Q1 2023 Zimmer Biomet Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2023 earnings conference call if anyone needs assistance at any time during the conference. Please press the star followed by the zero as a reminder, this conference is being recorded today may <unk> 2023.
Boeing todays 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 one on your push-button phone I would now like to turn the conference over to Kerry Medics Chief Communications Officer. Please go ahead.
Thank you operator, and good morning, everyone were joining you from our Warsaw, Indiana headquarters and are happy to be with you today welcome to Zimmer Biomet first quarter 2023 earnings conference call. Joining me are Brian Hansen, our chairman President and CEO EVP and CFO. So he will probably be I N C O L.
On 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.
Changed 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 Q1.
The earnings release, which can be found on our website Zimmer biomet dot com with that I'll turn the call over to Bryan Bryan.
Alright, Thanks, Kerry and thanks to everyone for joining us on the call. This morning.
You don't get the opportunity to do this too often so I am going to take advantage of it and I'm just going to start the call by simply saying this was a phenomenal quarter, where pretty much everything went better than expected and importantly, as a result of that momentum we are significantly raising our full year top and bottom line outlook, which took he's going to talk about.
Just a minute.
With that said and maybe taking a step back for today's call I'll talk more about our Q1 performance and the drivers of that performance and then so if you will get into more details for the quarter and importantly, also our financial guidance for the rest of the year and then we will make sure that we save plenty of time for your questions, which we look forward to addressing but before we do any of that I just want to take a minute.
To speak directly and personally to the D. B G.
It really just say thank you you know truly say thank you for yet again, you have delivered beyond our expectations and I'm very proud of what this team is doing to navigate an environment that while improving there's no question is improving it is still fluid you know when it presents us with challenges that quite frankly seen like daily challenges and it is truly impressive.
How you're navigating that environment right now.
And I'm very proud of the dedication resilience and the innovative thinking that you're bringing to your roles. Each and every day is truly making a difference but I'm most proud of how together and I do mean together we were living the ZB mission to alleviate pain and improve the quality of life for people around the world and as we know we do that every.
Eight seconds 24 hours a day seven days, a week, which is really what it's all about in the first place. So thank you. Thank you for what you do for ZB. Thank you for what you do for our customers and most of all and most importantly, what you do for our patients the patients that we serve every day.
Okay. So let's take a look now at the first quarter.
Some of you may recall coming into the year, our guidance assumed that Q1 would have the easiest comp of the year, but what also experienced some headwinds from both staffing and COVID-19 related challenges that we felt would put pressure on elective procedures. During the quarter. We also assume that there would be a pretty high level of <unk>.
Apply pressure in the first quarter.
Our assumptions also believed that all three of these headwind variables would then improved throughout the year, providing less impact to the business.
But then outside of the easy comp Q1 would be pretty bumpy, okay. So what actually happened in the quarter and why it was a considerably stronger than we expected well first and foremost procedure recovery was much better than we anticipated you know really having almost no material or meaningful impact from COVID-19 or staffing challenges in the quarter.
We manage the supply constrained environment better than we originally anticipated maintenance mistake.
Supply is a real problem and it's putting pressure on the business, but this team has done an excellent job managing that environment, probably leveraging some muscle memory from the past and then third and I think really importantly, our team's execution and traction with our new product innovation is even stronger than we anticipated and that's important because it's going to continue to provide bench.
If it to the rest of the year and so because of this we saw another quarter of very positive year over year momentum in large joints with our global hip and knee business is drawing approximately 13 and 18% on an ex FX basis. Our overall S. E. T category grew more than 6% driven by strong low.
Double digit performance in our growth drivers and set which we've talked about before being sports CMS tea and upper extremities and then this was partially offset as as expected from headwinds from a restorative therapies business, where are these headwinds will anniversary and it is you remember these are reimbursement change headwinds that we have in that business they should anniversary.
<unk> by the back half of this year and then finally, our other category grew 11% in the quarter. So needless to say it was a pretty strong quarter.
The momentum is real in this business and our confidence is extremely high and there's good reason for this confidence if we just think about this quarter alone. We officially launched our new cement less knee form factor of persona Osteo, Todd and this is adding to the persona family and really strategically rounding out that portfolio and this new keel design.
Trey it's extremely versatile it's anatomic because it is the persona family and it's stable and it's the only D that you can do a cemented or some atlas procedure within inter operative decision possible for the surgeon and that's a big deal. We believe that this will enhance the potential for cement was penetration because surgeons can go into a <unk>.
<unk> bone quality procedure with the intent to use them Atlas, but then they have the ability to pivot back to cement. It is the bone quality isn't there and for this reason and a lot of other reasons customer feedback. So far has been extremely positive as we launched this product and as you may know our cement less penetration is already in the mid teens, but we believe that.
This can get to 50% or higher penetration and we're excited about that and we truly do believe that this premium product could accelerate that growth for E beam and is already doing so it's still early days you know our full launches planned for the middle of this year as more sets become available making a mistake. This is a real driver for not just our knee franchise, but for the overall.
Company. So we're very excited.
And as you remember back in February we also closed our acquisition of and body, which is providing access to differentiated products and an innovative pipeline for our sports medicine business and this investment helps expands <unk> presence in this very attractive high growth market. While also in that market, serving our customers and our patients better and this combined with the <unk>.
Strong innovation pipeline that we have and sports and a dedicated commercial channel that we put into place gives us continued confidence in our global sports franchise and if you were at the double AOS meeting you would have seen that we previewed our hammer product, which is designed to ensure consistent and reproducible compassion for hip procedures, while allowing the surgeon to die.
Fill up or dial back the force of the strike depending on the individual patient need and this ability to be more personalised actually differentiates hammer versus other compaction devices on the market. So needless to say we're excited about this differentiated product. We believe this could actually increase not only the consistency for surgeons.
But also the procedure efficiency, which is really important right now and our current expectation is to launch hammer in the third quarter of this year.
And if you just look at these combined products. This is actually building on other launches that we've talked about persona IQ hip insights the identity shoulder system and in total we've introduced more than 55 zero new products from 2018 through the end of 2022 with the majority of those products coming in markets growing 4% or faster.
And we're geared to continue that momentum doesn't stop here with another 44 zero planned product launches between this year and the end of 2025 again with the majority of those products to be launched in 4% plus growth markets and this shift not only continues the transformation of our product portfolio and cause a short term revenue growth, but it also.
Improves our weighted average market growth and ultimately as a result of that gives us more confidence that our markets and our portfolio mix positions the company for sustainable mid single digit growth.
And with this kind of traction around our product pipeline, increasing strength of our balance sheet and our team members' ability to execute ZB continues to be well positioned to deliver value today and in the future and achieve our mission as a company.
And with that I'm going to turn the call over to <unk> to take a closer look at Q1 and our latest expectations for 2023, Okay, Yes oaky.
Thanks, and good morning, everyone as Brian mentioned, we had an excellent quarter with better than expected results.
The result of continued market normalization and the strength of our performance, we are increasing and narrowing our full year financial outlook with.
With that let's turn to our results and updated full year guidance.
Unless otherwise noted my statements will be about the first quarter and how it compares to the same period in 2022 and.
And my commentary will be on a constant currency and adjusted operating basis.
Net sales were 1.831 billion, an increase of 10, 1% on a reported basis and.
An increase of 13, 2%, excluding the impact of foreign currency.
As we noted on our last call, we had a selling day tailwind of about 100 basis points this quarter.
Overall, the business benefited from faster than expected recovery of elective procedures, driven by the easing of staffing related headwinds.
<unk> of cancellation rates and some backlog recapture.
Also we benefited from lighter comps strong commercial and supply chain execution.
And new product uptake.
While we continue to face macro supply headwinds our teams have been doing a great job mitigating these challenges.
U S growth of 12, 7% was well ahead of our expectations with elective procedure volumes recovering a procedure cancellation rates returning to pre pandemic levels.
International sales grew 14% with EMEA growing ahead of expectations, driven by faster recovery and strength across both developed and emerging markets and in APAC. We saw some pressure in China as anticipated, but results were generally in line with our expectations.
Turning to business category performance.
Global knees grew 18, 2% with U S growing 18, 1% and international growth at 18 point too.
Specifically, we saw strong uptake across a full persona product portfolio and traction in all regions. We now have the persona primary partial revision an osteo tie some atlas options rounding out our full product line.
And we are seeing very encouraging results across that Newsome Atlas form factor.
This full persona product line, not only improves and enhances our product mix benefits, but also supports the continued utilization of Rosa and associated pull through.
Global Hips grew 12, 9% with U S hips up 12, 3% and international up 13, 5%.
Driven by continued traction across the Avenir and G seven product lines, along with ongoing uptake of Rosa hip.
And we are encouraged by the early impact of the hip in site launch.
The S E. T category grew six 4% driven by continued strong performance across our key focus areas of C. M. F T Sports medicine, and upper extremities, all of which grew in the teens. This was partially offset by lower growth in other parts of S. E T, which includes the reimbursement changes and restore therapies that will anniversary.
Bursary mid this year.
Finally, our other category grew 11.1%, partially driven by some larger orders and surgical products, which may not repeat overtime.
Moving to the P&L for the quarter, we reported GAAP diluted earnings per share of $1.11 compared to our GAAP diluted earnings per share of 35 cents in the prior year.
While investments in R&D and commercial infrastructure increased net earnings were higher this quarter driven by revenues improved gross margins and losses in the prior year related to Zim V.
On an adjusted basis diluted earnings per share of $1 89 represents a 17% increase from $1 61 in the first quarter of 2022.
Adjusted gross margin was 72, 8% up 220 basis points from the prior year. These results were positively impacted by favorable mix related to large joints performance and foreign currency hedge gains. Excluding these items underlying gross margin was broadly in line with our expectations.
Related to inflation, we are seeing some incremental pressure from spot buy and contract manufacturing pricing, but overall inflationary pressure has largely stabilized.
Our adjusted operating margin for the first quarter was 28, 4% up 200 basis points, primarily driven by revenue better gross margin and continued discipline around our investment profile.
Interest and non operating expenses of 46 million and our adjusted tax rate of 16.3% were broadly in line with our expectations.
Turning to cash and liquidity.
Now moving to our updated financial outlook for 2023.
Based on strong Q1 results and our ongoing strong execution, we are raising and narrowing our full year 2023 outlook.
Constant currency revenue growth is now expected to be 6% to 7% versus 2022 with an expected foreign currency exchange headwind of 100 basis points.
We are also updating our adjusted EPS guidance range now expecting $7 40 to $7.50.
While we initially gave color that adjusted operating margin would be flat to slightly better in 2023, our Q1 results in tandem with an improved rest of year outlook gives us the confidence that we will expand operating margins this year.
We continue to expect interest and other nonoperating expenses, along with our tax rate to be in line with our previous commentary.
Finally, we now expect free cash flow for the year to increase to a range of 1 billion to $1 1 billion.
In terms of quarterly cadence throughout the year, our expectations remain unchanged.
One will be the highest revenue growth quarter, followed by Q4, which should benefit from improving supply and contribution from new and innovative products as well as the selling day tailwind of about 100 basis points.
Q2, and Q3 are expected to be lighter growth quarters, given tougher comps and in that selling day headwind of about 100 basis points.
Again, selling days will have a net neutral impact for the full year.
We expect adjusted operating margin largely follow revenue with second half operating margins being slightly better than the first half.
In summary, we delivered excellent top line results.
Meeting internal expectations in nearly every category, while posting very strong adjusted earnings performance.
Our business is executing well our pipeline is delivering and our momentum is real.
We feel very confident as we move forward with that I'll turn the call back over to Kerry to start the Q&A.
Thanks City 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.
We'll take our first question from Steve Lichtman with Oppenheimer.
Good morning, guys and congratulations on the quarter.
I guess first of all I wanted to see.
Start on the knee and hip market obviously.
Strong for E b and for the market.
As you noted comps play a part but I was wondering if you could talk about what you think sort of underlying market growth here is.
They talk a little bit about procedure growth and were sort of pricing stands as well.
Sure Steve. Thanks for the question. This is Ziggy and Hello to everyone on the call. The first thing I'd just step back overall, we had a very good first quarter.
As you can see from our results and it was really across all of our business segments, including all of our regions.
Through all the way through the P&L.
Really happy about the quality.
And the execution of the entire team. We did always think that Q1 would be our strongest growth quarter, we talked about that when we gave our initial guidance for the year. It was really two key drivers. One is you had a strong comp benefit versus the first quarter of 2022, clearly we were still dealing with Amazon back in 2022, Secondly, we've talked about a day rate.
Tailwind of 100 basis points. So we knew year over year that we would see strong growth.
But we achieved better than that.
And really across every one of our business segments as I pointed out earlier.
Recall, where our expectations, where before we thought we would continue to see some procedural.
Volume challenges some staffing challenges and also supply chain headwinds that underpinned our our previous guide.
Well, we actually overachieve.
Relative to those macro factors.
Just didn't see as much staffing or Covid pressure. We also saw some backlog come into the into the marketplace and so from a macro standpoint, it was better than we expected and then also our execution was incredibly stronger innovation was very strong.
Across commercial but also supply chain, so really happy with.
Where everybody sort of executed for the quarter and we think that that's durable going forward relative to.
Your specific question on the overall market growth rates I would just say look were not yet in normal market growth.
You clearly continue to have some choppy choppy comp comparisons versus the prior year.
We do still think we're going to continue to face some headwinds relative to staffing and of course supply chain continues to be continues.
Continues to be a very real challenge out there partially offset by buy.
Some of that tailwind.
Tailwind so again the markets.
But normal yet, but I would say, they're very strong, they're improving and normalizing and we're very encouraged about where theyre going.
Pricing in the quarter it was a little bit I.
I would say kind of in line with where we expected it to be we always talked about this year being a bit better than the traditional two to 300 basis points that we've seen historically and at 140 basis points of erosion.
That was right in line with where we expect it to be.
Great. Thanks, and then one product underneath side that is.
Yet benefiting you as on pursuing I accused wondering if you could give us your updated thoughts on that how the limited launch is going and maybe your latest thoughts on the outlook for that product, particularly after the untapped.
Proposal. Thanks.
Thank you Steve do you want to hear so lots of excitement as of late on that persona IQ as of late obviously, we got the in depth.
Ah indication that what became at October two 2023 were featured in the Wall Street Journal that got a lot of attention we signed an additional contracts all over the U S. Our advancing rapidly in order that limited market release, which as we said in the past as more clinical in nature than commercial.
Got now north of 500 million data points, and again thats getting a lot of excitement in terms of where we are I'll tell you nothing has changed we believe we'll be in a position to launch the product by the end of <unk> 2020 three we're working on four key things when he goes to these limited market release number one is understanding the clinical value proposition.
What is the commercial value proposition what do we do with all these data what is the best way to position this product in the marketplace number two as you can imagine with the data component there is a bit of a back and forth on our ownership how do we utilize said how do we make the best out of all these data. So we can act on it and I would say with advanced a lot in there.
As regard number the city is making sure that all the customer experience is seamless.
These symbols patient education. These impulse caregiver application, we're going to make sure that these are best in class experience and the number 40 is how do we monetize the device. So in those four key areas. We've made tremendous advancements and I do believe we're going to be in a position to launch at the end of the year. The <unk> tap is going to impact that every every single patient.
It's a sizable amount of patients that are going to benefit from the additional reimbursement.
And again he is just another reminder, that this is breakthrough technology first to market new to market that will make a difference. So the excitement is high and we look forward to updating you guys sat down the road.
Okay. Thank you Paul operator can we go to the next question.
Well go next to <unk> Singh with RBC.
Oh, great. Thank you so much for taking the question and congratulations on the really strong frontier.
I guess just a question around guidance in Q2 trend. So your guidance is about 6% to 7% ex FX in 2023 can you just walk us through expectations around cadence, perhaps shed some light on April trends for your business.
How you expect that to stack up versus Q2, I think prior to the call. What consensus was looking for sales and EPS of $1 79, and $1 77, respectively.
Obviously implies strength beyond Q1, so any color there and then longer term.
What does it mean for the growth profile for Daimler going forward really versus consensus I believe for 2024. It is around four 5%. So any color that would be great. Thank you so much.
Yeah, Hey, Hey, Sharon.
Ziggy. Thank you for the question.
We definitely saw a very good quarter.
Here in the first quarter, and we're expecting that momentum to carry through and I think you would see that in our rest of year guide.
Coming up to 6% to 7% ex FX.
From a quarterly cadence standpoint, I would expect the overall growth rates in.
In each quarter from here to step down from the first quarter and it really goes back to that one that comp benefit I talked about in the first quarter on Steve's question, but also we have that day rate.
Tailwind of about 100 basis points in the first quarter. So that you should think about again, the first quarter being the highest fourth quarter being the second highest from a growth perspective in the second and third being a little bit lighter just based on tougher comps and.
Our net day rate headwind and so that's how you should think about cadence but definitely.
We're lifting our guidance by more than just the first quarter outperformance, we're actually pulling that momentum through the rest of the year as part of that raise.
Ryan you want to talk about the.
The underlying growth as we move forward.
I mean, we've stated it before and obviously just based on our performance today, our confidence levels, even higher we do believe that we're four plus percent grower in a normal market. It's not exactly normal right now as <unk> talked about before but our confidence continues to grow that we're in the right markets. We continue to build scale in more attractive sub markets and our confidence is high.
And just any color on April trends.
I would say continue to support our increase in guidance so.
Things continue to our guidance initially showed or pad.
And assumption of improvement throughout the year.
Our current increase in guide assumes that as well in the early days in April continuing to prove that out.
Thank you operator.
Operator can we go to the next question. Please.
We'll go next to Matt Taylor with Jefferies.
Hey, Thanks can you hear me okay.
We can.
Great.
So I wanted to ask you your question about margins.
Because.
To your point, you're fortunate and now you have this maybe excess growth.
We don't know exactly but.
That gives you a lot of the margin to work with.
And so I.
I think ultimately that's what people care about is our margin is going to progress and I know you've talked a lot about it but.
If you enjoy.
Excess growth for a while how are you going to use that or you're going to reinvest or are you going to let it drop through what.
What are you what are you thinking about in terms of how to use the excess margin.
Yes, I'd say the first thing is it feels good to be in a position where you have the optionality of deciding where youre going to put that additional growth in the margin or the profitability upside that comes from that.
Look we continue to have very strong robust innovative pipeline, we're going to continue to invest against the business in the right way in a disciplined way.
Continue to be focused and make choices about.
You need to expand in faster growth submarkets that have good profitability profiles.
We believe we can do that while still expanding margins over time and that really comes from the strength in the discipline of the overall team.
And driving efficiency and mix shift in that investment profile to make sure that were growing the top line, while still growing the bottom line. So.
We think we can do both overtime.
Right and one follow up so no one quite knows what's going to happen but.
It seems like there may be some excess demand for a while and.
You know the best type of margins is that.
That comes from excess organic growth right.
And so you may have that for a while so how are you thinking about that could you talk about yourself as a 4% grower but.
I mean, clearly you just outperformed them by a lot.
And I.
I guess, a how long can that last and then b if it does last longer.
And then how does that change how you run the business.
Yes.
So just going back to your point there remember the comp benefit in Q1 was a key driver beyond underpinning that larger performance relative sort of that 4% to 5%.
So just want to make sure that we've got good clarity around that.
Having said that as Bryan talked about we do think and have even more confidence now based on our execution based on a normalization of market based on our pipeline that four to five is a durable number.
And we'd be disappointed again, if we weren't able to achieve that in normalized markets.
So we think that thats sustainable or not and then as we've talked about is that provides.
Profitability upside that can be reinvested back into the business, while still driving margin expansion.
Where we want to be right.
That was the story underpinning our margin expansion all the way back to beginning a few years ago, which is to be able to do this through revenue leverage and do in a high quality way, while investing back into the business.
Thanks, so much well take operator can we have the next question. Please.
We will take our next question from Vijay Kumar with Evercore ISI.
Yeah. There is some debate on that perhaps demand being pulled forward here do you see the stop order in market growth is.
That's perhaps a catch up of backlog as against the pull forward of demand and do you feel like with your product portfolio that you have is similar now gaining share in the markets versus the industry.
Well, maybe I'll just quickly talk about what I see from a market standpoint versus market and then maybe you can speak to.
When you say pull forward just talking about backlog consumption. So maybe you could talk about backlog.
Certainly.
From a us versus market perspective, that's up pretty good in the quarter. Obviously, we look at this on a year over year basis stack basis or sequential basis versus our key competitors.
We try not to get over exuberant about any specific quarter or too depressed about any specific quarter, but we do look at as I've always talked about is an eight quarter trend across those three vectors. If I go all the way back to Q2 of 2020 now let your debt consistent equaled or trend I feel very good about our position versus market and I truly believe we're just getting started.
So from a us versus market perspective, I feel good and I think you will only get better over time, if we think about the backlog maybe you could speak to what we saw in the quarter.
Yes. So there are a lot of factors inside the quarter.
The outsized performance I talked about year over year, our original expectations, but we were above that again for a number of variables including.
Less pressure than we expected.
We saw some backlog as I talked about and we were able to navigate the supply chain and good commercial execution I would say backlog was probably.
The smaller component of the overall change there are performance relative to expectations. In Q1, we do expect that to continue for the rest of the year, that's built into our guidance as we move forward.
And so yeah, it's good to have that a bit of an offset or tailwind relative to some of the other challenges we're seeing in the marketplace.
Understood and so Q1 in March.
Margins for your gross margins up 100 basis points sequentially.
Can you just remind us on on worked with the impact of inflation in China, We BP et cetera in Q1.
And what drove this sequential gross margin expansion.
And you know when I look at your guidance.
P S up by 6% clearly that implies.
<unk> margin expansion.
North of 50 basis points is it all coming coming from gross margins versus operating leverage.
Yeah. So thanks for the question second question there Vijay.
First thing is I, just want to step back a little bit part of the overall margin expansion story.
Brian that we talked about the ability to stabilize gross margins from 22 out for the next few years inside of that on better revenue growth, we would leverage SG&A, which would give us the platform to then expand margins increase our earnings power as a company. So that continues to be the strategy and story and I think youre just seeing that play out here.
2023.
It remains true in fact.
<unk> seen a little bit of additional incremental pressure on some areas of supply chain inflation I talked about contract manufacturing supply prices, we're still doing some spot buys them for certain raw materials, it's putting amount a modest amount of incremental pressure nothing significant but something we just want to keep our eyes on for the rest of this year and into 2024.
But again the deflation has largely stabilized so that 100 basis points is definitely coming in year over year.
But despite that we said that 'twenty two on gross margins would be relatively in line excuse me 23 versus 2022 right. So the teams were going to be able to find a way to offset that that incremental headwind and we've largely done that now in the first quarter, we did see exceptional growth sequentially, but also year over year.
There are a number of variables that drive that but I'd say the three biggest are around volume gains.
Let us year over year, but also versus expectation.
Some FX hedge gains in the quarter and also a pretty pronounced mixed benefit, especially given the outsized performance of our large joints versus our other category and also U S versus the rest of the world and so those are kind of the three dynamics that are going on in the first quarter.
As we go through the rest of the year, we still expect those three variables to play a positive impact, but not at the same level. Okay. So the way to think about this gross margin for the rest of the year will stop step down versus Q1, but still for the overall year will be higher than it was in 2022, but you should think about on an underlying base.
<unk> 23 being still in line with 2022, Okay. So gross margin definitely a tailwind underlying is still consistent with prior year. The operating margin that you're implying off of our EPS Guide is I think that directionally right way to think about that and that upside is coming primarily from from gross margin.
So those are some of the building blocks that underpin our EPS raise for the year.
Okay. Thanks, guys.
Yes.
Can we have the next question.
We will take our next question from Robbie Marcus with JP Morgan.
Okay.
Maybe to start I was hoping maybe you could.
Dive into some of the drivers behind the knee growth rate it was really impressive.
Definitely better than market growth and I was just hoping you could help us understand how much is coming from robotics from mix of new products and.
Really dive into some of the growth drivers there. Thanks.
Hey, Thank you Robby good talking to you. This morning, I will probably bucket the performance in two key areas commercial execution and innovation.
Ill start with slide number two and I won't break down all the details on what is driving what but that clearly a new product introductions had to do although with a performance. As you know you were in Las Vegas, we launched personal analogy with that.
That is our cement less new form factor of our platform and Thats gaining traction.
Tell you roughly one third of all customers for persona Osha by our competitive accounts we.
We've seen that with persona Alysha Ty would increase and also the penetration of robotics and again I won't break down the size of that increase but we've seen an increasing that robotic cases done in combination personal analysis dye.
On Rosa, so definitely definitely a driver there.
You, obviously too early.
But raw solve it all with SAP, our sonar primary is gaining traction across the globe.
The ecosystem the interconnectivity of our implants, and CBS is gaining momentum and thats gaining momentum whether you're here in the U S or in Europe , or Asia Pacific. So again, a lot to unpack when it comes to when it goes through innovation and commercial execution, we navigated supply challenges I think very effectively very proud of what the team has.
In that regard.
And we'd executed flawlessly.
We got new incentive plans in place in 'twenty three that were not around in 2022 around making sure that people are growing in knees and hips, while pulling asset.
We have added a new incentive C now or the geographies around EMEA and APAC and I will say again that commercial execution has gone very well. The last thing I'll talk about is the ASC. This is one area where in the past we're not doing now all that great. We'll have three major gaps people contracts on portfolio.
The portfolio is definitely there.
We added a lot of people in our contracting group.
The number of people thinking about seizing the in the hundreds so today around 10% to 15% of our sales come from an AUC and thats growing very nicely. So again commercial execution innovation chunky buckets. When he goes through this level of performance.
Really helpful and then maybe for Bryan and <unk> you know we've heard you talk in the past about.
Using M&A to maybe diversify into faster growing.
Parts of the market Theres a lot of talk from your competitors about M&A some of them more specific than others.
Thought it would be great to just get your latest thoughts on M&A for Zimmer, how youre thinking about it in terms of size and ability to diversify away from your core markets and your thoughts on on valuations out there right now.
Yes, so maybe just quickly before I get into our focus areas I'd say in valuations I still think see things as being pretty extensive.
Look at assets that are out there today, we're not seeing as much downward pressure on valuations as we certainly were hoping for maybe a little better recently, but not as good as we would've expected.
And then that combined with the fact that capital is a little more expensive to come by is not necessarily a great combination that said, we still think there's opportunities that we're going to try to pursue we are absolutely phase III of the transformation as we said many times phase III is focused on portfolio transformation using capital to be able to acquire <unk>.
Knowledge technologies that are attracted to the organization.
We're very focused on this and extremely disciplined number one we're not going to look at a target. If it's not mission centric that's very important to the organization. We are a mission driven organization and that target needs to move our mission forward, we need to see a path to leadership at some point, if we move into that space were already in that space, we need to see a wham accretion so increasing our weighted.
Average market growth and as a result of that our revenue growth and then ultimately helping us drive faster EPS growth. So those are the types of deals and then inside of that we're looking at enhancing our position through acquisitions in fast growth subcategories of recon, which may not seem super exciting, but the fact is there some fast growth subcategories.
<unk> that we want to build scale. So that we can grow faster than the overall market in a consistent way and then we're also going to look to diversify so looking at acquisitions, which we've already shown in other parts of orthopedics that are faster growth thats, mainly in our set category for us eventually looking to diversify outside of orthopedics to diversify outside.
Of electric procedures and give us other forms of opportunity to grow the business again outside of orthopedics, and we would say most likely.
In the near term, we would look at smaller to mid sized deals and we would kind of quantify that to say about $1 billion in revenue or less would put us in that category and we would probably stay a little closer to the best in orthopedics in the near term. So that's the way we're thinking about it right now.
I also want to add to that.
I would just say.
All the hard work that the team has done in improving financial performance paying down debt over the last few years, even through a challenging period COVID-19, we've really strengthened the balance sheet and so the great thing is our capital structure can support.
That Brian spoke about.
Right now we're traveling somewhere around the mid to high twos from a net debt to leverage ratio perspective.
So if you took a turn on turn and a half on that relative to two to $2 5 billion adjusted EBIT.
EBITDA you would see that there is there is a substantial amount of M&A firepower available to us and.
Those numbers would only be augmented by the EBITDA from a target so a long way of saying that we've got the capital structure, we've got the balance sheet to support what Bryan talked about.
And what's key about that we were very disciplined about this is both that phases into the organization and transformation.
Wanted to make sure that the base business was humming that the organization was executing just like you know our bonds spoke to we have that our confidence level is very high so not only do we have the balance sheet to move into that phase III transformation.
Now are ready to do it we have the capability we have the right team in place and we had the execution of the base business. So we're excited about phase III.
Thanks, Ravi Thanks for the question.
Yeah, operator can we go to the next question in the queue.
Well go next to Matthew O'brien with Piper Sandler.
Thanks for taking the questions.
Brian I know you've talked a lot about new product introduction that I think you said 40 through the next three years, how does that compare to the number of products you've introduced over the past three years and then I know you've got your competitors listening, probably I'm going to give us too much but just can you give us a general sense of where those are going to go are they going to go into that specifically.
And are you gonna start touch on maybe some areas that are outside your traditional.
Power alleys, I guess with those new product introductions.
Thanks for the question Matthew So first things first.
It's not just the quantity it's also the quality.
Our new product is created equal, but I think we referenced in the past.
We launched around 50, new products from 18 through 22.
There can be many studio at least 40, new product launches over the next 36 months and again, what excites me about these launches Matthew.
Is that the type of products that they are differentiated in many instances. They are they are first to market.
In Brazil, what are they going it will take me about an hour to go through everything in the pipeline I'll keep it to maybe 30 minutes or less but I'll tell you. We're excited about where we are in niche with a full portfolio.
Things that are already or we already spoke about some analyst or purchaser now occupy new to market themselves actually three months ago.
That's an attraction or.
Sam Mendes penetration is up 15% one five.
With the start to be in the 50% range and that is definitely the goal.
Got it about Rosa parks shell or robotic <unk> system that is next generation is getting relaunch.
Summer of 2023.
Persona IQ I think it was bought plenty about that.
We will have Oxford, approximately some analyst skewed in the U S that is a legacy product that has gained market share in Europe persona revision I didn't comment on that one Rob we ask about in your performance in Q1 persona revision so tremendous growth again.
That is a product that is only available in the U S. I can hardly wait for that in 2024, when he gets into our U S markets.
Shifting to <unk>, we launched a rosa heap under direct on theory or that category posted to come at some point already market. We are the only mixed reality company.
With heap insights.
That is something that is gaining tremendous traction.
You can see the hologram of a patient's anatomy anatomy, he drives that efficiency and accuracy in our case, we saw old instrumentation.
Brian in the opening remarks spoke about hammer or surgical impactor that is also a device that is driving efficiency that operating room, frankly, taking an existing product progress in market.
Make it a variable.
It bear better drive variable energy control, he's got a better accuracy.
Has the ability actually implanting the cap again I can spend on that one in that regard.
Beyond <unk>, we got.
What amount of products being shipped through acquisitions and organic.
We recently announced that we closed the embody deal.
That is giving us a competitive advantage in our soft tissue repair, where do you stand on where they stand on injury or whether it eats.
Rotator cuffs.
That is performing very well.
Got everything that we need in the sports med, we have a new product introduction and shoulder again I think about 30 minutes are almost done but I will tell you. There is a lot of that is happening and is happening both from an implant standpoint are happening from a technology or data solutions standpoint. So we look forward to updating you at an upcoming product fair, but I will tell you innovate.
<unk> is truly a competitive advantage to get a zimmer biomet.
Thank you Bonnie can hear the enthusiasm there appreciate it question pursue key on the pricing side I think you said down 140 bps in Q1 competitor report last night, and I said more like neutral this year theyre more diversified so I know, it's a little different but.
Are you are you guys, a little bit more of that screen side as far as pricing concessions at this point in the marketplaces that part of the strategy and kept pricing actually be a little less of a headwind for you guys over the next maybe year or two versus what you've seen historically thanks.
Yes, Hey, Matt So definitely think that pricing will be less of a headwind than we've seen historically.
I do think that.
Pricing pressure in the overall market will remain.
Potentially intensify over time, but I will tell you our performance so idiosyncratic to Zimmer biomet is that we're putting things in place to ensure that we don't have pricing erosion at the same level that we've had historically, even if the market worsens.
So we think that we can continue to travel less than 200 basis points here in 2023.
And at least for the near term beyond that.
Thanks, Matt.
Okay.
Can we go to the next question please.
Okay.
Good morning, and very nice quarter.
Back just a little bit.
I don't think anyone expects these kind of growth rates to go on forever that it from new normal, but it does give you what I would call BREIT ability to make some strategic decisions as you get these really strong quarters on a cash flow basis or on a revenue basis, what changes and maybe the way you approach your strategy given it.
Yes.
No.
A major change to be honest to your point, though it create some headroom in it gives us that optionality as swiftly as referenced before to let it flow through which as you can tell by our guide we're going to let some of this flow through.
But also to invest and we are highly focused on driving revenue growth, but then a lot of research in the med Tech space and it's very clear that those companies that are consistently top quartile performers in DSR grow faster than those companies that arent in the second leading thing behind that as EPS growth.
Make no mistake, we get this headroom, we're going to be focused first and foremost on investing in the business to continue to drive sustained revenue growth that ultimately as a result of that drives EPS growth as well so it's going to be the balance that we've always had with maybe a little more optionality than we would have otherwise.
And then as my follow up.
You did mention that there are some we'll call. It niggling supply chain issues that are out there is there a way to put some color around that what those issues may be are they easing or are they staying the same intensifying.
And just kind of maybe give us a line of sight on mix does go away.
Yeah, absolutely I wish I will tell you when they are going to go away what I would say is that that we're navigating those very effectively.
City key areas that I would say account for 90% of the problem.
Material shortage labor issues and sterilization issues on the materials.
He is better we have validated that second sources, we've come out with that and you might theory else. So I would say that that is probably better now than it was let's say six months to 12 months ago on the labor heating Warsaw, we constantly continue to hire people. So again I would say we're in a much better position than we were 612 months ago on externalization is also getting better but.
Make no mistake. It is a bottleneck we grew we could definitely be in a much better position you will have more serious issue on the capabilities that said as reflected in the quarter.
<unk> has.
Has been what it what it needed to be put us in a position that we can continue to manage the business and grow the business in digital and this goes away I have no idea, but I do think that is where managers off today.
Yes.
After that's impacting it as you've got all these negative pressures that Yvonne just referenced and then of course, our demand is going up pretty substantially so the demand signal is coming in much higher than we expected in the face of that environment, that's pretty challenging and I. Just wanted to again I know I said it in my prepared remarks, but I want to compliment the team I've been with the commercial teams around the.
Lobe and they're just doing an excellent job. These guys are really fighting 24 hours a day to make sure that we get product to the cases with it where they're needed and trust me. It's a lot of work. It's a lot of effort a lot of frustration on positive to that but the team is doing a wonderful job indeed.
Joanne Thanks for the question.
Yes.
We'll take our next question from Larry <unk> with Wells Fargo.
Good morning, guys.
Echo my congratulations really nice quarter here, just one for Yvonne persona IQ1 big picture one for Brian.
Yvonne on persona IQ can you put in and.
<unk> into context for us, it's a context for us what percent of knee patients.
Our.
Our Medicare where do you see happening with reimbursement for commercial payers do you expect them to follow and have you guys filed.
For a pass through payment and the outpatient.
And I had one follow up for Brian .
Thank you I'll keep it short so you cannot you can't continue with Bryan, but first things first and tap new technology add on payment.
Tables, an additional payment of around $150 Brent at least on me. So I have two seven $700 for a botanist the decision what you've seen in October and what actually the indication approval kicks in in October of 'twenty City in the last four years, so it's pretty material.
In terms of and by the way it's not done. So we are we're going to be requesting these additional payments for the base station and other components.
There may be some additional upside to these numbers that I just quoted.
In terms of the percentage of patients. This is Florida, maybe Karen in Beijing.
We estimate that to be between 15% to 20% one 5% to 20% relative to the second part of your question do we see that commercial payers will follow.
And that comes down to the data the clinical data as we expand the number of patients that benefit from this technology.
To validate the clinical claims that we've seen that we've been able to validate and of course. These will become a new standard of care and this will impact not just their Medicare patients, but also commercial patients.
Patients. So I think I had a follow up question for Brian .
Just Steve on the outpatient setting did you file.
<unk> filed for pass through payment.
We're in the process of evaluating that but we have not done that as of right now no we haven't.
Okay. Brian people have asked this question I'm going to ask a similar question a different way. So the recon market is clearly running hot now 13% by our math in Q1.
Pre COVID-19, the recon market grew 2% to 3%.
So a do you expect the recon market to eventually return.
Historical growth rate at some point in the future I'm not asking for a date.
B does that create more urgency for you to do.
M&A to increase your word why him grow and diversify.
While things are good thanks for taking the question.
Yeah, I think it's important to.
To go back to the first quarter, and just say hey, that's not indicative of the recon market that is an easy comp for everybody not just us but across the board. So you have to look at that outsized performance and kind of haircut it by the comp, but even without that it is a very hot market to your point right now and there are certain things about that that you might think would be.
For just a period of time backlog recovery should be here for a while but that will eventually go away, but there are some things associated with <unk> that we think are sustainable.
We've talked about these in the past don't know that everybody connects with what we're saying, but here's what I see.
If I think about market in total there's a pretty significant technology shift that's occurring in orthopedics at a very rapid pace and by the way. We're just really getting started with that technology shifts that has a mix benefit associated with it. So you don't need one new patient you just need that technology to come in and that lifts the overall market growth and creates.
Because of the innovation better pricing stability. So the combination of those two things in my view is durable and sustainable to elevate the overall recon market growth and we're certainly going to take advantage of that the other benefit that we have in this area for us specifically is that we're investing.
Very disciplined in areas in recon that are faster growth. So our weighted average market growth will be better than the overall market growth in recon that creates more sustainability for fast growth and above market growth for the company and then outside of that and specific to US as you said, we're doing a much better job on pricing and that's the big benefit. So if we can stay below our.
Oracle average and pricing that does also elevate our recon business and then finally, if I think about our innovation. We do believe is differentiated so we have an opportunity to also take market share through that innovation. So we really do believe recon is attractive and sustainable it's not going to be first quarter type of growth.
Normal because of the comp, but we do believe it could be elevated we're also looking into some patient behavior potential changes that we're seeing through Covid. This is early days, we're kind of analyzing it right now, but the feedback is that there's really three things that may be changing the perspective of a patient and whether they do or don't get a procedure, which should be positive for us because we think that they're going to make the decision.
Get the procedure first one is the technology advancements are giving people confidence that the outcome of the procedure is going to be good a lot of people don't get the procedure because they're afraid the procedure is not going to do what they wanted to do it that fear goes away you may see more people enter the funnel. The second is that youre getting out of the hospital or the ASC faster.
So that turnaround with the procedures 24 hours a lot of times used to be dates. So that also then is less inconvenient for the patient and in the ASC setting by itself is attractive.
Don't want to go to a hospital getting knee procedure or a bunch of sick people or ASC setting is less overwhelming youll safer and I think people are more attracted to it and the final thing is you've got flex work right now.
That's pre ramp that's out there so people feel more comfortable and more confident rehabbing and also staying work because we think those three things that really have the opportunity to continue to elevate the recon market and we're going to continue to look at it and take advantage of it.
Thank you.
Thanks, Larry.
I think we have time for one more question in the queue.
We'll take our next question from Travis Steed with Bank of America.
Hey, Thanks for taking the questions I guess.
I hear you on all the strong momentum to carry through post Q1, an improvement throughout the year and so maybe given the funky comps Q1, maybe think about Q2 in dollars like hips and knees before the pandemic, where typically flat to slightly down and I don't know if you think in a dollar basis Q2 hips or knees.
It will be flat or if it could actually go up sequentially.
Just kind of thinking about the momentum you have going through the year.
Yes, I think on a.
Siggi on an absolute dollar standpoint, you should expect to see a step down in Q2.
That's typical of seasonality.
So growth rates, you are going to be walkie sequentially or year over year between <unk> and <unk>, but you should expect to see the traditional sort of historic stepped down in absolute dollars for Q2.
Okay I appreciate that clarity and then I did want some clarification I think I heard you say gross margin for the full year, we would still be flat year over year I wanted to make sure I understood why it was so flat given the momentum on Q1, and then it looks like you bought back $268 million of stock in the quarter I don't know if there was any any color on that if thats kind of a new user.
Capital for you. Thank you.
Thank you thanks.
Thanks for the question on gross margin drops because actually I intended to say that gross margin would be higher this year versus 2022.
Primarily driven by that mix component FX hedge gains, but if you thought about neutralizing those because they may not continue beyond 2023 at the same level. The underlying gross margin will be equivalent to 22, but in absolute terms it will be higher.
This year versus last year on gross margin just want to make sure that's clear.
Very perceptive on the share buyback, we did buy back I think about $250 million of shares. This year 150 in Q4 of last year that gets split between the embody transaction.
We're restructured that with equity to be advantageous from a deal structuring standpoint. So we bought those shares back so to avoid any dilution on that deal from shares and then the second is.
A more normal cadence going forward will be to buy back equity dilution.
From annual brands.
Perfect. Thanks, so much for the question, Yeah, and I think that wraps us up through the queue and we're at 930. So thanks, everyone for your comments and your questions.
IR team is obviously available today and will continue the conversations as they go through the day, please feel free to reach out with any others.
Thank you again participate thanks, so much everyone.
Yeah.
Thank you again for participating in today's conference call you may now disconnect.
Okay.
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