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

Hello, everybody. Welcome to the next session of the Citibank Healthcare Conference. And I'm thrilled that we have today both Bryan Hanson and Suky, I'm going to kill your last name, I'm sorry, Upadhyay. As Joanne Wuensch, I feel I am allowed to do that. But Suky and Bryan, thank you so much for joining us today.

Before we get into sort of the exciting stuff, I want to spend a little bit of time talking about how the 2 of you are relatively new to the organization still. And how has it changed, Suky, since you joined, I guess, it was a year ago now, if I lost track of time. And Bryan, you, 3 years ago.

Yes. So maybe I'll start, Suky, and then turn it over to you. And first of all, I can't believe it's only been a year, not in a negative way, Suky. It's hard to believe it's only been a year. But for me, it's been a little longer. I'd say it's been -- it feels like a completely different organization to me. And Suky didn't come in, in the very beginning with what we had to manage in that first part of the story. But it feels completely different. The culture of the organization, the mission of the organization, the talent at the senior level is completely different. It's the diversity of the team and just the feeling of the ability to succeed. When I first got here, it was a beaten down, we're getting beat and it's okay mentality. And it is completely the opposite of that right now. So the biggest things, in my mind, that have changed is the clarity of mission, a change in senior-level talent, which brings a lot of diversity to the organization and a completely different culture that is a believe culture, a problem-solving culture. And I'm excited about. Now there's plenty of work to continue to do in those areas, but I feel really good about that foundation. And then the strategy has shifted. I think we've got a robust, long-term strategy, and our execution inside of that strategy now is becoming second to none that I've had in the past anyway. So just a completely different organization, it feels like to me anyway. But Suky, maybe you can provide some context from your perspective? Can't hear you, Suky. You might be on mute.

Okay. Hopefully, you can hear me. Sorry about that. Joanne, thanks for having us today. It's actually been 1.5 years, and I think you did an admirable job with my last name. So thank you for your concern there. But look, I think it's really 3 things, some of it are going to build on what Bryan said. First is the clarity and strategy since I came in. And not only the clarity and strategy, but moving that strategy to operational plans and then the tactics and then the execution and monitoring. I've never seen so much discipline in a company as I've seen at this one. That's exciting as a CFO. Two is talent. When I first came into the organization, there was a lot of convincing to bring talent in. Now when we find we're recruiting, people want to come in to Zimmer Biomet, right? We're getting multiple high-quality candidates that want to be a part of this. And I think third is culture. When I first came in, it was kind of, hey, can we do this? And now it's an absolute, hey, we know we can do this. How do we even accelerate? So to me, those were the 3 biggest inflections over the last 18 months.

So if we're going to put some numbers behind the changes, Bryan, I'm sure you have these. How do you think about either in terms of manufacturing or sites or people or senior management? What's different since you arrived?

Yes. That mean so much of what we just described, but if you just put numbers to what I have on the top of my head is just the leadership team that we have in place. I'll just give you a couple of stats. I mean, we now have almost 70%, 75% of the people that I have on the team were not in the role before when I joined the organization. We've changed the structure of the organization to be able to ensure that it aligns well with how we want to manage the strategy of the business. So a complete structural changes in the organization. With that leadership team, we also now have significant diversity. We're in the single-digit diversity on the leadership team. We're now more than 70% diversity on the team. And that's diversity in the traditional sense, but it's also diversity in thinking. And so we're thinking about how we solve these problems with our business in a different way. There's tension that occurs because there are different thinking, but that means we're going to get a better outcome. So we've been able to leverage this different thinking in our leadership team with the knowledge of the space we play in through the broader organization, combine those 2 things and come up with different solutions. Big change is the way we actually spend our innovation dollars, for instance. We pivoted dramatically as a result of the view of the new leadership team on where the puck was going for orthopedics. And we moved from a very small amount of money being spent in research and development on robotics and data informatics to 70-plus percent of our innovation being spent in that area and moving away from just the metal and plastic of an implant. So that's been a dramatic shift in how we're going to approach innovation and how we think we're going to be able to change the outcome for patients and service our customers better. So just so many different things that you've seen shift, but those are the biggest ones, in my view, anyway.

And we were talking about the last 3 years. So when you and I are sitting here 3 years from now, what do you think we'll be saying at that stage, like 3 years ago, remember, like what will have been accomplished? What are your goals?

Yes. I'd tell you, there's so much in just a typical business part. When we talk about Phase 3 of the organization, it's transforming the portfolio of the organization. So for me, if I just look at the financial portion of this, it's the obvious stuff that we've been talking about. I want more of our revenue being captured in markets that are faster growth today in those mid-single digits or better markets. We have a very small percentage of our business today in those markets. Our goal in transforming the portfolio is to increase that, right? And that's part of the spin that we're going to do right now. But that's the goal of transformation, and that's what we're going to be focused on. But I think the big one is just how people think about this company from a brand perspective. And Keri's on the line here. She runs IR, but she also runs communications for us. And she's rolling out a really good plan to change that narrative. We're not the 100-year-old company that moves slow, that is in implants. We are a technology company that is nimble, moves fast and brings technology to bear that is differentiated and can change the way we care for patients. And we are accountable for what we do. And so it's taking that narrative and changing it. And I'll be very disappointed if a few years from today in our strat planning rollout that people don't think differently about this organization when they hear the name Zimmer Biomet. That's the intent. So the financial stuff is real. I want to make sure that happens, and that's very important. But just that whole narrative needs to shift in this organization, and it will.

And is that narrative more Wall Street because I think many of us are already seeing that? Or is that narrative on the physician side or the hospital side?

It's every stakeholder. I want my own team members to feel differently about this organization when they hear it. I want them to be proud of the innovation that we bring to the marketplace before others can. Smart implants is one. But there's going to be multiple technologies that we bring to bear that will be first to market, leading the pathway in technology in our space. I want you to see that, too. You're going to see that financially. You've seen some of the turn already. But I want you to really believe that this organization is committed to bringing innovation that will separate us from everybody else. And I want our customers to see it and feel it and know it. And so to me, it's every stakeholder has to believe in this narrative. And that's through proof points that we're going to provide, but also changing the way we talk about the organization, internally and externally.

And one of the things that's made Zimmer Biomet interesting in 2021 from an investor standpoint is we talk about the recovery trade. And the recovery trade usually translates to elective surgery recoveries. But in some ways, I would suggest that Zimmer Biomet is also a recovery trade from the turnaround. Is that the right way to think about it?

So I would say on the side of the turnaround, and we're well past Phase II now. I mean, Phase II will be forever, Phase I will be forever [ exchanged ]. But we're really moving into getting that kind of momentum traction. And if anything, during the pandemic and the disruption, we took advantage of that disruption and really made sure that we double down in the areas that were important to us. There's almost like a pause occurred in the marketplace, and we kept moving forward safely, obviously, but we moved forward. And that gave us an opportunity to probably be better positioned coming out of this than we were before. And so that piece to me is in line. I feel very good about what we can control. The second part of this is what you just said is when does the vaccine get rolled out in scale. And as a result of that, the pandemic is in our rearview mirror. When that occurs, we're well positioned to benefit from it. And I think it's going to be a tailwind for some period of time. And we've got hundreds of millions of dollars of backlog that we've got to work through, and that's an exciting opportunity for us. And I think we're well positioned to take more than our fair share of that backlog.

So you just led me straight to my next question, thank you, which is, as we think about the recovery in elective procedures and in the post-vaccine world, what is the window of time between I'm vaccinated, I'm cleared before I go to my doctor, before I schedule my surgery. I'm trying to figure out that funnel, that lead time in different areas of medtech?

It's difficult to say now because there's a new variable. Before, what I would tell you is like what we saw in 2020, as soon as the virus began to subside coming into Q3, we really saw almost an immediate bounce back of procedures, patients coming back into the funnel. In certain situations, saw well above 2019 growth rates in certain parts of the world, and that was pretty exciting to see. I think that will happen again. But there's one more variable that we've got to look at. What we're hearing is, and we're seeing it actually with people in our own organization and their family members, people now are not just looking at when the virus subsides and capacity opens back up in the operating room. They're also saying, "I'm going to wait for me individually to get the vaccine before I get a procedure." And so you're going to have that as another variable you're going have to pay attention to. So that may augment then as a result of it when people come back in the funnel. But that's okay. I'm okay with it. The fact that people believe in the power of the vaccine that much tells you that they're going to want to get and you're going to get that scale that we're looking for. And to me, eventually, when that does happen, that opens up everything. It's going to be very difficult, and that's why we didn't give guidance to predict exactly when that happens. But hey, there's a light at the end of the tunnel finally, and that's a good thing for us.

And just building on that, Joanne. If you think about our demographic in our elective procedures relative to the demographic that's first getting the vaccine, there's a high correlation there. So we're hopeful and optimistic that as capacity starts to open up that those patients that are highly correlated to our procedures are already vaccinated and get back in the system relatively quickly. Still a lot of uncertainty around that, but that's one of the ways we're looking at it.

Right. Because I mean, we've been talking about these first half versus second half procedural flows. I think for Zimmer Biomet, second half will be stronger than the first half. But ortho may just go straight down the middle of the lane. As soon as you're vaccinated, you may get into your physician's office and schedule pretty quickly.

That's what we would predict. Yes, I really do think you're going to get a nice, again, bounce back. What's interesting about this is we've had some historical precedent. We look at maybe a natural disaster, it could be economic downturn, it could be different things where you've seen patients come out of the funnel. And we've been able to kind of predict how much time it takes for them to come back in the funnel and even what percentage of them typically come back in. So we think we've got a pretty good calculus there. The difference is there's really no precedent for this. We've never had a backlog of this size, this magnitude on a global basis. So it's pretty hard to predict at this point just based on capacity and other things how long it's going to take for that backlog to come back to the funnel. What we know for sure in a lot of our business, it is a disease state that we're treating that hurts, that is painful. And you're living with that pain every single day, and it progresses. So we have a high level of confidence people will come back in. We just don't know yet how quickly, given the size and magnitude of the backlog, we're going to be able to digest that backlog.

How do you estimate the backlog? Is that something your salespeople are doing or based on physicians or based on demographics?

At first, we started off with a very complicated calculation on this thing, really, I mean, it was like...

Can we all do that with just...

We started off with -- and it almost got to the point where it was unreal, like it was impossible to really figure it out. But we really try data points with our field folks calling customers, doing all kinds of crazy things. And then we just said, you know what? It's pretty simple. We've got a disease state that's progressive. It hurts a lot to be in that disease state. You're going to eventually come back in. So we said, anytime the business overall in the market is below market typical growth, that's adding to the backlog at some percentage because there's certain number of patients that would get better. They pass or sometimes they get to the point where you can't do the procedure anymore. So a certain number of patients come out of the funnel. But the fact is every day that we're below typical market growth, we're just doing that calculus of what's that delta, and that gets added back to, based on that formula, our backlog. So it's a pretty simple basic calculation, which is absolutely wrong, but directionally right.

That makes sense. There's so much I can say there, but that makes a lot of sense. But I do want to spend some time talking about the big announcement from the last earnings call, which was the spin-out of the Dental and the Spine business. What made you -- again, we're going back to your 3-year plan. What made you say, "Now is the time. Now is when we think we're ready to do this."

Yes. It was really trying to stay disciplined to that 3 phases that we talked about. I really wanted to be sure that Phase I, for sure, had to be in place. I mean that was hearts and minds. That was execution challenges. You remember back in the day all we talked about was the FDA and where we're going to get product out the door. I mean, so that was really what we spent time on. Once that was behind us and we're squarely in Phase II with a solid strategy, innovation that was met that matter, that skip in the step in sales organization, then I knew we were ready. And also, by the way, all along that, I was bringing in talent into the organization that have deep knowledge in spins and also divestitures and also acquisitions and integration. So we've built a competency set in this organization that we didn't have before. So it was Phase I, Phase II had to be in the right place. And I wanted to have a high level of confidence, to have the right competency and process in the organization to be able to do these types of things. And that brings you to Phase III. We looked at a number of different ways to unlock value in the Spine and Dental, a space that we've been very clear. Those were not going to be businesses that were growth drivers for us. We've explained why that is, and it's not because they're ugly businesses. They're just not as attractive as other businesses that we have. We think we have a better path of leadership and better margin profile and better market growth. And so here's where we're going to get the investment. We want to be able to unlock that value. We looked at a number of different pathways to do that. And based on what was available to us, what we saw as an opportunity to bring value to our shareholders, to bring value to our team members and to our customers, we decided that the spin was the best way to unlock that value.

And did you -- well, you may not be able to answer this directly, what about just selling it outright?

That was always in the calculus as well. I mean, we looked at every pathway that we could to unlock value. And just given what the opportunities were that were available to us, we felt this was the best way to unlock value for all stakeholders.

So there are a number of steps that happen when you think about the spin-out of an asset of this size, which is probably why you have the almost 18-month runway to execution. One of them is you just announced a CEO for the company. Do you want to comment on that maybe?

Yes, I'm excited. I'm excited about that. It's interesting when you go through the interview process. And you know how it is, I mean, because I had to do it a lot, bringing people in to -- on the leadership of this organization, a lot of people that I didn't know before. And you got to kind of go on faith when they tell you things in the interview process. And then even when you call their -- the folks that they say are not going to be the folks who give advice on what they did or didn't do well. But in this situation, the guy we brought in Vafa Jamali, actually used to work for me back at Covidien and Medtronic. And I know what he's done. So he didn't have to tell me what he accomplished in his resume because I already knew it. Here's a guy that is a culture guy like me. He really drives strong culture, mission, culture, talent, those are things that he concentrates on significantly. But he's also a proven turnaround guy. I brought him into a business that was sub-$1 billion back in the day when I stole him from the Canadian business that we had, and he did a fantastic job in turning that business. Then promoted him to a multibillion dollar business that was underfunded. We weren't funded. It was the same thing. We had growth drivers and then we had this other business. I brought him into that business, and he cut expenses over a 3-year period of time pretty significantly, built traction from a culture standpoint, brought the right talent in and grew the business actually in some quarters better than the businesses we are focusing on from a growth standpoint. So he's not just a guy that tells me he's done these things. He's a guy that has proven he can come in and turn the business around. And it's early days. It's only been a week or so since we announced him. But the -- already, I can feel the connection that he's getting with the organization. He's already talking to customers. He's already been in the lab with our customers. So he's doing a nice job right out of the gate, doing exactly what I know he can do is build trust.

And so what are the other steps to spinning it out so that we can sort of track or understand it?

Yes. There's -- gosh, there's so much work to be done already. No kidding. If you think about the big one for him, obviously, is building out and selecting his leadership team. And he's got a really great opportunity. He gets to build his whole Board. I mean so basically you're standing up a publicly traded company from the beginning. Now what's great about this is we brought people in, as I mentioned before, that are going to be heavily focused and dedicated to this process over the next year, year plus. But the 2 organizations, RemainCo that are focused on driving RemainCo and NewCo, focused on commercial and R&D, they're going to be pretty insulated from this. That was the whole plan. Let's insulate those folks so they can run the business, put a core group of individuals in place to be able to drive what needs to be accomplished over the next year plus and be ready for this. Now we will have TSAs in the same way that you would if you were divesting a business. There'll be TSA arrangements that we have for some period of time, particularly around research and development and other areas to make sure that they're standing up in a way that will allow them to be successful. But there'll be a lot of work that needs to be accomplished over the next year, a lot of fun things in part of that year as well, by the way. But it will not disrupt, and that was the key thing. It will not disrupt the 2 organizations that will be standalone. And what's interesting about that, I would just say, just because I think it's important I've been hearing people say, hey, there's going to be disruption. There's going to be dis-synergy and all this stuff. It's different than that. If you're selling an organization and someone's acquiring that organization in our space, there is always going to be dis-synergy. I don't care how good you are at integrating. There's going to be dis-synergy because there's overlap, and you've got to make choices on who you're going to keep, who you're not going to keep. So that dis-synergy occurs. Here, we're actually seeing the opposite. People are extremely excited inside of NewCo because they know they're going to get the focus. And if anything, I'm seeing more of a skip in the step and more focus on driving performance right now. And so I actually think it's going to be the opposite effect. It's not going to be a dis-synergy that occurs. I think there's going to be immediate traction. And I think they're going to perform better even in this year before the spin, I would predict they're going to perform better because they're excited about the future now more than they were before.

And how do you manage the organization you will be left with? And left with is sort of in quotes. But I mean, you're going to have a smaller building pot, so to speak. How do you think about that?

I'm excited about that. So what this does is it frees up completely mindshare, not immediately because we still have to do the transition, but frees up mindshare pretty quickly because I've got Vafa in place now to run NewCo, frees up my team to focus just on resource deployment inside of RemainCo. The other beauty of this, too, is we look at active portfolio management to transform the organization, we now have a smaller business so that the things that we acquire have a bigger impact on that overall shift in the portfolio that I mentioned before. I want to very quickly get as much of our revenue as possible in mid-single-digit growth businesses or better. And now smaller businesses that we acquire have a bigger impact on that percentage. So we really do look at it in a number of different ways as being beneficial to RemainCo.