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

Good morning, ladies and gentlemen, and welcome to the webcast of the 2021 Annual Meeting of Shareholders of Zimmer Biomet Holdings, Inc. Please note that today's meeting is being recorded. However, participants are not permitted to use any recording devices. I would now like to introduce Zimmer Biomet's Senior Vice President, General Counsel and Secretary, Chad Phipps, to begin the meeting. Please go ahead.

Thank you. Good morning, and welcome to Zimmer Biomet's 2021 Annual Meeting of Shareholders Webcast. We'll begin with a brief business update presented by Bryan Hanson, our Chairman, President and Chief Executive Officer. We'll then conduct the formal business portion of the meeting. Following that, we'll conduct a question-and-answer session. Shareholders may submit questions electronically during the meeting via the web portal. Shareholders were also able to submit questions in advance of today's meeting via the proxy vote website. During today's webcast, the company may make forward-looking statements. Forward-looking statements are based upon the current beliefs, expectations and assumptions of management and are subject to significant risks and uncertainties that could cause actual outcomes and results to differ materially from the forward-looking statements. Please refer to our 2020 Annual Report on Form 10-K and our subsequent SEC filings for a description of some of these risks and uncertainties. We expressly disclaim any intention or obligation to update or revise any forward-looking statements. With that, I'll now turn the webcast over to Bryan Hanson, our Chairman, President and CEO, to share a few opening remarks and to provide a business update before we call the formal business portion of the meeting to order.

All right. Great. Thanks, Chad, and good morning, everyone. Thanks for joining us this morning. I just wanted to start by acknowledging and thanking Zimmer Biomet's more than 20,000 global team members, our dedicated and engaged Board of Directors and you, our shareholders, for your support as we have executed our plans over the past year. I said early on in the COVID-19 pandemic that there really isn't a playbook of historical actions that an executive team could reference to know how to navigate 2020. The year genuinely has no direct precedent. And so we, at Zimmer Biomet, looked within and focused on our mission and guiding principles to move us forward. In a year when health and safety was top of mind for all of us, we worked very hard to keep our people safe, supported our communities and provided the products and solutions to help our patients live better lives. And we continue to reshape our company for the future. And despite the challenges posted by the global pandemic, Zimmer Biomet made steady progress during 2020 toward the continued transformation of our business. Over the last year, we have taken steps to accelerate innovation, execute on our strategy for sustained growth and deliver value to all of our stakeholders. Zimmer Biomet's headline numbers for 2020 may indicate a very challenging year. However, by many measures, 2020 was a remarkable year. We delivered above-market growth in our core large joint reconstructive business, launched new innovative products, executed against our restructuring plan and completed several strategic acquisitions that we project will be accretive to our top line growth. Highlights of our accomplishments in 2020 include, but certainly are not limited to, our swift response to the COVID-19 pandemic, which allowed us to protect our global supply chain and operate without compromising quality. We launched over 20 new products during the year. We had several tuck-in acquisitions and partnerships, setting us up for years of growth in very attractive markets and submarkets. We prepared for the recently announced spin-off of our spine and dental segments, and we accelerated the virtual work strategies that we have as an organization. And our ongoing commitment to diversity, equity, inclusion were clearly present during 2020 as well. The past year was unpredictable and challenging and tested us in ways we couldn't have imagined. We came together as one team, which has made Zimmer Biomet, in my opinion, even stronger. We have demonstrated our ability to execute in the most challenging market environments, and we believe we're ready to face any potential roadblocks that may lie ahead. We proved that our strategy is working, and we will continue to transform our business and invest in our mission, which is to alleviate pain and improve the quality of life for people around the world, as we enter 2021 with increased confidence in our team, our core businesses and our long-term strategic plan to drive sustainable growth and deliver shareholder value. And before I wrap up and on behalf of the entire Board and leadership team, I would like to express my sincere gratitude to both Larry and Gail, who are retiring from our Board of Directors this year, and we are very grateful for their years of dedicated service and tremendous contributions towards helping the company advance our mission. Larry has been a member of the company's Board of Directors since its inception in 2001 and served as Nonexecutive Chairman since May 2013. During his tenure as Director, he also served as a member of the Audit, Corporate Governance and Compensation and Management Development Committees and as Chair of the Audit Committee. Gail has been a member of the Board since 2012, most recently serving on the Audit and Corporate Governance committees. They have both played a pivotal role in the overall growth and transformation of our business, and we have benefited immensely from their guidance. Once again, on behalf of Zimmer Biomet, I thank you for your support. I look forward to updating you on our progress. Okay. I now call the 2021 Annual Meeting of Shareholders to order. It is my intent to chair and conduct a meeting in the manner stated in the agenda and the rules of conduct. The polls are now open for voting. All members of Zimmer Biomet's Board of Directors are attending today's meeting through this webcast. Also attending are members of the company's senior management team, a representative of PricewaterhouseCoopers, the company's independent registered public accounting firm, and a representative of Broadridge Financial Solutions, who will act as the inspector of the election for this meeting. Chad will now address some of the formalities of today's meeting. So Chad?

Thank you, Bryan. The agenda and the rules of conduct are posted with other meeting materials on the web portal. The procedures we are following are simple and are designed to ensure that we have a fair and orderly meeting. As noted, the polls are open. Most shareholders have already voted by proxy, and the proxy votes have been tallied. If you want to vote your shares now or change your vote, you may do so by clicking on the voting button on the web portal. The polls will remain open until the conclusion of the review of the matters to be voted on. This meeting is being held pursuant to proper notice. Approximately 208 million shares of the company's common stock were outstanding and eligible to vote as of March 15, 2021, the record date for this meeting. Proxies representing a majority of those shares have been received. And accordingly, a quorum is present and the meeting should proceed. We will now review the matters to be voted on. Proposal 1 is the election of 10 directors to serve until the 2022 Annual Meeting of Shareholders. The Board has nominated 10 incumbent directors. Those individuals are Chris Begley, Betsy Bernard, Mick Farrell, Bob Hagemann, Bryan Hanson, Arthur Higgins, Tessa Hilado, Syed Jafry, Sree Kolli and Mike Michelson. The company's bylaws require nominations made by shareholders to be received at least 90 days prior to the meeting. Since no other nominations were received, the nominations are closed. Proposal 2 is the ratification of the Audit Committee's appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2021. Proposal 3 is the annual say-on-pay vote. Shareholders are asked to approve, through a nonbinding advisory vote, the compensation of the named executive officers as disclosed in the proxy statement. Proposal 4 is approval of the amended 2009 stock incentive plan. Proposal 5 is approval of the amended stock plan for nonemployee directors. Proposal 6 is approval of the amended deferred compensation plan for nonemployee directors, and proposal 7 is approval of amendments to the company's restated Certificate of Incorporation to permit shareholders to call a special meeting. It is the Board's recommendation that shareholders vote for all proposals. This concludes the review of the matters to be voted on. We'll now pause briefly for anyone voting via the web portal to complete their vote. [Voting]

Now that everyone has had the opportunity to vote, the polls are officially closed. At this point, we will report the preliminary results of the matters voted on today based on information provided by Broadridge Financial Solutions. Any votes that have not been considered in the preliminary report will be included in the final vote tally reported in a current report on Form 8-K to be filed with the Securities and Exchange Commission within 4 business days. Based on preliminary vote totals, shareholders have: one, elected the 10 director nominees to serve 1-year terms until the 2022 Annual Meeting of Shareholders; two, ratify the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for 2021; three, approved, on an advisory basis, the compensation of the named executive officers as disclosed in the proxy statement; four, approved the amended 2009 stock incentive plan; five, approved the amended stock plan for nonemployee directors; sixth, approved the amended deferred compensation plan for nonemployee directors; and seven, approved amendments to the company's restated Certificate of Incorporation to permit shareholders to call a special meeting. With that, I will turn the meeting back over to Bryan.

Great. Thank you, Chad. And there being no other matters required to come before this Annual Meeting of Shareholders, I declare the formal portion of the meeting to be adjourned. Let me open it up to shareholder questions entered today via the web portal or submitted in advance via the proxy vote website. So Ezgi, who is our Investor Relations Manager, will facilitate reading the questions, and we'll tackle as many of them as we possibly can. So Ezgi, why don't we go and get started?

Thanks very much, Bryan. Good morning, everyone. I will read the questions that are germane to the meeting. If there are any questions we don't get to during the time allotted, we will respond directly to the shareholder or by posting answers to the Investor Relations section of our website, depending on the subject matter and relevance. Now on to the first question. The first question is, has Zimmer Biomet changed its policies on political giving since January 6? Will you be joining the recent conversations around political and social issues?

Great. Thanks for the first question. And yes, the answer is yes. Following January 6, Zimmer Biomet's Political Action Committee suspended all political giving to all federal political candidates in the U.S. We're currently evaluating our plans to reinstate our PAC contributions, but we did stop those back right after January 6. At Zimmer Biomet, diversity, equity and inclusion are embraced as a foundation to our mission. And it's upheld in every step of our commitment to alleviate pain and improve the quality of life for people around the world. It's just part of who we are and part of the mission of this organization. Consistent with our guiding principles, which is part of the mission, last summer, we committed our voices and our resources to community groups and business platforms and other organizations united to driving meaningful change and sustained social justice. We launched several initiatives to drive and accelerate change both within the organization and around the globe, including continuing our support of Movement is Life. It's a multidisciplinary coalition seeking to eliminate the racial, ethnic and gender disparities in muscle and joint health. We committed, in addition to that, a $5 million over 5 years -- that's at least $5 million over 5 years through the Zimmer Biomet Foundation to nonprofit organizations dedicated to combating racism and supporting diversity, equity and justice and engaged over 20,000 of our team members in cultural awareness and inclusion programs in the year. Okay. So next question, please.

Thank you, Bryan. The next question is, has any attempt been made to add more female, African American or Hispanic directors to the Board?

Yes, absolutely. Diversity is important to our Board of Directors and obviously to us, from a leadership team standpoint throughout the organization. And although we don't have a policy regarding director diversity, we have absolutely put this at the forefront of our focus when we're recruiting and nominating our Board members. And we could talk about it, obviously, but the action is more important than talking. If we just look at the last 3 Board members that we brought on, all 3 are diverse, and 2 are female and ethnically diverse. So clearly, this is a focus for the organization because we believe in the value of having diverse perspectives on our Board. If you look at our proxy statement, you would see that now women comprise 30% of the Board. And those directors that are ethnically diverse are 30% of the Board as well. And we have 10% of our directors that identify as LGBTQ. So clearly, this idea of diversity in thinking isn't just a thought in our mind, it is a part of what we do as an organization. And that's also reflective of the leadership team of this organization. When I joined the organization back in end of 2017, early 2018, we had 20% diversity on the leadership team of Zimmer Biomet. We now have over 70% diversity on the leadership team of Zimmer Biomet. So again, the actions associated with bringing in diversity and diverse thought is extremely important to us because we truly do believe it will set us apart from the competition and allow us to compete effectively. Okay. Next question, please.

Thank you, Bryan. The next question is, what is the strategy moving into the next decade and beyond for Zimmer Biomet? Where will the product focus be compared to conventional products such as hip and knee replacement today?

Yes. Thanks for the question. And yes, our strategy has been very clear here. We've been talking about this for a while. We're going to shift a lot of our investment to robotics and data and informatics. We believe that is the future of our space and really the technology revolution that we're going to see in orthopedics that we absolutely want to make sure that we're leading. But never forget that we will always be an implant company. This is the core of the business that we have. It is what I would define as the center of the universe, if you will, for this organization. But it's that ecosystem around the implant that can truly allow us to differentiate ourselves versus the competition and very importantly be able to move our mission forward as an organization, again, to alleviate pain and improve the quality of life for people around the world. And it's also a big part, that innovation, at accelerating our organic revenue growth to that mid-single-digit growth range that we're talking about organically and also, by 2023, getting to that 30% adjusted operating profit margins as well. Okay. So next question, please.

Thank you, Bryan. Next question is, please provide a more detailed strategic plan for the spin-off of the spine and dental divisions.

Great. Thanks for the question. And yes, so if I think about the spin-off, it's probably good to take a step back before we talk about it specifically and think more about Phase 3 of the transformation, which is, a big portion of it anyways, active portfolio management. And the intent behind active portfolio management is to make sure that we increase the weighted average market growth of our business, but with certain views in mind. The first is to make sure that anything that we're focusing on as an organization is mission-centric, very important to make sure that we're aligned to our mission in everything that we focus on. The second is that we have a path to leadership that we truly do believe that we can lead as an organization in that space. The third is to make sure, as I just referenced, that we can increase the weighted average market growth of our business. And the fourth is to make sure that we maintain our very strong profit margins versus our peer group. So those are all things that we got to focus on. And we looked at the spin of both the dental and spine businesses, although they both do meet our mission criteria, they don't meet our clear path to leadership, and they have slower growth markets and definitely both less profitable markets than what we have today. So for those reasons, they didn't necessarily make sense to have within Zimmer Biomet. And instead, we can -- truly believe we can unlock value by spinning them out of Zimmer Biomet, creating a NewCo organization. And as a result of that organization creation, have more focus and more intent on investing for growth in those 2 businesses. And at the same time, obviously freeing up space and mind share to be able to focus on ZB without those 2 in our portfolio. So that was really the whole point and kind of genesis behind it, and that's why we made the decision to spin it off, and we feel pretty confident that we're going to be able to create 2 strong organizations as a result. And so far, so good. It's early days, but it's progressing well. And the performance of the business has not wavered. So we have not created any kind of a disruption in the business so far, and we're going to continue to make sure that, that stays on track. Okay. So next question, please.

As a current shareholder of ZB, when the NewCo is launched, will I be awarded shares of NewCo?

Great. Yes. So how this works is the -- when the planned separation is actually completed, both obviously Zimmer Biomet and NewCo become separate publicly traded companies. And as an investor in Zimmer Biomet today, you will be entitled to receive a fixed amount of NewCo shares for each of the shares that you own in Zimmer Biomet today. And that would result in the fact that then you're going to be a shareholder of both Zimmer Biomet as well as the NewCo. And if we take past spins as a guide, and of course, there's no perfect predictor of the future, but if we look at the past, it would indicate that there's real value creation opportunity here in the long term for both ZB and NewCo. Okay. So why don't we go to the next question?

Thank you, Bryan. We have time for one final question. That question is, what led to the decision to combine the CEO and Chairman positions? Chad, would you like to respond to that question?

Sure. Thanks for the question. The recent decision to combine the roles of Chairman and CEO reflects the Board's strong belief that Mr. Hanson has demonstrated the leadership and vision necessary to lead the Board and the company. The Board believes that this leadership structure will promote efficient Board functioning, foster a constructive and cooperative relationship between the Board and management and reinforce Mr. Hanson's overall responsibility for the company's business and strategy under the oversight and subject to the review of the Board. Finally, it's also important to note that the Board appointed a lead independent director who performs most of the same responsibilities as a Nonexecutive Chairman.

Thank you, Chad. This concludes today's Q&A session. Thank you for your continued support and your interest in Zimmer Biomet.

This concludes today's webcast. Thank you for your participation.