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Text: I hope you are all well and safe.
Joining me virtually today are Bryan Hanson, our President and CEO; and CFO, Suky Upadhyay.
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.
So I'm just going to stick to really three 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 toward 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.
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.
Now you've heard me talk about the three 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 three 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 two 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.
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.
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 under way, and I'm excited about the value that we can drive for our shareholders on a go-forward basis.
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.
He's going to give you more financial details on the quarter, and obviously, most importantly, our expectations looking forward.
As Bryan mentioned, our underlying fundamentals remain strong as does our confidence in our outlook.
And third, how ZB is positioned for long-term growth in 2022 and beyond.
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 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 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.
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, earnings per share 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 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 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.
[Operator Instructions] With that, operator, may we have the first question please?

user
compname reports q1 earnings per share $0.94.
q1 adjusted earnings per share $1.71.
q1 earnings per share $0.94.
q1 sales rose 3.6 percent to $1.847 billion.
sees fy revenue up 14 to 17 percent.

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