Zimmer Biomet Holdings, Inc.
Q4 2021 Earnings Call Transcript

Published: 7 Feb 2022

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Fourth Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded today, February 7, 2022. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Investor Relations and Chief Communications Officer. Please go ahead.

[Keri Mattox:]

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's fourth quarter 2021 earnings conference call. Joining me today are Bryan Hanson, our Chairman, President and CEO; and EVP and CFO, Suky Upadhyay. 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 Q4 earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll now turn the call over to Bryan. Bryan? All right. Great. Thanks, Keri, and thanks, everyone, for joining us this morning. I'm going to just give you an outline of how we want the call to proceed this morning. I'm going to spend the first part of the discussion briefly talking about our fourth quarter results. And I'm also going to spend a little bit of time talking about what we're seeing so far in 2022. I know it's early, but I want to give you a sense of what we're seeing already and then just speak more broadly about our views of 2022 as a whole. And then I'm going to turn it over to Suky, who's going to provide more detail on fourth quarter and obviously, more detail on our guidance going forward. And then finally, it will come back to me before we move to Q&A. I just got a few things I want to close out the prepared remarks with and then we'll again jump into Q&A. Okay. So first, let's start with Q4, and I'm going to break this into really three categories. The first will be around COVID impact in Q4 and how it compared to our expectations. The second will be around VBP impact and again, how that compared to our expectations. And then finally, just performance outside of those environmental impacts and how we performed there. Okay. So let's take a step back first. I think that will help. Just when we gave our updated Q4 guidance on our Q3 earnings call back in November, we actually outlined our expectations around how COVID and staffing pressure would likely impact our fourth quarter results, and unfortunately, our assumptions largely played out in the quarter. As you probably remember, we felt that the pressure from the end of Q3 would continue into Q4. And thus, the overall pressure from COVID and staffing would actually accelerate from Q3 to Q4. And really, the big reason this played out, of course, we know now is because of the Omicron surge that occurred towards the end of the fourth quarter. And as many have already stated, a lot of that impact truly came in December itself. So what's interesting about this surge, though, is that even though the overall impact of COVID was about what we expected, the way it manifested was different, right? So ICU capacity was definitely a factor, but we did not see it as the primary driver of cancellations of procedures during the quarter. And so what we actually saw was more cancellations that occurred due to really either the patient or staffing member being diagnosed with COVID or actually having been around someone with COVID, and they were quarantining as a result and couldn't show up for the procedure. So that was really the shift that we saw in the quarter. So the overall impact was about what we expected, but the way, again, it manifested in the numbers was slightly different. Okay, so transitioning from there to VBP. Remember again on our Q3 call, we discussed what we thought the impact of China hip and knee VBP would be in our fourth quarter results. And we actually - we were largely right on how that played out. And so our expected headwind in large joints was in line with the expectations that we had and also what we communicated to you. So that was pretty much in check when we think about large joints. Now what changed during the quarter, actually even post the quarter was that on January 24, the Chinese government announced that it was formally nationalizing one of its provincial trauma VBP tenders, and that was kind of new to us. But based on that confirmation from the Chinese government and really just our knowledge of how the VBP process will work from here, we did take a sales reserve in the fourth quarter, which obviously results then in a negative Q4 impact to both our net sales and adjusted diluted EPS. And what I'd say is that even though this trauma VBP adjustment came earlier than we anticipated, it is pretty consistent with the overall scale of the impact and consistent with our expectations and what we've been talking about more recently. Now I would say looking forward, the good news is we have a lot more visibility now. We're a lot smarter on the topic, and we understand what the impact of VBP will now be on our 2022 business. And that has been included in our guidance, which Suky's going to talk about in just a minute. Okay, so now looking past VBP and COVID in the fourth quarter, I'm very proud of the team when we focus on the things we can control. ZB's business execution against a challenging backdrop has been strong. Our strength of our team right now, that kind of one ZB culture, is as evident as it's ever been, and I think more important than ever. And the team has really been able to move our strategy forward even in these challenging times. And a few proof points to be able to point at, the team was able to drive continued strong demand and momentum for ROSA. And that is globally, not just in the U.S. but globally. We actually more than doubled the number of installed ROSAs in 2021 versus our cumulative total at the end of 2020. That's a pretty significant jump up, and again, speaks to the momentum that we have in robotics and orthopedics. And those ROSAs are paying off. In the fourth quarter, those installed ROSAs allowed us to reach 10% in total knee procedure penetration in the U.S. for the first time as a company. That's a huge milestone for the organization, and it's just the beginning of this ROSA journey for us. The team also delivered a successful limited launch of the world's first and really only smart knee, the Persona iQ. Now it's early. Obviously, early days. We're in limited launch right now, as I said. But the launch trajectory feels great. The feedback is good, and we're looking forward to a full launch later this year. And then finally, and I think importantly, the team continues to execute in large joints across the board, driving again above-market performance in Q4 in the U.S. for both knees and hips versus 2019. Okay. So let's transition from Q4 and talk about what we're seeing so far in early 2022. And I'm going to speak specifically about COVID and staffing challenges. What I would tell you is that the challenges that we saw in Q4, in particular in December, are unfortunately continuing into January. And as a practice, and I think prudently so, our team is continuing to build our financial models using what I'm going to call a recency bias in those models. And as a result of that, we're expecting that December and really now January pressure in COVID and staffing will continue through Q1. So what we're basically saying is that overall, we anticipate that Q1 will likely be more pressured than Q4 was. And so what does that mean for our outlook for the full year? Again, we're going to follow that same approach. We're going to look at 2022 in a similar way, actually, in a very similar way in the way we gave guidance for Q4 of 2021. Until we see a fundamental shift in the current state and what's happening today in the environment, we are projecting that the COVID pressure will continue throughout the year and will be -- actually follow a similar peak and valley trend that we saw in 2021. As I'm sure you can appreciate, given that about 80% of our revenues come from elective procedures, ZB must be highly attuned to this topic. And trust me, we are. We're highly focused in this area, and that has been captured in our assumptions for guidance. And with that, I'm going to transition to Suky to give you again more detail on Q4 and also our 2022 guidance. Okay, Suky?

[Suky Upadhyay:]

Thanks, and good morning, everyone. For this morning's call, I'm going to focus on 3 topics

[Operator:]

Thank you. We'll take our first question from Josh Jennings with Cowen.

[Josh Jennings:]

Good morning, thanks, for taking the questions. Just wanted to start off on '22 -- 2022 revenue guidance and just make sure I understand the impact of VBP that you're baking into the range. I know you don't usually break out guidance for specific regions. But anything you can do to just help us think about what's baked in for Americas and EMEA versus Asia Pac into that down 4 to flat on a constant currency basis for 2022? And then just a follow-up on the operating margin guidance, just the trajectory. I know as these pressures are in play, you've taken another look at that in that 30% target. But just as you're moving through these transformation programs and looking at regional profitability, infrastructure in smaller markets and other areas of cost reductions, I mean, how do you balance that with the top line growth projections? Is there any risk that you're going to be impacting revenue growth over the next couple of years by pursuing these transformation programs? Thanks for taking the questions.

[Bryan Hanson:]

Yes. Maybe I'll just start real quick on that last portion of it, and then I'll pass it over to you, Suky. We actually feel more confident in our ability to invest for growth in because of the transformation programs. The transformation programs are not specifically associated with R&D and investment in those key growth drivers for us. They're more focused on finding efficiencies that do not impact our ability to spend in those growth areas. So they really actually bring more confidence that we'll be able to spend on the things that are actually going to drive growth in the future. But outside of that, I'm going to push it over to you for the other questions.

[Suky Upadhyay:]

Yes. So Josh, thanks for the question. Regarding revenue guidance, so we talked some of the overarching assumptions in that guide on negative 2 to 2 on an ex FX basis for the full year revenue is really around the concept of we expect COVID to continue for the full year and the impact of COVID on elective procedures and staffing shortages, again, to really be with us for the entirety of 2022. Now what we're saying is broadly, we would expect to see procedural volumes consistent with 2021. And that's in the backdrop of COVID actually accelerating in the first quarter, right, where we expect the first quarter on an underlying basis to be down. So we do expect to see some recovery in the later quarters within the year. Specifically inside of that your question to VBP, we don't see VBP as a material headwind or tailwind at this time relative to large joints or trauma, given the charges that we've taken in the fourth quarter of 2021. Now I would say that the cadence of that by quarter is going to be definitely different, even though it's not a full year headwind or tailwind. It will definitely be more pressured in the first half of the year than in the second half of the year. So that's how we think about VBP. Now I think your other question was regarding how do we see regional performance in that flattish . We're not going to comment on regional color at this time. There's a lot more that's got to play out relative to COVID and the recovery by region before we're going to talk about that. So we'll give you more color as we get into the -- further into the first quarter on our first quarter call. But right now, consolidated level, we expect it at our midpoint to be about flat.

[Josh Jennings:]

Great, Thanks for the detail.

[Operator:]

Our next question comes from Vijay Kumar with Evercore ISI.

[Vijay Kumar:]

Hi, guys. Thanks for taking the question. My first one, Suky, is on the EPS guidance here. The base of Zimmer, right, ex the spin, I just want to make sure I have the right numbers. I'm getting to maybe something $0.15 of earnings in 2019, earnings on a comparable basis for last year, fiscal '21. One, can you just walk us through the bridge