Zimmer Biomet Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet first quarter 2021 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 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 the star followed by the one on your push button phone. I would now like to turn the conference over to Keri 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 first quarter 2021 earnings conference call. Joining me virtually today are Brian Hanson, our President and CEO, and CFO Suki Upadhyay. 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 Q1 earnings release, which can be found on 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 thanks to everyone for joining us this morning for our call. And before we actually get into the Q1 numbers and our guidance, I just want to take a second to say that I certainly hope that all of you and your families are continuing to stay safe. We're obviously very pleased to see that so many people now have access, full access, to the COVID-19 vaccinations, and that adoption has been pretty strong so far. Now, of course, we'd like to see this even more broadly on a worldwide basis, but it certainly feels like we're making really important progress toward moving forward and ultimately, as a result of that, moving hopefully on from the pandemic. Now, it's not over. I think all of us realize that But I, for one, feel more optimistic than ever that we're coming out, I think, on the other side of COVID-19. And with that, you know, much better days ahead. And I guess with that, you know, probably it's a good lead-in to our Q1 call. Q1 was a stronger quarter than we initially expected. And I'm pretty excited to discuss it with you. You know, whenever you have a good quarter, obviously earnings calls are a lot more fun. So clearly we're excited about this one. And I'm going to try to keep my remarks relatively brief, you know, this way. And I know you're kind of laughing at that because it's not always easy for me to do that, but I'm going to try to keep it brief. And that'll give Sookie an opportunity to walk you through what you're really interested in, which is the financial results for the quarter and really how that translates into our expectations for the full year 2021 guidance. And I also want to make sure that we leave time for questions, obviously. So I'm just going to stick to really three topics as a result. Number one, I want to talk about the COVID recovery just briefly and our execution inside of that recovery. and then ZB's ongoing transformation and our progress against that. That would be the second topic. And the third topic would just be around our long-term growth strategy, just reiterating our position there and how we believe that's going to drive value for our shareholders and stakeholders overall. So let's start with navigating COVID and how we're executing inside of it. COVID clearly is not over, just as I stated a minute ago, and I'm very confident we're going to continue to have surprises ahead and disruptions ahead. But based on what we saw at the end of Q1 and what we're seeing in the beginning of Q2, And coupling that with just the pace of vaccine rollouts right now, we're clearly moving in the right direction. I don't think anybody can argue against that. And it's that shift toward what I would define as more stability, and I know that's on a relative basis when I talk about stability here, but that shift towards more stability really enabled us to give you the full year 2021 financial guidance. Now, inside of that guidance, there's going to be some important assumptions about trends and recovery timing that underpin our outlook. And Sookie's going to get into more of that in just a few minutes. But overall, it feels good. It feels good to have better insight into the broader market and greater confidence in what the rest of 2021 should look like for our business. Now, as we start to return to a more normal environment, I'm going to put normal environment in air quotes given the situation right now. But when that happens, you know, we expect that part of what we'll see is a pretty significant tailwind from the backlog of patients that has built up over the last year or more. Now, how fast that happens, how fast we work through that backlog, especially across certain regions, is something we're going to have to pay attention to. We're going to have to watch and track. But we absolutely believe that the vast majority of those patients who put off an elective procedure will come back into the funnel. And that's going to provide a significant tailwind well into 2022. And I, for one, cannot wait for that tailwind. And I can tell you that ZB is ready for them. They're ready for those patients, and we're ready to be able to help our customers care for those patients. Speaking of being ready, As I've said to you before, the things that ZB was able to directly control over the past year, I truly think the team has executed against. And I'm very proud of the ZB team for how they stood up and delivered against a backdrop of a whole lot of things that were absolutely out of their control. And I know I talk a lot about the importance of our talent, our mission, our culture here at ZB. And I can tell you that each were absolutely critical for us in 2020 and continue to be in 2021 and well beyond. And with that in mind, you know, we've made some additional changes to our leadership team here very recently. We've added a chief transformation officer, again, to help us with all the transformation that we're going to continue to have as an organization. We've appointed a new chief human resource officer to help us move our talent agenda forward, one of the key areas of focus for me as we move forward as an organization. And promoting Sang-Yi to group president of Asia Pacific. He's now going to have some responsibilities of certain projects, OUS, He brings a real disciplined execution mindset, and he can absolutely help us outside of Asia Pacific. And then expanding Yvonne Tornes' role as a chief operating officer with the added leadership now of EMEA, which is a region that he has had deep responsibility for in the past and knows very, very well, and I know can bring us value in that region. So I can tell you that his continued focus on talent and development is not just contained to the executive ranks. Our entire ZB organization is hyper-focused on our people, I'm really getting the right team members in the right roles and giving them the tools and support and really the opportunities to drive their performance, you know, to develop and excel. And it's working. I can tell you this focus on talent is working and I believe it is going to continue to set us apart from the competition. And in addition to the foundation built by our team members, our mission, our culture, our core business momentum is stronger than ever. You know, the team's execution continues to be on point. Our market momentum is building. Our commercial confidence is higher than ever. And I can tell you right now, we are very excited about the R&D innovation pipeline that we still have coming. You know, that's an important part of our revenue growth. You know, throughout Q1 and even in recent weeks, we've hit key milestones with our ZB products and our innovation. You know, the application for partial knee now is available for ROSA. It was just approved by the FDA. We've actually already had our first procedure using that application last week with very good results. And this is just a, you know, the latest addition to our ROSA robotics program, our platform here. And it's also another launch inside of our ZB Edge suite of integrated digital and robotic technologies. Again, something we truly do believe will set us apart from the competition. So if I just look at ROSA overall in the quarter, we continue to see strong market demand and traction with our ROSA platform. The Q4 performance was fantastic, and that continued right into Q1, both in the U.S. and internationally. And our forward-looking robotics pipeline is very robust. And I can tell you that given our market share and partial need, The partial application is only going to serve to bolster that going forward. For persona revision, another strong performance. This continues to move forward in an amazing way. Q1 was ahead of our expectations. And it is another example of a tip of the spear product that we have that as we make the conversion of revision, we also have the opportunity then to go after the standard knee business as well. So again, still exciting opportunities there for revision. And then our signature one planner for shoulder procedures, again, demonstrated a very strong sequential growth from Q4. Well, actually up 65% over Q4 when we look at registrations. Again, that's a pretty significant move. And again, this provides that stickiness with our customers in that procedure, but it also provides a mixed benefit wherever that presurgical planning is used. As we come into Q2 and the rest of 2021, ZB has additional innovation that's coming. And it's pretty exciting innovation with our anticipated launch of Persona IQ and also Rosa Hip later in the year. And I can tell you for Persona IQ, the initial feedback from evaluating surgeons has been very positive. And I can tell you that they're interested in being able to capture data from inside the body. And this is unique. They've not been able to do this before. And then ultimately remotely monitoring those data. And the hope would be that using that information to change the way that we care for patients. So the excitement around this is very strong from our surgeons. And we can tell that the momentum is going to be strong when we do get regulatory approval. So all that to say the momentum on the innovation front is real here at ZB. This will allow us multiple shots on goal across a number of innovations, again, with multiple robotics launches, continuing success with Persona Revision, Persona IQ, new iterations of MyMobility, and just really the broader ZB Edge ecosystem to drive mixed benefit for sure, but also competitive conversions. And ultimately, we really believe change the way that we care for patients, change the treatment paradigm for patients. That's really what it's about. It's about driving the mission of this organization, truthfully, to remove pain from patients around the world and improve the quality of their life. And we truly do believe ZB Edge can help us do that. Okay, so let's move to the second topic that I have for you this morning, and that's the continued transformation of ZB. Now, you've heard me talk about the three phases of transformation. The first was winning the hearts and the minds of the organization, of the team members, and really dealing with the execution challenges that we had that we spent a lot of time on in the first year. And then second was moving to that longer-term firm strategy for the organization that would drive innovation and really building the structure around that strategy and the operating mechanisms to ensure that we move it forward. And then third, you know, where we are now is the portfolio transformation. And truly, that is where we sit. That is squarely where we are positioned today in phase three of these three phases. And we have the ZB portfolio management strategy and process in place. And we have definitely built out our capabilities to move forward in this phase. We're focused on what we're going to define as mission-centric M&A that is WAMGR-accretive, that would absolutely increase our weighted average market growth and does not disrupt our best-in-class margin profile. And as you've seen, we've moved this forward already with selective tuck-in acquisitions that we did last year. And that really does illustrate the strategy at work. Now, those deals were smaller. No question they're smaller. And they're relatively immaterial when it comes to the initial revenue that we acquired from but they're absolutely designed to fill portfolio gaps and better position us in high growth markets. You know, those high priority markets and sub markets where ZB has a path to leadership and we believe a right to win in markets like sports medicine, ASC, and in the external closure market for us. And each of these deals gives us a gap filling and we believe differentiated product portfolio to drive growth. And that's important to growth, but also, you know, drive additional confidence in our SCT business category. And of course, inside of this active portfolio management phase, there's the plan spin-off transaction of our spine and dental business that we discussed back in Q4. That process of creating two independent, even stronger companies is on track. It's early days, obviously, but it is on track. And as you saw from our Q1 results, we do not believe it's causing distraction or disruption in our business. In fact, it's more the opposite. We've seen significant energy in the business, kind of a gelling in the business as the NUCO team starts to come together under CEO Vafra Jamali, and they begin to build out their own strategy and their focus. So, again, it's early days, but we're very happy with the progress so far of this spin. All right, so that brings me to my third and final topic this morning, really around our ZB plan to drive long-term growth and ultimately deliver value as a result of that growth. And I can tell you that we remain fully committed and confident in ZB's long-term growth and margin expansion expectations. We've said before and we'll say it again that the spinoff of NUCO actually serves to de-risk ZB and potentially accelerate our path to mid-single-digit growth and a best-in-class 30% operating margin profile by the end of 2023. And we're confident that throughout this process and as we achieve this growth and margin profile, we're also going to have the flexibility to reinvest for growth. And that is a key thing for us. We've got to continue to be disciplined, but ultimately invest for growth in this business. And that's what we will continue to do. Now, to get these growth levels and to achieve our top-core-top performance in TSR, which I think you probably remember is one of our strategic pillars, Now, we're going to continue to execute in our priority growth areas. And just as a reminder, that means that we expect to drive above market growth sustainably in these. We plan to grow HIPs consistently at market, but then later this year, above market rates when we launch the ROSA HIP application. And we expect to stabilize first and foremost, but also drive focus. And then ultimately through that focus, drive our set business at the higher end of market rates there. We're also very focused on driving change for ZB, you know, a real evolution of of the company from a metal and plastic provider of implants to a leading medtech innovator. Think of us as a high-tech company that happens to be in medtech. That's the ZB brand that we're looking for, that brand evolution of this company. And I can tell you that already more than 70% of our product development dollars are being spent in this area, being spent on ZB Edge, that ecosystem of connected technologies. Now, we're always going to be an implant company, and that's the center of the universe for this company. But the ZB Edge ecosystem around it is the way that we can differentiate ourselves versus the competition. And we're already, we have exclusive relationships to help us here. We have relationships already with Apple and several other tech companies that we truly do believe will drive future innovation that will delight our customers and ultimately benefit patients. And I believe fundamentally that this shift is coming not only for us, this technology shift, not only for us, but for the entire market that we play in. And I truly do believe that the technology advancements potentially can reshape the growth curve of these markets. I'll say that again. I think the technology advancements that we're seeing and the value they bring can reshape the growth curve of the markets that we play in. And I think very importantly, also change the care paradigm for our customers and their patients. All right, let me close by saying that I continue to be highly confident in the ZB team and in our business momentum. I truly believe that we are well positioned for success and our strategy is working. You know, our transformation is well underway, and I'm excited about the value that we can drive for our shareholders on a go-forward basis. I truly am. And before I hand it off to Sukya, I just want to take a minute to say thank you. You know, truly thank you to the entire ZB team. Your vigilance and dedication to our safety protocols over the past year or so has been absolutely critical. And you're focused on our mission, you know, our strategy, and really just how you show up. and execute every day, you know, it's unmatched in my view. It truly is unmatched. You are what makes us ZB. I truly believe that. And what makes me confident really is you, you know, that we can absolutely continue to deliver on all fronts.