Zimmer Biomet Q1 2024 Earnings Call Transcript

Yeah, I think Ivan summarized it really well. So I'll just try to build some incremental points here, I think, at that mid-single digit growth top line profile that Ivan mentioned we do have a durable path to operating margin expansion as well as improvements in our overall free cash flow conversion.

On the earnings outlook this year, if you look at our guide at 6% to 8%, which again, we reiterate and feel confident in. On an underlying basis, if you back out the step up in tax rate that we saw out of [Indecipherable] 2 as well as headwinds that I think everyone's facing on interest as well as FX. The underlying growth on the bottom line is much better than [indecipherable] maybe 300 to 400 basis points better on an online basis, which puts us kind of in that high single digits, low double digits. And if you look at what we did in 2023, I think we were also there.

As we look forward, using your words, Travis base case, et cetera, we think there's a pathway to low double digit earnings growth. I wouldn't say it's our base case or our commitment. And again, we're going to provide more color on our analyst day. But as we think about margin expansion with revenue growth, we just want to make sure we've got the right investment profile for the company to make sure that growth is durable.

So is that our base case? I wouldn't necessarily go there. I'd say we have a pathway there. But we're going to provide a lot more color in just a few more weeks, so thanks for the question Travis. [Speech Overlap].

Yeah, Steve, thank you. We're very pleased, obviously, with pricing performance. We call that in 2023 the second semester of 23. So the last half of 23 we already flatties when it comes to price. So this is a business that in previous years was having 300t o 500 basis points of price erosion in the US, pretty significant OUS that's not the trend that we got going on.

We put a structure in place, we put governance. New product introductions are helping from a category contracting. I wouldn't say there's any real surprises. Europe may be doing it slightly better than anticipated. You got all kinds of tender dynamics that come in and out. But [indecipherable], we're at a point where it's pretty predictable.

We like the strategy in place. We like the governance. We're not going to commit here to doing dramatically better. But no real surprises. Solid Q1, and a great outlook for the rest of the year. So if you haven't in the comments.

I think overall we're in a more favorable environment than we've been. Let's call it three, four years ago when you combine that with some of the structural changes we're making inside the company, that's I think those two things are really leading to better price performance. [Indecipherable] I'm really impressed and optimistic about the cultural change, quite frankly, within Zimmer Biomet as I talked to distributors, field level reps and their desire to want to make sure that we're getting the value for the products that we bring to market. That's encouraging, and I think that makes it durable.

In the quarter, we were roughly flat. I do expect us to be, when I set out the year, I thought we'd be 100 to 150 basis points of erosion. I think we're now under 100 basis points of erosion, especially given what we saw in the first quarter. I don't expect that flat profile to continue through the rest of the year because we've got a number of things that happen at the back end of last year, especially in Europe, where we took some pretty large price increases in devalue sort of currencies and markets that'll sunset later on this year.

Also, we've got some new contracts that are coming up, which will create a little bit of pressure, so I don't expect that flat profile to continue through the rest of the year, but nonetheless, we're in a much better spot than we were a few years ago, and again, expect overall pricing to be somewhere under 100 basis points for the full year 24.

Yeah. Thank you. Obviously very excited In terms of this product launch. We did the first cases at the Mayo Clinic a couple of weeks ago. Feedback was very solid. It is a product that has a high degree of accuracy in the cuts and the visibility of anatomy. It is sufficient from an instrumentation standpoint is fully interconnect with the rest of the CVS ecosystem. Case, over case the feedback was that you do achieve time efficiencies, so the learning curve is rather short. So very solid clinical feedback in terms of the impact, we settled along that we're going to take it slowly in the first, call it 90 to 120 days and you will see the real impact as we get closer to the end of the year, but a very meaningful product launch for the company. I'm very excited about it. Thanks, Steve.

Yeah. We'll definitely cover how we plan to achieve these three commitments we're making from a financial perspective. In terms of what are the drivers for revenue, EPS in free cash flow. So we'll definitely provide those details. We'll cover the new product introductions within that, we'll talk about the capital location, the strategy moving forward. So it's going to be very robust. So that's the Analyst Day [Speech overlap].

Yeah, I think Ivan said it really well in his opening remarks. We had a good start to the year and it was great to see the better than expected performance in revenue, and we saw very good flow through all the way to the bottom. So. I love the discipline that we've got throughout the company. I would say that this just reinforces and gives us more conviction in the guidance range that we provided earlier this year.

Thank you. We'll go next to Rick Wise with Stifel.

Thank you, Rick. I'll cover the hip question, and then we'll proceed with the interrogation of Suky here. When it comes to the margin. One product is not what's going to win the battle here, right? It is a category of products. We've been very transparent that we've not done great when it comes to hips over the last three or five years and essentially driven by three product categories. The first one is direct anterior stem, what is not in the market as a triple tapered stem. And it was a deficiency that we had. Z1 [indecipherable] and it does in a differentiated way.

So now with this 510k approval, we compete with the two other large orthopedic companies in direct anterior. The second category was a surgical impactor in drives efficiency. It drives accuracy in how you treat the cases. It integrates with the rest of the procedure. You need certain levels of power, as you do in that hip surgery. So that is a surgical impactor, and we have that with HAMMR. Fully launched. We're going to run that up. And the third thing that we needed was to have navigation.

We got true modalities navigation, obviously, we got ROSA hip and we are the only company with a 510k FDA approved mixed reality technology in our partnership with hip insights. So again, it's not just Z1, it Is the full portfolio. Direct interior stems, surgical impactors and some sort of navigation. So we do believe with a high degree of confidence that we're going to regain our positioning, hips still remain the number one hip company in the world, and I think that this portfolio accelerates our growth journey moving forward.

And, hey, Rick, Suki here, always good to hear from you. On the margin front I know the past isn't always indicative of the future, but it is a good validation improved point I think in our situation, With both 22 and 23, we were able to expand operating margins quite significantly, I would say even in the backdrop of a pretty hostile inflationary environment. And so, again, kudos to the entire ZB team. In 24, we expect to do it again and here's what I would say. We're doing it across the entirety of the PNL. First, through revenue growth and leverage. All our fixed costs. Secondly, we're making improvements in cost at a rate that we've not done before. Through inventory reduction, site optimization, reductions in PNL. Three, we're even getting more efficient inside of R&D looking at. Hey, do we really need all this sustaining? And how can we Rationalize some of our portfolio, migrate our customers to better products, get rid of some of these products which then reduces the amount of sustaining engineer which we can then Nix shift into NPI.

We're getting it through SGNA. We're getting it Through better allocation of capital and reducing our cost of debt. The beauty of that is when you have multiple shots on goal to improve operating margins, even if things go unexpectedly from a macro perspective or micro perspective, we have other levers to continue to help us pull margins as we move forward. And so the thing I'll leave you with is it's not just in one area of the company, it's throughout the entirety of the PNL, and we feel confident about where we're going. And quite frankly, and I love what Ivan's bringing, he's bringing this owner operator mindset to the company.

He's got the company thinking not just about top line, but all the way through cash being king and I think that's really driving a culture change within our company as well. So I'm optimistic on where we're going. Rick.

Thanks, Rick. Katie, we can go to the next question in the queue.

Thank you. We'll go next to Pito Chickering with Deutsche Bank.

Absolutely. Thanks for the question. So let's start with the global picture, if you will. Very excited [indecipherable] where we are overall with ROSA. So globally, ROSA is becoming the preferred robotic option in many markets outside of the US. Here in the US, we're approaching around 20% penetration of ROSA in cases. As you saw in the quarter, we had a large amount of ROSA sales, which is encouraging because that means in the other category. That's encouraging because that's a future stream of need pull-through. About a third of all the installs that we do in the US go to an ASE environment, which again, is not a surprise given the fact that ROSA does drive easier preplanning, you don't need to do a CT scan.

It's very surgeon center, so it's very controllable. And we continue to see that there is a high degree of preference for ROSA in those higher volume accounts so [indecipherable] everything in the right direction in terms of penetration, where we are gaining traction in key markets around the world, and a lot of the dynamic that we're seeing here in the US ambulatory surgical center environment. Thanks for the question, Pito.

So we starting to see a dynamic in where cases are moving to the ASC for shoulders. Again, the CMS chains, I would say today probably around 60% to 65% of the cases, shoulders are not done in the ASC, but that's moving pretty rapidly given the change of reimbursement. We got a Strong position both in the inpatient outpatient as well as the ASC but I would say Netnet is around 60, 65 to 35 in terms of that mix.

We'll go next to Caitlin Cronin with Canaccord Genuity.

It was a little bit choppy there, Caitlin. Sorry, you asked something about other. Could you repeat the question?

Yeah. So we had a pretty strong quarter in our other category, primarily driven by ROSA Capital, so we saw good installs, and we saw a higher mix of sales versus placements, which drove a higher level of dollar revenue in that quarter. The good news is we saw a lot of new placements in new ASCs, which is exactly where we're in seat ROSA's position and the capital sales were very good. We also love placements because that comes with a longer term commitment.

Our expectation is that we'll step down from what you saw in the first quarter as we move throughout the year, and that's been assumed in our guidance reiteration. Thank you.

Thank you, Caitlin. Is moving in the right direction. I will say, as of late, things are accelerating, both from an innovation and a commercial execution standpoint. So on innovation, we did receive recently the 510K approval for didn't make it to the press release for the Stuvi. So as the shorter stem version of Persona IQ, which has been a gating factor for some surgeons that don't use the longer stem, so that's an innovation app there right there.

The other piece that is gaining traction is the launch of what we call recovery curves. This is a platform that only Persona IQ has. Interconnects the data of the stem with a dashboard that, in a very objective way can quantify how patients are doing in comparison to other patients with similar dynamics. So those are true innovation updates that are more in the right direction. In terms of the execution and commercial journey, we got what we need. We got the right designs. We've been talking about value proposition. It's been resonating. We are in some of the largest teaching institutions and we continue to be committed to the journey.

So very excited about Persona IQ. Thank you for the question.

We'll go next to Mike Matson with Needham and Company.

Yeah. Hey, Mike. Directionally, the way you think about it right. I wouldn't quite go as low as that. To look quarter to quarter, there's going to be choppiness. There's going to be noise based on timing, contracts, et cetera. We had a great start to the year. We continue to believe and reinforce our guidance and still believe that the first half is going to land as we expect when we initially gave guidance. So nothing in particular about the quarter of note, but just the overall cadence. That's how we expect first half versus second half to play after this year.

We definitely are upgrading, if you will some or for cement-less legacy cementess platform over to Persona Osstei tank, but at the same time, a sizable amount of the business coming from converting accounts. So you do seem that the USD numbers in the quarter was strong, and a large component of that was the fact, with pretty heavy comps, by the way, comes from the introduction of Persona Osstei and the expectation is that as we continue to move into the acceleration of the product launch, we're going to continue to gain share, so, it's both existing accounts and new accounts.

Thank you. We'll go next to Vijay Kumar with Evercore ISI. [Speech Overlap].

Yeah. In any given quarter, there's going to be puts and calls, both in gross margin operating margin, but nothing material are out of the ordinary. We did a little bit better on gross margin. Than we expected to. We saw that flow through in the operating margin. So feel really good about the start of the year. As we progress through the year, we do expect operating margins to step up. In line with normal seasonality as revenue continues to step up in our savings, programs pull through so again, very confident in where we're headed from an earnings perspective in our guide.

And if you recall, I think we said on the last quarterly call that at the midpoint that implies about an 80 basis point, lift and operate margin and we're still confident in that.

Yeah, we always have a robust pipeline and we'll talk about the pipeline and the optionality of MNA in more depth once we meet in later in the months, but the same three key areas apply. We're looking for assets that are mission centric from a strategic standpoint fit in the higher growth segments of Rico. Certainly the high growth segments of set as a category. And then in the ASC space, which is a mixture of both one and two. So we later focus on those tricky areas while also keeping an eye on broader diversification.

Financially, nothing has changed. We have flexibility to do larger deals, but we like deals where the acquisition price is under $2 billion. We definitely want to be neutral from an EPS standpoint within two years and then high single digit ROIC to double digit ROIC in the five-year time horizon. So very clear on strategic and financial filters and the optionality is there and the pipeline is there. So more to come once we meet in New York.

We'll go next to Robbie Marcus with JP Morgan.

Yeah so, Robbie. Just a little bit of a correction. I'm not sure if I caught everything you said or understood. I should say everything you said. Fourth quarter will be our high watermark relative to operating margin in line with that being our high water mark from a revenue perspective. And so our margin does in many ways correlate heavily to our revenue outlook. Relative to cadence. I'm not going to sort of benchmark relative To that. I think we've actually given pretty good color already around the first half, second half revenue Cadence, I've talked about gross margins plus 100 in the first half, second in the back half, and then operating margins improving in the back half of the year through the restructuring overall, so I think there's actually pretty good color out there. In line with how we've traditionally been transparent, so hopefully that gives you enough to go from.

We'll go next to Chris Pasquali with Nephron.

Yeah. Thank you, Chris. First of all, I wouldn't categorize all performance being below market, and we can have a healthy debate on whether it's above or below. But what I will tell you. Is that what we're staying here right now? It is not below market. Certainly not from a trending standpoint over the period of time. And now that everyone is reported in Q1. We're not below market, so I'll start with that in terms of how we get through the 5%, I think the formula continues to be product introductions, which will ramp up later in the year.

And even more product introductions as we get into 2025, we've never had five and a half almost six years here with the company, I've never seen a full portfolio. I mentioned earlier that we don't have any gaps in hips with the introductions that we've done in east, there's zero gaps. I'm excited about the upcoming product launches in. Europe. Let's not forget we don't have Persona revision in EMEA. That's an almost $2 billion product here in the US, 2 billion over the last three, four years in gross sales.

And let's not forget, we also bring in [indecipherable] for parcel cement-less from Europe here to the US. So a strength in any portfolio strength in the heat portfolio, you've seen that said, we made a commitment that said that a category will grow mid single year or above. Is the third consecutive quarter we've seen that, and that's going to stay around. So I would say strengthened innovation, the strength in commercial execution, and the 5% to 6% to us is an admissible commitment.

Absolutely. So, closing the Q1 quarter approaching 20%. So it's fairly similar to our robotics, so cementless is approaching 20%. We'll break down some of these commitments. We keep repeating the same answer at the Investor Day. But our expectation, our ambition is to be where our competitors are 60%. We will provide timelines in that regard but the north start is to have robotic penetration in the 60% range and cementless penetration in the 60%.

So the fact that today we're at 20%. That tells you that there is pretty significant upside, and we're excited about that journey.

We'll go next to Shagun Singh with RBC.

Thank you so very much. So, starting with robots and capital dynamics. Look, I will tell you one. Thing that is pretty prevalent is that here in the US, you've seen the cases move to the ASC. Not a week goes by that is. Not a new AC opening. And those ACs do want to acquire robotics and either install or you purchase it. And with slider dynamic in Q1 what we saw more purchases, and we do believe this is driven by ASE Dynamics. Capital continues to be strong across key markets, so definitely not a gating factor.

And again, as I mentioned earlier, it started by the continuity here. Investigative secret question on MNA. Look, we want to be bigger than bolder. At the same time, we don't want to be reckless, and we say that all along. So we want to stick to the strategic and financial thresholds. We got the pipeline. We got the money and when it's time to act, we'll act on it, and we're not going to take the past as an indicator of how we're going to do things in the present and future.

The breakdown on the Vanguard will cover that as well once we get into the Investor Day. And it is a combination of organic and inorganic means. So we'll talk about the pipeline. We already mentioned that 80%, if not 90% of the new products in the pipeline are in markets that are growing above 4%, in some cases above 5%. So that's definitely a driver and then the combination of tacking deals, maybe some boulder moves will get us to the Vanguard that we deserve so more to come in that regard. Thanks for the question.

We come into the end of the call, so I'm just going to briefly close with closing comments. [Indecipherable] saying that it's great to be here at home in Worcester, Indiana, today to celebrate a founder's day. So May 2, 1927 we started the company with a very clear purpose to alleviate pain and improve the quality of life for people around the world. So 97 years later, I just can say that we just getting started.

So excited to see where we are as a company. It's an exciting time to be at Zimmer Biomet. The portfolio is where it needs to be. We have a strong commercial execution. We are very, very confident on our guidance for the year 2024. We are excited about what's becoming 25 and 26 once we are able to discuss the long range plan. So nothing but confidence and excitement.

And before closing, I want to thank Kari for four and a half great years with us. You've been a trusted partner, a great friend. You're going to be missed although I'm going to continue to call you and seek your advice in many, many years to come. So thank you, Kari, and thanks, everybody.

Thanks, everyone, for joining. We'll be talking to all of you today. If you have questions, of course, please don't hesitate to reach out to the IR team. Thank you again for joining the call this morning.