Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2022 Earnings Conference Call. [Operator Instruction] 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.

[Operator Instruction] I would now like to turn the conference over to Keri Mattox, Senior Vice President Investor Relations and Chief community Officer. Please go ahead..

Thank you, Operator. And good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet first quarter 2022 earnings conference call. Joining me today are Bryan Hanson, our Chairman, President and CEO; EVP and CFO Suky Upadhyay and COO Ivan 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 Bryan.

Bryan?.

Alright, thanks, Keri 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 Suky, who will get into more details on the quarter, but also very importantly, our full-year guidance update. And then we'll close out the call with your questions, of course. So, let's get started with Q1.

We had a strong quarter, well above our own expectations and obviously above external expectations. And the primary reason for that level of over achievement was stronger than anticipated COVID recovery in the quarter, particularly when we looked at the back half of the quarter. And if I look at the U.S.

recovery, it was stronger 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're raising and tightening our full-year guidance. Now there are clearly a number of headwinds that we're facing. Supply challenges, inflation, Russia, Ukraine. But given our revenue dependent 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 ZBEdge ecosystem. If you were an AAOS, you saw our recently launched WalkAI. 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 [Indiscernible] 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 ZB a best preferred place to work and a trusted partner. Just in Q1, we scored 100% on the human rights campaign’s corporate equality index.

We made Forbes best large employers list, and were named one of the most innovative companies by FastCompany for our ROSA Robotics platform. We have also prioritized our environmental, social, and governance, or ESG commitments and our actions in this area continued to expand.

We have committed to key environmental standards, delivered on social giving pledges and set DENI 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 ZimVie on March 1st. That was ahead of schedule and certainly as a part of our active portfolio management strategy.

So, in summary, even though there are real macro headwinds that we will have to manage, and I have confidence in our team to do so, the recovery, the shift in recover really in COVID is the bright spot we've been waiting for. And we're excited about and it's certainly changed our view of 2022.

And with that, I'm going to turn the call over to Suky for a deeper dive into Q1 and our revised expectations for the full year. Okay, Suky..

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 8-K last week to provide unaudited recasted financial information related to our ZimVie spin off, 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 a 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 significantly pressured January, recovery ramp 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 have 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 in 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 the 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 a 200 to 300 basis points of pressure across our global Knee, Hip and S.E.T.

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..

This decrease was driven primarily by an unrealized investment loss due to a decline in the value of our investment in ZimVie, and higher litigation-related and restructuring charges. On an adjusted basis, diluted earnings per share from continuing operations of a $61 represents an increase from $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 and manufacturing costs, which were partially offset by higher volumes and better mix.

Our adjusted operating expenses were about $735 million, up from the prior year driven by higher investments in R&D. Our adjusted operating margin for the quarter was 26.4%, down versus the prior year but ahead of expectations and driven by higher revenue. The adjusted tax rate was 16.1% in the quarter in line with our expectations.

And 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 a 150 basis points versus our original estimate of about 50 basis points.

Of the incremental a 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 $6.65 to $6.85.

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 Keri..

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

With that, Operator, may we have the first question, please?.

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

Good morning and thank you for taking the question. Very nice quarter. 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'd be curious to get your opinion on that. Thank you..

Yes, Thanks. Maybe I'll just start off and then I've got Ivan sitting next to me. We are actually here traveling in Europe, because we take the opportunity to get out and start Q2 strong.

What I would tell you is that yes, we are definitely still seeing pressure from the staffing standpoint and we actually, even today would expect that to continue throughout the year. What I think about the quarter itself, whether it be COVID or staffing of a combination of the two, it was pretty tough in January.

Got better obviously in February and that was really, really good. And in March -- actually March was a month that we had at growth over 2019, so true growth over pre -pandemic levels, and we've seen that continuing to April.

So, all positive from that perspective, but we do expect that staffing pressure will continue to be a challenge throughout the year. Just not as intense, I think is what we thought when we started the year. But, Ivan you're out there more than I am in the U.S. maybe you could also..

Absolutely. Thank you, Bryan. So, I concur, it remains a headwind. 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 calculations were ACE related, so fear and anxiety. In the early IQ, the staffing challenges, then 2021 it was mainly staff -- agreement, staffing agreement. And that [Indiscernible] seen that it's starting to look [Indiscernible] less of probably in Europe than 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, net pressure?.

Yes -- No, cap -- Yes. Capital purchasing. Thank you..

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

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

Yeah, I can see that question as well. So primarily we sell capital in two businesses, for surgical business and obviously robotics, Knee and Hip [Indiscernible]. We are not seeing anything that tells us that there's a shortage of capital. What the strategy for the quarter is being more around placements than selling robots.

But under 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 a capital allocation from a hospital standpoint. But again, as I mentioned, we are doing more placement than sales in the quarter.

We did more placements than sales 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 and 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 flowed through to 2023. Sounds like 50 basis points of incremental pressure at this point.

But also, curious if you have any offsets like pricing I -- 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..

Yes. Sure. Hey, Travis, this is Suky. Thanks for the question. I'll start and then maybe turn it over to Ivan on the pricing question that you had. So, you heard correctly, we think that inflationary pressures are going to be roughly a 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 a 100 basis points 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 this 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. I would say that the key challenges that we're seeing, again are very consistent across the sector from a supply chain standpoint. First, freight is higher; commodity costs are higher, energy costs and labor costs.

But 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 socks and supply chain.

But what we're hearing from our supply chain organization is that 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 on 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.

That sort of helps a tailwind on our pricing probably temporarily while our volumes are more muted. But maybe Ivan, you want to talk a little bit about what you're seeing in the pricing environment and our ability to offset price or past price pressure onto the end markets..

Absolutely Suky. Hey Travis, Ivan here. So as Suky do it too, and in our normal -- the normal price erosion is around 2 to 300 basis points. We did achieve better at price erosion in the quarter, some components of that are sustainable, others they remain to be seen. But I will tell you that we got over next today in the U.S.

and frankly in Europe and APAC 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 annexation to maintain or gain price. So, we're not making a commitment to do any better than the 2 to 300 basis points, given that a large percentage of the business is contracted.

But certainly, we have the plans and the government that we didn't have before. So, fingers crossed on that one..

I appreciate all that color. And Suky 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 headwinds 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 lock downs in other cities.

The good thing is, right now we're not seeing any lock downs 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 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 China -- beyond Shanghai, we're seeing stabilization to improvement.

We just have to keep a very close eye on China, [Indiscernible] on Shanghai. But the way you're thinking about the impact of VBP is correct..

Okay, thanks for the [Indiscernible]..

Yeah, I might just add this down -- I might just add some commentary there. It's actually because even though there's a lot that's happening, that's different than expected in China, the overall impact into 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 lock downs in Shanghai and disruption as a result, we're also seeing delays in VBP implementation. And those are almost balancing each other.

So, while certainly China was still a headwind for the quarter, from a top and bottom-line standpoint, it was pretty much in line with what we expected even though for just different reasons..

Great. Thanks, Brian and Suky..

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 wanted to 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 CAGR is and just try to make sense of it'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 ROSA 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 strongly suggest that you're gaining share..

So, I'll take that and then I'll pass it over to you, Bryan. I'm going to talk about some specifics. But it probably all depends on how you're running your data, because I would probably argue the different outcome. The fact is it's choppy. 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 good year. We're looking at it on a stack basis. You name it, we're running the analysis to get a sense for what we're doing.

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.

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. A big one that I look at is vitality index.

We had a more slow vitality in the business, we've doubled that in the last few years and that continues to move north. We've got a very strong pipeline of products. So, to me, when I think about that performance, it's clear. I mean, the transformation is real.

And the good news for us is that as COVID and staffing issues start to clear and continue to clear, that the reported performance that we have as a business as 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 innovations. So maybe Ivan, you want to talk about some of the innovation that gets you excited..

Yes, absolutely. I mean, I look forward to the day where we have objective market share data on because I also differ from that statement on markets there. But that said, I'm beyond excited about what we got in the store.

So, some of the products that we keep talking about, Russ, you mentioned 600 [Indiscernible] at place, I believe the number is higher now. We're getting a strong penetration in key accounts, both in the hospital setting and in the outpatient setting. We have indications, plenty of indications to come.

Our revision has only been launched here in the U.S. but continuous to grow at unprecedented rates. It's pulling our primary needs as well along the way, ZBEdge, I would spend an hour talking about all the things that you probably saw in [Indiscernible] in Chicago. Whether it is WalkAI, Mymobility on [Indiscernible] configurations.

By the way, we have the largest number of enrollments these last quarter, Cementless knees penetration is also in the teens, and that's before we launch a new form factor device at the end of this year, which is going to give us break in the category. So that's just the [Indiscernible], and Amani, we launched six products in the last two years.

As you look into Hips, we are performing strongly with Avenir Complete, direct Anterior, our revision platform. We don't talk enough about that. Somebody is also performing very well. In said CMSD sports made on trauma are doing well, we got some noise with that trauma early in the year, but we got new launches and new product launches to come.

And just a ton of stuff coming from -- and data on technology standpoint. So, I don't know, you were looking at the same data, when it looks the market share.

But what I do know is that as you look at the innovation story with the [Indiscernible] 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 [Indiscernible]..

Thanks for that color. We'd love to know specifically if you do have the data on the U.S. knees and hips, what your data set, I'm sure it's better than ours. But the second follow-up would be for you, Bryan. Just on capital allocation. Just how you're thinking about M&A post the spin now and this in 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. So maybe I'll start kind of topline and then I'll hand it to Suky to talk about capital allocation and our current focus there. But yes, for sure, M&A and active portfolio management is a big part of what we define as Phase 3 of the transformation.

Just as a quick reminder, we started this old journey in Phase 1, 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 2 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 the Phase 3 is where we are in kind of to your question. We are looking to transform the portfolio of the company. Now, 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 there have been smaller because we don't have the firepower, we've done acquisitions to be able to build, scale and attract as basis.

But for sure we will continue to focus on active portfolio management, acquiring companies that can drive weighted average market growth for us in our 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 3. 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 firepower to do this. Suky, maybe I'll just turn it over to you to talk about current capital allocation..

Sure. Thank you, Bryan. And thanks Amit for the question. Our focus has been very consistent in ensuring that we continue to pay down debt and maintaining our investment-grade. And just a little back point here.

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

But when you combine that priority as 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 Bryan talked about with active portfolio management.

I think in a bigger way, it enables us to look at opportunities to accelerate the top and bottom-line growth for 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 Bryan talked about, especially now, coming off the spin. And quite frankly, the organization has gotten out more bandwidth having undertaken in and gotten that very heavy lift behind us.

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

Thanks for the questions [Indiscernible], 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, Suky, on -- 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 then kind of I was hoping that -- here and answer to was are their 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..

Yes. The team is actively looking and always looks at offset to any headwinds, whether it's current year, future years, etc., so I think it's too early to tell exactly what next year's gross margin will look like. But all things being equal, we've got that added headwind.

The team is looking at, both from a supply chain standpoint, more faster structural changes across our plant footprint. We're looking at potential procurement and category savings through procurement to potentially offset those headwinds.

And I think you've heard about Ivan talking about price, we're making some nice, I think durable headway into improving our price discipline and our price performance. So, 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 I think you guys are pretty clear on kind of the R&D spending things like that. But where are we on a recovery in spend on things like conference attendance, doc training, corporate travel, things like that.

Are we at a level now that is back to normalized and just grow off that or is there a recapture that still has to happen there?.

I would say we've definitely increased 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 topline performance improved throughout the year. So, and especially in the backdrop of the new products launches that we've got coming out.

We want to make sure that we're investing appropriately from a commercial perspective, to make sure that those launches are successful. I don't know Ivan, if you want to say anything else there, but I guess the key thing we'd expect to see a modest increase that will be involve..

Just maybe quickly hearing that Jeff, I will tell you that the fact that they [Indiscernible] what it was three years ago tells you that we haven't a slowdown from an R&D perspective. Within R&D you 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 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 [Indiscernible], that's another area that we're trying not to cut.

Might have done some adjustments throughout the pandemic, but I will tell you we are full force globally when it comes to [Indiscernible]. So, R&D [Indiscernible] remain sacred cows here from an investment standpoint. Thanks, Jeff..

Yeah. Thank you..

Thanks, Jeff. Lauren, can we move into the next question in the queue, please..

Our next question comes from Shagun Singh with RBC..

Thank you so much for taking the question. So Q1 ex-FX 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 that? 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 [Indiscernible] are coming in from the ASC. So, any color there would be helpful. Thank you..

So, Suky, 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 ex-FX, the midpoint now being at 3% versus the former at flat year-over-year. But given our first quarter would suggest lower ex-FX 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, we would expect -- we already talked about second quarter being in the low single-digits on an ex-FX basis.

And the fourth quarter based on normal seasonality, we would expect the second quarter to be stronger than the third quarter. And then of course, the fourth quarter to be the strongest quarter of the 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, just to make sure that we're taking advantage of fast-growth areas in the world.

And then ASC, you referenced ASC as 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, Shagun.

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 questions. 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 to growth from a business perspective. Thank you..

Maybe just quick topline and then Ivan, maybe you could speak to some of the things you're seeing inside of set. First and foremost, it is an area that we're very interested in. Not all the sub-segments of S.E.T.

are created equal for us or certain categories that we're investing more heavily in because they're more attractive, we think we've got a better chance to win. Quite frankly, we really do believe that we've got scale that we can continue to move forward. So not all equal, but certainly an area 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 in VBP and in 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, S.E.T. is an important area for us.

We've put commercial infrastructure in place, we've acquired technologies in this space, we continue to innovate in the space and we will continue to focus in S.E.T. I don't know if you had anything else you want to --.

Just maybe just back up a little. We've seen [Indiscernible], so in the category, as I mentioned earlier, sports are going very well. The acquisition and integration are relying continues to go very nicely here in the US and in Europe. We've seen an increasing penetration on Signature ONE. We are now integrated in shoulder.

We Mymobility, which is the integration of ZBEdge components into the shoulder platform. Comprehensive and shoulder is growing, in the strong team globally. So as sports and upper extremities have done very well, CMFT and integration of [Indiscernible] is also going very well.

Continue to gain share on hip trauma, [Indiscernible] closer where we have some headwinds. It was referenced by Suky in the prepared remarks. [Indiscernible] trauma primarily because the headwinds in APAC, but also in the U.S. some time it was some contracts.

But overall, the category with the exclusion of trauma right now, it seems going really, really well. And as I mentioned, a different forum, we got more product launches in the segment in 2022 at the end of 2022 and in 2023, that we have had since 2015, 2016. So, the innovation to start is that as well. So, things are on track..

Got it, thank you. That just on robotics, I think I heard you mentioned that there was a struggle. It was a struggle quarter on placements than capital.

Can you just talk about whether you expect that trend to continue through 2022? What drives is just the hospital spending environment or are you doing new sales strategy with how to place robotics? Thank you..

Absolutely, thanks. So, it's very fluid. It's very customer-centered. We give the option of the placement, we obviously give the option of selling the ROSA, then sometimes we do a hybrid.

In 2021 with did more sales than we anticipated given some of the macro-dynamics as we entered 2022, we see on a particular placement that that delivers better financial returns, we want more of that. That said we still are selling robots. And as I said earlier, we're not seeing any clear headwind today.

That capital is not at a low for the robots, both in the hospital setting and in the ASC..

Thanks, Drew.

Lauren, can we go to the next question?.

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

Morning. Thanks for taking the questions. Bryan, your comment on recovery, that was interesting. As we look at the market as far as deferred procedures go, we come up with the kind of $1 billion to $2 billion of deferred orthopedic revenue globally over the last couple of years.

So, if we get to maybe a third of that here in 2022, I know you can't get to all of it because of staffing headwinds.

But given your market share position, get this be kind of a 100 to 200 basis points of tailwind to the topline, is that what you're trying to communicate this -- today as far as what kind of impacted the business we should expect this year from the backlog?.

Yes. So, to be clear, the backlog, we still believe there's got to be a backlog. I mean, just the fact there's just been no fundamental shift in the disease state itself and there has to be a backlog just given what's happened over the past couple of years.

But what we're not trying to state right now, given our guidance, is that we expect a big part of that backlog or really any of that backlog to influence our numbers.

So, 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 no 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, just -- you're just going to have capacity issues associated with that.

We do believe it should be a tailwind, but we think is 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, Suky, because I know you monitor this pretty closely on the ROSA side of things, you've been placing a lot of systems over the last couple of years.

Maybe talk a little bit about that pull-through revenue that 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 spread out over the next couple of years? Thanks..

Yes. Sure. Probably -- I mean, Suky 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, you want to speak to that..

Maybe I won't give too many details because you never know who's listening. But the facts are that penetration of Cementless associated with ROSA, is sort of the end of teams. The pull-through and a lot is going pointed of the Knee performance in Q1 is ROSA related. The 600 plus robots that we place roughly 50%, not 60% of those in the U.S.

half of those are in competitive accounts, how we've seen meaningful revenue going from those areas. And all of that is in the early innings. As we get into the additional launches on Hip, as we getting through all their modalities of ROSA Knee. We've got $7 billion innovation pipeline. We got to continue to see a nice pull-through there.

Cementless is one of the elements of our pull-through, as is regular knees. And then we have a disposable and another component, CVX many, many accounts and gets contracted as part of the ROSA placement or sale and that's another social revenue. So again, we don't disclose the revenue which were robots.

But I will tell you that is above expectations so far..

Thank you..

And Suky, sorry to step on here. But I figure that was more of a commercial discussion versus a financial one..

Is that what you were going to ask?.

[Indiscernible] or you want to change the answer here?.

Lauren, I think we are 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. When you think about '23 in the streets, I think modeling about 8, 3% growth or so. And there's a lot of puts and takes this quarter. We've now shed spine and dental.

Bryan, when you think about the business segments, I mean, and the growth rates and the, was kind of asked this from a pacing perspective, but I'd love your perspective from a business segment perspective, what's accretive to growth? What's dilutive to growth now? When you look out on the business? I think we know the answer to this, it'd be helpful I think to walk through where you think the growth rates could be for knees and hips versus sat, etc? Then my second question I'll just ask it now.

Suky, you may have spoken this before, but just help us understand any dis-synergy assumptions post-spin on ZimVie?.

So, I'll start and then obviously you can transition to Suky. We're feeling really good actually. The funny thing is when you think about Knee, most people think about it and rightly so a pretty slow growth market. But in reality, there's more innovation entering the Knee space than we've ever seen before.

We've got our, us, our competitors, all focused on data, robotics, and other forms of technology 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 because of all the shots on goal that we have. I also think all boats will float here. I mean, it's really great because you've got a lot of technology entering the space. What we've seen is that it's being digested.

When I think about that, what are the implications? You've got the same number of procedures being done, but you're getting more share of wallet for every procedure that drives up the entire space. Usually when you bring innovation as Ivan was alluded to earlier, when you have vitality in a space that also drives better pricing stability.

Because you signed longer-term contracts when somebody converts, for instance, to ROSA, they usually come right back, you try to knock it down from a pricing perspective. So, vitality really does drive stability and pricing as well.

So, I think even in a space like that, that you might not believe would be attractive for overall revenue growth, I do believe it is sustainably an attractive area for us to invest in growth. And it's very profitable for us as well. Set is pretty obvious.

The categories are 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 score set, I see them as attractive markets given the technology and innovation that we're bringing to bear..

Suky?.

Yes. And hey, Ryan. On your question related to the spin and I believe it was on this synergy.

So, if you look at the re - casted financials that we put out last week, you would see that overall, we see operating margin accretion of about a 190 basis points from the transaction, which is a little bit better than our original expectations, that's a good thing, of further validation of why we entered into that transaction.

Inside of that, that would then imply and suggest about $40 million to $50 million of stranded costs remaining with Zimmer Biomet. I would say that we're already making progress against those stranded costs this year.

We believe that there's more opportunity going into next year and we kind of just see that as part of our overall operating base as a potential source of opportunity for future efficiency. 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 the business and the recovery that we're starting to see..

Thank you..

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

Our next question comes from Mike Matson with Needham and 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 more detailed update on the launch.

And then is this something that could be material to your Knee growth this year or next year in terms of adding 100-plus basis points in Knee growth?.

Yes. So, we're lucky to have Ivan on the call today because obviously, I'm close to this. He is extremely close to Persona IQ, not just what we have in Knee, but also the future view of where we can take IQ and smart implants. But I would say we're in limited launch, 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 just so that when we do full launch, we launch well. But the early stage of this is very attractive.

What's interesting about it, he's going to get into IQ itself, what's interesting about it is 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 as -- differently.

They're looking at Zimmer Biomet as an innovative player in the space, and most people want to be linked to an innovative player, someone who'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 yeah..

Absolutely yeah, Mike. So, first thing is first, we're on track with our limited market release. I'm not a friend of the wind limit their market releases; I'd 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.

The -- I won't talk about the number of hospitals that have been on-boarded but it is significant. The base in pipeline is also significant on both expectations. We collect the data across the board on mobility, range of motion. We've had literally thousands of base plan data track. The platform Persona IQ is now fully integrated.

We found our mobility and the rest of the CDA ecosystem. We have not seen any surprises when it goes to the qualified data that we tracking. Most excitingly, we've got a technology road map that is going to go beyond knees. Already got the sign agreements for us. I mean, this for shoulder and other categories.

On the second part of your question, I'm not going to comment on what it is material or not. I will tell you this, material for patients. And then the logic shall prevail if it is material for patients. So far so good, very excited. I look forward to the next steps..

Okay. Thanks. And then just as a follow-up, I wanted ask one on ASC. So how do you feel your position competitively in ASC sector? And do you think your growth in ASC 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, but --.

Yes, I can take that one as well. So pleased with where we are, we [Indiscernible] ASC. Clearly, we started later than others in this environment, given our strong position in hospital settings, inpatient, outpatient and whatnot.

But we put a plan together to get around 40 components, making sure we have the right portfolio, the right people, the right partnerships, and the right contracts on the products we don't have ton. We fill the gaps on basic things like [Indiscernible] on the 20 cities from [Indiscernible]. We launched that ASC friendly innovation around robotics.

We have increased our Cementless penetration. So, I think that the portfolio is a second too, especially now that we added these ports made on [Indiscernible], so strong on the product angle. On the people aspect, we didn't use to have a dedicated, a structure, dedicated commercial structure, and contracting a structure on the ASC setting.

We have it now, is fully dedicated. We got a large group of people that each and every day get up, and seem volume about the ASC. On the partnership angle, we got those key relationships with [Indiscernible] in the US, we developing technology together that is applicable to the ASC.

We done a ton of medical allocation, together we found this key centers. I mean, around contract in his Meta date, we got an owner of all ASC contracts. We're 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 was growing faster or not than the others. The ASC performance in Q1 was above our expectations, and as we think about the rest of the year, I think we're in good position to continue to grow..

Great. Thank you..

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

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

Great. Thanks for taking the question. Maybe I could ask the S.E.T. 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..

Maybe also get a chance some of this, Ivan. But the fact is we did have a pretty significant headwind. So, you look at the difference in regions that the most challenging region that we had was Asia-Pacific and a big part of that as we all know, is the trauma, VBP and the weight that that's having on the overall segment.

Outside of that, when we looking inside of S.E.T., 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 Ivan talked about before, and that happening 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, commercial in CMFT.

So those are kind of the bright spots that we have, and those are across all regions. The big headwind for us is in trauma, a lot of that being in Asia-Pacific..

I guess, if I had to add to what Bryan is saying, I'll be saying the same thing with a different action. I want to extend myself, but that it started 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. Sports is going well; extremity is going well.

Again, some knows [Indiscernible] trauma, but two of the three key components are performing very nicely and they love to perform even at a faster basis. Thanks, Robbie..

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 Suky said and -- I think it was in your prepared remarks, Suky, but 200-300 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 is 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 in the guidance is to make sure that we're accommodating risk core opportunity in places like China. So, it's already calculated in the range that we have. What I would tell you is, again, within a little bit lucky there, 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 and BPP 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 VBP, they seem to be offsetting each up..

Thanks, Robbie. I think we're at 9:30, so we probably need to wrap there. Lauren, thank you so much. Bryan, don't know if there's any closing remarks from you or any other members of the team, applies there just to see if you'd like to make any comments before we wrap up on this end..

No, I think the nice thing is we've 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 it.

We're going to have to manage through and have confidence in the team can managed through those. The difference now is it's the same challenges for everybody where we've been disproportionately impacted by COVID.

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. That's the positive for us. That's been kind of a light at the end of the tunnel that we've been waiting for, which is COVID receding.

And I truly do believe if it does receding 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 business. With that, we'll go ahead and end the call..

Thanks, Bryan. 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..