Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2020 earnings conference call. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded today, May 11, 2020. 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 the star followed by the one on your push button phone. I would now like to turn the conference over to Carrie Maddox, Senior Vice President, Investor Relations, and Chief Communications Officer. Please go ahead.

Thank you, operator, and good morning, everyone. I hope you are all well and safe. Welcome to Zinner Biomet's first quarter 2020 earnings conference call. Joining me virtually today are Brian Hanson, our president and CEO, and CFO Suki Ipagyai. Before we get started, I'd like to remind you that we recently made slight changes to our revenue reporting format, as discussed on our fourth quarter call. These changes are designed to further align with the company's recent reorganization and are used in our first quarter results. Reconciliations are available on our website. Additionally, our comments during this call will include forward-looking statements. Actual results may vary 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 the earnings release found on our website at ZimmerBiomet.com. With that, I'll now turn the call over to Brian. Brian?

Thanks, Carrie. And I think everybody knows that we're in different locations right now, so I'll just apologize up front for any of the awkward handoffs that we have between each other for this earnings call and any bad cell phone connection and or dogs barking in the background. I'm sure everybody's used to that by now. I just also want to say before I get started that I certainly hope that you and your families are healthy and safe. and trying to get used to this unusual environment that we're working in and living in right now. I can tell you that I've been home more consecutive days with my family than I have, I'm pretty sure, in the last 20 years. And I know for sure that they cannot wait for this to be over because they want me to get out of the house. So again, hopefully you're managing through this as best as possible. It certainly gives us an opportunity to learn things about ourselves that we did not know before and our families. Kevin Thornal, JehanZeb Noor, I'll spend time walking through it so he will spend time giving his view of it. We'll let you know how it's impacting ZB, what we can give you relative to what we think will happen in the future from here. But the fact is there's going to be a lot of information moving back and forth, particularly in the Q&A, I'm sure. And I just want to make sure that you walk away from the call with at least these five key points because at the end of the day, I truly do believe these will be the most significant and meaningful points that we have throughout the call. And the first one is really that Zimmer Biomet, myself included, have been very focused on ensuring that our number one priority through all of this has been the safety of our team members. And I'll talk more about this in a minute, but I'm very happy with the momentum that we've picked up here very early to make sure that our team members are safe and the amount of energy that we've put behind this. The second thing is that we have a high level of confidence that we have adequate liquidity and financial flexibility to manage through this storm. I would tell you that I'm very proud of the work that Sookie and his team did to make sure that we backstopped the organization aggressively right out of the gate, and we do have a high level of confidence in our liquidity and financial flexibility as a result. Number three, we also have a very high level of confidence in the recovery. Thank you for joining us today. The fourth thing is that we will continue as an organization to invest in our key strategic areas in research and development and commercial projects. This will not deter us from continuing to double down in those key areas, and I'll talk more about that in a minute. It doesn't mean that we won't save money because we have aggressively, but we will be committed to spending money in these key strategic areas. And the fifth thing is that we are, just given the work we've done over the last two years to reshape the company, We are better prepared right now to deal with this challenge than we would have if it was two years ago. As a matter of fact, we feel confident that given that reshaping of the company in the position we're in, we can not only come through COVID-19, we will come through in a better position as a result of the work that we have done. So really those are the five things. Safety is our number one priority. We feel confident in the liquidity and financial flexibility of the company. We have confidence in the recovery. We will continue to invest in key strategic areas and we are very confident we will come out the other end of COVID-19 in a better position than when we started. Okay, so let's start with safety and I'll just give you an overview of why I feel so confident here. Interestingly enough, last year as a part of a broader risk mitigation kind of a planning process that we were going through, Thank you for joining us today. and that's been, from my perspective, a significant game changer for us. I also think it's our ongoing transformation of ZB that has really been key in this whole process. We already had the means to tackle this because we had a stronger team. We've been able to put a stronger team together over the reshaping over the last two years. We have a very active and engaged business right now and we have a very supportive culture. All those things are paramount to being able to get through a challenge like this. and we moved to put new policies in place even before the COVID-19 reached pandemic status. Very early on in the process, we began to shift immediately to work from home policies, no travel policies. We did not allow visitors in our distribution sites or our manufacturing facilities. We didn't want visitors entering the sites where our essential workers were. That just doesn't make any sense, right? We want to keep them as isolated as possible and we did that right out of the gate. We had no large meetings and we had broader social distancing practices in those sites that we were continuing to work. And so again, I really do think that we moved aggressively and took a very proactive stance because we had the roadmap already laid out through that planning process. I also want to just thank all of our team members and especially our manufacturing, distribution, and commercial teams who have gone just truly above and beyond during this challenging time. You know, we still have team members Thank you for joining us today. The work that we do in a safe and effective manner given the guidelines that we have right now for COVID-19. They've also managed temporary facility shutdowns to basically proactively modulate production where we need. And all the while, they've done all of this without disrupting our overall supply chain. So needless to say, I'm really proud of how the ZB team has taken safety so seriously out of the gate and has worked to achieve goals to keep not just our team members safe but also our customers safe. Our partners and our patients safe as well. Okay, moving on to number two and our confidence around the adequate liquidity for the business and financial flexibility. I would tell you just right out of the gate as we saw the challenges associated, disruption associated with COVID-19, we took very aggressive measures to contain cost and also obviously to support the liquidity of the company. One of the first things that we focused on was making sure that we refinanced our $1.5 billion of debt that came due on April 1st of this year. And then Sookie and team went to renegotiating our $1.5 billion revolver. And then shortly after that, secured an additional $1 billion credit facility as an additional backstop. And so again, just kudos to Sookie and his team to make sure they got right out ahead of this and made sure that we had that financial flexibility and liquidity strength in the organization. Additionally, we've continued to execute on our previously announced restructuring program. As you may remember, this program was focused on streamlining our structure and just driving efficiency throughout the organization with the ultimate intent to allow for margin expansion over time, which we committed to, while also allowing for investment for growth. Really, the only way that we could have both those things happen in tandem was to be able to put this restructuring plan in place. Having the restructuring plan and the working group in place to move it forward actually helped us to quickly pivot and aggressively cut costs as a result of the COVID-19 challenges using the very work streams and really the mindset that we had in place for this program. We've also modulated the schedules and the output across our manufacturing facilities, keeping an eye on cash consumption with inventory while also positioning the business for business continuity. We need to make sure that we have the inventory that is needed today and also we have the inventory for the recovery when it comes. And finally, we implemented temporary base pay reductions for all of our salary team members of about 20% and we did 25% cuts for executive teams and then up to 100% reductions to the annual retainer of our board of directors. And as you probably have heard, I've taken personally 100% reduction in my pay during this period. Okay, moving on to number three, our confidence in the recovery. What I tell you just first and foremost, the momentum that we had coming out of 2019 absolutely carried into the early part of the first quarter, obviously pre-COVID-19. But we were performing at or above our expectations pretty much across all businesses and regions. Now, you know, there's no doubt that the pandemic has absolutely changed the landscape for everyone. But for ZB specifically, it has significantly impacted our businesses. Probably more than most, just given our dependence on elective procedures. You know, we have 80 plus percent of our global revenue that comes from elective procedures. And that's the bad news. The good news is, as I said, our business was strong before the pandemic. And the good news is we do believe that these patients will, in fact, come back into the funnel. Now, the fact is you can certainly delay these procedures. There's no question about that. but the critical and really often life-changing nature of a knee procedure, a hip procedure, back surgery or other bone and joint procedures make us confident that these patients will ultimately return to the healthcare system. And the fact is we've seen that. It's not an exact proxy but we have seen when natural disasters occur or other market disruptions occur and patients get deferred, they do in fact come back, the large majority of those do come back into the funnel. This is obviously significantly different than what we've seen in the past, just given the volume of deferred procedures. There are other variables that make it harder to determine when they're going to come back. The fact is, even OR capacity will have to be something that we consider in the short term with bringing these patients back, just given the number of patients. We're going to have to think about the access to PPE and or testing kits, and we're also going to have to think about the psychological viewpoint of a patient on when they're ready to come back. But I can tell you right now, as we've done our own analysis and we've done an extensive outreach to our customers, the one consistency is that everyone does believe the majority of these patients will come back. The question just becomes over when that's going to happen. Based on our modeling right now and really our Q1 performance and our April performance, what we would say, if we're trying to put some color to this, is that clearly Q2 is going to be the most challenging quarter. and April as a month will be the most difficult month. We truly do believe after April we're going to see sequential improvement on a month-to-month basis and on a quarterly basis until we get back to normal. But we definitely see April as the most challenging month and then sequential improvement from there. Okay, moving on to number four. As I said, we're going to continue to invest in a dedicated and disciplined way in key R&D and commercial projects. Thank you for joining us. and other high value commercial programs. These things will not stop during this time. In terms of supporting innovative commercial initiatives, we've launched recently the MyMobility LE, which is a change to MyMobility to make it more limited edition, lower cost version of MyMobility, but really built for rapid deployment to help customers and patients respond to the needs of the COVID environment right now. MyMobility LE and our exclusive partnership with Apple can be used by surgeons and care teams to actively but importantly virtually support and guide patients preparing for the procedure and recovering from the procedure at home. This is an innovative and really alternative solution to continue delivering pre- and post-op care and reduce unnecessary in-office and hospital visits. It was perfect for this particular time. and providing all the while through this mechanism, MyMobilityLE, providing real-time data on patients' progress so that surgeons know how that patient is doing. It offers education. It offers video-guided exercises for rehab programs to be able to do that at home, to not have to have that personal contact with rehabilitation. And it provides direct video, picture, and text-based messaging right to the patient. Again, allowing that patient and surgeon connection to be there but also allowing that to happen with the new social distancing policies that are in place. Another great commercial initiative that was put into place was to make sure that when AAOS conference was canceled in March that we immediately got to putting together a virtual reality AAOS experience where healthcare partners can actually come in to the booth, again, virtually, but through that virtual experience, they can learn about the products that we would have shown at AAOS. They can talk directly with our commercial teams through that virtual experience, and they can even sign up for the trainings that would have been there or other trainings that we're doing online as well. And I can tell you that out of the gate, this has been very well received by our surgeon partners. We've had over 7,500 site visits in the first two weeks alone. So again, we're going to continue to stay focused on investing in those areas that are important and strategic to the organization. And we're going to make sure that we continue to bring innovations that matter right now during the pandemic. And finally, moving on to the fifth takeaway, you know, we truly do believe that the work we've done over the past two years to reposition the company for success absolutely better positions us to be able to not just get through COVID-19, But to be able to emerge on the other side in a better position than when we started it. This is clearly a challenging time that will test, I think it's obvious, even the best teams in the most innovative companies. And what I know for sure is that over the past two years, we have made real progress in transforming our culture, evolving our business strategy, improving our financial performance, and we have vastly improved our manufacturing supply and inventory management. Our base business is strong, and we have a talented and dedicated global team that positions us very well for this challenge. We believe that this progress, and truthfully our proactive stance and our financial stability, also give us key competitive advantages right now during this challenging time that could open up new opportunities not just to drive innovation, but also grow our business and our share position in the near term. And with that, I'm going to turn the call over to Sookie. to get into more financial details.