Q1 2022 Zimmer Biomet Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2022 earnings conference call if anyone needs assistance at any time during the conference. Please press the star followed by the zero as a reminder, this conference is being recorded today may three 2012.

Two following today's presentation, there will be a question and answer session. At this time all participants are in a listen only mode.

You have a question. Please press the star followed by the one on your push buttons zone I would now like to turn the conference over to Kerry Medics Senior Vice President Investor Relations and Communications Officer. Please go ahead.

Thank you operator, and good morning, everyone I hope, you're all well and safe welcome to Zimmer Biomet first quarter 2022 earnings conference call. Joining me today are Brian Hanson, our chairman, President and CEO, EVP and CFO sticky high B I N C O L Yvonne tornadoes.

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.

He's 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.

Filiation of these measures to the most directly comparable GAAP financial measures is included within our Q1 earnings release, which can be found on our website Zimmer biomet dot com with that I'll turn the call over to Bryan Bryan.

Alright, Thanks, Kerry and thanks to all of you for joining us this morning.

Talk briefly about our Q1 performance and our revised expectations for the full year I'm also going to spend a few minutes talking about our recent innovation in our key drivers for long term growth and then after that I'm going to turn it over to <unk>, who will get into more details on the quarter, but also very importantly, our full year guidance update and then we'll close out the call with your questions of course.

So let's get started with Q1, we had a strong quarter well above our own expectations, and obviously above external expectations and the primary reason for that level of over achievement was stronger than anticipated COVID-19 recovery in the quarter, particularly when we looked at the back half of the quarter and if I look at the U S recovery it was stronger in <unk>.

Faster than I think anyone expected pretty much across the board and while we continue to see Covid surges in EMEA and China. The impact on overall procedure cancellations have been minimal at least so far and inside of that we saw very strong performance in large joints and in particular, our knee franchise, while our set recovery lagged our core.

<unk> business at this point, we know it's still early in the year, but based on what we saw in the quarter hadn't really current trends into Q2, our confidence in 2022 growth has definitely increased and as a result, we are raising and tightening our full year guidance now there are clearly a number of headwinds that we are facing supply.

Challenges inflation, Russia, Ukraine, but given our revenue dependent on elective procedures COVID-19 recovery outweighs those headwinds and that's why even in the face of these challenges we're able to raise our outlook for the year.

Okay. So turning to page of it outside of external influences on our business our strategy is working and our.

Our underlying business is very strong our new product pipeline continues to deliver we're adding more innovation and value to our <unk> system. If you were a double AOS you saw our recently launched walk AI. This is <unk> first AI based solution. We also showed recently launched functionality for my mobility platform. This is under the.

The umbrella of our exclusive partnership with Apple our Rosa Robotics momentum continues to be very strong and the early feedback on persona I can't even though it's in a limited launch is very positive all of these things combined are highlighting the possibilities around data collection and integration on the patient experience. We also continue to drive Cigna.

Difficult to imagine traction with persona revision in our knee franchise with Avenir complete in our hip franchise and our signature one platter in shoulder and our new product pipeline remains very strong with additional product launches planned for 2022, especially across our knee and set portfolios. We're also continuing to reshape our business and accelerate G V.

Transformation that means of course, streamlining and modernizing our operating model, but also focusing on making Z b, a best and preferred place to work and a trusted partner of just in Q1, we scored 100% on the human rights campaign's corporate equality Index, we made Forbes best large employers list and we were in.

Name one of the most innovative companies by fast company for our Rosa Robotics platform. We have also prioritized, our environmental social and governance or ESG commitments and our actions in this area continues to expand we have committed to key environmental standards delivered on social giving pledges and set the eni standards and locked.

Term goals in this area and we've enhanced our overall reporting of ESG progress internal to our own team members, but also to investors and finally, our transformation also includes as you know active portfolio management and as a part of this we completed our spin of <unk> on March one that was ahead of schedule and certainly is a part of our active portfolio management strategy.

So in summary.

Even though there are real macro headwinds that we will have to manage and I have confidence in our team to do so the recovery.

The shifted recover really and Covid is the bright spot we've been waiting for and we're excited about and has certainly changed our view of 2022 and with that I'm going to turn the call over to <unk> for a deeper dive into Q1, and our revised expectations for the full year okay.

Thanks, and good morning, everyone. We had a good quarter driven by faster than expected recovery of elective procedures, giving us the confidence to raise our full year revenue and earnings per share outlook.

Let's turn to our Q1 results and how that translates into our updated full year financial guidance.

Unless otherwise noted my statements will be about the first quarter 2022, and how it compares to the same period in 'twenty, one and my commentary will be on a constant currency and adjusted continuing operations basis.

Please note we have changed our geographic revenue reporting to U S and international and we released a form 8-K last week to provide unaudited recast financial information related to our zombie spinoff as well as a change in non-GAAP reporting up in process R&D related expenses.

Moving to first quarter performance.

Net sales in the first quarter for 1.663 billion up three 9% on a reported and six 8% on a constant currency basis.

As previously guided selling days contributed about 130 basis points of tailwind in the quarter revs.

Revenue was driven by continued execution, along with stronger and faster than expected COVID-19 recovery across most markets with the largest uplift in the U S.

After a significantly pressure January recovery ramp through the quarter with improvement in February and a strong rebound in March.

Consolidated basis March grew versus pre pandemic levels and that recovery has continued into April .

U S sales grew five 8% driven by strong recovery as Covid cases, subsided and elected procedures return by the end of the quarter U S. Cancellation rates have returned to pre pandemic levels and procedure volumes were above 2019.

International sales grew eight 1% driven by strong growth across Europe, and we saw continued recovery despite COVID-19 surges in certain European markets in China.

Turning to our business category performance in the first quarter.

As a reminder, China Pvp is expected to be about neutral to overall revenue growth for the full year and so far that 2022 impact was broadly in line with our original expectations.

While we don't expect a material impact from BBB on full year 2022 growth, we do expect there to be fluctuations by quarter.

In the first quarter, we saw about a 200 to 300 basis points of pressure across our global knee hip and S. E T segments.

We expect to be broadly offset through the next three quarters with the majority coming in the fourth quarter.

Global knees grew 11% with U S knees up 11, 7% and international knees up 10, 1% driven by solid commercial execution continued traction for persona revision robotics pull thrilled and strong knee procedure recovery across most markets.

Global Hips grew four 5% with U S hips up three 3% and international hips up five 6% driven by recovery in both primary and revision hip procedures and we're seeing positive early traction on Rosa hip.

The sports extremities and trauma category increased one 8% driven by strong performance in CMS T Sports medicine, and upper extremities and.

And finally, our other category grew 11, 5%.

Moving to the P&L.

For the quarter on a continuing operations basis, we reported GAAP diluted earnings per share of <unk> 35.

Compared to GAAP diluted earnings per share of <unk> 92 in the first quarter of 2021.

This decrease was driven primarily by an unrealized investment loss due to a decline in the value of our investment in CMV and higher litigation related and restructuring charges.

On an adjusted basis diluted earnings per share from continuing operations of $1 61 represents an increase from $1 55 in the first quarter of 2021, the increase was largely driven by higher sales and lower interest expense.

Adjusted gross margin was 76% lower than the prior year as expected due to V. P P and higher input and manufacturing costs, which were partially offset by higher volumes and better mix.

Our adjusted operating expenses were about $735 million up from the prior year driven by higher investments in R&D.

Our adjusted operating margin for the quarter was 26, 4% down versus the prior year, but ahead of expectations and driven by higher revenue.

The adjusted tax rate was 16, 1% in the quarter in line with our expectations.

Now turning to cash and liquidity operating cash flows from continuing operations were $360 million in free cash flow totaled $223 million for the quarter, we reduced our debt by about $650 million, excluding the effects of foreign currency and the first quarter with cash and cash equivalents of about 430.

$5 million.

Our improving financial performance in tandem with our ongoing debt reduction continue to strengthen our balance sheet.

Moving to our updated financial outlook for 2022.

While we continue to manage through macro headwinds related to foreign currency, Russia inflation and supply chain challenges, a faster and stronger covered recovery in tandem with a positive first quarter gives us the confidence to raise and tightened our financial guidance.

Against this backdrop, our current expectations for the full year are as follows.

On a constant currency basis, we now expect to grow 2% to 4% versus 2021 with an expected foreign currency headwind of approximately 350 basis points.

This translates into our reported revenue growth projection in the range of negative one 5% to positive <unk>, 5% versus 2021.

Note that the selling day tailwind that we saw in the first quarter will be fully reversed in the fourth quarter with no material full year selling day impact.

Adjusted operating profit margins continue to be in the range of $26 five to 27, 5%.

This assumes inflationary pressure of about 150 basis points versus our original estimate of about 50 basis points.

Of the incremental 100 basis points of pressure.

<unk> will hit 2022, but be offset by expected higher revenue.

And roughly half will be capitalized and impact 2023.

Adjusted tax rate expectations remain in the range of 16% to 16, 5% adjusted diluted earnings per share is now expected to be higher at $6 65 to 685.

And we are increasing free cash flow to $750 million to $850 million.

Inside of that guidance, we have a tougher comp in the second quarter due to Covid recovery, we experienced in 2021.

But we do expect revenue to grow in the low single digits over the second quarter of 'twenty, one and to exceed pre pandemic levels for the full quarter.

In summary, we expect that the environment will remain dynamic, but we believe the pace of recovery, our continued execution and the strength of <unk> underlying business fundamentals position us well to improve our financial outlook.

With that I'll turn the call back over to Kerry.

Thanks, <unk> 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.

Thank you ladies and gentlemen at this time, we will now begin the question and answer session. One moment. Please for the first question.

Our first question comes from Joanne Wuensch with Citi.

Good morning, and thank you for taking the question very nice quarter.

Be interested in your view of what's happening at the hospital level. We've been hearing all season about staffing headwinds about capex spending headwinds and I would be curious to get your opinion on that thank you.

Yeah, Yeah. So maybe I'll just start off and then I've got a bond sitting next to me, we're actually at you're traveling in Europe .

Can we take the opportunity to get out and start Q2 strong [laughter], yeah, what I would tell you that yes, we are definitely still see pressure from a staffing standpoint, we actually even today, we'd expect that to continue throughout the year.

When I think about the quarter itself, whether it be cold or staffing or the combination of the two it was pretty tough in January .

Better obviously in February and was really really good in March actually March was a market. We have had growth over 2019, so true grow cover pre pandemic levels and we've seen that continue into April .

So all positive from that perspective, but we do expect that staffing pressure will continue to be a challenge throughout the year just not as intense I think is what we thought when we started the year, but youre out there more than I have in the U S. Maybe you could also yeah, absolutely. Thank you Brian so.

I concur remains what I will tell you is that in the U S. We have seen our cancellation rates. So the cases. They also be the cases that get canceled every week too.

Just trying to look out pretty much similar to those that cancellation rates in 2019 in the past most cancellations word relate.

Related Sofia and inside the <unk>.

Archie IQ the staffing challenges late 'twenty, one he was mainly steps <unk>.

Staffing agreement.

Now the fact that we've seen that stands alone.

Yes.

Got it.

The problem is not getting worse, but it actually had a problem.

Less of a problem in Europe , then and now.

The U S. But he remains a challenge in the U S.

Okay.

Sorry capital.

Yeah.

And what's your follow up about capital and the capital markets, Yeah, No pressure no cap, yes capital purchasing thank you.

So.

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

Sure Brian .

I would ask you about capital purchasing and what we're seeing on those trends.

Yes, I can I can see that question as well, so primarily with some capital into businesses or surgical business and obviously robotics.

In our <unk> platform.

We've not seen anything that Delta is that there is a shortage of capital while the strategy for the quarters would be more around placement.

Selling robots, but on the surgical side, we're not seeing a challenge we're not seeing that.

We've seen less fluidity, Dan out in Q4, so I'm actually pretty optimistic in terms of where we are when it comes to capital allocation.

But again as I mentioned, we do have more placements.

We did more placements that that's helping.

Thanks for the question.

Thank you.

Thanks, Joanne Lauren can we go to the next question. Please.

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

Hi, good morning. Thanks.

The questions Congrats on a good quarter.

I appreciate the colors on the margin pressures, but just want to make sure. It's clear how we're thinking about how these pressures flow through to 2023, it sounds like 50 basis points of incremental pressure at this point, but also curious if you have any offsets like pricing I kind of noticed that you didn't put pricing in the press release this quarter for the first time. So curious how are you thinking about that.

Yeah.

Yeah sure Hey, Travis this is suki. Thanks for the question I'll start and then maybe turn it over to Bob on the pricing.

Question that you had.

You you heard correctly we.

Think that inflationary pressures are going to be roughly 150 basis points of a headwind on margins. This year. Our original estimate back on the Q4 call was 50 basis points. So we think we're somewhere in the additional 100 basis point range from where we originally were and we were seeing that pressure grow post.

Our call, but it really started to accelerate with the war in Ukraine, and I don't think that's inconsistent with what youre hearing really across the sector and probably in other industries as well.

Now the way this works is.

Part of that pressure about half of that will hit this year, but given the way we account for cost and variances and given the higher level of inventory that we carry about half of that additional pressure will be capitalized and deferred into 2023, So about 50 base.

Points of that incremental hundred will find its way into into next year.

I would say that the key challenges that we're seeing again very consistent across across the sector from a supply chain standpoint, first freight is higher commodity costs are higher energy costs and labor costs.

The biggest the biggest culprit within that is our commodity costs. The good thing is we're starting to see some stabilization around that we do see it still see some higher cost related to stainless steel packaging materials like plastics and resins and of course, titanium, which we're doing a lot of spot buys to secure our safety stocks and supply chain.

But what we're hearing from our supply chain organization, that's starting to stabilize now the environment is still very dynamic. So we'll keep you posted as the year progresses, but the good thing is that the largest headwind that we've got feels like it's beginning to stabilize a bit.

Inside of that you know from a pricing standpoint, we did see a slightly better quarter. This quarter on a from a pricing perspective.

Perspective year over year.

Some of that is due to some specific strategies and tactics that the team is putting in place to better control pricing erosion year over year and some of that I think is just a little bit still opportunistic because with the with the continued COVID-19 headwinds that we saw in the beginning part of the quarter.

That resulted in lower volumes at Danville results in lower rebate thresholds for some of our customers and so that that's sort of.

Helps a tailwind on our pricing probably temporarily while our volumes are more muted, but maybe Yvonne do you want to talk a little bit about what youre seeing in the pricing environment, and our ability to offset price surpassed price pressure onto the onto the end markets.

Absolutely <unk>.

Ravi you back here, so as SaaS Luke alluded to.

Well the normal price erosion to run through the 300 basis points, we did achieve better net price erosion in the quarter. Some components of that are sustainable or there are there remains to be seen what I will tell you is that we've got Goldman Sachs today in the U S and frankly in Europe , and APAC that without having the best as we see our vitality index or percentage of sales coming from.

New products, we see that as a totally and again, we'll see how that develops in quarters to come and roadmap from an incentive standpoint for the first time, we don't have very clear incentives in our commercial organization to maintain or gain price. So we're not making a commitment to do any better than the two to 300 basis points given that a large percentage of their business is contracted.

But certainly we have the plans and the government.

We didn't have before so fingers crossed on that one.

So I appreciate all that color and one follow up on China, just want to make sure. We're modeling that correctly. It sounds like it was two to 300 basis point headwind to total company organic growth this quarter, but that comes back in Q4, and if you just look at China volume with the shutdowns and I'd love to hear how.

How thats playing out in Q2 and the recovery there from from a volume perspective.

Yeah. So the China volumes have clearly been negatively impacted because of some of the COVID-19 searches that you've been hearing about it.

It's most acute in Shanghai, we did see earlier in the quarter. Some additional lockdowns and other cities. The good thing is right now we're not seeing any lockdowns beyond Shanghai now there is limited movement in other provinces, but there are no shutdowns and we're still seeing cases being performed there Shanghai still remain.

The most acute situation in China I was just backing up a little bit remember China is in the low single digits of revenue of the entire company and Shanghai inside of China is just a.

Relatively modest fraction so.

While we're still seeing pressures specifically in that province, I think it's it's manageable and somewhat moderated.

Again broadly beyond tide beyond Shanghai, we're seeing stabilization to improvement.

You just have to keep a very close eye on on China, or excuse me on Shanghai, but the way youre thinking about the impact of GBP is that is correct.

Okay. Thanks.

I might just just a commentary there it's interesting because even though there's a lot that's happening that's different than expected in China.

The overall impact to the quarter. It was about what we expected and even into now coming into Q2, so for different reasons, but the fact is even though we're seeing lockdowns in Shanghai and disruption as a result, we're also seeing delays in BB payable mutation and those are almost balancing each other so while certainly China was still a headwind for the quarter.

From a top and bottom line standpoint, it was pretty much in line with what we expected even though even though if we're just different reasons.

Great. Thanks, Brian Thanks, Ricky.

Thanks Travis.

Can we go to the next question please.

Our next question comes from Amit <unk> with Goldman Sachs.

Oh, Thanks, Hey, good morning, maybe.

Maybe start with market share and I wanted to ask you. The question I mean, it's I know, it's hard to tell the trends given the last couple of years, but as we look at three year CAGR and just try to make sense of what's going on in the U S. It's actually not very clear that you are consistently gaining share and I'm trying to think about this and kind of in the context of the <unk>.

<unk> hundred or so roses at least that you have in the field I'm sure that's a little bit higher now and just trying to understand if there are offsets there or how youre thinking about market share in the U S for knees in particular, but knees and hips because the data doesn't it.

Strongly suggest that you are gaining share.

Yeah, So I'll take that and then I'll pass it over to you I'm going to talk about some specifics but.

It probably all depends on how youre running your data because I would I'd probably argue the different a different outcome.

Fact is it's choppy, it's really choppy and we're looking at this thing in every different way you again sequential growth versus the previous quarter, but looking at it versus prior year versus 2019, because that was your last you know good year, we're looking at it on a stack basis you name. It we're running the analysis to get a sense for what we're doing well.

Said always is that I don't really trust and you need to get.

Any given quarter, but I do look at trends in almost any which way you slice. It I do see us moving in the right direction and of course I also see things that you can't see in our own business and the combination of the trends that I'm seeing looking at a lot of different ways and also just the things that I see in my own business I feel very confident that we're moving in the right direction and we're doing the things that we have.

Need to do to be able to drive attractive growth.

So.

Big one that I look at is vitality index.

Had almost no vitality in the business, we doubled that in the last few years and that continues to move north.

Got a very strong pipeline of products. So to me when I think about that performance it's clear.

I think the transformation is real.

And the good news for US is that as Covid and staffing issues start to clear and continue to clear that the reported performance that we have as a business is finally going to start reflecting what we actually know what's happening in the business, but gives us a you know a lot of confidence again as the innovation. So maybe Bob if you want to talk about some of the innovation that gets you excited yeah, absolutely I mean as I look forward to the day, where we are.

Our objectives are much more data because I also I also would be Frank also differ from I'm trying to understand that not all markets here, but that's it.

Yeah I'm beyond excited about what we got in the store. So some of the products that we keep talking about Russia. You mentioned 600 robots at least obviously the number is higher now we get them out as strong penetration.

Both in the hospital setting and in the outpatient setting, we actually indications plenty of indications to come.

<unk> has already been launched in the U S continues to grow at unprecedented rates is pulling out primary primary knees as well along the way C. D edge that we spend an hour talking about all the things that you're probably selling the academy in Chicago.

Or are they just walk AI and mobility truthfully populations.

Largest number of enrollments this last quarter so.

Tremendous nice penetration is also in the teens and Thats before we launch a new form factor device at the end of this year, which is going to give us breaking that category. So that's just Denise I'll remind you we launched six products in the last few years.

You look at the hips, we are performing strongly with Avenir complete direct anterior or revision platform. We don't talk enough about that somebody is also performing very well.

Instead, CMS D sports that made them trauma doing well, we've got some some noise with that format early in the year, but we've got new launches and new product launches to come.

And just the tonnage that's coming from and they don't take all your standpoint. So I don't know you were looking at the same data when it looks at the market share, but what are doing now is that as you look at the innovation story with a vitality index being <unk>, what it used to be.

And the pipeline being dramatically higher than it used to be three years ago I'm pretty confident that we're going to we're going to remain above market for the key categories.

Thanks, Thanks for that color, yeah, we'd love to know specifically if you. If you do have the data on the on the U S knees and hips, what your datasets and I'm sure it is better than ours.

But the second follow up would be for you Brian just on just on capital allocation, just just how youre thinking about M&A.

Post the spin now and in this particular environment.

If you want us to be thinking about natural limits to kind of the size of the deal you'd be looking at and how you're thinking about adjacencies versus whiteboard opportunities just just any color would be super helpful. Thanks, So much.

Yeah, Yeah, so maybe I'll I'll kind of stop start kind of top line and then I'll hand, it to so can you talk about capital allocation and our current focus there, but yes for sure you know M&A and active portfolio management is a big part of what we define as phase III of the transformation just as a quick reminder, we started this whole journey in phase one.

Which I'm just going to define as kind of the hearts and minds of in other words kind of mission and culture focus.

Significant upgrading in talent at the leadership team level to make sure we have the right people to transform the business and then stabilizing just a number of significant issues around quality compliance turnover supply you name it.

Two it was more around a true long term strategy, making sure that we're shifting to innovation versus remediation and really changing the kind of innovation. We were focused on and then augmenting our structure and operating mechanisms to ensure that we truly do drive execution and accountability to the strategy and then phase III is kind of where we are and kind of to your question. We are looking to <unk>.

Transformed the portfolio of the company now Covid has hampered our ability to do that because it has put pressure on the business, we haven't had as much firepower.

The fact is we have made we have made decisions here that are moving the needle.

Number one we've got to spend at the dental and spine businesses, which we think is the right thing for both businesses and although there have been smaller just because we have the firepower, we've done acquisitions to be able to build scale in attractive spaces, but for sure. We will continue to focus on active portfolio management acquiring companies that can drive weighted average.

I am not going to get into specifics on where we would focus because as you probably know it's pretty competitive out there right now for assets, but this is something that we absolutely will focus on in phase III and the good news is as we continue to see stabilization in the market.

To be able to continue to buy down debt, which is important to us and eventually increase the firepower to do this but so can you maybe I'll just turn it over you to talk about capital allocation.

Sure. Thank you, Brian and thanks for the question so.

Our focus has been very consistent in ensuring that we continue to pay down debt and maintaining our investment grade and just just a little fact point here.

Since 2019, we've paid down almost $3 billion of debt and that's in the backdrop of a pandemic that has had significant pressure on our financial performance. So it speaks to the strength and durability of our cash flows as a company, but when you combine that.

Alrighty as capital allocation together with improving financial performance relative to growth in EBITDA. It really does start to set us up pretty nicely for more strategic optionality as Bryan talked about with active portfolio management.

I think in a bigger way enables us to.

Look at opportunities to accelerate the top and bottom line growth of the company, while diversifying it as well and I think all of those things are very credit positive and so while we will probably take more of a front foot.

Active portfolio management category, as Brian talked about especially now coming off the spin and that quite frankly, the organizations got now more bandwidth.

Having undertaken and gotten that very heavy left behind us.

We will we will undertake that active portfolio management with an eye towards maintaining our investment grade rating. So it feels good to start to turn the corner on that and to know that all of our hard work and Delevering the balance sheet, improving financial performance is actually starting to pull through.

Thanks for the questions Lauren can we go to the next question. Please.

Our next question comes from Jeff Johnson with Baird.

Thank you good morning, guys.

Maybe going back to <unk> question. So just.

Just on gross margins I think you are clear on the 50 basis points Thats been capitalized and will come out next year I think the way <unk> phrased it.

Was hoping to hear an answer to what as you know are there offsets to that or should we just assume that that 50 basis points that comes out next year is kind of how we should think conceptually about gross margin being down 50 basis points next year then.

Yeah.

The team is actively looking and always looks at offset any headwinds whether current year future years et cetera. So I think it's too early to tell exactly what next year's gross margins look like but you know all things being equal we've got that added headwind.

But the team is looking at but from a supply chain standpoint.

More faster structural changes across our.

Plant footprint, we're looking at potential procurement and category savings through procurement to potentially offset those headwinds and I think you've heard about it bond talking about price, we're making some nice I think durable headway into into improving our price discipline in our price performance. So.

We're going to continue to actively look for some offsets to that to that headwind, but right. Now. It's just too early to tell to say exactly what that what that 50 basis points ultimately translates to in 2023.

Yeah understood and then I think you guys are pretty clear on kind of the R&D spending things like that but where are we on a recovery in spend on things like conference attendance Doc training.

Corporate travel things like that are we at a level now that is kind of back to normalized and just kind of grow off that or is there kind of a recapture that still has to happen there.

I would say we definitely increased.

Since since 2021 and obviously since the depths of the pandemic I think theres likely a little bit more room to go.

To bring back spending as we continue to see topline performance improved throughout the year.

So and especially in the backdrop of the new product launches that we've got coming up we want to make sure that we're investing appropriately from a commercial perspective to make sure that those launches are successful I don't know Ivan if you want to say anything else there, but I guess, the you know that.

Yeah.

We would expect to see a modest increase as we move forward.

Just maybe very quickly here that Jeff I will tell you that the fact that the vitality index is at <unk>. What it was three years ago tells you that we have any slowdown from from an R&D perspective within R&D as you know you've got two components, which is.

Sustaining engineering, and then you'll probably be interactions.

And the number you'll find you probably interactions in 'twenty, one 'twenty two is dramatically different than in past years, as we get into 2020, 40% or higher.

So definitely not guidance when it comes to our true innovation and their relative to made it. That's another area that we try not to not to cut might have been some adjustments throughout the pandemic, but I will tell you. We are full force globally. When it goes to mandates. So RMB underwrite homeowners RMB Amit it remain a sacred cows here from an investment standpoint. Thank you.

Yes. Thank you.

Thanks, Geoff Lauren can we move to the next question. Please.

Our next question comes from Shogun thing with RBC.

Thank you so much for taking the question. So youll Q1, ex FX $70 million in 2022 guidance implies lower quarterly growth for the balance of the year. So what's the zoomed in your guidance beyond Q1, how should we think about the cadence. So said, perhaps you can touch on both revenue and EPS.

Any color on Q2 will be helpful. And then just as a follow up on portfolio management. How are you thinking about your diversification strategy that you've previously alluded to it seems like a lot of these procedures at least on the recon side are coming in from the S. C. So any color there would be helpful. Thank you.

So curious why don't you start with the cadence of growth is much color you want to provide there obviously, we're not providing quarterly guidance, but you can get more color there and then I'll talk about the diversification.

Yeah. So so you're right the forward looking based on our <unk>.

The increase in our guidance range on ex FX, the midpoint now being get at 3% versus the former.

That year over year, but given our first quarter, which suggests lower.

Ex FX growth rates for the remainder of the year that's.

Primarily due to as we previously discussed much tougher comps as we move through the rest of the year. The first quarter of this year. We were of course comparing against the first quarter of 2021, which had a very very deep COVID-19 impact and so it wasn't unexpected that you'd see a much better Q1 than the rest of the year. So it's really a comp related.

On the rest of the year as to why that that growth rate is lower than the first quarter. As we think about cadence of revenue growth as we move forward. We would expect that we already talked about second quarter being in the low single digits on an ex FX basis.

The fourth quarter.

Based on normal seasonality, we would expect the second quarter to be stronger than the third quarter and then of course, the fourth quarter to be the strongest quarter of the of the remainder of the year.

Very consistent with our former seasonality.

Seasonality that you saw last year and prior to the pandemic in 2019, and we would also expect earnings to follow that same suit and as revenue gets stronger. So it will be operating margin. So earnings are expected to follow in that same cadence as revenue.

Great and on the <unk>.

Sept of diversification, when we think about active portfolio management.

Definitely still there clearly we want to make sure that we're diversifying our business and we think about it really in three ways. Its not just products segment diversification clearly that's an area of concentration for us because there are faster growth categories that we play and we want to build scale in but also geographic expansion just to make sure that we're taking advantage of fast growth era.

In the World and then setting you referenced ASC, that's an attractive sudden we've actually already acquired areas to build our scale in that setting and we built a commercial infrastructure to pursue ASE as well so.

We look at it for sure and diversification to drive weighted average market growth, but we don't just look at it would be a product not just by geography, not just by setting, but all three of those.

Thank you.

Thanks, Doug.

Can we go to the next question in the queue.

Our next question comes from drew Ranieri with Morgan Stanley .

Hi, Thanks for taking the question just on your <unk> business for a moment.

I appreciate that a lag in the first quarter, but just trying to get a better sense of how that progresses through the rest of the year I think you mentioned in your prepared.

Remarks that there are some new products coming later this year, but maybe go into a little bit more detail. There just how are you thinking about your sub market or set to growth.

From a business perspective, thank you.

Yes, maybe just a quick top line and then maybe you could speak to some of the things youre seeing in size.

First and foremost it is an area that we're very interested in not all the sub segments of set are created equal for us for certain categories that were investing more heavily in because they are more attractive. We think we've got a better chance to win and quite frankly, we really do believe that we've got scale that we can continue to move forward, so not all equal, but certainly an area.

Overall concentration for us I would say that youre going to continue to see some pressure.

In the next couple of quarters, a lot of that comes from the fact that we still have pressure in pvp in trauma.

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

If you had anything else you wanted to just maybe just a couple of things here drew so the category as I mentioned earlier sports is doing very well.

Acquisition and integration of reliance continues to grow very nicely here in the U S and in Europe , we've seen an increase in penetration on the signature one.

We are now integrated in shoulder with my mobility, which is the integration of Cvs components into the shoulder platform comprehensive control that he is growing.

Our strong team globally.

Sports and Abbott extremities have done very well <unk> the integration of EE and he's also going very well continued to gain share it on with trauma sternal closure, where we have some headwinds.

<unk> referenced by <unk> in the prepared remarks, you said, we trauma, primarily because of headwinds that in APAC, but also in the U S. Some timing with some contracts, but overall the category.

The exclusion of trauma right now he has since gone really really well and as I mentioned in a different forum, we got more product launches in this segment in 2022 at the end of 2020, joining Dwight going pretty well.

We have had since 2015 2016, so the innovation stories as well.

Things are on track.

Got it. Thank you and then just on robotics I think I heard you mentioned that there was a stronger quarter. It was a stronger quarter on placements that capital.

But can you just talk about what.

Whether you expect that trend to continue through 2022, what drives it is just the hospital.

Spending environment or are you doing.

But our new sales strategy without a place to robotics.

Yeah, absolutely makes sense for them. So it was very fluid, it's very customer centric, we give the option of the placement.

Obviously, the option of selling the the Russia I mentioned that we do a hybrid.

In 2021 with even more sales than we anticipated given some of the macro dynamics as we enter 2022.

We see on a per day for placements that delivers better financially we've talked with a lot more of that.

We're still we still are selling pellets and MSR as answered earlier, we've not seen any any clear headwind today that capital is available for them.

Both in the hospital setting.

Yossi.

Yeah.

Thank you.

Lauren can we go to the next question.

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

Good morning, Thanks for taking my questions.

Brian Your comment on recovery I thought was interesting as we look at the market as far as deferred procedures go we come up with a kind of a 1 billion to $2 billion of deferred orthopedic revenue globally over the last couple of years. So.

If we get to maybe a third of that here in 2022, I know you can't get to all of it because of staffing headwinds, but given your given your market share position get this be kind of a 100 to 200 basis points of tailwind to the top line is that what you're trying to communicate this today as far as what kind of.

Fact of the business, we should expect this year from the backlog.

Yes, so to be clear the <unk>.

Backlog, we still believe there's got to be a backlog.

The fact is there's been no fundamental shift in the disease state itself and there has to be a backlog just given what's happened over the past couple of years, but what we're not trying to state right now given our guidance is that we expect a big part of that backlog really any of that backlog to influence our numbers. We're just saying that we believe as we get to the back half of the year, we're going to get to a normal ins.

<unk> not.

Not making assumptions about capitalizing or benefiting from backlog we.

We do believe at some point it has to come through.

But we believe at this point, it's not going to be some kind of a massive impact. It comes quickly just you're just going to have capacity issues associated with that we do believe it should be a tailwind, but we think it's going to happen over years not months or quarters would be our view on it but just to be very clear, we're not expecting that as a part of our guidance right now and backlog recut.

Sorry.

Okay. Thanks for that and then maybe it's too because I know you monitor this pretty closely on the on the Rosa side of things you've been placing a lot of systems over the last couple of years.

Maybe talk a little bit about that pull through revenue that youre going to get on the implant side and where we are in that cycle is it going to be a meaningful contributor to the business here in 'twenty, two or or is it more kind of.

Spread out over the next couple of years. Thanks.

Yeah, sure I'll, probably and he said he probably better maybe even have a talk about that because I mean that that realization of pull through is now I mean it is happening.

Bob maybe you want to speak to that maybe I won't give too many details because you never know who's listening, but the facts are that the penetration of Sam Mendes associated with Russia.

Sort of in the teens, the pull through and electrical component of the new performance in Q1.

We're also related.

600, plus robots that we place roughly 56% of those in the U S.

Around half of those are in competitive accounts, how we've seen a meaningful revenue coming from that from those areas.

And all of that is in the early innings as we get into the additional launches on keep aggregating to Oh, there modality for Rosa knee.

<unk> got several in the innovation pipeline, we Gotta go gains to see a nice a nice pull through there.

Simeon this is one of the elements of our pull through as these regular knees and then obviously you had the disposable another component C. D edge. Many many accounts gets contracted in spite of the robot placement or cell and that's another social revenue. So again, we don't disclose the revenue with that we robots, but I will tell you that he saw above expectation so far.

Thank you.

Okay.

So again it started its definitely here, but I figured that was more of a commercial discussion versus.

<unk> financial one is that what you were going to ask.

You want a chance to answer it.

[laughter].

Yes.

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

Our next question comes from Ryan Zimmerman with <unk>.

Thanks for taking my questions. Good morning, a couple for me.

When you think about 23 in the streets I think modeling about three.

<unk>, 3% growth or so and Theres a lot of puts and takes this quarter, we've now shed spine and dental Brian when you're thinking about the business segments. I mean, the growth rates in the chicken was kind of asked this from a pacing perspective, but I'd love your perspective from a business segment perspective, what's accretive to growth what's dilutive to growth now.

When you look out on the business and I think we know the answer to this but it would be helpful. I think to walk through where you think the growth rates could be for knees and hips versus set et cetera, and then my second question I'll just ask it now so you may have spoken to this before but just help us understand any dis synergy assumptions post spin on zoom.

Yeah.

Okay, Yes, so I'll start and then obviously, we can transition this IP.

We're feeling really good actually you know the funny thing is when you think about knee most people think about it and and rightly so pretty slow growth market, but in reality, there's more innovation entering the knee space than we've ever seen before we've got our us our competitors all focused on data robotics and other forms of technology.

Share of wallet opportunities that we just haven't seen in the past so even though one might view that as a relatively slow growth market.

Do you see it as a real potential to see some acceleration in that market growth I feel very confident that we can grow well the need because of all the shots on goal that we have but I also think all boats will float here.

Right, because you've got a lot of technology entering the space and what we've seen is that it's been digested.

And so when I think about that would have implications you've got the same number of procedures being done, but you're getting more share of wallet for every procedure that drives up the entire space and usually when you bring innovation as if I was alluding to earlier when you have vitality in the space. It also drives better pricing stability.

Sign longer term contracts when somebody converts for instance to Rosa they usually don't come right back and try to knock you down from a pricing perspective, so vitality really does drive stability and pricing as well. So I think even in a space like that that you might not believe would be attractive for overall revenue growth I do believe it is sustainably an attractive area for us to invest.

First and grow and it's very profitable for us as well said, it's pretty obvious you know the categories I said that we're concentrating on our attractive market growths that everybody knows we believe we have the ability to win and we will continue to scale in those areas. So pretty much across the board when I look at large joints worse, yet I see them as attractive markets, given the technology and innovation.

And that we're bringing to bear.

Yeah, and Hey, Ryan on your question related to the spin and I believe it was on dis synergy.

So if you look at the recast the financials that we put out.

Last week, you would see that overall, we see operating margin accretion of about 190 basis points from from the transaction, which is a little bit better than our original expectations. That's a good thing further validation of why why we entered into that into that transaction.

Inside of that that would then imply an suggests about $40 million to $50 million of stranded costs.

Remaining with Zimmer Biomet, I would say that we're already making progress against those stranded costs. This year, we believe that there's more opportunity going into next year, and we kind of just see that as part of our overall operating base as a potential source of opportunity for future efficiencies. So hopefully that gets to your question on where are we.

And how we size the synergies but.

Make no mistake about it where we're going after those as aggressively as we can while ensuring we don't disrupt.

You know the business and the recovery that we're starting to see.

Thank you.

Thanks, Brian .

Yeah as long as we have another question in the queue.

Our next question comes from Mike Matson with Needham <unk> Company.

Good morning, Thanks for taking my questions I wanted to ask one on persona IQ.

I know you've made some brief comments on it but maybe you can give us a more detailed update on the launch and then is this something that could be material.

To your knee growth this year or next year in terms of adding.

100, plus basis points in the growth.

Yes, so we're lucky to have Ivan on the call today, because obviously I'm close to this he is extremely close to persona out not just what we have in knee, but also the future view of where we could take IQ and smart implants.

But I would say we're in limited launch it as we've said.

We're going to do this right we're going to take our time were going to make sure that we learned what we need to learn.

And we need full launch we launch well.

But the the early stages of this is very attractive and what's interesting about it and he is going to get into IQ itself. What's interesting about it is it's also driving traction for the organization just because its innovative even people that are not ready for IQ, yet, they're just saying, hey, I'm not quite ready for it yet.

At us differently, they're looking at Zimmer biomet as an innovative player in the space and most people want to be linked to an innovative player someone's going to change the space and so even those customers that didn't want to come to us for IQ, we're getting interest for them just to move to ready the persona.

It's got a halo effect, because it's so unique in the marketplace.

Yeah, absolutely Mike So first things first that we are on track with Florida in limited market release, I'm not afraid of doing a limited market releases I like to do a full force lunches.

But on this one given the complexity and given the disruption in the market wanted to go slowly and collect data.

I won't talk about the number of hospitals that have been on boarded but that but it is significant the patient pipeline is also significantly above expectations. We're collecting data across the board on mobility, Rachel Moshe we got literally thousands of base of data attract the platform persona IQ is now fully integrated with <unk>.

Mobility and the rest of the <unk> ecosystem.

Have not seen any surprises when it goes to the qualified data that we're tracking and most excitingly.

We got a technology roadmap that he is going to go beyond beyond nice so already got the signed agreements for an answer mandates for shoulder.

On the second part of your question I'm, not going to comment on whether it's material or not I will tell you. It is material for patients and they know that logic will prevail.

It might be a probation. So so far so good very excited I look forward to the next steps.

Okay. Thanks, and then just as a follow up I wanted to ask one on <unk>.

So.

How do you feel you're positioned competitively in the ASC.

Sector and do.

Do you do you think your growth in <unk> was faster than your growth in hospitals I mean, it seems like it is for the overall market I guess, what we've heard but.

Yeah, I can take that one as well so pleased with where we are we sat DSC clearly we started later than others in this environment given our strong position in hospital settings, inpatient outpatient and whatnot, but we put a plan together around 40 components, making sure we have the right portfolio the right people.

The right partnerships and the right contracts on the product. We don't have time, we filled the gaps on basic things like once the lights on visualization towers, we launched that AAC friendly innovation around robotics, we have increased our Sam Mendes penetration. So I think that the portfolio is.

Second do not especially now that we added the sportsman and whatnot. So strong on the product angle on the people aspect that we didnt used to have a dedicated a structure dedicated commercial structure and contracting structure on the AC City. We have it now is fully dedicated we got a large group of people that each and every they get up and think about that Gary.

On the partnership angle, we got that key relationships with key centers. The U S. We are developing together that is applicable to the ASC, we're doing a ton of medical application that together without these key centers.

Around contract and he is night and day, we got a known at all ASC contracts, we are very disciplined around the governance and the relation seems particularly in pricing.

The plan is working well we are growing faster than expected I'm not sure. These days was growing faster or not.

Then the others, but the AUC performance in Q1 was above our expectations.

As we think about the rest of the year I think we're in a good position to continue to grow.

Great. Thank you.

Thanks, Mike Lauren I think we have time for maybe one or two final questions.

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

Great. Thanks for taking my question.

Maybe I could ask the S. E T business was the slowest scrubber this quarter, it's 25% of sales and we don't get a geographic breakout or segments. There I was hoping if you could walk us through.

So what are the different.

Components in any geographic differences to point out just given that a lot of your competitors called out extremities and sports medicine as is positive this quarter. Thanks.

Yeah.

Maybe.

So maybe let you answered some of this bond, but but the fact is we did have a pretty significant headwind. So when you look at the difference in regions did the most challenging region that we had was Asia Pacific and a big part of that as we all know is the trauma DPP in the weight that that's having on the overall segment.

Outside of that when we look inside a set I would say the same thing our upper extremities business did very well the innovation is helping us drive our performance there, but also focus that we have sports did very well as Ivan talked about before and that happened to both U S and Europe and when you think about our <unk> business. We continue to see traction there not just because of the.

<unk> that we've had but also because of the now what I would define as organic growth from those acquisitions and again the focus that we have commercially in S. E. T. So those are kind of the bright spots that we have and those are across all regions.

The headwind for us as in trauma, a lot of that being in <unk> and Asia Pacific.

I guess, if I, if I add to what Brian is saying they'll be saying the same thing with a different accent. So I want to extend myself, but excited about the dedicated channel in key geographies in Europe and the U S primarily.

Innovation that is coming that later in the year going into 2020 free so sports is going well extremely well against some notes with trauma, but sure it's pretty key components.

Performing very nicely and they allowed to perform even even at a faster pace. Thanks Robyn.

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

I think you could probably just read from what he said and I think it was in your prepared remarks, cookie, but two to 300 basis points of headwind as what you could look at in the quarter on the global business as a result of Oh, China.

Great and then maybe just one quick follow up for me.

As you think about China, it's a country with the difficult pathway forward.

With the no Covid policy I just.

Wanted to make sure are you assuming continued pressure from lockdowns through the rest of the year or are you assuming.

That it resolved in the near term thanks a lot.

Yeah.

The reason for the range that we have in the guidance is to make sure that we're accommodating risk or opportunity in places like China.

So it's already calculated in the range that we have what I would tell you is again, we've been a little bit lucky there, sometimes it's okay to be to be lucky rather than always just good but the fact is we've had that offset we have had some pressure when we look at Shanghai Lockdowns, but we've also had delays in pvp implementation, which helps us from a pricing standpoint, and they've offset each.

Joe.

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

Okay.

Okay.

Thanks, Robby I think we're at 930, so we probably need to wrap there Lauren. Thank you. So much Brian don't know if theres any closing remarks from you or any other members of the team applies there just to see if you'd like to make any comments before we wrap up on that then.

No I think the nice thing is we've captured a lot of what we wanted to save you. The question you know the fact is it was it was a good quarter.

It's good to have and I think probably the most important thing even though there's a lot of challenges that everyone is talking about right now that we're gonna have to deal with it we're going to have to manage through and have confidence in the team can manage through those the difference now is it the same challenges for everybody, where we've been disproportionately impacted by Covid. So if I, if I had to select I would take the challenge.

Is that we currently have in place and their impact to the business versus continued COVID-19 impact and so thats the positive for us that's been kind of a light at the end of the tunnel that we've been waiting for which is COVID-19 receding.

Truly do believe is it does recede and it continues to receive the actual performance that we see in the business will begin to be reflected in the performance that you see in the business. So with that we'll go ahead and end the call.

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

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

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