Zimmer Biomet Holdings Inc (ZBH) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, May 4, 2021. (Operator Instructions)

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

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's First Quarter 2021 Earnings Conference Call. Joining me virtually today are Bryan Hanson, our President and CEO; 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 Q1 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 I also want to say thanks to everyone for joining us this morning for our call. And before we actually get into the Q1 numbers and our guidance, I just want to take a second to say that I certainly hope that all of you and your families are continuing to stay safe. We're obviously very pleased to see that so many people now have access, full access to the COVID-19 vaccinations, and that adoption has been pretty strong so far.

Now of course, we'd like to see this even more broadly on a worldwide basis, but it certainly feels like we're making really important progress toward moving forward -- and ultimately, as a result of that moving, hopefully, on from the pandemic. Now it's not over. I think all of us realize that. But I, for one, feel more optimistic than ever that we're coming out, I think, on the other side of COVID-19. And with that, much better days ahead.

And I guess with that, probably it's a good lead into our Q1 call. Q1 was a stronger quarter than we initially expected. And I'm pretty excited to discuss it with you. Whenever you have a good quarter, obviously, earnings calls are a lot more fun. So clearly, we're excited about this one. And I'm going to try to keep my remarks relatively brief this way. I know you're kind of laughing at that because it's not always easy for me to do that. I'm going to try to keep it brief. And that will give Suky an opportunity to walk you through what you're really interested in, which is the financial results for the quarter and really how that translates into our expectations for the full year 2021 guidance. And I also want to make sure that we leave time for questions, obviously.

So I'm just going to stick to really 3 topics, as a result. Number one, I want to talk about the COVID recovery just briefly and our execution inside of that recovery. And then ZB's ongoing transformation and our progress against that. That will be the second topic. And the third topic would just be around our long-term growth strategy, just reiterating our position there and how we believe that's going to drive value for our shareholders and stakeholders overall.

So let's start with navigating COVID and how we're executing inside of it. COVID clearly is not over, just as I stated a minute ago. And I'm very confident we're going to continue to have surprises ahead and disruptions ahead. But based on what we saw at the end of Q1 and what we're seeing in the beginning of Q2 and coupling that with just the pace of vaccine rollouts right now, we're clearly moving in the right direction. I don't think anybody can argue against that. And is that shift toward what I would define as more stability, and I know that's on a relative basis, kind of talk about stability here. But that shift towards more stability, it really enabled us to give you the full year 2021 financial guidance.

Now inside of that guidance, there's going to be some important assumptions about trends and recovery timing that underpin our outlook, and Suky's going to get into more of that in just a few minutes. But overall, it feels good, feels good to have better insight into the broader market and greater confidence in what the rest of 2021 should look like for our business.

Now as we start to return to a more normal environment, I'm going to put normal environment in air quotes given the situation right now. But when that happens, we expect that part of what we'll see is a pretty significant tailwind from the backlog of patients that has built up over the last year or more. Now how fast that happens, how fast we work through that backlog, especially across certain regions is something we're going to have to pay attention to. You're going to have to watch and track. But we absolutely believe that the vast majority of those patients who put off in elective procedure will come back into the funnel. And that's going to provide a significant tailwind well into 2022. And I, for one, cannot wait for that tailwind. And I can tell you that ZB is ready for them. They're ready for those patients, and we're ready to be able to help our customers, care for those patients.

Speaking of being ready. As I've said to you before, the things that ZB was able to directly control over the past year, I truly think the team has executed against. I'm very proud of the ZB team for how they stood up and delivered against a backdrop of a whole lot of things that were absolutely out of their control. And I know I talk a lot about the importance of our talent, our mission, our culture here at ZB. And I can tell that each were absolutely critical for us in 2020 and continue to be in 2021 and well beyond.

And with that in mind, we've made some additional changes to our leadership team here very recently. We've added a Chief Transformation Officer, again, to help us with all the transformation that we're going to continue to have as an organization. We've appointed a new Chief Human Resource Officer to help us move our talent agenda forward. One of the key areas of focus for me as we move forward as an organization, and promoting Sang Yi to group President of Asia Pacific. He's now going to have some responsibilities of certain projects, OUS. He brings a real disciplined execution mindset, and he can absolutely help us outside of Asia Pacific. And then expanding Ivan Tornos' role as a Chief Operating Officer with the added leadership now of EMEA, which is a region that he has had deep responsibility for in the past and knows very, very well, and I know it can bring us value in that region.

So I can tell you is continued focus on talent and development is not just contained to the executive ranks. Our entire ZB organization is hyper-focused on our people. I'm really getting the right team members in the right roles and giving them the tools and support and really the opportunities to drive their performance, to develop and excel, and it's working. I can tell you, this focus on talent is working. And I believe it is going to continue to set us apart from the competition.

And in addition to the foundation built by our team members, our mission, our culture, our core business momentum is stronger than ever. The team's execution continues to be on point. Our market momentum is building. Our commercial confidence is higher than ever. And I can say right now, we are very excited about the R&D innovation pipeline that we still have coming. That's an important part of our revenue growth. Throughout Q1 and even in recent weeks, we hit key milestones with our ZB products and our innovation. The application for Partial Knee now is available for ROSA. I was just approved by the FDA. We've actually already had our first procedure using that application last week with very good results.

And this is just the latest addition to our ROSA robotics program, our platform here. And it's also another launch inside of our ZB edge suite of integrated digital and robotic technologies. Again, something we truly do believe will set us apart from the competition.

So if I just look at ROSA overall in the quarter, we continue to see strong market demand traction with our ROSA platform. The Q4 performance was fantastic, and that continued right into Q1, both in the U.S. and internationally. And our forward-looking robotics pipeline is very robust. And I can tell you that given our market share in Partial Knee, the partial application is only going to serve to bolster that going forward.

For Persona Revision, another strong performance. This continues to move forward in an amazing way. Q1 was ahead of our expectations. And it is another example of a tip of the spear product that we have that as we make the conversion of provision, we also have the opportunity then to go after the standard knee business as well. So again, still exciting opportunities there for revision.

And then our Signature ONE Planner for shoulder procedures, again, demonstrated a very strong sequential growth from Q4. We're actually up 65% over Q4 when we look at registrations. Again, that's a pretty significant move. And again, this provides that stickiness with our customers in that procedure, but it also provides a mix benefit wherever that presurgical planning is used. And as we come into Q2 and the rest of 2021, ZB has additional innovation that's coming. And it's pretty exciting innovation with our anticipated launch of Persona iQ and also ROSA Hip later in the year.

And I can tell you, for Persona iQ, the initial feedback from evaluating surgeons has been very positive. And I can tell you that they're interested in being able to capture data from inside the body. I mean this is unique. They've not been able to do this before. And then ultimately, remotely monitoring those data the hope would be that using that information to change the way that we care for patients.

So the excitement around this is very strong from our surgeons. And we can tell that the momentum is going to be strong when we do get regulatory approval.

So all I have to say, the momentum on the innovation front is real here at ZB. This will allow us multiple shots on goal across a number of innovations. Again, with multiple robotics launches, continuing success with Persona Revision, Persona iQ, new iterations of mymobility and just really the broader ZB edge ecosystem to drive mix benefit, for sure, but also competitive conversions. And ultimately, we really believe, change the way that we care for patients, change the treatment paradigm for patients. That's really what it's about. It's about driving the mission of this organization.

Truthfully to remove pain from patients around the world and improving the quality of their life. And we truly do believe ZB edge can help us do that.

Okay. So let's move to the second topic that I have for you this morning, and that's the continued transformation of ZB. Now you've heard me talk about the 3 phases of transformation. The first was winning the hearts and the minds of the organization of the team members and really dealing with the execution challenges that we had that we spent a lot of time on in the first year. And then second was moving to that longer-term firm strategy for the organization that would drive innovation and really building the structure around that strategy and the operating mechanisms to ensure that we move it forward.

And then third, where we are now is the portfolio transformation. And truly, that is where we sit that is squarely where we are positioned today in Phase III, these 3 phases. And we have the ZB portfolio management strategy and process in place. And we have definitely built out our capabilities to move forward in this phase. We're focused on what we're going to define as mission-centric M&A that is WAMGR accretive that would absolutely increase our weighted average market growth and does not disrupt our best-in-class margin profile.

And as you've seen, we've moved this forward already with selective tuck-in acquisitions that we did last year. And that really does illustrate the strategy of work. Now those deals were smaller. No question, they're smaller, and they're relatively immaterial when it comes to the initial revenue that we acquired, but they're absolutely designed to fill portfolio gaps and better position us in high-growth markets. Those high-priority markets and submarkets where ZB has a path to leadership, and we believe are right to win in markets like sports medicine, ASC and in the external closure market for us. And each of these deals gives us a gap filling and, we believe, differentiated product portfolio to drive growth, and that's important to growth, but also drive additional confidence in our ASC business category.

And of course, inside of this active portfolio management phase, there's the planned spin-off transaction of our spine and dental business that we discussed back in Q4. That process of creating 2 independent even stronger companies is on track. It's early days, obviously, but it is on track. And as you saw from our Q1 results, we do not believe it's causing distraction or disruption in our business. In fact, it's more the opposite. We've seen significant energy in the business, kind of a gelling in the business as the NewCo team starts to come together under CEO Vafa Jamali, and they begin to build out their own strategy and their focus. So again, it's early days, but we're very happy with the progress so far of this spin.

All right. So that brings me to my third and final topic this morning really around our ZB plan to drive long-term growth and ultimately deliver value as a result of that growth. And I can tell you that we remain fully committed and confident in ZB's long-term growth and margin expansion expectations. We've said before, we'll say it again that the spin-off of NewCo actually serves to de-risk and potentially accelerate our path to mid-single-digit growth and a best-in-class 30% operating margin profile by the end of 2023. And we're confident that throughout this process and as we achieve this growth in margin profile, we're also going to have the flexibility to reinvest for growth. And that is a key thing for us.

We've got to continue to be disciplined, but ultimately invest for growth in this business. And that's what we will continue to do. Now to get these growth levels and to achieve our top quartile performance in TSR, which, I think, you probably remember, is one of our strategic pillars, and we're going to continue to execute in our priority growth areas. And just as a reminder, that means that we expect to drive above-market growth sustainably in knees. We plan to grow hips consistently at market, but then later this year, above-market rates when we launched the ROSA Hip application. And we expect to stabilize, first and foremost, but also drive focus. And then ultimately, through that focus, drive our set business at the higher end of market rates there.

We're also very focused on driving change for ZB, a real evolution of the company from a metal and plastic provider of implants to a leading med tech innovator. Think of us as a high-tech company that happens to be in med tech. That's the ZB brand that we're looking for, that brand evolution of this company. And I can tell you that already, more than 70% of our product development dollars are being spent in this area, being spent on ZB edge, that ecosystem of connected technologies.

Now we're always going to be an implant company. And that's the center of the universe for this company. But the ZB edge ecosystem around it is the way that we can differentiate ourselves versus the competition. And we're already -- we have exclusive relationships to help us here. We have relationships already with Apple and several other tech companies that we truly do believe will drive future innovation that will delight our customers and ultimately benefit patients.

And I believe, fundamentally, that this shift is coming, not only for us -- this technology shift, not only for us, but for the entire market that we play in them. And I truly do believe that the technology advancements potentially can reshape the growth curve of these markets. I'll say that again, I think the technology advancements that we're seeing and the value they bring can reshape the growth curve of the markets that we play in. And I think very importantly, also change the care paradigm for our customers and their patients.

All right. Let me close by saying that I continue to be highly confident in the ZB team and in our business momentum. And I truly believe that we are well positioned for success, and our strategy is working. Our transformation is well underway, and I'm excited about the value that we can drive for our shareholders on a go-forward basis. I truly in.

And before I hand it off to Suky, I just want to take a minute to say thank you. Truly, thank you to the entire ZB team. Your vigilance and dedication to our safety protocols over the past year or so has been absolutely critical. And you're focused on our mission, our strategy and really just how you show up and execute every day, it's unmatched in my view, it truly is unmatched. You are what makes us ZB, I truly believe that. And what makes me confident really is you, that we can absolutely continue to deliver on all fronts.

Okay. And so with that, I'm going to turn the call over to Suky. He's going to give you more financial details on the quarter, and obviously, most importantly, our expectations looking forward. Okay. Suky?

Thanks, and good morning, everyone. As Bryan mentioned, our underlying fundamentals remain strong as does our confidence in our outlook. For this morning's call, I'm going to focus on 3 topics. First, our Q1 results, including commentary on the impact of COVID; second, how that translates into our full year 2021 financial guidance that we provided this morning. And third, how ZB is positioned for long-term growth in 2022 and beyond.

Moving forward, unless otherwise noted, my statements will be about Q1 2021 and how it compares to the same period in 2020, and my revenue and P&L commentary will be on a constant currency or adjusted basis. Net sales in the first quarter were $1.847 billion, a reported increase of 3.6% and a constant currency increase of 80 basis points versus the same period in 2020.

It's important to note that we had one fewer selling day, resulting in approximately 150 basis point headwind to consolidated revenue growth. Overall, consolidated and regional results were better than our initial expectations, as vaccine adoption continued to ramp up and pandemic pressure eased across most markets in March versus January and February.

First, the Americas increased 1%. We continue to see variability by country, and while the region was in decline for most of the quarter, a sharp increase in U.S. procedures in March drove regional growth. As expected, the EMEA region was hardest hit by COVID-19, decreasing 10.3% with all submarkets in decline. While we did see some recovery or decrease in COVID pressure as we move through the quarter, some markets continue to operate under recently enacted restrictions and actions that are limiting the near-term recovery of elective procedures. So we are continuing to monitor uptake very closely and expect that recovery in EMEA will lag other regions by 1 to 2 quarters.

Lastly, Asia Pacific grew 15.5% with solid year-over-year growth across our 3 largest markets. Overall, we've seen a stabilization around COVID cases and surges in the region, but we continue to see some significant delays in recovery across India and other smaller markets.

Turning to our business performance in Q1. Before jumping in, let me call out that we've updated our product category reporting to provide visibility into NewCo and to align products to categories based on how we internally evaluate performance of those businesses.

Also, we have adjusted our historic reporting of revenue for these changes to assist in year-over-year comparisons. First, our ROSA robotics capital revenue has been moved from the knee's category to the other category. And our disposable revenue associated with robotic knee procedures have been moved from the other category into the knee category. This will allow us to more clearly indicate to investors the growth of our base knee business and sets us up for reporting once we launch ROSA Hip, which is currently expected in the second half of 2021.

We've also broken out our global spine and dental revenues this quarter in conjunction with NewCo reporting. And as a result, CMFT is now included within S.E.T. The global knee business declined 5.2% versus Q1 2020, negatively impacted by ongoing pressure from COVID. Inside of that, we continue to see strong momentum from Persona and from ROSA Knee.

Our global hip business increased 0.3%. Both the Americas and Asia Pacific continued their growth trends, increasing 0.9% and 11.2%, respectively. We continue to see strong demand and favorable feedback on the Avenir Complete hip with adoption from both gold and platinum accounts.

Sports extremity and trauma increased 7.2%, driven by solid growth in upper extremities, trauma and CMFT. In S.E.T., we continue to see strong surgeon registrations of the Signature One surgical planning system for shoulder procedures.

Our dental and spine segment grew 9.6%, fueled by outpaced recovery, especially in Dental. New products and better commercial execution also drove growth in the quarter with strong contributions from implants and digital solutions in our dental business and from Mobi-C and Tether within Spine.

Finally, our other category was down 2.5%. As mentioned earlier, this quarter, our other category includes the contribution of ROSA Knee capital sales.

Moving on to the P&L. In the first quarter, we reported GAAP diluted earnings per share of $0.94 and adjusted diluted earnings per share of $1.71. Our reported GAAP diluted earnings per share were up significantly when compared to a reported GAAP diluted loss per share of $2.46 last year. The increase in year-over-year GAAP earnings was driven by higher revenue in the current period in tandem with prior year goodwill and product liability related charges. On an adjusted basis, EPS was up about 60 basis points driven by higher revenues, with operating margins down slightly compared to 2020 and a higher share count. The adjusted tax rate of 16% in the quarter was better-than-expected, driven by the realization of excess stock compensation benefit and other smaller discrete items.

Turning to cash and liquidity. Overall, operating cash flows were $247 million and free cash flow totaled $137 million for the first quarter. We paid down an additional $200 million of debt and ended the first quarter with cash and cash equivalents of $724 million. We continue to make good progress with another quarter of delevering the balance sheet.

Moving to our full year outlook and financial guidance. While we continue to see pressure due to the global pandemic, vaccine rollout and adoption is approaching meaningful levels. Translating into a reduction of infection surges and hospitalizations in most markets. This increased stability gives us greater confidence that we'll return to normalized market growth in our key markets within the year and also begin to see deferred patients reenter as an added tailwind. As a result, today, we provided financial guidance based on our latest expectations, and that is underpinned by 2 key assumptions: First, current vaccine adoption trends continue to strengthen, driving a decrease in the number of new COVID-19 cases through 2021; and second, hospitals increase capacity to work through some portion of patient backlog this year.

Against that backdrop, our current expectations for full year 2021 financial results are reported revenue growth of 14% to 17% versus 2020 with an expected foreign currency exchange tailwind of approximately 150 basis points. Adjusted operating profit margins of 26.5% to 27.5%, an adjusted tax rate of 16% to 16.5%, adjusted diluted earnings per share in the range of $7.50 to $8 and free cash flow of $900 million to $1.1 billion. Inside of that guidance, we expect to see seasonality in revenues in '21 that begins to resemble pre-COVID cadence.

Additionally, our investments in R&D and key commercial initiatives will increase throughout the year. However, we do expect operating margins to improve as we exit 2021 as a result of higher revenues. Net interest expense is expected to step up about 5% versus 2020, and we expect fully diluted shares outstanding to be about 211 million shares for the full year.

Of course, we will continue to update you on market dynamics and financial expectations as we move through the year.

Let me now turn to our long-term growth profile. We continue to expect our structural organic revenue growth rate to accelerate to the mid-single-digit range, with adjusted operating margins of at least 30% as we exit 2023. We're confident in our expectations as a result of the following proof points. First, we have been delivering consistent strong performance versus the market. Second, we have the best new product pipeline in the company's history that will complement an already robust portfolio. And third, our global team members continue to ramp up execution across our strategic priorities.

In addition, our previously announced transformation initiatives are progressing well, and the addition of a Chief Transformation Officer has the potential to drive even greater investment opportunity for growth while maintaining a leading margin profile.

To summarize, we are pleased with our better-than-expected revenue performance in Q1. While we anticipate and are prepared for ongoing short-term market uncertainty due to COVID and remain sensitive to ongoing challenges in a number of markets, from a financial standpoint, we believe the worst of the pandemic is behind us and look forward to improving results as we execute on our strategy.

With that, I'll turn the call back over to Keri.

Thanks, Suky. (Operator Instructions) With that, operator, may we have the first question please?

(Operator Instructions)

We'll take our first question from Mike Matson with Needham & Company.

I guess I wanted to start with the backlog that you mentioned. If your sales were down about 12% in 2020, does that equal around 12 -- does that keep our the 12% or around $1 billion for the backlog? And then where do you think the capacity is among surgeons and hospitals to address that? And how much have you factored into your guidance for this year?

Yes. Thanks for the question. So I would say, it's not as simple math, is that, but it's pretty close, right? I mean, because you've got to remember, certain portions of our business would not have patients that would have a disease state that continues to -- that they have to deal with. And so not all of our revenue then is linked to procedures that have been deferred. But if I take those that are, and we also have kind of a percentage that we would assume will drop out of the funnel, we still have a very sizable backlog, hundreds of millions of dollars. So maybe not quite the number you're referencing, but the math logic makes sense when you peel out some of those other pieces.

Now relative to the cadence or state at which we're going to digest those patients. It's difficult to predict. I mean we've never experienced anything of this size and magnitude and global impact. And so I don't know that I have a perfect proxy to determine how quickly we can actually work through that backlog of patients.

But my general feeling is easy to look at just historical views of this, although much smaller and different, it's usually 12 to 18 months. You typically work through a backlog funnel. My guess is it will take at least that long, given the size and the magnitude of the backlog that we're talking about here. And it's going to be different. It's going to be different depending on where you are in the world. Certain places in the world will move that backlog through much faster in other places that will go a lot slower because the incentives are not there just to be able to digest again that patient flow as quickly.

So again, I guess the takeaway is it should be a very large backlog of patients that will be pretty substantial dollars for us to be able to take advantage of as a tailwind, but the timing of that, the speed at which we work through is we're just not sure yet.

Next question comes from Bob Hopkins with Bank of America.

But for now, I'll keep my questions a little bit short term, just given how confusing an environment it is. When Suketu reported, they said their hip and knee results for April were kind of already rebounding to up mid-single-digit year-over-year. And I'm just curious, directionally, if you're seeing sort of a similar thing here in the first part of the second quarter?

Yes. Maybe what I'll do is toss that one over to Suky, as he's going to get more color around either guidance is what we're seeing going forward. Suky, do you want to take that one?

Sure. So before I get into Q2, I think it's important to reflect on Q1 for a moment. Versus 2020, we we were up -- sorry, just under 100 basis points versus the prior year, better than our commentary earlier in the quarter, where we expect to be down low to mid-single digits, and that was really because of the sharp uptake, as I talked about in March, primarily in the U.S., and we saw greater stabilization, faster stabilization in Asia Pacific than we expected. That more than offset a lingering headwind or below expectation for EMEA.

Versus 2020, things get a little bit choppy because of the comparisons to prior year in COVID. But if you look at Q1 versus 2019, we were down, that implies about 8%. And as we exited March, we were also down versus 2019.

Now our guidance moving forward, when compared to 2019, assumes sequential improvement in growth rate in Q2 and Q3 and Q4. So far, as we've entered into Q2, we've got confidence in that shaping for Q2. We expect to exit the second quarter at about 2019 levels, not for the full quarter, but as we exit. And inside of that, we expect Asia Pacific to be above Q2 of 2019. The Americas about flat to slightly up, and EMEA continuing to lag.

And again, the early start that we've seen so far in the second quarter gives us positive proof points and confidence that we'll see that sequential step-up in the second quarter.

Okay. That's helpful. And then just for a quick follow-up. Can you give us an update on the timing for Persona iQ and your thoughts there in the U.S. and timing of that approval and launch?

Yes. Sure. We're actually waiting for the FDA approval right now. We're ready to go. Obviously, we're prepared and ready to launch. We've worked through our commercialization strategy, did a really nice job about complements team here in getting a third-party engagement to do a comprehensive survey of what we could expect upon commercialization, price points, what people will be willing to pay for it. How interested people are for the data capture of using that data from a remote patient monitoring perspective.

So I think we're really well prepared for the commercialization. But at the end of the day, you can't do anything until you get the FDA approval. So that's what we're waiting on. And when we get that, we'll be moving forward.

My guess is we'll be able to launch this over the next handful of months. But what I would just emphasize is, this is a unique launch for us. It's first of its kind. We're going to take our time. We're going to do a limited launch this year. I would expect material revenue in 2021. The full launch would really come towards the end of 2021 or 2022.

But we really want to make sure that we're concentrating on a few customers. Going deep with those customers, really understanding the data capturing the value that it brings. So then from there going in a more widespread way. Now if we pick up information quickly and our confidence level grows more quickly than we're expecting, then you could see a difference this year than what I'm predicting right now. But I would think about it as launch this year, obviously, more limited in the way we would do that launch and then a more aggressive launch, more full launch as we come into 2022.

Our next question comes from Jason Wittes with Northland Capital.

Maybe a follow-up on Person iQ. You actually mentioned, I think, 70% of your innovation pipeline is it data-driven. I assume Persona iQ is part of that. I'm just curious in terms of how you see that playing into the marketplace? Is it simply share gains, ASP gains?

And then related to that, if you look at traditional ortho implants, they take about a year or so before they really impact in the revenue line. Is that the kind of time -- I mean, you kind of laid that time line out for Persona iQ. But for some of the other products in the pipe, should we expect it takes about a year or so plus gestation before it really matters, I guess?

It's -- for us, I think it matters right out of the gate. I mean the most -- to be in to look at this is, first of all, absolutely, iQ was part of that spend that I talked about for the ZB ecosystem, right? And we think about ZB edge. It is a very unique part of it, too. As I said in my prepared remarks, we're an implant company. This is where our operating butter is, for sure. But what we want to do is we want to elevate beyond that and make sure that we've got an ecosystem around it.

In iQ, although extremely important in that is a variable in the overall equation. You still got my mobility that we connect with iQ, which would connect with ROSA and OrthoIntel is kind of a backdrop to that and would allow us to be able to collect data on a patient before surgery, interoperatively, post surgery and then be able to use those data ultimately to change the way of care for the patient. And that's what's so exciting about it.

And so I think you can't really compare this to a typical knee implant or another implant and the timeline it might take up to drive real traction or materiality in the market because it's that unique. It is -- it really is a connection point to this broader capability that just does not exist today. So it will be interesting to see.

We've got a pretty ambitious plan that we have in front of us. And the feedback so far from our evaluating surgeons has been very strong. And just generally in the marketplace, this desire to have data and be able to use the data to have better insights to be able to provide different care, better care is real.

And ultimately, what we're so excited about is as we collect data right out of the gate, we're first to market, obviously, with a smart implant. But as we collect data, we'll stay out ahead of folks because that data is really where the magic is. The implant is interesting. You can listen to it right away. But as you collect a certain amount of data over a period of time, that is actually what provides the insights that are going to matter in the future. And so that gives us an opportunity to stay ahead.

So we're very excited about it. It is part of that R&D spend, and we believe that it has the opportunity to have a better ramping curve than a typical implant just because it's so unique.

Okay. And then just a quick follow-up. You guys mentioned in your guidance I prefaced on the fact -- the idea that the hospitals are going to be able to increase capacity. I guess, have they indicated that months COVID clears they're ready to basically double up or what have you? And should we assume that is something that really happens towards the third -- late third, fourth quarter in terms of when we might see that bump?

Yes. So what I would say is that really varies depending on which customer you're talking to, what part of the world you're talking to them in. But Suky, maybe if you could just provide a little more color on that, just to give a view of how we're thinking about the back half and our view of how much backlog or not come through in the back half?

Yes, sure, Bryan. So Q2, again, we expect to be sort of a transitional quarter as we get into the back half of the year. Our guidance assumes sort of normalized growth rates to historic levels or '19 levels. Inside of that, we would expect, if you look at sort of the midpoint of our guidance range, that, first of all, we expect COVID to continue to lever in many markets within the second half of the year.

But broadly, offsetting that will be some additional capacity that comes through hospital systems in other markets to basically net that out. And that's not uncommon. We saw that in the third quarter of last year when you look at our results as COVID will stabilize and you saw hospitals actually increase their capacity to start to bring that backlog through. So again, at the midpoint of our range, we kind of assumed that lingering COVID is out there in certain markets, but that's offset by additional capacity in other markets. So net net, you're effectively keeping your backlog steady.

Towards the bottom end of our range, we assume that COVID has a bigger impact on that backlog pull-through. And at the upper end of our range, we assume that backlog capacity more than exceeds the COVID pressure that we expect to see lingering through the second half of the year. So that's kind of how we see it. Again, we did see those proof points in the third quarter of last year. And as we expect to see pull-through through this year on the backlog, we expect it to resemble very much what we saw in the third quarter of last year.

Our next question comes from Jeff Johnson with Baird.

Wanted to go to the spine and the dental segment, if possible. I don't think I heard specifics on one versus the other, other than dental, kind of led that growth. So Bryan, any way to break that out for us? And then the cervical disc space, you called out Mobi-C, you are seeing some good traction from a 10% competitor in the space. You got a new 2-level approval from another competitor. Just what's your outlook on the cervical disc side, that would be helpful as well?

Yes, absolutely. I won't give specifics between the 2 businesses, but just know that both businesses did better than we expected in the quarter. Dental definitely was the stronger of the 2. But we know we're excited about seeing that progress. And it was a big important quarter for us because, remember, this is really the first full quarter when the organization knew about the spin, really understood the spin. And there was always that risk, obviously, when you announce something like that, there could be some disruption. And as you can tell, we're not seeing disruption, if anything, we're actually seeing momentum, which is great.

But I would say on the cervical disk side, I kind of like the idea of others entering the market because, ultimately, I truly do believe the cervical disc is a better way to go to fusion. And so if we have more people entering the space, talking about it. I think we've got an opportunity to convert more of the business that's out there today in fusion. That's really the target.

If we can increase the size of the cervical market, that's a good thing for everybody, good thing for patients, good thing for the overall business. And it's an area we're going to continue to focus on. We're going to make sure that we shore up the customers that we have today, but we're going to continue to sell. And proactively get conversions. Another big opportunity for us in spine is tether. I mean it really is a unique technology for us. It helps scoliosis patients in a way that they cannot get otherwise. And product is on fire. It's doing a great job, and it's extremely mission-centric to the organization. So that just kind of gives you a general overview. Again, happy with both businesses. Dental was stronger in the quarter, but spine did well as well.

Fair enough. And then maybe a quick follow-up on iQ. Any time lines on actual reimbursement pathway on the monitoring side? Just how to think about that getting reimbursed? And is that really going to be the rate-limiting factor to uptake of that product? Or do you think you could, without monitoring reimbursement still sell the iQ product?

Yes. I think it would be nice to have for sure. And in reality, it already existed. And so we believe that it will be something that people will be able to access, but we're going to make sure that we get smarter on that topic and help our customers understand and have beat that as well. We don't believe it's the requirement, though, for uptake. I really do believe that people see this as an opportunity to capture the data, enter the data, be able to provide better care.

A couple of things that I would say about that is this is just the beginning. We've got a very strong relationship with Canary. It's a relationship that will go on for many, many years. And it's not just a -- it's going to be for hip, it's going to be for shoulder. There's going to be a whole pipeline of technologies that we'll launch. So this is just the beginning of the beginning, if you will, for sensors. And this idea of a close loop is being able to have mymobility applications in each of the areas that we play. Having smart implants as well, having ROSA applications, having at orthoIntel that connects the dots across those. That is something that ZB edge ecosystem that we're going to use in each of the areas that we play.

So we're pretty excited about it. And so I guess I'd love to say, the remote patient monitoring reimbursement is a great thing to have. And I think it's warranted, but it's not the reason why we believe we're going to get uptake in this. We truly do believe it's a data to capture and what that data can tell us is what's going to drive it.

Our next question comes from Robbie Marcus with JPMorgan.

Great. Congrats on a really nice quarter. Maybe just 2 quick ones for me. One, you did the restatement, and I think it helps give us a little more clarity, but there was a bit of movement out of knees and into other and other into knees. I was wondering if you could give us any sort of net number on what ROSA was. And then I'll just ask the follow-up as well. Really strong operating income results, but free cash flow and operating cash flow came in a bit lower than I was thinking. Any color there and how that should progress over the year?

So Suky, maybe I'll toss that one over to you, and then maybe I'll get the follow-ups.

Yes, sure. So on the restatement, first of all, good to talk here, Robbie, we did do provide a little bit more color into what's happening in our base knee business. So you've captured the moving parts correctly. We provide a lot of detail as to what those comparisons are. We're not going to break it down much further. But if there are additional questions after this, our IR team is happy to go through any additional quarterly breakdown.

But overall, we think that, that's a good move, especially in the backdrop of we hope are going to be some expanding and growing indications for ROSA robotics. So this will help clarify what's actually happening in those underlying indications relative to base business and capital sales.

Cash flow, overall operating cash flows were about $245 million. With free cash flow at about $145 million. It was a little bit lower than we would -- that we had last year. Remember that first quarter is seasonally lower than other quarters throughout the year. That's primarily because we have a lot of big payments I have in its first quarter around prior year rebates as well as employee bonuses. There are a number of other things that happened in the first quarter that's seasonally make that number lower.

In this quarter, 2 key things. One is we built some excess inventory. So working capital is higher. We do see a market recovery coming later this year, and we want to make sure that we've got a sufficient supply to meet that market demand. So one, we think that, that was the right move.

Secondly, from a working capital standpoint, receivables were a bit lower than expected. If you remember, we had a pretty low fourth quarter of last year that income or that cash comes in the first quarter of this year and because of those lower sales, we're seeing less cash receipts in the first quarter of this year.

So again, not out of expectation for us, first quarter is generally lower and those are some of the moving parts inside. And again, inventory being a better piece because we are excited about the recovery that's coming.

We will, as you can see from our guidance, expect a step-up in overall cash flow through the rest of the year. I'd say it's more biased towards the second half of the year, and it's really predicated on 2 things: higher earnings relative to greater sales in the back half of the year, as we've talked about in our revenue guidance. And the second thing is we would expect to see some improvements in working capital and bringing those inventories down through the rest of the year as we work down that inventory we built this year in anticipation of the market recovery.

So hopefully, that gives you some additional color on free cash flow.

Our next question comes from Matt Taylor with UBS.

I wanted to ask you more about your recovery assumptions. I think you mentioned that expected Europe/EMEA to trail in recovery by a couple of quarters. Can you talk about what's informing that view? And when you mentioned areas taking longer to go through the backlog. Is that also Europe/EMEA?

Yes. Just quickly maybe hit that backlog recovery and then Suky I'll turn it over to you. Yes, Europe is typically one, just based on the health care model there. That's a little slower to work through backlog. The incentives just are not the same as you have in, say, the U.S., for instance. So we would expect that to be a little slower in capturing the backlog, but interestingly enough, just because it's running behind probably will have one of the biggest backlogs as a percentage, right? If you look at the overall backlog versus the revenue in that region. And it will likely take the longest to work through just based on what we just said. But Suky, outside of that, maybe you could provide more color on our thinking on why we believe it's going to be lagging behind?

Yes. I think you summarized it well, Bryan, as I made the vaccination rates are a bit slower than we had originally expected. Outside of that, outside of EMEA, we also expect a few markets throughout Latin America as well as Asia Pacific to continue to lag just based on so far, the vaccination trend that we've been seeing.

Hopefully, the vaccinations begin -- the vaccines begin to roll out as robustly as they have in the U.S. globally. But until then, we expect COVID to continue to have a lingering impact on elective procedures.

Okay. Great. And then just wanted to ask on hips. You talked about the ROSA Hip launch later in the year and that potentially driving to your goal of above market performance. Can you talk about how sharp you expect the inflection to be and how quickly that could happen? Or any color on how much you think you can outgrow the market once you have that application?

Yes. Thanks. It's interesting because I referenced that for sure. But actually, if you go back 3 or 4 quarters, we probably already in a share taking mode for hip. So I just want to make sure that I give a compliment to the team there. Avenir Complete has been a great launch, but just the portfolio that we had before, which get supply out of the way, that team is really executing well. So I don't want to discount the fact that if you do look at the last 3 or 4 quarters and you look at the other players in the market, we've done well versus the overall market.

The confidence, though, in sustaining that goes up with a ROSA Hip application. So it's more of the confidence in being able to sustain what's already happened and potentially even buy it further. And our goal here would be able to launch that in the back half. Again, the good news is we have a lot more experience with ROSA announce. So our confidence level to go more to almost an immediate full launches there. So you're going to see a lot less time spent in limited launch for either partial or ROSA hip, and we did to be a nice one-to-one for some time to come.

We'll take our next question from Richard Newitter with SVP Leerink.

Bryan, first question. I think I've heard you mention when you're talking about Persona IQ how excited you are about the platform there and that you guys have a multiyear kind of vision strategically with canary, including into hip and shoulder. My understanding was you were only exclusively for now partnered on knees, but did something change? And are you guys more exclusively focused now in other areas as well?

Yes. We've done a lot of work with Bill and team over Canary. Great team over there, by the way, just really good people. And yes, we've solidified a very long-term relationship basically perpetual. With proprietary use of the technology in all areas that we play, all areas that we place. So we are excited to be able to start to work on a very robust pipeline of technology. We've got to look at miniaturization. We got to look at battery consumption. We've got to look at different form factors that would allow us to use the sensor in other implants. And that's something that we're going to be heavily concentrating on. And so it's much broader than just the in long-term and the 2 organizations work really well together, and we're excited about the opportunity.

Great. Congratulations on that. And then just a follow-up on ROSA Hip. Thanks for the revenue contribution commentary, but just I guess, more philosophically, we've seen robotics uptake in hip for your competitor just be slower, a little bit different type of value proposition. I'm curious, one, are you noticing a mine -- like a mindset shift amongst the customer base with respect to how they're perceiving robotics and hips that would suggest good runway for you as you're launching or different from what maybe your competitor experienced earlier on in there launch of the hip? And/or is there something that ROSA does specifically with robotics, it's different?

I think it's probably a little bit of both, potentially. I mean, if I think about it, the way I would think about this is the in hip. You've got pretty good outcomes right now. It's different than -- you still have most people that get a hit procedure that ultimately feel like they don't even remember having it because it functions pretty well. Whereas a knee, as we always talk about, a good 20% of patients that are a little frustrated with the outcome because they don't get exactly what they expected.

But on the hip side, because of that, most surgeons don't want to disrupt their flow, right? They don't want to take more time to do a procedure. And the key seems that we do for ROSA perspective to try to keep that surgeon flow, that procedure flow pretty consistent with what they're used to and not as a result of that, change the amount of time it takes to do a your procedure. And I think that will be a very important differentiator here. We're not going to change the time needed to do this.

A couple of other things that will be different about this is it is a pinless application of robotics. It would be the first that we'll see in hip. Don't have to place these pins, basically drill into the bone of the leg to be able to have the robot know worth what the body is in space. So that's going to be unique to us.

The other thing that we're going to focus on here is the application out of the gate is going to be for direct anterior approach, which we know is the fastest growth subcategory at hip right now. And it's a challenging procedure because you don't have great visualization, and it's difficult as a result of that, but it's a tough placement right. We're going to make both of those things easier through the ROSA application that we have. So we think the -- we have complete implants. We think with this ROSA application, not taking more time to be able to do this. The pinless application and being able to allow people to see where they can't see and place the cup where they need to place it is going to be a big deal. That's what we're betting on.

Our next question comes from Steve Beuchaw with Wolfe Research.

Liza on for Steve Beuchaw. Just a quick one on Signature One planner. That was a meaningful sequential uptick. And so I was just wondering if you could talk about that relative to your targets? And then also, if you could speak to robotic -- ROSA robotic placements in the quarter. And maybe -- I know you said they were strong, but maybe if you could detail a little bit on the geographic trends there that you saw?

Okay. So maybe I'll start quickly with that. We had a really strong quarter, again, as I referenced, pretty similar to what we saw in Q4 of last year. I think I'm going to be a little cautious there because those are 2 exceptional quarters, and I feel very confident in our pipeline, but I wouldn't necessarily say that, that becomes a new trend. And those are great quarters for sure. And again, the pipeline is strong. And I would say that my confidence level is extremely high that the overall placements this year will definitely be more than last year. But I just don't want people to think that those quarters are going to be every quarter from here on out, even though the pipeline is pretty strong at this point.

From a geographic mix standpoint, we continue to see really good traction in OUS. So I've been very pleased with that. Asia Pacific, in particular, but also Europe, Middle East and Africa. So it's been a good distribution around the world of robotic placements, which is one of the key things we wanted to concentrate on. So a really strong quarter. The pipeline is very strong, partial and ROSA, if are going to help us with that, obviously. And then the distribution is a positive for us.

On the Signature One planner, yes, I mean we're excited about it. I mean until every single procedure uses presurgical planning, we're not finished. We truly do believe it is a better way to care for patients. If you don't know what you're getting into relative to the anatomy, how can you be as prepared as you should be, to be able to do the procedure. So we want to make it easier for a surgeon to be fully prepared for that patient, knowing what they're going to deal with when they're in surgery and presurgical planning allows that to happen, right? And the real benefit to us is that, number one, we feel the mission of the organization because we're going to do a better procedure. We truly believe that. And number two, we get that cyber benefit of mix.

More revenue per procedure because if you know the anatomy challenges you're going to be dealing with, you're probably going to be able to get augments ahead of time, and you're going to be able to ensure that you've got guides that you're going to need, and that's incremental spend. Appropriate spend, but incremental spend in the procedure. So that's the benefit for us. But just no matter what the increases that we talked about on a quarterly basis sequentially until we get 100% penetration, we're absolutely not finished there.

Our final question comes from Pito Chickering with Deutsche Bank.

When I look at the strong first quarter back into the implied EPS guidance for the rest of the year is generally in line with Street expectations. I believe that that you mentioned 2Q as a transition quarter. So are there any inventory pull forward or reasonable impact that could have a large impact on 2Q EPS estimates, in which case, 2Q EPS comes down, the back half of the year goes up? Or has the Street generally modeled in the cadence of 2021 in the right way?

Yes. I think -- so Pito, thanks for the question. One of the comments I made earlier in my prepared remarks are about the seasonality, and we're going to start to see that resemble or pre-COVID cadence than what we saw in 2020. So we would expect, again, Q2 to resemble that. Q2 and Q4 tend to be our stronger quarters from a revenue perspective. You tend to see a little bit of seasonality in a dip in the third quarter. And we think that, that's the same shaping for this year.

Perhaps, not as pronounced as you would see in an underserved pre-COVID environment, but again, beginning to resemble what we experienced in 2019.

So hopefully, that gives you a little bit more on shaping of our revenue and our P&L cadence as we move through the year.

I'll just make maybe -- go ahead, I'm sorry.

A quick follow-up question for you on ROSA. What's the breakdown between sales and leases in the first quarter? And I assume lease revenues are now located in the other revenues? And how much lease revenue was there in the first quarter?

Yes. We don't want to provide specific breakdown of the mix, but just know that we've got multiple ways that you can place robotics and we -- trucks based on what the customer demand or need is, and we don't -- usually don't give any specific dollars relative to what we did with ROSA in a specific quarter. But again, I'll just reiterate the fact that it was a positive quarter for us in ROSA and it was a big benefit. And again, the most important thing isn't really the quarter that these are placed. It's the tailwind that they create on a go-forward basis because now you've got an opportunity to be able to build revenue around those robotic systems. And what we do when we place is you get a commitment to competitive conversions. But what we're finding is we're tracking this is that whatever we thought we were going to get we actually get more. And a lot of times, it's not even in the knee business. It's in other businesses that just kind of come to it. It's almost like, hey, look that it occurs. The product category.

So it's always important to concentrate on, obviously, what happens in the quarter. But more than anything, it's the annuity value of this that occurs post that placement.

And I'm just going to say, maybe with a quick close here, I know we get a spec over to you, Keri, to close it out. But I just want to make sure that every focus, a little bit of attention. I know that there's a ton of focus right now on trying to predict the exact moment that the pandemic is behind us and as a result of that impact on 2021. And it's important to believe that we're spending a lot of time on it, too. But in reality, that's kind of a short-term thinking right now. And where I'm spending more of my time and the organization is spending more of our economics what does this look like post the pandemic when it truly is fully behind us.

I kind of think about it in a few ways. Number one, the obvious thing is you're going to have a backlog of patients that's going to buoy the market growth for some period of time. I said before, I can't predict the amount of on that is, but there's clearly going to be at least a year or more of this backlog that when the pandemic is gone, it's going to be able to -- this kind of extraordinary growth in the marketplace, and that's exciting. Although, not obviously sustainable beyond that.

But there are other things that we're looking at now that truly give us a view that we could potentially reshape the curve of these -- the large joint growth market. And big things for us, kind of threefold in the way I think about it is there's no question this technology revolution is happening in orthopedics. We're going to help drive it, but others are doing it as well. And when that occurs, you're going to get a mix benefit. You're going to see revenue premiums for every procedure as this technology is adopted. And if you think about that over a 5-year period of time, as you get higher adoption, that clearly has an opportunity to drive up the growth rates of the market. Now we got to do it. When you actually get it done, it doesn't happen. But the fact is, we at least see a pathway through technology advancements to be able to bend the curve of these growth markets.

The other thing that it does, too, in my view, or could do is that there's some hurdles associated with having this type of an ecosystem, it's connected ecosystem. And that's going to create barriers to entry into the space where there really wasn't a lot before. And that gives you the byproduct benefit of longer-term contracts, deeper relationships with your customers and probably better pricing stability, right? So those are something else that we're looking at with this technology.

And I think the third one, I think, is very important. As we get better outcomes for patients and their confidence level goes up for these procedures, I truly do believe there are patients on the sidelines today that should be getting the procedure, but are fearful of it. When you start to hear better outcomes, more technology, you may see some of those patients out of the funnel. So again, all these things are potential building blocks. As we think about the future of orthopedics, it can make the space much more attractive. We've got to deliver on them. They're not guarantees. We got to make sure that it happens, but that's where we're focusing our attention now to make those things a reality. So I just want to leave you with those thoughts because that's an exciting future, I believe, for orthopedics.

Keri, I'll turn it back to you.

Thanks, Bryan. I'm sure we'll be talking to many of you today for calls and follow-up questions. If you do have them, please don't hesitate to reach out to the IR team. We're always available over phone or email. Lauren, I'll turn it back over to you to close out.

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