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

Good morning, everyone, and welcome to Day 3 of the Jefferies 2021 Virtual Health Care Conference. I'm Anthony Petrone with the Healthcare Research Group, here in New York. We're happy to introduce Zimmer Biomet, one of our top picks in the large-cap space, in the orthopedic space. We're very happy to welcome the company's CEO, Bryan Hanson. We're also very -- warm welcome to the company's CFO, Suky, and I don't want to pronounce it wrong, Upadhyay. Sorry about that, Suky. Welcome, Bryan, and welcome Suky. We appreciate your attendance at this year's conference and the support. We hope that your family is doing well and that the team at Biomet is doing -- Zimmer Biomet is doing well.

Great. Glad to be here.

Thanks, Anthony.

I think a good place to start. And there are several conferences going on. And certainly, there's a lot swirling on out there in the breakout meetings, the Zoom meetings, just about procedure volumes broadly. Obviously, Zimmer is tethered to procedure volumes in the orthopedic space. The company last quarter, obviously, sort of a reversal from the 4Q trends, with some mix performances by geography. Of course, U.S. doing a little bit better, mixed trends, EMEA, some mix trends also in APAC. And so maybe a good place to kick off is on the more recent trends that you're seeing. How has May trended in terms of U.S. volumes? How has -- are the trends in Europe, how are the trends in APAC in other areas across the world? And we could go to Bryan then or Suky to kick off.

Okay. Yes. And maybe I'll just kick it off, high level and then pass it to Suky to give a little more detail. But I would just say that, what we're seeing so far in Q2 is pretty consistent with what we expected. And is basically in line with what we've been saying since Q1. So really no major surprises since Q1 in our conversation about the recovery. Pretty much down the middle of what we expected from our guidance. And so that's kind of where we are right now. I just want to make sure that people understand that we're talking about a big opportunity at some point in the future when backlog comes through, and we're anxious for that. But our guidance range didn't necessarily predict that to happen, obviously, in Q2. But with that, maybe I'll turn it over to Suky. And you can give a little more color on the range and some color around it.

Yes. Happy to do that, Bryan. And thanks, Anthony, for having us here, and congrats on the new role. As Bryan said, things are consistent with how we position them back from our first quarter call and then interactions since then. What we said was second quarter, we expect to exit at about 2019 volumes and rates. So that's not for the full quarter, but by the time we exit, we expect to be there. And that's a sequential improvement from what we saw in Q1. Inside of that, what we said is Asia Pacific would grow above 2019 levels, the Americas and of course, the largest part of the Americas is the U.S. would grow at about 2019, maybe slightly better. And in EMEA would continue to be challenged. Taking the click down from there, getting to your question on what's happening inside of each of those regions. In Asia Pacific, we're actually seeing stability and growth for the large part, in our 3 largest markets, which are Japan, China and Australia and New Zealand. So things continue to be performing well relative to COVID. We're still struggling in Southeast Asia, continues to be challenged. While we're seeing modest improvement in vaccinations and infection rates. There's still a significant challenge in that part of the world. Within EMEA, things are improving, but they continue to lag where the U.S. is, and we continue to believe that both developed and emerging markets inside of EMEA are about a quarter to 2 quarters lag in recovery from what we're seeing in the U.S. and that's primarily due to vaccination rates and the uptake of vaccination. So it's improving, but still not where the U.S. is, but largely performing as we expected. And then within the Americas, again, continuing to see pretty significant challenges in Latin America. Some challenges in Canada, but to a lesser extent. But again, both improving, but still challenged. And then in the U.S., we're starting to see the recovery take shape and take form. We have a number of states that are actually operating at '19 levels or slightly above as the backlog comes through, but we do have some states that are operating still below '19 levels as infections continue to abate and the vaccinations continue to improve. I would say, in those states where we're seeing volumes lower than normal, it has less to do with hospital capacity whether that's beds or ORs or staff. And it has more to do with patients just remaining on the sidelines for a little bit longer, just waiting for more vaccinations or perhaps taking a little bit of a break with their newfound freedom. So it has less to do with the system and more to do with the patients. And so we believe that, that's going to, again, correct itself over time, hopefully, in the not-too-distant future. So again, second quarter, we expect to exit at about '19 rates and getting at to sequential improvement. As we look forward, if you look at our guidance ranges, the way we thought about it, Anthony, is if you took kind of normal lies WAMGR for us, which we would say is about 3%. The lower end of our range would suggest that the back half is going to grow below that. The midpoint of our range would suggest we're going to grow right around that kind of average. And then the upper end of our range would suggest we're going to grow above that, meaning we get to normalized market, plus we see the tailwind from the backlog of deferred patients. So there is still some uncertainty in the market in front of us. We think that we are seeing, I think we're seeing things improve, and so we remain optimistic. And the one thing that resonates for me is, we've never had more conviction and confidence in our underlying business, whether that's our new product pipeline, our recent launches or commercial execution. And so we feel really good about executing in those areas and controlling what we can control. And for those things that we can't control, we do see things getting marginally better as we move through the year.

It's really a great kick off here to the discussion, and I would be remiss to not go, Bryan, to the metaphor on dinner party. And maybe we can even expand that metaphor a bit. It sounds like there's multiple dinner parties going on right now. Folks are -- don't know where to go. Should we spend our time on sort of discretionary areas, I put off the surgery, should I get into the OR. What are you hearing, I guess, even from the surgeons? I mean maybe that would be the leading indicator. They may be, if you will, parking the cars in the valet and bringing people in. And so what is the latest in terms of surgeon feedback, in terms of actually starting to see that flow of backlog come in. And then maybe we can circle back and sort of, again, sort of try to quantify what that is. And I guess the feedback in the last couple of meetings has been that it certainly will extend into 2022. So what are you hearing now from surgeons and then a recap on how big you think it is?

Yes. So first of all, what I would say is, when we're looking at what we're anxiously awaiting is for the party, and using again that metaphor, to be in full swing. That basically speaks to what Suky just said on the upper end of our range. Once we see the backlog coming through, and we see an outpacing of market growth. That's when we're going to say, hey, guys, the guests are all here. The party started. And we've got that tailwind for some time. And we would agree that it would be well into 2022, just given the size and scale of that backlog. So that's the way that we're looking at it. We're anxiously awaiting it just like you. Our guidance does not suggest it's going to come, though, until the back half, and that's only at the top end of our range. So I just don't want people to be worried because we're not seeing it yet. That's actually what we expected. It's actually what we expected. But believe me, we know it's coming. You just work through the logic of this. You've got a lot of patients that have clearly had progression of the disease that are living in pain, would normally have come in for a procedure. And assuming there's no structural change in the disease, assuming there's no structural change in patients have willingness to deal with the pain, then those patients will eventually enter the funnel. And that's the way we've kind of looked at this. Any time your below market growth, you're building backlog. It's just a natural way to look at it. So that's the way we look at it. We do expect it to happen. I think the key takeaway is, we can't guess the timing. That's why we gave you the range. We just don't know. Nobody knows. Even we talk to our surgeons, they don't know. But what we can say is that we do believe strongly it's going to occur at some point. And when it does, you're going to see above normal growth. And so that's what we want to make sure we're driving the message home on: our confidence level is high, it's going to happen; our confidence level is not as high, and when it's going to happen.

Maybe, Suky, to throw your way to just round out the topic here and then we'll move on to strategics and talk about some products. Again, I think a lot of folks are trying to quantify this number, very hard to do. The number around $700 million has been thrown out there a few times. I mean is that the number to Zimmer itself. If so, how does that break down maybe by regions across the world, U.S., EMEA, APAC, et cetera?

Yes. So as Bryan said, just very simplistically looking at this, assuming nothing structurally has changed in incidents or disease progression. We look at market growth versus our performance. And take some haircut to assume that some patients will fall out either because of comorbidities are no longer eligible; unfortunately, maybe they've passed away; or three, perhaps their inflection has gotten better, or they're delayed in coming back into the market. There are a number of variables that can affect ultimately where that backlog is. But wherever you are in that range, that backlog is significant, and we believe to be in several hundreds of millions of dollars. Now to your question of where is that backlog? We don't think that there's a significant material backlog in Asia Pacific. They were first to get hit, probably, first to recover and therefore, have probably worked through the majority of their backlog. The second area is likely the U.S. We believe that the U.S. backlog will likely get worked through faster than Europe, let's say, given that Asia Pacific is probably worked through most of theirs. Just given the incentives in the health care system and the way our -- structurally, our health care system works. And then EMEA, we believe, will be a bit longer to work through their backlog, just given the public type structure and probably less incentive or capacity, quite frankly, to work through that backlog. So we think it's going to be a little bit longer tail in EMEA than you would see in the U.S.

Good segue into a high level strategic. And Bryan, you've been with the company now, CEO 4 years. Suky, I believe be going on 2 years. The company has gone through, obviously, several phases of the transformation, 3 high level that we've sort of bucketed, that win hearts, minds, get buy-in from the team and then the portfolio transformation, so maybe before we go into details, it sounds like and we got the French Open going on. In a tennis match, we're kind of in the third or fourth set here, maybe in those terms, where do you think the company is, if we define it as a turnaround, I think we're firmly in transformation. It's hard to say the company is still in a turnaround phase. But maybe just your high-level views on where the company is as you've embarked on this sort of mission over the past 4 years.

Yes. Pretty good description overall and look at it the way we've talked about it. I'd tell you that Suky and I, both agree on this. And even though I've been here a little longer, he's been here for quite some time. It feels longer than that, doesn't Suky? Longer than 2 years. But I'll tell you, if I look back on where we were 3 years ago versus where we are now, I would agree with you. I think that the transformation has clearly taken hold. And any risk to not being able to move to that other side of where we were, in my view, is gone. Now it becomes how do we outpace market growth. That's kind of the view that we have today. The beginning was all around fixing the major problems. We had a lot of culture problems. We had talent problems. We had -- just people still talking about Zimmer and Biomet versus one company. We have supply problems, quality problems, DOJ, SEC problem. We just -- everything was going wrong at that time. And that's all the discussion was about is how are we going to fix those things. And it wasn't a lot of fun, to be honest, and a lot of intense moments in that first year or so. But we've moved past that. We've got the right team in place. We've got the culture moving faster than I expected actually to have the culture moving in the right direction. We've got one mission for the organization. Nobody talks about Zimmer or Biomet anymore it's ZB. And we've really done a lot of great work in that first phase, I would call it. Phase II was really important, though. And that is for -- Phase II is forever, right? That is truly shifting to a longer-term strategy, having clarity in that strategy, restructuring the organization and all of our metrics and the way that we actually hold our operating mechanisms to be able to ensure that we drive accountability to those. And we are clearly there. Innovation is coming to the market. We're delivering on that innovation. We're clearly seeing it, knowing our performance versus our peers in the market. So we're excited about that. And that takes us to where you just said, Anthony, we're in Phase III. In Phase III, you could not do Phase III effectively. Unless you get 1 and 2 in place. They've got to be firm. You got to have the right team. You've got to have confidence in your business, your base business before you get into what I would define as, transforming the portfolio of the business. And there's other elements to Phase III, but the big one is transforming the portfolio. And we're deep into that already as well because there's two parts of that. One of it is, focusing our research development dollars where they really matter. And the other part is actively moving our portfolio around, selling spinning or buying businesses, and that's what we're focused on today. So I feel very good about where we are in the process. I'm very proud of the team for letting us move faster than I even expected that we could, and I'm excited for Phase III.

We talk about transformation. I think it's a good segue. For me, when I look at Zimmer, I say, well, we have a big spin coming spine, dental and then ZBEdge in the balance sheet. So we'll touch on these briefly. Maybe just a quick update, spine dental spin timelines. It sounds like that's still on track for the end of the year. Maybe just a quick update there. And then in terms of thinking of bigger transformations we're continuing on that theme, maybe before we go to Edge on the buy side, what do we think about sort of the M&A aperture. So an update on the spin and your current views on M&A?

Yes. So just on the spin, the timeline that we spoke about was doing this by mid-2022. And the timeline is on track. What I would tell you is, we're early days, obviously, in the process. There's a lot of work to be done. But we feel very good about what's happened so far. We feel like we're on time. We feel like everything is moving in the right direction. One of the biggest risks you always have in these is, business disruption. Business continuity concerns and so far, so good. We have not seen that. If anything, we've seen the opposite where the organization is feeling a little more traction, getting excited about the spin and being their own entity. So that would just be -- we're still on track. It would be, what we said before, by the middle of 2022. So outside of that, another part of the equation is not just moving stuff out. Obviously, it's moving stuff in. And we've already started to do that. You've seen some smaller acquisitions. Our firepower has not been exactly what we would like because of COVID and put a pretty big divot. And our opportunity to be able to get after the stuff we would like to have done. But even with the limited amount of money we've had, we've shown that we are going to do tuck-in acquisitions in spaces that are mission-centric, where we believe we have a right to win and I think have seen passive leadership that are beneficial to our weighted average market growth and ultimately allow us to keep our high level profit. And you've seen that. You've seen it in Sports Medicine, you've seen it in the ASC setting with booms and lights, you've seen it in our thoracic business with an acquisition that really sets us apart from the competition, and we're going to continue to do that. In the short term, you're going to see us do more of these tuck-in acquisitions and spaces we have confidence in, that we truly, we do believe we can be a market leader in. And we'll help the growth rate of the company. Longer term, we'll look at more aggressive stances here, larger deals, potentially even white spaces to allow us to diversify the growth of the business. But in short term, just expect these smaller tuck-in deals that we have confidence in that we can move with little disruption.