Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2022 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, May 3rd, 2022. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen-only mode. If you have a question, please press the star followed by the one on your push button phone. I would now like to turn the conference over to Carrie Maddox, Senior Vice President, Investor Relations, and Chief Communications Officer. Please go ahead.

Thank you, Operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's first quarter 2022 earnings conference call. Joining me today are Brian Hansen, our Chairman, President, and CEO, EVP and CFO, Suki Apadhyay, and COO, Yvonne Tornos. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements, even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our Q1 earnings release, which can be found on our website, ZimmerBiomet.com. With that, I'll turn the call over to Brian. Brian?

All right. Thanks, Carrie, and thanks to all of you for joining us this morning. I'm going to talk briefly about our Q1 performance and our revised expectations for the full year. I'm also going to spend a few minutes talking about our recent innovation and our key drivers for long-term growth. And then after that, I'm going to turn it over to Sookie, who will get into more details on the quarter, but also very importantly, our full year guidance update. And then we'll close out the call with your questions, of course. So let's get started with Q1. We had a strong quarter, well above our own expectations and obviously above external expectations. And the primary reason for that level of overachievement was stronger than anticipated COVID recovery in the quarter, particularly when we looked at the back half of the quarter. And if I look at the US recovery, it was stronger and faster than I think anyone expected pretty much across the board. And while we continue to see COVID surges in EMEA and China, the impact on overall procedure cancellations has been minimal, at least so far. And inside of that, we saw very strong performance in large joints and in particular our knee franchise, while our set recovery lagged our core recon business at this point. We know it's still early in the year, but based on what we saw in the quarter and really current trends in the Q2, our confidence in 2022 growth has definitely increased. And as a result, we are raising and tightening our full year guidance. Now there are clearly a number of headwinds that we are facing, you know, supply challenges, inflation, Russia, Ukraine, but given our revenue dependence on elective procedures, COVID recovery outweighs those headwinds. And that's why even in the face of these challenges, we're able to raise our outlook for the year. Okay. So turning the page a bit outside of external influences on our business, our strategy is working and our underlying business is very strong. Our new product pipeline continues to deliver. We're adding more innovation and value to our ZB Edge ecosystem. If you were at AAOS, you saw our recently launched Walk AI. This is ZB's first AI-based solution. We also showed recently launched functionality for MyMobility platform. This is under the umbrella of our exclusive partnership with Apple. Our ROSA robotics momentum continues to be very strong, and the early feedback on Persona IQ, even though it's in limited launch, is very positive. All of these things combined are highlighting the possibilities around data collection and integration on the patient experience. We also continue to drive significant demand and traction with Persona Revision in our knee franchise, with Avenir Complete in our hip franchise, and our Signature One Planner in shoulder. And our new product pipeline remains very strong, with additional product launches planned for 2022, especially across our knee and set portfolios. We're also continuing to reshape our business and accelerate ZB's transformation, That means, of course, streamlining and modernizing our operating model, but also focusing on making ZBA best and preferred place to work in a trusted partner. Now, just in Q1, we scored 100% on the Human Rights Campaign's Corporate Equality Index. We made Forbes' best large employers list, and we were named one of the most innovative companies by Fast Company for our ROSA robotics platform. We have also prioritized our environmental, social, and governance, or ESG, commitments, and our actions in this area continue to expand. We have committed to key environmental standards, delivered on social giving pledges, and set DE&I standards and long-term goals in this area. And we've enhanced our overall reporting of ESG progress internal to our own team members, but also to investors. And finally, our transformation also includes, as you know, active portfolio management. And as a part of this, we completed our spin of ZIMB on March 1st. That was ahead of schedule and certainly is a part of our active portfolio management strategy. So in summary, even though there are real macro headwinds that we will have to manage, and I have confidence in our team to do so, the recovery, you know, the shift in recovery really in COVID is the bright spot we've been waiting for. And we're excited about and has certainly changed our view of 2022. And with that, I'm going to turn the call over to Sookie for a deeper dive into Q1 and our revised expectations for the full year. Okay, Sookie.

Thanks and good morning, everyone. We had a good quarter driven by faster than expected recovery of elective procedures, giving us the confidence to raise our full year revenue and earnings per share outlook. Let's turn to our Q1 results and how that translates into our updated full-year financial guidance. Unless otherwise noted, my statements will be about the first quarter 2022 and how it compares to the same period in 21. And my commentary will be on a constant currency and adjusted continuing operations basis. Please note, we have changed our geographic revenue reporting to U.S. and international And we released a Form 8K last week to provide unaudited, recasted financial information related to our ZIMV spinoff, as well as a change in non-GAAP reporting of in-process R&D-related expenses. Moving to first quarter performance. Net sales in the first quarter were $1.663 billion, up 3.9% on a reported and 6.8% on a constant currency basis. As previously guided, selling days contributed about 130 basis points of tailwind in the quarter. Revenue was driven by continued execution along with stronger and faster than expected COVID recovery across most markets, with the largest uplift in the U.S. After a significantly pressured January, recovery ramped through the quarter with improvement in February and a strong rebound in March. On a consolidated basis, March grew versus pre-pandemic levels, and that recovery has continued into April. U.S. sales grew 5.8%, driven by strong recovery as COVID cases subsided and elective procedures returned. By the end of the quarter, U.S. cancellation rates had returned to pre-pandemic levels, and procedure volumes were above 2019. International sales grew 8.1%, driven by strong growth across Europe, and we saw continued recovery despite COVID surges in certain European markets and China. Turning to our business category performance in the first quarter. As a reminder, China VBP is expected to be about neutral to overall revenue growth for the full year. And so far, the 2022 impact is broadly in line with our original expectations. While we don't expect a material impact from VBP on full-year 2022 growth, we do expect there to be fluctuation by quarter. In the first quarter, we saw about 200 to 300 basis points of pressure across our global knee, hip, and SET segments, which we expect to be broadly offset through the next three quarters, with the majority coming in the fourth quarter. Global knees grew 11%, with U.S. knees up 11.7% and international knees up 10.1%. driven by solid commercial execution, continued traction for persona revision, robotics pull-through, and strong knee procedure recovery across most markets. Global hips grew 4.5%, with U.S. hips up 3.3% and international hips up 5.6%, driven by recovery in both primary and revision hip procedures, and we're seeing positive early traction on ROSA hip. The sports and extremities and trauma category increased 1.8%, driven by strong performance in CMFT, sports medicine, and upper extremities. And finally, our other category grew 11.5%. Moving to the P&L. For the quarter, on a continuing operations basis, we reported gap-diluted earnings per share of $0.35 compared to gap-diluted earnings per share of $0.92 in the first quarter of 2021. This decrease was driven primarily by an unrealized investment loss due to a decline in the value of our investment in SIMV, and higher litigation-related and restructuring charges. On an adjusted basis, diluted earnings per share from continuing operations of $1.61 represents an increase from $1.55 in the first quarter of 2021. The increase was largely driven by higher sales and lower interest expense. Adjusted gross margin was 70.6%, lower than the prior year as expected due to VBP and higher input in manufacturing costs which were partially offset by higher volumes and better mix. Our adjusted operating expenses were about $735 million, up from the prior year driven by higher investments in R&D. Our adjusted operating margin for the quarter was 26.4%, down versus the prior year, but ahead of expectations and driven by higher revenue. The adjusted tax rate was 16.1% in the quarter, in line with our expectations. Now turning to cash and liquidity, operating cash flows from continuing operations were $360 million and free cash flow totaled $223 million for the quarter. We reduced our debt by about $650 million, excluding the effects of foreign currency, and ended the first quarter with cash and cash equivalents of about $435 million. Our improving financial performance in tandem with our ongoing debt reduction continue to strengthen our balance sheet. Moving to our updated financial outlook for 2022. While we continue to manage through macro headwinds related to foreign currency, Russia, inflation, and supply chain challenges, a faster and stronger COVID recovery in tandem with a positive first quarter give us the confidence to raise and tighten our financial guidance. Against this backdrop, our current expectations for the full year are as follows. On a constant currency basis, we now expect to grow 2% to 4% versus 2021 with an expected foreign currency headwind of approximately 350 basis points. This translates into a reported revenue growth projection in the range of negative 1.5% to positive 0.5% versus 2021. Note that the selling day tailwind that we saw in the first quarter will be fully reversed in the fourth quarter with no material full year selling day impact. adjusted operating profit margins continue to be in the range of 26.5 to 27.5%. This assumes inflationary pressure of about 150 basis points versus our original estimate of about 50 basis points. Of the incremental 100 basis points of pressure, a half will hit 2022, but be offset by expected higher revenue, and roughly half will be capitalized and impact 2023. Adjusted tax rate expectations remain in the range of 16% to 16.5%. Adjusted diluted earnings per share is now expected to be higher at 665 to 685. And we are increasing free cash flow to 750 million to $850 million. Inside of that guidance, we have a tougher comp in the second quarter due to COVID recovery we experienced in 2021. But we do expect revenue to grow in the low single digits over the second quarter of 21. and to exceed pre-pandemic levels for the full quarter. In summary, we expect that the environment will remain dynamic, but we believe the pace of recovery, our continued execution, and the strength of ZB's underlying business fundamentals position us well to improve our financial outlook. With that, I'll turn the call back over to Carrie.

Thanks, Suki. Before we start the Q&A session, just a reminder to please limit yourself to a single question and one follow-up so that we can get through as many questions as possible during the call. With that, operator, may we have the first question, please?

Thank you. Ladies and gentlemen, at this time we will now begin the question and answer session. One moment, please, for the first question. Our first question comes from Joanne Wench with Citi.

Good morning, and thank you for taking the question. Very nice quarter. I'd be interested in your view of what's happening at the hospital level. We've been hearing all season about staffing headwinds, about CapEx spending headwinds, and I would be curious to get your opinion on that. Thank you.

Yeah, thanks. Maybe I'll just start off, and then I've got Yvonne sitting next to me. We're actually here traveling in Europe. Figured we'd take the opportunity to get out and start Q2 strong. And what I would tell you is that, yeah, we are definitely still seeing pressure from the staffing standpoint. And we actually, even today, would expect that to continue throughout the year. You know, when I think about the quarter itself, whether it be COVID or staffing or the combination of the two, it was pretty tough in January. It got better, obviously, in February and was really, really good in March. Actually, March was a month that we had that had growth over 2019. So true growth over pre-pandemic levels. And we're seeing that continue into April. So all positive from that perspective, but we do expect that staffing pressure will continue to be a challenge throughout the year, just not as intense, I think, as what we thought when we started the year. But, you know, Yvonne, you're out there more than I am in the U.S. Maybe you could also.

Absolutely.

Thank you, Brian.

So I concur. It remains a headway. What I will tell you is that in the U.S., we have seen our cancellation rates. So the cases will also be the cases that get canceled every week. to starting to look pretty much similar to those cancellation rates in 2019. In the past, most cancellations were related, so fear and anxiety. In the early acute staffing challenges, day 21, it was mainly staffing driven. Another factor we've seen that it's starting to look the problem is now getting worse, but it has remained a problem. Less of a problem in Europe and other markets in the U.S., but it remains a challenge in the U.S.

Sorry, capital? Joanne, was your follow-up about capital and the capital markets?

Yes. Net pressure? Yes. Yes, capital purchasing. Thank you.

Hey, so I'm having a hard time hearing her for some reason. I don't know if maybe, Kerry, you could repeat the question. I couldn't hear it.

Sure. Brian, Yvonne, Joanne was asking about capital purchasing and what we're seeing on those trends.

Yeah, I can take that question as well. So primarily we sell capital in two businesses, or surgical business and obviously robotics in our knee and hip platform. We've not seen anything that tells us that there is a shortage of capital. or the strategy for the court has been more around placement than selling robots. But on the surgical side, we're not seeing a challenge. We're not seeing that we've seen less fluidity than in Q4. So I'm actually pretty optimistic in terms of where we are when it comes to capital allocation from a hospital standpoint. But again, as I mentioned, we do have more placements than cells in the quarter. We did more placements than cells in the quarter. Thanks for the question.

Thank you. Thanks, Joanne. Lauren, can we go to the next question, please?

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

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

Yeah, sure. Hey, Travis, this is Suki. Thanks for the question. I'll start and then maybe turn it over to Yvonne on the pricing question that you had. So you heard correctly. We think that inflationary pressures are going to be roughly 150 basis points of a headwind on margins this year. Our original estimate back on the Q4 call was 50 basis points. So we think we're somewhere in the additional 100 basis point range from where we originally were. And we were seeing that pressure grow post our call, but it really started to accelerate with the war in Ukraine. And I don't think that's inconsistent with what you're hearing really across the sector and probably in other industries as well. Now, the way this works is part of that pressure, about half of that will hit this year, but given the way we account for costs and variances and given the higher level of inventory that we carry, about half of that additional pressure will be capitalized and deferred into 2023. So about 50 basis points of that incremental 100 will find its way into next year. You know, I would say that the key challenges that we're seeing, again, very consistent across the sector from a supply chain standpoint, first freight is higher commodity costs or higher energy costs and labor costs. The biggest culprit within that is our commodity costs. The good thing is we're starting to see some stabilization around that. We do still see some higher costs related to stainless steel, packaging materials like plastics and resins, and of course, titanium, which we're doing a lot of spot buys to secure our safety stocks and supply chain. But what we're hearing from our supply chain organization is that's starting to stabilize. Now, The environment is still very dynamic, so we'll keep you posted as the year progresses. But the good thing is that the largest headwind that we've got feels like it's beginning to stabilize a bit. Inside of that, from a pricing standpoint, we did see a slightly better quarter this quarter from a pricing perspective year over year. Some of that is due to some specific strategies and tactics that the team is putting in place to better control pricing erosion year over year. And some of that I think is just a little bit still opportunistic because with the continued COVID headwinds that we saw in the beginning part of the quarter, that results in lower volumes, that then results in lower rebate thresholds for some of our customers. And so that sort of helps a tailwind on our pricing, probably temporarily while our volumes are more muted. But maybe Yvonne, you want to talk a little bit about what you're seeing in the pricing environment and our ability to offset price or pass price pressure onto the end markets.

Absolutely, Suki. Hey, Travis, Ivan here. So as Suki alluded to, the normal price erosion is around 200 to 300 basis points. We did achieve better price erosion in the quarter. Some components of that are sustainable. Others, they remain to be seen. What I will tell you is that we got governance today in the U.S. and, frankly, in Europe and APEC that we didn't have in the past. As we see our vitality index or percentage of sales coming from new products We see that as a tailwind, and again, we'll see how that develops in quarters to come. And from an incentive standpoint, for the first time, we will have very clear incentives in all commercial organizations to maintain or gain price. So we're not making a commitment to do any better than the true to 300 basis points, given that a large percentage of the business is contracted, but certainly we have the plans and the governance that we didn't have before. So fingers crossed on that one.

I appreciate all that color. And Suki, one follow-up on China. Just want to make sure we're modeling that correctly. It sounds like it was 200 to 300 basis points headwind to total company organic growth this quarter, but that comes back in Q4. And if you just look at China volume with the shutdowns, I'd love to hear how that's playing out in Q2 and the recovery there from a volume perspective.

Yeah, so the China volumes have clearly been negatively impacted because of some of the COVID surges that you've been hearing about. It's most acute in Shanghai. We did see earlier in the quarter some additional lockdowns in other cities. The good thing is right now we're not seeing any lockdowns beyond Shanghai. Now there is limited movement in other provinces, but there are no shutdowns and we're still seeing cases being performed there. Shanghai still remains the most acute situation in China. I'll just back you up a little bit. Remember, China is in the low single digits of revenue of the entire company and Shanghai inside of China is just a relatively modest fraction. So while we're still seeing pressures specifically in that province, I think it's manageable and somewhat moderated. Again, broadly beyond Shanghai, we're seeing stabilization to improvement. We just have to keep a very close eye on China. or excuse me, on Shanghai. But the way you're thinking about the impact of VBP is correct.

Okay, thanks for the question. I might just add some commentary there. It's interesting because even though there's a lot that's happening that's different than expected in China, the overall impact to the quarter was about what we expected and even into now coming into Q2. So for different reasons, but the fact is, even though we're seeing lockdowns in Shanghai and disruption as a result, we're also seeing delays in BBP implementation, and those are almost balancing each other. So while, you know, certainly China was still a headwind for the quarter, from a top and bottom line standpoint, it was pretty much in line with what we expected, even though for just different reasons.

Great. Thanks, Brian. Thanks, Ricky.

Thanks, Travis. Lauren, can we go to the next question, please?

Our next question comes from Amit Hazan with Goldman Sachs.

Oh, thanks. Hey, good morning. Maybe start with market share. And I want to just ask you the question. I know it's hard to tell the trends given the last couple of years, but as we look at three-year CAGRs and just try to make sense of what's going on in the U.S., it's actually not very clear that you are consistently gaining share. And I'm trying to think about this in the context of the 600 or so ROSAs at least that you have in the field. I'm sure that's a little bit higher now. and just trying to understand if there are offsets there or how you're thinking about market share in the U.S. for knees in particular, but knees and hips, because the data doesn't, you know, strongly suggest that you're gaining share.

Yeah, so I'll take that, and then I'll pass it over to you, Ron, to talk about some specifics. But it probably all depends on how you're running your data, because I would, I'd probably argue the different outcome. The fact is it's choppy. You know, it's really choppy. And we're looking at this thing in every different way you can. Sequential growth versus the previous quarter. We're looking at it versus prior year versus 2019 because that was your last, you know, good year. We're looking at it on a stack basis. You know, you name it, we're running the analysis to get a sense for what we're doing. What I've said always is that I don't really trust any given quarter, but I do look at trends. And almost any which way I slice it, I do see us moving in the right direction. And, of course, I also see things that you can't see in our own business. And the combination of the trends that I'm seeing, looking at it a lot of different ways, and also just the things that I see in my own business, I feel very confident that we're moving in the right direction and we're doing the things that we need to do to be able to drive attractive growth. so you know the big one that i look at is vitality index you know we have almost no vitality in the business we've doubled that in the last few years and that continues to move north and we've got a very strong pipeline of products so to me when i think about that performance it's clear i think the transformation is real and the good news for us is that as covid and staffing issues start to clear and continue to clear that you know the reported performance that we have as a business is finally going to start reflecting what we actually know is happening in the business But what gives us a lot of confidence, again, is the innovation. So maybe, Ivan, you want to talk about some of the innovation that gets you excited.

Yeah, absolutely. And I mean, I look forward to the day where we have objective market share data because I also differ from that statement on market share. But that said, I'm beyond excited about what we got in store. So some of the products that we keep talking about, Ross, you mentioned 600 robots at place. Obviously, the number is higher now. We're getting strong penetration in key accounts, both in the hospital setting and in the outpatient setting. We have two indications, plenty of indications to come. Revision has only been launched here in the U.S., but continues to grow at unprecedented rates. It's pulling primary needs as well along the way. CVH, I will spend an hour talking about all the things that you probably saw in the academy in Chicago. whether it is work AI mobility and truthfully configurations. By the way, we had the largest number of enrollments this last quarter. Cementless needs penetration is also in the teams. And that's before we launch a new form factor device at the end of this year, which is going to give us breaking the category. So that's just the needs. And Amani, we launched six products in the last two years. As you look into HIPS, we are performing strongly with Avenue Complete, Direct Interior, or revision platform. We don't talk enough about that, but it's also performing very well. In SED, CMFT, sports med and trauma are doing well. We got some noise with trauma early in the year, but we got new launches and new product launches to come. And just a ton of stuff coming from a data and technology standpoint. So I don't know if we're looking at the same data when it looks to market share, but what I do know is that as you look at the innovation story with the vitality index being 2x what it used to be, and the pipeline being dramatically higher than it used to be three years ago, I'm pretty confident that we're going to remain above market for the key categories.

Thanks for that, Collier. I would love to know specifically if you do have the data on the U.S. knees and hips, what your data says. I'm sure it's better than ours. But the second follow-up would be for you, Brian, just on capital allocation, just how you're thinking about M&A post the spin now and in this particular environment, If you want us to be thinking about natural limits to kind of the size of the deal you'd be looking at and how you're thinking about adjacencies versus whiteboard opportunities, just any color would be super helpful. Thanks so much.

Yeah, yeah. So maybe I'll kind of start kind of top line, and then I'll hand it to Suki to talk about capital allocation and our current focus there. But, yeah, for sure, you know, M&A and active portfolio management is a big part of what we define as phase three of the transformation. Just as a quick reminder, you know, we started this whole journey in phase one, which I'm just going to define as kind of the hearts and minds, in other words, kind of mission and culture focus, significant upgrading in talent at the leadership team level to make sure we have the right people to transform the business, and then stabilizing just a number of significant issues around quality, compliance, turnover, supply, you name it. Phase two was more around a true long-term strategy, making sure that we're shifting to innovation versus remediation and really changing the kind of innovation we were focused on and then augmenting our structure and operating mechanisms to ensure that we truly do drive execution and accountability to the strategy. And then phase three is kind of where we are, kind of to your question. We are looking to transform the portfolio of the company. Now, you know, COVID has hampered our ability to do that because it's put pressure on the business. We haven't had as much firepower. But the fact is, we have made decisions here that are moving the needle. Number one, we've got the spin of the dental and spine businesses, which we think is the right thing for both businesses. And although they've been smaller, just because we have the firepower, we've done acquisitions to be able to build scale and attractive spaces. But for sure, we will continue to focus on active portfolio management, acquiring companies that can drive weighted average market growth for us and are mission-centric. I'm not going to get into specifics on where we would focus because, as you probably know, it's pretty competitive out there right now for assets, but this is something that we absolutely will focus on in phase three. The good news is, as we continue to see stabilization in the market, we're going to be able to continue to buy down debt, which is important to us, and eventually increase the buyer power to do this. Suki, maybe I'll just turn it over to you to talk about current capital allocation.

Sure. Thank you, Brian, and thanks, Amit, for the question. You know, our focus has been very consistent in ensuring that we continue to pay down debt and maintain our investment grade. And just a little fact point here, since 2019, we've paid down almost $3 billion of debt, and that's in the backdrop of a pandemic that's had significant pressure on our financial performance. So it speaks to the strength and durability of our cash flows as a company. But when you combine that priority as a capital allocation together with improving financial performance relative to growth and EBITDA, it really does start to set us up pretty nicely for more strategic optionality, as Brian talked about with active portfolio management. I think in a bigger way enables us to look at opportunities to accelerate the top and bottom line growth of the company while diversifying it as well. And I think all of those things are very credit positive. And so while we will probably take more of a front foot in that active portfolio management category, as Brian talked about, especially now coming off the spin and quite frankly, the organization's got now more bandwidth, having undertaken and gotten that very heavy lift behind us, we will undertake that active portfolio management with an eye towards maintaining our investment grade rating. It feels good to start to turn the corner on that and to know that all of our hard work in de-levering the balance sheet, improving financial performance, is actually starting to pull through.

Thanks for the questions, Amit. Lauren, can we go to the next question, please?

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning, guys. Maybe going back to Travis's question, Suki, just on gross margins, I think you're clear on the 50 basis points that's being capitalized and will come out next year. I think the way Travis phrased it and kind of I was hoping to hear an answer to was, you know, are there offsets to that or should we just assume that that 50 basis points that comes out next year is kind of how we should think conceptually about gross margin being down 50 basis points next year then? Thanks.

Yeah, you know, the team is actively looking and always looks at offsets to any headwinds, whether current year, future years, et cetera. So I think it's too early to tell exactly what next year's gross margin will look like. But, you know, all things being equal, we've got that added headwind. The team is looking at, from a supply chain standpoint, more faster structural changes across our plant footprints. We're looking at potential procurement and category savings through procurement to potentially offset those headwinds. And I think you heard about Yvonne talking about price. We're making some nice, I think, durable headway into improving our price discipline and our price performance. So, you know, we're going to continue to actively look for some offsets to that headwind. But right now it's just too early to tell to say exactly what that 50 basis points ultimately translates to in 2023.

Yeah, understood. And then, you know, I think you guys are pretty clear on kind of the R&D spending, things like that. But where are we on a recovery and spend on things like conference attendance, doc training, corporate travel, things like that? Are we at a level now that is kind of back to normalized and just kind of grow off that? Or is there kind of a recapture that still has to happen there?

I would say we've definitely increased, you know, since 2021 and obviously since the depths of the pandemic. I think there's likely a little bit more room to go to bring back spending as we continue to see top-line performance improve throughout the year. And especially in the backdrop of the new product launches that we've got coming up, we want to make sure that we're investing appropriately from a commercial perspective to make sure that those launches are successful. I don't know, Yvonne, if you want to say anything else there, but I guess the key takeaway there is we'd expect to see a modest increase as we move forward.

It's me very quickly here, Jeff. I will tell you that the fact that the Vitality Index is 2x what it was three years ago tells you that we haven't slowed down from an R&D perspective. Within R&D, as you know, you've got two components, which is sustaining engineering and then new product introductions. And the number of new product introductions in 21 and 22 is dramatically different than in past years. And as we get into 23 and 24, it's even higher. So definitely no cuts when it comes to true innovation. And then relative to MedEd, that's another area that we try not to cut. We might have done some adjustments throughout the pandemic, but I will tell you we are full force globally when it comes to MedEd. So R&D and the right components of R&D and MedEd remain sacred cows here from an investment standpoint. Thanks, Jeff. Yeah, thank you.

Thanks, Jeff. Lauren, can we move to the next question?

Our next question comes from Shagun Singh with RBC.

Thank you so much for taking the question. So your Q1 XFX revenue results in 2022 guidance implies lower quarterly growth for the balance of the year. So what's assumed in your guidance beyond Q1? How should we think about the cadence of it? Perhaps you can touch on both revenue and EPS. Any color on Q2 will be helpful. And then just as a follow-up on portfolio management, how are you thinking about your diversification strategy that you've previously alluded to? It seems like a lot of these procedures, at least on the recon side, are coming in from the ASC, so any color there would be helpful. Thank you.

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

Yeah, so you're right, the forward-looking based on our increase in our guidance range on XFX, the midpoint now being at 3% versus the former at flat year over year. But given our first quarter, it would suggest lower XFX growth rates for the remainder of the year. And that's primarily due to, as we previously discussed, much tougher comps as we move through the rest of the year. The first quarter of this year, we were, of course, comparing against the first quarter of 2021, which had a very, very deep COVID impact. And so it wasn't unexpected that you'd see a much better Q1 than the rest of the year. So it's really comp related on the rest of the year as to why that growth rate is lower than the first quarter. As we think about cadence of revenue growth as we move forward, you know, we would expect, we already talked about second quarter being in the low single digits on an XFX basis, and the fourth quarter, you know, based on normal seasonality, we would expect the second quarter to be stronger than the third quarter, and then, of course, the fourth quarter to be the strongest quarter of the remainder of the year, very consistent with our former seasonality that you saw last year and prior to the pandemic in 2019. And we would also expect earnings to follow that same suit. And as revenue gets stronger, so will the operating margins. So earnings are expected to follow in that same cadence as revenue.

Great. And on the concept of diversification, when we think about active portfolio management, it's definitely still there. Clearly, we want to make sure that we're diversifying our business. And we think about it really in three ways. It's not just product segment diversification. Clearly, that's an area of concentration for us because there are faster growth categories that we play in that we want to build scale in, but also geographic expansion to make sure that we're taking advantage of fast growth areas in the world and in settings. You referenced ASC. That's an attractive setting. We've actually already acquired areas to build our scale in that setting, and we built commercial infrastructure to pursue ASC as well. So we look at it for sure in diversification to drive weighted average market growth, but we don't just look at it to be a product, not just by geography, not just by setting, but all three of those.

Thank you.

Thanks, Shagan. Lauren, can we go to the next question in the queue?

Our next question comes from Drew Ranieri with Morgan Stanley.

Hi, thanks for taking the question. Just on your set business for a moment, I appreciate that it lagged in the first quarter, but just trying to get a better sense of how that progresses through the rest of the year. I think you mentioned in your prepared remarks that there's some new products coming later this year, but maybe go into a little bit more detail there. Just how are you thinking about your set market or set growth from a business perspective? Thank you.

Yeah, maybe just, you know, quick top line, and then, Yvonne, maybe you could speak to some of the things you're seeing inside of SET. You know, first and foremost, it is an area that we're very interested in. Not all the subsegments of SET are creating equal for us. There are certain categories that we're investing more heavily in because they're more attractive. We think we've got a better chance to win. And quite frankly, you know, we really do believe that we've got scale that we can continue to move forward. So not all equal, but certainly an area of overall concentration for us. I would say that you're going to continue to see some pressure in the next couple of quarters. A lot of that comes from the fact that we still have pressure and BVP and trauma. And then I think as you get to the end of the year, particularly some of those new products being launched, you might have an opportunity to see some of that move in the right direction. But just make no mistake, SET is an important area for us. We've put commercial infrastructure in place. We've acquired technologies in the space. We continue to innovate in the space, and we will continue to focus in SET. I don't know if you had anything else you wanted to add.

Maybe just a couple of quick things here, Drew. So in the category, as I mentioned earlier, sports is doing very well. The acquisition and integration of Reliant continues to go very nicely here in the U.S. and in Europe. We've seen an increase in penetration on Signature 1, We are now integrated in SOLDIER with Mammal Mobility, which is the integration of CVH components into the SOLDIER platform. Comprehensive in SOLDIER is growing in the strong teams globally. So sports and upper extremities are doing very well. CMFT, the integration of A&E is also going very well. Continue to gain shared on grip trauma, sternum closure. Where we have some headwinds, as it was referenced by Suki in the prepared remarks, is with trauma, primarily because the headwinds in APAC but also here in the U.S. some timing with some contracts. But overall, the category with the exclusion of trauma right now is going really, really well. And as I mentioned in a different forum, we got more product launches in this segment in 2022, at the end of 2022 and in 2023 than we have had since 2015, 2016. So the innovation story is there as well. So things are on track.

Got it, thank you. And then just on robotics, I think I heard you mention that it was a stronger quarter on placements than capital, but can you just talk about whether you expect that trend to continue through 2022? What drives it? Is it just the hospital spending environment, or are you doing a new sales strategy with how to place robotics? Thank you.

Yeah, absolutely. Thanks, Fran. So it's very fluid. It's very customer-centric. We give the option of the placement. we obviously get the option of selling the ROSA, and then sometimes we do a hybrid. In 2021, we did more sales than we anticipated, given some of the macro dynamics. As we enter 2022, we see an opportunity for placement that delivers better financial returns. We do more of that. At that stage, we still are selling robots. And as I answered earlier, we're not seeing any clear headwind today. The capital is not available for those robots, both in the hospital setting and in the ERC.

Thanks, Drew. Vaughn, can we go to the next question?

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

Morning. Thanks for taking the questions. Brian, your comment on recovery I thought was interesting. As we look at the market as far as deferred procedures go, we come up with kind of a billion to $2 billion of deferred orthopedic revenue globally over the last couple of years. You know, if we get to maybe a third of that here in 2022, I know you can't get to all of it because of staffing headwinds, but given your market share position, can't this be kind of 100 to 200 basis points of tailwind to the top line? Is that what you're trying to communicate today as far as what kind of impact to the business we should expect this year from the backlog?

Yes, so to be clear, you know, the backlog, we still believe there's got to be a backlog. I mean, you know, just the fact is there's been no fundamental shift in the disease state itself, and there has to be a backlog just given what's happened over the past couple of years. But what we're not trying to state right now, given our guidance, is that we expect, you know, a big part of that backlog or really any of that backlog to influence our numbers. We're just saying that we believe as we get to the back half of the year, we're going to get to a normal environment. not making assumptions about capitalizing or benefiting from backlog. We do believe at some point it has to come through, but we believe at this point it's not going to be some kind of a massive impact that comes quickly. You're just going to have capacity issues associated with that. We do believe it should be a tailwind, but we think it's going to happen over years, not months or quarters would be our view on it. But just to be very clear, we're not expecting that as a part of our guidance right now in backlog recovery.

Okay, thanks for that. And then maybe, Suki, because I know you monitor this pretty closely on the ROSA side of things, you know, you've been placing a lot of assistance over the last couple of years. Maybe talk a little bit about that pull-through revenue that you're going to get on the implant side and where we are in that cycle. Is it going to be a meaningful contributor to the knee business here in 22, or is it more kind of, you know, spread out over the next couple of years? Thanks.

Yeah, probably. Yeah. And it's probably better maybe even have Ivan talk about that because I mean that realization of pull-through is now, I mean, it's happening. So maybe Ivan, maybe you want to speak to that.

Yeah, maybe I won't give too many details because you never know who's listening, but the facts are that penetration of cementless associated with ROSA is already in the teams. The pull-through and a large component of the new performance in Q1 is ROSA-related. The 600-plus robots that we place, roughly 50, if not 60 percent of those in the U.S., around half of those are in competitive accounts. We've seen meaningful revenue coming from those areas. And all of that is in the early innings. As we get into the additional launches on HIP, as we get into other modalities of ROSA-E, we got several in the innovation pipeline. We're going to continue to see a nice pull through there. Sementless is one of the elements of a pull-through, as is regular needs. And then, obviously, you have the disposable and other components. CVH, many, many accounts, gets contracted as part of the ROSA placement or sale, and that's another source of revenue. So, again, we don't disclose the revenue with robots, but I will tell you that it's above expectations so far.

Thank you. And Sugi, sorry to step on you there, but I figured that was more of a commercial discussion versus a financial one.

Is that what you were going to ask or you want to change the answer here?

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

Our next question comes from Ryan Zimmerman with BTIG.

Thanks for taking the questions. Good morning. A couple for me. You know, when you think about, you know, 23 and the streets, I think modeling about maybe 3% growth or so, and there's a lot of puts and takes this quarter. We've now shed spine and dental. Brian, when you think about the business segments, I mean, and the growth rates, and Shagun was going to ask this from a pacing perspective, but I love your perspective from a business segment perspective. What's accretive to growth? What's dilutive to growth now when you look out, you know, on the business And I think we know the answer to this, but it would be helpful, I think, to walk through where you think the growth rates could be for knees and hips versus set, et cetera. And then my second question, I'll just ask it now. Sookie, you may have spoken to this before, but just help us understand any dis-energy assumptions post-spin on Zimpy.

Okay. Yeah, so I'll start, and then I'll see if we can transition to Sookie. You know, we're feeling really good, actually. You know, the funny thing is, when you think about NEI, most people think about it, and rightly so, pretty slow growth market. But in reality, there's more innovation entering the NEI space than we've ever seen before. You know, we've got us, our competitors, all focused on data, robotics, and other forms of technology and share wallet opportunities that we just haven't seen in the past. So even though one might view that as a relatively slow growth market, I actually see it as a real potential to see some acceleration in that market growth. I feel very confident that we can grow well in need because of all the shots on goal that we have. But I also think all boats will float here and really raise because you've got a lot of technology entering the space. And what we've seen is that it's being digested. And so when I think about that, what are the implications? If you have the same number of procedures being done, but you're getting more share of wallet for every procedure, that drives up the entire space. And usually when you bring innovation, as Yvonne was alluding to earlier, when you have vitality in a space, it also drives better pricing stability. Because you sign longer-term contracts, when somebody converts, for instance, to ROSA, they usually don't come right back and try to knock you down from a pricing perspective. So vitality really does drive stability in pricing as well. So I think even in a space like that that you might not believe would be attractive for overall revenue growth, I do believe it is sustainably an attractive area for us to invest and grow. And it's very profitable for us as well. Set is pretty obvious. You know, the categories of set that we're concentrating on are attractive market growth that everybody knows. We believe we have an ability to win and we'll continue to scale in those areas. So pretty much across the board, when I look at large joints or set, I see them as attractive markets given the technology and innovation that we're bringing to bear. Suki?

Yeah. Hey, Ryan. Your question related to the spin, and I believe it was on dis-synergy. So if you look at the recasted financials that we put out last week, you would see that overall we see operating margin accretion of about 190 basis points from the transaction, which is a little bit better than our original expectations. That's a good thing, further validation of why we entered into that transaction. Inside of that, that would then imply and suggest about $40 to $50 million of stranded costs remaining with similar Biomet, I would say that we're already making progress against those stranded costs this year. We believe that there's more opportunity going into next year, and we kind of just see that as part of our overall operating base as a potential source of opportunity for future efficiency. So hopefully that gets to your question on where we see and how we size the synergies, but make no mistake about it. We're going after those as aggressively as we can while ensuring we don't disrupt you know, the business and the recovery that we're starting to see.

Thank you.

Thanks, Ryan. Lauren, do we have another question in the queue?

Our next question comes from Mike Mattson with Needham & Company.

Good morning. Thanks for taking my questions. I wanted to ask one on Persona IQ. I know you made some brief comments on it, but maybe you can give us a more detailed update on the launch. And then is this something that could be material to your knee growth this year or next year in terms of adding, you know, 100 plus basis points in knee growth?

Yes. So we're lucky to have Yvonne on the call today because obviously I'm close to this. He is extremely close to persona IQ, not just what we have in knee, but also the future view of where we could take IQ and smart implants. But I would say we're in limited launching. As we've said, we're going to do this right. We're going to take our time. We're going to make sure that we learn what we need to learn so that when we need full launch, we launch well. But the early stages of this is very attractive. And what's interesting about it, and he's going to get into IQ itself, what's interesting about it, it's also driving traction for the organization just because it's innovative. Even people that are not ready for IQ yet, they're just saying, hey, I'm not quite ready for it yet. They're looking at us differently. They're looking at Zimmer Biomed as an innovative player in the space. And most people want to be linked to an innovative player. Someone's going to change the space. And so even those customers that didn't want to come to us for IQ, we're getting interest for them just to move to regular persona. So it's almost got a halo effect because it's so unique in the marketplace.

but about offensive use. Yeah, absolutely, Mike. So first things first, we are on track with limited market release. I'm not a friend of doing limited market releases. I like to do full force launches. But on this one, given the complexity and given the disruption in the market, we wanted to go slowly and collect data. I won't talk about the number of hospitals that have been onboarded, but it is significant. The patient pipeline is also significant, above expectations. We're collecting data across the board on mobility, range of motion. We got literally thousands of days of data tracked. The platform, Persona IQ, is now fully integrated with Samoa Mobility and the rest of the CDH ecosystem. We have not seen any surprises when it comes to the qualified data that we're tracking. And most excitingly, we got a technology roadmap that is going to go beyond these. So already got the design agreements for cementless, for solder, and other categories. On the second part of your question, I'm not going to comment on whether it is material or not. I will tell you it is material for patients. And then the logic should prevail if it is material for patients. So, so far so good. Very excited. I look forward to the next steps.

Okay, thanks. And then just as a follow-up, I wanted to ask one on ESVs. You know, how do you feel your position competitively in the ASC sector? And, you know, do you think your growth in ASCs was faster than your growth in hospitals? I mean, it seems like it is for the overall market, I guess, from what we've heard.

Yeah, I can take that one as well. So please be aware with the ASC. Clearly, we started later than others in this environment. giving a strong position in hospital settings, inpatient, outpatient, and whatnot. But we put a plan together around four key components, making sure we have the right portfolio, the right people, the right partnerships, and the right contracts. On the product, we've done a ton. We filled the gaps on basic things like booms and lights, on visualization towers. We launched ASC-friendly innovation around robotics. We have increased our cementless penetration. So I think that the portfolio is second to none, especially now that we added the SportsMed and whatnot. So strong on the product angle. On the people aspect, we then used to have a dedicated commercial structure and contracting structure on the ASC setting. We have it now. It's fully dedicated. We've got a large group of people that each and every day get up and think only about the ASC. On the partnership angle, we've got key relationships with key centers in the U.S. We're developing technology together that is applicable to the ASC. We're doing a ton of medical education together with these key centers. And then around contracting is night and day. We had an owner of all ASC contracts. We are very disciplined around the governance in those relationships, particularly in pricing. So I think the plan is working well. We're growing faster than expected. I'm not sure these days we're growing faster or not than the others, but the ASC performance in Q1 was above our expectations. As we think about the rest of the year, I think we're in a good position to continue to grow. Great. Thank you.

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

We'll take our next question from Robbie Marcus with J.P. Morgan.

Great. Thanks for taking the question. Maybe I could ask, the SET business was the slowest grower this quarter. It's 25% of sales, and we don't get geographic breakout or segments there. I was hoping if you could walk us through sort of the different components and any geographic differences to point out, just given that a lot of your competitors called out extremities and sports medicine as positives this quarter. Thanks.

Yeah, maybe, you know, also maybe the chance of some of this, but, you know, the fact is we did have a pretty significant headwind. So when you look at the difference in regions, the most challenging region that we had was asia pacific and a big part of that as we all know is the the trauma bbp and the weight that that's having on the overall segment outside of that when we look inside of set i would say the same thing our upper extremities business did very well the innovation is helping us drive our performance there but also the focus that we have sports did very well as avon talked about before and that happened both u.s and europe And when you think about our CMFT business, we continue to see traction there, not just because of the acquisitions that we've had, but also because of the now what I would define as organic growth from those acquisitions. And again, the focus that we have commercially in CMFT. So those are kind of the bright spots that we have, and those are across all regions. But the big headwind for us is in trauma, a lot of that being in Asia-Pacific.

I guess if I add to what Brian is saying, I'll be saying the same thing with a different accent. So I won't extend myself, but excited about the dedicated channel in key geographies in Europe and the U.S. primarily, and the innovation that is coming later in the year and going into 2023. So sports has gone well, extremely has gone well. Again, some noise with trauma, but two out of the three key components are performing very nicely, and they're about to perform even at a faster pace. Thanks, Robby.

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

I think you could probably just read from what Sookie said, and I think it was in your prepared remarks, Sookie, but 200 to 300 basis points of headwind is what you could look at in the quarter on the global business as a result of China.

Great. And maybe just one quick follow-up for me. As you think about China, that's a country with the difficult pathway forward with the no COVID policy. I just want to make sure, are you assuming continued pressure from lockdowns through the rest of the year, or are you assuming that it resolves in the near term? Thanks a lot.

Yeah. The reason for the range that we have and the guidance is to make sure that we're accommodating risk or opportunity in places like China. And so it's already calculated in the range that we have. What I would tell you is, again, we've been a little bit lucky there. You know, sometimes it's okay to be lucky rather than always just good. But the fact is we've had that offset. We have had some pressure when we look at Shanghai lockdowns, but we've also had delays in PPP implementation, which helps us from a pricing standpoint, and they've offset each other. And so at this point in time, even though the mix of how we're getting to the revenue and the bottom line that we assumed we would get in China, it's changed, but the overall impact is about where we thought it would be. So I guess all that to say, even if we see continued lockdowns, as long as we see continued delays in PPP, they seem to be offsetting each other.

Thanks, Robbie. I think we're at 930, so we probably need to wrap there. Lauren, thank you so much. Brian, don't know if there's any closing remarks from you or any other members of the team. I'll pause there just to see if you'd like to make any comments before we wrap up on this end.

No, I think the nice thing is we captured a lot of what we wanted to say via the questions. The fact is it was a good quarter. It feels good to have, and I think probably the most important thing, even though there's a lot of challenges that everyone is talking about right now that we're going to have to deal with, that we're going to have to manage through, and I have confidence the team can manage through those. The difference now is it's the same challenges for everybody. where we've been disproportionately impacted by COVID. And so if I had to select, I would take the challenges that we currently have in place and their impact to the business versus continued COVID impact. And so that's the positive for us. That's been kind of the light at the end of the tunnel that we've been waiting for, which is COVID receding. And I truly do believe as it does recede and it continues to recede, that the actual performance that we see in the business will begin to be reflected in the performance that you see in the business. So with that, we'll go ahead and end the call.

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

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