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

All right. Great. Thanks for joining us for our next session here at the Jefferies Healthcare Conference. I've been informed that I'm the Jefferies Healthcare Analyst here covering med tech. And I'm pleased to be joined by the management team from Zimmer Biomet. Ivan Tornos, who is the CEO; and Suky Upadhyay, he's the CFO. And we're going to start with some high-level comments from Ivan just talking about state of affairs of the business. Ivan, if you want to get us going.

Thanks, Matt. Great to be here. So maybe I'll summarize the, let's call it, investment theses of Zimmer Biomet in 4 bullet points or maybe as you call it the state of affairs of Zimmer Biomet. Looking at the current multiple of 10, probably seeing the reaction to the earnings call, you will think that everything is out of whack here. So maybe it's worth spending 3 minutes, if you allow me to talk about these 4 key components. So let's talk about market. Let's about innovation. Let's talk about execution, which is both commercial and operational. And then lastly, just talk about the topic de jure. Let's talk about guidance and expectations. So on market, I think it's very clear by now that these markets, orthopedic markets are not retracting. These are healthy markets, combination of volumes and price. We pick the market to be 4% to 4.25%. And every other quarter, I get asked the question, is pricing sustainable? Do we believe that volume is going to continue to be steady? The answer is yes, yes and yes. We look at pricing 2 years forward. We look at volumes pretty much every other week for a variety of reasons. These markets will not retract. So 4% to 4.25%. Let's move to innovation. Look, those of you who know Zimmer Biomet, we went through a lot of stuff. We did a deal back in 2015, June 24, to be exact, called Biomet. And in many ways, it was a great deal. In some ways, it did set us back. The integration was complex. We had 1.4 FDA warning letters. We had some compliance challenges and that delayed our innovation journey. Now fast forward to 2025, we are launching a ton of innovation that we should have launched a while ago. The good news is that we have no gaps in the portfolio. So when you look at our recon portfolio and sale portfolio as opposed to 3 years ago, there is not a single gather I can tell you, we don't have it. Late to robotics, but we got plenty of them. Late to cementless knee, but we have them. Late to SET ASC products, we have them. And now we're entering a new chapter of innovation for the company. We're moving from doing what I call customer or rather competi-centric innovation catching up with competitors to do in customer-centric innovation, we are first to market in anti-infective platforms, we are first-to-market smart implants. We're first to market in shoulder robotics. And we will be first to market in autonomous robotics. So when it comes to innovation, we really are excited in terms of what we did. This is the third topic, which is execution. And hey, look, it's been inconsistent. We own it, I own it. This is a company that does not miss years. If you go back and look at the guidance we provided in 2019, skip 2020, it was COVID. Look at 2021, 2022, 2023, 2024, soon to be the end of '25, we do not miss yearly guidance. We don't. But we do have some inconsistencies along the way. One quarter is up, the next quarter is down, and that's not how you need to be running a company like ours. We need to deliver consistent results. I will need to avoid the operational surprises that we have had. On my second quarter as CEO, I was here announcing an ERP debacle, that 10 years working on ERP, and then we got a surprise. In the latest earnings call, we're talking about restorative therapies, Latin America and emerging markets. That's now how you run a best-in-class company. So we got to work on those inconsistent quarters and some of these operational challenges. And that leads me to the fourth and final point at the end of the summary here. As we work on those operational commercial challenges, we need to be more measured in how we think about quarterly guidance, the comments that we make or don't make about the quarter and then how we set up the year. So again, recapping healthy markets, best-in-class innovation, about to be bolder with the introduction of new-to-the-world technologies. Got to work on commercial execution to deliver consistent quarters. So not just about a year, it's about the quarter, and again, in the backdrop of all of the above, we will be much more measured when it comes to setting expectations and the comments that we make about different quarters.

Great. Well, good summary. A lot of things to key off of there. I guess I'd like to start with some things that are actually going well, which are seeing the organic growth pick up in Q3 to 5.6% from I think 2.3% in Q2. Can you talk about the drivers of that sequential year-over-year acceleration?

Sure. Innovation in 1 word. We are in the early stages of launching what we call the magnificent 7 products. Some of these products are catch-ups to products that we didn't have, but some are new technologies. In the third quarter, we delivered 5.6% organic growth in the U.S., the best quarter in the last 2 years. And that's the combination of accelerating penetration for Persona OsseoTi or cementless platform, having 1 of the best quarters we have had in Solder's performance, upper single digit. We did see an increase in robotic penetration. I love the combination of having thing surgical, ROSA and other navigation modalities. We have 1 of the best quarters that we have had 20% growth in our capital sales. We saw in the quarter an uptick on Persona IQ, we've been talking about smart implants for a while. And the third quarter of was 1 of the best quarters for smart implants. And then when you move to hips, a combination of Z1 or triple-taper system plus OrthoGrid plus surgical impactors delivered a robust number for the quarter. So again, summarizing, innovation was the driver of the growth in the U.S., and we don't see that fading away.

Super. And then maybe you could just unpack some of the issues that you saw late in Q3. I think investors would appreciate some of those details to understand what happened at the end there.

So look, let me start with the fact that these are not structural issues. So the 3 things that we spoke about in the earnings call, and I'll cover those in a second, are not long-term problems for the company. We saw at the end of the third quarter, specifically on Friday, September 26, we saw that 3 things were happening late in the third quarter of 2025. Number one, distributor orders are at Latin America in the amount of $7 million, we're now going to come in mostly from Brazil. Number two, we saw that in emerging markets, some distributor orders and a tender coming out of SoFi was not going to be realized in the quarter in the amount of $9 million. And then number three, the smallest business that we got restorative therapies with around $120 million per year, so call it $25 million to $30 million per quarter. We're expecting some last-minute orders at the end of the quarter, and those did not materialize. Again, noncore geographies, noncore businesses, but when you add all 3 of them late in the quarter, that equals $24 million. If those 3 things would have happened, we'll be talking about a 6.3%, 6.4% growth rate instead of 5%. The fact that I'm sitting here talking about noncore businesses and noncore geographies is very telling. In any other company, these things will happen by inertia. So what are we doing about it? We have changed management in some of these geographies. We're changing forecasting practices in some of those geographies. We're eliminating some of these distributors. And we're taking the revenue from some of these volatile areas out of the guidance that we provided for the rest of the year 2025. But again, this is not a structural issue. This is not something that's going to permeate into 2026. And moving forward, we're going to be more prudent when we account or not for some of this revenue.

Yes. As you talked about being more prudent, can you talk about any changes in the guidance philosophy and how you might give guidance in the future? Are you going to, I guess, I hear cut a little bit more or be a little bit more...

Yes. Look, I'll repeat myself. We don't miss years. And I want everybody to fact check me on this later or send me an e-mail, if I'm saying something is inaccurate. We don't. And we have missed revenue from a consensus standpoint 4x in the last 6, 7 years. Twice because of COVID, once because of this ERP debacle that I mentioned earlier. And then in Q3, we missed revenue by consensus by $9 million. I just want to repeat the number. We missed consensus from a revenue standpoint by $9 million in the quarter over delivery EPS by a couple of pennies in the third quarter. So we don't miss years and we missed a few quarters over the last 6, 7 years. All of that said, as we get into 2026, we're going to be much more measure when it comes to the outlook for the year. We're going to establish probably a more measured approach for the quarterly guidance that we provide and how we think about the phasing of the quarters throughout the year.

And I guess bringing it back to sort of the core business and some of the changes that you're making, can you talk about changes to your commercial approach in the U.S., anything internationally? And maybe, Suky, you can chime in on how that's going to impact margins.

Yes. So 62% of the revenue of the company and north of 50% of the EBITDA of the company comes from the U.S. We are not going to be a best-in-class company if we don't have a best-in-class organization in the U.S. Over the years, we have moved from having a channel that sells every product to now specializing, having dedicated people doing SET, dedicated people having doing technology, dedicated people doing ASCs and whatnot. But we need to go faster. We need to go faster. We can be in a position where a large percentage of the U.S. organization continues to meet commitments. If the U.S. was going at a faster pace, we will not be talking to you about Latin America, emerging markets and restorative therapies. So as we enter 2026 in the backdrop of being more measured with guidance, we are going to accelerate some of these changes that we started to implement in the U.S. many years ago. I want to exit 2026 knowing that I have the absolute best team that we can have in the U.S.. Fully dedicated in the core areas of growth, having the right people in the right jobs when it comes to technology and making sure that across the board, we have best-in-class talent because we do have best-in-class innovation.

Yes. And thanks, Matt. From a margin perspective, our operating margins, our gross margins are much stronger in the U.S. than they are outside of the U.S. And so as we do better there, of course, it helps our earnings profile. You saw that in the third quarter. Mix was 1 of the reasons why we had such a strong gross margin quarter as well as a good earnings profile. And as Ivan said, as we continue to work on accelerating the U.S., that's just going to be better things for our earnings power.

Great. And Ivan, you touched on this in the beginning, but can you talk a little bit more about the health of your underlying markets? Maybe talk about things like the shape of the quarter and the strength that you're seeing. There's been questions about whether like Medicaid is going to impact a few things like the -- talk about your outlook for demand and pricing a little bit more?

Yes, we -- as the largest pure-play in orthopedics, we spend a lot of time, and we engage third party in understanding market dynamics. So first things first, volumes continue to be very strong. And in the U.S., the shift to the ASC, Ambulatory Surgical Centers is creating a double dip in effect. Now you see in a lot of cases moving to an ASC, but you still continue to see a lot of volume going to inpatient HOPD, hospital outpatient departments. And we don't see that slowing down. And I can give you the 3-minute speech on demographics, technology and all that, but you get it. And then pricing, look, 10 countries account for 90% of the revenue of the company and most of the EBITDA. Those being the U.S., the U.K., France, Germany, Italy, Spain, China, Japan, Australia and New Zealand. And the beautiful thing about these 10 countries is that they operate with either commercial contracts, CMS in the U.S. or tender cycles of 2 to 3 years. So we monitor the contracts. We extend the contracts before they expire. We can see the pricing evolution of these contracts over a 2- to 3-year cycle. So we see a strong volume. We don't see anything in the horizon for the next 2, 3 years that lead us to believe that pricing is going to revert to pre-pandemic levels. The third quarter 2025 was the seventh consecutive quarter for Zimmer Biomet to deliver a positive pricing. We cannot commit to that moving forward. But we know we're not going back to the price erosion that we used to see. In terms of Medicaid exchanges and whatnot, Medicaid is less than 3% of our volumes for Zimmer Biomet. Even if we lose that 3%, there is a backlog of patients, noncommon related, just people waiting, patients waiting in the silence to get activated as patients. So we don't see this as an imminent threat for the company. And again, with an extensive research in that regard.

And innovation is a key theme here. So maybe you could talk a little bit more specifically about the innovations you're excited about for 2026 and beyond?

Sure. So as I mentioned, we cut off with all the gaps that we had in the portfolio, right? So there is not a single portfolio gap when it comes to hips, knees or SET, and now we're in a different stage of innovation. We're leaping forward with new-to-the-world technology. Next week, we're going to be launching the first anti-infective platform in the world in Japan, which is the second largest market for Zimmer Biomet. It's an iodine-coated hip implant that has a coated platform on the surface of the implant. We're going to start with hips that reduces biofilm formation. And again, that's a product that took 10 years to bring to market. We got a pretty significant competitive barrier over the next-generation technology. This is a product that took 10 years from a clinical standpoint to bring to market. We're going to start in Japan. We're going to bring it to other markets. We already got breakthrough designation in the U.S. via the FDA. We were first to market with the smart implants and shoulder robotics. Those 2 categories are going to be full launches in 2026. So we're done with the limited market release for both categories. A week ago, on the 30th of November, we got approval from the FDA to launch ROSA OptimiZe, that's next-generation ROSA with full automation to do a kinematic knee. Not to mention a simpler registration, faster registration user interface. We got, I don't know, 20 new products in S.E.T. that we're launching. So 2026 will be a very exciting year when it comes to our new products. And of course, in early 2027, we expect to be first to market with semiautonomous robotics. And at the end of the year, we'll be the first company to launch a fully autonomous robot with the acquisition of Monogram.

Maybe you could expound on the Monogram opportunity. Talk about why that's so exciting. What are the key aspects that are resonating with customers?

So I got to be careful what I say here publicly because we got to validate thesis. And to that extent, we're doing the largest clinical trial, I believe, in the history of robotics to demonstrate that you get faster registration with monogram. You get higher accuracy because there is less human involvement. And you get better reproducibility because it's a simpler procedure. So Monogram offers all of the above. We believe that this is a standard of care changer. The fact that it's going to be efficient, fast, reproducible, accurate is highly compelling. Now all of that said, we're not betting on 1 platform alone. I like the category leadership that we have put into play. We have now a CT scan handheld robot via the partnership with Think Surgical. We have a large footprint robot, ROSA, that is non-CT scan-based which is the preference outside the U.S. We have fast navigation, nonrobotic fast navigation with OrthoGrid. And now we had another component with Monogram. We think it's a bold bet. We know it's a bold bet. We're going to prove that it's a bold bet, but it's not the only bet that we're making in robotics or navigation.

Yes. And like you maybe just to underscore the efficiencies that we might see from a Monogram-like solution. Maybe just talk about how that could lead to speeding up procedures and managing an ASC, for example?

Well, that's the thesis, right? In a world that we're looking for efficiency and with the dynamic of the Ambulatory Surgical Center here or there in the U.S., you want to do more cases. At the same time, you cannot compromise quality and accuracy with the speed. And that's what we're going to be demonstrating with Monogram. The fact that Emboss can be doing those surgeries in, I don't want to give percentages because we need to validate it, but at a fraction of current robotic procedures, that's very compelling. The fact that at some point, you can have a surgeon and the staff going around in 2, 3 different operating rooms, while doing robotic cases, has a compelling thesis that we need to validate. So again, I don't want to get ahead here and make commitments on what the clinical and economic benefit is going to be. We're going to demonstrate it, but the efficiency is that this is going to be faster, more efficient, more accurate and more reproducible.

And you talked about the Iodine hip a little bit. I think everyone understands how preventing infections could be important, but maybe just talk about the differential reimbursement. And now with the breakthrough path, what that could ultimately mean for ASPs in Japan and the U.S.?

So similar to the U.S. in Japan, when you launch a breakthrough technology, you can apply for a different level of reimbursement that triggers different pricing. In this case, we're looking at a 40% to 50% premium on price in Japan, which by the way, is the second largest market, multibillion-dollar opportunity as you expand this technology across the world. I'm not going to commit to when we're going to be launching in the U.S. But I will say that infection as a program cause the U.S. health care system north of $20 billion. So once you launch the technology, there is a clinical benefit and there is an economic benefit. So we're going to start with Japan. Then we'll move into the less regulated markets around the world. It will take some time and a PMA to get into the U.S., but we will bring the technology to the U.S. We'll start with hips and then we'll move into knees and other categories.

Great. Maybe I'll shift to margins. Obviously, pricing has a big impact there. Could you talk about what's driven some of the gross margin expansion that you've seen this year and the outlook for gross margin, the biggest puts and takes impacting that going forward?

Yes. So we had a good quarter overall for the full year, we would expect gross margins to be up modestly versus 2024. Some of the puts and takes there, we've seen positive mix, both at a product level but also from a geographic perspective. The teams continue to get efficiency gains. We've seen slightly positive pricing, which has been helpful, all of which has helped to offset the tariff headwind this year. As we move into -- and you take all that together, Matt, and you look at our guide for earnings, it's kind of funny. We're actually almost right back where we started the year with our initial guidance. But that's after stepping over tariffs, which was new as well as the Paragon 28 dilution, which was new since we first launched this year. So it's great to see that we're almost right back where we started from even after digesting both of those. As we move into next year, revenue growth is going to be the key driver in determining where our margins go. From a gross margin perspective, there are some headwinds that we have to watch for. I think we've talked about those, which is the annualization of the tariff headwind as well as some pressure from FX hedge gain perspective as we've seen a weakening of the dollar. But we're going to take those things and we're going to continue to work on efficiency gains to try and mitigate those impacts. So it's a little bit on gross margin. And then like I said, from an operating margin perspective, it will follow revenue. And in the backdrop of that, we're going to continue to invest against the things that are really important to our business, which is specialization of our sales force. We've got more work to do around Paragon 28. It's a very exciting pipeline and a lot more growth to be had there as well as investing more against digital technology and robotics, especially ahead of Monogram. So putting all those together, again, we'll see where we net out when we give guidance in February. But I like our starting point this year.

Great. And then I guess speaking of Paragon, maybe you could give us an update there and just talk about capital allocation priorities going forward?

Yes. I'll start and Suky, by all means, elaborate. So Paragon 28 is going as expected, if not better than expected. So we committed to be seen in 2025, revenue accretion of around 270 basis points to our core business. And that's exactly where we're going to end at the year, around 270 basis points of revenue accretion which implies that we're going to keep more or less the same growth rates at Paragon 28 had as a stand-alone company. We said when we announced the deal that we're going to be having 3% of EPS dilution up to 3% on year 1, 1% in year 2 and they were going to be neutral as we start year 3, and that's exactly what's happening. So we are in line to deliver on the EPS dilution associated with the deal. Cash flow is a better story than anticipated or the integration costs have been lower than expected. One of the reasons why at the end of Q2, we raised free cash flow guidance for the year. So all the financial, some metrics around revenue around dilution and cash flow are more in line, if not better than expected. From a commercial standpoint, we said that we're going to keep the core channel intact. We said we're going to keep leadership intact. We said we're not going to play around with innovation, we're going to keep the same pipeline, the same R&D center, we're not going to be disrupting the QMAs, quality management system. You can put a check in all of those. The same CEO that was running Paragon 28 is running Paragon 28. The same commercial team is running the organization. We had 256 reps. I'm not aware of many of them that are leaving Zimmer Biomet. So it very much functions as a stand-alone operation. On capital allocation, here's what I'll say, we've done 3 deals. People forget that in the last, call it, 12 months, OrthoGrid, Paragon 28 and now Monogram. We're going to take all time to integrate these deals. We're going to make sure that we earned the credibility we need to earn associated with M&A. We like the revenue associated with these 3 deals. We believe that these are platforms versus companies. And then in 2025, late '25, 2026, the 1 deal that we like is CVH. At current valuations, it makes sense to buy CVH. We're going to -- we say we're going to be opportunistic around allocating capital to buybacks and we're looking at that. And at the right time, we'll talk about it. Other than that, I don't think there is much more to add, but capital?

I think that's a good summary.

Well, maybe Suky, you could just add some perspective on capacity and would like to double-click on how you're thinking about buybacks just given where the shares are?

Yes. So capacity continues to be incredibly strong for the company. Just some metrics to put that in frame in context, we have a net debt leverage ratio in the low 3s to high 2s, so still very attractive there. We do about $1.7 billion in adjusted EBITDA. So plenty of capacity when you put those 2 metrics together, and we generate over $1 billion of free cash flow. So a very strong balance sheet, a lot of strategic flexibility and optionality there. As Ivan said, as we move to 2026 to focus on M&A, it's more about integrating what we've already done versus starting new. And then we're going to be -- as we generate cash flow into next year, a very opportunistic on what I consider to be an attractive valuation for the company.

And maybe just to wrap up, we have just a minute or 2 left, 1 of your big competitors just announced that they're going to spinoff their orthopedic business. And in the short run, I was wondering if that could create some opportunity for you, some frictions. Maybe talk about your ability to capitalize on that as they spend?

I got to be careful what I say, and I got to be respectful to my former company, Johnson & Johnson. But I think all of us have seen this movie before, when you announced a spinoff or an acquisition, you acquire somebody or you are getting acquired, there tends to be disruption across a couple of vectors, right? Customers wonder what's going to happen moving forward. Do I have the same reps, the same contracts, the same whatever. Employees are looking right and left to understand what's happening here. Suppliers and then overall contracts. So yes, there is disruption in the marketplace. I do think for the next 18 to 24 months, there's going to be some disruption and it's up to some of us to leverage that disruption and serve those customers. But look, down the road, 18, 24 months from now, you have a stand-alone company, that is not part of J&J, is a worthy competitor with a great CEO. So we are paying attention to that.

Great. Well, I think we have to wrap up here. But thanks, everybody, for your attention and for your interest in Zimmer Biomet. And thanks, guys, for your time.

Thanks, Matt.