeah.
Yeah.
Laurence we have the next question in the queue.
Our next question comes from Steven Lichtman with Oppenheimer <unk> company.
Thank you good morning, guys.
Brian on roads I was wondering if you could talk a little bit about the pipeline. You see ahead. How are you seeing 22 placement opportunities versus 'twenty, one and where are we in terms of the.
Build out of the opportunity to pull through.
Knee implants.
Following those Rosa placements.
Yes, so the I would tell you that the pipeline is really strong.
The things that has been a positive surprise during this COVID-19 pressure there has not been a reduction in demand on our robotics, which is to be honest. When we first started I thought it would be the case.
We just haven't seen it we've seen continued pipeline gets stronger and what we're finding is that that pull through is already happening. We always talk about are we placing robotic systems into competitive account or a friendly account.
What I always go back to you as every account for the most part has some competitive flavor to it.
I'd always homogeneous so even in those accounts that we would consider our platinum accounts when we place a capital system their Rosa system there.
We absolutely have an opportunity to convert a competitive surgeon because there will be a competitive surgeon that exists in that platinum account. So that's what's exciting about it is the demand is strong we continue to see it move in the right direction and that pull through is already happening.
Proof point to that is just the fact that in the U S. We reached at 10% of total knee is being done robotically. It doesn't sound like much because I know one of our competitors is much further along than that.
That feels like a pretty good start and the fact is it's just the beginning of the journey.
Yes, so the demand is strong and I would tell you that the pull through is real and it's continuing.
Great and then just a follow up on cash you are clear on the debt paydown expectations near term.
Will M&A be muted as a result of you still see opportunities for for tuck in deals. Thanks.
Yes, Unfortunately, as we get into the phase III of our transformation a big part of phase III as we've always talked about as active portfolio management and Covid has definitely put a dent in our ability to leverage as much cash as we were hoping to deleverage to move that forward at the same time, even in a pretty cash.
Strange environment, we've done a good job of continuing our strategy there as I mentioned in my prepared remarks, we've done a number of deals either M&A or partnerships to ensure that we're building scale in those important faster growth areas, but we just have not had the amount of firepower and certainly that pressure is going to continue.
Got it thanks, Brian .
Sure.
Thanks, Steve Lauren can we have the next question in the queue. Please.
Our next question comes from Larry <unk> with Wells Fargo.
Good morning, Thanks for taking the question.
Brian just two for me one on persona Q1 on the ASC strategy.
Can you talk about what impact do you expect persona IQ to half two revenue in 2022.
And the pricing strategy, just remind us again of kind of if you well if youre planning to re submit.
Submit for the new Tech add on payment and if not why and then just second on the ASC strategy just talk about you've talked about being under indexed there whats the plan to change that and can you grow at or above market at recon before you address this or will it be a headwind to growth in the near term thanks for taking.
The questions.
Sure So maybe I'll start with the ASC.
And believe me we were already shifting our focus here, what we had planned to do it anyway, but obviously with the results of Covid.
And pushing more patients to the ASC, we put that plan on steroids, we built a I guess first and foremost a direct selling organization to ensure that we're contracting effectively in that setting.
That was a zero to 100 people in.
In a relatively short period of time fully dedicated to contracting in the ASC setting that that was probably the first big step also driving compensation operating mechanisms to drive focus there also compensation to drive focus there.
The other thing that we're doing is to make sure that we're filling our product gaps that will give us more presence inside the ASC that would be like the reliant acquisition in sports, where we have that gap in capital it would be like the incisive.
Scott booms and lights to be able to give more infrastructure to the ASC. So those are the things that we're doing right now to be able to get further traction in the ASC, we're making progress.
We have more work to do there is no question, but when I look at our growth in the ASC and I look at our expanding the size of our business and the ASC I know that what we're doing today is actually working so.
That's ASC on the IQ side.
It may be the reimbursement question first.
We're going to pursue everything we possibly can to try to get incremental reimbursement, but we're not counting on any of it. So our plan today assumes no incremental reimbursement at this would be captured under the DRG that exist today and that even in that we've built a plan that we think is very favorable to the company.
From a revenue standpoint, maybe you can take a step back IQ really helps us.
<unk> has three different ways. One is the obvious revenue contribution that we can get and that can come through a mix benefit because it's going to be a higher priced item versus a standard implant, but it can also come from competitive conversions now that's going to be biased to the back half that revenue impact because we're not going to move to full launch until the back half, but revenue was clearly one of the variables that are going to help us with IQ.
<unk>.
The second one is brand reputation and this matters.
There's going to be able to solidify the fact that we are an innovator in our space and this matters, even if a surgeon is not ready for IQ yet they want to be married if you will to a company that's going to be a leader from an innovation standpoint and their space. So it does matter when people are making decisions on who they're going to be linked to whether your innovative or not so that brand.
That brand reputation is important to us and as everyone is differentiation.
Is it going to help us differentiate our CBS ecosystem that robotics and data ecosystem I truly do believe that robotics decisions from our customers will be influenced by the ecosystem around robotics, not just robotics by itself remember robotics, just does what you tell it data collection will eventually tell you what you should do it.
And then the robotic system could do it for you. It was just to make sure that you deliver on it.
The way I think about the impact of IQ, not just revenue, but brand reputation and differentiation as well.
Thank you.
Sure. Thanks, Larry.
Lauren can we have the next question.
Our next question comes from Matt Taylor with UBS.
Yes.
Hey, good morning, Thank you for taking the question.
So I wanted to ask one about.
Operating margin longer term, obviously you changed the.
Timing of the 23 goal could.
Could you just talk about the trajectory of margins that you foresee.
Occurring with your forward outlook.
Thank you I know you've talked about margins would be largely revenue dependent maybe talk about the importance of revenue growth for driving margins higher and then also some of the things that you're doing.
With regards to regional profitability, ERP and how those could play into margin growth going forward as well.
Yeah sure. So thanks, Matt for the question you're right, we did remove our 30%.
Target by the end of 'twenty, three because of the ongoing challenges of Covid and the lack of revenue growth and if you recall that that margin was largely predicated on a three building blocks one of the main one was revenue growth, which obviously, we're just not seeing come through.
As we've been talking about I think longer term, we still do have the opportunity in the near term to expand margins, we're not going to size that at this time, because we do still think it's largely going to be revenue dependent.
Because we have to balance and the mix of efficiency that we're seeing across the company and that we're driving forward with the right level of investment against the business for long term growth because we do see COVID-19 eventually it's temporal and we want to make sure that we can continue to invest against the very strong pipeline, we have in commercial execution.
To make sure that we can grow value over time.
Not only in a pandemic world, but most importantly in a post pandemic world. Some of the key drivers that I would say beyond revenue growth that can help drive margin expansion.
In the near term as our establishment of global business services or large shared service regional centers, which we planned for in 2020 and actually implemented in 'twenty, one that's going to be.
A key component of that incremental margin expansion I talked about 'twenty, two but then beyond that the ability to leverage those beachheads theyre going to be important you're right, we're making investments into ERP. Those are generally longer term in nature to actually play through to get those benefits. So I would see that those benefits coming in post 2023. In addition, we.
We continue to look at our supply chain is always looking at opportunities to optimize and rationalize our overall manufacturing footprint, but also to continue to combat input cost rises through through a very aggressive procurement. So those are some of the levers I would think of us in the near term in the absence of revenue growth.
But no doubt revenue growth is going to be the key driver to meaningful margin expansion.
Over the over the mid and long term.
Okay, great. Thanks for the thorough answer I think I'll leave it there. Thank you okay. Thanks, Matt Thanks, Matt.
Our next question comes from Rick Wise with Stifel.
Okay.
Good morning, Brian and Hi, Suki.
Maybe going back to Covid.
It's hard to ask this question.
I know, there's a million moving pieces, but.
As you are reflecting.
On the sort of early headlines of Covid headwinds.
Nearly easing in the northeast.
New cases are down dramatically how are you thinking about how the recovery post COVID-19 .
Recovery unfolds.
Relative to backlog.
Sort of delayed procedure volumes.
Just how are you thinking about it now as you see the reality you start to unfold.
Yes.
So I'll give you a sense of how we built it into our forecast and the guidance that you just referenced.
Actually try not to get too caught up into this whole concept of the.
The cases are dropping.
From a COVID-19 standpoint, because we're still seeing cancellations that are as high as we've seen in a long time.
So there seems to be other reasons as I've referenced in the prepared remarks on why we're seeing cancellations versus just ICU beds being taken out by Covid patients. So we're really at this point or assuming that the 2022 impact from Covid will look a lot like the 'twenty, one maybe different timing of peaks and valleys, but we expect.
At this point until we see something that tells US it is going to be different that youre going to continue to see it come down like we're seeing now.
It's going to go right back up given the new variant that's the assumption that we have throughout 2022.
Now if we set that assumption aside and we say that we see a peak come down into a valley. If you will and it never comes back.
A completely different game that gives us an opportunity then to get back to those growth rates that were seeing back in Q4 Q4 of 2019 I remember those growth rates. We saw back in Q4 2019 about three 2% or sale that was really before vitality index is picking up for us that was just on the beginning of that vitality index moving north.
That would be an exciting exciting environment for US is no question about it but just know that what we built into our guidance is that 'twenty two from an overall impact standpoint is going to look a lot like 'twenty one when it comes to cook and staffing pressures.
Got you.
And on Rosa again.
I mean clearly.
You had a terrific year despite.
Some of the challenges.
Where are we with the.
The partial knee rollout where are we with the hip rollout both launched last year.
Maybe as part of your comment.
Brian about the new product pipeline being stronger than ever I don't know, whether there's a rosa component there.
What's next what's coming what are your priorities now.
To keep this momentum going thank you so much.
Yes, so Rosa overall as I've said before our primary knee is going really well the pipeline is as strong as it's been the pull through is there.
Penetration in our overall procedures is coming up moving in the direction that we had hoped I think youll, even on a lot more value in COVID-19 subsides, because that is obviously impacting our ability to get procedures, even in those accounts, where we have rosa, but it's definitely moving in the right direction partial is the same thing I'll just take a step back there to the partial knee application was important one for us.
Because I think as most people know we have a very high market share position in partial knee so to be able to bring a robotic platform with that application is really important for us and we have a lot of opportunity again to go to those accounts that are using our partial knee and try to move them to robotics.
And the hip is going well too, it's really kind of a combination of Rosa hip in Avenir complete one of the fastest growth subcategories that pay up as I think everybody knows now is direct anterior approach and both of those the avenir complete as well as our Roes application that we launched first goes directly at that fast grow Submarket. Now later this year. We also have another.
<unk>, we're going to launch it hit that we'll go after the post area approach. So we'll have everything locked up from a hip standpoint, but those are the things that we're pretty excited about stepping back from that just Rosa.
I feel really good I'm not going to get into a lot of the things. We're launching that we haven't talked about already but just some of the things we talked about a lot persona revision I mean this is one that has been driving really strong growth for us for two years and we expect that to continue.
And it's not just the revision conversion.
The universe of primary knees that are still competitive where they're using us for revision, we're going after that business and it was a real opportunity again in the hundreds of millions of dollars for US and then when you look at outside of outside of Rosa IQ. We're just getting started on persona Ikea and I talked about three different ways that can bring value I, absolutely expect that to be a.
A true provider of revenue for US and then Cvs just in total ZB edge is getting a lot of traction it's creating brand awareness for this company to be a leading edge organization and that does drive revenue growth for us. So those are just a few of the things that we have that we're excited about and.
And we've talked about it so I'll talk about it again, we have a cement less persona coming that has a different form factor. This should remove all stops for us to be able to move some atlas forward that has been nascent for us. It's a real opportunity were below 10% penetration in some atlas, but we have all kinds of headroom associated with that and that new form factor coming later this year, we'll open that door.
As well so a lot to be excited about for sure.
I referenced before the pipeline is strong and we expect our vitality index to continue to move in the right direction.
Appreciate that.
Sure. Thanks, Rick.
Can we have the next question that Keith please.
Our next question comes from Chris Pasqual with Guggenheim.
Thanks, So I wanted to start just following up on the DVT impact to make sure. We're thinking about this right you're saying that the dollar impact is going to be the same in 'twenty two versus 'twenty, one across hips knees and trauma is included in that as well, but it's just going be spread out differently throughout the year and maybe just help us with how the impact was <unk>.
<unk> in 'twenty, one did you have anything in the third quarter or is it really all packed into the fourth quarter.
Yeah. Good question so.
We do see to your first point overall.
The revenue impact topline impact against recon or large joints and trauma being roughly about the same year over year. So again no material headwind tailwind.
Based on where we stand today the impact I said will be different by quarter. So you really didn't have any impact in Q1 to Q2 of 2021 and so therefore, you've got pricing impact in the first half of this year 22, which is being compared to a non EVP first half of 'twenty one.
So the pressure is going to be more acute on that year over year comparison as you move through the second half you had a modest level of impact in the third quarter around some inventory contraction, but not material that really big impact was mostly in Q4 if.
If you think about all the numbers that we provided you today in some of our earlier commentary it was worth roughly about 400 basis points.
<unk> of growth in the fourth quarter, So that's where you're going to feel the biggest impact in 2022. This year it'll be more of a tailwind for us because we won't have to crossover that that one time that we took in 'twenty. One so okay sorry.
A lot of numbers there.
Is that in any way, it's confused I can help clarify.
One thing I will say it.
A dollar standpoint relative to revenue there is that consistency and differences in quarter quarter ization of it but that's consistent but in margin it will be more of a negative impact in 2022.
So if you've referenced before about 50 bps of headwind for us in margin profile due to the BP in 2022.
Thanks that is helpful.
Brian just wanted to follow up on the cement. This opportunity. This was really alongside robotics one of the things you guys were highlighting a few years ago as a significant potential mixed driver for you.
Across the hip and knee businesses.
It seems like it's gotten off to a much slower start here than we would've thought at that time, what was it about the prior persona cement list that really didn't allow you to gain as much traction there as you were hoping that it how does this next version fix that.
Yeah. It is that actually we again, we have a form factor that we feel we felt confident with.
That was already kind of in the mix, but when we get it out there in the sort of just look at it they don't feel as comfortable with the keel designed that we that we want on a go forward basis.
Remember when Youre talking to some at least you want to make sure that you really get good contact between the implant and the bone.
And as a result of that we've changed the design of that of that connection. If you will and that we were talking to surgeons already about the design, that's going to be coming they have a lot more confidence.
And the safety of that connection is that's the reason why we changed the form factors. So it's not so much our inability to sell some atlas constant costs are and in particular with robotics, it's more around that form factor and the confidence people have in that form factor to get to seal that theyre looking for.
And we feel very confident about what we're going to be launching later this year and again I look at to say as much as I'm frustrated by the fact that we have not had the right design I know one's coming and I'd, probably rather be at the 10% now when I think of future growth opportunities to be able to increase that penetration over time, when we do launch that product.
Thanks.
Thanks, Chris.
Lauren can we have the next question in the queue.
Our next question comes from <unk> <unk> with RBC.
Thank you for taking the question.
I was just wondering if you can talk about trends exiting January and into early February , especially since the USB.
It appears to have a good around January <unk>, even though they're very regional variations and they continue to be you did call out seeing.
More cancellations and also that go with branches will continue throughout the year. So I'm just trying to figure out if you could provide more color and if your guidance is realistic or conservative.
Yeah sure. Thanks. Thanks for the question. This is <unk>. So as we said we provided I think pretty good color on Q1, where we expect it to be about flattish, but that includes 130 basis point tailwind from selling days. So on an underlying basis, it's really down year over year.
January was.
Definitely more pressure than what we saw in December exiting 2021, and we continue to see very high cancellation rates coming into the beginning part of February so we.
We think what we've seen so far continues to support that first quarter color that I talked about and I think it's important to note that while omicron cases may be some markets starting to.
I mean people are characterizing that is plateauing there is still a residual effect on.
Staffing shortages, which in some part are linked to own the crown, but there are other factors that are driving staffing shortages. So just because we see a decrease in overall <unk> cases does not mean youre going to see a one for one reduction in staffing shortages, which continues to be a headwind for us. So short story everything that we're seeing so far in January .
The very beginning of February continues to support that first quarter color we provided.
Okay got it and then just one other question on operating margins, maybe you can help us with the cadence if you Havent Dutch Donald and I'm, especially curious with respect to the 150 basis point benefit from the spin how should we think about the timeline there for you to achieve that especially.
Given the context that you do have higher corporate cost allocations in the near term. Thank you for taking the question.
Sure. So on the on the margin cadence, it's really our margin is very correlated and linked to revenue and so.
As we said revenue will be more pressured in the first half of the year versus the second half of the year, especially because of the pressure we're seeing in the first quarter and so we would expect margins to follow that same cadence it'll be more pressured in the first half was it most acutely in the first quarter not atypical from what we saw in 2021.
Regarding seasonality and the impact of Covid. So that's how we see the cadence of that operating margin again, most acute down in Q1.
And then recovery as we move through the rest of the year with revenue recovery as we've talked about relative.
Relative to the spin.
I think youre going to see that 150 basis points start to manifest relatively quickly here in 2022.
We have already started to attack some of those corporate stranded costs and are going to continue to fight our way through that but that's how we see operating margin so far.
Thanks, Shannon Lauren we have time for maybe one last question.
We will take our next question from Matt <unk> with credit Suisse.
Hi, Thanks, so much for fitting me in.
Just one question if I could on the.
The strength in EMEA knees was one question.
So it would be worth fleshing out if you if you have it just to just a minute and I'll just leave it at that.
Yeah, I would just say that we see almost right now that EMEA is seems to be ahead of schedule relative to what we're seeing in the U S and other parts of the World I'm not sure why that is but you did see some relief that we saw in EMEA.
Because you did see a kind of a downward trend in <unk> and also youre seeing some policy shifts, which I think is going to be really important on a go forward basis, where you've got countries like the UK and Spain and others that are looking at this to say listen omicron is acting more like an endemic phase now and we're going to change some of our restrictions associated with.
And I think that those policy changes are going to be an important factor in COVID-19 eventually getting behind us. It's not just COVID-19 itself, but it's going to have to be these policy shifts that we're seeing kind of led right now by Europe that would be something we'd like to see across across the world actually but that's the only thing I could probably point out is that just a little bit ahead of the curve.
And in Covid impact than the rest of the world.
Thanks, so much.
Sure. Thanks, Matt.
Alright, I think that the question and answer session.
Yeah no. Thank you and then just kind of you guys.
Ken.
I can jump in here and just close out.
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Okay.