Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, February 5, 2021. Following today’s presentation, there will be a question-and-answer session. At this time, all participants are in a listen-only mode.

[Operator Instructions]. I would now like to turn the conference over to Keri Mattox, Senior Vice President, Investor Relations 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 quarterly earnings conference call. Joining me virtually today are Bryan Hanson, our President and CEO; and CFO, Suky Upadhyay.

Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements. Actual results may differ materially from those indicated by the forward-looking statements due to a variety of risks and uncertainties.

Please note, we assume no obligation to update these forward-looking statements even if actual results or future expectations change materially. Please refer to our SEC filings for a detailed discussion of these risks and uncertainties, in addition to the inherent limitations of such forward-looking statements.

Additionally, the discussions on this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included within our earnings release.

As a note to all call participants, we provided updates via 2 press releases issued this morning, and we have also posted an investor presentation to our website, zimmerbiomet.com. With that, I'll now turn the call over to Bryan.

Bryan?.

All right. Great. Thanks, Keri. And also I want to say just thanks to everyone for joining us on the call here this morning. As you saw from our announcements earlier today, we clearly have a few updates that we want to fill you in on and I'm looking forward to a very productive call this morning.

Just given the backdrop of COVID, let me just start by saying that I certainly hope that all of you are doing well and staying safe. And continuing to, as much as it's frustrating, I'm sure by now, continuing to social distance and wear your masks. I think, at this point, we're all pretty good at it. So let's make sure that we continue to do it.

And to all of the ZB team members joining the call this morning and who are listening at a later time, I just want to let you know I'm thinking about you as well. I just want to say thanks.

Thanks for everything that you do and have done and will do actually to continue to follow our protocols, to keep yourself safe, obviously, but also our teammates safe. And as a result of that, continue to deliver for our customers and our patients and move our mission forward.

And I just continue to be very proud of everything this team has accomplished against a significantly challenging backdrop in 2020. So, I'm proud of you, I'm glad to see what you've been able to do, and I'm looking forward to what you're going to do in 2021. And here we are, right? We're in 2021.

And there's going to be challenges and we've seen already early on in 2021, but I'm confident that we're ready to deal with the challenges as we do, and I'm pretty confident that we're going to see some real opportunities for 2021 as well.

And there's just a lot of updates that I want to share with you today, but I'm going to keep my comments to a minimum, if possible. I really want to make sure that we have time for Suky to get into a little more detail on Q4 and then ultimately say how that's going to translate into 2021.

Now we're not going to give too many specifics on 2021, but he'll give you some color on what we're seeing from Q4 and again, the impact we think that's going to have on 2021. And I want to make sure that we leave time for questions as well, okay, so for today, I'm just going to kind of keep it to 3 main topics.

The first is really how we're continuing to navigate COVID-19 and to continue inside of that to ensure that we're executing against our strategy. The second one is really going to talk about the ongoing transformation of the company. We really are making sure that we're moving forward with active portfolio management.

And obviously, we're taking the next steps there with the planned spin-off of our Spine and Dental business. So, we'll talk a bit about that, and then third, I want to make sure that we, again, touch upon our long-term growth strategy and how it positions us to drive growth, obviously as a company, but also value for you and value for us.

And so, let's start again, navigating the challenges and executing here in the short term. There's just no doubt that COVID, unfortunately, remains a challenge. Coming out of Q4, we're seeing the pandemic pressure and the surges continue, and frankly worsen across pretty much all of our regions and markets.

There's clearly more lockdown measures that we're seeing throughout Europe, Middle East, and Africa, to a far lesser extent, but still impacting Asia Pacific as well. And certainly, in the Americas, we're all seeing it in the U.S. May be different by state, but we're clearly seeing increased pressure as a result of surges in the pandemic.

So, all of that is kind of the backdrop that we saw coming out of Q4. Unfortunately, this pressure in the corresponding decline in elective procedures grew throughout Q4 and actually was worse at the end of December. And at this point, we expect that increase in pressure will continue throughout Q1, at least and will impact all 3 of our regions.

As a matter of fact, we're actually seeing this probably increase in pressure coming out of Q4. So, we would expect Q1 to be a little more challenging than even what we saw in Q4. But even given that backdrop, I'd say that I'm optimistic. Sounds crazy to just say what I said, but say that I'm also optimistic, but [indiscernible] the approved vaccines.

We're currently rolling those out around the world. We do believe the vaccines are going to change the COVID-19 dynamic, and we're going to see positive impact as a result of it. As soon as we start to see the surges stop, we see the impact of COVID end.

And we're confident that the recovery is going to mean that the normal patient flow is going to start again, and we're going to have the pull-through effect of a sizable patient backlog that's been created over the past number of quarters.

We expect that when that recovery occurs, we're going to see a period of what I would define as normal market growth augmented by deferred procedures that will be coming in as well. And we're going to be ready for that. And we're excited about that.

So as much as it's going to be a little rocky in the short-term and potentially more challenging than what we saw in the fourth quarter, we see a light at the end of the tunnel, and that's a good thing. The big question is when? When is that going to happen? We know the vaccine is going to have the impact. The big question is when.

And that's certainly going to be the key variable we're going to be looking at as we try to predict where 2021 is going to look like. So while I would just say, against this backdrop of COVID, what is clear to us is we can't control when the vaccines allow the surges to stop, but what we can control inside of that is how we execute our strategy.

And I have confidence we're going to continue to move forward. Our core business is strong. Our execution is on point. I would just say momentum around our key commercial launches and programs continues to be strong. And I would say that overall, our commercial confidence is better than it has ever been. So let's give a few examples of this.

I can say it all day long, but once we talk about it and actually, it reflects in the numbers, who cares. So let's first start with ROSA Knee. Obviously, this is something that everyone's going to be paying attention to. Certainly, I am. And I know we said we're going to hit between 200 to 300 cumulative placements by the end of 2020.

Obviously, you know that we are in that range as of Q3. So I'm happy to report that, not only did we achieve that goal, we achieved the high end of that goal. And I would tell you that the momentum is strong coming into 2021. Q4 was actually our strongest quarter as of the date of launch of ROSA Knee.

So we had some pretty strong quarters in the past, Q4 was our best, and we were on the high end of the goal that we set for the year.

And as I've said before, with some of the new launches that we have coming, specifically associated with the knee, I feel pretty confident that 2021 is going to continue to show that kind of resilience and strength for ROSA Knee. On the Persona Revision side, again, this product continues to be very successful for us.

We now show that in Q4, we actually had the strongest quarter-over-quarter growth that we've seen since launch. We did realize our 2020 expectations of $100 million in gross revenue and almost $40 million in net of cannibalization revenue during the year.

And I would just tell you that that's just the beginning because Persona Revision serves as a really compelling tip of the spear product for our commercial team. Once we get Persona Revision in, we've got an opportunity to hunt for the typical primary knee as well. So we're very excited about that launch, and it continues to be strong.

On the hip side, Avenir Complete continues to be a strong one for us. Even in the pandemic, it continues to beat our expectations. And if I just look at Q4 specifically, we grew about 30% over Q3, again, even with the increased pressures of the pandemic in Q4.

So very excited with what we're able to do with Avenir Complete, and we expect big things to continue with this product throughout 2021. And as you obviously know, we also expect at the end of 2021 to launch the ROSA Hip which, again, gives us a lot of confidence in the hip category for our business.

And then finally, for Signature ONE Planner, we demonstrated, again, strong sequential growth with registrations up nearly 25% in Q4 over Q3, and we expect utilization to continue to expand significantly in 2021 with really a goal of having more than 50% of our shoulder procedures using presurgical planning. And that's important for a lot of reasons.

Remember, the presurgical planning creates stickiness with the customer. But it also enhances our ability to get more guides and to augment using the procedure, which can really take up the ASP for that procedure. So again, exciting stuff with Signature ONE Planner as well. And so all in, we continue to execute -- we continue to execute as a team.

The way we're showing up every day, the way we're showing up in the market, frankly, versus our peers, gives me confidence in our business as does our continued innovation and our product launches. But we're going to see more this year, some pretty pivotal innovation that we're going to see this year.

As I mentioned before, we're going to see what ROSA Partial Knee, we're going to see ROSA Hip. And we're also going to see the first smart implant, Persona-IQ, launched this year. So definitely exciting for us from an innovation standpoint in 2021. And yes, that leads me to really my second topic this morning. We continue the transformation of ZB.

That's been the goal since I got here. You've heard me talk about our 3 phases of transformation. First was the hearts and minds and the execution challenges that we had in the very beginning. That's what we talked about a lot in the beginning.

The second phase of this was really doing a more robust, longer-term strategy, making sure that we brought innovation to the market and getting our execution straight. We're clearly well into that phase. And third is our portfolio transformation.

And that's the goal of active portfolio management to change the complexion of the organization, so that we can have better goal of sustaining the mid-single-digit growth. And I'm proud to say that we're squarely positioned in phase 3 now as well. And as you've seen by our recent announcement, we're going to continue to move this forward.

We have the portfolio management strategy and the process in place and have built a pretty strong capability to move us forward in this area. Late last year, we executed a number of smaller but still important M&A deals to fill portfolio gaps and to better position us in higher growth areas that we do believe we have a right to win in.

And just this morning, we announced our intent to spin-off our Spine and Dental businesses. Ultimately creating, we believe, 2 independent, publicly traded companies, both Zimmer Biomet and the new company called NewCo that are going to be better positioned, separate.

I truly believe, by separating out these businesses, we're going to create 2 stronger companies. 2 companies that are going to be better positioned to meet customer needs and improve patient lives, and ultimately, and very importantly, deliver greater value to you, our shareholders.

And let me give you a bit more detail on why we believe this is an opportunity for value creation and really why we think it delivers value for both the ZB and NewCo. First of all, the transaction increases our management focus and resource prioritization. We truly do believe for both companies.

We think about NewCo, and we think it's going to thrive as an independent company with prioritized capital allocation to pursue strategies and growth opportunities and through the investments inside of Spine and Dental that has not been a focus for ZB. It will absolutely be a focus for NewCo.

And for Zimmer Biomet, the transaction is an important next step in our transition into a more streamlined company with sharper focus in greater and more optimized resource allocation towards innovation in those core businesses that we are committed to, that are profitable for us, where we see attractive markets with a right to win in those markets and be market leaders.

And really, the second thing is it's going to drive increased growth and efficiency for both companies. We really do believe that.

Simply put, we expect that these 2 companies, with their simplified operating models and just reduced complexity and increased focus, we'll be able to grow revenue, margin and earnings per share faster than they would if we remain combined as one company.

And Suky is going to talk more about the specific financial impact that we expect in just a few minutes, but just note, it's positive for both organizations, financially speaking, as we separate the organizations.

And third, it's going to enhance value creation for our patients, our providers and all of our key stakeholders, including our own team members. This is the next step in ZB's transformation, and it underscores our commitment to ensuring long-term priorities remain aligned with shareholders' best interest.

It's going drive the business forward to meet customer needs and advance our mission to alleviate pain and improve the quality of life of people around the world. We think we can do it better as 2 separate organizations. Okay. So that's the backdrop of the spin. And today, obviously, it's just day 1 in terms of announcements around this process.

You can absolutely expect that we're going to continue to provide updates as we move forward, as NewCo takes shape and as we move towards the transaction close, which we're currently expecting to be around mid-2022. Okay. So we're confident in the steps we're taking and our ability to keep executing and in our overall ZB strategy.

And that brings me really to the third and really the final topic that I have for these remarks, and it's our plan to drive long-term growth. And ultimately, as a result of that, deliver increased value for you. And to do that, we remain fully committed and confident in ZB's long-term growth and margin expansion expectations.

In fact, the spin-off transaction that we're going to do over the next year serves to de-risk, if not accelerate, our path to that 4% to 5% growth rate we've talked about and our 30% operating margin profile by the end of 2023.

And to get there, to be able to deliver on both of those, we're going to have to be committed to our priority growth areas, and we've talked about these in the past, but I'm going to remind you of them again. The key area of concentration for us would be knees, hips and S.E.T.

If we think about knees first and foremost, we need to be able to grow above market rates here. And we're going to continue to focus on the fastest growth submarkets of knees. For us, that's going to be robotics, data and informatics, cementless and revision.

We feel we have plenty of innovation and momentum here to continue to grow sustainably above market rates in knee. From a hip perspective, it's a little less ambitious in the beginning.

We just said that we need to grow at market in the short-term, with the idea that over the long-term, particularly after ROSA Hip is launched, that we would grow above market in hip as well.

And I can tell you based on our performance so far, the ROSA Hip application being launched later in 2021 and the Avenir Complete momentum that we have, we feel confident we're going to be able to do that as well. And as far as that goes, we just want to grow at market, if not the higher end of market.

And to do that, we're going to focus on the most attractive sub-element of S.E.T for us and that's, for us, again, going to be sports, medicine and extremities. Those are key areas of concentration for us that we're going to invest internally.

We're going to look for external ways to build scale, and we're going to build commercial infrastructure as well, right? It's only closed by saying that I continue to be more confident about ZB's future than ever. I know I say that a lot recently, but I really do feel the momentum right now.

I truly believe that we are well positioned for success and that our strategy is absolutely working. And our transformation is well underway. And our proven ability to rise to challenges and face adversity, I think has prepared us well for navigating the current environment. And really, for that matter, any environment in front of us.

And I just want to, again, say thanks to the entire ZB team in your focus on our mission, our strategy and how we show up and execute every day is unmatched. It's what makes ZB and what makes me confident that we're going to continue to deliver.

So with that, I'm going to turn the call over to Suky for more financial details of the quarter and also looking forward. Okay.

Suky?.

Thanks, and good morning, everyone. Before jumping into the details, I'd like to summarize the quarter as one where we made significant progress across a number of strategic and operational fronts, all in the backdrop of heightened market pressure.

While revenue and profitability were challenged due to the pandemic, we executed extremely well against the things we can control, positioning ourselves to win through eventual market recovery and beyond. Now for this morning's call, I'm going to focus on 2 topics.

First, our Q4 results, including commentary on the COVID impact and what we're seeing so far in Q1; and second, how ZB is positioned for long-term growth, specifically, how we believe the spin-off transaction we announced this morning is expected to impact us post execution.

Moving forward, unless otherwise noted, revenue and P&L commentary will be on a constant currency or adjusted basis. Net sales in the fourth quarter were $2.085 billion, a reported decrease of 1.9% and a constant currency decrease of 3.7% versus 2019. But we did not experience any material day rate differences in our year-over-year comparisons.

Our consolidated regional results were in line with expectations despite deepening pandemic pressure on global elective procedures as we exited the year. While the market softened through the quarter, execution remained strong across all regions.

Beginning with Asia Pacific, the region grew 2% versus Q4 2019 with growth across all 3 of our largest markets of Japan, China and Australia, New Zealand. While COVID pressure on elective procedures increased towards the end of the quarter, the impact is less pronounced than what we are seeing in EMEA and the Americas.

We are excited about the uptake we're seeing in ROSA in the region and with the solid performance across our knee and hip businesses. As expected, the EMEA region was hardest hit by COVID-19, decreasing 17.5% versus 2019, with all sub-regions in decline.

Surges in the virus leading to policy actions and government lockdowns negatively impacted elective procedures across the region. Lastly, the Americas region was about flat, decreasing 0.3% compared to 2019, driven by continued COVID headwinds in Latin America, in tandem with a softening U.S. market. The U.S.

was flat despite increased pressure on elective procedures.

Performance was buoyed by continued strong demand for recent innovative product introductions, strong execution by our commercial organization and some favorable impact related to the order timing and year-end purchases, as some accounts increased their buying patterns to utilize remaining 2020 budgets. Turning to our business performance for Q4.

The global knee business declined 4.8%, negatively impacted by the ongoing pressures in EMEA. However, the U.S. knee business continued to grow, increasing 1.8%, and Asia Pacific knee business returned to growth increasing 2.9%. Overall, execution was strong with continued momentum for Persona and ROSA Knee.

Our global hip business decreased 3.4%, again, driven by declines in EMEA. Both U.S. hips and APAC hips continued their growth trends, increasing 1.4% and 1.3%, respectively. Sports, extremity and trauma sales declined 3.3%. Dental, Spine and CMFT continued to deliver better execution, increasing 0.8%. And finally, our other category was down 9.3%.

Moving to the P&L. We reported GAAP diluted earnings per share of $1.59 and adjusted diluted earnings per share of $2.11. Additional details on our GAAP results can be viewed in our press release issued this morning.

On an adjusted basis, with revenue down 3.7%, EPS was down about 10%, driven by a lower operating margin and a higher share count, which more than offset the favorable tax rate in the quarter. Lower adjusted operating margin was driven by lower revenue and an expected year-over-year decline in gross margins.

Adjusted gross margin was 71.3%, sequentially better than Q3 but lower than Q4 2019. Versus the prior year, favorable geographic mix was more than offset by lower volumes, ongoing pricing pressure and the impact from prior period deferred costs.

OpEx was down versus the prior year as we implemented several cost containment initiatives as part of our response to the pandemic, in addition to the realization of our transformation programs that were ultimately reinvested back into R&D and commercial infrastructure to help drive consistent above-market growth in priority areas.

Based on our performance versus market over the recent quarters, our reinvestment of efficiency savings is translating into strong returns. The Q4 adjusted tax rate of 15% was better than the previous year due to geographic mix of income and certain discrete benefits in the quarter related to recent audit settlements.

Turning to cash and liquidity in the quarter. Free cash flow totaled $329 million, higher than the same period in 2019, driven by better working capital and lower capital expenditures.

And we utilized better-than-expected cash flow to pay down $250 million of debt ahead of schedule, ending the year with cash and cash equivalents of approximately $800 million. Now moving to 2021.

Due to the ongoing uncertainty related to COVID-19 and its impact on elective procedures, we will not be providing full year financial guidance at this time. We recognize that this is challenging for you as you build your '21 models.

However, we will reserve financial guidance until we have more certainty around the outlook of elective procedures relative to COVID surges, and related vaccine adoption. We strive to be credible and transparent. And to that end, I will provide additional quarterly details and broader full year shaping as an interim measure.

So far through January, we've seen COVID pressure continuing to intensify from the end of December. Based on what we've seen so far in the quarter and in tandem with our latest estimates for procedure cadence, we project that Q1 revenue will be down in the low single-digit to mid-single-digit percentage range versus Q1 2020.

Now we have optimism and confidence that we'll see a positive vaccine impact on elective procedures this year. And once we do, we expect elective procedure volumes to return to pre-pandemic levels and the sizable patient backlog to serve as a tailwind to underlying market growth.

As we turn to the P&L, we expect that the impact of COVID-19 on sales volume will put pressure on adjusted operating margins and earnings leverage until we return to consistent pre-COVID revenue levels and growth rates, as I just discussed.

Despite this near-term pressure, our confidence in the market recovery and the longer-term financial profile of the company is driving continued investment into priority areas of the business. We expect that adjusted gross margin will stabilize in 2021, with quarterly margin levels broadly in line with what we saw in the back half of 2020.

We could see some fluctuation from quarter-to-quarter depending on a number of variables, including volumes, price, foreign currency, mix and other drivers that can change results over time. Regarding operating expenses.

Sequentially versus the fourth quarter of 2020, we expect non-commission spending in Q1 to be modestly lower with increases in future quarters' OpEx investments as the impact of the pandemic abates.

We expect interest expense to increase in the mid-single-digit versus 2020, as the benefit from lower debt balances is more than offset by the renewal of net investment hedge positions.

Our tax rate is expected to be modestly higher than the full year 2020 rate and could fluctuate over the year as a result of variability in geographic mix of income due to the pandemic. Also, we are not projecting any material U.S. corporate tax reform to be implemented in 2021.

We project that the full year share count in 2021 will continue to increase modestly versus Q4 2020, and we are not planning for any share buybacks in the year. And in terms of capital allocation, we remain committed to maintaining our investment-grade rating and are planning to pay down an additional $500 million of debt in 2021.

Now let's turn to today's announcement related to our intent to spin the Spine and Dental businesses into an independent publicly traded company. The transaction will be structures of tax redistribution of newly issued NewCo shares to ZB shareholders.

As Bryan mentioned, we believe that this tax-efficient transaction, which is expected to close in mid-2022, subject to certain conditions, will drive greater focus for each company with an enhanced prioritization of capital allocation, while accelerating growth and providing the platform for greater shareholder value.

In terms of the NewCo financial profile, 2019 and 2020 pro forma revenues totaled approximately $1.022 billion and $897 million, respectively, and is supported by a diversified geographic base with real opportunities for enhanced growth and margin expansion.

We expect NewCo to have a financial profile generally in line with its peer group and a capital structure supportive of innovation and investment over time. Importantly, the transaction will empower NewCo to pursue a more focused investment and execution strategy.

ZB delivered 2019 and 2020 pro forma revenue of $6.96 billion and $6.128 billion, respectively. For post-spin ZB, the transaction is expected to deliver an improved growth profile with accretion to our revenue growth of approximately 50 basis points over the course of our 5-year strategic planning period.

We also expect that it will expand our adjusted EBITDA and operating margins on a pro forma basis by approximately 125 basis points. With that, you should have even greater confidence in our operating margin expansion goals. We remain committed to at least 30% adjusted operating margins by the end of 2023.

And with this transaction, we have the opportunity to accelerate the timing of that goal. However, we will continue to balance margin acceleration against investment opportunities to accelerate durable top-line growth.

Ultimately, this transaction provides greater optionality to invest more in the business, while delivering a leading margin profile, and that's an incredibly powerful lever. And in terms of capital structure, post spin, we will prioritize proceeds towards debt pay down to maintain our investment-grade rating.

We're truly excited about this transformational opportunity to increase value for our investors, and we'll continue to provide more details as execution of the spin progresses.

To summarize, while the pandemic continued to pressure our growth and earnings profile in the quarter, we made substantial progress on many fronts, including very strong performance versus the market; progress on our efficiency programs that enabled increased investment for growth; free cash flow generation that was ahead of revenue growth; strengthening of our balance sheet through early pay down of debt; integrating our strategic and accretive tuck-in M&A deals; and positioning ourselves to execute the spin-off of our Spine and Dental business as a platform for greater value.

I'm truly proud of what the ZB team accomplished in the quarter and throughout 2020. With that, I'll turn the call back over to Keri..

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

[Operator Instructions] Our first question comes from Steven Lichtman with Oppenheimer & Company..

Bryan, as you continue in phase 3, obviously accelerated with today's announcement, I was wondering if you could provide your latest thoughts on capital allocation. Are you still targeting tuck-ins, larger deals? Any color would be helpful. And I have a follow-up on COVID..

Okay. Yes. I'll just briefly answer your first question, and then I'll pass it over to Suky. But yes, our capital allocation strategy remains the same. We do want to look at tuck-in acquisitions that we think would have low dis-synergy risk and we have a right to win in the space. And that's what we're going to continue to do. This does not change that.

And Suky, you want to give maybe a little more color just overall -- on the overall capital allocation strategy?.

Yes, sure. So we made good progress even in the backdrop of the pandemic in 2020. We're going to continue to make progress in strengthening our balance sheet and creating firepower moving forward. As I said in my earlier remarks, we expect to pay down about $500 million of debt -- of maturing debt this year.

And as cash flows improve, as the virus abates throughout 2021, that will increase and expand our opportunity, firepower opportunity for continued tuck-in M&A. So again, consistent with how we talked about previously, first priority is to maintain investment grade, pay down debt, delever.

And our second priority from a capital allocation standpoint is to continue to grow that topline and bottom-line through accretive strategic tuck-in M&A, and this now gives us even greater focus through our spin transaction..

Great. And then just on COVID, where do you think the size of deferred procedures is? I know we've talked about in the past, I know it's a tough number to tee that, obviously.

But any comments there would be great as we hopefully see end market conditions improve as the year goes on?.

Yes. It's a fantastic question truthfully and one that we track quite a bit and try to estimate. I would just say that without being able to be a fine point to it, it's hundreds of millions of dollars is the way that we view it. And that's what gets us pretty excited about the fact that the end of the pandemic, and our view is on the horizon.

And once that occurs, we've got a heck of a backlog that we need to work through. Now the timing of when you work through it, it's based on capacity, capabilities in different markets and those types of things, but we feel it's very sizable, and we're excited to start working through it..

And we'll take our next question from David Lewis with Morgan Stanley..

Just 2 for me, and I'll start strategically on the spin, Bryan. A lot of times in spins, we create a lot of value through multiple arbitrage between the 2 assets. We even finished our math there. My sense is the multiple spreads won't be that wide here. So the real value creation for Zimmer is sort of to execute your goals or grow faster.

So, when you say 50 bps of growth, Bryan, does this get you to 4% to 5% growth faster or are we talking about it's just going to get you to a higher end or higher structural growth rate at some point towards the end of the LRP? And then I have a quick follow-up….

Yes, yes. So for us, when we just think about growth rate, we're kind of sticking to that 4% to 5% that we've been talking about. But what we should look at here is that you should have greater confidence, obviously in our ability to do that and potentially be on the higher end of that range. And so that is a key focus for us.

And really the significant value for us is that ability to focus. Remember, we talked before about getting to 4% to 5%. We had a number of variables associated with it. One of those variables, even though we didn't have the same level of investment in these businesses, was that they had to grow at least at the lower end of the market.

And over time, if you're not investing appropriately in businesses, there's risk in that. So, we've eliminated that risk as we spin these out, and we've unlocked value for SpinCo because ultimately -- or NewCo because ultimately, they're going to invest more intently in those businesses.

So, it provides value in both ways, but go ahead on your second question there..

Sure. And sorry, Bryan, can we think about our confidence which suggests that maybe 4% to 5% growth is possible in the next 2 years? Is it there any faster? And then I'll ask my other question for Suky just real quick. Suky, there’s a lot of focus this call on the USD number.

Can you just give us any sense as it relates to the USD number, what was the impact of those strategic deals or bulk purchase deals on the fourth quarter and how does the ROSA contribution in the fourth quarter on a revenue basis look relative to the third quarter?.

Suky you could talk, you’re on mute..

Yes, thank you, Bryan. So thanks for the question, David. On your first question relative to the year-end and the U.S. number, it's not uncommon at the end of any quarter, especially at the end of the year-end, to see higher sales and some potential timing favorability or headwinds for that matter.

In this quarter, we actually saw some incremental uptake in our U.S. business. Again, probably not different than what many others saw across our sector as many accounts were utilizing their year-end budgets to bring in some product. For us, we look at it, it was a modest benefit on the total company. It was in the low-single digits.

But again, it was something that was above our normal trend, so we wanted to make sure we called it out. And again, any impact that, that might have into 2021 is reflected in those Q1 estimates that I've already provided. So overall, still a very, very strong quarter for the company versus market, both in knee and hip.

Your second question relative to ROSA. We did see a shift in the fourth quarter, especially with those expanded hospital budgets or remaining budgets, I should say, more dollar sales on installments than we've previously seen in Q2 and Q3.

But year-over-year, Q4 last year to this year, it was not a major material headwind or tailwind on our overall growth numbers..

Operator, can we have the next question please..

We'll take our next question from Larry Keusch with Raymond James..

Just wanted to first come back to the spin-off here. I guess, what I'm really curious about is why is now the right time for this spin-off? And along with that why a spin versus the sale? And then I'll come back to the second question..

Yes. So the timing of it is -- it fits right into the phases of where we look at transforming the business. For us, it was sequential. We wanted to make sure that phase 1 in our transformation was in great shape, and it is. Phase 2 would need to be well underway before we want to take something like this on.

And I think based on our performance over the last few quarters versus our competitors, it's pretty clear that Phase 2 is working quite well. And now's the time. It's time for active portfolio management.

And in a time when we don't have as much capital to work with, this is clearly one of the most significant ways that we can impact and influence the portfolio in a positive way for both companies, I do believe that. So that's the why now. And we're excited about it. We truly are.

We're excited about it for our organization, NewCo -- and we're excited about it for NewCo. And we'll be in it together for the next year, 1.5 years and even post that. So that's the margin -- the line now. And we've looked at multiple ways to drive value with these businesses. Just know that this isn't the only option that we've looked at.

And just given the number of options on the table, we felt that this was the most significant way that we could drive value for our shareholders and our businesses and our team members. So that's the reason for the spin..

Okay. Very good. And then, Bryan, look, you guys seem to be increasingly well positioned in creating sort of this digital ecosystem in orthopedics. If I think about it, you've got a surgical planning, you've got robotics, you've got mymobility, you've got Persona-IQ.

So maybe just talk about how you see the product offering evolving at Zimmer and how the ecosystem can help improve outcomes? And what are you thinking about sort of reimbursement for Persona-IQ from both the implant and the remote monitoring aspect of it?.

Yes. So no, I won't get into specifics on reimbursement for Persona-IQ, but we definitely see it as a very important piece of the puzzle when we think about the ecosystem that you're referencing. And I would just say that we're taking it very seriously when we look at ecosystem versus just the typical implant.

We've had a significant shift in our research and development dollars towards robotic storage, data infomatics to build that ecosystem that's going to be meaningful for patients and for our customers alike. And I got to say, there's a lot of excitement around that in our organization, a lot of excitement from our customer base as well.

And the competency that we've built over the last few years in this area is, in my opinion, second to none. And where we don't have the competency, we've been working with external partners that have pretty significant names like Apple, and you're going to hear more about those coming up as well. So we feel really good about where we are today.

And we feel, in my opinion, anyway, that these ecosystems to be able to capture data before, during and after procedure are going to be a significant benefit for patient outcomes.

And ultimately, at some point, when we pick up enough data and have the data like available to us, be able to have predictive analytics to be able to make better pure decisions before the surgery occurs. And that's really the intent. So we're very excited about it.

We've shifted dramatically research and development in this area, and we feel we're ahead right now versus our competitors..

Our next question comes from Larry Biegelsen with Wells Fargo..

Just 2 financial questions for me, probably both for Suky. So Suky, the margins of the Spine and Dental businesses, how do they compare to the new or current Zimmer? You talked about them being similar to peers, but there are a lot of different peers out there.

Can you give us a little bit more color on the margins of those businesses, please? And I have one follow-up..

Sure. Good morning, Larry. So the first thing I would say is we’ve provide some color on the pro forma accretion impact on our RemainCo EBITDA and operating margins, which should give you a good initial view as to what the NewCo margins could look like.

Just stepping back, overall, both those businesses are, Spine, Dental and our bone healing business, have a gross margin profile that's a little bit below the overall company average. I would say bone healing is actually a little bit above the company average.

But really, it comes down to the cost to serve where the spending levels in both those businesses are much higher than the company average, which overall drives the operating margin for both Spine and Dental lower than where ZB HoldCo is from a standalone basis.

So as we think about margin opportunity going forward in both those businesses, we do think that there's opportunity to enhance margins. One will come through, we believe, a real opportunity to accelerate top-line growth, which will bring some operating leverage to the business.

But there's also opportunity for mix shift and potential efficiency within the existing cost structure. So hopefully, that gives you a little bit more color on how to think about margins in those businesses going forward..

That's helpful. And then on 2021, you gave some helpful color on Q1 revenue growth, Suky. Maybe you could talk about sales growth cadence through the year, just any reaction to consensus, which assumes about 2% growth over 2019. I know you don't have guidance out there, but just directionally -- and operating margins.

In the past, I think you said they could come close to 2019 but maybe lag a bit.

How should we be thinking about that for full year 2021?.

Yes. Yes, absolutely. So first, on revenue, why we're not providing guidance is because there are a number of variables that are just really difficult to predict at this time with any level of credibility or confidence. The first being where is the trough in this most recent surge that we're seeing.

January, February, where does it land in Q1? What does that uptake look like post adoption of vaccine. And then when do you ultimately return to normalized market growth and potential tailwind from the deferred procedures. So we're running a number of scenarios. There are some scenarios where absolutely we could see a path to growth versus 2019.

But again, those variables are, at this point, just too uncertain.

But clearly, I think just stepping back, once we do have adoption -- wide adoption of that vaccine, which we believe will have at some point in 2021, we think that there's a real opportunity for some strong growth, again, once we return to normalized market and are augmented by that tailwind.

But it's just too difficult to say what our cadence looks like at this time. Regarding margins, you're absolutely right. As the margins or revenue continues to improve throughout the year, which we believe it will, once we have good uptake with the vaccine, the margins should follow.

There may be a slight lag, consistent with how we've talked about things before as we catch up on certain investments. But make no mistake, they will expand, and we do see the opportunity for significant margin expansion over time as we normalize our revenue uptake..

Our next question comes from Amit Hazan with Goldman Sachs..

I wanted to start on the U.S. market for knees and hips. And obviously, with the dollars, there's a lot of noise as you mentioned. So just from an underlying basis, I'm wondering what you think about market share -- what you think what happened to market share in the fourth quarter for you in both knees and hips in the U.S.

from a volume perspective?.

Yes. Yes. So what I would say is, I try not to look at any specific quarter and draw too much of a conclusion. I would now -- saying that I'd much rather have what we just saw in the fourth quarter, where we're significantly above-market growth that always feels good. But instead, more look at a trend.

And if I just go back, let's call it, 3 quarters, that gives you more of a sense of how we're doing versus market. And if I think about U.S., which is probably the cleanest way to look at this because there's a lot of noise in the mix and everything else that people may have outside of the U.S., but we just look at U.S.

and we're somewhere in the neighborhood, just think about large joints, 500 to 600 basis points over the last 3 quarters above market, above our key competitors. Knees is a little better than hips, but we're seeing outperformance in both.

Knees probably more 600 basis points to 700 basis points and hips, more like 500 basis points to 600 basis points better. So that's what I look at. Not a single quarter, but a combination of quarters and where we're seeing that trend. And by the way, I fully expect us to continue that trend.

And I talked about the innovation that is going to be pretty pivotal this year in both hips and knees with the current momentum that we already have, with the commercial prowess that we have as an organization, and that innovation is still yet to come, and our confidence level is pretty high..

And I just wanted a follow-up -- focus on R&D. And as we look at just the absolute number this year, I was on that you haven't spent this little on R&D in several years. It's down 15% for the year. And that kind of separates you from other companies in medtech, and like that medtech and clinical.

I'm wondering if you can give some color to where you've made the cuts, how you're prioritizing that budget, and how that impacts your future product cadence?.

Would I like too much to run a business? It's, first and foremost, always assessing how are you spending research and development dollars and then making mix shift spend to make sure that you're spending it wisely. And so that's why you saw -- you're not seeing research and development increase. You saw some slight compression there.

But it really was just to get straight on what are we going to spend our dollars on. And we killed a lot of projects that just didn't have returns that we expected. And that's the cleanup, if you will. What you're going to see from here, though, is an increase, for sure, in research and development.

I always want to make sure that we're spending money wisely before we say whether we're spending enough or too little or do we need to spend more. We have a real good deal now for what we should be spending money on, that we're spending money in a disciplined fashion, and we have a lot of things in the bulk in now that we want to turn on.

So as we look forward, you should expect to see increased spend in research and development, but increased spend in a very disciplined way..

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

I'll just state my 2 questions upfront in the interest of time. So the first one is just to come back to something people have been asking about already, but I was wondering if we could get just a little bit of a better sense for the impact of the bulk orders that you're calling out on Q4, specifically on U.S. hips and U.S. knees.

And again, the reason I ask is that your hip and knee growth in the U.S. is so materially above what we're seeing from peers. And the gap was just very, very wide this quarter. So any sense as to the quantification on U.S. hips and U.S. knees in those bulk orders would be great? And then on the second question, which is on the spin announcement, Bryan.

I mean, I don't think it's unfair to say that Spine and Dental are 2 relatively subscale businesses with not a lot of synergies between them. So I guess my question is, why not sell them to the folks with scale? It just seems like that will be a lot cleaner. So would love your take on that..

Yes. So first of all, on the quarter itself, again, we feel great about our quarter performance. And I would say that when you're looking at this year, in COVID, in particular, there was a lot of money that folks had to spend, and we always see in the fourth quarter, we've seen purchases that occur.

We see it every quarter, but fourth quarter, in particular. So it's not abnormal to see as Suky referenced before. If I was going to try to put a number to it, I'd say maybe in the 200 basis points to 300 basis points of benefit that we saw, if you're thinking about large joints.

So it was important for us in a normal quarter given this quarter differential between us and competitors, not as material. And I would be surprised, quite frankly, if others didn't see the same thing. But either way, that's -- we just want to make sure we call it out as being transparent as we possibly can.

And that was the order of magnitude that we saw in the quarter. As far as the spin and having both Dental and Spine together, if you're going to spin a business, you want to make sure that it has a reasonable amount of scale, obviously, for it to be a viable publicly traded company. We feel that $1 billion-plus is kind of that number.

Although there's not obvious reasons that you would look at from a strategic standpoint that those businesses would be together from a commercial perspective, there is a lot of capability and know-how and materials that are used for implants across Dental as well as Spine that there is some value in.

And so it was really more around the idea of scale and the importance of that scale and utilizing those competencies, if you will, on those raw materials that go across those 2 businesses. And that was the reason why we spun both together..

Our next question comes from Joanne Wuensch with Citibank..

So as you think about spinning this out in the next 18 months, what do you need to prepare? And does it accelerate tuck-in acquisitions or anything in terms of spending so that the next company heads into its stand-up phase in a good position?.

Yes. I would say it's generally business as usual for most of the organizations. We're going to continue to focus where we have. We've got pretty good separation between businesses. So it's not going to be highly disruptive. There's a lot of work to be done. Don't get me wrong for this thing to occur and to occur as effectively as we wanted to.

But it's not going to be disruptive to the 2 organizations because they're pretty again separated today. But yes, we're actually increasing, not a significant amount, but increasing spend in these businesses to get them a good tailwind coming into the spin itself.

And if there was small opportunities for us to spend capital over the next 12 months, that would make sense to again, to bolster that portfolio, we would certainly consider it in the same way that we would have beforehand. But we want to make sure that we're setting up NewCo to the first success.

And we're very close on a CEO to bring in, and that person will bring leadership right out of the gate. And so that's really the way we're looking at it. If we can give them a little more money to spend to get things going, that's what we're going to do here in 2021.

And if, again, very small deals, but if there were things that we could do to, again, bolster their portfolio, we'd do that as well..

And a quick follow-up question for Suky.

How do you think about us modeling over the coming quarters in terms of sequential improvement, starting with the fourth quarter commentary?.

So Joanne, as I said, it's difficult to predict at this point until we start to see a little bit more stabilization in our -- some of our key or larger markets. If you go back to last year, we're hopeful that this is a 1 to 2-month trough, and we begin to see a V-shaped recovery as we did last year within Q2, leading into Q3.

If that happens into Q2, and we start to see stabilization of market growth in the back end of the year and then potentially that tailwind that we've been talking about with preferred patients, that could present a nice trajectory for us and one of those pathways to potential growth for this year. But it really is just too early to tell.

As we’ve done over 2020, we will keep you updated as we learn more and as we understand how this impacts our business..

Our next question comes from Chris Pasquale with Guggenheim..

First one from me, just hoping you can give us any more clarity on the timing of the new ROSA Knee and Hip applications. I think I heard you say late '21 for hips.

Just trying to get a sense for whether either of those can really have an impact this year?.

Yes, we think both will have an impact this year. Obviously, the U Knee will be first -- will be in the first half of the year. That's one that we are very excited about. We have a significant share of the U Knee market, and we're excited to be able to bring robotics to that market. And then hip will be second half of the year.

And even though second half, we still believe it will have an opportunity for us to be the hit number in the back half of the year..

Great. That's helpful.

And then can you talk a little bit more about the performance at ASC and how you see those individual positions heading into '21? I'm curious whether there's any notable differences between them in terms of how you finish the year and whether you're seeing any opportunities within extremities, in particular, to take advantage of some of the disruption in that market?.

Yes. I mean, for us, obviously, S.E.T is not all created equal. We talked about sports and extremities as being key focus. Upper extremities is the here and the now. Lower extremities would be more in the future. In sports, is the here and the now with the recent acquisition that we did to tuck-in -- to fill in some product gaps that we have.

But we feel good about all 3 of those areas. And our ASC presence, again, with the tuck-in acquisition that we recently did to give us more scale in the ASC and the contracting team that we put into place, was not as fulsome yet as hip or knee, but it's getting there pretty quick.

So our confidence level is high that we're going to see the growth rate that we need in S.E.T, and it's going to be driven by sports, it's going to be driven by extremities, and it's going to be driven by our presence in the ASC..

We'll take our next question from Kyle Rose with Canaccord..

So I'll ask my -- both of my upfront. First is, Bryan, you talked a lot about data and the ecosystem -- connected ecosystem.

Can you kind of just help us understand how that translates relative to revenues or driving lower cost? I mean, you changed the commercial model? Does it help you develop better technologies? And these have good long-term outcomes. But I'm just trying to understand how this drives incremental growth longer term.

And then, obviously, you're having great success with ROSA in robot placements.

Help us understand maybe utilization there and then maybe any benefits you're seeing with respect to price and mix on the actual implant side?.

Yes. If you think about it, we're trying to attack is the fact that 20% of patients in the knee right now are still not satisfied with the outcome that they have. That's a pretty significant number. And we truly do believe that the ecosystem is going to be able to help resolve that disappointment in any procedure.

And that's good for everybody, by the way. As we move down this path, we make those outcomes at better as a result of capturing the data and then making different decisions as a result of the data, that's going to allow us to get better outcomes.

And when that occurs, you're going to have more patients get bold enough to move into the funnel because it's underserved today. There are patients that need a knee procedure that are afraid of the outcome, are not competent as a result of it, and they're not entering the funnel.

So as we can change that outcome, and we believe we can, then we're going to have more people into the funnel, and let's get to the entire market. That's the way we're thinking about data and informatics and driving better outcomes over time. As far as ROSA goes, I'll tell you, I'm excited. We've got one application in our robotic system.

I think that's what people -- remind people of just one application, there's 2 more coming this year, but there's one right now. I mentioned in my prepared remarks that we were at the higher end of our placement goal in 2020. But what I would tell you is that in reality, we were above that number. When I say higher end, I actually meant above 300.

And the quarter was significant. And I think this is really important. We placed over 115 units in the fourth quarter, which was just an outstanding performance by the team. And what I love about that is that happened in concert with one of our other players in the marketplace, one of our competitors also having a record quarter in the fourth quarter.

And that's good news because that tells you that orthopedics is open for robotics -- wide open for robotics. And that tells you that you've got an opportunity for all boats to rise as a result.

So we truly do believe that the market is accepting of robotics, it's moving quickly, it's hitting the pivot point, and it's going to be very accepting, we believe, as well of the data and informatics that can come with it..

Yes. And if I could just build on what Bryan said, it was a question earlier about the strength of our U.S. number in recon and yes, absolutely, we had some benefits due to timing. But one of the great things about some of that benefit that we saw is really -- it came because of some stocking because of new accounts and account conversion.

And I think that's yet another proof point of the strength that we're seeing in our commercial execution and with our new products. So we had a really strong quarter, no doubt in the U.S. We'll continue to see momentum for all the products that Bryan mentioned earlier. And that just actually accelerated in the fourth quarter.

And now we've shown it consistently for a few quarters. So we're pretty excited about where this is leading into 2021 and even more excited about where that potential is through recovery and post recovery..

I think we have time for maybe one last question before we hit the 9:30 time..

Our next question comes from Kaila Krum with Truist Securities..

Just 2 quick ones on portfolio management. I mean, it sounds like you'll continue to do tuck-ins.

But I mean, first, is it fair to say you'll now focus on these core areas in orthopedics? And then second, I'm curious, do you think that a different portfolio of buying products with greater scale can be more synergistic with your ortho business? Or do you simply think that there are limited synergies between the spine and ortho markets overall?.

Yes. So our strategy around M&A and how we would spend capital dollars to augment the portfolio is unchanged. There are certain categories that we've talked about in the past where we believe we have a right to win, that we have a brand recognition that gives us that right to win, and there's a path for leadership as a result of that.

And they're profitable. And those are really the main things we're focused on. How do we enter into spaces, build scale in faster growth markets, where we have a right to win, and we have a path to leadership and the profitable businesses. And that wasn't the case for us for Spine. But it doesn't mean that Spine can't be a very attractive business.

It's just not one that we would invest in to become a leader because there's other opportunities for us to spend in sports or extremities or thoracic that are just more attractive markets and more profitable. So we would look at these as being better as a result of that as separate businesses versus a part of our portfolio.

And I don't believe -- and we certainly haven't seen that there's a real benefit in having even a fulsome spine business in concert with large joints or S.E.T. We just don't see a lot of contracting -- large contracts that pull-through either one of those businesses..

Great. I think that takes us to 9:30. We'd like to thank everyone for joining us on this morning's call. Of course, the IR team, and -- of course, the team will be available today if there are any further questions. I'm sure we'll be talking to all of you. Thanks so much and have a great day..

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