Zimmer Biomet Holdings, Inc. Q2 FY2020 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2020 Earnings Conference Call. As a reminder, this conference is being recorded today, August 4, 2020. Following today’s presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode. I would now like to turn the conference over to Keri Mattox, 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 and safe. Welcome to Zimmer Biomet’s second quarter 2020 earnings conference call. Joining me virtually today are Bryan Hanson, our President and CEO; and Suky Upadhyay, our CFO. 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.

Great. Thanks, Keri. Before we begin, I want to express my hope that you are safe, your families are healthy, and that you are managing through this unusual situation. As we’re in a remote setting for this earnings call, I apologize in advance for any possible glitches or background noise that might occur. We are navigating an unprecedented time due to the pandemic, and today we will discuss how we’re managing through it, its potential impact on our business, and importantly, the underlying strength of our business and our plans for long-term growth. I’ll focus our conversation around three main topics: first, our execution and financial results in Q2, emphasizing the strength of our underlying business; second, our modeling and assumptions for the future related to the pandemic; and third, our long-term growth plan. To start with our Q2 performance, safety remains our top priority, and we continue to execute our comprehensive global pandemic plan that we established last year. We’ve learned to work more efficiently across the globe without disruptions to our supply chain and ability to meet demand. I am proud of how seriously the entire team has committed to safety, and I want to thank our team members for their efforts during these challenging times. In terms of Q2 execution, I want to highlight some encouraging takeaways. The recovery we've seen so far is better than expected, and while there are still many unknowns regarding COVID, there’s genuine reason for optimism. We are observing a rise in patient demand, leading to increased procedure volumes, and hospitals are ramping up capacities accordingly. Our Q2 performance exceeded expectations across regions, particularly in the U.S., where recovery is encouraging despite the resurgence of the virus. While we expect discussions around COVID's impact to be significant, I want to highlight the aspects we can control which will drive durable growth. We have remained focused on our growth drivers, and it's reflecting positively in our second-quarter results. Our robotics strategy, particularly with ROSA, has shown strong demand, and we've seen positive feedback from surgeons. We have about 150 ROSA Knee Systems globally, demonstrating robust utilization, and we are on track to achieve substantial procedural volumes. Additionally, our Persona Revision system has surpassed expectations, and we received positive feedback from current users and competitors. Demand is high, and we anticipate reaching $100 million in revenue for this product in 2020, albeit with some expected cannibalization. Furthermore, our Signature ONE Planner shoulder system has also gained traction, with a significant increase in surgeon registrations in Q2. Our partnership with Apple on mymobility exemplifies how we're advancing telemedicine, enhancing patient-physician communication, and improving remote patient care, which is particularly relevant during this time. Now, regarding COVID-19 and our modeling for the rest of the year, we are encouraged by Q2 but remain aware of the near-term uncertainties. We're refining our understanding of COVID's impact on procedures and markets, focusing on three key variables: the tailwind of deferred patients, and two headwinds related to patient fear and virus recurrence. The backlog represents an estimated $700 million to $800 million in future revenue for us, which will continue to grow until normal market conditions return. In terms of our long-term growth plan, we are prioritizing high-growth areas and making disciplined investments to drive innovation and improve patient outcomes. We aim for above-market growth in specific sectors and consistent performance in our other business areas. Our restructuring program continues to support investments needed to drive long-term growth, and we remain open to strategic M&A to seize high-growth opportunities. Overall, we feel confident in our business strength and recovery pace from COVID. We have learned valuable lessons that reinforce our business strategy and enhance team engagement. Although short-term variables related to COVID pose challenges, we are optimistic about our path forward. With that, I will hand the call over to Suky for more financial details.

Thank you, Bryan, and good morning, everyone. I hope all of you are well. I’d like to reiterate Bryan’s most recent comments that our underlying fundamentals remain strong and our long-term growth profile is compelling. Before jumping into the specifics, I would summarize our second quarter performance as 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 and ample liquidity. Net sales in the quarter were $1.2 billion, a reported and operational decrease of about 38% from the prior year, driven by the pandemic. We saw the deepest impact on elective procedures and revenue in April, but then saw a rapid recovery with sequential improvement in May and June. While we’re not at normal procedure volumes yet, we are encouraged by the trends since April, as all of our regions and 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 then hitting it to our businesses. Moving forward, unless otherwise noted, my commentary will be on a constant currency basis. Beginning with Asia Pacific, the region decreased about 18% in the second quarter versus the same period in the prior year. While China demonstrated sharp V-shaped recovery since April, posting improvement in May and growth in June, most other markets in the region continued 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 trough levels experienced in China and was stable in Q2, operating at about 80% of normal run rates. Australia and New Zealand, our third largest market in Asia Pacific observed a sharp decline and a sharp recovery within Q2 and continues to make progress back to normalization. And smaller markets within Asia Pacific continue to struggle with containing the virus and implementing effective policies, and accordingly procedures were down substantially in the second quarter. But there’s a wide disparity across the sub-markets within the region. But, as expected, a common theme is that we see improvement in the number of elective procedures when the infection rates are stable or declining and where there’s deterrence to physicians and hospitals to make treatment decisions based on the local situation. This holds true for other regions as well. Moving to EMEA, the region decreased 49% in the second quarter. As with other regions, we observed the deepest trough in April and then saw steady improvement through the quarter across all major markets, with the exception of the UK where patients continue to be deferred at very-high rates. Overall, developed markets within EMEA are recovering well. By the end of the second quarter, Germany has started to approach prior year procedure volumes. France, Italy, and Spain also improved significantly this quarter and showed the fastest recovery in the region in June. While not yet back to normalized levels, we are encouraged by this progress. Emerging markets in EMEA are improving, but generally continue to lag developed markets in that pace of recovery. Last week, the Americas decreased 40% in the second quarter. As we talked about on our last quarterly call, the COVID-19 impact ramped up materially in mid-March with federal and state governments' guidance to defer elective procedures. April was the trough in the Americas, but we saw stronger than expected recovery in May and June, as U.S. states reopened. In the U.S., while there are variations week to week, to-date, we have seen approximately 50% of states at or above prior year cases 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’d see that the U.S. hip and knee growth was actually about 200 to 300 basis points higher than the total Americas number. So clearly, non-U.S. markets in the Americas are still struggling and creating a drag on overall regional performance. Importantly, in the U.S., and in other regions and markets, we’re seeing second waves of steep infection growth. However, we clearly see that the healthcare 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, see a similar pattern in other severely hit states. Since the second quarter in July, we’ve seen continued progress and sequential improvement in elective procedure trends. Next, let’s turn to our businesses for Q2. Our global knee business declined 47%. As we 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 the Persona Revision launch. As Bryan talked about a few minutes ago, ROSA Knee continues to be an important growth driver for us in the near term and the long term. And our ecosystem strategy in the knee business and other categories is really starting to take traction. Our global hip business declined 31% in the second quarter. We continue to see our hip business recover faster than the knee business, pointing to somewhat less elective nature of these procedures. And we continue to see strong traction for our Avenir Complete launch. Sports, extremity, and trauma sales declined 29% in Q2. This decline was less pronounced than what we observed in large joints, primarily due to the non-elective nature of trauma. However, the trauma market continued to be pressured due to reduced activity levels related to widespread quarantine and stay-at-home orders. Dental, spine, and CMFT sales declined 37% in the quarter. We’ve seen stronger recovery in spine due to recent new product introductions, including Tether. Also, much like our hip business, spine procedures are seen as less elective by many physicians and patients, primarily due to the pain burden. Finally, our other category was down 44% versus the prior year. Looking beyond Q2, as you know, we withdrew our 2020 full-year financial guidance in April due to the uncertainty related to procedure volume uptake. The impact of COVID-19 continues to be fluid, and there are a number of market dynamics and variables that we are unable to reliably quantify at this time. As such, we will not be providing updated financial guidance for 2020. But we do want to share information and insights that may provide shaping of our revenue expectations for the remainder of the year. To give you 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. By the end of 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 Bryan described earlier, continue to play out as they are today, we expect the sequential improvement seen in Q2 to also continue through the back half of 2020, but likely at a more modest pace. Now, let’s turn to P&L liquidity. We’ve taken a disciplined and proactive approach to mitigate the earnings impact of the pandemic and enhance our liquidity profile. Results in the quarter were a little bit better than expected since our first port of call, and we would expect margins, earnings, and cash flow to improve as our revenue profile improves moving forward. In terms of our second quarter results, we reported GAAP diluted loss per share for the quarter of $1 and adjusted diluted earnings per share of $0.05. 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 adjusted results. Adjusted earnings per share were 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 costs 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 actioned to deal with the pandemic. As we previously discussed, we were able to flex quickly on COVID-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 on 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. We do not expect that trend to continue moving forward. Moving to cash and liquidity in the quarter. While free cash flow was negative $145 million, we ended Q2 with higher cash and cash equivalents of $713 million, further strengthening our liquidity position. Also, we continued to maintain $2.5 billion in additional liquidity through our credit facilities, which remain untapped. We believe we’re well-positioned from a capital structure standpoint. In terms of our P&L for the remainder of 2020, we expect that operating expenses will continue to ramp up in the second half of the year when compared to Q2, as we are seeing higher investment levels in R&D and commercial initiatives, in tandem with higher 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 full year rate is expected to be about 100 basis points higher than what we originally guided in February, driven by a change in the geographic mix of income due to COVID-19. Overall, we expect that margins, earnings, and cash flow will improve as our revenue profile improves. From a longer-term perspective, we remain committed to achieving at least a 30% operating margin in 2023, as we continue to track well versus our restructuring plans. To 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 the ZB team has responded and 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 Bryan.

In closing, it’s clear that the challenge of COVID-19 has been significant to ZB and to many others as well. However, we are encouraged by the early signs of recovery and our ability to confront this challenge as a team. I want to highlight three key points from today’s call. First, the recovery in Q2 occurred more quickly than anticipated, which is a positive indication for us. Nevertheless, we are remaining cautiously optimistic about the latter half of 2020, given the ongoing uncertainties related to the pandemic that we still need to navigate. Second, while our business has been affected by COVID-19, our strategic focus and progress have remained intact. In fact, this challenge has offered us insights that are strengthening the strategic aspects of our operation. Lastly, we are confident in the strength of our core business and our strategy, as well as Zimmer Biomet’s capability to achieve long-term growth and value. Before we transition to the Q&A, I want to take a moment to thank all of our team members around the globe for their outstanding efforts. Your dedication to ZB allows us to provide value to our customers, patients, and shareholders. Now, I’ll hand the call back to Keri, and I look forward to your questions.

Thanks, Bryan. 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 to as many questions as possible during the call. With that, operator, may we have the first question, please?

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.

Thank you for the detailed information, Bryan. If possible, could you expand a bit more on how you're viewing the recovery moving forward? You touched on it earlier, but when I examine the second quarter numbers and the market averages, it seems that Zimmer outperformed, declining less than the overall averages both globally and in the U.S. Could you help clarify the drivers behind this? Is it primarily your focus on execution, your knee products, ROSA, or a combination of factors? What do you see as the key areas of emphasis? Ultimately, what does this mean for our outlook into 2021 and beyond? How quickly do you think we can achieve mid-single-digit growth? Thank you, Bryan.

Thanks, Rick. You asked a lot of questions, so I’ll try to address them in two parts. First, I'll discuss what is driving the underlying strength of the business, providing a bit more detail than in my prepared remarks. The second part will touch on the overall recovery from COVID and share some deeper insights on that. Then, I’ll pass it over to Suky for more details on our expectations for June and July. To start, it's crucial for us to remain disciplined about the areas we can control right now. This focus is key to the successful execution of our strategy. One major improvement is that we no longer face the supply issues we previously had. The commercial team has moved past their previous skepticism and is now fully focused on generating new business, which is a significant aspect of our progress. Innovation and new products are vital; having a reliable supply is only the foundation. We must go beyond that and introduce new offerings, which are essential for a thriving commercial organization. We are providing them with new technologies and committing to our promises. Another significant change is the improved relationship between our senior management and the commercial team. The previous distrust has been eliminated, which boosts our commercial team's confidence and effectiveness in the field. We've also revised compensation programs to better reward growth, focusing on high performance, while implementing stricter accountability measures to ensure delivery. These controllable factors are driving positive momentum in our business and will continue to do so. Regarding COVID, I still believe the key variables include patient fear and the potential recurrence of the virus. These aspects are unpredictable, which creates volatility, and that’s why we're hesitant to provide specific guidance moving forward. Observing current trends can offer some insight into potential future developments, as we are witnessing a resurgence of the virus in various regions. With that, I’ll turn it over to Suky to provide more specific observations about what we’re currently seeing, which may help clarify our outlook moving forward.

Great. Thanks, Bryan. And thanks for the question, Rick. So, we clearly saw really good performance and improvement through the back end of Q2. As I talked about June exits on a day rate basis, were down 13.5%. That compares to being down 70%, if you recall back in April. So, clearly a pretty steep V-shaped recovery in the quarter. Now, in spite of that what we saw was Asia Pacific was about overall Company average plus or minus. Some of the areas we’re really watching in Asia Pacific, our second and third largest market, China and Australia, sorry, Australia and New Zealand, performing really well, getting very close or at normal-wise run rates. The other big watch-out for us is Japan, which continues to operate in sort of that 80% to 90% range, and that is our largest market. So, we’re keeping a close watch on the recovery in that particular market. And, of course, we’re really struggling in a lot of smaller markets in Southeast Asia. As we turn to EMEA relative to that overall company average of down 13.5%, EMEA was down significantly more than that. And that’s simply because the recovery just started later in the quarter for that particular region. Seeing really good uptake with our larger markets, but we’ve got to keep our eyes on the UK, which continues to defer at a very high rate and emerging markets is lacking. That was already a pretty lumpy business with tendering. COVID has just made it that much more difficult to predict the trend. But again, recovery in the biggest markets within EMEA is really good in the back end of the quarter. Then, you turn to the Americas, and this is probably where we saw the biggest and sharpest return in the second quarter, and as Bryan talked about, a little bit ahead of our expectations. Within the U.S., we’re seeing really good traction. We do continue to get hit in some pretty hard states, as we talked about, Florida, Texas, Arizona, but nothing compared to the first wave. Those particular markets are operating in the 80% to 90% range. And what we’re seeing is some of the states that have recovered a little bit later, like New York, New Jersey, some of the Northeastern states, they’re operating close to 100 or maybe even some aspects or some parts going above 100. So, you’re seeing that offset, some of the harder hit states. So again, the U.S. is overall trending pretty well, but we’re keeping our eyes on that second surge. I think within America’s however, we’re seeing a pretty big headwind from Canada and more importantly from Latin America, as those particular markets continue to struggle. And so, trying to kind of emphasize the headwind that we’re getting from those markets, if you actually looked at our U.S. knee number for instance, there was about 200 basis-point headwind by including total Americas. And so, if you excluded Americas, our U.S. knee number was about down 44.7%. So, again, about 200 basis points better, and that’s even with a tough comp on ROSA. And then, our U.S. hip business had a headwind of about 300 basis points, when you include the rest of Americas. And so, clearly, the rest of the Americas is a piece of kind of masking even better performance in the U.S. So, as we think about things going forward in July, sequentially, things got better than where June was. And so, that’s good second leading indicator there. However, July was still down versus prior year, okay? So, than June, but still down. And when you think of the composition of the reasons 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, APAC kind of in line and EMEA, a little bit behind. So, hopefully, that gives you a little bit more color. Sorry for the long answer, but I know that’s a question on a lot of your minds. So, we just wanted to address it proactively.

We’ll take our next question from David Lewis with Morgan Stanley.

Just two for me. One, Bryan or Suky, just on recovery. Bryan, you mentioned this $700 million, $800 million backlog. I just sort of wonder how much of that has been worked out. And I’m assuming this dynamic of scheduled versus rescheduled patients is why you said recovery is less steep into sort of the back half. And just maybe talk about that backlog and whether you think you can get back to growth in the fourth quarter. And then I had a quick follow-up on ROSA.

I would say that there is still a backlog of $700 million to $800 million for future revenue, which I have not considered as already captured. This backlog can be divided into two categories. The first category includes patients who were deferred early on, and we know they are deferred. The second category consists of patients, which I’ll refer to as category 2 patients, who are currently being added and will continue to grow until we return to market growth. Thus, this $700 million to $800 million represents potential future revenue for us. I believe that most of the first category of deferred patients will be addressed by the end of 2020. However, there will still be a substantial backlog remaining for 2021. To estimate that, you can look at the difference between what we achieved in 2020 and the overall market growth – that delta will encompass elective procedures associated with progressive diseases, and a large majority of those patients will return. For example, if there were 100 fewer procedures than typical, approximately 80 of those would likely be my backlog for 2021. The challenge is that we still face significant variables such as patient fear and a potential resurgence of the virus, making it hard to say that the returning backlog will provide the desired boost without the negative influences of those factors. If we can reach a point with a valid vaccine or effective treatment, those concerns will be alleviated, and the backlog will act as a significant advantage for us. Therefore, there is a potential pathway to strong growth in 2021, assuming those negative variables diminish. It ultimately depends on how those factors unfold.

Okay. Just a follow-up there. It’s hard to be definitive on fourth quarter growth I think is what I’m hearing, that’s what in your comment there. And then, I’ll ask my second question as well. Just on ROSA, Bryan, obviously that number is kind of materially how the way 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 placement has changed at all as well as usage-based agreements? And if you could just give us some sense from a competitive account perspective, where the systems are being placed, what percent are the traditional Zimmer majority accounts versus the 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 friends and family. So, 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 market, we are definitely seeing competitive situations and we’re winning in those areas. When I think about ROSA in general, I would just say that we continue to see sequential improvement in placements. And believe it or not, even in Q2 there was no disruption in that sequential improvement. That 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 to buy. And now, we’re seeing a shift to this opportunity to acquire the technology through volume commitments, which in reality, as I stated before, is actually the preferred method of placement for us. I would much rather have that annuity revenue that is linking me to the customer for a longer period of time than having upfront capital acquisition. And that’s what Suky referenced before. If you look in Q2, you 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 in knees, because we had sold more last year than we did this quarter. So, again, I think, again, the pipeline is strong, excited about the product line and we’re seeing continued sequential improvement quarter-over-quarter.

We’ll go next to Matthew O’Brien with Piper Sandler.

Just a follow-up on the ROSA side of things. When I look at, Bryan, 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 placing this year versus what you had out last year. So that’s pretty similar to what the market leader did as far as placements last year in this category. So, what I’m trying to figure out is kind of to David’s question, what’s the split between friends and family versus competitive accounts? And are you seeing a building improvement on the competitive account side, as we speak or kind of as you’re looking forward? And I do have a follow-up.

Yes. So, I would say, without giving specifics, I would say that the competitive accounts are probably greater than 50% of the 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 placed like that, you’ve got to have a competitive situation, so that they can commit that volume to be able to get the robotic system placed. So I’d say, it’s north of 50% and it looks better right now because of the placement strategy shift, not from us, but from our customers.

And then, on the revision side, and I didn’t hear much on cementless, I may have missed it. But when I look back historically, you’ve lost, I think some somewhere around 300, 400 basis points a share on the revision side, cementless, as they incurred primaries in total, I think it was a couple hundred basis points. So there’s a lot of users out there that are familiar with Zimmer. Are those the ones are getting back the quickest right now or even going into new accounts that you hadn’t really been present before? Because of those assistance, because of ROSA, and you feel comfortable. Again, I understand there’s some variability about outperforming the knee market, broadly speaking over the next several years?

Yes, I would say we are continuing to gain traction with our cementless products. They are being well received in the market. As we increase our use of robotics in our accounts, the comfort level with cementless options will naturally lead to a higher percentage of our business coming from these products. Regarding our revision systems, they represent a key opportunity for us. We are entering accounts that have used Persona but haven’t previously been able to utilize our revision technology, and we are gaining those accounts. Additionally, our revision system is so effective that it is attracting competitive surgeons who want to switch to our offerings. This will also drive primary sales alongside the excitement surrounding our products. When I mentioned the nearly $100 million opportunity for this year, that figure does not include the additional sales we anticipate from competitive conversions in primary needs.

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 the just more the exit rate of June versus the full month or is there something else going on there?

Hey, Robbie. That was the full month of June, as opposed to the final weeks.

Got it. Okay. Bryan, regarding dental and spine, during challenging times, it becomes easier to reevaluate various segments of the business that may not be top performers or show the best growth potential moving forward. How are you approaching the underperforming areas of your business, and what are your thoughts on improving or monetizing them, especially in a market with numerous potential buyers who have recently raised capital? Thanks.

Yes. As mentioned in my prepared remarks, we have specific businesses and sub-businesses that will be the focus of our investments. However, I want to emphasize that this does not mean that the other businesses are unimportant, nor does it mean I don’t anticipate results from them. They are receiving investment, although not at the same level. I fully expect the dental, spine, and CMFT sectors, which I did not highlight as areas of extreme focus, to perform well with the investments they receive. Specifically for spine, we have a significant opportunity that must be realized in several ways. Our commercial organization has gone through a lot of changes and is now stable, but this stability needs to translate into productivity. We have Mobi-C, the leading cervical disc in the market, which we haven't fully capitalized on yet, and I need to see that change. Additionally, we have Tether, an innovative product that significantly enhances the experience for scoliosis patients, and we need to utilize it effectively. We also have ROSA, so we possess the elements needed for success in spine with our current investment level. I expect to see results similarly to how we’ve experienced success in dental with a comparable investment. I want to ensure it's clear that although I don't categorize these businesses as primary growth drivers, they are still important to us, we will continue to invest at some level, and I do expect results.

We’ll take our next question from Pito Chickering with Deutsche Bank.

Good morning, guys, and thanks for taking my questions. The first one is I wanted to follow up on David’s question on $700 million to $800 million of backlog. I understand that the backlog is out there. But, any chance you can give us the color as to procedures you guys saw in June or July, where the split between deferred procedures that happened to versus newly-diagnosed cases that were done. I’m just trying to understand the price of recovery and the sustainability of that recovery.

Yes. While we do collect data on this, it’s becoming more complicated. The reason is that there is now a complete mix of what constitutes a deferred patient. If we focus only on those we know were deferred, I can get an idea of how many are returning. However, when I look at the increasing backlog of deferred patients, it’s hard to distinguish between new cases and those that are deferred due to COVID. It's becoming unclear. The best way to approach this is to review areas with elective procedures connected to progressive diseases, like large joints and shoulders. We should consider the market growth and realize that over 80 percent of these patients will eventually return. It’s more beneficial to focus on the overall market deficiency rather than the specifics of deferred versus new patients. History shows that these patients tend to re-enter the system at a high rate. That's our perspective. Spending too much time trying to categorize the mix of deferred and new patients is becoming too complicated and doesn't provide clear insights.

Okay. A follow-up there. August is typically a pretty slim month, surgeons take vacations. Any color from your sales force about how do you see surge in demand in August? And do you think that docs are motivated to work through their backlog and provide big growth and easy comps?

It's interesting to note that in Europe, August is usually a tough month due to numerous holidays. However, reports from parts of Spain indicate that people are planning to take fewer vacation weeks to manage some of the backlog. This trend seems to be consistent globally. Surgeons and hospitals are indicating they will reduce their vacation days to address the backlog, as there is an understanding that many patients need to be attended to. I believe we will see efforts to tackle this backlog. The only exception could be in the public health system in Europe, where there isn’t the same motivation or sometimes even the budget to manage this situation. Overall, I'm receiving positive feedback regarding the intent to work through the summer, address the backlog, and care for patients.

We’ll take our next question from Matt Taylor with UBS.

So, it’s really interesting to hear the color on ROSA system placements and utilization there. And around the focus on utilization perspective, and I’m going to much about that. You saw pretty strong use despite the pandemic conditions. And I guess, I was hoping you could provide some outlook for that and maybe benchmark it versus other systems that are out there. Where do you think utilization could go in the coming quarters for these ROSA systems in that maturity?

I believe we will continue to see an increase in utilization for each system. It's important to remember the principles we established while designing the system. Our main focus was to ensure that it wouldn’t disrupt the surgical flow or lengthen procedure times, and that’s what we are observing. The positive aspect is that surgeons can adapt to it more easily since it doesn't significantly change their current practices; it simply enhances them. Additionally, it enables a higher surgical volume because the use of robotics doesn't slow down procedures. As more people become accustomed to it and recognize the improved patient outcomes with robotics compared to traditional methods, I expect utilization per unit to keep rising. Moreover, as we deploy more units, I foresee the procedural lines increasing rapidly.

And another follow-up, people have alluded to the deposits prior to it and being able to push that forward in a tough environment. Do you think that hospitals are benefiting from stimulus or how have they been able to continue to make the kind of capital investments or other arrangements despite the disruption and pressure on the budget?

Yes. I really do. We were very concerned out of the gate that we wouldn’t be getting paid by hospitals, let alone, seeing this kind of traction. And I think the stimulus did help. I think it took the pressure off and it made hospitals feel more confident and comfortable to be able to continue to move their strategy forward. And so, our receivables, for instance, never really got significantly damaged during all this because I think they felt comfortable 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 and they didn’t know for sure what was going to happen. So, there was a month, period of time where there was a little bit of chaos. But as you worked through that and people felt more confident and comfortable in liquidity, things got back to normal pretty quick. I said normal. Clearly, that’s a new normal, not actual normal.

Thanks. Katie, I think we have time for one last question.

Thank you. We’ll go next to Richard Newitter with SVB Leerink.

Hi. Thank you for taking my question. Regarding ROSA, I noticed that one of your competitors, who leads the market, has experienced a higher than expected number of placements in ASC settings. I'm interested to know if you've observed any similar placements for ROSA in ASCs. Additionally, how is Zimmer positioned to take advantage of or be affected by the growing trend in ASC settings? Thank you.

Yes. I mean, clearly, you would see a natural desire from patients, I would think to be in a non-hospital setting, just given the issues around virus fear. So, it’s not surprising to me that we’re seeing some additional pace moving to the ASC from a procedure volume standpoint. And we are absolutely ensuring that commercially we’re going to be ready for that. We’ve already focused on it obviously, but we’re going to put that on steroids now. And I would say from a robotics standpoint, it plays quite well for us. Remember that you do not have to have a CT scan to be able to use a robotic system for ROSA and that helps us quite a bit in the ASC setting. And also, we’ll go back to this idea of throughput, these are business people in ASC 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 business dynamics that they want. And that ability to use our system without a change in time really matters to them. And so, again, I think it bodes well for us, quite frankly. And I’m very happy to hear that our competitor also saw a surge in robotic placements. It tells you that the demand for robotics is real and the penetration of robotics is still very low. And that to me is an opportunity for everyone who has a real robotics solution.

Got it. And then, Bryan, just for my follow-up. I’m curious on the M&A front, I appreciate you are doing the start-up, smaller or tuck-in. I’m just curious, in the wake of COVID, has that in any way changed maybe where you might be initially focused on the types of acquisitions or anything that now just on a go-forward basis might fit more strategically into the business, as you look forward? Thanks.

Yes, let me answer that specifically. I want to provide some context before diving in. I feel much more confident now about moving into active portfolio management, and we will definitely pursue that direction. It was crucial to reach this point since I view our company's transformation for success in three phases. The first phase was clear to everyone; we had to address significant issues. We faced challenges related to culture, mission, and connection. We also lacked the top talent needed to advance the business, had supply and quality problems, and were under scrutiny from a DOJ monitor. Addressing these issues was essential. I don’t mean to imply we’ll stop focusing on these areas as they will continue to evolve. That was Phase 1, fixing those problems. Phase 2 revolved around innovation. We needed to launch new products, define our strategic approach, and ensure our organizational structure supported those efforts. All those elements came together in Phase 2, and we needed the right operating mechanisms to achieve them. Phase 3 is focused on portfolio transformation, which is exactly where we are headed. I believe we’re gaining valuable insights from COVID, learning every day, and integrating those insights into our strategy. While we aren't changing our fundamental strategy, we are enhancing it. We aim to diversify and improve our presence in the ASC while focusing on promising subcategories and considering acquisitions to reduce our reliance on elective procedures. We are evaluating various sectors for potential acquisition opportunities. However, I still maintain, as I mentioned earlier, that for now, we will primarily seek smaller tuck-in acquisitions due to our current liquidity constraints. We want to remain investment grade, but we are clearly zeroing in on active portfolio management at this time.

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

Thanks, Katie. And thank you all again for joining us this morning. If you have questions, please do not hesitate to reach out to the IR team. You can also find a replay of the call on our website, zimmerbiomet.com. Thanks so much and have a great day.

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