Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Good morning, again, everybody. It is my distinct pleasure to welcome my friends from Zimmer Biomet. We've got the whole gang here. Bryan Hanson, President and CEO; Suky Upadhyay, EVP and Chief Financial Officer; Keri and Ezgi from the Investor Relations team. Good morning, welcome. Thank you so much for joining us today. Bryan, just to start us off as I am in every presentation during the conference, can you help us understand, given the continuing challenging difficult sad headlines about the surge, second or third wave, depending on what you want to call it, of COVID. Are you more [ concerned ] today? Was this reflected in your planning, your thoughts about these weeks and months? Where are you thinking about the potential impact on Zimmer and your outlook?

Yes. Yes. I mean, it's -- clearly, when you see the media reports and you hear about the surges just pretty much across the board, particularly Europe, Middle East and Africa, here in the U.S., it's hard not to be more concerned. We said on the Q3 call that we kind of expected, at least based on what we have seen at that point, Asia Pacific and the U.S. to kind of trend pretty similar, at least again, at that point, to the growth rates we had seen in Q3. We also felt that just given the backdrop of the surges, there's probably more risk associated with that continuing. And as we had referenced before, Europe and Middle East and Africa were really getting hit hard, and that was having a direct impact even in the early days of Q4 versus the Q3 growth rate. And that's continuing. There's clearly -- it hasn't subsided and that pressure continues and it's unfortunate. It's unfortunate. And we're going to watch it closely and the key thing for us is to continue to do what we can control and really execute our strategy in the midst of all this turbulence around us. But unfortunately, it hasn't gotten better and it continues to put pressure on the business.

I thought, on the third quarter call, Bryan, that you -- I heard a lot of encouraging commentary about supply issues, execution challenges, resolved -- resolving, quality remediation well on track, new product gaps filled, ROSA, the energized sales force. Maybe just talk to us more broadly on your confidence in the underlying business performance and execution from here. What's -- you talked about entering Phase III. What's left to do operationally? Where are you focused now? Just at a high level, maybe talk us through some of those thoughts.

Yes. Yes. So it was really important for me when I came in and kind of my new team, to lay out a phased approach to transforming the business. We needed some work out of the gate. And Phase I was, as I referenced before, really around capturing the hearts and the minds of the team and dealing with the execution challenges. Kind of the sub elements of that were around creating the mission and the culture of One ZB, which we've done an enormous amount of work associated with that. And I think we're getting great traction. Brought in a lot of new talent to make sure that we could push the culture in a different direction. And we tackled the supply issues. I mean, remember, we were 4 days-plus of back order at one time, which is absolutely impossible to run a business in an offensive way. You got to be defensive the entire time. And now, we're below half a day of back order. And so a dramatically different situation. Pretty tense situation from a quality perspective with the FDA, as you remember. Challenging times in the beginning, and we're in a much better place now. We still have some work to do, obviously, but I feel much better about our position and the trust that we've built with the FDA. And we needed to get innovation out. And that was kind of Phase II. We had to fix the problems, get people focused on One ZB. And then start launching innovation that matters and get a long-term strategy that is focused and is crystallized for the organization, and that's where we are in Phase II right now. And I got to tell you, I'm very happy with the innovation that's sitting in the marketplace right now, because almost across the board, all of the new products are delivering at or better than what we expected, even inside of COVID. And that would tell you that the traction is there, the innovation is real, and the organization, the commercial organization, is driving it hard and not losing a beat. And now, as you referenced, we're moving into Phase III, which is going to be more around active portfolio management. And though we're not going to have as much firepower as we would like in the short term, just given the fact that we've got an EBITDA divot as of April and May, and that's a 12-month trailing EBITDA when you look at that debt leverage ratio calculation. We do have some money, and we're going to use the money wisely to begin that active portfolio management transformation. So we feel pretty good overall that we're on track with the phases in the way that we would want. We're not happy at all with COVID and the impact it's having in confusing the marketplace. But we have a lot of confidence in what we're doing.

And you gave us a lot of great color on this Phase 3 and your focus on more active or ongoing active portfolio management. What should we understand from the 2 deals you've done to date, Bryan, about your priorities? Is it -- I'm sure it's always a matter of opportunity and focus. But maybe talk to us where if you had your druthers, you'd like to focus and spend those precious dollars, what parts of the business in particular?

We've kind of shown it already with the amount of money that we had in it. And we didn't -- from a cash outlay perspective, a relatively conservative number that we had to put out for the deals that we just brought in. But they're the perfect type of deals. They're almost like product launches, so very little dissynergy risk, which is typical of our space. As you know, the dissynergy risk is usually high when you acquire a business and try to integrate it. But to be able to do acquisitions that bring in real technologies to fill gaps for us in attractive spaces like the ASC setting or the sports market, is exactly what we want to do, particularly when we don't have a lot of funds to spend. So it gives us a portfolio gap filler. And also, as I mentioned before on the call, some differentiation in both of those spaces. That are going to allow us to pursue those markets with real innovation that matters, with the commercial organization that's already in place. And it is a perfect way to start, from my perspective. In areas where we know we have a path to leadership, where we have a right to play and we have some differentiated technology now to leverage.

I know that, again, beneath service, you're doing a lot to improve both sales volume with innovation, sales incentives. But on the cost side, internally, talk about some of your initiatives there in terms of cost reduction, portfolio -- product portfolio realignment, working capital reduction. All these things that could -- with more focus with volume, with mix, drive sales, margins and cash flow over time.

Absolutely. I mean, it's a target-rich environment at Zimmer Biomet. I'll let Suky get into this. But just broadly speaking, this is that kind of restructuring that we've talked about. We call it restructuring, but there's multiple subcategories to it that are attacking the very elements you referenced, with the overall goal of expanding margins while still being able to invest for growth. But Suky, maybe you can provide a little more color on that process?

Yes. So great to be with you, Rick. As Bryan said, that is a target-rich environment. The key for us, though, is really we have sort of class-leading operating margins at this time. And the key for us is how do you continue to liberate funding from low-value activities and redeploy them to higher growth, higher-margin opportunities. And that's really the crux of our efficiency programs that we launched at the end of 2019 coming into 2020. And I have to say, I'm quite pleased with some of the progress that we've already made, and we're already starting to see fruit. And I, quite frankly, think through COVID, we've learned a few things. And if anything, that will accelerate our savings capture to be reinvested and put us towards the higher end of that goal that we originally put out there. But that's just around operating expense. And you're right to pick on a few areas around cash flow because at the end of the day, that cash is giving us the ability to continue to even strengthen our capital structure while provide capital to expand our portfolio and accelerate our revenue growth through M&A. And some of those cash opportunities are, quite frankly, just about having a higher-margin and having that drop down. But then working capital around inventory. We operate over 400 days of supply. Our pure-play orthopedics will naturally be higher just given the operating model than other med tech, but it does not need to and should not be over 400 days. And so we've got a lot of active programs against that particular level to bring that days in and to improve our overall working capital and cash flow. But that's just one example. I think the bigger picture here is we went from when I started the company of trying to identify and prioritize the areas we should go after relative to cost and cash flow. We're now, in a very short amount of time now looking at, okay, how are we performing on those? So we've actually turned to executing and they're delivering. We've got very specific programs against each of our operating activities in both cost-down as well as cash. We monitor them at the LT level, Bryan's leadership team, on a weekly, monthly basis and with the Board of Directors. So I feel pretty confident that we're going to be able to achieve the ambition that we've already talked about, if not exceed it over time.

Thank you, Suky. Bryan, maybe back to the business side of things, to the product side. I mean, I hate to always talk about ROSA. It's one product, you're a huge company. But I feel like ROSA is certainly a driver of investor psychology. But I feel like it's potentially a transformative platform kind of technology for the whole portfolio. So starting on the ortho side of ROSA, you indicate you're already above the 200 placement mark worldwide year-to-date. Really impressive, ahead of our thinking. Obviously, in the range you talked about in the previous quarter. But talk about where you think you are with ROSA on this journey and maybe some of the physician commentary and experience with ROSA that could set the stage for an even better year and a more dramatic era of growth and adoption in '21 and beyond.

Yes. I mean, it's early, early innings. And that's promising because it's already pretty good success that we're seeing. But remember, ROSA, from an orthopedic standpoint, is only one application, and that's primary need. We've got other applications that we'll be launching over the next 12 months that will give us more opportunity to get deeper penetration of robotics and orthopedics. So it's very heartening with just 1 application to see the amount of uptick that we're getting in folks wanting to move forward with the ROSA platform. But I think it's important to pull back a little bit because ROSA to me, or robotics, just in general, is really just 1 variable in the equation. We're absolutely going to launch new applications in robotics. There's no question about that. But we're also keeping an eye on and innovating around the robotic system. I'm just going to kind of call it the ecosystem around it. Obviously, the implant is the obvious one with Persona. But we're also looking at pre-surgical planning as a pathway here, too. We want to make sure that we're enhancing the amount of folks that use pre-surgical planning. And there's a number of reasons for that. Obviously, you're capturing data that you can use to be able to look at afterward through artificial intelligence and draw some conclusions from. But also, you get smarter on what you're going to deal with from an anatomy perspective. You can make sure the robotic system is going to be able to let you do it accurately. But that data will allow better application of the robotic system during the surgery. And it will ensure that you've got what you need to do the procedures. You might have augments in the procedure, you can use them, or guides. You wouldn't have had that if you didn't do pre-surgical planning. And the beautiful thing for us is we get more revenue per procedure. So that pre-surgical planning is going to be something we're going to focus on, robotics, obviously, but then also, data and informatics. We want to make sure that pre-surgery, during the surgery and post-surgery, we're capturing data in a much more unique way and differentiated way than all of our competition, so we can provide more data and insights to being able to care for the patients. We think that's a very powerful way to move in the future. So robotics will absolutely be a key variable on this. But those other variables make the equation much more valuable to the customer, and this is clearly something we're focusing on. That's why we talked about our relationship with Canary during the Q3 call. We'll have the first smart implant in the marketplace that will allow us to capture data continuously from these patients. And ultimately, that should draw some conclusions on what kind of care should be provided for the patient that looks like that patient in the future. So we're pretty excited about that full ecosystem, not just robotics.

Can you give us any more color, Bryan, on timing of your thoughts about new applications, new ROSA platform applications on the large joint side. The data informatics or research and planning. Any -- can you give us any feeling for the cadence that we might see products and product launches?

Yes. So I would just say, just broadly speaking, what I would tell you is that over the last 2 -- probably 2.5 years, you've seen a dramatic shift in the amount of money being spent in robotics and data informatics. So we did a significant mix shift in spend away from traditional implant dollars being spent in our R&D, metal and plastic, if you will, to technology. So a dramatic shift. We didn't have to dramatically increase research and development. What we had to do is move the dollars to the right areas. And so you're seeing a significant amount of investment, resources and mind share being focused in that area. As a result of that, you're seeing a very full pipeline of products that we're going to be launching over the next 2 to 3 years in robotics, and again, across various plans of data and informatics. And so it's an area of concentration for us. It's an area of very full pipeline for us. The things that we've talked openly about, and I'm more than happy to share them again, would be around the next applications in ROSA, which would be in 2021. The next one for us will be, again, in the knee category, which would be for a uni or partial knee. And the one following that will be for hip, and we'll have a hip application that we think will really benefit the Avenir product launch that we just had. And those are the 2 that we're willing to talk about, but it won't end there. It's a very full pipeline of products that will come, not just in large joints, but in other categories as well. We just don't want to talk about the timing or the specificity of those.

All right. I totally understand. And when I think about ROSA's impact, particularly -- let's just focus on knees for a second, which I get asked about all the time. When we think about the pull-through of -- that ROSA can create with premium implants, Persona, the cementless volume contracts, previously lost procedures, I mean, and I'm sure more, it's hard to model. But when I look at Stryker a few years and to MAKO, they were growing at 6%, 7% plus. Is that where we think we're heading for Zimmer as you continue to roll out?