Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zenro Biomet third 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, November 6, 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, Chief Communications Officer. Please go ahead.

Thank you, Operator, and good morning, everyone. I hope you are all well and safe. Welcome to the Reviomet's third quarter 2020 earnings conference call. Joining me virtually today are Brian Hanson, our President and CEO, and CFO Suki Ipadiai. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within the earnings release found on our website at ZimmerBiomet.com. With that, I'll now turn the call over to Brian. Brian?

All right, great, Carrie. Thank you. And here we are now with our third virtual earnings call. It's hard to believe that so much time has already passed as we live inside the pandemic environments. But either way, we're here, and I certainly hope that you're listening somewhere safe and socially distanced. We're clearly taking precautions here, and we continue to follow our safety protocols, and that's the reason why Carrie, Sookie, and I are in different locations again for this call. As we've seen in the past, hopefully we, again, do not have any tech mishaps, but just know if we do, for whatever reason, we'll push past and make sure that we move forward. So 2020 has clearly been unlike any other year in ZB's nearly 100 year history, as I'm sure it is for every company that's out there right now. And as you know, I think we're all probably too aware. It's not over yet. It's definitely not over yet. And that said, you know, I have to say that I look at how we've managed and just really navigated COVID-19 this year and specifically in the third quarter. And I'd say that I'm proud of the team, you know, and I'm confident. about ZB's future, probably more confident now than I ever have been about ZB's future, I truly believe we are well positioned for success and our strategy is absolutely working. As you all know, we've been acutely focused on transforming ZB since I joined the company. That's almost three years ago now. We faced challenges before and while nothing could have ever prepared us fully for COVID-19, I do believe our ability to rise to those earlier challenges They truly put us in a stronger position to effectively manage the pandemic situation, the environment that we're in right now. I actually think it's been a catalyst for ZB. The team's focus on our mission, our strategy, and how we show up and execute every day is the strongest it's been since I joined the company. And the way I look at it is the things we can control, we are absolutely galvanized around and executing flawlessly against. So it feels good right now. As much as it's noisy around us with COVID, The execution inside the organization is as strong as I've seen it. That said, the unpredictability of COVID means there are several variables, and unfortunately they're pretty big variables, that are outside of our control. And as a result, the pandemic continues to be challenging. It continues to be fluid. This requires us to quickly adjust, to change, given the changing environment, so ultimately we can effectively meet the needs of our customers and, very importantly, our patients at all times. And that's exactly what we've been focused on. Along those lines, there are really three key areas that I'm going to talk about today that I think are important for you to take away, be aware of, and also see the progress that we're making inside of each. The first one should be pretty obvious. It's our view of the COVID-19 recovery path from here where we see it going. And I think importantly inside of that, you know, the areas of concentration or execution that we're going to have inside of the COVID recovery path. The second is an update on our strategy to drive long-term growth. and through that, value for ZB and for you. And the third is an update on the ongoing transformation of our business, which I truly do believe we're making great progress on. And again, I'll spend time on each of these, and then I'll pass it to Sookie. He's going to give you more detail in color about Q3 on the financials and then how we're thinking about and framing Q4 in our minds. So first, let's talk about the recovery and execution we saw in the third quarter. Ultimately, the recovery of the elective procedures Going from Q2 to Q3 is encouraging. I would imagine it is encouraging for everybody at this point, looking at Q2 to Q3. But it's still difficult to predict from here what's going to happen. The fact is we've talked about how the key variables impacting procedure volumes needed to remain constant. Obviously, they can improve, but they needed to at least stay where they were for the recovery to continue and to see sequential improvement from Q2 to Q3. You know, as you probably remember that we said that these variables included both positive and negative influences on procedure volume. On the positive side, which would be pretty obvious, we have the new patient volume and then the backlog of patients that had deferred treatment during the pandemic for whatever reason. On the negative side, we have the effects from the economic downturn, but most importantly, surges in the virus that can drive negative policy decisions and or increased patient fear. Those would be the negative influencers, obviously. If I look at the combination of those in terms of recovering Q3, the variables played out in a way that allowed continued improvement over Q2. So overall, the full quarter was stronger than expected, and we actually returned to growth over 2019 faster than we thought we would. And this was driven, again, by these COVID recovery dynamics. But importantly, our team's strong focus on, and probably even more importantly, execution against our strategy. We've been very focused on moving the strategy forward, regardless of the noise around us. We saw a steeper rate of recovery in July, followed by a more modest recovery or even a flattening of the curve toward the end of the quarter. This was driven by the shift in the recovery variables that I just outlined a minute ago. surges of the virus, especially in Europe, Middle East, and Africa, and in the U.S. And this is negatively impacting both patient fear and in certain areas, policy decisions. And as a result, we exited the quarter with September growth flat versus 2019. There's not much we can do to stem the virus surges, but we have launched a unique and a very large scale directed patient campaign focused on patient fear. So we can't influence the virus, but we can try to influence patient fear. And the focus of the campaign is to educate and support patients about their options to get procedures during COVID, and really even beyond, focusing on the fear that patients typically have to come and get a procedure. And what we're finding early on in this campaign is that the feedback has been very positive, and in particular, associated with the concept of MyMobility and its ability to allow for virtual care capabilities during this challenging time. All right, so those are obviously some of the factors surrounding COVID and its recovery dynamics. But I also want to make sure that we spend time talking about the things that we have more control over, you know, the execution of our strategy and the performance of our business inside the impact of the pandemic. And even in the midst of this turbulence, we continue to deliver against our goals. This focus and execution against our strategy is the reason we have performed well over the last two quarters versus the overall market. Specifically, if you look at Q3, our performance in U.S. knees and hips is a great example of this underlying momentum. We grew 3% in the quarter in U.S. knees. We also saw 10% growth in U.S. hips. I got to tell you, these numbers are strong even without the backdrop of COVID. So the question is going to be, you know, what's driving the performance? I'm sure I'm going to get that right away, so I'm just going to answer it now. Our core business is strong really for four major reasons in the way that we view it. The first is pretty obvious. We have truly shifted from this triaging of execution challenges to launching meaningful innovation. And I'm going to spend a little bit more time on this one in particular, but that's a big one. Second, our operating mechanism and really the resulting operational discipline has never been stronger. And I'd argue probably as good as I've ever seen it anywhere. And third, our compensation programs have shifted towards disproportionately rewarding growth, not just paying you for keeping the business you have, but truly disproportionately paying and rewarding for growth. And then finally, and I'm not sure if this is causing it or because of it, but our commercial confidence is higher than I've ever seen in my tenure here at ZB. The commercial confidence, the swagger, whatever you want to call it, is higher than I've ever seen. So again, those are really the combination of things that has helped create the momentum inside the pandemic. But let's talk specifically about innovation, that as a component of this equation. broadly speaking over the last year we've taken a very dismal low single digit vitality index to a a low double digit number and that's still not as good as we'd like it to be but that's a pretty big jump and with our current product pipeline i can promise you that's only going to continue to move in the right direction and as you know obviously vitality index speaks to the percent of sales driven by new product launches so in other words those products that have been launched within the last three years, the revenue associated with them versus your overall revenue. So again, a real nice jump in the right direction in Vitality Index and more coming. But to get a little more specific, I think go to some of the key launches that you're interested in, and I'll start with our knee franchise. Our ROSA execution continues, and I'm very proud to report that we have already passed the 200 ROSA knee placement mark in the worldwide placement strategy that we have. And importantly, Our utilization continues to increase and the placement pipeline remains very strong. So again, remember we're way under penetrated in robotics for our business and across all of orthopedics. So the tailwind associated with Rosa, in our opinion, is going to be around for a while and it feels very good right now. On the persona revision side of things, we keep gaining traction in the marketplace with this product launch. Q3 results were even stronger than last quarter, which had been our best quarter to date post the launch. And revision remains on track, as I said before, to hit $100 million of gross revenue this year. And that's 40% of that will be new growth. In other words, $40 million of net of cannibalization revenue this year from percentile revision by itself. This is really exciting, not only because it shows strong momentum for percentile revision, but because it also opens the door to more growth. Revision system is truly a tip of the spear product. When we convert a competitive surgeon to our revision system, we absolutely have the right to hunt for their primary knee business, and that's exactly what we're going to do. And if you know about this marketplace, you would also know that the primary business is usually much larger than the revision business. So you can get the order of magnitude of opportunity we have to go after now. So exciting stuff there on the knee side. Shifting to hips, Avenir Complete is really still outperforming our expectations for 2020. That's even with the pandemic impact. These are the expectations that we had for 2020 before we knew about the pandemic, just to give you some perspective on that, on how well it's doing. And this launch has really helped provide a great implant to leverage the high-growth, direct anterior approach sub-market in hips. That's one of the most attractive sub-markets in hips. And this implant is the perfect opportunity for us to take advantage of that attractive market. And then one more product I'll highlight in the quarter is in our upper extremities business, our Signature One Planner. I talked about this last quarter as well. we had another 50-plus percent increase in surgeon registrations in Q3, and we already have one in four cases using presurgical planning for shoulder replacement. This increased penetration of the system is important, in my mind, in two very important ways. First of all, there's a real potential for mixed benefit, or maybe said another way, share of wallet gain in each procedure that you use presurgical planning in. And it also provides more stickiness with the surgeons. On the surgeon's stickiness, it's probably obvious. When a surgeon's using our implant and they're also using the presurgical planning, it's harder for them to want to move away from that environment because they're used to it. On the share of wallet benefit, this may not be as obvious, but it's a pretty significant opportunity. It comes because you get a higher utilization in augments and guides when you do a pre-plan procedure versus those without presurgical planning. It's because you know the anatomy before you get in, And you know that if you're going to have an anatomy issue, you've already got your augments ready to go and your guides ready to go. That's great for the patient because you're going to get better outcome. It's great for the surgeon because they have what they need to do the procedure. And it's great for us because we get more revenue for that surgical procedure. So very exciting stuff. And so in short, I would just say that even with the challenges of COVID, we're driving our business forward, meeting our customer needs and improving patient lives as we go. That's the whole mission of this organization. It truly is what we do and wake up for every day, alleviating the pain of patients around the world and improving the quality of their life, and we are doing that during COVID. And as a team, we've dealt with many challenges over the past three years. Let's prepare us for this moment. I've said it before. This is a time when companies and teams can slow down. They can hesitate. They can take their foot off the pedal. Hey, we're being smart and safe, but we are not letting up, and it shows. It shows in the ZB performance and in the energy of this team right now. All right, so I'm going to move on to cover our strategy to deliver long-term organic growth and ultimately drive more value for ZB and very importantly for you as well. And as we've outlined, to drive our strategic pillar of top core child performance at TSR and truly bring value to you and ultimately to achieve mid-single-digit growth organically, we have got to focus most intensely on driving long-term growth in our key focus areas. And first, as we've said in the past, the first and foremost area of concentration is above-market performance and needs. And just given the size and the scale of this business, we need to be ahead of market here. And we're going to do that by focusing aggressively in the fastest-growth sub-markets of need, robotics, data and informatics, cementless, and for us, revision. These are the areas of concentration and investment that are going to allow us to sustainably perform above-market in needs. And next, we've got to drive consistent at-market growth, if not the higher end of market, for our performance in set. And that's focusing on the most attractive sub-elements of set. For us, that's going to be sports, and it's going to be extremities. Also, we've got to make sure that we have a consistent at-market performance in HIPS. That's in the short term. In the longer term, when we launch into robotics, we absolutely expect above-market growth in HIPS as well. And then finally, while our other business is at least at this point, will not receive the same level of investment and will be managed differently, we would still expect these businesses to drive in line to the lower end of their market growth. And that's our pathway. That's our pathway for long-term, durable, 4% to 5% organic growth rates in this business. Okay, so next I want to talk about ZB's transformation. You've probably heard me outline the three phases of our ZB transformation, but I'm just going to go over them again just quickly here. Phase one, capturing the hearts and minds of the team, truly capturing the hearts and minds of the team and addressing our execution challenges. That was really phase one. And with this in mind, we've aggressively shifted to the 1ZB mission, the 1ZB culture. We've added new and very diverse executive talent, and we've stabilized the business across all key areas. So good progress in phase one. Phase two was really around shifting to a disciplined strategic clarity for the organization that's more focused on long-term success, not solving problems, but truly long-term success. This is where ZB shifts to innovation, drives our strategic plan, has our pillar priorities that are very clear to the organization, locks in our operating mechanisms, and evolves organizational structure to ensure that we can drive a focused approach to execution of this strategy. And phase three is where we transform for the future. Through active portfolio management, we look to change the portfolio complexion to accelerate growth. So we've made pretty significant and really durable progress in phase one. We've laid the foundation for and are absolutely executing against phase two. And now we're moving squarely into phase three of the ZB turnaround. And so for us, when I think about phase three and I think about that active portfolio management, it includes three main components and really should include these same three for anyone who's looking at active portfolio management. But the first one is disproportionately investing. in our priority businesses, you know, in our priority markets. And that would be across research and development, commercial infrastructure, just mindshare being disproportionately invested in those areas. For number two, being selective in M&A, prioritizing opportunities that are accreted to our weighted average market growth and aligned to our strategy. So selective M&A. And the final one, when appropriate and in line with our overall strategy, divesting non-core assets that are financially less attractive than our core businesses. So those are the three components of active portfolio management in the way that we see them. As we manage this EV portfolio, we're going to continue to focus on high growth areas and areas where we truly believe we have a right to win. Size is going to be a factor here, particularly in the short term. Out of the gate here, we're going to have a preference towards smaller tuck-in deals that can be easily integrated and operationalized while also maintaining, very importantly, our investment grade ratings. And I really do believe this philosophy is apparent when looking at the recent transactions we just highlighted in our earnings press release. You know, again, while these deals are not material in terms of acquired revenue, they're absolutely instrumental in filling some of the product gaps we have at ZB in our ASC and sports portfolios. And really, they add to our pipeline of new technologies and product launches in markets that are accretive to our growth rates. And these deals are small, so they're going to be easily integrated. And we're going to be able to validate our new deal process, our new team, the integration playbook that we now have in place. So I think great first step in the M&A side of things. From looking at the individual deals, if I look at the acquisition of Incisive, this is an OR solutions company in the $1.2 billion integrated OR market. And this is going to provide ZB with a soon-to-be-launched, it's not launched yet, but a soon-to-be-launched surgical booms and lights portfolio that will help us push more aggressively into the attractive ASC market, which is clearly an area we want to go. We also see some real differentiation. It's not just filling the gap of the portfolio. It's truly bringing differentiation for really two reasons. First of all, they have a smaller footprint. And this focuses on reducing the acquisition cost, but also the construction cost, which we know is a pretty important aspect of the ASC market, looking at controlling these costs. And the second reason why we think it's differentiated is they've really done a really interesting job incorporating an innovative and automated way to capture data in the operating room that ultimately leverages artificial intelligence, and that helps us in the operating room drive efficiency and productivity and potentially even better outcomes. You know, again, this is really lending itself to the needs of the ASC setting. So, again, you know, pretty excited about this portfolio opportunity. This idea of a smart OR and really leveraging data to drive decision support and efficiency is also reflected in our exclusive relationship with Canary Medical. Through this partnership, we actually see the opportunity to further differentiate our knee ecosystem, which is a major focus of ours right now. You know, our goal is to launch an intelligent persona total knee implant that incorporates Canary's smart sensor technology. And we feel a combination of active data capture from this smart implant that we already have from MyMobility and we already have from ROSA is going to provide an unmatched data set that ultimately can be leveraged through AI for decision support related to how best to treat and care for the patient. And this will give us a unique opportunity, we feel, to create an intersection between the $4 billion total knee market and the telehealth solution space which is growing somewhere north of 15%. So a very attractive area for us to differentiate the ecosystem and kind of enter into an adjacent space in telehealth. And the last deal I'll talk about is our acquisition of Rely. And this is focused on the sports medicine market, which we know is a $5 billion market, and it's growing 5% to 7%. So again, accretive to our overall weighted average market growth. And this deal clearly helps fill our gaps in arthroscopy capital. The capital makes up about 30% of the sports market. And until now, we had absolutely no offering in this space. With this acquisition, we've not only filled the gap, we also see some real differentiation in the portfolio. They've done a nice job of, again, innovatively consolidating three tower components into a single comprehensive system, both at the equipment side and on the end defector side. And this is a first in the industry. This system is very early in commercialization stage, but I would say it's getting very positive feedback early on. And we see this as another great opportunity to drive a successful product launch, leveraging our ZB commercial infrastructure, which we absolutely know we can do. So I would just say that, hey, we've got other portfolio management opportunities in the near-term funnel. And we're not ready to talk about those yet, but we've got other ones in the funnel. And we will continue to keep you up to date as we make progress here. And finally, we are fully committed to our margin expansion goal of at least 30% operating margin by the end of 2023. And Sookie's going to talk more about this, but our restructuring plan is on track. And the cost savings we're delivering will help drive margin expansion, which has got to be there, but also support reinvestment in the business for growth. It's got to be able to do both. And that was what the whole idea behind the restructuring plan was. So, again, Sookie will give more detail on that, but it's on track so far. Overall, we are clearly watching the COVID recovery trends closely and completely realize, as everybody does, the short-term market performance, and I want to reiterate market performance, is out of our direct control as a result of the COVID recovery trends. That said, and I hope it is very clear, we feel confident in ZB. We feel confident in our business strength and our execution and the long-term growth prospects we have as a business. And as a result of that, the value creation opportunity we have as a company. Okay, with that, I'm going to turn the call over to Sookie again for more financial details for the quarter and looking forward. Sookie?