Earnings Call Transcript - ZBH Q4 2020

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Fourth Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded today, February 5, 2021. Following today’s presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Investor Relations and Chief Communications Officer. Please go ahead.

Keri Mattox, SVP, Investor Relations and CCO

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's quarterly 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 earnings release. As a note to all call participants, we provided updates via two press releases issued this morning, and we have also posted an investor presentation to our website, zimmerbiomet.com. With that, I'll now turn the call over to Bryan.

Bryan Hanson, President and CEO

All right. Great. Thanks, Keri. And also, I want to say just thanks to everyone for joining us on the call here this morning. As you saw from our announcements earlier today, we clearly have a few updates that we want to fill you in on and I'm looking forward to a very productive call this morning. Just given the backdrop of COVID, let me start by saying that I certainly hope that all of you are doing well and staying safe. And continuing to, as much as it's frustrating, I'm sure by now, continuing to social distance and wear your masks. I think, at this point, we're all pretty good at it. So let's make sure that we continue to do it. And to all of the ZB team members joining the call this morning and who are listening at a later time, I just want to let you know I'm thinking about you as well. I just want to say thanks. Thanks for everything that you do and have done and will do actually to continue to follow our protocols, to keep yourself safe, obviously, but also our teammates safe. And as a result of that, continue to deliver for our customers and our patients and move our mission forward. And I continue to be very proud of everything this team has accomplished against a significantly challenging backdrop in 2020. So I'm proud of you, I'm glad to see what you've been able to do, and I'm looking forward to what you're going to do in 2021. And here we are, right? We're in 2021. And there are going to be challenges and we've seen already early on in 2021, but I'm confident that we're ready to deal with the challenges as we do, and I'm pretty confident that we're going to see some real opportunities for 2021 as well. And there are just a lot of updates that I want to share with you today, but I'm going to keep my comments to a minimum, if possible. I really want to make sure that we have time for Suky to get into a little more detail on Q4 and then ultimately say how that's going to translate into 2021. Now we're not going to give too many specifics on 2021, but he'll give you some color on what we're seeing from Q4 and again, the impact we think that's going to have on 2021. I want to make sure that we leave time for questions as well, okay? So for today, I'm just going to keep it to three main topics. The first is really how we're continuing to navigate COVID-19 and to continue inside of that to ensure that we're executing against our strategy. The second one is really going to talk about the ongoing transformation of the company. We really are making sure that we're moving forward with active portfolio management. And obviously, we're taking the next steps there with the planned spin-off of our Spine and Dental business. So, we'll talk a bit about that, and then third, I want to make sure that we, again, touch upon our long-term growth strategy and how it positions us to drive growth, obviously as a company, but also value for you and value for us. So let's start again, navigating the challenges and executing here in the short term. There's just no doubt that COVID, unfortunately, remains a challenge. Coming out of Q4, we're seeing the pandemic pressure and the surges continue, and frankly worsen across pretty much all of our regions and markets. There's clearly more lockdown measures that we're seeing throughout Europe, the Middle East, and Africa, to a far lesser extent, but still impacting Asia Pacific as well. And certainly, in the Americas, we're all seeing it in the U.S. It may be different by state, but we're clearly seeing increased pressure as a result of surges in the pandemic. So all of that is kind of the backdrop that we saw coming out of Q4. Unfortunately, this pressure in the corresponding decline in elective procedures grew throughout Q4 and actually was worse at the end of December. And at this point, we expect that increase in pressure will continue throughout Q1, at least, and will impact all three of our regions. As a matter of fact, we're actually seeing this probably increase in pressure coming out of Q4. So we would expect Q1 to be a little more challenging than even what we saw in Q4. But even given that backdrop, I'd say that I'm optimistic. It sounds crazy to just say what I said, but say that I'm also optimistic, but it's due to the approved vaccines. We're currently rolling those out around the world. We do believe the vaccines are going to change the COVID-19 dynamic, and we're going to see positive impact as a result of it. As soon as we start to see the surges stop, we see the impact of COVID end. And we're confident that the recovery is going to mean that the normal patient flow is going to start again, and we're going to have the pull-through effect of a sizable patient backlog that's been created over the past number of quarters. We expect that when that recovery occurs, we're going to see a period of what I would define as normal market growth augmented by deferred procedures that will be coming in as well. We're going to be ready for that. We're excited about that. So, as much as it's going to be a little rocky in the short-term and potentially more challenging than what we saw in the fourth quarter, we see a light at the end of the tunnel, and that's a good thing. The big question is when? When is that going to happen? We know the vaccine is going to have an impact. The big question is when. And that's certainly going to be the key variable we're going to be looking at as we try to predict where 2021 is going to look like. So while I would just say, against this backdrop of COVID, what is clear to us is we can't control when the vaccines allow the surges to stop, but what we can control inside of that is how we execute our strategy. I have confidence we're going to continue to move forward. Our core business is strong. Our execution is on point. I would just say momentum around our key commercial launches and programs continues to be strong. Overall, our commercial confidence is better than it has ever been. So let's give a few examples of this. I can say it all day long, but once we talk about it and actually, it reflects in the numbers, who cares? First, let's start with ROSA Knee. Obviously, this is something that everyone's going to be paying attention to. Certainly, I am. We said we're going to hit between 200 to 300 cumulative placements by the end of 2020. Obviously, you know that we are in that range as of Q3. So I'm happy to report that, not only did we achieve that goal, we achieved the high end of that goal. The momentum is strong coming into 2021. Q4 was actually our strongest quarter as of the date of the launch of ROSA Knee. So we had some pretty strong quarters in the past, but Q4 was our best, and we were on the high end of the goal that we set for the year. As I've said before, with some of the new launches that we have coming, specifically associated with the knee, I feel pretty confident that 2021 is going to continue to show that kind of resilience and strength for ROSA Knee. On the Persona Revision side, again, this product continues to be very successful for us. We now show that in Q4, we actually had the strongest quarter-over-quarter growth that we've seen since launch. We did realize our 2020 expectations of $100 million in gross revenue and almost $40 million in net revenue after cannibalization during the year. That’s just the beginning because Persona Revision serves as a really compelling tip of the spear product for our commercial team. Once we get Persona Revision in, we've got an opportunity to hunt for the typical primary knee as well. So we’re very excited about that launch, and it continues to be strong. On the hip side, Avenir Complete continues to be a strong one for us. Even in the pandemic, it continues to beat our expectations. If I just look at Q4 specifically, we grew about 30% over Q3, again, even with the increased pressures of the pandemic in Q4. We’re very excited about what we’re able to do with Avenir Complete, and we expect big things to continue with this product throughout 2021. As you obviously know, we also expect at the end of 2021 to launch the ROSA Hip, which, again, gives us a lot of confidence in the hip category for our business. Finally, for Signature ONE Planner, we demonstrated significant sequential growth with registrations up nearly 25% in Q4 over Q3, and we expect utilization to continue to expand significantly in 2021, aiming for more than 50% of our shoulder procedures using presurgical planning. This aspect is important for various reasons. Remember, presurgical planning creates stickiness with the customer and enhances our ability to get more guides to augment the procedure, which can really raise the average selling price. So again, exciting times with Signature ONE Planner as well. In summary, we continue to execute as a team. The way we're showing up every day, the way we're showing up in the market, frankly, versus our peers, gives me confidence in our business, as does our continued innovation and product launches. We're going to see more this year, some pretty pivotal innovation that we're going to see this year. As I mentioned before, we expect to launch ROSA Partial Knee, ROSA Hip, and also the first smart implant, Persona-IQ, this year. So definitely exciting for us from an innovation standpoint in 2021. Yes, that leads me to my second topic this morning. We continue the transformation of Zimmer Biomet. That's been the goal since I got here. You've heard me talk about our three phases of transformation. The first was the hearts and minds and the execution challenges that we had in the very beginning. That's what we talked about a lot in the beginning. The second phase was really doing a more robust, longer-term strategy, making sure that we brought innovation to market and got our execution straight. We're clearly well into that phase. The third phase is our portfolio transformation. The goal of active portfolio management is to change the complexion of the organization, enabling us to maintain our mid-single-digit growth. I'm proud to say that we're squarely positioned in phase three now as well. As you've seen by our recent announcement, we're going to continue to move this forward. We have the portfolio management strategy and process in place and have built a robust capability to move us forward in this area. Late last year, we executed a number of smaller but still important M&A deals to fill portfolio gaps and to position us in higher growth areas that we believe we have a right to win in. Just this morning, we announced our intent to spin-off our Spine and Dental businesses, ultimately creating two independent, publicly traded companies: both Zimmer Biomet and the new company called NewCo, which we believe are going to be better positioned separately. I truly believe that by separating these businesses, we're going to create two stronger companies. Two companies that are going to better meet customer needs, improve patient lives, and ultimately, very importantly, deliver greater value to you, our shareholders. Let me give you a bit more detail on why we believe this is an opportunity for value creation and why we think it delivers value for both the ZB and NewCo. Firstly, the transaction increases our management focus and resource prioritization. We truly believe for both companies. We think about NewCo, and we believe it's going to thrive as an independent company with prioritized capital allocation to pursue strategies and growth opportunities with investments inside of Spine and Dental that has not been a focus for ZB. That will absolutely be a focus for NewCo. For Zimmer Biomet, the transaction is an important next step in our transition into a more streamlined company with sharper focus and optimized resource allocation toward innovation in those core businesses we are dedicated to, that are profitable for us, where we see attractive markets and a right to win. Secondly, it will drive increased growth and efficiency for both companies. We genuinely believe that. Simply put, we expect that these two companies, with their simplified operating models and reduced complexity and increased focus, will be able to grow revenue, margin, and earnings per share faster than they would if we remain combined as one company. Suky will provide more details about the specific financial impact that we expect in just a few minutes, but just note it’s positive for both organizations, financially speaking, as we separate the companies. Thirdly, it will enhance value creation for our patients, providers, and all key stakeholders, including our team members. This is the next step in ZB's transformation, underscoring our commitment to ensuring that long-term priorities remain aligned with shareholders' best interests. It's going to drive the business forward to meet customer needs and advance our mission to alleviate pain and improve the quality of life of people globally. We believe we can do it better as two separate organizations. Okay. So that's the backdrop of the spin. Today, obviously, is just day one in terms of announcements around this process. You can expect that we're going to continue to provide updates as we move forward, as NewCo takes shape and as we prepare for the transaction close, which we currently expect to be around mid-2022. We're confident in the steps we're taking and our ability to keep executing and in our overall ZB strategy. This brings me to the third and final topic I have for these remarks: our plan to drive long-term growth. Ultimately, as a result of that, we aim to deliver increased value for you. To do that, we remain fully committed and confident in ZB's long-term growth and margin expansion expectations. In fact, the spin-off transaction we will pursue over the next year serves to de-risk, if not accelerate, our path to the 4% to 5% growth rate we've talked about and our 30% operating margin profile by the end of 2023. To get there, we'll need to commit to our priority growth areas, which we discussed in the past but I will remind you of again. The key areas of concentration for us would be knees, hips, and sports, extremities, and trauma (S.E.T.). If we think about knees first and foremost, we need to be able to grow above market rates here. We'll continue to focus on the fastest growth submarkets of knees: robotics, data and informatics, cementless, and revision. We feel we have plenty of innovation and momentum here to grow sustainably above market rates in knee. From a hip perspective, it's a little less ambitious in the beginning. We just said that we need to grow at market in the short-term, with the idea that, over the long-term, particularly after the ROSA Hip is launched, we would grow above the market in hip as well. I can tell you based on our performance so far, with the ROSA Hip application launching later in 2021 and the momentum we have with Avenir Complete, we feel confident we'll be able to achieve that as well. We want to grow at the market, if not the higher end of the market. To do that, we’re going to focus on the most attractive subelements of S.E.T for us: sports, medicine, and extremities. These are key areas of concentration we’ll be investing in internally, looking for external ways to build scale, and building our commercial infrastructure as well. In closing, I want to reiterate that I continue to be more confident about ZB's future than ever. I know I say that a lot recently, but I truly feel the momentum right now. I genuinely believe that we are well positioned for success and that our strategy is absolutely working. Our transformation is well underway, and our proven ability to rise to challenges and face adversity has prepared us well for navigating the current environment and, for that matter, any environment in front of us. I just want to say thanks to the entire ZB team for your focus on our mission, our strategy, and how we show up and execute every day is unmatched. It’s what makes Zimmer Biomet what it is, and it makes me confident that we’re going to continue to deliver. So with that, I'm going to turn the call over to Suky for more financial details of the quarter and also looking forward. Okay? Suky?

Suky Upadhyay, CFO

Thanks, and good morning, everyone. Before jumping into the details, I'd like to summarize the quarter as one where we made significant progress across a number of strategic and operational fronts, all against a backdrop of heightened market pressure. While revenue and profitability were challenged due to the pandemic, we executed extremely well against the things we can control, positioning ourselves to win through eventual market recovery and beyond. Now for this morning's call, I'm going to focus on two topics. First, our Q4 results, including commentary on the COVID impact and what we're seeing so far in Q1; and second, how ZB is positioned for long-term growth, specifically, how we believe the spin-off transaction we announced this morning is expected to impact us post execution. Moving forward, unless otherwise noted, revenue and P&L commentary will be on a constant currency or adjusted basis. Net sales in the fourth quarter were $2.085 billion, a reported decrease of 1.9% and a constant currency decrease of 3.7% versus 2019. However, we did not experience any material day rate differences in our year-over-year comparisons. Our consolidated regional results were in line with expectations despite deepening pandemic pressure on global elective procedures as we exited the year. While the market softened through the quarter, execution remained strong across all regions. Beginning with Asia Pacific, the region grew 2% versus Q4 2019 with growth across all three of our largest markets of Japan, China, and Australia, New Zealand. While COVID pressure on elective procedures increased towards the end of the quarter, the impact was less pronounced than what we are seeing in EMEA and the Americas. We are excited about the uptake we're seeing in ROSA in the region and the solid performance across our knee and hip businesses. As expected, the EMEA region was hardest hit by COVID-19, decreasing 17.5% versus 2019, with all sub-regions in decline. Surges in the virus leading to policy actions and government lockdowns negatively impacted elective procedures across the region. Lastly, the Americas region was about flat, decreasing 0.3% compared to 2019, driven by continued COVID headwinds in Latin America, in tandem with a softening U.S. market. The U.S. was flat despite increased pressure on elective procedures. Performance was buoyed by continued strong demand for recent innovative product introductions, strong execution by our commercial organization, and some favorable impacts related to the order timing and year-end purchases, as some accounts increased their buying patterns to utilize remaining 2020 budgets. Turning to our business performance for Q4. The global knee business declined 4.8%, negatively impacted by the ongoing pressures in EMEA. However, the U.S. knee business continued to grow, increasing 1.8%, and the Asia Pacific knee business returned to growth increasing 2.9%. Overall, execution was strong with continued momentum for Persona and ROSA Knee. Our global hip business decreased 3.4%, again, driven by declines in EMEA. Both U.S. hips and APAC hips continued their growth trends, increasing 1.4% and 1.3%, respectively. Sports, extremity, and trauma sales declined 3.3%. Dental, Spine, and CMFT continued to deliver better execution, increasing 0.8%. Finally, our other category was down 9.3%. Moving to the P&L, we reported GAAP diluted earnings per share of $1.59 and adjusted diluted earnings per share of $2.11. Additional details on our GAAP results can be viewed in our press release issued this morning. On an adjusted basis, with revenue down 3.7%, EPS was down about 10%, driven by a lower operating margin and a higher share count, which more than offset the favorable tax rate in the quarter. Lower adjusted operating margin was driven by lower revenue and an expected year-over-year decline in gross margins. Adjusted gross margin was 71.3%, sequentially better than Q3 but lower than Q4 2019. Versus the prior year, favorable geographic mix was more than offset by lower volumes, ongoing pricing pressure, and the impact from prior period deferred costs. OpEx was down versus the prior year as we implemented several cost containment initiatives in response to the pandemic, in addition to realizing our transformation programs that were ultimately reinvested back into R&D and commercial infrastructure to help drive consistent above-market growth in priority areas. Based on our performance versus market over recent quarters, our reinvestment of efficiency savings is translating into strong returns. The Q4 adjusted tax rate of 15% was better than the previous year due to the geographic mix of income and certain discrete benefits in the quarter related to recent audit settlements. Turning to cash and liquidity for the quarter, free cash flow totaled $329 million, higher than the same period in 2019, driven by better working capital and lower capital expenditures. We used the better-than-expected cash flow to pay down $250 million of debt ahead of schedule, ending the year with cash and cash equivalents of approximately $800 million. Now moving to 2021. Due to ongoing uncertainty related to COVID-19 and its impact on elective procedures, we will not be providing full year financial guidance at this time. We recognize that this is challenging for you as you build your '21 models. However, we will reserve financial guidance until we have more certainty around the outlook of elective procedures relative to COVID surges and related vaccine adoption. We strive to be credible and transparent. To that end, I will provide additional quarterly details and broader full-year shaping as an interim measure. So far through January, we've seen COVID pressure continuing to intensify from the end of December. Based on what we've seen so far in the quarter and in tandem with our latest estimates for procedure cadence, we project that Q1 revenue will be down in the low single-digit to mid-single-digit percentage range versus Q1 2020. We have optimism and confidence that we'll see a positive vaccine impact on elective procedures this year. Once we do, we expect elective procedure volumes to return to pre-pandemic levels, and the sizable patient backlog will serve as a tailwind to underlying market growth. As we turn to the P&L, we expect that the impact of COVID-19 on sales volume will put pressure on adjusted operating margins and earnings leverage until we return to consistent pre-COVID revenue levels and growth rates, as I just discussed. Despite this near-term pressure, our confidence in the market recovery and the longer-term financial profile of the company is driving continued investment into priority business areas. We expect that adjusted gross margin will stabilize in 2021, with quarterly margin levels broadly in line with what we saw in the back half of 2020. There may be some fluctuation from quarter to quarter depending on variables including volumes, pricing, foreign currency, mix, and other drivers that can change results over time. Regarding operating expenses, we expect non-commission spending in Q1 to be modestly lower, with increases in future quarters' OpEx investments as the impact of the pandemic abates. We expect interest expense to increase in the mid-single-digit percentage versus 2020, as the benefit from lower debt balances is more than offset by the renewal of net investment hedge positions. Our tax rate is expected to be modestly higher than the full year 2020 rate and could fluctuate over the year due to the geographic mix of income variability caused by the pandemic. Additionally, we are not projecting any material U.S. corporate tax reform to be enacted in 2021. We project that the full year share count in 2021 will continue to increase modestly versus Q4 2020, and we are not planning for any share buybacks in the year. In terms of capital allocation, we remain committed to maintaining our investment-grade rating and are planning to pay down an additional $500 million of debt in 2021. Let's turn to today's announcement related to our intent to spin the Spine and Dental businesses into an independent publicly traded company. The transaction will be structured as a tax redistribution of newly issued NewCo shares to ZB shareholders. As Bryan mentioned, we believe that this tax-efficient transaction, expected to close in mid-2022, subject to certain conditions, will drive greater focus for each company, with an enhanced prioritization of capital allocation while accelerating growth and providing a platform for greater shareholder value. In terms of the NewCo financial profile, 2019 and 2020 pro forma revenues totaled approximately $1.022 billion and $897 million, respectively, and this is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion. We expect NewCo to have a financial profile generally in line with its peer group and a capital structure supportive of innovation and investment over time. Importantly, the transaction will empower NewCo to pursue a more focused investment and execution strategy. ZB delivered 2019 and 2020 pro forma revenue of $6.96 billion and $6.128 billion, respectively. For post-spin ZB, the transaction is expected to deliver an improved growth profile with accretion to our revenue growth of approximately 50 basis points over the course of our five-year strategic planning period. We also expect to expand our adjusted EBITDA and operating margins on a pro forma basis by approximately 125 basis points. This should give you even greater confidence in our operating margin expansion goals. We remain committed to achieving at least 30% adjusted operating margins by the end of 2023. With this transaction, we have the opportunity to accelerate the timing of that goal. However, we will continue to balance margin acceleration against investment opportunities to speed up durable top-line growth. Ultimately, this transaction provides greater optionality to invest more in the business while delivering a leading margin profile, and that's an incredibly powerful lever. In terms of capital structure, post spin, we will prioritize proceeds towards debt pay down to maintain our investment-grade rating. We're truly excited about this transformational opportunity to increase value for our investors, and we'll continue to provide more details as execution of the spin progresses. To summarize, while the pandemic continued to pressure our growth and earnings profile in the quarter, we made substantial progress on many fronts, including very strong performance versus the market; progress on our efficiency programs that enabled increased investment for growth; free cash flow generation that was ahead of revenue growth; strengthening of our balance sheet through early debt repayment; integrating our strategic and accretive tuck-in M&A deals; and positioning ourselves to execute the spin-off of our Spine and Dental business as a platform for greater value. I'm truly proud of what the ZB team accomplished in the quarter and throughout 2020. With that, I'll turn the call back over to Keri.

Keri Mattox, SVP, Investor Relations and CCO

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

Operator, Operator

Our first question comes from Steven Lichtman with Oppenheimer & Company.

Steven Lichtman, Analyst

Bryan, as you continue in phase three, obviously accelerated with today's announcement, I was wondering if you could provide your latest thoughts on capital allocation. Are you still targeting tuck-ins, larger deals? Any color would be helpful. And I have a follow-up on COVID.

Bryan Hanson, President and CEO

Okay. Yes. I'll just briefly answer your first question, and then I'll pass it over to Suky. But yes, our capital allocation strategy remains the same. We do want to look at tuck-in acquisitions that we think would have low dis-synergy risk where we have a right to win in the space. That's what we're going to continue to do. This does not change that. And Suky, do you want to give maybe a little more color on the overall capital allocation strategy?

Suky Upadhyay, CFO

Yes, sure. We made good progress even in the backdrop of the pandemic in 2020. We're going to continue to make progress in strengthening our balance sheet and creating firepower moving forward. As I said in my earlier remarks, we expect to pay down about $500 million of maturing debt this year. As cash flows improve, as the virus abates throughout 2021, that will increase our firepower opportunity for continued tuck-in M&A. So again, consistent with how we talked about previously, first priority is to maintain investment grade, pay down debt, delever. Our second priority from a capital allocation standpoint is to continue to grow topline and bottom-line through accretive strategic tuck-in M&A, and this now gives us even greater focus through our spin transaction.

Steven Lichtman, Analyst

Great. And then just on COVID, where do you think the size of deferred procedures is? I know we've talked about it in the past; I know it's a tough number to tee. Any comments there would be great as we hopefully see end market conditions improve as the year goes on?

Bryan Hanson, President and CEO

Yes. It's a fantastic question and one that we track quite a bit and try to estimate. I would just say that without being able to pinpoint it precisely, it's in the hundreds of millions of dollars, in our view. That's what gets us pretty excited about the idea that the end of the pandemic is on the horizon. Once that occurs, we've got a substantial backlog that we need to work through. Now the timing of when you work through it depends on capacity and capabilities in different markets, but we feel it's very sizable, and we're excited to start working through it.

Operator, Operator

And we'll take our next question from David Lewis with Morgan Stanley.

David Lewis, Analyst

Just two for me, and I'll start strategically on the spin, Bryan. A lot of times in spins, we create a lot of value through multiple arbitrage between the two assets. We haven't finished our math there. My sense is the multiple spreads won't be that wide here. So the real value creation for Zimmer is to execute your goals or grow faster. When you say 50 bps of growth, does this get you to 4% to 5% growth faster, or are we talking about just getting you to a higher end or higher structural growth rate towards the end of the long-range plan? And then I have a quick follow-up.

Bryan Hanson, President and CEO

Yes, for us, when we think about growth rate, we’re sticking to that 4% to 5% that we've been talking about. At a high level, you should have greater confidence in our ability to reach that goal and potentially be at the higher end. This is a key focus for us. The significant value for us is the ability to focus. Remember, we talked before about getting to 4% to 5%. We had several variables associated with it. One variable — even though we didn’t have the same level of investment in these businesses — was that they had to grow at least at the lower end of the market. Over time, if you aren't investing appropriately in businesses, there's risk in that. We've eliminated that risk with this spin, and we've unlocked value for NewCo because they will be more focused on investing in these businesses.

David Lewis, Analyst

Sure. Sorry, Bryan, can we think about our confidence which suggests that maybe 4% to 5% growth is possible in the next two years? Is it there anything faster?

Suky Upadhyay, CFO

Yes, there’s a lot of focus on the USD number. Can you give us any sense, as it relates to that number, of the impact of those strategic deals or bulk purchase deals on the fourth quarter? How does the ROSA contribution in the fourth quarter on a revenue basis look relative to the third quarter?

Bryan Hanson, President and CEO

Suky, you could talk; you're on mute.

Suky Upadhyay, CFO

Yes, thank you, Bryan. On your question relative to year-end and the U.S. number, it's not uncommon at the end of any quarter, especially year-end, to see higher sales and some potential timing favorability or headwinds. In this quarter, we saw incremental uptake in our U.S. business, not too different from what many others saw across our sector, as many accounts were utilizing their year-end budgets to bring in product. For us, we look at it as a modest benefit for the total company, in the low-single digits. But it was above our normal trend, so we wanted to make sure we called it out. Any impact that might have into 2021 is reflected in those Q1 estimates I've already provided. Overall, still a very strong quarter for the company versus the market, both in knee and hip. Your second question about ROSA, we did see a shift in the fourth quarter, especially with those expanded hospital or remaining budgets, seeing more dollar sales on installments than previously in Q2 and Q3. But year-over-year, Q4 last year to this year, it was not a major material headwind or tailwind on our overall growth numbers.

Keri Mattox, SVP, Investor Relations and CCO

Operator, can we have the next question please?

Operator, Operator

We'll take our next question from Larry Keusch with Raymond James.

Larry Keusch, Analyst

Just wanted to come back to the spin-off here. What I'm curious about is why is now the right time for this spin-off? And along with that, why a spin versus a sale? Then I'll come back to the second question.

Bryan Hanson, President and CEO

The timing fits right into the phases where we look at transforming the business. For us, it was sequenced. We wanted to ensure phase one in our transformation was in great shape, and it is. Phase two needs to be well underway before we take something like this on. Based on our performance over the last few quarters versus our competitors, it’s clear that phase two is working well. Now’s the time for active portfolio management. In times of having less capital, this is one of the most significant ways we can positively impact the portfolio for both companies. We’re excited about this. We believe this is the most significant way we can drive value for our shareholders, our businesses, and team members.

Larry Keusch, Analyst

Very good. Bryan, you seem to be increasingly well-positioned in creating this digital ecosystem in orthopedics. If I think about it, you’ve got surgical planning, robotics, mymobility, and Persona-IQ. Could you talk about how you see the product offering evolving at Zimmer and how the ecosystem can help improve outcomes? What are your thoughts on reimbursement for Persona-IQ from both the implant and the remote monitoring aspect of it?

Bryan Hanson, President and CEO

I won’t get into specifics on reimbursement for Persona-IQ, but we see it as a very critical piece of the puzzle within the ecosystem. We take it very seriously, moving beyond just the normal implant. We’ve made a significant shift in our research and development dollars toward robotics, data informatics to build an ecosystem meaningful to patients and customers alike. A lot of excitement surrounds this shift in our organization and excitement from our customer base as well. The competency we've built in this area over the last few years is, in my opinion, second to none. Where we don't have competency, we've been working with external partners that have significant names like Apple, and you'll hear more about those soon. We feel good about our position today, and we believe these ecosystems will capture data before, during, and after procedures. This will significantly benefit patient outcomes. Ultimately, when we gather enough data and have analytics available, we'll make better decisions before surgeries. That’s the intent behind the ecosystem. We’ve shifted dramatically in R&D in this direction, and we feel we’re ahead of our competitors.

Operator, Operator

Our next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen, Analyst

Two financial questions for me, probably both for Suky. So, Suky, how do the margins of the Spine and Dental businesses compare to the new or current Zimmer? You talked about them being similar to peers, but there are different peers out there. Can you provide a bit more color on the margins of those businesses? I have one follow-up.

Suky Upadhyay, CFO

Sure. The first thing I would say is we’ve provided some color on the pro forma accretion impact on our RemainCo EBITDA and operating margins, which should give you a good initial view of what the NewCo margins could look like. Overall, both those businesses, Spine, Dental, and our bone healing business, have a gross margin profile slightly below the overall company average. I would say bone healing is a little above average. The costs to serve in both those businesses are much higher than the company average, which overall drives the operating margin for both Spine and Dental lower than where ZB HoldCo stands as a standalone. As we think about margin opportunity going forward in these businesses, we believe there is an opportunity to enhance margins. It will come from accelerated top-line growth and potential efficiencies within the existing cost structure.

Larry Biegelsen, Analyst

That's helpful. And then on 2021, you guided Q1 revenue growth. Could you talk about sales growth cadence through the year, just your reaction to consensus, which assumes about 2% growth over 2019? We know you don’t have guidance, but directionally—operating margins could come close to 2019 but may lag a bit. How should we think about full-year 2021?

Suky Upadhyay, CFO

Yes. On revenue, why we're not providing guidance is because there are numerous variables that are really difficult to predict with any level of credibility or confidence. The first being where the trough in the most recent surge that we're seeing lies. January, February, where does it land in Q1? What does the uptake post-vaccine adoption look like? When do we ultimately return to normalized market growth and potential tailwind from deferred procedures? We are examining several scenarios. Some scenarios suggest we could absolutely see a path to growth against 2019. However, those variables are just too uncertain at this time. Stepping back, once we have wide vaccine adoption, which we believe will happen at some point in 2021, we can see strong growth once we return to normalized market metrics augmented by that tailwind. Regarding margins, as revenue continues to improve throughout the year, which we believe will happen once we have good uptake of the vaccine, the margins should follow. There might be a slight lag, consistent with how we've discussed in the past, as we catch up on certain investments, but they will expand. We see strong margin expansion over time as we normalize revenue.

Operator, Operator

Our next question comes from Amit Hazan with Goldman Sachs.

Amit Hazan, Analyst

I wanted to start on the U.S. market for knees and hips. There’s a lot of noise, as you mentioned. From an underlying basis, I'm curious about your thoughts on market share in the fourth quarter for both knees and hips in the U.S. from a volume perspective?

Bryan Hanson, President and CEO

Yes. I try not to look at any specific quarter and draw too much of a conclusion. That said, I'd much rather have what we just saw in Q4, where we're significantly above-market growth—this feels good. I look at the trend rather than a single quarter. If I think back, let’s say three quarters, it gives you a clean view of performance. In the U.S., which is the cleanest way to look at this due to noise in the mix, we’re somewhere in the neighborhood of 500 to 600 basis points over the last three quarters above market, above our key competitors. Knees are a little better than hips. We’re seeing outperformance in both—knees, probably 600 to 700 basis points and hips around 500 to 600 basis points. That’s how I look at it. Not based on a single quarter but a combination of quarters and overall trend. I expect us to continue that trend and I discussed the pivotal innovation planned for this year in hips and knees, combined with the current momentum we have.

Amit Hazan, Analyst

I wanted a follow-up to focus on R&D. As we look at the absolute number this year, haven't spent this little on R&D in several years—15% down for the year. That sort of separates you from other companies in medtech. Can you explain where you've made cuts, how you're prioritizing that budget, and how it impacts your future product cadence?

Bryan Hanson, President and CEO

When it comes to running a business, you should always assess how R&D dollars are spent and adjust accordingly. That’s why you're not seeing a significant increase. It’s about determining what projects are worth our investment. We've eliminated projects that didn’t yield expected returns. This is part of our cleanup. Looking ahead, you should expect to see an increase in our R&D budget, but that increase will be conducted cautiously and strategically.

Operator, Operator

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

Bob Hopkins, Analyst

I'll state my two questions upfront in the interest of time. The first is just to revisit something people have been asking about. I was wondering if we could get a better sense of the impact of bulk orders on Q4, specifically on U.S. hips and U.S. knees. Again, the reason I ask is that hip and knee growth in the U.S. is so materially above peers, and the gap was wide this quarter. Any sense of quantification on U.S. hips and knees from those bulk orders would be great? The second question is on the spin announcement. I don’t think it’s unfair to say that Spine and Dental are relatively subscale businesses with few synergies between them. Why not sell them to folks with more scale? It seems like that would be cleaner.

Bryan Hanson, President and CEO

Yes. First, we feel great about our quarter’s performance. Looking at this year in COVID, there was significant budget spending, which we often see, especially in the fourth quarter. It’s not unusual to see purchases occur. While that’s not uncommon, it’s particularly notable in Q4. If I was to quantify it, I would estimate a 200 to 300 basis point benefit from these bulk orders. This quarter’s performance relative to our competitors is strong, so we wanted to call it out. I would be surprised if others didn't experience similar impacts. In terms of the spin, when you spin a business, a reasonable amount of scale is important for it to be a viable publicly traded company. We believe the $1 billion-plus mark is significant. While there isn’t an obvious strategic reason for the businesses being together from a commercial perspective, there is valuable knowledge and materials used for implants across Dental and Spine. That synergy isn’t as visible, but it's present and valuable.

Operator, Operator

Our next question comes from Joanne Wuensch with Citibank.

Joanne Wuensch, Analyst

As you think about spinning this out in the next 18 months, what do you need to prepare? Will it accelerate tuck-in acquisitions or any spending plans so that the new company heads into its stand-up phase in a strong position?

Bryan Hanson, President and CEO

It’s business as usual for most of the organizations. We'll continue to focus on where we need to. We have good separation between businesses, so it won’t be highly disruptive. There’s a lot to prepare, but it won’t be disruptive to the organizations. We’re increasing investment not significantly, but to ensure that the new company gets a tailwind. If there are small opportunities to spend capital over the next year to strengthen that portfolio, we’ll consider them. We want to set NewCo up for success. We're close to finding a CEO for it who will bring immediate leadership.

Suky Upadhyay, CFO

On that front, Joanna, going forward, we’ll keep you updated on how we examine elements that may impact that going forward as we learn more.

Keri Mattox, SVP, Investor Relations and CCO

I think that takes us to 9:30. We’d like to thank everyone for joining us on this morning’s call. The IR team will be around to field any further questions. I’m sure we’ll be talking to all of you. Thanks again, and have a great day.

Operator, Operator

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