Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet fourth 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, February 5th, 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 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 Zimmer Biomet's Quarterly Earnings Conference Call. Joining me virtually today are Brian Hanson, our President and CEO, and CFO Suki Ipagli. Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties. Please note we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties in addition to the inherent limitations of such forward-looking statements. Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our earnings release. As a note to all call participants, we provided updates via two press releases issued this morning, and we have also posted an investor presentation to our website, ZimmerBiomet.com. With that, I'll now turn the call over to Brian. Brian?

All right, great. Thanks, Carrie. And I also want to say just thanks to everyone for joining us on the call here this morning. As you saw from our announcements earlier today, we clearly have a few updates that we want to fill you in on, and I'm looking forward to a very productive call this morning. Just given the backdrop of COVID, let me just start by saying that I certainly hope that all of you are doing well and staying safe and continuing to, as much as it's frustrating, I'm sure, by now, continuing to social distance and wear your masks. I think that at this point, we're all pretty good at it, so let's make sure that we continue to do it. And to all of the VB team members joining the call this morning and or listening at a later time, I just want to let you know I'm thinking about you as well. I just want to say thanks. Thanks for everything that you do, have done, and will do, actually, to continue to follow our protocols, to keep yourself safe, obviously, but also your teammates safe. And as a result of that, continue to deliver for our customers and our patients and move our mission forward. You know, I just continue to be very proud of everything this team has accomplished against a significantly challenging backdrop in 2020. So I'm proud of you. I'm glad to see what you've been able to do. And I'm looking forward to what you're going to do in 2021. And here we are, right? We're in 2021. And there's going to be challenges we've seen already, you know, early on in 2021. But I'm confident that we're ready to deal with the challenges of ZB. And I'm pretty confident that we're going to see some real opportunities for 2021 as well. And there's just a lot of updates that I want to share with you today. But I'm going to keep my comments to a minimum if possible. I really want to make sure that we have time for Sookie to get into a little more detail on Q4 and then ultimately say how that's going to translate into 2021. Now, we're not going to give too many specifics on 2021, but he'll give you some color on what we're seeing from Q4 and, again, the impact we think that's going to have on 2021. And I want to make sure that we leave time for questions as well. Okay, so for today, I'm just going to kind of keep it to three main topics. The first is really how we're continuing to navigate COVID-19 and to continue inside of that to ensure that we're executing against our strategies. The second one is really going to talk about the ongoing transformation of the company. We really are making sure that we're moving forward with active portfolio management, and obviously we're taking the next steps there with the plan spin-off of our spine and temple business, so we'll talk a bit about that. And then third, I want to make sure that we, again, touch upon our long-term growth strategy and how it positions us to drive growth, obviously, as a company, but also value for you and value for us. And so let's start, again, navigating the challenges and executing here in the short term. There's just no doubt that COVID unfortunately remains a challenge. Coming out of Q4, we're seeing the pandemic pressure and the surges continue, and frankly worsen, you know, across pretty much all of our regions and markets. There's clearly more lockdown measures that we're seeing throughout Europe, Middle East, and Africa. To a far lesser extent, it's still impacting Asia Pacific as well, and certainly in the Americas, we're all seeing it in the U.S., may be different by state, but we're clearly seeing increased pressure as a result of surges in the pandemic. So all of that is kind of the backdrop that we saw coming out of Q4. Unfortunately, this pressure, you know, in the corresponding decline in elective procedures grew throughout Q4. It actually was worse at the end of December. And at this point, we expect that increase in pressure will continue throughout Q1 at least and will impact all three of our regions. As a matter of fact, we're actually seeing this probably increase in pressure coming out of Q4. So we would expect Q1 to be a little more challenging than even what we saw in Q4. But, you know, even given that backdrop, I'd say that I'm optimistic. It sounds crazy to just say what I said, but say that I'm also optimistic, but that's thanks to the approved vaccines. You know, we're currently rolling those out around the world. We do believe the vaccines are going to change the COVID-19 dynamic, and we're going to see positive impact as a result of it. As soon as we start to see the surges stop, we see the impact of COVID end, and we're confident that the recovery is going to mean that the normal patient flow is going to start again, and we're going to have the pull-through effect. of a sizable patient backlog that's been created over the past number of quarters. We expect that when that recovery occurs we're going to see a period of what I would define as normal market growth augmented by deferred procedures that will be coming in as well and we're going to be ready for that and we're excited about that. So as much as it's going to be a little rocky in the short term and potentially even more challenging than what we saw in the fourth quarter we see a light at the end of the tunnel and that's a good thing. The big question is when? When is that going to happen? We know the vaccine is going to have the impact The big question is when, and that's certainly going to be the key variable we're going to be looking at as we try to predict what 2021 is going to look like. So I would just say, you know, against this backdrop of COVID, what is clear to us is we can't control when the vaccines allow the surges to stop. But what we can control inside of that is how we execute, how we execute our strategy. And I have confidence we're going to continue to move it forward. You know, our core business is strong. Our execution is on point. I would just say momentum around our key commercial launches and programs continues to be strong. And I would say that overall our commercial confidence is better than it has ever been. So, you know, let's give you a few examples of this. You know, I could say it all day long, but unless we talk about it and actually it reflects in the numbers, who cares? So let's first start with rows in need. Obviously, this is something that everyone's going to be paying attention to. Certainly, I am. And I know we said we're going to hit between 200 to 300 cumulative placements by the end of 2020. Obviously, you know that we're in that range as of Q3. So I'm happy to report that not only did we achieve that goal, we achieved the high end of that goal. And I would tell you that the momentum is strong coming into 2021. Q4 was actually our strongest quarter. as of the date of launch of Rose and Me. So we've had some pretty strong quarters in the past. Q4 was our best, and we were on the high end of the goal that we set for the year. And as I said before, with some of the new launches that we have coming, specifically associated with the uni, I feel pretty confident that 2021 is going to continue to show that kind of resilience and strength for Rose and Me. On the persona revision side, again, this product continues to be very successful for us. We now show that in Q4, We actually have the strongest quarter-over-quarter growth that we've seen since launch. We did realize our 2020 expectations of $100 million in gross revenue and almost $40 million in net of cannibalization revenue during the year. And I would just tell you that that's just the beginning, because persona revision serves as a really compelling tip of the spear product for our commercial team. Once we get persona revision in, we've got an opportunity to hunt for the typical primary need as well. So we're very excited about that launch, and it continues to be strong. On the hip side, Avenir Complete continues to be a strong one for us. Even in the pandemic, it continues to beat. our expectations. And if I just look at Q4 specifically, we grew about 30% over Q3. Again, even with the increased pressures of the pandemic in Q4. So very excited with what we're able to do with Avenir Complete. And we expect big things to continue with this product throughout 2021. And as you obviously know, we also expect at the end of 2021 to launch the Rosa HIP, which again, gives us a lot of confidence in the HIP category for our business. And then finally, for Signature One Planner, we demonstrated this, again, strong sequential growth with registrations up nearly 25% in Q4 over Q3, and we expect utilization to continue to expand significantly in 2021, with really a goal of having more than 50% of our shoulder procedures using pre-surgical planning. And that's important for a lot of reasons. Remember, pre-surgical planning creates stickiness with the customer, but it also enhances our ability to get more guides and augments using the procedure, which can really take up the ASP for that procedure. So again, exciting stuff with Signature One Planner as well. So all in, we continue to execute. We continue to execute as a team. The way we're showing up every day, the way we're showing up in the market, frankly, versus our peers, gives me confidence in our business, as does our continued innovation. in our product launches. We're going to see more this year. Some pretty pivotal innovation that we're going to see this year. As I mentioned before, we're going to see Rosa partial knee. We're going to see Rosa hip. And we're also going to see the first smart implant, Persona IQ, launched this year. So definitely exciting for us from an innovation standpoint in 2021. And that leads me to really my second topic this morning. We continue the transformation of EV. That's been the goal since I got here. You've heard me talk about our three phases of transformation. First was the hearts and minds and the execution challenges that we had in the very beginning. That's what we talked about a lot in the beginning. The second phase of this was really doing a more robust, longer-term strategy, making sure that we brought innovation to the market and getting our execution straight. We're clearly well into that phase. And third is our portfolio transformation. And that's the goal of active portfolio management, to change the complexion of the organization so that we can have a better goal of sustaining and making a busy growth. And I'm proud to say that we're squarely positioned in phase three now as well. And as you've seen by our recent announcement, we're going to continue to move this forward. We have the portfolio management strategy and the process in place and have built a pretty strong capability to move us forward in this area. Late last year, we executed a number of smaller but still important M&A deals to fill portfolio gaps and to better position us in higher growth areas. that we do believe we have a right to win in. And just this morning, you know, we announced our intent to spin off our spine and dental businesses, you know, ultimately creating, we believe, two independent publicly traded companies, both Zimmer Biomet and the new company called Nucco, that are going to be better positioned separate. I truly believe by separating out these businesses, We're going to create two stronger companies, two companies that are going to be better positioned to meet customer needs and improve patient lives and ultimately, and very importantly, deliver greater value to you, our shareholders. And let me give you a bit more detail on why we believe this is an opportunity for value creation and really why we think it delivers value for both ZB and NUCO. First of all, the transaction increases our management focus and resource prioritization. We truly do believe for both companies. We think about NUCO and we think it's going to thrive as an independent company with prioritized capital allocation to pursue strategies and growth opportunities and truly investments inside of Spina Dental. That has not been a focus for ZB. It will absolutely be a focus for NUCO. And for Zimmer Biomet, the transaction is an important next step in our transition. into a more streamlined company with sharper focus and greater and more optimized resource allocation towards innovation in those core businesses that we are committed to, that are profitable for us, where we see attractive markets with a right to win in those markets and be market leaders. And really, the second thing is it's going to drive increased growth and efficiency for both companies. We really do believe that. Simply put, we expect that these two companies, with their simplified operating models and just reduced complexity and increased focus, We'll be able to grow revenue, margin, and earnings per share faster than they would if we remained combined as one company. And Tuki's going to talk more about the specific financial impact that we expect in just a few minutes, but just know it's positive for both organizations, financially speaking, as we separate the organizations. And further, it's going to enhance value creation for our patients, you know, our providers, and all of our key stakeholders, including our own team members. This is the next step in ZB's transformation. And it underscores our commitment to ensuring long-term priorities remain aligned with shareholders' best interests. It's going to drive the business forward to meet customer needs and advance our mission to alleviate pain and improve the quality of life for people around the world. We think we can do it better as two separate organizations. Okay, so that's the backdrop of the spin. Today, obviously, is just day one in terms of announcements around this process. You can absolutely expect that we're going to continue to provide updates as we move forward, as NUCO takes shape, and as we move toward the transaction close, which we're currently expecting to be around mid-2022. Okay, so we're confident in these steps we're taking and our ability to keep executing and in our overall GB strategy. And that brings me really to the third and really the final topic that I have for these remarks. And it's our plan to drive long-term growth and ultimately, as a result of that, deliver increased value for you. And to do that, we remain fully committed and confident in ZB's long-term growth and margin expansion expectations. You know, in fact, the spinoff transaction that we're going to do over the next year serves to de-risk, if not accelerate, our path to that 4% to 5% growth rate we talked about and our 30% operating margin profile by the end of 2023. And to get there, to be able to deliver on both of those, we're going to have to be committed to our priority growth areas. And we've talked about these in the past, and I'm going to remind you of them again. The key area of concentration for us would be needs, hips, and set. If we think about needs first and foremost, we need to be able to grow above market rates here. And we're going to continue to focus on the fastest growth sub-markets of needs. For us, that's going to be robotics, data and informatics, cementlets and revision. We feel we have plenty of innovation and momentum here to continue to grow sustainably above market rates and needs. From the HIP perspective, it's a little less ambitious in the beginning. We just said that we need to go at market in the short term, with the idea that over the long term, particularly after ROSA HIP is launched, that we would go above market in HIP as well. And I can tell you, based on our performance so far, the ROSA HIP application being launched later in 2021, and the Avenir complete momentum that we have, we feel confident we're going to be able to do that as well. And as far as SET goes, we just want to go at market. It's not the higher end of market. And to do that, we're going to focus on the most attractive sub-elements of SET for us. And that's, for us, again, going to be sports, medicine, and extremities. Those are key areas of concentration for us that we're going to invest internally. We're going to look for external ways to build scale, and we're going to build commercial infrastructure as well. All right, let's only close by saying that I continue to be more confident about ZB's future than ever. I know I've said that a lot recently, but I really do feel the momentum right now. I truly believe that we are well positioned for success and that our strategy is absolutely working, and our transformation is well underway. and our proven ability to rise to challenges and face adversity, I think it's prepared us well for navigating the current environment and really, for that matter, any environment in front of us. And I just want to, again, say thanks to the entire ZB team. Your focus on our mission, our strategy, and how we show up and execute every day is unmatched. It's what makes ZB and what makes me confident that we're going to continue to deliver. So with that, I'm going to turn the call over to Sukhi for more financial details of the quarter and also looking forward. Okay, Sukhi. Thanks, and good morning, everyone. Before jumping into the details, I'd like to summarize the quarter as one where we made significant progress across a number of strategic and operational fronts, all in the backdrop of heightened market pressure. While revenue and profitability were challenged due to the pandemic, we executed extremely well against the things we can control. positioning ourselves to win for eventual market recovery and beyond. Now, for this morning's call, I'm going to focus on two topics. First, our Q4 results, including commentary on the COVID impact and what we're seeing so far in Q1. And second, how ZP is positioned for long-term growth, specifically how we believe the spinoff transaction we announced this morning is expected to impact us post-execution. Moving forward, and less otherwise noted, revenue and P&L commentary will be on a constant currency or adjusted basis. Net sales in the fourth quarter were 2.085 billion, a reported decrease of 1.9% and a constant currency decrease of 3.7% versus 2019. But we did not experience any material day rate differences in our year-over-year comparisons. Our consolidated regional results were in line with expectations, despite deepening pandemic pressure on global elected procedures as we exited the year. While the market softened through the quarter, execution remains strong across all regions. Beginning with Asia Pacific, the region grew 2% versus Q4 2019 with growth across all three of our largest markets of Japan, China, and Australia, New Zealand. While COVID pressure on elected procedures increased towards the end of the quarter, the impact is less pronounced than what we are seeing in EMEA and the Americas. We are excited about the uptake we're seeing in ROSA in the region, and with the solid performance across our knee and hip businesses. As expected, the immediate region was hardest hit by COVID-19, decreasing 17.5% versus 2019, with all subregions in decline. Surges in the virus leading to policy actions and government lockdowns negatively impacted elective procedures across the region. Lastly, the Americas region was about flat, decreasing 0.3% compared to 2019, driven by continued COVID headwinds in Latin America in tandem with a softening U.S. market. The U.S. was flat despite increased pressure on electric procedures. Performance was buoyed by continued strong demand for recent innovative product introductions, strong execution by a commercial organization, and some favorable impact related to the order timing and year-end purchases, as some accounts increased their buying patterns to utilize remaining 2020 budgets. Turning to our business performance for Q4. The global knee business declined 4.8%, negatively impacted by the ongoing pressures in EMEA. However, the U.S. knee business continued to grow, increasing 1.8%, and Asia-Pacific knee business returned to growth, increasing 2.9%. Overall, execution was strong with continued momentum for Pursana and Rosa Knee. Our global hip business decreased 3.4%, again, driven by declines in EMEA. Both U.S. HIPS and APAC HIPS continued their growth trends, increasing 1.4% and 1.3% respectively. Sports, extremity, and trauma sales declined 3.3%. Dental, spine, and CMST continued to deliver better execution, increasing 0.8%. And finally, our other category was down 9.3%. Moving to the P&L. We reported gap-diluted earnings per share of $1.59 and adjusted diluted earnings per share of $2.11. Additional details on our gap results can be viewed in our press release issued this morning. On an adjusted basis, with revenue down 3.7%, EPS was down about 10%, driven by a lower operating margin and a higher share count, which more than offset the favorable tax rate in the court. Lower adjusted operating margin was driven by lower revenue and an expected year-over-year decline in gross margins. Adjusted gross margin was 71.3%, sequentially better than Q3, but lower than Q4 2019. Versus the prior year, favorable geographic mix was more than offset by lower volumes, ongoing pricing pressure, and the impact from prior period deferred costs. OpEx was down versus the prior year as we implemented several cost containment initiatives as part of our response to the pandemic, in addition to the realization of our transformation programs that were ultimately reinvested back into R&D and commercial infrastructure to help drive consistent above-market growth in priority areas. Based on our performance versus market over the recent quarters, our reinvestment of efficiency savings is translating into strong returns. The Q4 adjusted tax rate of 15% was better than the previous year due to geographic mix of income and certain discrete benefits in the quarter related to recent audit settlements. Turning to cash and liquidity in the quarter, Pre-cash flow totaled $329 million, higher than the same period in 2019, driven by better working capital and lower capital expenditures. And we utilized better than expected cash flow to pay down $250 million of debt ahead of schedule, ending the year with cash and cash equivalents of approximately $800 million. Now moving to 2021. Due to the ongoing uncertainty related to COVID-19 and its impact on elective procedures, We will not be providing full year financial guidance at this time. We recognize that this is challenging for you as you build your 21 models. However, we will reserve financial guidance until we have more certainty around the outlook of elective procedures relative to COVID surges and related vaccine adoption. We strive to be credible and transparent, and to that end, I will provide additional quarterly details and broader full year shaping as an interim measure. So far through January, we've seen COVID pressure continue to intensify from the end of December. Based on what we've seen so far in the quarter and in tandem with our latest estimates for procedure cadence, we project that Q1 revenue will be down in the low single-digit to mid-single-digit percentage range versus Q1 2020. Now, we have optimism and confidence that we'll see a positive vaccine impact on elective procedures this year. And once we do, we expect elective procedure volumes to return to pre-pandemic levels and the sizable patient backlog to serve as a tailwind to underlying market growth. As we turn to the P&L, we expect that the impact of COVID-19 on sales volumes will put pressure on adjusted operating margins and earnings leverage until we return to consistent pre-COVID revenue levels and growth rates, as I just discussed. Despite this near-term pressure, our confidence in the market recovery and the longer-term financial profile of the company is driving continued investment into priority areas of the business. We expect that adjusted gross margin to stabilize in 2021, with quarterly margin levels broadly in line with what we saw in the back half of 2020. We could see some fluctuation from quarter to quarter depending on a number of variables, including volumes, price, foreign currency, mix, and other drivers that can change results over time. Regarding operating expenses, sequentially versus the fourth quarter of 2020, we expect non-commissioned spending in Q1 to be modestly lower with increases in future quarters of FX investments as the impact of the pandemic abates. We expect interest expense to increase in the mid-single digit versus 2020 as the benefit from lower debt balances is more than offset by the renewal of net investment hedge positions. Our tax rate is expected to be modestly higher than the full year 2020 rate and could fluctuate over the year as a result of variability in geographic mix of income due to the pandemic. Also, we are not projecting any material U.S. corporate tax reform to be implemented in 2021. We project that the full year share count in 2021 will continue to increase modestly versus Q4 2020, and we are not planning for any share buybacks in the year. And in terms of capital allocation, we remain committed to maintaining our investment grade rating and are planning to pay down an additional $500 million of debt in 2021. Now let's turn to today's announcement related to our intent to spin the spine and dental businesses into an independent publicly traded company. The transaction will be structures of tax-free distribution of newly issued new co-shares to ZB shareholders. As Brian mentioned, we believe that this tax-efficient transaction, which is expected to close in mid-2022, subject to certain conditions, will drive greater focus for each company with enhanced prioritization of capital allocation while accelerating growth and providing the platform for greater shareholder value. In terms of the new co-financial profile, 2019 and 2020 pro forma revenues total approximately $1.022 billion and $897 million, respectively, and is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion. We expect NUCO to have a financial profile generally in line with its peer group and a capital structure supportive of innovation and investment over time. Importantly, the transaction will empower NUCO to pursue a more focused investment and execution strategy. ZB delivered 2019 and 2020 pro forma revenue of $6.96 billion and $6.128 billion, respectively. For post-spin ZV, the transaction is expected to deliver an improved growth profile with accretion to our revenue growth of approximately 50 basis points over the course of our five-year strategic planning period. We also expect that it will expand our adjusted EBITDA and operating margins on a pro forma basis by approximately 125 basis points. With that, you should have even greater confidence in our operating margin expansion goals. We remain committed to at least 30% adjusted operating margins by the end of 2023, and with this transaction, we have the opportunity to accelerate the timing of that goal. However, we will continue to balance margin acceleration against investment opportunities to accelerate durable top-line growth. Ultimately, this transaction provides greater optionality to invest more in the business while delivering a leading margin profile, and that's an incredibly powerful lever. In terms of capital structure, post-spend, we will prioritize proceeds towards debt pay down to maintain our investment grade rating. We're truly excited about this transformational opportunity to increase value for our investors and will continue to provide more details as execution of the spend progresses. To summarize, while the pandemic continued to pressure our growth and earnings profile in the quarter, we made substantial progress on many fronts, including very strong performance versus the market, progress on our efficiency programs that enabled increased investment for growth, free cash flow generation that was ahead of revenue growth, strengthening of our balance sheet through early pay down of debt, integrating our strategic and accretive Tucky and M&A deals, and positioning ourselves to execute the spin-off of our spine and dental business as a platform for greater value. I'm truly proud of what the ZB team accomplished in the quarter and throughout 2020. With that, I'll turn the call back over to Carrie.