Q2 2020 Zimmer Biomet Holdings Inc Earnings Call

Well.

Again.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet second quarter 2020, <unk> earnings Conference call.

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This conference is being recorded today August 4th 2020. Following today's presentation. There will be your question answer session.

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I would now what's your turn the conference over to carry Nordics Senior Vice President Investor Relations and Chief Communications Officer. Please go ahead.

Thank you operator, and good morning, everyone. I Hope you are all well in six welcome to Zimmer Biomets second quarter 2020 earnings Conference call, joining me virtually today or Brian 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 reconciliations of these measures to the most directly comparable GAAP financial measures is included within the earnings release found on our website at Zimmer Biomet dotcom with that I'll now turn the call over to Brian Brian.

Great. Thanks, Kerry and before we get started I just want to say that I, certainly hope that you're saying if your families are healthy and that's how you doing everything you can to manage through this very unusual situation that we find ourselves in.

Speaking of that once again, we find ourselves in an earnings call were different places, we're not altogether and my guess is as we may have some missteps potentially anyway, when we hand off to each other so I was going to apologize anytime pretty missteps that we see through the handoffs here and potentially any background noise that we might get a you know obviously this is a.

Personnel to go in for all of US very challenging times as we deal with the pandemic here are the U.S. and around the globe and we as a result to that want to talk about the buyers today, we want to talk about how we're managing through it we want to talk about how we're modeling against potential impact, but we really also want to make sure that we spend some time on our underlying strength.

Business that we have and airplanes for long term growth and along those lines I'm really going to try to sector of the conversation around three main topics.

First one is obviously your execution and the financial results in Q2 really spent time in Q2 on the strength of the underlying business and why we're feeling confident in the things that we can control. The second thing would be around our broader modeling and our assumptions on a go forward basis associated with the pandemic.

You may not be officiating as you want there, but we're certainly going to give you the best that weekend on how we're looking at it and then the final piece will be just on our long term plan for growth what are the things were going to be focusing on to be able to get sustained growth in the future.

First let's talk about the same quarter me and I want to begin was saying that safety.

As I said last quarter continues to be our top priority safety of our team members or customers are patients. The communities that we serve and we continue to execute on that comprehensive global pandemic plan that we did develop last year building or not as I said before we actually develop that plan before this all happen and we've been putting that into action at the you know it's a very.

Earlier stages of Cobot, Nike and as a result to that plan and our additional safety protocols, we've definitely seen changes to how we work and have learned a lot about how we can more efficiently collaborate across the globe no significant changes associated with that but importantly, you know the safety related protocols have not.

We have not cost disruptions in our supply chain and our ability to meet our customer demand and in our ability to serve those patients who rely on our technology in our products to improve the quality of their life.

So I'm really proud of how seriously the entire Zeevi team has taken our collective safety not want to take each and every one of our team members, especially our manufacturing a commercial teams who are just gone above and beyond during this entire time during a very challenging time I just can't thank you enough. So in terms of our Q2 execution.

Formats, I'm going to cover some broad takeaways and I really want suky. After I finish to it you get into more specific detail, but maybe more than what we would typically get into just given that you know the current circumstances as the first you know the recovery that we've seen to date and really specifically in Q2 is encouraging now it's early but so far it's been better than we had.

You know based on what we are seeing and it really just experiencing in the recovery.

Real reason for optimism.

But given the number of on no one's related to co. They you know I would say, it's more prudent to be cautiously optimistic right now you're going to hear that feeling throughout the throughout the discussion today.

No we're watching closely and continuing to see rising patient demand, we'll just keep I've got to see that patient demand and that's resulting obviously it increased procedure volumes and very importantly, we're also seeing the majority of surgeons and hospitals are ramping up capacity to support that demand, it's a pretty big variable associated with.

Whether or not you can get that backlog patient entity patient coming in and so as a result of this you know our future performance was better than we expected across all of our regions and in particular, we saw strength in the U.S. and I got to the U.S. recovery performance is really encouraging to me as this is momentum that we're seeing despite the research.

And so the virus in many of our stage importantly, this trend is continuing into July even if some of the stage, but the rising Tobin numbers like Florida, Texas in Arizona, So again, even though we're seeing that resurgence of the virus. We still are pretty bullish on what we're seeing in a in U.S. so far.

Clearly in for good reason and everyone is going to focus on the impact Kobe during the quarter and probably more importantly, its forward looking impact on our business and we're absolutely going to talk about that in a minute, but the last thing I want to discuss for Q2 centers more around the things we can actually directly control.

During the pandemic and the activities that ultimately will drive durable growth and strengthen our business. So through the pandemic I could tell you that we have remained maniacal focus on executing against our growth drivers and that focus is delivering results and we saw those in the in the second quarter. So I'm going to just start with what I know everyone wants to hear about.

It is our progress with Rosa, obviously robotics plays an important part of our strategy on a go forward basis and importantly, we continue to see very strong demand for rose.

Even through the pandemic and also importantly, we're getting very good feedback from surgeons that are using the system and while I could tell you that I'm not going to provide the level of detail I'm about to give you.

Probably ever again I do want to give you some additional insights into where we are with Rosendo watch just given the fact is being hit me right now with all the the clouds I guess associated with the cobot impact on our business says I'm just gonna say, so we're now about a year away from the full launch of our business about a year, it's about launch and we now.

Now have about 150 rose a knee systems out in the globe.

And the good news is we're seeing with those units very strong utilization per unit. That's some of those are newly place you're not seeing the same same volume yet, but when I system has been out there for a while we're getting very good utilization per unit and if I just kind of add it up and I look at the current procedural volumes that were seeing weren't really on pace to be doing about.

3000, plus cases per quarter, and just to put that in the context relative to growth that's more than double the procedural volumes that we would have seen in the fourth quarter 2019 and by the way that's inside of the pressure on elective procedures that we're seeing as a result at the pandemic. In addition to that we've got.

Hey, a number of accounts in our active pipeline you know a whole bunch of the company in the active pipeline someone doesnt fall out, but based on the volume of accounts in that pipeline will be very disappointed. If we don't have between 200 300 Rosa systems out in the market by the end of this year.

I would you say for Rosa, we continue to see very strong momentum and remain on track actually slightly ahead of our expectations for both system placements and procedures, even went to pressure of cobot in this environment. So good news obviously on the on the Rosa front.

Another Great example of strong innovation and commercial prowess is the persona revision story that we're seeing play out and saw play out in the second quarter. Our launch of the revision system. It is well ahead of plan believe it or not in receiving very positive remarks from current persona users, which is important but even more importantly, we're seeing.

Very positive remarks from competitive surgeons, which is where we want to make sure that we're focusing in some of the key areas. The feedback are really a lot of excitement around the ease of use of the system and a significant excitement around precision and a in the intuitive nature of the instruments that we have which is important in this procedure.

Also the ability to provide all the benefits of a more personal lives fit for the patient that precise brings to the table and do this in a revision system, which again is unique in the marketplace. So just for perspective, you know that percent revision surpassed our expectations in Q2 and delivered the most successful quarter to date since launch.

It's kinda repeat that it's the most successful quarters dates since launch in Q2, which is the quarter that's been most impacted by the pandemic.

The demand is still very robust even outside of that we already have doubled the instrument sets originally anticipated for the launch to support that demand and again for context. This product has done a trajectory to reach close to $100 million in revenue during 2020, something that's going to be cannibalized out as you cannibalize revenue I would expect the cannibalization rate to be about 60%.

Six zero percent, so again on track to do $100 million or very close to it in 2020, and I would expect about 60% cannibalization of that revenue.

We also continued our focus on driving our dedicated commercial team for extremities as I talked about quite a bit and we've been very pleased that our signature one cleaner shoulder system continues to gain traction again, even in Q2 surgeon registrations just to give you some perspective for signature one increased nearly 60%.

In Q2 sequentially over Q1, and our recent FDA clearance also enables even greater integration of that system with our family of implants and guides and so that's going to open up even more opportunities. We also increased the portability of the system really trying to become more open architecture. So that you can use it on your computer but you can also put it on night.

Pattern I phone, so that if you're walking in and out of the surgery I'd operating room, you can still use the system creates that portability, which serves as wide.

So we're excited again about her show or franchise and the impact that this system will have on our success. There and then finally my mobility our partnership with Apple continues to be a Prime example of how research and development investment in Tech innovation are going to drive the next wave of telemedicine advances and we truly believe we'll check.

Change the patient and surgeon experience in our space and with my mobility, what we're really focusing on is ensuring that we have that patient physician communication link that even better than it once before but allowing us to happen more virtually.

The system also helps improve adherence to the pre and post patient requirements because the information is pushed to the patient when they need to actually do something and very importantly, its advancing the collection and the analysis of patient specific data points that ultimately can help the care team make the best and most personalized care decisions for that patient.

In June we announced with Apple a new application, it's going to be able to provide now gate quality functionality.

Then my mobility and that will happen this fall and that's pretty exciting development at a fixed afford no pun intended in this remote data collection journey again with the idea of collecting data that is personalizing the patient and ultimately as result of having that provide their care decisions.

So the my mobility functionality in today's cobot environment is especially interesting because it does allow for this significant demand that we're seeing right now for allowing effective and engaged remote and virtual patient care. So we're excited clearly about my mobility, we were before the pandemic, but certainly this is giving us some additional steam in the markets.

Place so moving to the second key area of focus for the earnings call I want to talk about cobot 19 in our modeling assumptions for the rest of this year and we're encouraged by what we saw in Q2 and are confident in our ability to continue to execute but we understand and I think probably everybody does the near term or uncertainty.

The that cobot Nike brings our thinking regarding cobot is obviously change and its evolving sharpening as we experienced more of its actual impact on our procedures and overtime. We're also seeing the impact on various markets and submarkets.

So I'd like to think about and just based on that knowledge that we're getting we can refine our thinking here and explain it really by talking about three major variables that I think we've got to pay attention to one of those variables would be a tailwind for us.

Created by by the pandemic and then two would be headwinds that we've got to pay attention to so the first we talk about tailwind, but just to be the backlog of deferred patients that we have built these are both the initial deferred procedures that we saw in the beginning in the building backlog thats continuing to happen from Heaven standpoint, I really look at it two ways one.

To be around those patient specific factors patient fear or unemployment for instance, and then the second only to be around the recurrence of the virus and I would think about that in two ways. The recurrence, having an impact on actual bed capacity and the recurrence having impact on policy decisions that could directly impact elective procedures, because that's kind of.

Wearables that I think about in determining where we think this is going to go.

Relative to the backlog I think it's really important to note that the approximate value of this backlog just for CBS. Just for this company is already were about 700 $800 million in revenue because thats the approximate value of the backlog already created is worth about seven or $800 million in revenue future revenue.

And this value continues to grow.

The fact is it continues to grow and we'll continue to grow until the market returns to normal market growth rates.

Relative to the headwinds given that we're currently seeing play out.

I would say that patient feared and in virus recurrence impacting specifically bed capacity are the two most significant threats, while I would say that policy decisions and unemployment concerns will be less material.

Based on the way that we're seeing policy decisions roll out right now so the key takeaway I just give me a lot of information on these variables and nothing attention to if the variables that I really just described continue to play out as they are today.

We would expect that sequential improvement seen in Q2 will continue through the back half of 2020, but likely at a more modest pace in Q3 Q4.

Great So just to repeat that.

The variables that I just described continue to play out just as they are today just what we're seeing today, we would absolutely expect the sequential improvement that we saw a few two to continue in the back half, but it would be at a more modest pace.

Another important aspect of this equation I think sometimes this is lawsuits important thing to bring up is that the two most significant headwinds become non variables once the vaccine is available.

And the vast majority of those patients they didn't get treatment for either of these reasons become a tailwind eventually for our business remembering that this is a progressive disease and as a result of the progressive nature of that disease. The vast majority of these deferred patients will eventually re entered the procedural funnel and become a tailwind for us.

Finally, I'd like to also spend a portion of my time today talking about the third category, which is our long term plan for growth.

And I could say that our strategy is relatively simple you've heard me talk about before not all of our businesses.

We're going to be treated the same all of our businesses are important to us, but they're not all going to be invested in for managed to say.

No we have prioritized the high growth and most strategically relevant areas of our business and we're going to make very disciplined investments there to continue to drive innovation innovation centered around improving patient outcomes and also providing for procedure efficiencies and to drive our strategic pillar of top quartile performance in TSR, we have.

To focus most intensely on driving long term growth in these key areas.

Number one and said this before but number one we must achieved above market growth in knees.

Just given the size and scale this business for us we need to be ahead of market here and we're going to do that by focusing more aggressively in the fastest growth submarkets of any.

Robotics data and informatics revision like I've just talked about.

Next we need to see and drive consistent at market actually has a higher end of that market range for said, we need to see that happened for our business and we're going to do that again by focusing more of our attention and those most attractive sub elements of set.

Also we need to consistently deliver at market performance in this in the short term that's all I'm asking for us that market performance in the short term, but transitioning to above market growth with our future robotics launch in the space and then finally, while our other businesses that lease at this point will not receive the same level of investment and they will be managed differently, we still would expect.

Business that would drive in line, maybe to the lower end market growth for these errors. Okay. So that's the way, we think about our businesses and the way that we're going to invest in them.

Focusing on these markets just as I've described we believe that over time, our pursuit of consistent and sustainable mid single digit organic growth rates is absolutely possible.

Now to fuel the investment needed to drive this long term growth and at the same time drive margin expansion over time, we've continued to focus and execute on our restructuring program.

In the last piece when it comes to long term growth is our M&A strategy and this is going to be key for us and it remains consistent with what we outlined in 2019 and earlier. This year, we will continue to focus on high growth areas and areas, where we truly believe we have a right to win.

Size is going to be a factor here as well with a preference at least at the outset toward tuck in deals that we can easily integrate and operationalize while also maintaining investment grade rating. So overall I think it's obvious we feel confident in our business strength and execution.

In the current pace of recovery from Cobot.

Our long term growth prospects, we've already learned so much from cobot 19, you know, while it's a challenge that none of us would really want to face. The fact is no. We do believe that it has reinforced the strength of our business strategy and I believe that its positively impacted our team engagement and our one zeevi culture.

In Trust me, we will focus on leveraging our learnings to accelerate TV transformation.

At the end of today, there's a lot of short term variables associated with cobot that demand a level of caution.

But make no mistake, we're very optimistic about our path forward and with that I'll turn the call over to seeking to get into more financial details sticky.

Thank you, Brian and good morning, everyone I hope all of your well I'd like to reiterate price. Most recent comments that are underlying fundamentals remain strong and our long term growth profile is compelling.

Before jumping into the specifics I will summarize our second quarter performance or simply being better than expected revenue was ahead of expectations driven by fast recovery in most markets, which led to better margins and we ended the quarter with a strong cash position ample liquidity.

Net sales in the quarter were $1.2 billion reported and operational decrease of about 38% from the prior year driven by the pandemic.

So the deep its impact on elective procedures and revenue in April but that saw rapid recovery with sequential improvement in May and June.

While we're not at global procedure volumes that were encouraged by the trends since April has all of our regions of businesses performed better than anticipated since our first quarter call.

We will look more closely at our Q2 revenue trends, starting with regional performance and Ben pivot to our businesses.

The forward unless otherwise noted my commentary will be on a constant currency basis.

Beginning with Asia Pacific region.

The recent decreased about 18% in the second quarter versus the same period in the prior year.

Hi to demonstrate a sharp V shaped recovery since April posting improvement in may and growth in June.

Most other markets in the region continue to perform below normal run rates.

In Japan, our largest market in Asia Pacific, we've seen a different profile as that market never got to its trough levels experienced in China and it was stable in Q2 operating at about 80% of normal run rates.

Failure, and New Zealand, a third largest market agents.

Surface sharp decline in a sharp recovery within Q2.

He needs to make progress back to normalization.

I think smaller markets within Asia Pacific continue to struggle with containing the virus and implementing effect of policies.

Accordingly procedures without substantially in the second quarter.

So there's a wide disparity across the submarkets within the region.

But as expected a common theme is that we see improvement in a number of elective procedures or the infection rates are stable or declining.

And where there's a deference to physicians and hospitals to make treatment decisions based on the local situation. This holds true for other regions as well.

Moving to match the.

The region decreased 49% in a second quarter.

As with other regions, we observed deepest trough in April that saw steady improvement through the quarter across all major markets.

Exception of the UK patients continue to be deferred at very high rates.

Overall developed markets within there are recovering well.

By the end of second quarter, Germany have started to approach prior year procedure volumes.

France, Italy, and Spain also improved significantly quarter and share the fast recovery in the region in June.

I will not yet back to normalized levels were encouraged by this progress.

Emerging markets and <unk> are improving but generally continue to lag developed markets and that pace of recovery.

Lastly, the Americas decreased 40% in a second quarter.

We talked about on our last quarterly call. The covert 19 impact ramped up materially in mid March with federal and state governments guidance ticket for elective procedures.

April what's the trough with Americas, but we still stronger than expected recovery in May and June as the U.S. States we opened.

In the U.S., while there are variations week to week to date, we have seen approximately 50% states at or above prior year case, those levels with 80% of states above 90% when compared to last year.

While progress in the U.S. has been good other markets within the Americas continue to struggle and operate well below normal levels.

For example, if you strip out the rest of the Americas from the U.S., you'll see that the U.S. hip and knee growth was actually about two to 300 basis points higher than the total America's number so clearly non U.S. markets in the Americas are still struggling creating a drag and overall regional performance.

Importantly in the U.S. and in other regions at markets. We are seeing second waits a steep infection growth.

However, we clearly see that the health care systems in general are better equipped to address the pandemic such that we're not seeing an erosion of elective procedures at the same level as observed in April.

For example in some of the hardest hit counties within Texas, We continue to see procedure volumes at 80% or better prior year volumes.

Similar pattern and other severely hit states.

Since the second quarter in July we've seen continued progress and sequential improvement in elective procedure trends.

Let's turn to our businesses for Q2.

Our global knee business declined 47%.

As we've talked about last quarter prior to the pandemic. We saw strong performance in this category driven by improved operational execution and the continued positive impact of a precise about revision launch.

Brian talked about a few minutes ago Rosen knee continues to be an important growth driver for us in the near term and the long term.

And our ecosystem strategy, the knee business and other categories is really starting to take traction.

Our global hip business declined 31% in a second quarter.

Tell you to see our hip business recover faster than the knee business pointing to somewhat less selective nature of these procedures.

And we continue to see strong traction for our avenue or complete launch.

Sports extremity in trauma sales declined 29% in Q2.

This decline was less pronounced than what we observed in large joints, primarily due to the non electric nature of trauma.

However, the travel market continued to be pressured due to reduced activity levels related to widespread quarantine and stayed home orders.

Dental spine that CMS t. sales declined 37% in the quarter.

We've seen stronger recovery and spot due to recent new product introductions, including Heather.

Also much like our head business spry procedures are seen as less elected by many physicians and patients primarily due to the paper.

Finally, our other category was down 44% versus the prior year.

Looking beyond Q2.

As you know we went through our 2024 year financial guidance April due to the uncertainty related to procedure volume uptick.

The impact of Coca 19 continues to be fluid and there are number of market dynamics and variables that we are unable to reliably quantified. This time as such we will not be providing updated financial guidance for 2020.

But we do want to fair information and insights that may provide shaping up our revenue expectations for the remainder of the year.

To give me a sense of the sequential improvement we saw through the second quarter remember that on our first quarter call. We noted that revenues were down about 70% in April across the full business.

The ended the quarter in June that decline was only 3.6% down.

However, it's important to note that there was an additional selling day in June 2020 versus June 2019.

After adjusting for the additional day in 2020.

June was down 13.5%.

There was no day rate impact on the full quarter.

So the key takeaway is if the variables that Brian described earlier continue to play out as they are today, we expect a sequential improvements seen at Q2. It's also continue to the back half of 2020, but likely at a more modest pace.

Now, let's turn to PNM and liquidity.

We've taken a disciplined a proactive approach to mitigate the earnings impact of a pandemic and to enhance our liquidity profile.

Also in the quarter were a little bit better than expected since our first quarter call. We would expect margins earnings and cash flow to improve as our revenue profile, Chris moving forward.

In terms of our second quarter results, we reported GAAP diluted loss per share for the quarter of one dollar and adjusted diluted earnings per share of five cents.

GAAP earnings per share in the second quarter were negative and lower than the prior year due primarily to the impact of the pandemic and I will speak to that as part of our test results.

Adjusted earnings per share with lower than the prior year, driven by lower revenues and higher cost of goods.

Adjusted gross margins were 65.5% for the second quarter due to less favorable mix and lower fixed cost absorption as a result of decreased production volumes.

Adjusted operating expenses were lower due to reduced variable selling expense. The continued early impact of our restructuring program and cost reductions we action to deal with the pandemic.

Previously discussed we were able to flex quickly on cobot 19 related cost reductions in the fourth quarter by leveraging the restructuring programs already in place.

Overall, adjusted operating margin for the quarter was 5.7% substantially lower than the prior year, but again a bit better than what we expected our first quarter call.

Moving beyond operating margin net interest expense of 54 million was down versus the prior year due to debt pay down in 2019.

And our adjusted tax rate was 42.8% in the quarter.

Our adjusted tax rate was distorted in the quarter due to discrete tax expenses on a small base of pre tax income do not expect that trend to continue to fall.

Moving to cash and liquidity in the corner.

While free cash flow was negative $145 million, we ended Q2 with higher cash cash equivalents of $713 million further strengthening our liquidity position.

Also we continue to maintain two and a half billion dollars and additional liquidity through our credit facilities, which remain on track.

We believe we are well positioned from a capital structure standpoint.

In terms of our PML for the remainder of 2020.

We expect that operating expenses will continue to ramp up in the second half the year when compared to Q2, as we're seeing higher investment levels in R&D and commercial initiatives in tandem with high revenues.

Interest expense will be a bit higher in the second half of the year versus the first half driven by the refinancing of debt this year and the additional $1 billion facility put in place.

For the adjusted tax rate a whole year rate is expected to be about 100 basis points higher than what we originally guided in February driven by a change in geographic mix of income due to covert 19.

Overall, we expect that margins earnings and cash flow will improve as our revenue profile crews.

From a longer term perspective, we remain committed to achieving at least 30% operating margin in 2023, as we continue to track well versus our restructuring plans.

Summarize our underlying business and our financial fundamentals remain strong.

Such that as the market continues to improve we expect our financial performance will also improve.

I continue to be extremely proud of how that maybe team has responded performed over the past few months.

We believe we're well positioned to address the current challenges as well as accelerate our growth profile over the long term with that I'll turn the call back over to Brian.

Great. Thanks, Turkey, and closing it's clear that the challenge of Cobot 90 has been significant Dizzy b.

In May obviously, but we're also very encouraged by the early days of recovery and that's really importantly, our ability to rise to that challenge as a team.

I am really who are three points from today's call that I hope you take away. The first one is that the future recovery clearly happened faster than expected and we are encouraged as a result of that but we are still cautiously optimistic about the performs in the back half of 2020, just due to the the variables associated with that the pandemic that we still have to manage through.

And to well our business has been impacted due to cobot 19, our strategic focus and to our progress has not been disrupted and if anything. This challenge has provided us with learnings that are enhancing strategic components of our business and then three we feel very confident about our underlying business strength.

Our core business strategy, and Zimmer biomets ability to drive long term growth and value.

You could take a minute before we close out today to say thank you.

Each and every one of our team members around the world, They're doing just fantastic job in your commitment.

And dedication to Zeevi enables us to deliver the value to our customers to our patients into our shareholders. So with that I'm going to turn the call back over to carry and I'm looking forward to your questions.

Thanks, Brian before we start the kinase session. A reminder, please limit yourself to a single question and one follow up so that we can get to as many questions as possible during the call with that operator, maybe had the first question Blake.

Thank you ladies and gentlemen at this time, we will now begin the question and answer session.

We'll take our first question from Rick Wise with Stifel.

All right good morning buying.

Suky, Brian Thanks for over a detailed information maybe if I could add.

More specifically if you could expand a little more gets a little more color on how you're thinking about that.

But just the kids get the drivers or recover from here Youve highlighted two a bit but when I look at the second quarter numbers and the weighted average since for their ortho market.

For both hips and knees it looks like to me that did outperform declined less than the group ravages both worldwide and you asked specifically maybe help us better understand.

Specifically the drivers is it execution execution focus your products.

These rosa.

But all the above.

Where do you think the emphasis points and just bottom line all that's.

What's the set up that as we look at 21 and beyond how quickly can you get to that mid single digit.

Absolutely possible.

Kind of growth. Thanks, so much Brent.

Hi, Thanks, Rick that was a lot of questions in there Matt so.

[laughter].

So I'm going to try to tackle.

This and maybe in two categories.

One I think all just still from your question is what's kind of driving the underlying strength of the business I'll give a little more color on that versus what I had my prepared remarks, and maybe the second piece of it is just broadly speaking about the recovery in Poland and just any deeper thinking there and then maybe I'll pass it over to so keen to get into some detail on maybe.

For more detail even on how we're looking June July and what we think thats going to mean on a go forward basis.

I would say first of all.

The things that we can control right now are extremely important to stay disciplined on so I actually do believe that's the reason why our strategy is being executed as flawlessly as it is and that's really important to us some of the major things that are allowing to happen is number one we don't have the supply issues that we used to half and you remember when I talk about this.

It was going to be posttraumatic stress disorder from the commercial organization in this category and they wouldn't believe us for a while that it was actually solved they do now they're not wasting time anymore. On this they're fully focused on driving new business. That's a big part of it the second piece to that you've got to have new products. You got had innovation having supply is just base.

Hi, Jane you got to move past that and actually bringing products and payment because that's a lifepoint of commercial organization and that's what we're getting them.

Given them new technologies that already talked about and they're delivering in those areas sticking to the commitments that we had.

The big one is that we dramatically change the engagement between the senior management at this organization and our commercial organization. There was just trust never before that does not exist anymore and the combination of those things I would tell you know we've got a swagger back in a zeevi commercial organization and that's swagger goes a long way when you're talking about getting.

In the field and getting things done on top of that we've also got to change compensation program. This more focused on growth is biased to paying people to grow and unless bias and those that don't and we also have operating mechanisms with discipline to hold people accountable for delivering that we did not have before so those are the things that the things we can control that.

Driving positive momentum in the business and we'll continue to drive positive momentum in the business outside of that we talked about posted I would sit with you know the variables that I mentioned before.

Think about those variables that idea the headwinds being patient fear and recurrence in a virus. Those are big those are big variables and they're going to be unpredictable unfortunate there's no way to predict what they're going to do in the future. That's why that volatility exist and we're not giving specific guidance moving forward, but I think sometimes the best way to.

To to try to get a sense for what's going to happen is look at what's happening right now because we are seeing the resurgence of the virus in many areas and as a result of what we're learning in those areas that would give us some feel for what happened on a go forward basis. So maybe with that I'll, just kind of flip it to soucie to be able to talk more specifically about what we're seeing right now and maybe that'll give us some color on what we think is going to have.

And going forward.

Great. Thanks, Brian and thanks to the question Rick.

So you know, we clearly saw a really good performance and improvement through the back end up about two to as I talked about our June exits on a day rate basis were down 13.5% that compares to being down 7%. If you recall back in April so clearly a pretty pretty steep being shape recovery in the quarter.

Now inside of that what we saw with Asia Pacific was about that overall company average cost from minus.

Some of that some of the areas, where really watching and Asia Pacific Park, the second and third largest market, China, and Asia, or sorry, Australia, New Zealand, performing really well getting very close or at normal lives run rates. Other paid watch out for us in Japan, which continues to operate and sort of that 80% to 90% range and that is our largest market. So lucky.

Kind of close watch on the recovery.

At that particular market now of course, we're we're we're still really struggling in a lot of.

Smaller markets in Southeast Asia.

As we turn to EMEA relative to that overall company average of doubt there if you're going to happen may it was down significantly more than that and that's simply because the recovery. Just started later in the quarter for that particular region.

Really good uptake of how larger markets.

Got to keep our eyes on on the UK, which continues the protocol three high rate and emerging markets is lacking that was already have a pretty lumpy business with tendering cobot has estimated that much more difficult to predict the trend.

But but again recovery and the biggest market within a matter as look really good in the back ended the quarter that you turn to the Americas and this is probably where we saw the biggest sharpest return in the second quarter and as Brian talked about a little bit head of our expectations.

Within the U.S., we're seeing really good traction we do continue to get hit some pretty hard hit states as we talked about Florida, Texas, Arizona, but nothing compared to that the first way those those particular markets were operating.

The 80 or 90% range and what we're seeing as some of the states that have recovered a little bit later like New York, New Jersey, some of the North Eastern States their operating close to 100 or maybe even some.

Aspects are some parts growing above 100, so you're seeing that offset some of the harder hit state. So again, you assets is overall trending pretty well, but we're keeping our eyes on that second Serge I think within Americas. However, we're seeing a pretty big headwind from Canada and more importantly from Latin America.

So as those particular markets continue to struggle ambition to try and kinda emphasize the headwind that we're getting from those markets. If you actually looked at our our us need buffer for instance, there was about a 200 basis point headwind.

By including total Americas, and so if you excluded Americas, our U.S. The number was about down 44.7% forget about 200 basis points, better and that even with a tough comp on Rosa then our U.S. hip business.

Had a headwind of about 300 basis points. When you include the rest of America's in it. So clearly the rest of the Americas is the piece that's kind of masking even better performance in the last so if we take about things going forward in July sequentially things got better than where do you lost and so that's good second leading indicator that.

However July was still down versus prior year, okay, so better than June but still down.

Do you think of the composition of the regions I talked about it's very similar to what we saw in June Americas, a little bit better than the overall company average in July.

Hey, Pat Kinda in line and EMEA, a little bit behind so hopefully that gives it a little bit more color sorry for the long answer, but I know that's a question on lot of your mine. So we just wanted to address it proactively.

Thank you.

Thanks, Brad Katy can we go to the next question. Please.

Our next question from David Lewis with Morgan Stanley.

No.

Good morning, Thanks for taking the questions just two for me one Brian or Suky I'd just on recovery you. Brian you mentioned this seven $800 million backlog into sort of wonder how much of that it's been worked out and I'm. Assuming this dynamic of schedule versus rescheduled patients is why you said recoveries less deep into the back half, but just you can talk about that backlog.

Whether you think you can get back to growth in the fourth quarter and they had a quick follow up on Rosa.

Okay, great. So so what I would say that seven or 800 million.

It's still out there so I would say that's the amount of backlog that is still out for future revenue and none of that is I'm counting as being already captured I do believe that when you think about the backlog you again, you've got to separated into two different categories first category would be those patients that were deferred in the very beginning.

Absolutely no they're different patients and the other portion of that backlog are those one is going to calm category to patients, which are kind of just building right now and we'll continue to build until we get back to market growth. So so that seven 800 million will be future revenue for us My sense is that first category of patients those were deferred initially.

Will likely be completely run through by the time again to the end to 20, twond or most of them well, but you're still going to have a pretty significant backlog left for 2021 I would say the way you can calculate that is when you look at the overall market growth.

Delta between what we actually did in 2020 versus the market growth whatever that delta is in those procedures that are elective and also our connected to progressive disease is a large majority of those patients will come back into the funnel. So if you just look at that Delta. So you had a 100 procedures and less than typical market you could.

Take probably 80% of those are 80 procedure to say, that's my backlog that will come into 2021, and so thats kind of the way the way I'm thinking about it.

Challenges that you have these big variables that are still moving out there around patient fear in the resurgence of the of the virus. So it's difficult to say that the backlog coming back in <unk>.

<unk> is is is going to give us that tailwind that we want without the negative impacts of those two variables.

But I would say again is if we can move to the point, where we having a valid vaccine or a and effective treatment. That's access to variables off the table and then you've got to backlog as a tailwind which would be significant for us. So if you could see a pathway I guess, what I'm, saying if things stay about the same.

I should come into a vaccine entering into renewed or mitigate those two negative variables very strong growth in 2021. The challenges you know those variables and I'm, saying that need to go away or a pretty significant and we just don't know if there is going to happen or not but certainly you can see a pathway just given again that backlog volume.

Strong growth in the back half in 2021, it just depends on how those other two variables play out.

Okay. So its use defaulter, it's hard to be definitive on fourth quarter growth I think is what I'm, what I'm hearing, but 20 your comment there and then just I'll ask my second question as well just numbers, Brian obviously that number is that pretty materially head of where the street was thinking on Rosa placements and thanks for the detail so did placements accelerate here into the second quarter.

I'm sort of curious has the selling structure around this placements changed at all has raised the usage based agreements.

And just give us some sense of come a competitive account perspective, where decisions are being placed what presenter took traditional zimmer majority accounts versus competitive share capture thanks. So much.

Yes, absolutely. So it's a combination I would tell you that we are absolutely looking at both competitive as well as you know friends and family. So we even though the original strategy was to focus just on friends and family because we've got a huge opportunity just given the amount of implant percentages that we have in the markets, we're definitely seeing competitive situations of on winning and.

Those areas.

I think about rose in general I would just say that we continue to see sequential improvement in placements and and believe it or not even in Q2 and it was there was no disruption in the sequential improvement.

Just speaks to the maturity of our commercial organization. The majority of the pipeline of potential customers that we have and our ability to translate that pipeline into actual sales and I would expect that to continue I would say that more recently as I referenced before the mix in the way that we're placing these is different most customers previously wanted.

By now we're seeing a shift to this opportunity to acquire the technology through volume commitments, which in reality as I've stated before is actually the preferred method and placement for us I would much rather have that annuity revenue that linking each if a customer for a longer period of time than have an upfront capital acquisition.

And that's what have you had referenced before.

And looking to to look at our knee performance in the U.S. for instance, we actually had a headwind associated with robotics versus last year was actually a slight drag to our growth rate and needs. Because we had sold more last year than we did this quarter and so again I think you know again that pipeline strong excited about the product line and we're seeing.

Continued sequential improvement quarter over quarter.

Thanks, Kevin can we go to the next question. Please. Thank you well go next a Matthew O'brien with Piper Sandler.

Good morning, Thanks for taking my questions just a follow up on the on the Rosa side of things.

When I look at it Brian the number that you're thinking that you're going to have in the field. This year, that's around 200 compared to how many you had out that you're replacing Mr. versus what you had out last year. So that's pretty similar to what the market leader good as far as system placements last year.

In this category so what I'm trying to figure out is is you know kind of the David's question.

What's the split between your friends and family versus competitive accounts that are you seeing a building improvement on the competitive account side.

As we speak or kind of what you're looking forward that I do a follow up thanks.

Okay, Yes, so I wouldnt say without giving specifics.

Say that the competitive accounts are probably greater than 50% up and placements.

Again, that's even increasing as we're finding more customers looking at this opportunity to bring in the system based on volume commitments. So almost by default to be able to get a system place like that you've got to have a competitive situations and they can commit that volume to be able to get the robotic system placed so I'd say.

North of 50% and it looks better right now because in a placement strategy shift from us but from our customers.

Okay. That's helpful and then on the revision side and I Didnt hear much on some metal if I may have missed it but when I look back historically, you know you've lost I think some somewhere around three 400 basis points to share on the revision side. Some balances anchored primaries in total I think there's a couple hundred basis points. So there's there's a lot of users out there.

That is that are familiar with them or are those the wasn't you're getting back the quickest right now or even going into new accounts that you haven't really been present before because of those in the system because of rose and you know some and I'll, let you feel comfortable again understanding of some variability about outperforming the knee market.

Broadly speaking over the next couple of years.

Yeah I'd tell you is on the Cementless side, we continue to get traction I think where our product is being well received and as we see more penetration of robotics in our accounts, you're going to see by the very nature and robotics and the capability introduce amount was more confidently you're going to see a continued increase in the cementless percentage of our business.

Our San revision side, it is absolutely a tip into spear product and we're clearly going into accounts that had been using persona and have not been able to use our revision system and we're picking up those accounts. So have the obvious ones, but it's such a good revision said that we're getting competitive surgeons that want to move to this and as a result of that will get primary.

Through as well so as much as that's an exciting product when I talked about that.

Close to 100 million dollar opportunity there for.

For this year, that's not including to pull through that we would get when we have competitive convert conversions on the primary primary name.

Thank you.

Thank you we'll take our next question from Robbie Marcus with JP Morgan.

Great. Thanks for taking the question maybe just a quick clarification in the script you said that at the end of June the decline was only 3.6%, but adjusted for selling days. It was down 13.5 is that just more the exit rate of June versus the full month or is there something else.

Going on there.

Hey, Ravi that was the full month again.

As opposed to the final weeks.

Got it Okay and then maybe.

Fine it it sounds like.

You know if I go back to dental and meet the spine when times are tough it's easier to revisit Ah different parts of the business that might not be some of your top performers or have the best growth rates going forward. How are you thinking about some of your businesses that had been underperforming lately and how are you thinking.

Out potentially improving or monetizing them in this environment, where there are a lot of willing buyers out there with recently, we raise capital. Thanks.

Yeah. So as the first focus is as I said in the prepared remarks, we have certain businesses and sub businesses that will be the primary areas of investment well make very clear is that does not mean that the businesses outside of that are not important to us and it does not mean that I don't expect results a.

And they are getting investment just not the same level. So I fully expect my businesses in dental spine CMS T that I did not name.

Areas of extreme focus I expect them with the investment they're getting to perform.

And if I think about spine specifically.

Got it an opportunity there to do that now it's got to happen in a few different ways. We've had a lot of flux in our commercial organization that is now stable well that stable commercial organization has turned into a productive commercial organization. We have mobi C, which is the best cervical disc in the marketplace kind of get traction with that we had that as a tip of the spear product.

That we had not been taking advantage of and I need to see that and we have tether that took you mentioned in the prepared remarks that is a and innovative change that dramatically changes the patient experience and scoliosis patients that is an exciting product that we need to be able using that rosen. So we've got the the the components of success in spine Wednesday investment level that we.

I have I need to see it transpire in the same way that we saw with similar investment level dental perform so I just want to make sure that it's clear that just because I don't have those businesses as one of the primary growth drivers into the organization. It does not mean, they're not important to us and does not mean that we're not going to continue invest in some level and it does not mean now expect resolved.

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Great. Thanks, a lot thanks Robbie.

Well take our next question from Peter Chicory.

With Deutsche Bank.

Good morning, guys as they pay for taking my questions. First one is I wanted to follow up on David's question on at $7800 that backlog.

I understand that the backlog at the out there, but he can't can give us color as to procedures. You guys saw in June or July worthy split between deferred procedures that happened to versus newly diagnosed cases that were done I'm just trying to understand the price recovery in the sustainability of that recovery.

It would I'd tell you that although we do collect data on their since becoming more modeled and the reason why is because you've got a complete mixture now of what is a different patient.

Looking at just those folks that we knew were deferred then I can get a sense for how many of those are coming through.

But when I look at truly just this growing backlog of deferred patients it's difficult to know, which one of those as a new versus a different that's created as a result of covance. So so it is becoming models I think the easiest way to look at it again is to go back to in those areas that we have large joints.

Schoener those areas that are elective, but are connected to a progressive disease I would just look at the delta in market growth and just know that 80 plus percent of those patients are eventually going to come back in Abbott stop worrying as much about what does into for patient what does a new patient I just look at the total deficiency to market.

And know that he has a history shows those patients eventually come back into funnel at a pretty high rate and assess the way we're thinking about it I think spending too much time now trying to understand and defer to new patient mix. It's just it's to model this too challenging to understand what actually means.

Okay, a follow up their August is typically a pretty slow month.

The case and.

Any corporate health for sure, but how do you see surging demand in August and you think that docs are motivated to work for the backlog can provide good growth an easy comps.

I'd say, it's interesting because particularly in Europe.

See August being a challenging challenging month, because a lot of holidays, but even if our sustainable. We're hearing is that people are going to take fewer weeks and vacation to be able to deal with some of the backlog and that is an area that you typically don't here.

That type of response and it's the same pretty much around the world that day the general.

Feedback, we're getting from surgeons and hospitals that they're going to take fewer days and vacation to try to work through the backlog everyone recognizes there's a bolus of patients in need to get served and my general sense is that you're going to see people try to work through that backlog.

The only time that you would see maybe it out.

Something that we look different than that is in the public health system in Europe, or where you just don't have the same incentive to be able to work through it and potentially sometimes even the budget to be able to work through it but generally speaking I'm getting very good feedback on the desire to work through the summer worked through this backlog and take care patients.

Great. Thanks.

Well take our next question from Matt Taylor with yes.

Hi, Thank you for taking my question so.

It really interested to hear the color on the.

The roads and placements and utilization there.

I wanted to focus on utilization per second to him.

That's about that.

You talked pretty strong. These claims and then the conditions I guess I'm, hoping you could provide some outlook for that and maybe benchmark at versus other systems that are out there. When you think utilization could go in the coming quarters for these legacy systems that that maturity.

Yeah. My sense is we can see continued increases of utilization per system and again remember go back to the tenants that we had in place as we designed the system one of the primary things be focused on was to make sure that it did not disrupt the surgical flow and did not change that time to do a procedure and that's.

What we're finding actually happening so the good news on that as it you know surgeon can digest it more easily because it doesn't change what they do as much just makes it better but when it also allows us more surgical volume right using robotics, because we don't slow the procedure down so I would expect as people get more comfortable with it and they see the difference in.

Outcome for patients that use robotics versus not use robotics, how expected to continue to go up per unit and then obviously as we placed more units I see those procedural volumes increasing pretty quickly.

Right.

Another follow up then people have alluded to that.

Surprise here, if you'd be able to push that forward in a tough environment.

Yes, we think that.

So those are.

Benefiting from stimulants are held them unable to continue to make these kind of capital investments or other arrangement, despite the disruption and pressure on the budget.

Yeah, I really do when we were very concerned out and again that we we wouldn't be getting paid by hospitals. Let alone scene is kind of traction and I think the stimulus did help I think it took the pressure off and it made me hospitals feel more confident and comfortable to be able to continue to move their strategy forward. So our receivables for instead.

I never really got significantly damage during all this because I think they felt comfortable with with that liquidity.

And we really haven't seen much of a change in demand I mean initially for sure I mean people didn't know what was going on that didn't know for sure what was going to happen. So there was there was a month period of time, where it was a little bit of chaos.

But as you work through that and people felt more confident and comfortable in liquidity, if things got back to normal pretty quick.

Great. Thanks, a lot I think normal.

Hey, Matt.

Actual normalize [laughter] [laughter]. Thanks, Katy I think we have time for one last question.

Thank you we'll go next to Richard Newitter SVP Leerink.

Hi, Thanks for taking my question.

Maybe just.

On rose.

I think what what are your competitors.

The leader in the markets they saw.

A portion of placements are better than expected placements into the S. You said Im just curious if you could comment at all.

You know whether you'd rather than seeing roses did in placed into c. and within the context for that question, how Zimmer may maybe that position Q on.

To benefit from or to fill and in fact, some for accelerated trend to be sending more broadly thinking.

Yeah, I mean, clearly you would see a natural desire from patients I would think to be in a non hospital setting just given that the issues around virus fear. So it's not surprising to me that we're seeing some additional pace moving to the as seen from a procedure volume standpoint, and we are absolute.

The ensuring that commercially we're going to be ready for that we've already focused on obviously, but we're going to put that on steroids now and I would say from a robotic standpoint. It plays quite well for US remember that you do not have to have a C.D. scan to be able to two to use robotic system for Rosa and that helps us quite a bit in the assay setting.

And I also will go back to this idea of throughput there's a business people Nancy setting volume is very important to them. They have to get the throughput of patients to be able to get the same reimbursement and to be able to get the you know the business dynamics and they want and that ability to use our system without a change in time really matters to them. So again I think it bodes well for us.

Quite frankly, and I'm very happy to hear.

Our competitor also see assert saw surgeon and robotic placements. It tells you that the demand for robotics is real and the penetration of robotics is still very low that to me as an opportunity for everyone who has a real robotic solution.

Got it and then Brian just for my follow up I'm curious on the M&A front.

Appreciate it.

Brought up smaller tuck in.

I'm just curious you know in the wake up call them.

Many weight change, maybe where you like initially focused on the types of acquisitions or anything you know that now just.

On a go forward basis makes it more strategically.

To the business as you as you look forward. Thanks.

Yeah, Let me I'll answer that very specifically, but but let me pull up just for a second because I think I think it's helpful context, because we are in a phase now where I feel much more confident and comfortable moving into active portfolio management, and we will absolutely move in that direction, but it was important to get there because I kind of think about this positioning this company are transforming this.

Company for success in three phases. The first phase was kind of obvious to everybody. We had to treehouse patient right right. We had real problems around culture mission connection just wasn't there we didnt have a top level talent that we needed to be able to move the business forward their supply issues quality issues. We had we had a deal Jay monitor in the house. So we had all these things that we had to fix.

And I'm, not saying that we're not going to continue to focus in those areas because it's going to evolve but that was kind of phase one we had to fix those things phase two is more around shifting to innovation had to get new products out in the market, we had to be able to crystallize our strategy and our focus in our strategic pillars, and then make sure we had the right organizational structure to drive that it's all those things.

It's kind of happened in phase two and we've had the operating mechanisms to make sure that we deliver on those things phase three or that you can't really comes around portfolio transformation and that's exactly what we're going to be focused on and yes, I would tell you that the insights that we're getting from Covance, because we're learning everyday and we are applying those insights into the way they were going to manage our strategy and funding.

Metal and change the strategy, but its bog netting the strategy and I would tell you that we will have a focus as we looked for diversification and being able to get better trends that have better penetration in the seem to be able to continue to focus in those subcategories and set that we know we're going to be attractive and to be able to think about acquisitions now to get us away from our dependence on elective procedures.

A lot of different sectors that were considering now in the a in the way that we're going to look at potential opportunities for acquisition I was still say as I said before they're going to be smaller tuck ins for now because our access to liquidity isn't quite the same just given what's going on right now and we want to make sure that we stay investment grade, but we are clearly focused right now on active portfolio management.

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Thank you.

Hi, Thanks.

That will conclude our question and answer session I'd like to turn the call back over to Keri mattox for any additional for closing remarks.

Thanks, Katy and thanks again for joining us. This morning, if you have questions. Please do not hesitate to reach out to the IR team I. You can also find a replay of the call on our website that her biomet dot com. Thanks, so much and have a great that.

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

So.

Okay.

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