Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 6, 2020. Following today's presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Keri Mattox, Senior Vice President, Investor Relations, 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 third quarter 2020 earnings conference call. Joining me virtually today are Bryan Hanson, our President and CEO; and CFO, Suky 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 the earnings release found on our website at zimmerbiomet.com. With that, I'll now turn the call over to Bryan. Bryan?

All right. Great, Keri, thank you. And here now with our third virtual earnings call, it was hard to believe that so much time is already passed as we live inside the pandemic environment. But either way we're here, and I certainly hope that you're listening somewhere safe and socially distanced. We're clearly taking precautions here and we continue to follow our safety protocols and that's the reason why Keri, Suky and I are in different locations again for this call. As we've seen in the past hopefully we again do not have any jet mishaps, but just know if we do for whatever reason will push fast and make sure that we move forward. So, 2020 has clearly been unlike any of the year in ZB's nearly 100-year history, as I'm sure it is for every company that's out there right now. And as you know, I think we're all probably too aware, it's not over yet, it's definitely not over year. And that said, I have to say that look at how we have managed and just really navigated COVID-19 this year and specifically in the third quarter. And I'd say that I'm proud of the team, I am confident about ZB's future, I'm more confident now than they ever have been about ZB's future. I truly believe we are well positioned for success and our strategy is absolutely working. As you all know, we've been acutely focused on transforming ZB since I joined the company that's almost three years ago now. We face challenges before and while nothing could have ever prepared us fully for COVID-19, I do believe our ability to rise to those earlier challenges and then truly put us in a stronger position to effectively manage the pandemic situation, the environment that we're in…

Thank you, and good morning, everyone. To echo Bryan's comments, ZB's underlying fundamentals remain strong. Overall, our Q3 performance was better than expected. Revenue was ahead of expectations as we posted operational growth due to faster market recovery across most developed markets in tandem with strong commercial execution. Improved revenue performance drove better margins and a solid quarter of free cash flow. I've a genuine feeling of pride in how our 20,000 plus team members have responded to a very challenging environment. Net sales in the third quarter were $1.9 billion, a reported increase of 2% and constant currency increase of 1.1% versus the same period in 2019. Sequentially Q3 improved over Q2 as expected. Inside of that, we continue to see variability and recovery by market and region as we progress throughout the quarter and we did see a flattening of the recovery curve with September effectively flat versus the prior year. I'll talk about performance across our regions and then move to our business segments. And moving forward, unless I note otherwise, my comments will be on a constant currency basis. Beginning with Asia Pacific, the region returned to growth, increasing 0.7% versus Q3 2019. We saw strong performance in China with results well ahead of normal levels and while Japan has not yet returned to prior year volume, so market continues to show stability. Australia, New Zealand made steady progress in Q3, but were negatively impacted by surges of the virus late in the quarter. Finally, India and other small Southeast Asian countries continue to significantly underperform the broader region. EMEA decreased 5.7% while we saw recovery from Q2, the region did not return to growth in any part of the quarter and we observed a slowing in September due to recent COVID-19 surges and corresponding policy…

Thanks, Suky. Before we start the Q&A session, a reminder to please limit yourself to a single question and one follow-up, so that we can get through as many questions as possible during the call. With that operator, may we have the first question please.

Thank you. [Operator Instructions] Our first question comes from Ryan Zimmerman with BTIG.

All right. Thank you. Good morning, everyone. So, Bryan, I want to start on the backlog and the commentary about in September exit rate. And then I have one on ROSA. If you recall back, the last quarter you talked about $700 million backlog for ZB. And I'm just wondering if you could comment a little bit around that backlog in terms of what do you feel like you achieved against that in the third quarter, and how we should think about that maybe refilling back up in light of some of the dynamics of COVID in the fourth quarter here that you're talking about?

Yes. So, I appreciate the question. So, what I would tell you is that the -- what we saw in Q3 because we actually saw a positive growth relatively in line, if not a little above say, for instance, in hips in like a typical market growth. That would indicate that we did not build further backlog or deferred patients in a way that I calculated in Q3. That said, we still have hundreds of millions of dollars of deferred patients that will eventually come back in the funnel. So, I still feel very bullish about the fact that we have these deferred patients. There are patients, as we know for most of our business that has a disease that progresses. It does not get better by itself. And as a result of that those patients typically come back in the fall. So, I wouldn't say that we built more backlog in Q3, but we certainly still have quite a bit of backlog to go through. So that's my view of where we are from a backlog standpoint. And again, I think, eventually when we get to the point where we have a vaccine that people have confidence in it or treatment that people have confidence in. We're going to have that backlog of patients begin to come through in concert with new patients and that should be a really nice headwind for our business, looking forward in that day for sure.

Understood. And then just the second question, ROSA really nice number there, the 200 -- exceeding the 200 placements on ROSA. Just talk a little bit about the visibility on the order book and your expectation for 2021. Is it unreasonable to believe that you can accelerate beyond that 200 to 300 placement rate you're expecting this year? Thank you for taking the questions.

And for just clarification, just to make sure that 200 to 300 is what we've done from operational standpoint since launch. And there wasn't 200 to 300 that we would expect just in 2020, but it would be since launch, which is just call about a little over a year and a half now since full launch of the ROSA System. But I'd tell you that, hey, I'm pretty enthusiastic as it the team around the ROSA placements that we saw in Q3, it was the best quarter that we've had relative to the number of installations we did in a single quarter. And I can tell you that that momentum is continuing into Q4. And even though, I think, it will be slightly better, if it is still slightly better than what we did in Q3, that's what our expectation will be in Q4. And so that pipeline, if I'm just going to call, future customers is robust as it's ever been with our product. And as I mentioned before in the prepared remarks, I really do believe the under penetration of robotics is it such a point that this is a tailwind for the organization for a long time to come. And it's a very exciting tailwind. No question about it. Because not only is it before us [ph], it's to the patient. It really is providing a level of accuracy in the operating room that you can see when you're in the operating room with surgeon. Forget studies, we've got those coming, but when the surgeon uses the robotic system in the operating room, you can see the lights go off -- I mean go on. They clearly understand that they have an opportunity to get better cuts more accurate cuts, but also and very importantly feedback right away in the operating room around tissue balancing. It's really you need to see actually to have an opportunity to go and see that kind of light bulb go off in the surgeon's mind when they're using it is pretty amazing. Relative to 2021, I don't want to give specifics there. But what I would tell you is that I would be disappointed if the level of placements that we saw in Q3 and Q4 which were better than the first half of 2020. I would be disappointed if that level of placement didn't continue into 2021, right. And that would indicate in fact that does happen that 2021 should have more placements overall than 2020 did. So, again, I think real positive momentum, great feedback from our customers and a really strong pipeline of future customers that are out there right now.

Thank you.

Thanks, Bryan.

Sure. Can we go to the next question, please?

Our next question comes from Bob Hopkins with Bank of America.

Hey, good morning. Thanks. Can you hear me okay?

Yes.

Yes. Maybe great.

Good morning. Thanks. So, first quick question, I appreciate, Bryan, your comments on deals and divestitures and the two deals you announced. So, quick question there is, one, are those deals that could start to have an impact from a revenue perspective, more in 2022, just kind of how should we be thinking about those launches? And then on the divestiture side, kind of how would you characterize how likely divestitures might be in 2021? Thank you.

Okay. So, what I would tell you is that the deals that we just talked about, obviously, are not super accretive relative to acquired revenue growth just [ph] not much there. Think about most product launches that we have facilitating product launches in these very attractive spaces ASC, it would also be in sports, which is kind of a combination ASC impact, and then also in the data informatics portion of things. But I would absolutely expect revenue growth to be driven in 2021, I wouldn't say 2022. I definitely believe that the portfolio being provided by these acquisitions will immediately give us traction to be able to go out and hunt in the ASC marketplace, in the sports marketplace and continue in 2021 to provide more unique offerings inside of our knee category and we talked about that knee ecosystem. So, it's all three [ph] of the things that we just talked about in prepared remarks, we will provide revenue growth just not acquired revenue growth in 2021 and well beyond by the way. As far as divestitures go, clearly, I wouldn't talk about the time frame, I don't want to give anybody any [ph] expectation here. But the fact is when we think about active portfolio management that is one of the vectors. One of the obvious ones is M&A. And for us M&A that we're going to focus on will always be to build scale and or innovation that matters in markets that are accretive to our ZB weighted average market growth. And very importantly, where we think we have a right to win and see a clear path to leadership in those categories that would potentially be on the docket for divestiture. It would in those areas that are not as financially attractive to the business are not as core to our strategy and where we don't really see a clear pathway to leadership. Those would be the things that we would look at when we think about sharing the business, but I just don't want to give you a specific time frame because I don't want to set that expectation. But just know that that is part of the equation as we think about active portfolio management with the intent over time to move more of our revenue in higher growth markets, right, as we intend. If we're going to be a top quartile performer in total shareholder return, we have to have more of our revenue in higher growth markets, I'm just talked about mid-single-digits to upper single-digit growth markets and that's the intent of the active portfolio management process.

Thanks so much, Bob. Bran, can we go to the next question in the queue, please.

Our next question comes from Josh Jennings with Cowen.

Hi. Good morning. Thanks for taking the questions. One on ROSA and then just one on your average Chinese business. Just on ROSA, I was just wondering just kind of parse out just the implant performance in knees in the quarter. Was there a headwind from third quarter 2019 ROSA upfront purchase revenues, again, versus the placement dynamic has been happening over the course of the pandemic. And just, can you help us as we think about modeling these ROSA placements out in the 2021, and just all robotic solutions out there in the orthopedic marketplace. And do you think that percentage of systems that are placed that will drive an upfront capital purchase and that upfront revenue is at a 50% bar, is at a 25%, anything you can help us just in terms of modeling out that that system revenue as we think about 2021 and beyond would be helpful.

Okay. Maybe I'll hit that piece first. What I would tell you is we're definitely seeing it's not dramatic, but we're already seeing a slight shift back towards customers having a desire to acquire either lease or acquire the robotic systems and it almost seems like it's already starting although not nearly at the pace that it was, let's say, last year. And so I would guess, it's purely a guess, but I would again based on that assume that as we move into 2021 you might see more of a shift in that direction. But I just don't have a good sense for where it's going to land. I'll say [ph] it right now, it's definitely the larger portion of installations are these placement programs which is truly what we would prefer. I really like having that longer-term contract in relationship with the customer that does require certain volume commitment to the company and we're just building that relationship in a more stable way. But I would assume that as our customers get more confidence in the market that they may want to shift back to where they were before which is maybe acquiring more. I just don't want to give you a sense for what the percentage would be, but it is moving slightly back in that direction. Relative to Q3, interestingly enough even though there were some sales of ROSA in Q3. On a relative basis, it was actually a headwind for us. If I think about US knees particularly I talked about 3% growth in the US knees. If I eliminated ROSA as a part of that and just looked at core knees, and base knees, we actually grew closer to 4%, even a little better than 4% in base knees in the US. So, it was almost 100 bps of -- actually a little more than 100 bps of headwind from ROSA in the quarter. So, hopefully that answers the question.

That's very helpful. Thanks for those details. And then just I heard Suky call out strength in upper extremities in the quarter, are you seeing any disruption from the Stryker-Wright combination, maybe hard to parse out in the middle of the pandemic. But I just wanted to get your thoughts on the opportunity with the integration next year from second biggest competitor and what that opportunity represents in your mind for the upper extremities business? Thanks for taking the questions.

Yes. Absolutely. I mean, the fact is, when we look at the performance in Wright, they had a pretty good quarter. So, clearly, at least based on that performance one would indicate that it's not disruptive yet. Always hoping for things to happen, I would be very happy if there was disruption when you try to bring those two organizations together finally. The fact is, most of the time in our industry when they're bringing two organizations together is dis-synergy risk there just is. And that's why I like some of the small deals that we just did, it really eliminates that dis-synergy risk because there are really more product launches versus bring two sales organizations together. So, I would expect at some point just given the historical views of acquisitions in our space that you are going to see some level of the dis-synergy and hoping that we have an opportunity to take advantage of that. That said, I hope is [ph] in a strategy we have a very clear strategy in our extremities business and we're executing against that. And I feel very confident in the commercial infrastructure we're putting together, the product pipeline that we have and the traction that we're getting in the marketplace right now with or without disruption from our competitors.

Thanks, Bryan.

Thanks.

Thanks so much.

Our next question comes from Vijay Kumar with Evercore ISI.

Hey, guys. Thanks for taking my question and congrats on a footprint [ph] here. Bryan, maybe a big picture question, if I look at 2021, Street's modeling earnings above 2019, I'm just curious a couple of your peers have called out gross margin manufacturing variance et cetera. Is there anything you need to be aware from a margin perspective, and should the Street perhaps -- are you guys comfortable with the Street EPS numbers?

Maybe what I'll do for that one is just pass it over to Suky to provide a little more color there. I know you had some of that in your prepared remarks, Suky, but maybe you can comment on that.

Yes, sure. So, we're not obviously giving guidance on 2021 and I'm not going to speak to Street numbers. What I would say is next year's profile, obviously, it's going to be driven by revenue and a large component of that is going to depend on what happens relative to COVID-19. From a top line perspective, if we saw situation where the recent surges and [ph] experiences begin to abate or moderate and then stabilize, there could be a pathway to seeing a 2021 revenue profile. That's in line with the 2019 revenues. And if we got into next year and saw that stabilization moderation, but also on top of that saw vaccine or credible treatment. In tandem with the vaccine, you could potentially see volumes or revenues ahead of 2019 level. So, that's kind of how we're thinking about it from a broad strokes perspective, but there is look [ph] a lot of runway between here and there relative to COVID and how that's going to play out. So, we're going to pause on giving too much additional color beyond that. From a margin perspective, it's really going to fall in line with overall revenue and volumes, right, as you would expect. Volumes and revenue is better, so will margins. That's intuitive. I would say, as we think about our margins going into next year, there are a number of headwinds and tailwinds that we have taken into consideration using sort of second half of this year as a starting point or as a run rate. First on gross margins, we'd actually had a pretty good quarter in Q3. We expect to sequentially step-up in gross margin into Q4 based on overall volumes and seasonality that we typically see in the fourth quarter. But as we move into next…

Yes. That's extremely helpful. And Bryan one for you on that. Thanks for all the color on the Persona Revision. I guess, when you look at next year, as you guys gain traction on the Revision side, should those, I guess, gains accelerate as you gain a beachhead into the primary side of knee as well.

I'm sorry, could you repeat that, I missed part of the -- the first part of your question, you went out a little bit for me. Could you repeat that?

So, on that the Persona Revision knee side, I think, the comment you made was that should allow you guys to go after the primary implant side as well. So, when you think…

Oh, I guess, yes.

$40 million of net gains on the Revision side, should we perhaps be looking at an accelerating share gains for next year as you gain share into -- on the primary side.

Yes, I'd say, it's -- that's the most exciting thing for me on Persona Revision. And probably it was a little ostomy to take impurities [ph] in the beginning, because I assume the better connection between Revision sets and primary, but what we're finding is that a good portion of that $40 million or so of competitive conversion [ph] where we have the primary business already, we did not have the Revision System. But a lot of them or the other way around, but we didn't have the primary or the Revision. And so when we pick up that Revision business, it absolutely, as I said before, gives us a right to hunt for the primary business. And it's an order of magnitude larger than the Revision business. So, if you just look at the market differential, let's call, Revision somewhere in the neighborhood of 10% to 15% of the overall knee market. The rest of it is really primary unit that are out there. And that again once we get the Revision business, we then can go after that primary, the unit that the surgeon is doing. And it doesn't mean you're going to natural get or automatically get it but you again have a right to go after it and you build the trust and you build the relationship with the surgeon and it gives you that chance. So, I absolutely expect two things in 2021, continued competitive conversions with primary and with Revision, but also that opportunity to pull in the primary business as well. And it will clearly be one of the catalysts that we use to continue to drive towards above market growth in knees just as we've been saying. It will absolutely be one of the variables that will drive us in that direction in 2021.

Understood. Thanks, guys.

Sure.

And our next question comes from Raj Denhoy with Jefferies.

Hi, good morning. A couple of questions if I could, so I'm just trying to put a finer point on your comments around the fourth quarter. So, it sounds like you're suggesting that Asia Pacific and the Americas perhaps in line with the third quarter, but given that EMEA is worsening, I guess, we should assume that the growth rate in the fourth quarter will be below what you posted during the third quarter, is that a fair way to think about that?

Yes. So, maybe, Suky, I'll start, if you want to provide any more color feel free to do so. I would say, generally, what you're saying is accurate, I would say that Asia Pacific which is clearly being less impacted by surgeons in the virus seem to be relatively consistent. Again, it's early in the quarter based on what we've seen so far, pretty consistent with the growth rates that we saw in Q3, overall, Q3. The Americas, even though it's a positive growth, it has slightly decelerated versus Q3. But the good news is even with the surges that we're seeing in the US, we're still seeing positive growth. And it's close relative to what we saw in Q3 again, it's early. And the risk feels a little more tenuous right now because the surges are so much more prominent than they were in Q3. But the fact is that US is hanging in there and still has positive growth, but in EMEA, to your point, we are seeing more pressure. The policy decisions and the reaction to the virus surge is more acute in Europe, Middle East and Africa. No question about it. And I would expect Q4 to be slower growth and it was already negative in Q3 than Q3 was. And so we're really watching this everywhere, obviously, but right now, Europe, Middle East and Africa is a key area of focus for us to understand what's happening in that region. And then importantly, inside of that storm, if you will, what are we going to do to make sure that we stay ahead of the competition while it's occurring.

Okay. But maybe just...

Anything else you want to add?

No, I think, you summarized it really well, Bryan.

Thanks.

And really my second question is, I guess, somewhat related, frankly, Suky made a comment that that demand in some areas is still at 70% to 90% of normal. And I guess I'm curious how to think about that, is that a kind of broad statement that you are still more than 10% below what you would consider normal demand, and it's going to take something like a vaccine or better treatment ultimately to get that to 100% and beyond?

Well, let me clarify what you're saying there is, what you're saying is that, so take the US, for instance, if you look at a specific state or a county inside the US that is being very hard hit by surges, what he was referencing is that even in those very hard hit areas, the county or the state, you're still seeing 70% to 90% of procedure volumes that you would typically see, say, versus 2019. So, that doesn't necessarily mean that broad-based, we're seeing 70%, 90% of demand, it's just, let's say that in that hard-hit area, you're still seeing 70% to 90% of typical procedure volume, so that is what he was referencing.

Yes, I think, Raj...

Perfect. Thank you.

Yes, the extrapolation from there is even in the very acute second surges, we're not seeing anything that resembles what we saw in April and May, right. So, clearly, the end markets, the hospital systems with precision, more deference being provided to them, they are better prepared to deal with COVID. They have better protocols and triage our patients, I mean, they've got incentives to get the elective procedures through. So, that's really the key point of that statement of 70% to 90%.

Very clear. Thanks for the clarification.

Thanks. And Barn, It looks like we have time for at least one, maybe two more questions.

We'll take our next question from Matt Miksic with Credit Suisse.

Hi, good morning. Thanks for taking the questions. I have one on S.E.T. and one on, just to follow up on Raj's question on trend. So, on sports medicine, extremities, trauma, you provide a global reporting line here, it's a 20% or so of your business. I was wondering, if you could maybe expand a little bit on how the major moving parts of that business are performing and maybe proportions or geographic color would be helpful. And then I actually have one quick follow up.

Okay. We don't really provide a breakdown beyond the S.E.T. overall category. But what I would tell you is that the US and I think that Suky referenced this in your prepared remarks, you said I think that the overall S.E.T. category. The US was definitely the strongest performer in the world. I think, we have somewhere neighborhood the 6% in US S.E.T. performance from a growth standpoint. So, that would indicate that we clearly had lower growth in other parts of the world, which isn't surprising when you think about our S.E.T. category, say, for instance in Asia Pacific, a bigger part of that category would be trauma in that region plus other [ph] regions, just given the dominance or the significant portion of revenue in each [ph] specific that China has. And even though we're seeing less surges of the virus in that part of the world, we still are seeing less activity. And that typically will drive lower volumes and/or lower revenue growth in sports, it would drive lower revenue growth in trauma. So, just when people aren't moving as much and they are not doing as much, we typically see those two businesses with inside of S.E.T. get hurt. And I would tell you that as we talked a lot about, we've had pretty significant focus in extremities obviously upper extremities is one of the key areas of focus for us. And I would just say, our growth rate there is promising. And that's probably all the detail I provide below S.E.T. But overall, if I look at the category, the US region -- the US or the Americas was definitely the strongest growth region.

Thanks for that. And then just on -- Suky, your comments just now on trends and what we could expect and not expect potentially around surges. Is there anything -- there was a pretty tight period, I guess, this summer in Arizona, Texas when there were some very narrowly focused constraints by county and other. I just wondering if you could talk a little bit about what you saw there? How quickly it rebounce back and sort of what we might learn from that as it pertains to maybe the next few months in some other areas?

Yes, I think, we actually commented on that on our second quarter call. And some of those very hard hit counties within the states that you mentioned were operating somewhere in that 80% to 90% range. So, we've seen a very consistent pattern coming out for a few months where we've seen heightened surface. So, I think, that's again another positive inflection that we're not going to return back to those periods of April and May, even with acute surges, at least based on what we're seeing today. The time to abate, it really -- it's variable, right, there is no broad statement, it depends on the specific market, the specific sub-market that you're talking about or territory and the number of surges and how quickly -- how big that population is, and how quickly those surge rates come back down. So, it's tough to say. But in some of those hardest hits where we were at 80%, 90%, we've seen a path in some of those where they've gotten back to normal or perhaps a little bit above normal within a few months. But, again, it's really variable from market to market.

Thanks.

And that concludes today's question-and-answer session. I'd like to turn back to Keri Mattox for additional or closing remarks.

Thanks so much, and thanks everyone for joining us. I know we'll be in touch today, if you have questions, please don't hesitate to reach out to the IR Team. And we look forward to continuing the conversation.

All right, great. Thanks, everyone.

Thank you again for participating in today's conference call. You may now disconnect.