Zimmer Biomet Holdings, Inc. Q1 FY2021 Earnings Call

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. Following today’s presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. 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 Suky Upadhyay, our CFO. 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?

Alright, 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 to 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, hopefully moving on from the pandemic. Now it's not over, and I think all of us realize that. But I for one feel more optimistic than ever that we're coming out 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. I'm going to try to keep my remarks relatively brief, and that'll give Suky an opportunity to walk you through what you're really interested in, which is the financial results for the quarter and how that translates into our expectations for the full year 2021 guidance. I also want to make sure that we leave time for questions, obviously. So I'm just going to stick to really three topics. Number one, I want to talk about the COVID recovery just briefly, and our execution inside of that recovery. Second, ZB's ongoing transformation and our progress against that. And the third topic will be our long-term growth strategy, 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. 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 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 it's that shift toward what I would define as more stability. And I know it's on a relative basis when I talk about stability here, but that shift toward more stability 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. Suky is going to get into more of that in just a few minutes. But overall, it 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. As we start to return to a more normal environment—normal in quotes given the situation right now—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. 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 will have to watch and track, but we absolutely believe that the vast majority of those patients who put off an 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 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, and 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 say that each word is absolutely critical for us in 2020 and continues to be in 2021 and well beyond. With that in mind, we've made some additional changes to our leadership team here very recently. We've added a Chief Transformation Officer 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 we've promoted Sang Yi to Group President of Asia Pacific; he's now going to have some responsibilities for certain projects outside the U.S. He brings a disciplined execution mindset, and he can help us outside of Asia Pacific. We've also expanded Ivan Tornos' role as Chief Operating Officer with added leadership of EMEA, a region he has had deep responsibility for in the past and knows very well. So, this continued focus on talent and development is not just contained to the executive ranks. Our entire ZB organization is hyper-focused on our people—on getting the right team members in the right roles and giving them the tools and support and the opportunities to drive performance, to develop, and to excel. It's working. This focus on talent is working and I believe it is going to continue to set us apart from the competition. 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 and our commercial competence is higher than ever. I can tell 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've hit key milestones with our ZB products and our innovation. The application for partial knee on ROSA was approved by the FDA; we've actually already had our first procedure using that application last week with very good results. This is just the latest addition to our ROSA Robotics program and another launch inside of our ZBEdge suite of integrated digital and robotic technologies—again, something we truly believe will set us apart from the competition. If I just look at ROSA overall in the quarter, we continue to see strong market demand and traction with our ROSA platform. Q4 performance was fantastic, and that continued right into Q1, both in the U.S. and internationally. Our forward-looking robotics pipeline is very robust, and given our market share in partial knee, the partial application will bolster that going forward. For Persona Revision, another strong performance—Q1 was ahead of our expectations. It is another example of a tip-of-the-spear product that as we make the conversion of revision, we also have the opportunity then to go after standard new business as well. So again, exciting opportunities there for revision. Our Signature ONE planner for shoulder procedures demonstrated very strong sequential growth from Q4—we're actually up 65% over Q4 when we look at registrations, again that's a significant move. This provides stickiness with our customers in that procedure, and it provides mixed benefit wherever that pre-surgical planning is used. As we come into Q2 and the rest of 2021, ZB has additional innovation coming, including our anticipated launch of Persona-IQ and ROSA Hip later in the year. For Persona-IQ, initial feedback from evaluating surgeons has been very positive. Surgeons are interested in capturing data from inside the body—this is unique; they've not been able to do this before—and remotely monitoring those data with the hope of using that information to change the way we care for patients. The excitement around this is very strong from our surgeons, and we can tell that momentum will be strong when we get regulatory approval. So all that to say the momentum on the innovation front is real at ZB. This will allow us multiple shots on goal across a number of innovations—multiple robotics launches, continuing success with Persona Revision, Persona-IQ, new iterations of mymobility, and the broader ZBEdge ecosystem to drive mixed benefit and competitive conversions. Ultimately, we really believe this will change the way we care for patients and change the treatment paradigm. It's about driving the mission of this organization: to remove pain from patients around the world and improve the quality of their life. We truly believe ZBEdge can help us do that. Okay, so let's move to the second topic: the continued transformation of ZB. You've heard me talk about the three phases of transformation. The first was winning the hearts and minds of the organization and dealing with execution challenges we had in the first year. The second was moving to a longer-term firm strategy that would drive innovation—building the structure around that strategy and the operating mechanisms to ensure we move it forward. The third, where we are now, is portfolio transformation. That is squarely where we are positioned today in Phase 3. We have the ZB portfolio management strategy and process in place and have built out our capabilities to move forward in this space. We're focused on mission-centric M&A—whenever repeated, that would increase our weighted average market growth and does not disrupt our best-in-class margin profile. As you've seen, we've moved this forward with selected tuck-in acquisitions last year. Those deals were smaller and relatively immaterial initially in revenue, but they were designed to fill portfolio gaps and better position us in high-growth markets and sub-markets where ZB has a path to leadership and a right to win—in markets like sports medicine, ASCs, and the sternal closure market. Each deal gives us gap-filling, differentiated products to drive growth and additional confidence in our S.E.T. business category. Inside this active portfolio management phase, there's a planned spin-off transaction of our spine and dental business that we discussed back in Q4. That process of creating two independent, even stronger companies is on track. It's early days, but it is on track. 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 of the opposite. We've seen significant energy as the new split teams begin to build out their strategy and focus under CEO Vafa Jamali. So again, it's early days, but we're very happy with the progress so far of the spin. That brings me to my third and final topic this morning, around our plan to drive long-term growth and deliver value. We remain fully committed and confident in ZB's long-term growth and margin expansion expectations. We've said before, and we'll say it again, that the spin-off of NewCo 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. We're confident that as we achieve this growth and margin profile, we'll have the flexibility to reinvest for growth. That's key: we must remain disciplined, but ultimately invest for growth in this business. To get these growth levels and achieve our top-quartile performance in TSR—which is one of our strategic pillars—we will continue to execute in our priority growth areas. As a reminder, we expect to drive above-market growth sustainably in these areas. We plan to grow hips consistently at market, and later this year above-market when we launch the ROSA Hip application. We expect to stabilize and then drive our S.E.T. business at the higher end of market rates. We're focused on evolving the company from a metal-and-plastic implant provider to a leading med-tech innovator—think of us as a high-tech company in med tech. More than 70% of our product development dollars are being spent on ZBEdge, the ecosystem of connected technologies. We'll always be an implant company—those products are the center of our universe—but the ZBEdge ecosystem differentiates us. We already have exclusive relationships to help us, including a relationship with Apple and several other tech companies that we believe will drive future innovation that will delight our customers and benefit patients. I believe this technology shift is coming not only for us but for the entire market. Technology advancements potentially can reshape the growth curve of the markets we play in and change the care paradigm for customers and patients. Let me close by saying I continue to be highly confident in the ZB team and our business momentum. I truly believe we are well-positioned for success and our strategy is working. Our transformation is well underway, and I'm excited about the value we can drive for our shareholders going forward. Before I hand it off to Suky, I just want to say thank you to the entire ZB team. Your vigilance and dedication to our safety protocols over the past year has been absolutely critical. You're focused on our mission and strategy, and how you show up and execute every day is unmatched in my view. You are what makes us ZB, and that makes me confident we can continue to deliver on all fronts. 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 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 three 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. 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 a 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. 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 sub-markets in decline. While we did see some recovery and decreased COVID pressure as we moved through the quarter, some markets continue to operate under recently enacted restrictions limiting the near-term recovery of elective procedures. We're continuing to monitor uptake very closely and expect that recovery in EMEA will lag other regions by one to two quarters. Lastly, Asia Pacific grew 15.5% with solid year-over-year growth across our three largest markets. Overall, we've seen stabilization around COVID cases and surges in the region, but we continue to see significant delays and incomplete recovery across India and other smaller markets. Turning to our business performance in Q1, 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. We've 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 knees 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, 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. 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 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 surge in registrations of the Signature ONE surgical planning system for shoulder procedures. Our dental and spine segment grew 9.6%, fueled by outsized 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 benefits 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 delivering 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 begin to see deferred patients re-enter as an added tailwind. As a result, today we provided financial guidance based on our latest expectations underpinned by two 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 the 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 $7.60 to $8.00; and free cash flow of $900 million to $1.1 billion. Inside that guidance, we expect to see seasonality in revenues in 2021 that begins to resemble pre-COVID cadence. Additionally, our investments in R&D and key commercial initiatives will increase throughout the year. However, we 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. 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 these 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 prepare 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?

Thank you. Ladies and gentlemen, at this time, we will now begin the question-and-answer session. Operator instructions. We'll take our first question from Mike Matson with Needham & Company.

Hi, good morning. Thanks for taking my questions. I wanted to start with the backlog that you mentioned. If your sales were down about 12% in 2020, does that equal to a 12% or around $1 billion 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?

Yeah. So, thanks for the question. I would say it's not as simple math as that, but it's pretty close. You've got to remember certain portions of our business would not have patients with a disease state that continues to exist to deal with, and so not all of our revenue is linked to procedures that have been deferred. But, if I take those that are, and we also have 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 older pieces. Now relative to the cadence or speed at which we're going to digest those patients, it is difficult to predict. We've never experienced anything of this size and magnitude in global impact. I don't have a perfect proxy to determine how quickly we can actually work through that backlog of patients, but my general feeling—looking at historical views of backlogs, although much smaller and different—is it's usually 12 to 18 months to work through a backlog funnel. My guess is it will take at least that long, given the size and the magnitude of the backlog we're talking about here. And it's going to be different depending on where you are in the world. Certain places will move that backlog through much faster, and other places will go a lot slower because the incentives are not there to digest that patient flow as quickly. So again, the takeaway is it should be a very large backlog of patients and substantial dollars for us to take advantage of this tailwind, but the timing and speed at which we work through it are uncertain.

Thank you.

Our next question comes from Bob Hopkins with Bank of America.

Great. Thank you, and thanks for taking the questions and I appreciate those prepared remarks, Bryan. There is a lot to unpack in there. For now, I'll keep my questions a little bit short-term just given how confusing an environment it is. When Stryker reported, they said their hip and knee results for April were already rebounding to up mid-single digits year-over-year. I'm just curious directionally, if you're seeing a similar trend here in the first part of the second quarter.

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

Sure. Hey, Bob, good morning. Before I get into Q2, I think it's important to reflect on Q1 for a moment. Versus 2020, we were up just under 100 basis points versus the prior year—better than our earlier commentary where we expected to be down low-to-mid-single digits—and that was really because of the sharp uptake in March primarily in the U.S., and we saw greater stabilization and faster stabilization in Asia Pacific than we expected. That more than offset a lingering headwind or below expectations for EMEA. Versus 2019, Q1 implied about an 8% decline. As we exited March, we were also down versus 2019. Our guidance moving forward when compared to 2019 assumes sequential improvement in growth rate in Q2, Q3, and Q4. So far as we've entered Q2, we have confidence in that shape for Q2. We expect to exit the second quarter at about 2019 levels—not for the full quarter but as we exit. 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. The early start 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. Thank you. And then just for a quick follow-up, can you give us an update on the timing for Persona-IQ and your thoughts on timing of that approval and launch in the U.S.?

We're waiting for FDA approval right now. We're prepared and ready to launch. We've worked through our commercialization strategy and engaged a third party to do a comprehensive survey on commercialization price points, willingness to pay, and interest in data capture and remote patient monitoring. I think we're well-prepared for commercialization, but we can't do anything until we get FDA approval. When we get that, we'll move forward. My guess is we'll be able to launch over the next handful of months. This is a first-of-its-kind launch for us, and we'll take our time. We'll do a limited launch this year. I wouldn't expect material revenue in 2021; the full launch would come toward the end of 2021 or in 2022. We want to concentrate on a few customers, go deep, understand data capture and the value it brings, and then expand more broadly. If we pick up information quickly and confidence grows faster than expected, you could see a difference this year, but think of it as a limited launch this year and a more aggressive launch in 2022.

Great. Thanks, Bryan. Thanks, Suky.

Our next question comes from Jason Wittes with Northland Capital.

Hi, thanks for taking the question. Maybe a follow-up on Persona-IQ. You mentioned 70% of your innovation pipeline is IT and data-driven. I assume Persona-IQ is part of that. I'm curious how you see that playing into the marketplace—share gains, ASP gains. And related to that, traditional ortho implants take about a year or so before they really impact the revenue line. Is that the kind of time frame we should expect for Persona-IQ and other products in the pipeline before they matter?

For us, I think it matters right out of the gate. Persona-IQ is part of ZBEdge. Think of ZBEdge as the ecosystem: IQ connects with mymobility, which connects with ROSA and OrthoIntel, allowing us to collect data pre- and post-surgery and use those data to change how we care for patients. This is different than a typical implant; it's a connection to broader capabilities that don't exist today. We've got an ambitious plan and strong feedback from evaluating surgeons. The desire to have data and use it for better insights is real. Capturing data from the beginning gives us a chance to stay ahead— the implant is interesting immediately, but as you collect data over time, that provides the real insights. That gives us an opportunity to stay ahead, so we are excited. It is part of R&D spend and we believe it can have a faster ramp than a typical implant because of its uniqueness.

Okay. Quick follow-up: you mentioned in guidance the idea that hospitals will increase capacity. Have hospitals indicated they can rapidly address backlog once COVID clears, or should we assume that happens late in the year—third or fourth quarter?

It varies by customer and region. Suky, could you provide more color on our thinking about the back half and how much backlog we expect to come through?

Sure. Q2 will be a transitional quarter as we get into the back half of the year. Our guidance assumes normalized growth rates to historic levels or to 2019 levels. At the midpoint of our guidance, we expect COVID to continue to linger in many markets in the second half. Broadly offsetting that will be additional capacity in hospital systems and other markets, which nets out. We saw similar dynamics in Q3 of last year when COVID was stabilizing and hospitals increased capacity to start bringing backlog through. At the midpoint, we assume lingering COVID in certain markets but offset by additional capacity in others, effectively keeping the backlog steady. At the bottom end of our range, we assume COVID has a bigger impact than backlog pull-through. At the upper end, we assume backlog capacity more than offsets COVID pressure. That's how we see it, and we saw proof points in Q3 of last year that support this view.

Very helpful. Thank you.

Our next question comes from Jeff Johnson with Baird.

Thank you. Good morning, guys. I wanted to go to the spine and dental segment if possible. I don't think I heard specifics on one versus the other, other than dental led that growth. Any way to break that out for us? And then on the cervical disc side, you called out Mobi-C—you're seeing good traction—another competitor got a two-level approval. What's your outlook on the cervical disc side?

I won't give a specific split, but both businesses did better than we expected in the quarter. Dental was the stronger of the two. This was the first full quarter where the organization knew about the spin and understood it; there was a risk of distraction, and we're not seeing disruption—if anything we're seeing momentum. On the cervical disc side, I like more entrants in the market because cervical disc is a better alternative to fusion. More people entering the space can expand the market and help convert fusion cases to disc replacement, which is a good thing for patients and the business. We're focused on shoring up current customers and proactively driving conversions. Another big opportunity in spine is Tether—it's a unique technology for scoliosis patients, it's doing very well, mission-centric to the organization, and performing strongly. So, happy with both businesses; dental was stronger in the quarter, but spine also did well.

Fair enough. Quick follow-up on IQ: any timelines on reimbursement for the monitoring side? Is reimbursement rate-limiting for uptake, or can you sell IQ without monitoring reimbursement?

Reimbursement would be beneficial and we believe it's warranted, but we don't think it's required for uptake. Remote patient monitoring reimbursement exists and we believe customers can access it, but we'll get smarter on the topic and help customers understand details. We have a strong relationship with Canary and it's a multi-year, broad relationship for proprietary use of the technology in all areas we play—hip, shoulder, and knee. It's just the beginning for sensors. The closed loop—mymobility applications, smart implants, ROSA applications, and OrthoIntel connecting the dots—will be used across our areas. This is the beginning of a longer pipeline of technologies, and reimbursement is helpful but not the primary driver; the data capture and what the data can tell us will drive adoption.

Thank you.

Our next question comes from Robbie Marcus with JPMorgan.

Great. Congrats on a really nice quarter. Maybe two quick ones. One, you did the restatement and I think it helps give us a little more clarity, but there was movement out of knees and into other and vice versa. Can you give any net number on what ROSA was? And then a follow-up: strong operating income results, but free cash flow and operating cash flow came in a bit lower than I expected. Any color there and how that should progress over the year? Thanks.

On the restatement, we did it to provide more color into the base knee business. We provided detail on the moving parts. We're not going to break it down further on the call, but our IR team is happy to go through additional quarterly breakdowns offline. We thought the move was appropriate, especially with growing indications for ROSA Robotics, as it clarifies what's happening in underlying indications relative to base business and capital sales. On cash flow: operating cash flows were about $245 million and free cash flow about $145 million. It's a little lower than last year, and Q1 is seasonally lower. We had large payments in Q1 around prior year rebates and employee bonuses. Also, we built some excess inventory so working capital was higher—we believe that was the right move to ensure supply for the market recovery. Receivables were lower than expected because we had a low Q4 last year and that cash came in Q1 of this year; because of lower sales, you're seeing fewer cash receipts in Q1. First quarter is generally lower and these are some of the moving parts. We expect a step-up in overall cash flow through the rest of the year, biased toward the second half, predicated on higher earnings from greater sales in the back half and improvements in working capital as we work down the inventory we built this year in anticipation of recovery.

Yeah, that's great. Thanks for the color.

Our next question comes from Matt Taylor with UBS.

Hi, thanks for taking the question. I wanted to ask more about your recovery assumptions. You mentioned EMEA will trail 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 EMEA?

Europe typically is a bit slower to work through backlogs because the healthcare model there is different and incentives are not the same as, say, the U.S. We would expect it to be slower in capturing the backlog and it will likely take the longest to work through. Suky, do you want to add color?

You summarized it well. Vaccination rates are a bit slower in certain EMEA markets than we originally expected. Outside of EMEA, we also expect some markets in Latin America and parts of Asia Pacific to continue to lag based on current vaccination trends. Hopefully vaccines roll out more robustly globally, but until then we expect COVID to continue to have a lingering impact on elective procedures in those markets.

Great. And on hips: you talked about ROSA Hip launching later in the year and potentially driving above-market performance. How sharp do you expect the inflection to be and how quickly? Any color on how much you think you can outgrow the market once you have that application?

If you look back three or four quarters we've already been in a share-taking mode for hip—so that team is executing well. ROSA Hip increases our confidence in sustaining and potentially buoying that performance further. We intend to launch in the back half and, given our experience with ROSA, we have more confidence to move to a faster or fuller commercial rollout than early adopters might have. The ROSA Hip application is expected to be a significant tailwind. A few differentiators: we aim to keep surgeon procedure flow consistent with what they're used to and not increase procedure time; our approach will be a minimally disruptive application. We won't require pins drilled into the limb to register, which is unique to us. Also, the initial application will focus on the direct anterior approach—the fastest-growing hip subcategory—which is challenging due to visualization limitations; ROSA Hip will help with visualization and placement. We believe these elements make the offering compelling.

Thank you.

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

Thank you. Bryan, first question: you mentioned Persona-IQ and a strategic, multi-year vision with Canary, including into hip and shoulder. My understanding was you were exclusive for now on knees. Did something change? Are you broader now in other areas as well?

We've done a lot of work with Bill and the Canary team—they're a great group. We've solidified a long-term relationship, essentially perpetual and proprietary use of the technology in all areas we play. We're excited to work on a robust pipeline to miniaturize sensors, optimize battery consumption, and develop different form factors for other implants. So it is much broader than just knee.

Great, congratulations. And philosophically on ROSA Hip: robotics uptake in hip has been slower historically. Are you seeing a mindset shift among customers that suggests runway for ROSA Hip, or is there something ROSA does differently?

It's a bit of both. Hip outcomes are generally very good today, so surgeons are cautious about disrupting their flow. Our ROSA approach aims to keep procedure flow consistent and not increase procedure time, which is a key differentiator. We also avoid drilling pins into the limb for registration, which is unique and less invasive. The initial application will focus on the direct anterior approach, which has limited visualization and is a fast-growing subcategory. ROSA Hip will help with visualization and placement. We believe the combination of not increasing time, painless registration, and helping with difficult visualization will be compelling to surgeons.

Thank you very much.

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

Thank you. Our next question comes from Steve Beuchaw with Wolfe Research.

Good morning, guys. Liza Garcia for Steve Beuchaw. Just a quick one on Signature ONE planner—that was a meaningful sequential uptick—I'm wondering how that compares to your targets. Also, could you speak to ROSA robotic placements in the quarter and detail geographic trends?

We had a really strong quarter, similar to Q4 of last year. I'll be cautious—those were two exceptional quarters and while the pipeline is strong, I wouldn't assume that level of sequential growth every quarter. My confidence is high that placements this year will exceed last year. From a geographic mix perspective, we continue to see good traction outside the U.S., particularly in Asia Pacific and also in EMEA. So distribution around the world of robotic placements has been broad, which is positive. Regarding Signature ONE planner, we're excited—until every procedure uses pre-surgical planning, we're not finished. Pre-surgical planning allows the surgeon to prepare better for anatomy and challenging cases, which can lead to better outcomes and incremental procedure spend for augments and guides. So we are encouraged, but until we reach high penetration we won't be satisfied.

Great. Thanks so much.

Thanks, Liza. Lauren, I think we have time for one final question.

Our final question comes from Pito Chickering with Deutsche Bank.

Good morning, guys. Thanks for squeezing me in. When I look at the strong first quarter and the implied EPS guidance for the rest of the year, it's generally in line with your expectations. I believe Q2 is a transient quarter. Are there any inventory pull-forwards or regional impacts that could have a large effect on Q2 EPS estimates—meaning Q2 EPS comes down and the back half of the year goes up? Or has history generally modeled the cadence of 2021 correctly?

Pito, thanks. As I mentioned earlier, we expect seasonality to begin to resemble pre-COVID cadence. We expect Q2 to resemble historical Q2 behavior with Q4 generally being our strongest quarter and a dip in the third quarter. The shaping for this year may not be as pronounced as an undisturbed pre-COVID environment, but it will begin to resemble 2019. That should give you an idea of revenue and P&L cadence through the year.

Quick follow-up on ROSA: what's the breakdown between sales and leases in Q1? I assume lease revenues are now located in the other revenues—how much lease revenue was there in the first quarter?

We don't provide a specific breakdown of sales versus leases for ROSA on the call. We have multiple ways customers can acquire robotics and we track based on customer demand. We usually don't give specific dollars for ROSA in a given quarter. ROSA was a positive contributor this quarter, and the more important factor is the annuity value post-placement—robotics placements create ongoing revenue around the system and commitments to competitive conversions. Often the halo effect drives revenue in categories beyond knees. That annuity value is the long-term benefit. I'd like to close by saying that while there's a lot of focus on predicting exactly when the pandemic will be behind us, where I'm spending more of my time—and where the organization is too—is thinking about the post-pandemic future. First, a backlog of patients will provide a tailwind for at least a year or more. Beyond that, technology advancements could reshape growth curves in our markets and change care paradigms. Three major areas to consider: technology revolution in orthopedics (which can create revenue premiums), barriers to entry created by building a connected ecosystem (leading to longer-term contracts and pricing stability), and better outcomes increasing patient willingness to undergo procedures. These are potential building blocks that could make orthopedics a more attractive market over the long term. That's where our focus is as we move forward. 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 by 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.