Q4 2022 Zimmer Biomet Holdings Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet fourth 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 February 3rd 2023 following.
Today's presentation, there will be a question and answer session. At this time all participants are in a listen only mode. If you have a question. Please press the star followed by the one on your push button phone I would now like to turn the conference over to Kerry Medics Senior Vice President Chief Communications and Administration Officer. Please go ahead.
Thank you operator, and good morning, everyone. I Hope you are all well and safe welcome to Zimmer Biomet fourth quarter 2022 earnings conference call. Joining me today are Brian Hanson, our chairman, President and CEO, EVP and CFO to heat your part D. I N C O L. Yvonne tortillas 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.
The SEC filings for a detailed discussion of these risks and uncertainties. In addition to the inherent limitations of such forward looking statements.
Additionally, the discussions on this call will include certain non-GAAP financial measures reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q4 earnings release, which can be found on our website Zimmer biomet dot com with that I'll turn the call over to Bryan Bryan.
Alright, great. Thanks, Gary and thanks to all of you for joining US. This morning for the call. We really got three sections for the call. This morning first I'm going to talk briefly about our fourth quarter performance and spend a few minutes on our teams are just define as solid execution as well as our innovation and drivers for continued strong performance.
And then for the second section as usual Siggi will provide more detail on the quarter itself.
And very importantly, our 2023 guidance and expectations and then of course, we'll close things out by addressing any questions that you might have before we get started I wanted to take a minute to thank really does E. B team just a full E V team not only for their work in making Q4, another successful quarter, but also for their resilience the innovator.
Just thinking and dedication to getting the job done throughout all of 2022, even in the face of very real adversity. There's no doubt in my mind that this team is the engine that is driving US forward. So again, thank you and I can tell you that I'm very proud to be on this journey with you and now let me turn the queue.
Poor results know that each and every one of you made the quarter happened and I can tell you. It was a solid quarter. We again saw better than expected growth driven by continued procedure recovery strong execution and a solid momentum with our new innovation and as expected. We also benefited from some favorable comps in the quarter inside of this.
We saw another quarter of positive year over year momentum in large joints with our overall global hip and knee business growing more than 8% and 10% on an ex FX basis.
And our overall set category grew in the high single digits, driven by strong performance in our business growth drivers, which as we've said before our sports C. N S T and upper extremities as well as the expected tailwind from Pvp comps in our trauma business.
That said, we are clearly seeing overall market stabilization, but our fourth quarter execution and procedure recovery is still set against the macro backdrop that is challenging and fluid.
Foreign currency has improved but remains a challenge and supply inflation and staffing pressures continue.
In fourth quarter, our team was once again able to navigate these challenges flexing what I would just define as a muscle memory that I think fortunately or unfortunately is a bit unique dizzy b and it served us well over the past year during 2022, but make no mistake. The challenges are real and they are ongoing but regardless of this environment.
Covid, mainly in the rearview mirror I have confidence that the E. V team will continue to deliver our culture, our strategy innovation and execution are coalescing right now driving tangible momentum and importantly belief from the team and as a result confidence in our business continues to grow but let me just give a few.
Two examples from Q4 in the quarter, we announced the approval of our new cement less knee form factor, which is adding to our persona family and strategically rounding out that portfolio.
The first procedures have been completed with this new keel design and the feedback as expected has been very positive. We continue to believe that our cement less knee penetration will grow significantly and that this differentiated premium product can really accelerate that growth. It's early days with full launch planned for the middle of the year, but make no mistake.
This is a real growth driver for our knee franchise.
This launch builds on other recent product launches like hip insights and our identity shoulder system introductions, bringing our total to more than 50, new product launches from 2018 through 2022 and importantly, the largest majority of these launches came in markets, we see growing in the mid single digits or better.
That's really important being launched in markets that we see growing in the mid single digits or better this strategic prioritization and output from our innovation pipeline has helped Z be more than double our vitality index over that time, and very importantly increase our revenue and faster growth markets and submarkets.
Which of course drives positive increases in our weighted average market growth.
And that momentum continues we expect to launch another 40 plus products between now and the end of 2025 once again with the majority of those launches in 4% plus growth markets. This will drive further increases in our vitality index and weighted average market growth and most importantly, bring real and meaningful innovation to the patients and customers.
We serve.
What I know for sure is that our current momentum very robust new product pipeline and our strengthening balance sheet focused on accelerating our portfolio transformation positions <unk> well for the future and as a result, I feel increasingly confident about <unk> ability to transform our business drive growth deliver value and achieve.
Our mission to alleviate pain and improve the quality of life for people around the world and with that I'll turn the call over to Sookie for a closer look at Q4 and again our expectations for 2023, okay.
Thanks, and good morning, everyone for today's call I'm going to focus on three topics.
First our fourth quarter results second how that performance of recent macro trends translates into our 2023 financial guidance and third I'll provide a brief update on our long term financial priorities.
With that I'll turn to the fourth quarter results.
Unless otherwise noted my statements will be about the fourth quarter of 2022 and how it compares to the same period in 2021 and.
And my commentary will be on a constant currency and adjusted continuing operations basis.
Net sales in the fourth quarter were 1.825 billion, an increase of two 7% on a reported basis and an increase of eight 3% on a constant currency basis.
Previously noted we had a selling day headwind of 150 to 200 basis points that impacted each category at about the same level.
U S sales grew six 2% driven by strong elective procedure recovery and commercial execution, especially in our knee and hip businesses.
In addition, the U S business saw strength across our three priority areas within the S E T.
International sales grew 11, 1% driven by strong procedure volumes across most markets in EMEA and APAC in tandem with later comps and continued strong commercial execution.
EMEA performance was driven by recovery in developed markets and continued strength in emerging markets.
<unk> was impacted by COVID-19 searches and Lockdowns in China that were broadly offset by strength in other markets.
Now turning to our business category performance.
Global needs grew 10, 2% with U S knees up 10, 8% and internationally is up nine 3% with strong performance driven by knee procedure recovery across most regions and an easier comp outside of the U S.
Continued global traction for our persona knee system, including both persona primary in revision in the U S and continued increase in Rosa procedure penetration of pull through.
Global Hips grew eight 4% with U S hips up five 9% and international hips up 10, 8% driven by strong international procedure recovering easier comps outside the U S continued traction across hip products, including the G. Seven revision system and Avenir complete primary hip which is focus on the direct into.
<unk> surgical approach and lastly continued solid rosa pull through in the hip category, especially in the U S.
The sports extremity and trauma category grew seven 6% and was impacted by continued strong performance across our key focus areas of C. M F T sports medicine and upper extremities.
S. E. T was also impacted by a comp tailwind from China V. B P that was partially offset by reimbursement changes and restorative therapies.
Finally, our other category grew one 3%.
Moving to the P&L.
For the quarter, we reported GAAP diluted loss per share of <unk> 62, compared to GAAP diluted loss per share of <unk> 40.
In the fourth quarter of 2021.
The change was driven by higher revenues, partially offset by a goodwill impairment in EMEA as a result of macro factors.
On an adjusted basis diluted earnings per share of $1 88, representing an increase from $1 79 in the fourth quarter of 'twenty one.
Adjusted gross margin was 71, 7%, bringing full year gross margin of 71, 2% or about in line with full year 2021, despite significant headwinds from inflationary pressure.
Our adjusted operating expenses were $791 million, an increase versus the prior year due to inflationary pressures in tandem with higher investments into R&D and commercial infrastructure to support new products.
For the year overall Opex was flat to 2021 with an increase in R&D at lower SG&A, we remain disciplined and realizing efficiencies, while investing in our priority areas and offsetting headwinds.
Adjusted operating profit margin for the quarter was 28, 3% up slightly from the prior year, bringing total year operating margin to 27, 3% ahead of full year 2021, despite macro headwinds.
The adjusted tax rate was 16, 9% in the quarter slightly higher than our expectations due to certain one time discrete tax items.
For the full year adjusted tax rate was 16, 5% and in line with our full year guidance.
Turning to cash and liquidity.
Operating cash flows were $244 million in free cash flow totaled $115 million for the quarter, bringing our total free cash flow for the full year to $910 million.
We continue to reduce our net debt by approximately $150 million in the fourth quarter, excluding the effects of foreign currency and ended the quarter with cash and cash equivalents of approximately $375 million.
Moving to our financial outlook for 2023.
We base our projections on the following key assumptions, we expect to.
Experienced procedure cancellations and staffing challenges, but the impact will be less acute than what we experienced in 2022.
Supply chain headwinds will continue throughout the year, but with improvement in the second half of 'twenty three.
Pricing headwinds are expected to be slightly better than our historic average of two to 300 basis points.
Inflationary pressure will remain stable to 2020 to exit and unexpected adjusted EPS dilution of about five to 10 cents due to our acquisition of the body in the first quarter of 2023.
Against this backdrop, our expectations for the full year 'twenty three financial outlook, our reported revenue growth in the range of one 5% to three 5% versus 2022.
As expected foreign currency exchange headwinds of approximately 150 basis points, resulting in revenue growth of 3% to 5% on a constant currency basis.
And adjusted diluted earnings per share in the range of $6 95 to $7 15.
Inside of that guidance at our midpoint, we expect adjusted operating profit margins to be flat to slightly up compared to 2022 levels.
We also expect net interest and other nonoperating expenses will be about $190 million, primarily due to higher interest rates.
Our adjusted tax rate should be broadly in line with 2022 and total shares outstanding are expected to remain in line with full year 2022 average fully diluted shares outstanding.
Finally, we expect our free cash flow to be in the range of 925 million to $1.0 billion to $5 billion.
In terms of cadence through the year, we expected constant currency revenue growth rate for the first half will be slightly higher than the growth rate in the second half.
And we do expect Choppiness by quarter.
Q1 is projected to be our highest growth quarter due to easier comps and will be followed by the fourth quarter, driven by improved supply and innovation building throughout the year.
Q2, and Q3 will be lighter quarters, given tougher comps.
Lastly, we don't expect any material day rate impact on full year results. However, Q1, and Q4 will benefit by about 100 basis points of tailwind that will be offset by headwinds in Q2 and three.
In summary, we delivered accelerated growth in 2022 with a margin profile that is better than 'twenty, one as we overcame headwinds while investing in our priority areas.
Navigated a number of macro challenges and delivered on our commitments to all of our stakeholders.
As we look forward to 2023, while the environment remains dynamic we see a path to delivering solid growth and earnings performance with robust free cash flow.
The close out let me make a few comments about our financial priorities moving forward.
We've made significant progress over the past few years in strengthening our balance sheet through improved financial performance and ongoing reductions in debt.
This ultimately provides <unk> with greater strategic flexibility as we look to transform our portfolio with a focus on increasing our Wagner and driving improved long term growth.
We remain committed to our investment grade rating and we'll continue to look at ways to accelerate profitable growth with a focus on achieving our mission.
I'm, so very proud of the team for their perseverance and dedication throughout 2022.
And I'm excited about what we can accomplish in 2023.
With that I'll turn the call back over to Karen.
Thanks, <unk> 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.
Thank you, we'll go to Ryan Zimmerman with BTG.
Alright can you hear me okay.
Yes, we can hear you.
Alright, good morning, Thanks for taking the questions Brian .
Brian .
Bearing with guidance.
Yes, if I think back to third quarter, you were asked whether 4% organic growth was the appropriate way to think about 'twenty three.
The time, you said 23, you didn't see 'twenty three is normal but then in January you said, we're in a better place procedures are kind of normal and we would expect that to continue in 'twenty three and so as we sit here today with guidance at 4% constant currency at the midpoint. So just help us understand kind of that shift that's occurred in the fourth quarter that gives you a more.
Optimistic view of the year ahead and really the key is my question is this 4% do you view that as a floor or do you view that as realistic or or aspirational and just help us kind of characterize kind of where.
Where you sit in your guidance and the year ahead.
Got it thanks for the question Ryan maybe what I'll do is sick.
So if you can provide color around the way, we're thinking about guidance because there's a lot that goes into it we still don't believe it's a normal year. Obviously, there's a lot of puts and takes on either side of the equation, but you could walk through those perhaps and then I will give you some color around what we're seeing so far in January and how that's making us feel as well, but once you go and start yes.
So Ryan. Thank you for the question good to be with everyone first of all I'd say, we had a really good close to the year.
And at top line bottom line and free cash flow at the top end of our third quarter guidance. So really strong finish theres a number of.
Variables behind that but the key one is really about execution. So I feel really good about the momentum that we have.
As we move into 2023.
Some of the key variables that underpin our guidance I talked a little bit about them on our in the script.
Scripted remarks.
The first is around stabilization related to case cancellations staffing shortages and things of that nature.
Expect that to continue to improve throughout 2023, we're not complete yet normal markets. There's still some underlying dynamics impacting the overall market, but things are definitely improving we expect that to continue to work through through the rest of this year.
So procedure recovery for sure twenty-three.
The other thing we have to think though to balance that out as we're continuing to see supply challenges we saw those in the fourth quarter.
Our supply chain team as well as our commercial team responded incredibly well to those challenges.
We're assuming that those supply challenges remain at least through the first half of this year and begin to improve in the second part of this year.
But as we put all that together you know we've got a lot of confidence against our full guidance range.
We're optimistic about where trends are going and.
Like I said, we're really excited about where the business is headed I don't know, Brian if you want to talk a little bit about sort of what we're seeing so far yeah.
Clearly a lot of variables that are still moving but if I just think about kind of the here and now and just look at what we've already accomplished in January I'll, just say it was a really strong start to the year.
Again, we're still looking at those variables, but when I think about the things that we can control things around execution innovation theyre going in the direction. We want when I think about the things we can't control is procedural recovery and supply chain challenges. Those are also coalescing in a nice way and so I guess suffice to say based on those things the momentum right now.
And it's early days, but the momentum right now in 2023 has us feeling really good.
So again, we'll continue to monitor those are the variables, but we feel pretty good about how we're starting.
Okay.
Very helpful and then if I could ask a follow up.
The street's margin expectations going into today.
Operating margins were essentially flat, maybe up 10 basis points. So really in line with with your guidance, but let's just maybe walk us through kind of the levers that you think are at your disposal here.
Operating margin line that can maybe move that up a little bit higher than where we're starting today.
Yeah, I think one of the key drivers is obviously going to be revenue growth right. So if we continue to navigate challenges around supply as we have been and that's what we saw in the fourth quarter. If we continue to see stabilization in the market and start to trend towards the upper half of the range clearly that will help drive some margin expansion as we continue to leverage.
<unk>.
Our overall cost base.
Beyond that there.
Just the normal blocking tackling that this company has gotten accustomed to over the last four or five years, we're going to continue to drive sourcing improvements around site optimization six Sigma procurement I'd tell you. The commercial team has really stepped up I've never seen a focus on mix on simplification of the supply chain and SKU rationalization.
<unk> on.
On pricing that is.
Before in the company's history. So I think we've made really good strides from a commercial perspective, which I think could be some leverage the potential upside and then across SG&A. We're still in the early innings of fully leveraging our shared services operating model, which we started through the pandemic. So I think we have a number of things at our disposal that can help either expand more.
Margins or de risk our margin aspirations in a downturn. So I'm feeling really good about what the overall team has been able to accomplish and where we can go with this.
Brian . Thanks, so much for the question Katy can we go to the next one in the queue.
Well go next to Mike Matson with Needham.
Yeah. Good morning, Thanks for taking my questions I guess I'll start with the recon market. It looks like it grew about 8% in 2022, and this is well above that 3% to 4%.
Prior to Covid, what do you think is driving this above normal growth. It seems like it's got to be the COVID-19 backlog, because I don't think pricing and all that strong.
But maybe you can comment on that and do you think that this type of high single digit market growth can carry into 2023.
Yeah. So so I would say that probably the biggest reason that youre seeing that outsize growth overall I wouldn't define it as backlog consumption I don't believe we've started to consume the backlog I would define it more as comps just had easier comps, maybe you call that procedure recovery.
Versus the prior year.
So that to me is is not something that's necessarily sustainable but it was just easier comps that we had more pressure last year pricing was better across the board, whether it's our company or other companies, we did a better job in pricing as a as a group and as a result of that buoyed us as well.
And certainly started before about what our expectations are in pricing as we move into 2020, Threep and I'm sure. We'll get another question around that so those are probably the two biggest things that wouldn't be as sustainable but make no mistake I feel like the market is strong in some of the things that we look to that Ken buoy sustainably the market growth is innovation and innovation adoption.
Right now in orthopedics is really.
Promising.
Not just the typical innovation technology innovation that absolutely can drive up the share of wallet or mix benefit you get with that new innovation.
Great. Thank you.
Sure.
We will take our next question from Larry.
Questions.
Yes, Sir thank you.
Larry <unk> with Wells Fargo.
Good morning, Thanks for taking the question congrats on a nice finish to the year here.
FX of negative one 5% can you tell us the rate youre using that seems a little high in the EPS flow.
Flow through.
Yes, sure Larry good to be with you today.
So youre right, we pegged FX as a headwind year over year at 150 basis points, that's an improvement from our original commentary back on our third quarter call. Originally we were thinking 300 basis points and so we did see some moderation of the dollar at the very back end of 2022 and early part of 'twenty three so that that drove the improvement.
To think about it is we use recent rates.
We look at the full cadre of all of our foreign currency exposures one of the things to recall I remember is that about 40% of our revenues foreign currency exposed half of that is euro and yen right. So the other half is a lot of other currencies that you have to take into consideration. So when we aggregate all of that.
We're at 150 basis points out hopefully, we see continue to see things improve throughout this year and things turn favorable but for right now that's our that's our latest estimate the flow through on that we expect it to be about 20% to 30% down to earnings.
That's a little bit less than what we said last year and as I said last year. When we quoted 30%. There are a lot of variables that can affect that but it's still a reasonable drop through to the historical norm. So again 150 basis points based on recent rates year on year, and making up about half of our foreign currency exposure and the flow through.
Being about 20% to 30%.
That's helpful and then on that it was about 2% in 2022 can.
Can you help us think about the growth that's embedded in the 4% constant currency at the midpoint and how youre thinking about the <unk>.
Different sub segments there thanks for taking the question.
Yes. So if we think about overall said I think what youre asking Larry is how we view that business in an undisturbed market going forward is that kind of what you are asking.
Yes.
For 'twenty three Brian .
Yes, yes.
So so when we come into 2023, even though it's not going to be a normal market. We're still thinking about set as being able to be a mid single digit grower.
That's the way, we're looking at that and in a undisturbed market. We would think we would think the same thing remember in the first half that we're going to be a bit pressured still by the restorative therapies group and that change in reimbursement, but even with that throughout the year. We believe that that segment can grow in the mid single digits.
The key drivers for that because we don't treat all of the businesses. The same from an investment standpoint would be our growth drivers, which would be upper extremities for us our sports business and then certain portions of our CMS business.
Thank you.
Thanks, Larry.
Go to the next question in the queue.
Well go next to Travis Steed with Bank of America.
Hey, good morning, and congrats on a nice quarter.
Wanted to ask about the robotics shoulder opportunity I think before you said you'd be first or second to market now that Stryker has given more definitive timeline.
You can kind of clarify if youll be first or second or kind of timing, there and how youre thinking about the opportunity and from a mix and share perspective.
Hey, Travis good morning, you aren't here so.
I don't know what they are we don't pay attention to our competitors aren't we pay attention to where we are in the process I would tell you frankly I would be very surprised with our first to market, even where we are in the development cycle.
So my expectation remains that we are going to be are we going to be a head.
The most important part is no just as steep in the actual launch is the quality the features and benefits that we have in the platform.
The mix of developers that we have involved in the project I do think as I know youre transformation I'll add platform, so that will be manageable.
Okay, That's fair and then.
Quick clarification on the 3% to 5% constant currency growth how much of the revenue was coming from and body and not and then Brian a question for you on M&A just kind of curious what your willingness is in 2023 and now that markets are a little more diversified.
The diversified beyond electives are 2023 is more of a tuck in Europe from an M&A perspective. Thank you.
Yeah sure sure maybe I'll just start with the <unk> body thing that's a relatively small acquisition I would probably think more about that as a product launch.
So it's not overly material, but it's a very attractive sub space of sports and as we're building out that commercial channel. It's one of those things you really need in your bag to attract talent to that commercial channel. So it is important to us, but I wouldn't look at that as a significant or material impact to the to the year.
Only in the sense that we're going to be able to bring that channel in place and.
Good momentum in sports overall.
From an M&A standpoint, yeah, we're clearly in phase III of the transformation of the company, which.
Clearly talked about looks at portfolio transformation focused on getting more revenue and faster growth markets in its simplest form.
That's exactly what we're going to concentrate on the fact is as our balance sheet continues to strengthen our flexibility your strategic flexibility goes up.
We will look at acquiring technologies that make sense from emission standpoint for the company that we see a path to leadership in that we think will increase our weighted average market growth because thats important for sustainability and we see a path to be able to increase the growth rate in EPS.
And I've said before there are three areas that we will look at for acquisitions, mainly kind of smaller to midsized deals we'd look at things that would enhance our position in recon in those faster growth submarkets that could be robotics data or the ASC setting.
In orthopedic areas diversification that would be industrial sub segments like sports or CMS or extremities and then as you said those things that might be outside of orthopedics that would help us diversify the business away from elective procedures, but also in vast growth markets. All of those things are on the table right now and <unk>.
As our balance sheet strengthens.
Our ability to action that obviously also increases we're going to stay discipline. There is no question about it but we are clearly on the.
The hunt for targets that makes sense in those ways.
Great. Thanks for the color.
Sure. Thanks for the question Travis Kt, we can go to the next question in the queue.
Well go next to drew Ranieri with Morgan Stanley .
Hi, Good morning, Brian This is Keith thanks for taking the caution.
Maybe Brian just to start for a quick question for you.
You've talked about your confidence in the business and I understand that Youre thinking is this year is not normal relative to prepay pre.
Pre pandemic times, but just it's been a while since you've kind of last discuss long term plans and just curious how youre thinking about the business longer term and your confidence in gross margin expansion opportunities ahead, just anything that you could help.
Frame investors with in terms of thinking about the business from a margin or a growth perspective.
Yeah, Yeah, so maybe I'll start.
<unk> on the margin side.
I would say not mine our team's confidence is as high as it's ever been quite frankly, just think about that in the short term.
It is not a normal environment. There are a lot of challenges that we're having to deal with from a supply chain standpoint.
I do go back to what I said in the prepared remarks, I have a lot of confidence in this team because of the muscle memory, we have over the last five years and dealing with a lot of adversity.
Just in this moment of a non normal environment I would rather have this team than any other team because I believe taking baidu those challenges they've proven it that's number one number two outside of those challenges were just hitting our stride from a momentum standpoint would have a lot of kick off meetings here recently I love to go to those meetings you get a real sense for how people are feeling.
Just having a conversation with sales reps, that's where it all starts and the momentum there the competence there the belief there is as good as I've ever seen it. So all those things add up to me, that's a particularly in a normal environment. We're in a good place.
Feel confident that we can continue to deliver the innovation and drive real revenue growth I don't want to give too many views.
The future revenue growth as a company will be but know this as we increase the weighted average market growth of the company as we get to a 4% organic that we can we can we can commit to and sustain that won't be good enough. We will continue to look at portfolio transformation to drive it north of that but right now I feel really good I feel really good about the confidence.
The team has and I feel really confident about the team's ability to drive the results that we just guided to in 2023, maybe you want to talk more about the margin expansion, yeah, I'll I'll actually leveled up for margin expansion talk a bit more about how we think about it which is earnings power inside the company and our goal is to drive a leveraged <unk>.
Now what do I mean by that so we're looking for earnings growing faster than revenue.
As we as we approach those revenue kind of outlooks that Brian just talked about we see a very clear path to being able to do that in our margin expansion will be a key building block in that but it's not the only one right obviously sales leverage and then.
Our ability to continue to leverage.
Our interest rate as well as tax there are a number of levers at our disposal to drive that earnings power higher than revenue.
Inside of that for margin. We continue to have the same variables that I've been talking about for quite some time in the company's continued to show improvement on all those fronts, whether it's pricing manufacturing simplification cost improvement SG&A improvement I mean, just look at our SG&A. This year, we have been flat year over year, while driving expansion.
And a number of areas in commercial infrastructure. So we've shown that we can do this I'm confident we can continue to do it forward as we start to really see that durable revenue expansion that Brian talked about.
Im very confident we can we can drive earnings power faster than revenue.
Great Thanks, and just as a.
Another question.
We had a survey out with hospital Cfo's and they kind of pointed to orthopedic robotics being kind of a key capital spending category for this year, just curious what youre seeing in the environment in terms of both hospital purchases and it would be great to really kind of here, where you are seeing or having the most success in rosa, whether it's greenfield placements or multi.
System orders hospital versus ASC, and maybe what your share shift has been within Rosa accounts and somebody wants mix. Thanks for taking the questions.
Happy to take it out one drew I'd tell you Q4 was solid bulks from Russ at installation and purchasing standpoint.
I'm not aware of any deal that we've lost what is here in the U S or U S relative to capital. We also do a small capital DLC, the surgical business and those would on track as well so sequentially Q3 to Q4 of 2022 was solid.
Because the comps obviously is a lower number than a year ago, but so far so good when it comes to capital. So nothing that I've seen so far leads me to believe that we're going to have a challenge when it comes to robotics.
Yes, and I think we do a really nice job of not just getting individual deals, but also getting multiple placements in the same account you do typically have hybrid accounts, where you have got us in there with robotics and potentially another competitor, but it's not just greenfield it is existing accounts.
<unk> gone to the point, where you don't have enough capacity for that robotic system and they want to buy another system. So it's a combination of those two things.
Thanks.
<unk>.
Oh, sorry that was missed is that part of the question.
Following.
Can you repeat the question we didn't catch it.
Or what was your some atlas mix in the news.
Okay.
Yes, I can take that as well so we've been we've been in the low teens as we've been disclosing that's obviously prior to the launch of persona also your time.
Which is now in the market it's been around for two weeks. So the expectation is that number is going to dramatically increase.
And as you know drew in combination with robotics, you're going to see a collateral effect youre going to see increase of this mix.
Youre going to see the increase of robotics penetration. So we're very bullish about what we're going to we're going to end at the end of the year, we don't disclose that externally.
You should expect something fairly aggressive.
Just to make sure no one is confused it persona Osceola type we've not used the name before but that is the new form factor for some Atlas represented.
Yes, Thanks, Joe.
Hi, Katy can we go to the next question in the queue.
Well go next to Josh Jennings with Cowen.
Hi, good morning, Thanks for taking the questions I was hoping Brian that to ask you you teed up the question for us on price and.
And just maybe a recap of how you fared in 'twenty, two and I'm not sure. If you quantified prices assumptions in guidance top line.
For 'twenty, three but maybe if you could.
Also just directionally help us think about the difference in terms of the pricing environment in the U S versus Europe and Asia Pac.
Sure I'll take that so first of all thanks for the question Josh on pricing, we had a really good fourth.
Fourth quarter.
Look at our disclosure in our press release would actually see that pricing was positive in the fourth quarter now I would say on an underlying basis.
Pricing was a road had erosion of about 100 to 150 basis points, we benefited by some year over year comps due to BBB and we also had some one time accrual adjustments that were favorable in the quarter that drove us to be positive in the fourth quarter, but on an underlying basis I would still think about it as 100 to 150 basis points erosion, which is still incredibly.
Good versus our historical average of 2% to 300 basis. We ended the year at about 150 basis points of erosion again, so a pretty clear step change to where we've been historically.
I talked about in my scripted remarks, we expect next year or this year I should say 2023 to be slightly better than that.
That annual average that we had before 2022, so maybe not as good as 22, but definitely better than where we've historically been.
There are a number of drivers inside that some of them are transitional some are more structural in nature.
The ones that I'm more excited about are those structural improvements that we've made we've made a lot of investments around capabilities around systems around analytics, we've got better governance, we've got better discipline. It is an area. We incent the field source off now so they're all host of things that structurally are improving our price performance ethylene.
As we move into 2023, and that's that is sticking and part of our guide.
If you think about the dynamics between.
U S and EMEA and Asia Pacific, maybe I'll, let Bob talk a little bit about what he's seeing so far and I think so so far we've not seen the pro forma performance when he goes to pricing being a single region frankly, 2022 ultra regions.
Beat our expectations when he goes through pricing.
The most important part I do think that is sustainable and that with the guidance that we've given for 2023 the relevant innovation also you.
Critical component of the sustainability of the pricing as you think about bundled deals do you think about bringing innovation that is going to drive mix and in some cases out price at a better price performance.
Thanks for that and maybe just a follow up.
Okay.
Our team has been tracking.
Sure for large joints in the United States more effectively than internationally, but hoping maybe you could just help us understand where you think.
You had success capturing share in knees and hips in Europe , and Asia Pac and just where that stands and how youre thinking about share capture in those markets or the international markets and 23, thanks for taking both questions.
Yes.
So it's.
First of all I think it's really important we never really pay a whole lot of attention to any individual quarter. Obviously this quarter's pretty strong one for us globally and in the U S. But we.
Don't try to over index on that we do an eight quarter trend and we look at how were trending versus market or even try to stay away from specific competitors, but just the overall market growth looking at the largest players and I would tell you in that eight quarter trend as that continues to roll we're seeing good performance versus market in large joints.
Hip and knee by more in knees and hips, but overall, we're feeling pretty good I mean, you got to go back to.
But for Q2 2020.
As you probably remember we had 20 straight quarters of being below market in every quarter. So five years below market in large joints and so we definitely have seen a sea change in our ability to perform at or above market in large joints, which as you know is our biggest business.
That's the way, we think about it and we break it in a bunch of different ways year over year, we look at it on a stacked basis you'd look at it sequentially, but in all those areas. When we look at any quarter trend, we're feeling good about where we are.
Thanks, a lot appreciate it.
Thanks, Josh and Katy can we go to the next question in the queue. Please.
We'll go next to Robbie Marcus with JP Morgan.
Oh, great Congrats on a good quarter, thanks for taking the questions.
Maybe to start in the script, you talked about improving supply.
Moving throughout the year, but you also talked about it as a.
Benefiting fourth quarter sales.
What are the products that are supply and limited right now and how should we think about the potential benefit to sales from improving supply.
Yeah, So maybe I'll start off on a broad based basis, because theres really two factors that you talked about <unk> and being able to drive performance in the fourth quarter, one would be supply challenges alleviating, but also the innovation building because there was almost two separate things so make sure that we talked about both.
Maybe talk about some of the innovation.
For us when we think about the supply challenges it really comes down to material shortages that we're seeing that we think are going to get better as we move in through the year labor shortages that we think are going to get better as we move into the year and then sterilization capacity, which everybody is dealing with right now that I do believe is going to catch up at some point. So that's why we think supply challenges are going to be.
Better, but it's pretty broad based I can't look at supply challenges and say, it's just this product or that product because it's in packaging. It's in it's in resins as it almost almost everything that we're dealing with has some form of supply challenges like sterilization for instance.
So I wouldn't isolate the supply challenges to a product or product set is just a broad based pressure that we're feeling.
Part of that is around innovation, that's going to be building and maybe you could talk to some of the things you're excited about there yes sure. Good to talk to you I hear is debated Ravi So innovation as we discussed at Jpmorgan earlier in the year. It will be a three hour conversation, so I'm going to try to keep it more or less <unk>, but I will tell you I truly do believe today innovation as a key competitive advantage and two data.
Point is rather they gave that I mentioned or vitality index the percentage of sales coming from new products is more than double over the last few years, and we expect that number to increase dramatically over the strategic horizon.
Then the second part.
We file in 2022 the highest number they will have I think a fight encasing that he said the company and actually we got the largest number of approvals public information when it goes to the App to the peer group.
Breaking down innovation in three or four buckets when it comes to nice already mentioned, but just on a <unk>.
That is the new cement this form factor device that we got hit of Zimmer Biomet.
The clinical data that we got on that product is compelling. We believe is highly stable when it comes to the mechanical and biological fixation <unk>.
This extremely versatile you can all the way through the end of the sugar duty decide whether you want to go cemented or Sam Mendes.
You would actually use the but Sean I think know that usually is highly and autonomy you can customize the.
The device to any kind of anatomy, we got the broad SaaS Nigel ranges.
I am excited we separate sonex model, we don't talk much about it because we still are in the limited market trials.
What has gone like.
Like the opportunity that we have with percentage of smart, especially later in the year.
When it comes to hips in the prepared remarks, Brian talked about keeping site.
Is the world's first and only meets reality digital surgery platform for time hip arthroplasty.
This is making procedures faster.
Increasing accuracy in the actual procedure when you come to the meeting in Vegas. So the economy I think youll be impressed.
Effectively gave the shirt you an X ray vision over the anatomy of the pace and the instruments implants.
Can I get more accuracy plastic procedures. It is going to be transformational I like the momentum we got that with both the raw sand keeps a niche.
We got.
Strong portfolio when it comes to shoulder we spoke about identity. The transformation of launch that we did at the at the end of 2022.
That is followed by a cadence of launches on Blayne, Alex on signature one planning I can span out on that and then through organic and inorganic means I think we have a best in class portfolio of sports Med. So I guess that'll be my three minutes summary on a lot of things that are happening from an innovation standpoint, but I'll close by saying again I do believe is a true competitor.
Advantaged Zimmer biomet.
Yeah, and Hey, Robert just back to your question around supply chain. Our comments on Q4, and then 2023, but we did see pressure in the fourth quarter around supply chain I think you've heard us comment on that.
Not inconsistent with what you are hearing around the sector. We expect those challenges to continue into 2023. The commentary on Q4 just to provide a little color that we think that are our group did a really nice job in navigating that.
The situation continues to be dynamic into 'twenty, three but our expectations that we're going to continue to navigate that really well.
Great and.
You touched on inorganic you did in body and.
And.
The business line, how should we think about overall inorganic and your view at Zimmer Biomet in 'twenty, three and beyond and how should we think about the size of deals you're looking to do and how fast you are looking to move to take the organic in and help expand the wanker higher thanks a lot.
Yes, yes.
We're ready now and again the balance sheet is moving in a place that allows us to have even more strategic flexibility than we've had in the past which is a good a good thing and as I said, it's probably more of those smaller to mid sized deals that would be a bit closer to the best for now.
The words closer to the orthopedic space that we are we are already in but we're ready we're definitely ready now comes down to Opportunistically, finding the right target at the right price and the right returns, but we are ready to move into phase III of the transformation for sure.
Ravi Thanks, so much for the question Katy can we go to the next question in the queue.
Well go next to Jason Bedford with Raymond James.
Good morning, and thanks for taking the questions just a couple.
Clarification on the growth cadence in 'twenty three I think you said that.
Organic growth would be the highest in the first and fourth quarter, but I think those are your toughest comp quarter. So I'm just wondering why <unk> were a bit softer from a relative growth perspective is simply the day rate dynamic.
Yeah, well, let me take that one so you heard us correctly.
First half will be stronger than the second half from a growth rate perspective topline ex FX first quarter will be the strongest.
Followed by the fourth quarter, and then the second and third quarter, Let me go into a little bit more detail on the first quarter that'll be our strongest one primarily due to procedural recovery remember, we're comparing against the first quarter of 2022, which had omicron in it.
And therefore, you've got a you've got a nice comp benefit in the fourth quarter.
Generally from a seasonality perspective from growth, usually one of our strongest quarters and we're assuming a nice benefit from the innovation and the momentum innovation build throughout the year from new products and execution. So that's why we characterize that is our second largest quarter and then inside of that.
Second and third quarter will actually have tougher comps because thats. When you began to see some recovery last year.
Relative to on the cloud.
The day rate impact you're right, we said 100 basis points for each of Q1 and Q4, that's a tailwind which will be offset by headwinds in Q2 and Q3, So you've got it largely right there.
Okay.
Maybe just on M&A, the five to 10 cents dilution tied to the embody deal is a bit heavier than we expected can you just talk about the return profile there and when can this be additive or at least neutral to earnings.
Yes, we would see this at breakeven to positive and the.
And the first 24 months.
It's a very attractive from a margin profile from a earnings accretion profile as Brian said.
It's more or less like a product launch right now, but as that begins to ramp up from a revenue standpoint and begins to cover some of the investments we're making in a very important sector in <unk>.
<unk> and extremities, we feel good about the return profile it meets all of our hurdles.
I'm, an NPV IRR ROIC ROIC metric perspective, and so against US early days, but again neutral within the first 24 months.
Okay. Thank you Jason and thanks for the question Yeah, Katy can we go to the next question in the queue.
We'll go next to Kyle Rose with Canaccord.
Great. Thank you for taking the questions just wondering.
I apologize if I missed it I'm wondering if you could give us a little more insight into where you are at from an.
An inflationary perspective into 2023.
Honestly, you talked about being at the higher end of the range of 50 to 100 bps I just wanted to see if that was the way to think about inflationary impact in the P&L in 'twenty three and then maybe update us on the actual headwind you did see in 2022.
Yes so.
Youre right, we did point to the higher end of our range back in 'twenty two.
50 to 100 basis points flowing into 'twenty, three we're actually seeing that come through year over year as a headwind to gross margin.
I can say that I'm very pleased with how the commercial and supply chain teams have reacted to that and we believe we're going to be in a position to offset all of that and pretty much hold gross margin flat year over year, and that's coming from a number of variables, but again.
We are proud of what the team has done to offset that.
And the impact that we saw in 2022 was I would say about 100 basis points as well and if you actually look at gross margin performance.
Was flat to 2021, so again the team did a really nice job in offsetting those headwinds. So once again, we are demonstrating and showing that we can be disciplined we can offset these headwinds and.
Help our earnings growth over time.
Great. That's helpful. And then overall in the commercial channel you've talked a lot about historically about making investments in.
Our specialized sales forces.
Investing alongside your distributors.
To support some of the higher growth market segments. Just wondering can you help us understand how these initiatives are trending and then any potential updates and kind of where you stand from a distributor versus the direct model you know across some of those higher growth segments.
Maybe I can take that one Kyle so first things first on the on the three segments, we think that our growth drivers sports med.
But extremities and CFT.
We have double if not triple the number of people dedicated to two leases specialties the sports med that expansion.
Now that we have a portfolio.
So the number of dedicated specialized people highest dramatically dramatically increase in these three categories in.
In tandem we also increased the number of people that are fully dedicated to the ASC environment.
And that's because these procedures for the most part do take place in that space. So that goes beyond sales reps you also touches on the contracting arm of the organization.
Your second question the percentage of direct or indirect I don't see that we disclose that externally, we like where we are we like the mix that we have the regular inc.
We just left ourselves meeting in Denver.
Some people were to there.
And I'll tell you the mood is very solid with a union indirect or direct.
Either I.
Ive seen people feel is a good time to be part of the company, but I don't think we break down the percentages externally.
Thank you very much alright, Kyle thanks, yeah. Thanks, so much for the question Jami I think we have time for maybe one or two more.
Okay, we'll take our next question from Chris Pasquale with Nephron.
Thanks.
Just a quick one first I was hoping you could give us an update on the Rosa installed base exiting 'twenty two.
I'll keep it short and sweet here.
Any year, we expect to do no less than 300 installations.
We exceeded that expectation across all three regions and as you think about the future 'twenty three 'twenty four or whatnot, that's frankly the point of entry.
I would be disappointed maybe.
Maybe even jobless, if I, we don't exceed that number given the.
New applications can solve their next generation keep on other technologies coming in less time with that.
So far is exceeding those expectations.
Okay, and then Brian I thought your comment that you had not started to work through the Covid backlog yet was interesting certainly felt like the market.
Had some pent up demand benefit last year, but I understand your point that the comps weren't exactly normal. My question is if you haven't started to make progress on the backlog yet do you think youll ever will and are you assuming any progress on that front in 'twenty three.
That is the question that I think we're all grappling with.
There is clearly backlog you might call. It is longer waiting lists backlog you can define it the way you want but the fact is there is pent up demand for these procedures.
The rate limiting factor is really capacity at the provider level.
You could because of the supply challenged environment, maybe even capacity constraints with the at the.
Company level, but I think the bigger capacity constraint at this point is at the provider level, we actually had a third party run this analysis for us because we really wanted to get in tune to what is the size of the backlog based on a third party's view and then also when they believe the backlog would start coming through and at what pace and what we found in that is that number one.
They came back with there is a very sizable backlog in orthopedics actually it was their analysis came back smaller than what we expected, but still very material and they said that when we start to work through it it would be constrained again because of the capacity and it was a relatively minor.
Impact tailwind for sure but impact to the overall market growth just given the capacity constraints are going to have in the provider for some period of time. The good news about that I guess is when we start to digest the backlog it will come as a positive tailwind likely for years and it wouldn't be overly material in any given year, but it would be a tailwind for multiple years.
So that's the analysis that we have and we just again just doing the math, we don't believe that we are into that backlog yet.
We will see some of that come in 2023, but we're not depending on that when you look at the center of our guidance range.
Alright, Katie I think we have time for just one final question.
We'll take our next question from Rick Wise with Stifel.
Hi can you hear me now sorry about that.
Yes.
Great two questions I'll just add.
Right up front.
I don't think you've commented on China, Brian It seems like the latest Covid surge is subsiding, we're seeing sort of mostly negative but sort of mixed results from doing a little better.
How are you thinking about China factoring it in to the first quarter.
The full year and a quick one for <unk>.
So Bryan asked me to ask you.
About the shared services initiatives you are in the early innings. He said why is it that moving faster just kidding. So could you just getting.
Great question, Great question Gregg.
Great clearly knows.
Launch against both yes, so we're seeing.
China and Covid surge is literally start to stabilize in the first quarter. It was pretty acute there in the fourth quarter. Fortunately, we were able to offset it with strength in other markets.
So overall, China wasn't as big a factor in the fourth quarter, and we don't see it as a material mover at least from a COVID-19 standpoint in the in the first quarter, we do see China as a very attractive market for overall growth in 'twenty, three and beyond especially now that we've moved through all of the the pain and noise of BBB, which is now.
Sunset and behind Us so really feeling good about where that market is and now that team can start to position towards not only growing the business, but start to really work on the margin structure of China as a whole coming out of BBB. So again feel very optimistic about where we are there.
Yes on the water.
Way to end our call on a good quarter and good outlook with shared services, but I love your ambition and I'm going to share that with the leadership team that we've got to move faster. So thanks for the question.
Thanks, Thanks, Greg and thanks, Thanks for all the questions I'll turn it over to Brian just to close out the call.
Just a couple of those first of all and thanks for joining US This morning, and I would say I hope, it's clear that the phase one and phase two of the transformation of this company are well on track.
We're feeling very good about where we stand and I can tell you because of those two phases I feel that we will at least take our fair share of the markets that we play and certainly hope to do more than that now we're moving on to phase III and that really is the portfolio transformation of our company looking at changing the mix of our revenue to make sure that we have.
More of that mix in high growth markets. So we're going to do that in three ways, which is kind of combination phase II phase III. The first one is innovation, we're going to invest in innovation in the right areas and faster growth markets. So that we built more revenue to that innovation in those attractive markets gives you real time revenue growth, but it also makes it sustainable by increasing the weighted average market.
As a company the second is investment in the commercial channel you've got to have the commercial channel and capability to drive that innovation and make it real and the third is portfolio active portfolio management really looking at moving things into the organization and out of the organization that can drive our weighted average market growth rate. So we are clearly in that phase.
We have a better balance sheet right now that we're going to be able to leverage in that in that in that part of the transformation, but make no mistake, we feel very confident about phase one phase two and now phase III given that balance sheet freedom that we're going to have going forward.
With that I think we'll go ahead, Nicole yes, thanks, everyone for joining us I'm sure. We'll talk today and of course, if you have questions. Please don't hesitate to reach out to the IR team.
Have a great day.
Thanks, Dave.
Thank you again for participating in today's conference call you may now disconnect.
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Okay.
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