Q2 2022 Zimmer Biomet Holdings Inc Earnings Call
Ladies and gentlemen, you're on hold for the Zimmer Biomet second quarter 2022 earnings conference call will start momentarily. Thank you for your patience. Please remain online.
[music].
Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet second quarter 2022 earnings Conference call.
If anyone needs assistance at any time during todays conference. Please press star followed by Zero as a reminder, this conference is being recorded today August seven 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 star followed by one on your push button phone.
I would now like to turn the conference over to Kerry Medic Senior Vice President.
Communications and administration officer.
Thank you operator, and good morning, everyone. I Hope you are all well and safe welcome to Zimmer Biomet second quarter 2022 earnings Conference call.
Joining me today are Brian Hanson, our chairman, President and CEO EVP and CFO . So he can probably be up.
I N C O L Yvonne toward us.
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 Q2 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, great. Thanks, Kerry and thanks to all of you for joining US. This morning for the call. We've got three sections for the call. This morning. The first section I'll talk briefly about our Q2 performance from an overall perspective, and how a combination of strong execution and COVID-19 recovery.
<unk> enabled us to revise our expectations up again for the full year and that's in the face of some pretty significant macro pressures, especially around FX I'll also spend a few minutes talking about GB innovation, that's a primary contributor to our performance today and certainly our performance in the future. So we want to make sure we touch upon that and for the.
The second section I'll switch it to Sookie Sookie, we'll obviously provide details on Q2, but I think even more importantly, it probably more interesting is to talk about 2022 guidance and our updates there.
And then for our favorite section of the call, we'll close things out by addressing any questions you might have either on Q2 or any other topic. So let's go ahead and get started with Q2 and I'll start this section by saying that despite some very real and what I would define as universal challenges in our sector I'm very proud of the fact that the team delivered.
Again, another solid quarter.
That actually was above our internal expectations and I think this speaks to the teams I'm just going to define it as muscle memory associated with effectively managing through challenging times and Thats exactly what we have right now with the supply concerns that are out there.
Is a challenging time and it's great to know that our team have that muscle memory to manage through it effectively and they continue to show that the primary reason for the over achievement was stronger than anticipated COVID-19 recovery for sure which happened in the quarter, but also just really solid and focused execution from the team across our regions and all of our business segments.
<unk>.
From a procedure volume standpoint, the momentum that we saw in Q1, particularly at the end of Q1 actually continued through April and May, but we did see a bit of a slowdown in June and that has actually carried over through to July the recovery pace was different depending on where you were in the in the world in Q2, it was strong everywhere.
But it was really strong outside the U S, where we saw strong performance pretty much across the board in all of our areas O U S and inside of this we saw solid momentum again in knees and hips I'm really pleased to see another strong quarter in large joints and excited that we continue to get traction for our innovation in this error.
Area.
The momentum in large joints was then offset by some expected pressure in our businesses and our other category and so if you will provide more detail here in a minute I think it's pretty clear for all of US actually is it foreign currency.
Is the challenge that supply challenges are very real inflationary pressures are with US right now and those hurt us in Q2 all of these did theyre going to continue to pressure us through the back half of 'twenty, two and potentially beyond but just given our business momentum this far into the year, our new product innovation and the traction we're getting there with our customers and COVID-19 recovery at least a profile.
Today, our overall confidence in 2022 has actually gotten better.
And as a result of that we are raising our full year guidance for revenue operating margin and earnings per share and I think this should be a solid indication that our strategy is working and our team is executing really just getting it done and our underlying business is gaining strength and a big part of that the big part of this momentum is our new product.
And continuing to deliver and delighting our customers and in Q2, we debuted another element of our <unk> system. This is an AI technology within our omni suite smart or system that focuses on optimizing surgical workflow and increasing procedure efficiency and I'd say that's important right now it's really important because of the.
Passive constraints that our customers have.
Separate from that from a Rosa perspective, Rosa robotics momentum continued in both nee and hit for the quarter and our placement pipeline remains extremely strong.
While it's still in limited launch in very early days, the feedback and interest in persona Ikea was positive and we're focused on collecting as much early data as quickly as we possibly can with an eye toward clearly establishing clinical use benefits. So when we move into full launch in 2023, whereas prepared as possible in all of these innovations and our broader <unk>.
Sweet highlight the possibilities around data collection and integration on a patient and customer experience and that's really our focus in addition to the strength of our existing product portfolio. Our new product pipeline is just as exciting we have additional product launches planned for the second half of 2022, especially across our.
And set portfolios in knee or soon to be launched persona. Some atlas form factor will complement our current form factor and provide additional momentum for cement less conversions, particularly as we get into 2023 and in our businesses I'm very excited about our identity shoulder system. A watch that this is going to be a much more customer.
<unk> shoulder for a more personalized feel for the patient that should optimize movement in the shoulder. We're also continuing to reshape our business and accelerate GBS transformation, we've made significant progress in streamlining and modernizing our operating model, but we've also really focused on making <unk> a best in preferred.
Place to work as well as the trusted partner, which are two of our strategic pillars for the company in Q2's Zimmer Biomet was certified by Great place to work. This is a global authority on workplace culture. The U S. Certification was based on direct survey feedback from our team members, which I think makes it even more compelling we also established a new function.
For refining and driving our environmental social and governance strategy, but also the commitments and actions we're taking in this area as well.
We have already seen significant improvements across almost every element of ESG and truly we're just getting started we see this as an important responsibility as a company for sure but also something we believe is critically important to our team members our customers and our investors you'll be hearing more from us on the ESG front as we make further progress.
And as we continue to enhance our reporting in this area. So in summary, even though they're a real macro headwinds that our team is managing the recovery shifting COVID-19 continues and the execution of our strategy is making a difference we will need to stay close to the headwinds into the recovery in any of the last couple of years have proven that things are fluid, but I do feel com.
And our team's ability to navigate the path forward and I'm excited about where <unk> is going and with that I'm going to turn the call over to Sookie for a deeper dive into Q2 and again I look at our revised expectations for the year, Okay Suki.
Thanks, and good morning, everyone.
Overall, we had a good quarter driven by strong execution and faster than expected recovery of elective procedures across most markets. While we continue to face heightened headwinds and challenges related to foreign currency inflation and supply chain disruptions, our second quarter performance gives us the confidence to raise our full year revenue and EPS outlook.
With that I'll turn to our second quarter results and how that translates into our updated full year financial guidance.
Unless otherwise noted my statements will be about the second quarter of 2022 and how it compares to the same period in 2021, and my commentary will be on a constant currency or adjusted continuing operations basis.
Net sales in the second quarter were 178, 2 billion up 1% on a reported and 6% on a constant currency basis.
As Brian mentioned strong procedure volume recovery extended from the first quarter, especially as we moved into April and May with moderation of recovery in June .
U S sales grew one 3% driven by strong recovery in execution as Covid cases, subsided and elective procedures return, especially in knee and hips. This was partially offset by lower S&P growth and declines in the other category.
International sales grew 12, 2% driven by strong procedural volume across most markets in EMEA and APAC.
EMEA experienced rapid uptake in the second quarter across developed and emerging markets with a generally lighter comp versus 2021.
Asia Pacific overall grew in line with expectations with China, performing largely as projected and Japan growing better than anticipated.
Turning to our business category performance.
Global knees grew 11, 2% with the U S knees up four 5% and international knees up 21%.
These results were driven by easy comparisons O U S along with strong knee procedure recovery across most regions.
Continued global traction for our persona knee system, especially with persona revision in the U S and Rosa penetration and pull through.
Global Hips grew eight 6% with U S hips up two 6% and international hips up 14, 9% driven.
Driven by easier comparisons O U S in tandem with strong international procedure recovery.
We also saw continued traction across key hip products, including our Arcos <unk> system for a revision and our Avenir complete primary hit which is focused on the direct anterior surgical approach.
Lastly, we continue to see solid Rosa pull through and the hip category.
Sports extremities and trauma category increased <unk>, 1% and was impacted by a tough comp in 2021 expected pressure in trauma due to <unk> implementation as well as expected pressure in restorative therapies due to our reimbursement shift for our gel one product.
Within the category will continue to deliver strong performance across our key focus areas of CMS T Sports medicine and upper extremities.
Finally, our other category declined six 1% driven by tough comps and expected lower capital sales related to a higher mix of Rosa placements versus upfront sales in the quarter.
Moving to the P&L.
Revenue and lower IP, R&D charges more than offset restructuring costs and mark to market losses on our retains N V stake.
On an adjusted basis diluted earnings per share of $1 82, representing an increase from $1 51 in the second quarter of 'twenty one.
Higher sales in tandem with lower IP R&D in the quarter more than offset lower year over year gross margins.
Adjusted gross margin was 71, 6% slightly ahead of expectations, due primarily to better mix and lower pricing erosion.
As a note we expect heightened inflation to temper our observed second quarter favorability as we move through the rest of the year.
We continue to project full year gross margin to be slightly down when compared to full year 2021 gross margin.
And as we've said increasing inflationary pressure will pull through into 2023, and we now expect about 50 to 100 basis points of headwind from inflation in 2023 versus our previous estimate of about 50 basis points.
Our adjusted operating expenses were $777 million lower than the prior year, primarily due to the 2021 IP R&D charges referenced earlier.
Our adjusted operating margin for the quarter was 28% up from the prior year. As previously noted full year margins will be pressured versus the prior year due to inflation supply chain headwinds in China, Pvp with partial offset by the ongoing realization of our efficiency programs.
Despite these ongoing headwinds.
We expect those efficiency programs to drive improved second half operating margins versus the first half of the year.
The adjusted tax rate was 16, 5% in the quarter and in line with our expectations.
Operating cash flows were $346 million and free cash flow totaled $240 million for the quarter.
We paid down about $100 million of debt in the second quarter and ended with cash and cash equivalents of about $390 million.
Our improving financial performance in tandem with ongoing reductions in debt continue to strengthen our balance sheet for greater strategic flexibility.
And now moving to our updated financial outlook for the full year 2022.
We're raising our financial guidance based on the following key assumptions.
Covid and customer staffing pressures will continue through 2022, but with a lesser impact than previously anticipated.
Supply chain and inflationary pressures stabilize at current levels.
Foreign currency will be a 500 basis point headwind in 'twenty, two versus our previous projection of 350 basis points.
Also we assume about a 30% flow through of FX related revenue headwinds falls to EPS.
And that the FX headwinds applies to the full range of EPS guidance.
Against this backdrop I'll walk through our updated financial guidance for the year.
Constant currency revenue growth is now expected to be 4% to 6% versus 21.
With an expected foreign currency headwind of 500 basis points. This means that reported revenue growth is expected to be in the range of negative 1% to positive 1% versus 2021.
We're raising adjusted operating margin by 25 basis points to the range of $26 seven 5% to 27, 75%.
Adjusted tax rate guidance remains in the range of 16% to 16, 5%.
Adjusted diluted earnings per share is now expected to be higher at $6 70 to $6.90.
And free cash flow is now expected to improve to $800 million to $900 million and lastly, net interest expense and non operating expense will be modestly higher than the $160 million. We anticipated early this year due to higher interest rates and foreign currency.
We expect to see typical seasonality in the back half of the year, which would suggest stronger revenue dollars in Q4 than in Q3. Additionally, we expect Q4 revenue growth to be higher than Q3 growth in part due to the easier fourth quarter comp related to China V. BP headwinds, we observed in the fourth quarter of 2021.
Operating margins are expected to follow a similar trend as revenue.
In summary, while there are macro challenges and headwinds our team is navigating those challenges and executing well.
We are raising our 'twenty two financial guidance due to better than expected COVID-19 recovery, the strength of our execution and our confidence in <unk> underlying business fundamentals and with that I'll turn the call back over to Kerry.
Thanks, Nikki before we start the Q&A session. Just a quick 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.
Once again, ladies and gentlemen, if you'd like to ask a question you can send them by pressing star one on your telephone keypad.
We will begin with Rick wise with Stifel.
Alright, good morning, everybody, Hi, Brian Hi, Suki.
Maybe I'll start off with your commentary about.
The outlook for the second half from a couple of perspectives.
Brian you talked about the April may strengthening maybe some softening in June and continuing.
Help us understand where youre seeing it what do you think is happening and maybe better understand what you've dealt into the second half. We recently did a survey of 50 orthopedic surgeons, who.
We're cautious about the second quarter, but the most.
Exuberant about their volume expectations for the second half of any Doctor group, we surveyed them.
I'm confused about you know how.
How we sort of reconcile those two points of view.
Yes, thanks for the question, Rick So what I.
I would tell you is that what we experienced in <unk> and of course, we talked to a lot of our customers as well as you would imagine but what we experienced is in June and then carrying through to July not fewer procedures, but more cancellations of those procedures and most of that was driven by either one.
<unk> remember, having COVID-19 or testing positive for COVID-19 or the patient testing positive for Covid and as a result of that they could not.
They could not carry on with the procedure and what we're saying is that we believe that could continue.
I'll leave that to continue until we see a shift we're going to assume that will continue at least through the third quarter.
That's just what we're experiencing the good news is when I think about the quarter, we had a really strong quarter and the business momentum the underlying business momentum is real and we believe that's going to continue but outside of that I don't know if you want to speak more sticky to just our second half view yeah. So good morning, Greg good to be with you today. So if you look at our implied guidance.
And second half at the midpoint versus what we did in the first half you would get about 4% operational ex FX growth for for revenue. It really what underpins that is three key assumptions, we've made inside of that.
One you've got tougher comps in the second half than you saw in the first half you see that especially with EMEA. If you just think about the second quarter growth, we just posted but it really translates to other markets as well so tougher comps two we have one less selling day in the second half of the year.
So we've accounted for that in third as Bryan talked about were just taken a prudent view on COVID-19, especially given our index to elective procedures we.
We did see some softening of procedures due to those cancellations as we exited the second quarter.
And we're assuming that that continues into the third quarter with a step up or.
Prove it in Covid and the fourth quarter now I would say if we don't see that pressure continue all the way through the third quarter, you know that would likely take us to the top end of our range. So those are some of the big building blocks that we've assumed in our second half growth rate, but as Brian said, we feel really confident about the execution of the team where our pipeline is growing and our ability to <unk>.
Executing our recent product launches so feeling really good about the second half.
That's great.
Thanks for that and maybe just as a follow up to a follow on to some of these thoughts.
Maybe suki and this is always I know, you're just kind of favorite.
Question on calls like this at this time of the year talk about the setup for 23, just hearing some of the factors you are talking about improved internal execution major new products.
Being launching.
The positive impact of your efficiency.
Programs it would seem like.
I'm, leaving us feeling more encouraged about that setup.
For the for the next year than I might have.
Appreciating that the many uncertainties as well.
Yes, so I'm glad you're feeling encouraged because we're feeling encouraged as well that outlook.
As we were going to get into guidance, obviously for 'twenty three there's still a lot more to play out in 'twenty two but as.
As we think about a normalized market and normal market dynamics.
We would expect revenue at a floor of 4% and inside of that based on all the operational efficiencies. The team has been very successful in making and things that we've got planned for next year. We believe we can offset.
This headwinds that we're seeing this year related to inflationary pressures and we believe we're in a position where we can expand margins into 2023 now.
<unk> B is as great a margin expansion as you would have if we didn't have these inflationary pressures this year, but we still feel confident that we can expand margins with that type of top line growth profile into next year.
And just maybe.
Additional comment on that I would agree I think that the execution of the business and the team is very real the momentum in the business is real the product pipeline that we have is very strong that we haven't even launched yet so for all those things coming together in a normal market I would be very disappointed if we didnt elite deliver at least a 4% growth.
And that said, that's not where we're going to stop right. We clearly have a little more cash flexibility and that opens up options for us from an acquisition standpoint, and we're going to be looking to add accretive wanger acquisitions potentially diversifying acquisitions to bolster that growth rate over time.
That's incredibly helpful. Thank you.
Sure. Thanks, Rick Jacob you can go onto the next question.
We will hear from Peter Chickering with Deutsche Bank.
Hey, good morning, guys. Thanks for taking my questions looking at your 2022 guidance on the margin side can you help us understand the increase of inflationary pressures and the FX headwinds and how that's offset by stronger revenue growth and margin leverage than you usually have around positive price mix in your updated guidance for the year.
Yeah, Hey, Peter this is suki, so I'll start with the.
The operating margin guide so.
Inside of that gross margin, we do expect a step down in the second half versus the first half we are experiencing.
Greater headwinds due to inflationary pressures.
It's baked into our operating margin guide and that's increase in the second quarter from our first quarter call and what we now see is where we originally anticipated about 50 basis points of that incremental.
Inflationary pressure landing in 2023, and we now think it's closer to 50 to 100 basis points, but again, we've completely included that in our new operating margin and gross margin guide or expectations for the rest of this year I would say inside of that our assumption is that inflationary pressure to stay relatively stable.
Where we exited the second quarter as we think about the rest of the year.
If you take that operating margin you would expect perhaps a bigger EPS flow through but as youre seeing with across the sector.
FX has been a significant headwind.
Taking our number up from 350 basis points of headwind now to 500 basis points of headwind and so if you think about our EPS guide and a raise.
A way to think about it is while we're increasing our ex FX or operational growth by 200 basis points or reported growth at the midpoint is only going up by 50 basis points.
If you take that 50 basis points that translates to about an incremental $35 million in revenue, including Q2 performance and if you flow that through that would get you to about a nickel and so that helps support or help to give the big building blocks around the <unk> raise that we just put in there. So hopefully that gets to your questions, but happy to take any follow.
Once you might have.
Just a quick follow up here is around the 2020 commentary with this sort of 5% FX hit Youre seeing assuming that this where comps next year can you just refresh us how that would flow through the P&L in 2023.
Yes, so right now we're assuming that FX is flowing through to net income at about 30%.
And that's inclusive of any natural hedges, we have less any FX gains and losses now I would say that 30% can vary over time for a number of variables.
Can vary based on mix of regional profit it could vary because of timing of foreign currency changes it could vary because of the timing of FX gains and losses, but right now our best estimate is 30% and as that changes over time, we'll keep you updated.
Great. Thanks, so much.
Thanks Peter.
Can we go to the next question please.
We will now move to Larry <unk> with Wells Fargo.
Good morning, Thanks for taking the question and congratulations on a really nice quarter here.
Brian or excuse me I just wanted to confirm there was international was really strong for hips and knees I just wanted to confirm there was nothing kind of one time no catch up there.
And then just set in other maybe just some color on what accelerates those two businesses.
The new shoulder and set.
When does that happen in.
And the outlook for other.
Given some of your comments more Rosa rentals or lease agreement.
What's the outlook there thanks for taking the question.
Sure Yeah, and thanks Larry.
I'd tell you is that there was nothing other than some easy comps, obviously that we had <unk> there was no one time event.
That buoyed the quarter.
Somehow skewed the quarter. It was just the factors that we referenced already that that came together and allowed for a very strong quarter O U S. So that's the.
The first answer.
And then maybe you could talk about the other or a bond you can as well.
So on the search side I think it's probably good to just take a step back because we don't talk about the subcategories that often have set and just kind of reoriented to everybody. We have six businesses underneath that we have our CMS P, which sir cranial maxillofacial and thoracic business sports med upper extremities foot and ankle trauma and restorative therapies.
And I would just say in the quarter, we saw a very strong performance in our three focus areas upper extremities, CMT and sports with upper extremities and CMO T. Both growing double digits in the quarter, and we think thats sustainable and sports medicine growing mid single digits, even with a pretty tough comp in that area.
That was offset by expected pressure from Asia Pacific and trauma and to be very clear, we expect that to continue that pressure in Asia Pacific to continue through Q3, but then reversed itself in Q4 and.
And then in the U S. We saw pressure in restorative therapies. This is due is so if you had already mentioned because of a reimbursement change and gel one but what's what's important on this is that is going to accelerate into Q3 and continued through about mid 2023, and then it will annualize out. Okay. So just net net I would expect to set to state pressured.
In Q3.
And then improve in Q4.
And again, we feel pretty confident that we're going to continue to see momentum in our focus here or is it maybe if you could speak to some of the innovation and some.
The things that give you confidence about those areas sure. Thanks, Larry Thanks, Brian . So you mentioned on the shoulder whether it is just one device that is driving the growth and I think the answer Larry is that that's not the case is it's more than one product you are familiar we saw the signature one planner.
We launched that about two years ago that today about 50% of our procedures are done using this technology.
The feedback continues to be really compelling around accuracy around the simple interface, we saw with the surgeon the integration of the workflow and just the fact that the structure is in control.
Nino Auto stimulus shoulder was also launched and is gaining great momentum.
The big loans that I think you're talking about hasnt happened, yet so what identity launch, which is going to be your biggest solar launched in the last five years is about to get launch and that is going to be a spacing centric actually gets truly personalized solution. It has.
The ability to do an inlay libre construction I can spend an hour talking about it I know you had a product guy what I will tell you is going to be transformational, but beyond shoulder sports med, we have filled the portfolio very quickly still integrating relying.
The acquisition that we need are about 12 months ago. It is only one arthroscopic surgical platform the.
The feedback continues to be great, but most of the capital and consumable side, we got the new products on anchors and again I can continue to go on and on but I will say that our portfolio and the sports med two they have everything that we need to have.
And then lastly on CFT as Brian referenced that is a double digit growth business.
A combination of organic and inorganic place, we launched new products I'm, sorry, I think in Europe , we're about to launch as many as six to seven different products in the next 12 to 18 months, we're making a lot of investments in that business. So it's no. One product is not one category at least three categories are growing really strongly globally.
And on top of that I would say our commercial execution is best in class when it comes to the focus, especially say Shannon incentive black incentive plan and our contracting capabilities. So really excited about the momentum that we've got Larry great. Thanks, So much.
Maybe you can just speak quickly to other yeah. So you had two other questions in there Larry one was on the quarter for knee and hip and anything.
That we saw on there, but I would say, it's a very clean quarter, we really didn't see anything material or meaningful relative to shifts in timing on tenders or anything.
Straightforward on both well on recon in total and then relative to other it was down primarily driven by the mix of Rosa I would say the installments continue to be very strong as a company. We're very happy with how that the continued uptake of Rosa and the utilization increases we are seeing.
But the mix of placements versus sales.
It was different than the prior year, where we saw this year more placements this quarter more placements than we saw absolute dollars in sales and then we did see just a little bit of modest level of pressure in surgical capital within our other business. So again that was the those are the two key drivers to the year over year declines in the quarter.
Alright, thanks, so much guys.
Yeah. Thanks, Larry Jason We can go on to next question. Please.
We will now hear from Josh Jennings with Cowen.
Hi, good morning, Thanks for taking the questions.
Brian I wanted to just ask about competitive wins and enjoying some and.
And what you think is driving in.
In the marketplace.
Decision, making by certain customers.
The robotics.
Provided an edge that we're employing now all the big four have the robotic <unk>.
Systems commercialized do you.
Think that surgeons are shifting back to making decisions in terms of what brand based on implant.
Robotics tool driving competitive wins.
And just in the same vein just what how should we think about the evolution of Rosa from here, but I'm sure it's probably a.
Combination of been playing in the robotic system, but but what were the what.
What is that were doing to evolve the Rosa system, Let me think thats any software updates that you guys have implemented so far in 2022, sorry, one follow up.
Yes, Thanks, Josh for the question I would say that it's always been a combination of the implant and the value of the implant to the surgeon and will always be that way in concert with the technology you bring that surrounds the implant that could be robotics that can be mined mobility. It could be our entire ecosystem that surrounds the implants. So it's always.
Been a combination of those two things when I look at our performance just those things are now coming together in a cleaner market than we've had in the past. So the underlying strength, we've had as a business has been masked by some external things as those clouds begin to move I think youre going to see the real performance of it has come out with that said obviously of honest here. He is much closer.
Two it even than I am so maybe you could speak to what Youre seeing out there yeah, absolutely. So on question number one Joseph I concur with Brian the FCC as to any side clearly the decision maker, but the role of the provider and the Bay area is also very very important and obviously, we target those decision makers as well.
Relative to Russia, I'll tell you Josh.
Russia unique is not that it is one product. It is a part of an ecosystem that consolidates a lot of different parts. Some thesis is fully integrated we felt a lot of pre op stuff or partnership with Apple and our mobility or planning software.
The fact that you can use Ross how are we being number one in the war persona the connectivity with fast semi data points you know down also.
Also our Intel data platforms, and obviously persona I guess at some point. So I think it's more of an integrated solution and then just just one product that is driving those decision makers to come away. If you go out they don't ask.
Why or for that matter why are they choosing Ross at all other than the outcomes on a technology play and the like the efficiency. They like the fact, though or pre planning is that Easter there seeing the outcomes and I think those are the reasons why we've seen the great momentum with Russia. So hopefully that answered your question.
Thank you.
Ryan just wanted to ask about.
If there is any any opportunities you see for maybe product line pruning or even if you're working through any product obsolescence.
Could you could go dropped some maybe anchor product lines.
Okay.
Stronger growth.
Current business units, thanks for taking my questions.
It's a great question and it's interesting because when I first started at Zimmer Biomet I made the mistake one time on an earnings call talking about the fact that we were going to reduce skus and the stock just tanked because normally what happens when you do that there is risk associated with revenue.
What we've done that is just to be kind of quiet about it but we've also been doing it we've had dramatic decreases in skus over the past four years dramatic.
And we're going to continue to focus on that because theres a lot of inefficiencies in orthopedics. If you have multiple product lines youre trying to cover and it reduces focus in the field. So we really are trying to focus on the main brands push from an incentive standpoint, our teams to focus on those brands.
And rationalized categories, they're just not as important to us. So again, we've been doing that very quietly, but very effectively over the last four and a half years.
Great. Thank you.
Sure.
Thanks, Josh J, if we can go to the next question in the queue.
Our next question will come from Jason Bedford with Raymond James.
Good morning, and congrats on the progress.
A couple of quick ones.
The response to Rick's question earlier, you mentioned margin expansion in 'twenty, three and I was just a little unclear exactly in reference to gross margin op margin or Paul.
Yes, Jason Great. Great question. Good clarification, it's really more about operating margin expansion as I said, we've got some inflationary pressure. This year, that's going to capitalize into next year, which is going to.
Put some headwinds into gross margins year over year, I don't want to get into exactly where we think gross margins are going to add but just know that year over year as a starting point you've got you've got 50 to 100 basis points working against you because of things that happened this year, having said that.
Excited about all the progress the team is making to help offset those.
We're doing some really good things around pricing.
As improving our profile you saw that in this quarter, we expect to see some of those more strategic and tactical levers continue to play through for the rest of this year and into next year.
Im really happy about what the supply chain and commercial teams are doing relative to site optimization and cost down in manufacturing even in the backdrop of a very tiny <unk> supply chain.
Market and the challenges, we are trying to get product and packaging materials and logistics all sorted out in a very again volatile market and then beyond that in SG&A, we're going to continue to look at improvements in our go to market models commercial models across the world.
Already implemented a number of those for instance, in Europe , where we'd look to restructure and rethink how we go to market and lower margin.
Markets as well as lower margin business categories and then.
The global business services operating model that we created during the pandemic is ripe for further leverage and we think that we can continue to drive efficiencies by by putting more of our activities into those services. So we feel we feel really good that.
<unk> ongoing gross margin pressure because these inflationary headwinds that we can we see a clear path to operating margin expansion in 'twenty. Three so hopefully that gives you a little bit more color and clarification on where we expect to see it.
Youre welcome.
Cool.
Just.
Unrelated follow up.
In terms of patient backlog somewhat refreshing that you didn't talk about hospital staffing issues.
So my question is what do you think you closing the biggest hurdle.
Kind of cool.
Leasing that backlog patient reluctance to come in whether it be co greater economic reasons or is it still hospitals.
Okay.
I think it's a good question I would say, it's a bit balanced it's multifactorial I would tell you that even in the quarter in the second quarter, we didn't talk about backlog much but I do believe in certain areas, where you had capacity capabilities. We did see some backlog come through unfortunately, what we continue to see is also an offset tip.
<unk> of that in other areas that have either COVID-19 or staffing pressure that then drive the numbers down so I've kind of continue to see this kind of offsetting of areas that can drive forward and pick up a backlog and other areas that are probably building backlog.
I don't know when Thats going to stop it is hard to predict but the good news is that what we're seeing now anyway is very strong procedure growth. We're just seeing cancellations being the thing we're concentrating on so we're not seeing COVID-19 driving ICU beds in the wrong direction or capacity of ICU beds being in challenge. It just is a patient wants.
To come in the procedures being schedule, either the patient or the staff member gets COVID-19 and they can't conduct procedure.
What we're seeing and that's what we saw more in June and July so far.
Okay.
Thanks for the questions Jason Jason.
Jake can we go to the next question in the queue. Please.
Yes, we will hear from Kyle rose with Canaccord.
Great. Thank you for taking the questions and good morning, I just yes.
Yes.
You made some comments on the last question just about pricing updates I wonder if we could just take that at one level deeper where are you seeing the biggest success I guess in price pressures near term and then when you think about strategically over the long term I mean, where do you see pricing power in opportunities to two <unk>.
Potentially flex from a pricing perspective longer term.
Yes. Thanks for the question I'll actually turn it over to Yvonne is probably the closest and.
During the day to day contact on this yeah, absolutely. Thanks, So I'll tell you when I joined this business 40 years ago.
The normal price erosion was three even 400 basis points per year in some categories 500 basis points.
That's not what we are that's not what we're going to be.
I would be extremely disappointed it would not at the low end of the range of 2% and that isn't about Dave you asked me 200 basis points of price erosion.
Relative to what are we doing what are we seeing success first of all ill defined the journey as a subsidy stage journey.
Tactical number one strategic number true transformation and number three.
We completed a number one we've done a lot of tactical stuff raising price for a noncore products raising price in non core markets thinking differently about different customers based on segmentation all of that has been done we've gotten great success.
Stakes number two strategic I would say, we'd probably me pointing that that in that stage is about that category contracting we have a number one position in hips and knees in many different accounts around the world.
<unk> done a good job in leveraging that position to bring set another category studies happening now that we have truly an ecosystem of solutions. We are bundling I don't like the word but that's the one that comes to mind or ecosystem and our contracting across the entire episode of care.
We're doing all of those things in terms of thinking Asp's, we incorporated a ton of people in our contracting group that are thinking more strategically about those relationships line extensions or whatnot and then.
At some point, we're getting to the transformation stage and that is how do we leverage all these data that were getting to do risk sharing agreements now that will launch product platforms like outwork, AI, where they want to engage in predictive analytics, we're going to leverage that to really understand what happens three six months. After their surgery is done so it's really friendly stages I would say I guess.
States number two.
We are now at least or at war, 2% price erosion, we're not doing our job. Thanks for the question.
Thank you that's very helpful. And then just one follow up on Rosa, maybe just talk a little bit about utilization youre seeing in some of the positive and then I'll take a stab but overall installed base.
<unk> of knees and hips flowing through that would be very helpful.
I think you've always got to try to take a stab at those two things, but we're just not going to provide it but I do want Ivan if you could just talk about the momentum we're seeing really strong momentum in Rosa.
Little off from the other category given the mixes if you've referenced before we sold less than when we did the prior year, but the placements were still strong and the pull through on those placements are also still strong, but maybe you can speak to it.
Absolutely I'll tell you I'm really proud of the work that the team has done a globally were 940 countries with Rosa over the last three years, but I'm.
Even more energized about what's happening or what's going to happen over the next step three years, but 2000 callers I won't disclose the number of placements as Brian has done that in the past I wont talk about penetration, but I will tell you that he is double digit share in beer in the U S. We had a solid Q2 sequentially.
Sequentially, we grew both on sales and placements up at all with Goldman <unk> Q2 2022.
Versus Q1 of.
2022 versus last year comps you know whats that was a headwind we continue to see a nice mix in terms of things installations.
Inpatient unit than in an ASC unit I mentioned earlier that the feedback from customers is very compelling when he goes to efficiency and that's where they are about 30% of all installations are happening in the ASC. So that's a great leading indicators to what's going to happen here given the migration into our into the setting.
From a competitive standpoint, we track that obviously very closely about 40% to 50% of installations are happening in competitive accounts.
And again the number of returns and the feedback has been very very positive in that space as well. So really excited the way. We are is a global business continue to see penetration in the right direction.
So think about the next Stephanie here, so with as many as nine indications coming I would say that we're in a really really early innings of this game.
Thanks, Kyle Jake can we go to the next question. Please.
Yes next we will hear from Jason Wittes with loop capital.
Hi, Thanks for taking the questions maybe a follow up on what you meant.
Appreciate the detail on Rosa curious on the competitive accounts that you're getting in with Rosa.
Are they using multiple robots or is it usually just a single robot that's a rosa or how would you characterize those competitive inroads.
Absolutely Jason Thank you it really depends.
We are in a lot of our teaching institutions and as you can imagine when you're talking to an HSA as a hospital for special surgery in New York or equivalent clinic or May you do like to have.
Hawaii a rate different robotics solution. So it's not uncommon to see Chaudhry Citi robotic systems there.
So that's that that comes to mind when it comes to selection as you look at our ordered Oh. They are savings. So really that's about it depends on the preference when you have high volume surgeons that they used to have seen but.
Then they tend to gravitate towards Rosa, because it actually integrate but disorder and as Ray said, if a level of efficiency. So it is dependent on the volume of the surgery on teaching institution Nonteaching institution, but yes, we do have examples here in the U S and globally, what do you have as many as two or three robots.
Yeah, it's not surprising that that occurs even if you just look at the implants, even in a very strong account that we would have usually is not homogeneous with one implant you typically have some competitive implants in there as well so it would follow suit that debt if youre going to move into robotics, you likely will have more than one robotic system.
Okay. Okay. That's I appreciate that detail and then a follow up on the persona IQ I know you mentioned youre kind of working out or building up the case for the value proposition.
I assume that's going to be a premium priced product and it sounds like you're ready to fully launch that in 2023.
How do we think about that in terms of I mean is it.
In terms of the price and the value proposition for the patient in the hospital.
Youre absolutely right. It is going to be it is today and it will be a premium priced product is just one of those opportunities for share of wallet. Just like you would see in robotics disposables you would see in my mobility, you would see some atlas uptick in price point.
That's why we're sprinting right now to be able to collect data to prove out the value proposition as I said in my prepared remarks, but.
Obviously, you're very close to the launch maybe you can speak to that as well I'm not sure Jason that we're ready to commit to a launch date.
When we when we acquired this technology, where we partner with these technology that this was going to be a limited market release and it will take 612 or even 18 months, depending on the level of data that we're getting.
We knew that that is LMR was modified clinical exercise on a commercial exercise we are on track with the things we want to get really the LMR has Saturday stages number one is a validation of the value proposition.
And I guess, we're getting millions and I'm talking millions of data points. So far in these early March.
From what happens in trial upon resection got balancing the level of alignment decoding what happens postop.
In terms of a range of motion in terms of a gait speed that all kinds of things with all those data points, we need to understand what is the true value.
Proposition for that that patient that provider and reputation.
Second part is how do we once we really do launch their product how do we may be sufficient what's the pathway towards activating sites.
At a faster speed, how do we train surgeons, how do we deal with a data question around privacy and whatnot.
And then number today its really whats next we don't want to be just as Martin company would it be smart solutions company. So we've got a pathway to get into heap, we've got a pathway to get into shoulder what understand both SaaS I meant that SMA listening.
Current platforms onto that and there's a lot of data that we get into a funded stand what is that going to do from a portfolio standpoint. So.
Now coming to.
What date for launch, but I would say we're on track in terms of gathering all the data.
Road map ahead.
And maybe thank you that's helpful and just maybe one quick conceptually question here.
Is the market ready to pay up for these AI technologies planning technologies.
Additionally, the market has been very focused on implants implant costs.
So this is a bit of a shift.
How has the market been receptive do you think they're receptive.
2023, they are receptive to paying.
Types of premiums for these sort of new.
New take on technologies.
I'll answer in a couple of ways I think first I'll look at data points that would suggest that the market is ready and I just look at Rosa.
Robotics in general wasn't that long ago that there was an assumption that orthopedics would not pay a premium to bring robotics into play I think we're finding that is changing very rapidly.
We do believe robotics will become a standard of care at some point I think it's the same thing. This is the next leg of the stool I really do believe that data collection.
And the informatics capability as a result of that will be something that people desire and pay for.
To prove it we have to collect the data created a data lake create the insights as a result of that and give guidance to surgeons from that data once that occurs and we can then predict things ahead of time and change care as a result of that there's value in that Theres. No question remember there is still a large percentage of patients somewhere in.
The neighborhood neighborhood of 20% to get a knee procedure that are not happy for whatever reason and when you talk to surgeons, even really good surgeons. They don't always know what they'll say, hey, I had the best surgery Day X Ray looks fantastic that patient is not happy I do not know, what we don't either but I'm pretty confident with the data. We're collecting we will be able to predict in the future and then change the care for that patient.
And Thats really good for the patient and that's why we're doing it.
Just maybe quickly add that in addition to the example of Russia, which I think is a great example of the market being ready to pay for technology.
We already have thousands of patients in our mobility by Apple platform. So as another example of <unk>.
When you do provide the right data people will pay for it.
Two questions that every day, we are trying to solve with Payors and providers can we lower the length of stay in hospital post surgery.
Below where we had initial rates and if we can do that through data and technology that Michael would pay for that and we're making bolt basis that we're going to be able to do both of those.
Yeah, Okay. Thank you very much.
No. Thank you Jake if we can go to the next question in queue that'd be great.
And we will hear from Chris Pasqual with nephron.
Thanks, just following up on the persona acute question can you give us a sense for the scope of what you're collecting and is this something we should expect it to double AOS meeting in the spring or is the timing not gonna lineup with them.
From pre up doing trials to post up through different devices were collecting data now we fab persona Ikea, which is obviously in trials and post up we're looking at things such as resection data got balancing the accuracy on cats the overall alignment.
The range of motion expectations, we're looking at <unk>, but our cemetery side, the actual implant disturbed land.
What else data speed.
How well are you doing physical therapy post surgery.
And I can go on and on.
Addition to those patient centric measures. We're looking at how did the time products are in a better way.
So how does <unk> plus are functioning post the post surgery, but I was thinking the economy Youll see a much more in this space and I think <unk> gone back to value proposition. He is out of all of these multiple data points what are their tour city, that's going to drive a premium on their willingness to pay I am looking forward to showing that in their economy.
And I think it is important because you said, it's not just Q it as an ecosystem of capabilities allows us to collect data across all areas of the of the procedure before during and after.
Combination of those things that will create that data lake that is just too vast for us to make any sense of it with machine learning, we can look for patterns and this data and ultimately provide insights as a result of it.
Got you. Thank you.
And then I just wanted to clarify on the pricing commentary you guys used to give the impact of price by business went away from that this year, but if I look back over the past seven or eight years. The average impact was just a little bit over 2%. So I'm a little confused by the 3% to four point comment and how much of an improvement we should really expect to percentage of target going forward.
Maybe you can just clarify that thanks.
Yes.
I'll take that one excuse me so.
Overall on a consolidated basis Youre right. It was somewhere in the two to 300 range, but if you would be constructed that and actually look by.
By category and we did provide that level of data you would see that knee and hip of recon was higher in price erosion in the overall consolidated and you saw generally lower than that average in <unk>.
So that was your offset I don't know I.
Just to be clear on the sale of 400 basis points that is a large joints in the U S. So when you look at the overall category might have been different.
But yeah. It was not unusual to see $3, 40% higher than 400 basis points here in the U S. Given the way that we contract on historical factors.
Got it thank you.
Thanks, Chris.
We have time for maybe one or two more questions can we go to the queue.
Yes, probably hear from Steve Lichtman with Oppenheimer.
Thank you good morning.
Follow up on Etsy key you talked about the pipeline you have coming in in your focus areas.
As you think about overall FCT versus wanger for those markets do you have do you see a pathway to improved foot and ankle growth versus that market either through internal innovation or M&A.
<unk> thoughts on your foot and ankle premier.
Yeah. So I would tell you is again all six of the categories. We have and set are interesting and attractive categories. There is no question, we do bias our investment in our focus areas, which are the ones that are referenced CMT sports in upper extremities, mainly because those businesses have either been able to acquire a full portfolio.
Have a full portfolio and we see a cleaner path two to three years.
ZIP in those spaces and so they get disproportionate amount of investment.
And as a result of that we expect above market growth in those spaces.
And the other categories. They still get investment they are still important to us. We just expect a different performance because the investment level is different.
One of those businesses comes back with a pathway through acquisition or otherwise that would also show a clear path to leadership, they can become a focus area as well.
I know if you wanted to add in but I'll just keep it various exchange, let's say, we'd have no giving up on our foot and ankle pace I.
I would say a meaningful amount of R&D that has gone into that space. We recently closed the buyout of an extremity, which he was a partner of ours in foot and ankle. We now have a more complete offering in forefoot midfoot in human food, we got some biologic solutions that we're launching as we speak we got a partnership with them.
Sports Medicine group on switchers.
So there is that there is a compelling portfolio of labeling that the that we're seeing that we're gonna be able to launch here.
Got it Okay, and then Brian you said before that as you guys moved into phase III of your transformation.
M&A got crimped, obviously by by Covid.
The impact there from a procedure volume basis has has ed, but obviously there are some other macro headwinds your balance sheet in good shape.
But how do you feel overall about the environment for Zimmer to go out and do some deals here over the next 12 to 18 months.
Well a lot better now than it did before that's for sure.
<unk> is our financial flexibility is improving.
Balance sheet looks strong.
And we've earned the right now to be able to truly increase our focus in this area don't get me wrong, all along since we've been in phase III, we've been looking at the market looking for assets that we could pursue but now our ability to execute this phase of the of our transformation is more real in just to give you some color there.
We truly will be looking at mission centric targets because the number one criteria. We're also going to be looking for places where we believe are spaces, where we believe we can get a path to leadership at least at some point.
We're always going to be looking for Wham grr accretive assets and then those things that as a result of that can drive faster growth and faster EPS growth over time.
The size it we're probably looking more small to medium sized deals and it would be across three areas number one would be to diversify in our faster growth orthopedic markets like extremities sports CMS, even settings like ASC, but also secondly to diversify our revenue outside of traditional orthopedics.
With an eye towards those things that are a little less elective in nature and then inside of recon, we're actually looking to enhance our position in those faster growth Submarkets of re constant we can bring our wind grew up there as well things like data and robotics. So that's where we're going to focus and we've been a phase III for a while we've got a lot of things that we're interested in and now we have a little more financial flexibility.
<unk> ability to move in that direction.
Yeah and.
Jack we probably at the end there I know, we're a little bit above.
930 here, but thanks for all the questions from the queue Bryan don't know if theres any closing remarks that you would make to round out the call. Yeah. I think what else is hey, it was a strong quarter, but it's just a quarter. The fact is the momentum has been there for a long time and I'm just really happy that finally with some of the clouds being removed you can actually see the performance.
The teams actually delivery.
I think I do want to make sure that we're clear as we think about that concept of <unk>.
Should at least do a 4% growth rate, it's going to be choppy for a while the fact is it's not a clean market. It's not an undisturbed market is not going to be for a while so you could expect quarters that might be above that 4% you might expect to see quarters that are below that 4% just given all of that noise in the market make no mistake the business momentum is real.
The team is executing right now flawlessly and our product pipeline is really really strong. So our confidence is high even though is going to be choppy for a while our confidence is very high.
Thanks, everyone for the questions of course that you have others. Please don't hesitate to reach out to the team today and Im sure well talk soon thanks for joining.
And this concludes the Zimmer Biomet quarterly earnings call. Thank you for your participation.
Okay.
Yeah.
Okay.
Okay.
[music].
Yeah.
[music].
Hum.
[music].
Right.
[music].
Okay.
[music].
Okay.
[music].
Yeah.
Okay.
Okay.
Yes.
[music].
Okay.
Okay.
Yeah.
[music].
Yeah.
[music].
Yes.
[music].
Okay.
Okay.
Yes.
Yeah.
[music].
Okay.
[music].
Yeah.
[music].
Right.
[music].
[music].
Okay.
Yeah.
Okay.
[music].
Yeah.
Okay.
Okay.
Yeah.
Yes.
[music].
Yeah.
Yes.
Okay.
Yeah.
[music].
Yes.
[music].
Yeah.
Yes.
Hum.
[music].
Okay.
[music].
Yeah.
[music].
Okay.
Yeah.
Okay.
[music].
Yeah.
Okay.
Okay.
Yeah.
No.
Yes.
Yeah.
[music].
Okay.
Yes.
Okay.
Yeah.
Yeah.
Yeah.
[music].
Yes.
[music].
Yeah.