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Good morning, ladies and gentlemen and welcome to the Zimmer Biomet Third Quarter 2021 earnings conference call. If anyone needs assistance at any time during the conference, please press [Operator Instructions], as a reminder this conference is being recorded today, November 4th, 2021. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. If you have a question, please press [Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Senior Vice President. Didn't Investor Relations Chief Operating Officer, please go ahead.
Thank you, operator. And good morning, everyone. I hope you are all well and safe. Welcome to Zimmer Biomet's Third Quarter 2021 Earnings Conference Call. Joining me today are Brian Hanson, our Chairman, President, and CEO, and EVP and CFO, Suky Upadhyay. Before we get started, I would 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 Q3 earnings release, which can be found on our website, zimmerbiomet.com. With that, I will now turn the call over to Bryan. Bryan.
All right. Great. Thanks, Keri, and thanks everyone for joining us this morning. Let me just start with the things that I'm happy about when it comes to Q3. First of all, I'm happy on our progress with our new product introductions, they're going quite well. Our execution on recent M&A is going as planned, if not better. Our commercial focus in our discipline is as good as I've seen it and I'm very happy with our growth versus our key competitors in both large joints and inset, particularly when it comes to the U.S. The team, in my view, continues to drive results in the areas under our control. And as a result, I continue to be proud of them for doing so. Alternatively, Q3 was also a quarter with unexpected negative environmental impacts, that are for the most part, out of our control.
Q3 brought greater COVID pressure than I think anybody expected: 1. more customer staffing shortages, certainly than we expected; and 2. an earlier China VBP impact than we anticipated. And this resulted in Q3 revenues that were lower than we had projected. And unfortunately, we expect these pressure points to continue into Q4. And as a result, we need to update our 2021 financial guidance. And really, the view we have with the fourth quarter. As we look forward, until we see a fundamental shift in these trends, we're just going to assume that these pressure points aren't going away; but will be with us into Q4 and possibly into early 2022. Let's just start by taking a look at COVID and staffing concerns kind of together because I believe they're somewhat related.
As I think most of us know by now, that there was a significant Delta variant surge in Q3 that drove more COVID pressure than, again, I think anybody expected. We previously thought COVID pressure would lessen through the back half of the year; but instead, while procedures did seasonally step-up in September, it wasn't by as much as we expected. Again, due to the enhanced COVID and staffing pressures. And as a result, September was our least attractive month relative to growth and until we see a real shift COVID and staffing related recovery, we're projecting that the pressure we saw in September will continue through the end of the year. That's a view of COVID. We think about China BPP, the process in China is moving forward. And although it's still fluid, we are getting more clarity on what it will mean this year and in 2022. And our assumption going into the process was that DBP would pose no more than a 1% risk in terms of impact, 2 ZBS, overall revenue.
And although for a number of reasons, the overall impact will likely be greater than what we originally anticipated. We do believe that sizing this at around 1% of revenue impact is still accurate. That is the right way to size it. That said, the timing of the revenue impact has definitely shifted forward. And we now expect that much of this impact will be felt in 2021. And there are a few factors that are driving the shift into 2021: 1. is around current year inventory reductions by distributors; and 2. is around just ongoing negotiations we have with our distributor partners that are beginning to include price concessions on existing inventory; and 3. unfortunately, what we're now seeing patients differ their surgeries until after the lower BVP pricing is in effect.
Apparently, even though China achieves near universal public medical coverage, there are out-of-pocket expenses that increase or decrease, based on implant pricing. And this is substantial enough for patients to defer their procedures. And so, clearly in summary, although we feel very good about our execution in the areas we can control these macro environmental issues continue to mute our overall performance. And these are fluid. These issues for sure they are fluid, but we've done our best to incorporate our current view of their impact in our revised guidance. And I think that's a pretty good segue to move to Suky section where he is going to focus on Q3 financial performance. And I think very importantly, our forward-looking guidance. Okay, Suky.
Thanks, Bryan. And good morning, everyone. I'm going to briefly discuss our Q3 results and updates that we've made to our full-year 2021 financial guidance. Moving forward, unless otherwise noted, my statements will be about Q3 '21 and how it compares to the same period in 2020. And my revenue and P&L commentary will be on a constant currency or adjusted basis. We've also provided comparisons to the third quarter of 2019, as we feel that performance to pre -pandemic results as an important comparator. Net sales in the third quarter were $1.924 billion, a reported decrease of 0.3% and a decrease of 0.8% on a constant currency basis. When compared to 2019, net sales increased 0.4%. On a consolidated basis, as Bryan mentioned, we were growing through August, but then declined in September, as we saw Delta variant cases and staffing shortage increases. In short, there was a seasonal step-up in procedural volumes for the quarter, but the recovery has not taken hold as fast as we thought it would, especially in our hip and knee businesses.
The America's declined 3.2% or flat versus 2019. The U.S. declined 4.4% or up 0.1% versus 2019. Lower U.S. performance in September was the key driver to lower consolidated results. EMEA grew 5.9% or up 0.3% versus 2019. This is the first time the region posted positive growth since the start of the pandemic. In the quarter, we saw an improving trend across a number of markets -- however, the UK, France, Spain, and most emerging markets continue to be challenged, despite higher vaccination rates. Lastly, Asia-Pacific grew 0.5% or up 1.5% versus 2019. While we did see growth versus 2019, it decelerated versus what we observed in the first half of the year. This was driven in part by pricing adjustments [Indiscernible] channel inventory as we continue to negotiate with our distributor partners ahead of DBP implementation in tandem with continuing COVID pressure throughout the region, especially in Japan, and Australia, and New Zealand.
Turning to business performance in the third quarter, the Global Knee business declined 0.7% or down 1% versus 2019. In the U.S., Knee declined 5.3% or down 0.7% versus '19. Our global Hip business declined 6.6% or down 2.4% versus 2019. And the U.S. Hips declined 11.3% or down 2.4% versus '19. The sports extremity and trauma category increased 4.2% or 7.7% versus 19 driven by continuing commercial specialization, new product introductions, and the contribution from strategic acquisitions we added to this portfolio in 2020. Our dental and spine category declined 6.1% were down 2% versus 2019, The dental business posted good growth in the quarter and continued to benefit from strong execution and market recovery, while the spine business declined when compared to 2020 and 2019, due to increase in COVID pressure throughout the quarter.
Finally, our Other category grew 15.4% or down 1.1% versus 2019. Inside this category, we saw ongoing demand for ROSA Knee, as well as increased revenues from the launch of our ROSA Partial Knee and Hip applications. Moving to the P&L. For the quarter, we reported GAAP diluted earnings per share of $0.69 lower than our GAAP diluted earnings per share of a $1.16 in the third quarter of 2020. This decrease was driven primarily by cost of goods and higher spending related to litigation, our spin-off and R&D. In addition, our share count was up versus the prior year. On an adjusted basis, diluted earnings per share of a $1.81 was flat compared to the prior year, even though sales were down. We implemented targeted reductions in SG&A, which in tandem with a slightly lower tax rate helped offset higher investments in R&D and a higher share count.
Adjusted gross margin of 70.3 was just below the prior year and the results were slightly below our expectations due to lower volumes in tandem with less favorable product and geographic mix. Our adjusted operating expenses of $852 million were in line with the prior year and stepped down sequentially versus the second quarter. In spite of that, we continue to ramp up investment in R&D and commercial infrastructure across priority growth areas like [Indiscernible], Robotics, and Data and Informatics. And we are offsetting those increases with improvements in efficiency across other areas of SG&A. Our adjusted operating margin for the quarter was 26.1%, largely in line with the prior year and prior quarter. The adjusted tax rate of 15.8% in the quarter was in line with our expectations.
Turning to cash and liquidity, we had operating cash flows of $433 million, and free cash flow totaled $307 million with an ending cash and cash equivalents balance of just over $900 million. We continue to make good progress on deleveraging the balance sheet and pay down another $300 million of debt totaling $500 million of debt paydown for 2021 to date. Moving to our financial guidance. We've updated our full-year 2021 outlook based on 2 factors: 1. COVID and customer staffing pressure is continuing at levels higher than previously expected. And while we expect procedure volumes to seasonally improve into the fourth quarter, we are taking a cautious approach and currently assuming that the more acute pressure we saw in September will continue through the fourth quarter; and 2. as Bryan mentioned, we now know more about the dynamics leading up to the implementation of the China BVP and project that it will have a bigger impact on the fourth quarter than originally assumed.
The impact across inventory reductions, price write-downs on existing inventory, and a new factor which is patients deferring their procedures have increased the impact of VBP and the timing of that impact. As a result, our current projections for Q4 VBP impact is about 300 basis points of headwind to our consolidated results. But the situation remains fluid and we will continue to update you as the implementation of VBP unfolds. For the full year, we now expect reported revenue growth to be 11.3% to 12.5% versus 2020 with an FX impact of about a 140 basis points of tailwind for the year. While we are taking steps to further reduce spending in the fourth quarter as a response to our lower revenue outlook, we're reducing our adjusted operating margin projections to be 26% to 26.5% for the full-year. Our updated full-year adjusted diluted earnings per share guidance is now in the range of $7.32 to $7.47. Our adjusted tax rate projection is unchanged at 16% to 16.5%. And finally, our free cash flow estimates remain in the range of $900 million to $1.1 billion.
This updated full-year 2021 guidance range implies that Q4 constant currency revenue growth will be between -2.3% and +1.8% versus Q4 2020. And we project Q4 adjusted earnings per share to be between $1.90 to $2.05. We kept a wider range of potential Q4 outcomes in our guidance to account for the uncertainty around COVID surges, customer [Indiscernible] pressure, and VBP implementation. As a note, we do believe that COVID pressure, including the related staffing shortages will continue to mute pandemic recovery as we move into 2022. Additionally, as we mentioned earlier, VBP is expected to reduce 2022 consolidated revenues by about 100 basis points. That impact will be felt in our large joint segments and will [Indiscernible] impact gross margins as we move forward. To respond to this, we are accelerating transformation and efficiency efforts to help offset these headwinds. In summary, the macro environment presents challenges, but our underlying business fundamentals remain strong as we continue to execute successfully against what we can control. With that, I will turn the call back over to Bryan.
All right. Great. Thanks Suky. And to close out our prepared remarks, I'm going to talk about what ZB can control -- our strategy and our execution -- and that's why I have such confidence in our long-term growth projections. The ZB team remains intensely focused on creating value and, most Importantly, delivering on our mission. Our underlying business is strong and overall, we're pleased with our performance in Large Joints and S.E.T. versus market. This is a significant shift for ZB versus where we were just a few years ago and an important driver of our ongoing growth. Our innovation is in full stride, and that's a big part of this. We're going to enter 2022 with a new product pipeline of more than 20 anticipated product launches across the next two years. And of course, this is incremental to a number of new products we recently launched, including, but certainly not limited to ROSA Partial Knee, ROSA Hip, and Persona IQ, which is the first smart knee implant in the world. We're very excited about this launch.
And we continue to see strong ROSA placements, increased robotic penetration into our accounts. I think most importantly, just more robotic procedures as a percentage of our overall procedure base. And ROSA is even more attractive because it's a key component of our ZBEdge suite of truly integrated solutions. And that -- it really does help to tie pre, intra, and post-op data together with the goal of changing patient care. And finally, we are accelerating our corporate transformation. We're making great progress on the planned spin-off of our spine and dental business. We just recently appointed a new CFO and other key leadership team members for [Indiscernible]. And we continue to be strategic and selective in our active portfolio management process, and [Indiscernible] key assets over the past year that have helped us to better compete, and more importantly to win across robotics and data, dental, S.E.T., [Indiscernible], and the broader ASC market. We're reinvesting in our business for sure, but we're also advancing efficiency programs designed to streamline and improve how we operate, and very importantly, drive savings.
All of this forward momentum plus ZB 's differentiated portfolio, the expected value creation of our plans [Indiscernible] transaction, and our ability to execute really does give us continued confidence in our path to grow revenue in the mid-single digits and to deliver a 30% operating margin by the end of 2023. And I can tell you, this is clearly a time of significant challenge in market pressures. Particularly given the fact that we have such a dependence on elective procedures; there's no doubt about that, but this is also a time of significant opportunity for Zimmer Biomet. And we look forward to delivering for our team members, delivering for our shareholders and most importantly, the customers and patients that we serve. And with that I'm going to turn it back over to Keri to begin the Q&A session. Keri.
Thanks, Bryan. Before we start the Q&A session, just a reminder to please limit yourself 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?
Thank you. Ladies and gentlemen, at this time, we will now begin the question and answer session. One moment please for the first question. Our first question comes from Ryan Zimmerman with BTIG.
Great. Thank you for taking the questions. Suky, I really appreciate the guidance for the fourth quarter. [Indiscernible] maybe $200 million or so ahead of where you're landing for the fourth quarter and the top-line $0.40 or so below consensus in terms of EPS line. And so, just I'd love to understand specifically where you see the greatest Delta, between your previous expectations from a product segment and recovery standpoint. It sounds like VBP is maybe 3/4 of that $200 million. But outside of that, where you see an impact that we should be thinking about from a guidance perspective.
Yeah, so thanks for the question, Ryan. Absolutely, our Q4 implied is lower than where we were when we last provided guidance in August and updated in September. And if you remember that guidance is predicated on COVID not worsening and actually starting to see things recover and improve. And as we came into the third quarter, the early part of third quarter, we actually saw some positive momentum with some modest growth in the first two months. But then as we came into September, we saw -- while we saw elective procedures increase in September, as they generally do seasonally, that pressure from COVID and from staffing shortages was greater than expected, such that the growth wasn't there; and we just didn't get to 2019 levels. So you really have to think about recalibrating the third quarter as then you move into the rest of the year because those much lower than we thought.
And then our original guidance suggested that Q4 would be at about market growth or slightly better. That clearly is not what we saw in September and so what we're doing is we're taking that September trend, which was down, and we're carrying that forward into the fourth quarter. So that, I would say, is the largest component of our takedown for our rest of year guidance and for Q4 specifically. In addition to that, there's been some incremental additional pressure due to VBP -- we had always assumed that there would be some inventory dynamics that we accounted for within our forward-looking guidance range.
But what we're seeing now is slightly bigger impact primarily driven by this notion of we're seeing in-market, and from our local teams are telling us that patients are beginning to defer their procedures until the implementation so they can secure a lower out-of-pocket. So I would really pull back and say that the biggest component is due to that headwind due to COVID. And instead of the fourth quarter growing, as we originally thought, that pressure that we're seeing in September we're assuming that continues for the rest of the year and that really is your biggest deviation.
Okay. I appreciate that color and then just from a margin perspective, stick with you Suky. Longer-term margins -- you obviously talked about 30% adjusted operating margins. The street's assuming about 26.7% in '22, just given the dynamics today and the expectations, how does that sit with you today from that perspective, where consensus is at right now. What is your view of a normalized operating margin and call it a steady-state, normalized operating environment, because you do have some operating expenses and fluctuation as a result of some of these dynamics.
Yes. Great, great question. So I'll try and unpack that. First of all, we see next year as a bridge year to that 30% operating margin. But I -- you really have to step back and there are a lot of moving parts into 2022. And I'll just try and break that down one-by-one and help give you some additional color. First of all, like I said about 3Q going into 4Q, as you think about '21 on to '22 you got to recalibrate the starting point, right? We're going to be on a lower revenue base because the pressure that we're projecting to see in the fourth quarter. And then from that, we would expect this COVID pressure to continue at least until the early part of '22, right? So revenue will be pressured. We believe in at least the early part of '22; that's one overarching assumption. And then margin largely follows revenue, especially for our Company from a leverage standpoint and the ability to get profit off of our fixed cost base.
But from there, as we move into operating margin, there's a number of moving parts. I would say first inside of operating margin, you have gross margin. The way I've always talked about gross margin sort of in the mid-term is the take the second half of 2020 and kind of think about gross margins being stable from there. It could be slightly up or down in any given quarter, but largely stable to the back half of 20. We still think that that's the right starting point, but what we have to watch out for now is the impact of BVP, and what that does as a headwind. And also, what we're seeing like many of our peers in our sector is some inflationary pressure on cost of goods and input, costs and labor costs. So we're just got to watch those headwinds. Look, our teams are working really hard to help offset those.
But that's still a moving target for us and something that we got to continue to put a little bit more rigor on, and obviously we will give more detail when we give guidance at the end of the 4th quarter. Then within operating margin as well, the 2nd key component is SG&A. I'm really proud of what the team has done already this year to respond to lower revenues and lower margins, because all the factors I talked about. And quite frankly, we're accelerating our transformation journey and we're doing that in a number of ways. 1. We're looking at regional profitability and we're looking at restructuring a number of markets that are just below where our expectations would be. We're looking at other areas of our cost base and accelerating our Global Business Services strategy.
And there are other structural type initiatives that we're taking inside of SG&A to help some of those revenue and gross margin headwinds that I talked about. So those are some of the moving parts. I'm not going to get into exactly what '22 looks like yet. I think we got to let a lot more play out in the rest of this year, especially around COVID before we can give you a more detailed view of '22. But hopefully, you've gotten some good color there to help you start on '22.
Thank you.
Thanks, Ryan. Our next question comes from Drew Ranieri with Morgan Stanley.
Hi, Bryan and Suky. Thanks for taking the question. I guess just to go off of the previous question, but more so on your long-range plan. Suky, you're mentioning that you're pulling forward some initiatives, but just how are you thinking about your long-range growth right now at margin targets. Maybe help us better understand if any of the composition has really changed in reaching that 30% operating margin. It's about a 400 basis points of expansion, it looks like. But any more that you can provide there?
So maybe what I'll do is I'll start off with the components that we've defined as what we need to see for growth rates. And then you can take it from there on the up margin piece. First of all, when we think about this 4% to 5% growth that we're trying to accomplish, we've been pretty clear on what we need to see to make that happen. First and foremost, we need to see above-market growth in our biggest franchise, which is Knee. And we've been able to prove that over the past six quarters or so that we were able to get a trend in that direction.
Second, is we need to be at market growth in Hip trending to above-market growth as we get ROSA traction, which is now in the market. New to the market, but now in the market. And then we needed to be in that mid-single digit growth rate for [Indiscernible], if not to the upper end of that. And so, those are the areas that we're really focusing on we believe are the building blocks as we get into 2023 to get that 4% to 5% revenue growth. We still believe that that is absolutely possible for this organization since that's kind of the topline view, which should be a big component obviously, of driving that operating margin that we're projecting in 2023 as well. So Suky, I'll pass it to you for that.
Yeah, I think that's one of the key components, and we're consistent on how we think about that operating margin expansion. That's largely leverage-driven, right? We talked about gross margins being stable. I've talked about some headwinds are we're going to look to offset over time and then SG&A becoming a lot more efficient, and the ability to reinvest that back against that higher growth, which gives us that leverage to 30% operating margin. In addition, through active portfolio management, we now also have the spin, which is going to create a tailwind for us from an operating margin standpoint as well, so feel good about that. We still think we have all the right building blocks in place to get to that 30% operating margin run rate as we exit 2023.
All of this obviously assumes that when we're in 2023, that COVID is in the rearview mirror and no longer a headwind, obviously.
Great. Thank you. And just as a follow-up, just on Persona IQ. Bryan, you just launched the product, but would love to get your initial feedback on what you're hearing in the field and maybe if you could set expectations of how a launch should progress over the next 12 months. I mean, would you be disappointed if it wasn't like 5% of your total Knee implants, but just any flavor would be helpful. Thank you.
So I'm kind of -- I'm looking at my COO right now across the table and I just gave him a new target of 5% to get IQ and [Indiscernible] implants. He is a little worried about that. But what I would tell you though, all tongue and cheek aside, we're very excited about IQ; this is the first of its kind. It's good to bring technology to the market that literally is new-to-market. And that's exactly what we have. And although we're excited about IQ by itself, it's a really important variable in a much broader equation which we call ZBEdge. Because now what we're focused on in ZBEdge is to be able to collect data before, during and after the procedure and is a really important reason for that, because as that data lake increases, what we're going to be able to do is to predict what kind of care we should provide for the patient.
Here's what I know, every time I'm out talking to a surgeon, I don't care how good they are, or what their capability is. They always have a patient, patients that look perfect. They did all the right cuts. They have -- the image looks fantastic. The tissue balancing was perfect, but that patient is not happy. And they don't know why. I don't know why. But as we collect this data and again, the data later gets larger, we're going to be able to predict why and be able to change that outcome. That's the intent here. And why that's really important -- is because when we can do that, you got patients sitting on the sideline right now that would enter the funnel, but are afraid to because they don't believe they're going to get the satisfaction they're looking for. If we can change that paradigm, we can get more patients into the funnel. That's good for everybody in this base. So IQ is very attractive to us, but it's a part of a bigger equation. And I could tell you from IQ perspective, we're in a very limited launch. We want to learn as much as we can as fast as we can. We do have some supply constraints here.
And that will put a little bit of a damper on how we're going to roll this out. Microchips are tough to come by. It's not impacting us in ROSA because you're talking in hundreds. When you move to IQ, you're talking thousands. And so it is going to get in the way, in the short-term that we're again -- we're trying to work through it, but that is going to put a damper on our launch. The demand is great, there's a lot of noise around this and people are very interested, so that's a good sign. We've got to work through the supply constraints and move this forward, but overall, we're very happy.
Thanks for taking the questions..
Thanks and Loren, can we move to the next question in queue, please?
Our next question comes from Amit Hazan with Goldman Sachs.
Thanks and good morning. I just want to maybe first to get a clarification on the China situation. I'd love a little bit more color on what you're thinking now in terms of your share within the China market going forward, but also whether you're contemplating spine and trauma in the new impact. And then perhaps most importantly, why would next year be a 100-basis-point impact given that you're already seeing pretty significant impact this year.
I'll start with the impact. No matter what happens in this base year, we're still predicting a 1% shift to whatever revenue assumptions you've had in 2022. So if you look at growth rate from '21 to '22, that's going to change because you can have more in your base. But the actual impact to consolidate revenues is still 1% in '22. So that's why we're looking at it. And let's say 1% sounds like I know exactly, Just know there's still some variability here. Could be a little more, could be a little less, but I think the right way to model it is 1%. Remembering again that even though it's 1% of consolidated revenue, it's all in large joints. Okay. If I think about our share position in China, we look great -- I just give you a factoid. Just as an example, if you look at our Asia-Pacific 's, not specifically China, but gives you some context here. If you look at our Asia-Pacific Knee business -- the revenue that we do on an annual basis, i's bigger than all 3 of our major competitors' OUS Knee business.
That gives you some sense for our market share inside of Asia-Pacific and inside of China. So this is a pretty important market for us. Here's what's great though when we think about share position going forward; even though it's not as an attractive market now because of the margin profile of the business in large joints, we won every one of the categories. There are eight categories. Number 1, it may be an unattractive space but you still got to win. And the first step in winning is you got to be in play. And we're in play in every one of the categories. We're the only multinational Company to do that. Number 2 now is going to be negotiating with distributors. So we get the best distributors to be able to get the most share at the best margin. And that's exactly what we're focused on right now.
So that gives you a sense for how we're feeling about it. And when I think about trauma spine, it's too early. What I'd say on trauma, there's a provincial tender that just went through; its 12 provinces tender that we think [Indiscernible] at least hearing rumors could end up being a national tender, kind of transition to a national tender, but we don't have any sense for when that would occur. But anyway, that's our sense for China, our share position and [Indiscernible].
And then I want to focus on [Indiscernible] share with my second question. Just [Indiscernible] -- obviously important for investors. And I think that one of the things that investors have a harder time understanding now is just the fluctuations in share quarter-to-quarter, especially in the U.S. market. And so the question is really whether anything is changing in the way you sell the product. Is there more end-of-quarter selling? What is it that you're seeing or doing differently now that makes it more difficult for all of us to assess whether you're gaining share on a -- kind of consistent basis? I know, like you said, there's been more quarters of share gains than not in the last 6. But still investors are, I think, uncertain as to where that's going because of some of that fluctuations. So what can you do to help us understand what's happening on a quarterly basis that's changed in this COVID era?
Well, what I would say is there's nothing that I would point out for us. I mean, we're conducting business the way we always have. My sense is probably everybody else's too. I think what's happening is just there's a lot of variability in the market because of COVID. You think about it, I mean, COVID is surging at different times in different states in the U.S. different cities in the U.S.. It all kind of depends on your mix in those states. And that's just looking at the U.S. is even broader than that and more volatile outside the U.S. So I think the challenge in seeing these individual quarters have these odd deltas between competitors is not necessarily because competitors are doing anything different. It's because the market dynamics are very different. That's why I continuously look at trends even in these turbulent times, the trend typically tell us a story because it neutralizing some of that variation. But I don't think it's anything that anybody is doing differently. I just think that the market is creating a much more challenging environment to look at consistency from Company to Company.
Thank you.
Thanks, Amit. Lauren, (ph) can we go to the next question in the queue?
Our next question comes from Joanne Wuensch with Citi.
Good morning and thank you for taking the questions. Just 2 in particular. The first one has to do with the month of October -- it sounds like you're taking September and applying that, but we have a whole other month of data in between -- is there anything you can share with us on how that is looking or how it looked?
So what I'm -- without giving specifics, we haven't seen anything in October that we'd indicate that this logic that we're using is incorrect.
Okay. And then the other category which [Indiscernible] ROSA, could you share a little bit of color on how that launch is going in terms of utilization, halo effect to other products, competitive accounts, anything that flushes that out a bit would be appreciated. Thank you.
Yeah. You know, essentially because in these turbulent and challenging times, you always look for things that you're excited about. And our innovation pipeline is one that I'm very excited about, and at the center of that is ROSA. There's no question that we continue to deliver on our expectations there, if not above. And I will just go back to the design characteristics that we put into place. We've really took our time to make sure that we learned from who went first and we designed a robotic system that surgeons really wanted and that's translating into demand and that continues. The fact is, surgeons don't want to change the flow of their procedure. And we have created a robotic system that keeps it as close as possible to non-robotic procedure.
We make [Indiscernible] time neutral to be able to use robotics at the same amount of time it would take to do a non-robotic procedure, including all the accuracy though involved in it. And we made sure that we didn't change the standard of care relative imaging. We don't have to CT scan, people don't use it otherwise and they can use the typical imaging that they would use for a procedure. All those things combined with the best implant that we have in Persona is what's driving traction right now. And we are absolutely seeing strong demand, which is continuing for us. We're seeing deeper penetration as a result of that into our accounts; in competitive accounts as well.
And what's really important about that is with all these placements now in place, remember that pull-through that you're asking about the commitment of volume is being muted by COVID. So in the COVID, the [Indiscernible] has gone, those units that we have in place will actually increase their overall input and not just in the disposable price point that you have with robotic procedures, but also the pull-through of competitive business. So we're very excited about where we are with ROSA. We know that we've got the right design in place, and we're seeing great traction.
Thank you.
Sure.
Thanks, Joanne.
Our next question comes from Kyle Rose with Canaccord.
Great. Thank you for taking the questions. Two for me as well. First on -- you talked a little bit about accelerating some of the transformation programs. Just wondering if you can maybe break that down a little bit more granularly. What specifically have you accelerated, and then maybe what costs do you expect to unlock over the course of the next 15 or 12-15 months?
So thanks for the question. We're still in the planning phase of that and we'll have a lot more detail around that on our fourth quarter call as we come into 2022. But the key areas for us are really around, as I talked about earlier, accelerating our view of market profitability and regional profitability -- how we ultimately go to market, what's our infrastructure in a lot of our smaller markets and just making sure that investments are in fact aligned to growth and opportunity. So I would say that's one. The second area is we looked across our organization. We looked at how we're structured relative to benchmark and where we had outliers, where we had higher costs; we're looking to take actions to make ourselves more efficient, either through just restructuring and de -layering and/or accelerating moving resources to our highly capable Global Business Services that we have in lower-cost countries. So, those are probably the 2 key areas.
I think the 3rd structural area we're looking at is continued consolidation of our ERP systems, which is going to give us a better global process orientation, which could yield savings over time. And then of course we're always actively looking at site rationalization to help with gross margin. And I'm really excited about where the team is moving with pricing improvements going forward. Again, we're going to provide more detail as those become more refined, both on the contribution but also the relative cost to those when we give our fourth quarter earnings.
Great. Thank you and then maybe Bryan on maybe some of the bigger picture longer-term initiatives you talked about. I mean, you talked a lot of ZBEdge in my mobility and we've got Persona IQ and I understand that IQ is going to be a slower roll out, but maybe just help us understand where you are as far as commercialized in some of these initiatives that you talked about the long-term perspective. I'm just trying to really put some goalposts around expectations for investors as far as, when we'll actually start to see the materially impact your business and be a driver or a competitive differentiator.
Yeah. I think you're already seeing some of this and the nice thing is we're just in the forefront of that innovation pipeline. Here's what's interesting. I think one of the most important things about that 5 quarters out of the last 6 where we've been above market in Knee, isn't necessarily the amount that we've been above-market or just even those 6 quarters. It's looking at the trend break that you're seeing from ZB -- and what do I mean by that -- if you go beyond those 6 quarters and you look at the 20+ quarters that ZB has been a Company, we did not have one quarter as a Company above-market in Knees -- not 1 quarter in more than 20 quarters. So that as a significant reflection of the transformation taking hold. And it's a reflection of the transformation taking hold when we're at the -- just the beginning of the innovation cycle. We're only about a mid-single-digit vitality index right now.
Our strap plan would indicate that's going to triple over the strap plan period. That's a dramatic tailwind that we expect to see in our innovation pipeline which is a big part of why we believe this is sustainable. If you look at specifically in Knees and the execution is definitely better than we've seen before. Our compensation structure is now focused on growth rather than just maintaining business and our operating mechanisms are as good as I've ever seen. There's clearly no more supply issues anymore. It's all around innovation now. And innovation still drives from Persona Revision that is still getting conversions on the revision side. But most importantly now, it gives you a beachhead with customers that are using our Revision System in somebody else's total Knee -- guaranteed we're going to be pursuing that total Knee business, and that's bigger than the revision business.
You still have ROSA Knee that's just getting started. We've got a lot of headroom in ROSA Knee and that continues to pace very well. ROSA Partial just launched. Remember, at Partial, we have a very large share position. So even if we didn't get competitive business which we certainly are going to try, we have a mixed benefit associated with that in those partial procedures. Persona IQ just starting as we talked about before, and ZBEdge is exciting and then in 2022, we've got a new form factor for our Persona Cementless, which is going to remove all stops for us to be able to pursue a conversion to Cementless Knee. So all those things just give you a lot of shots on goal to continue to drive strong performance in Knee.
Great. Thank you.
Sure.
Thanks Kyle. Loren can we go to the next question in queue, please?
Our next question comes from Sam Broido Kodatsky with Truist.
Hi, thanks for taking the questions and I'll just ask both of mine. So when we think about that September pressure continuing into the fourth quarter with the two components being COVID staff shortages. I think the general thinking is that COVID is getting a bit better here. So should we take that to mean staff shortages are becoming a bigger portion of the problem into the fourth quarter. And then as a follow-up to that, a little bit harder to predict when those staff pressures ease up. So how long do you think about those impacting volumes and what are you looking forward to indicate that the pressure from staff shortages is easy. Thank you.
So I guess either one of you and I can answer this. But what I will tell you is that it's probably a bit of a conservative approach to look at September and then assume that that's going to continue through. A lot of indicators would say it's going to get better. The combination of COVID pressure and staffing. But, here's what we've learned. Every time I try to use an external view of when COVID is going to get better, we seem to be wrong. And so I'm not going to go with that. I'm going to go with what we're actually seeing in the marketplace and what we're seeing in the marketplace is consistency. Not always the same mix of pressures between COVID and staffing, but consistency in the overall pressure in October that we saw in September. And so I've learned my lesson. I'm not going to try to predict this anymore until I actually see proof in the marketplace that we're seeing firsthand that we're bending that curve. We would expect this to continue into 2020. Your guess is as good as -- others have tried to predict when this is going to stop; your guess is as good as ours. We truly do believe this will float into 2020. We don't know how far but we do believe it's going to float into 2022.
And Sam, this is Suky. Just to build on what Bryan said, I think the labor shortage is the toughest component to really try and read because it's unprecedented. And it's not just at the nurse level. It's really throughout the hospital setting. What we do know through survey data -- this is not sophistically relevant, so please don't run too far with it but over half of the physicians that have reported in the third quarter have stated that they've suffered from staff shortages. And when those particular physicians have that challenge, they're doing about 10% fewer procedures than they normally would do. So that's very real. And we're also seeing that that impact is greater in the hospital setting than it is in the ASC setting. And as you know, we've got a more prominent share in the hospital setting, so I think it more disproportionately impacts us. Because of those, we're taking the approach until we see substantial, durable improvement, we're going to continue to take a view that this is lingering with us. But again, hopefully it's a conservative view, as Bryan said. Hopefully it lifts sooner than we all expect and we're better off, but that's how we're thinking about it.
And Sam, did you have another follow-up? I think that was 2 questions in 1, but anything that close out there?
Yeah. Sorry. That wasn't my tail. Thank you
Great Lauren, can we have the next question on queue then?
Our next question comes from Mike Matson with Needham & Company.
Yes, thanks for taking my question. I guess I wanted to start with the M&A. I thought you would have done more by now. Are multiples too high, are you waiting to get through all this COVID uncertainty? Do you need to de -lever the Balance Sheet more? Or is there some other reason that you haven't gotten more active in terms of acquisition?
Yes. So clearly, we would like to do more too, but I got to be honest with you if you think about the COVID pressure from an EBITDA standpoint. And you look at the debt leverage ratio that's created for us, the fact that we've done as much as we have with the limited firepower we do have, is pretty impressive. I'd actually give the team high complements to be able to select targets, get creative in the way that we pay for those targets, even in an environment with high multiples and bringing technologies that are absolutely fundamental to success inside of S.E.T for instance. Our A&E acquisition helps us in our Thoracic space, which is a big growth area for us that we're focused on. The relying technology that we brought in, filled that significant gaps we had in sports and that gives you the ability then to leverage that full portfolio.
And even Omni Suite, which is not overly exciting when you talk about blooms and lights, but it gives us bigger presence in the ASC market. All those things happened in concert with a relationship with Canary for its smart implants -- long-term smart implants beyond just Knee during the time that we just didn't have a lot of firepower. We absolutely expect over the next 5 years to increase that firepower, particularly as COVID gets behind us, and we will then flex more muscle in this area. But, I would say the opposite -- I would say that we did more than I think would have been expected, given the firepower we had.
Okay, that's helpful, and then just looking at -- in the recon category, it looks like your Hips were down substantially more than your Knees in the quarter and I thought that Hips were somewhat less elective and maybe would have been less affected by the COVID wave than Knee is. Is that really just a reflection of the new products and ROSA Knee side or is there something else going on there?
Yes. So that is a switch because what we have seen in the past and I think everybody has seen that the Knee procedures were lagging behind Hip mainly because you've got 2 factors. Number 1, it really hurts when you got a hip procedure issue. And there is some trauma related to it as well. But I think what you're finding is that that initial wave was where backlog was being consumed at a faster pace with Hip. And some of that has caught up is my view on it. And then the Knee procedures now are -- patients have really been waiting. You got patients that have been out there for a year that are finally coming in to get a procedure. And so I truly do believe these patients have waited as long as they could from a pain threshold standpoint. But now we're entering the market where a lot of those that had significant pain with Hip or trauma were already in the funnel. That's the only thing I can predict, it's the only thing I can see why it's happening. We'll see what happens next quarter, but that's what I think is happening right now.
Okay. Got it. Thank you.
Sure.
Thanks, Mike. Lauren can we go to the next question in queue, please.
Our next question comes from Robbie Marcus with JPMorgan.
Great. Thanks for taking the question. Suky, on the 100 basis points impact from China next year, is it fair to assume that since its price pretty much just dropped through the bottom line as well?
That's the right way to think about it, Robbie.
Got it. So second question, does that hinder your ability to get to your operating margin target at all in 2023? Since I imagine that probably wasn't included. And then just two quick clarifications. If you could let us know what the M&A and selling day benefit was in the quarter. Appreciate it. Thanks.
Sure. So on the operating margin point, it certainly does add another headwind to get to that 30%. But when we put that 30% aspiration out, there were two big components that we had not contemplated. One was the BPS you just mentioned, but the other was the active portfolio management and the spin of the spine and dental business, which will be margin accretive. We think that those two largely offset one another. So again, that's another reason why we're even in the backdrop of this headwind still confident in our ability to deliver that exit run rate at the end of 2023. Relative to day rate, there is no meaningful headwind, tailwind relative to the day rate. And that's going to be true for the full year as well. And then on the M&A contribution, I would put it in the low single-digits. So if you think about M&A, if you looked at S.E.T. by itself, which is about 20% of our overall revenue, it's in the neighborhood of about 300 bps of benefit. So probably less than a percent for the overall consolidated results. But in S.E.T., it helps by about 300 basis points.
Great, thanks a lot.
Sure.
Thanks, Robbie. Lauren, we have time for a few more questions. Can we go to the next one in the queue?
Our next question comes from Matt Taylor with UBS.
Thanks for taking my question, guys. Bryan, I just wanted to ask you about what you're seeing in the marketplace and predicting COVID -- I know it's very challenging -- what about the last year would help, I guess inform you what we could see for 2022, in terms of how things could start to come back. We have had [Indiscernible] been closed and after the [Indiscernible] in the early part of the year, we saw a strong 2Q in the fields more muted this time in terms of the comeback. Do you think the delta is [Indiscernible] or is there something else going on in terms of what we've seen so far?
It's just so hard to predict, every time I think I've got it nailed because I'm looking at trends from the past. I'm wrong, But what I would tell you is I do believe it has been so far and we more recently putting a combination of those two. The Delta surges are absolutely real, and that is impacting capacity in the hospitals less so on the ASC, but definitely the hospital. And staffing surges are very real again, as Suky referenced more in the hospital than the ASC. But both of those things are contributing what we typically look at though, and we still. We still look at starts when is the patient enter the funnel? And usually takes from the time they do to the time to get a procedure 4 to 5 weeks. That seems to be extending now because you've got more people that are entering the funnel, I believe.
But here's the thing, we're just not seeing those stats change north versus more than what seasonality would allow. So seasonality is occurring, procedures are increasing. August to September was better, procedurally speaking. We expect the fourth quarter to be better than the third quarter, but that's being muted by these pressures associated with COVID and staffing. And so that's the reason why we're changing the guidance. It's not that procedures aren't increasing, they are. They're just not increasing nearly at the clip we would expect because of these pressures. I wish I could [Indiscernible]. I don't have a better answer, unfortunately.
Sure. There's a lot of [Indiscernible] certainly, but I guess I wanted your view on how much of the staffing is related to COVID. In other words, conceptually, if in 2022 COVID really wanes, do you think there's going to be ongoing staffing issues in the second half of the year or post normalization?
It's challenging to say because there are multiple components associated with it. Some -- what people are saying is that, is this mandate for vaccinations that is driving some of this change? So if that were to be changed, if say vaccination requirements change because COVID starts to leave the pressure point, maybe. But I don't know, I think that although they may have started because of the COVID challenges, just because of COVID vaccination pressures, whatever it may be -- I don't know that they're going to work in sync. That's just my guess because I have no idea. But my guess is they're somewhat disconnected now, and you may see lingering staffing beyond COVID.
Thanks Bryan.
Sure.
Thanks Matt. Lauren, can we got to the next question in the queue, please?
Our next question comes from Imron Zafar with Deutsche Bank.
Hi, good morning. Thanks for taking my question. I was wondering if you could comment on how you're thinking about blended implant ASPS in the U.S. over the next couple of years in large joints. Obviously, a lot of moving parts with new products, higher mix of Robotics, maybe ASPS versus inpatient, case mix, things like that. Just [Indiscernible] -- how you're thinking about implant ASPS over the next couple of years. Thanks.
So I'd answer that in 2 ways. First and foremost, we're going to focus on is pricing discipline in the organization. And so if I just take everything else out of the equation, we look to be able to mute some of the pricing impact that we've been experiencing as an organization for a long time. So that up by itself could obviously help from an ASP standpoint just by doing better job on the pricing front, that's one area. Separate from that, a big focus for us is mix benefit. The fact is when we think about share of wallet in a procedure, a lot of the technologies we're launching actually do have an effect of taking up the amount of money you make per procedure. And so if I think about Robotics, you've got a premium.
Every time somebody uses a Robotic procedure in that procedure. We think about Cementless, you get a premium every time somebody uses it. We think about Mymobility. Every time somebody uses it, you get a premium in that procedure. So we would actually expect as we get deeper penetration in these key areas of technology -- Persona IQ is another one. As we get deeper technology penetration, we would expect the ASP that we capture inside of an existing procedure to go up and actually be a tailwind for market growth.
Okay, great, thanks. And then secondly, can you just talk about your latest views on the opportunity internationally for ROSA, what your latest thoughts are and timing in key international markets? Thanks.
Yeah. I'd say we've been very happy actually, with our ability to get traction with robotics very early on outside the U.S. A lot of times, we see a nice split between our U.S. business and our OUS business. I truly do believe in certain markets, specifically Asia-Pacific. We have an opportunity to surpass anybody in the robotics space. If we continue with the trends that we're seeing, we could be the number one share player in robotics pretty quickly in Asia-Pacific, and not in the too far distance in EMEA. It could take a little longer in the U.S., but those are the way we look at it. We don't want to just get presence in the U.S., we want to make sure that we're getting traction in OUS as well. And so far, we've seen that.
Thank you very much.
Sure.
Thanks Imron. [Indiscernible], I think we have time for maybe one last question.
Our final question comes from Anthony Petrone with Jefferies.
Anthony, do we have you on the line?
Great. Thanks for taking my question. Maybe just to double back on staffing. It seems like there's a number of headwinds as it relates to staffing, whether it be just staff burnout, turnover, just in terms of personnel from healthcare services to industry. And we also heard early retirements could be a big trend in 4Q. So when you think about sort of the stack of headwinds out there, how deep into 2022 do you think some of these trends could last and what do you think that could mean in terms of throughput for ortho recon specifically? And then the quick follow-up would be just on as we navigate the next few quarters, just a recap on pricing for both hips and knees. Thanks again.
Yes. So again, I think it's really challenging to try to project when staffing concerns are going to end. I think what's interesting about it is just the fact that there are staffing concerns is driving a whole new sub-market for nurses and other folks because you can leave the hospital you're in and you can become a traveling nurse and you can get paid a lot more than you're getting paid inside of the hospital you're at. And so if you're willing to take that flexibility, you're willing to travel, you can get paid a lot more. So it's creating a whole new sub market for nurses, which is exacerbating the problem. I just can't predict it. I'd love to be able to for you, but I'm definitely assuming it's going to happen -- continue to happen in 2022. I just -- I can't say with any accuracy when it would stop. And could you just repeat the second question you had?
Apologies just as we sort of navigate this period here with some of the Delta headwinds in staffing and in particular staffing with some inflationary pressure in hospitals, just how you think that will translate to pricing, as we head into next year.
I got you. That's a good question because if you think about it, as people are having to pay for traveling nurses, they're paying a lot more, too, and they're trying to retain their talent in this market, which also cost s more. But this is nothing new. I mean, hospitals get pressured all the time in their margin. And they pressure us all the time from a pricing standpoint. So no matter what the pressure they're feeling, there's going to be really no change associated with how much pressure they put on us for pricing. And so I don't predict any real change in our pricing dynamics as a result of this. As we've said before, I actually would predict over the five-year strap plan to reduce the pricing impact for a number of reasons. Number 1, just better pricing discipline as an organization and number 2, better contracting skills as we contract, particularly with ROSA in place, in multi-category contracting, we can stabilize our pricing. There's clearly going to be headwinds and there's clearly going to be people looking for better pricing. There' s no question about that. I don't believe this particular variable will change the dynamic there though.
That does conclude today's question-and-answer session. I would like to turn the conference back to Keri Mattox for any additional or closing remarks.
Thanks, Lauren, and thanks everyone for your questions today. Of course, we'll be speaking to many of you today, tomorrow and throughout the next couple of weeks. If you have questions and need more information, please don't hesitate to reach out to the IR team anytime. Thanks so much for joining.
Thank you again for participating in today's conference call. You may now disconnect.