Zimmer Biomet Holdings, Inc. ($ZBH)

Everybody knows Ivan Tornos, CEO. And we also have Paul Stellato, Interim CFO. So welcome. I think this is probably your first fireside chat as Interim CFO.

Yes.

So maybe we'll start with you kind of give a quick introduction and kind of how you're thinking about the interim CFO role and setting guidance and all that.

Sure, sure. So I'll be very brief because I know we're all here to see Ivan, obviously. But again, very, very happy to be in the role. It came up very quickly, but it's something that we've been planning within the organization for some time. We've always had succession planning as something that Suky took extremely seriously, and we all had to be ready. So from my perspective, what I look forward to is I know we won from a finance team perspective, we've had a lot of strength. Our leadership at the different disciplines, whether it's treasury, a lot of folks don't know Pradipto here, FP&A, business finance, tax, we've got a first-class team. So that makes the transition pretty manageable, and it's something that I'm actually looking forward to. In terms of the health of the business, that's the other piece, at least from a balance sheet perspective, inheriting something that's very strong and something that we can build off of -- and something that actually we've been very, very proud of. So from a business perspective, that's kind of how we see things and why it feels very, very comfortable kind of coming into the role. And then from an experience perspective, when I think about when I got hired into the role, I believe one of the things they appreciate about my background is they didn't have a typical Chief Accounting Officer, Controller type background. I've spent a lot of time in FP&A. I spent some time in Investor Relations, I have public accounting within there. So as I think with diverse background is one of the things that brought me to the role in the first place. So in the event something this happened, we can do this very smoothly. Hopefully, it's invisible to the organization -- to the outside world as we go forward.

Maybe Ivan, just off Q1, good quarter, beat the guidance. I think there's a lot of kind of factors in Q1 in total. So if you kind of walk through some of those puts and takes.

Sure. That's quite a change from this curriculum to Q1, but straight into Q1. Look, we're happy with the first quarter of the year. We guided for the year 1% to 3%, and we came at the top of the range, 3% revenue growth -- organic revenue growth in the first quarter of '26. The U.S. was north of that at 3.2%. And that's in a quarter was rather unique. I'm not going to go through all the drama of what happened in the first quarter. I think now everybody has seen the results of all the orthopedic companies, combination of weather, strikes in California. There were a couple of events that probably distorted the reality of the quarter. That said, pleased with the U.S. performance, pleased with the evolution of the sales force. I'm not pleased -- I'm sure we're going to talk about the U.S. Knee number, 2.2% Knee growth. We will do better than that. We have to do better. A couple of elements that we can discuss, but very happy with the 5% in U.S. Hips. International at 2.5% was pretty much in line with our expectations. We've gone through some changes in some markets. But net-net, we guided 1% to 3% came at the top of the range. If you're asking me the implied question, why are you not narrowing or raising guidance? It's early in the year. We're going through some transformation in the year. We're going to be prudent. We like where we ended the quarter. We like where we started the second quarter. We like what we see from a market standpoint. And again, the major transformation initiatives that we're undertaking are going as expected, if not better.

And kind of drilling down in the Knee 2.2% in the quarter, how did that kind of play out versus expectations?

Below expectations. So we're never happy growing below market. And again, a unique quarter. There were some competitors that were out of the market. There were some onetime events. But the market, when you normalize for everything, it still is around 4% to 4.25% for Knees. So don't believe the high that all the sudden the market has slowed down from Q4 to Q1. I mentioned publicly, there were 2 or 3 things that impacted our Knee growth number. One is Kaiser, a major strike in California. We are the #1 player in the West Coast at Kaiser. We had a couple of accounts that if we end up losing for the rest of the year, which I don't believe so, by the way, could be up to 50 basis points. And again, most of that impact happened within the first quarter. And then we had some changes that we made in the quarter that we anticipated and maybe they were more acute than initially anticipated. And as we enter the second quarter that have been resolved. Happy with 2.2% U.S. Knee growth? No. Do we think we're going to do better? Absolutely.

And then there was 2 accounts that you did mention on the call. And I think we talked about a little bit last night, but maybe it sounds like there's maybe even an opportunity to get some of those back over time.

I got to learn to shut up and say less in these calls, and that's ongoing work because, hey, we did lose 2 accounts. We also gained a lot of accounts. Guys knows what those 2 accounts look like for the next 3 quarters. I like the trends like what we see. Again, if we did lose those accounts for the rest of the year, the impact to our U.S. knee number is less than 50 basis points on growth. we got all kinds of other things that become tailwinds. I like where we are with ROSA OptimiZe, which obviously is going to carry pull-through of U.S. Knees. In the first quarter of 2026, we placed a record number of robots. We also sold an [indiscernible]. Our Technology business grew 30%, three-zero in the quarter. Our Oxford Parcel cementless knee continues to move above expectations. I like where we are with the Magnificent 7. So again, I wish would've never talked about 2 accounts being lost. We have 29,000 accounts in our database. So I like our changes as we get deeper into the year.

One other quick thing I'd add for those 2 accounts specifically, that was known, right? It's like that played out in the quarter. So it was something we knew kind of going into the guidance period, there wasn't going to be pressure on Q1 related to it. So that was in.

And you said the impact was 15, one-five?

Could be up to five-zero.

Five-zero, 50. Okay. I just wanted to make sure I heard that number correctly.

I'll say this publicly, I don't think there's going to be an impact.

Okay. And you don't think those 2 accounts are being lost as a trend of any sort either, right?

No, there were competitive dynamics relative to some price deals that I'm not going to entertain. For what is worth it, we are not seeing that dynamic of going out there and discounting massively permeating the market. Point in case, our price performance in the first quarter was 40 basis points of erosion. We continue to see the main competitors being very responsible when it comes to pricing strategy. So I will call this a 2-time event within the quarter.

Okay. And then kind of digging into the new products, last night at dinner, we talked a little bit about the iodine coated hip in Japan, but it little bit targets to the U.S. Anything you kind of dig into the new product cycles that you want to highlight?

Sure. There is a lot going on. So beyond the -- what we call the magnificent 7, 7 pretty compelling product launches, whether it's Oxford Partial Cementless, revision systems in Europe, whether it's next-generation cementless, Persona also we got a lot going on. I will tell you, Travis, that most of them are going above expectations. The one product you're talking about iodine-coated hip implants, that is groundbreaking. We are the only company that has an iodine-coated hip implant starting in Japan. which is the second largest market in the world, worth around $1.2 billion to $1.4 billion. The ramp-up of that product in the second half is pretty compelling. It's actually one of the growth drivers in the second half of the year for Zimmer Biomet. The next competitor is probably 5 to 7 years away in a best case scenario. At some point, we'll bring the technology over to the U.S., but that's very unique. Biofilm -- prevention of biofilm formation. You carry a 40% price uplift. So you just converting legacy hips to coated hips with iodine, you get a 40% reimbursement premium, again, in the second largest orthopedic market in the world. So excited about that. Really excited about ROSA OptimiZe. We talked a lot about autonomous robotics that coming in early 2027. But ROSA OptimiZe platform is the only robot that can do truly a personalized kinematic alignment procedure. And again, the adoption of this technology is better than we expected out of the 30% growth that we had in the first quarter. So again, I could spend an hour talking about innovation, but Magnificent 7s are working. Our suite of technology is going better than expected. And now we get into bolder plays, whether it's anti-infective platforms or other things we're doing around digital ecosystems.

Is your market share in Japan pretty similar to the U.S.?

We are the #1 company in Japan, again, second largest orthopedic market and the second largest revenue-generating country for Zimmer Biomet. We're #1 in hips. We're #1 in knees. We're also the fastest-growing technology company in Japan.

And so you see the 40% price uplift with the iodine coated hip. You also kind of seeing -- starting to see share gains as well on the volume side?

Absolutely. Absolutely. So this is a country that should be growing upper single digit in 2026.

Okay. That's helpful. On S.E.T., it was weaker in Q1. I think we had a little bit of debate last night on the kind of the prior quarters, how much is strong versus weak. This is lot of businesses within the S.E.T. business. So help us kind of walk through the moving parts in that.

Sure. So back in May of 2024, when we did our LRP presentation at the Analyst Day, we committed to growing S.E.T. to mid-single digit. And if you go back to that, [indiscernible], May 29th, 2 years ago, we have had, I think it's 10 quarters, if not 9 quarters out of 12 or now the last 10, 11 growing at the rate. So go back to early '23, go through '23, '24, '25, most quarters have been mid-single digit. And that's excluding Paragon 28. Obviously, if you put Paragon 28 in there, you are solidly in the mid-single digit, not upper single digit. Q4 of 2025 was softer than expected. And I'll talk about those segments in a second. And yes, Q1 of 2026 is not the best S.E.T. quarter. Two reasons for both the last quarter of '25 and the first quarter of '26 being softer than expected. We continue to see our trauma business declining at an upper single, double-digit rate. So trauma is a $0.5 billion business for us, declining double digit. It's not great. And biologics or restorative therapies, HA, hyaluronic acid injections have also been declining at a double-digit rate. That's a platform that used to have preferred reimbursement and is being commoditized. So those 2 platforms have been a headwind for the last 1.5 years, 3 years, and we're addressing that through investment and thinking about other portfolio management in place. But what was outlined in the last quarter of '25 and the first quarter '26 is that we had some supply challenges with sports medicine. That's a business that has been growing double digit for quite some time. We've done 3 acquisitions. And then Q4 and Q1, we did have some shortages. We moved from a vendor in Europe to Mexico, and that creates some disruption. That has been resolved, and we expect sports medicine to get back on track. Net of that, CMFT continues to -- cranium, maxillofacial thoracic, continues to grow double digit. We have a tremendous opportunity with sternal closure and other growth drivers within CMFT to continue to grow double digit. Our Paragon 28 acquisition is going very well. I think I said in the earnings call that you should expect moving forward to have solid double-digit growth. I like where we are with shoulders with Identity launch, OsseoFit, again, upper single double digit. Just got a [indiscernible] and Restorative Therapies and Sports Medicine has been resolved. That's a long answer to tell you that I do think that S.E.T. should get back to a mid-single-digit growth.

When do you think it kind of returns back to that normalized growth?

Second quarter of 2026.

Okay. And then Paragon 28, I guess it's been almost a year, a little over a year?

It's a year. We anniversary in April of this year.

How is the integration from a sales force perspective going? Kind of what have you learned over the last year in terms of, one, being able to do and integrate acquisitions; and two, just from owning that portfolio and kind of integrating those sales forces.

Sure. Well, I think I kind of answered that already. We expect Paragon 28 to grow double digit starting the second quarter of 2026 and continue that trend moving forward. We've not lost any material number of representatives -- sales representatives or accounts in the combination in the merger. We have kept the entire management team over in Denver, Colorado. So from the former CEO, who is doing a great job, to the former Chief Commercial Officer, Matt, who continues to do an amazing job. We kept the people. We're growing double digit. We are not delaying any product launch. So the pipeline remains robust, and we're delivering on the financial commitments. So we committed to being EPS neutral by the end of year 2. That's on track. Our integration acquisition costs are better than expected. One of the reasons why we raised cash flow last year. And again, this year, we're raising cash flow. So that's going better than expected. So what are we learning with this? We're learning that we now have a muscle that we didn't have before in terms of integration. About 1.5 years ago, we put a different management team behind integration. That's working well. Beyond Paragon 28, we're also integrating, obviously, OrthoGrid and now working actively on the integration of Monogram. So we believe that we're ready to do these type of deals. And at the right time, we're going to continue to do these type of deals.

And then when you think about capital allocation of your stock price with all of the med tech sector at a record low valuation. So is buyback still part of the plan? Why not accelerate buybacks? I think you actually had an announcement this week increasing your buyback authorization.

That sounds like a leading question. Yes, yes. When you look at the multiple that we got and you see the cash flow generation of this business, it's a no-brainer that we need to be buying Zimmer Biomet. Not to say that we're going to stop our diversification effort. We're going to do that, continue to do that in a responsible way. But right now, we're integrating 3 companies. We're integrating Paragon 28, again, only 1 year behind. We're integrating OrthoGrid, which is a smaller acquisition, but one that requires a thoughtful approach in terms of how we penetrate this surgical AI technology in key markets, starting with the U.S. And then Monogram. I mean Monogram will be transformational. And there is extensive work that is happening around segmentation, spending time with customers, thinking what is the right message, when we launch the technology, working on reimbursement pathways early on, really thinking of the surgical algorithm. We're working in tandem on the semiautonomous and fully autonomous indication. So that's something that is going to take some effort. And we don't want to complicate our lives adding a fourth acquisition as we've done all of that. So that's why we announced the $1 billion of buybacks in 2026. We think that's a responsible way to allocate capital.

Okay. That's helpful. Maybe touching on the U.S. sales force changes. Maybe to start, why now? Why are you doing this? And kind of where you expect to be on the other side of the changes?

I think it's fairly commonsensical that you can be a best-in-class med tech company by not having a dedicated channel in the world's largest market. So I'm going to stop right there. We do $8.5 billion in revenue, 62% of the revenue of the company is in the U.S., 53% of the EBITDA of the company comes from the U.S., given allocations and whatnot. And our channel in the U.S. has been non-dedicated. And I want to make sure I'm not confusing people. It's now 1099 W-2 is dedicated, right? 1.5 years, 2 years ago, roughly 2/3 of the U.S. channel were non-dedicated. They worked for Zimmer Biomet and they worked somewhere else through mostly a 1099 type of contract. Some of our sales reps, 2,545 reps actually had as many as 3 jobs. So now the mandate is everybody that works at Zimmer Biomet needs to be a dedicated employee of the company. I don't have a second or third job, and I expect people that work with me to be fully dedicated to the journey here. Then 1.5 years, 2 years ago, only 20% to 25% of the organization was specialized. So this, Travis -- was I'm going to sell everything to everybody approach. I'm sure that you agree with me that in med tech, you only win if you have people that every day wake up one call point, one portfolio that they sell, one bag that they are selling. And the mandate here is I want to make sure that everybody is specialized. The other dynamic is 1.5 years, 2 years ago, there were different incentive plans given the legal angles that we have, the legal aspects that we had. There were different ways to look at compensation. Now the mandate is going to be that everybody gets paid the way that I get paid on growth. So those are the changes that we're making. It's going to take another year and change. So we should be done by the end of 2027. Why now? We're about to launch Monogram. We got a cadre of new products that we're launching. We have launched a ton of new products. And clearly, we have a commercial execution issue. So we -- the average rep does 7 cases per week. Our competitors have 16 cases per week. And again, that goes back to the fact that all of them are working 5 full days a week. So we're addressing that productivity. We got what we need from an innovation standpoint, and we like what we see. So that's the why.

You've been traveling all over the country, meeting with reps and distributors and stuff. How have the conversations gone? The receptivity to some of the changes in the sales force?

Look, I think most, if not almost all sales reps get it, get the why. Everybody gets the why. We can't have a channel that is all over the place. This is not customer centricity, and this is not the best way to run the business. They get the why. Conversation as I travel, and yes, I've been going left and right all over the U.S., the conversation around how we do it and what does this mean for me, right? So how -- are you going to take my entire Shoulder business? Are you going to compensate me for that? Are we going to transition this in a responsible manner? Am I going to be able 3, 5 years from now to continue to make the money I was making, if not more. And again, so far, the business case is that you will make more as a dedicated specialized representative. So we spend a lot of time, Travis, on the how we do this, what are the time lines and what are you going to do for me to make sure that I don't have a financial headwind here in the short term. And when you have these conversations in the same room and you talk to individuals, they get it.

Where are we in the transition in kind of thinking about like where is the risk along the way? And I think you've highlighted end of '27 for it to be finished. So where are we today in the different phases?

I'll reinforce that this is going better than expected. We brought down the project on 3 tiers. Tier 1, no regret moves, low-hanging fruit, opportunity, go fast, underperformers, where we have contracts, we have the presence that we need, we're moving fast in that regard. And I would say we are done, if not mostly done with that first tier of the change. Then it's the middle of the road. We're going to have to be careful and we're going to have to go at the right pace and make sure that we're responsible in terms of the conversations we're having. And that's what we're doing right now. And then the Tier 3 is the -- either we leave it as it is for a period of time or we become bolder when it comes to the type of negotiation agreements that we put in place. And I said publicly that on the Tier 3, which is later in '26 and '27, proactively already have locked in a lot of that business. So there are 6 independent distributors in the U.S. that account for 40% of the revenue, 6 general managers, and we have locked in those agreements for the next 7, 10 years. So now already working with some of those individuals and making sure that a level below and a little below, we're converting their sales forces to a fully dedicated. So again, done with Tier 1, working on Tier 2 middle of the road and then some of the stuff, the higher risk stuff is going to be later this year or as we enter 2027.

And you were talking about earlier your rep...

Stating the obvious, all of that is contemplated in the guidance that we provided. So this is not an event where in the second half of 2026, we slow down and then hey, it the sales force changes that we implemented.

Right. And your rep productivity right now, you mentioned basically half of your competitors. Like as you go through these changes, does that increase linearly, like increasing going forward?

We've seen it. I mean it's -- again, I keep using the word commonsensical, but if a rep Travis in Atlanta, Georgia is doing 7 cases because Travis doing two, if not three other jobs, and now we convert it to fully dedicated 5 days a week. If you're a W-2 employee, you're part of all the operating mechanisms, you are going to do more cases. So in those areas where we have converted individuals from nondirect, nonexclusive to Zimmer Biomet to exclusive, you see a dramatic pickup in productivity. And obviously, I know with the productivity, you see an improvement in revenue.

So, that's like almost like a positive tailwind that you have in the business that maybe is not even factored into the guidance.

Yes, but then you also have to offset the potential disruption that maybe there'll be a Travis in Atlanta who says, I don't want to work 5 days a week for Zimmer Biomet because I have these 2 other jobs. So there may be an offset. So the balance of those 2 is the reason why we guided the way that we did. And candidly, the balance of those 2 is the reason why, although we like what we see, although we had the quarter that we have, we're waiting to have better guidance.

Makes sense. Maybe transitioning to the robot sales force that you're building out. Just help us understand where you are in hiring those reps, where you're getting them from and what they're going to be doing that's different than what you've been doing from the capital side?

Yes. So with the upcoming launch of Monogram, we really are building what I call a world-class organization in technology. And I say technology it's not just robotics. We are a company that collects data before, during and after surgery, and we got digital models to monetize the data at the provider and payer level. We got a suite of technology with small robots, large robots, CT scan, non-CT scan with obviously every indication under the sun from hips to shoulders to you name it. And then we're looking at other technology plays. So we're building a technology organization. We're hiring up to around or 200 reps in the U.S. alone, maybe potentially more as we enter 2027. We have our ASC organization, which we have built, which will have obviously access to that technology. We built a best-in-class account management platform. We recently announced we've hired Jonathan Vigdorchik -- Dr. Jonathan Vigdorchik, who is one of the most prominent global key opinion leaders when it comes to AI technology. So he's helping us with that launch. So all this rambling to tell you that we had a ton of people. We've got a portfolio that I believe is a major competitive advantage. And as we enter 2027, you should see a large sales force organization selling a cadre of technology that we didn't have before.

How are you thinking about the whole portfolio of robotics and segmenting it and even keeping the message clean to different surgeons?

Well, it's working, right? 30% growth in Q1 and now or what we call our suite of technology, the optionality that we're providing is something that our competitors are paying attention to. And candidly, some of them are doing some of the same, moving from having one platform to, hey, maybe portability, smaller footprint matters as well. Maybe at some point, it's not the robot, it's some sort of modern navigation device. I like our strategy. We believe in optionality. We believe that not everybody is going to be a robotic user, but most surgeons will be doing some sort of navigation. We believe that some users will want to have less to do in the procedure, simplifying autonomy, whereas some others will always like to be more involved and have more of a cobot cooperation between the machine and the surgeon versus just a fully autonomous robot. So we will be the company that offers that optionality. And then obviously, as time evolves, we'll make our portfolio choices. Maybe at some point, we don't have to have the broad suite of technology that we have today, something smaller. But right now, all the research that we've done and the results that we achieved in the first quarter suggest that our strategy is working, and we're going to continue that strategy.

And on Monogram, show it's a lot of surgeons. What's been some of the feedback you've got? And then you had like 5 pillars, I think, on Monogram?

5 what?

5 pillars of kind of how -- what it take to make Monogram -- so if you kind of want to walk through those too.

Yes. I got 3 minutes and 58, so I'm going to speak faster than usual and nobody is going to understand me. We have demoed Monogram to around 1,000 surgeons between Academy and Hip and Knee society, and the feedback has been very compelling. Obviously, we get the usual questions of what's going to be my role in an operating room. Are you selling a driverless car to a taxi driver? That's not what we're doing for the record. We're not selling a driverless car to taxi driver. This is surgeon-enabled autonomy, but the feedback has been very compelling. Five things that I keep mentioning, safety. We believe that because the automation of the device, because of the less human involvement, the safety profile is best-in-class. The surgical boundaries, the intelligence of the platform to detect soft tissue is like nothing you've seen in orthopedics, dare to say medical technology. So safety is number one. Number two is efficiency, really fast registration, landmarking in 60 seconds or less, bone cutting preparation in 3 to 4 minutes and then a really fast procedure. So at some point, this achieves time neutrality, dare to say you could make surgeons faster. So that's efficiency. Ease of use, 75% of all the Knees done in the U.S., according to 29,000 surgeons earlier, are done by surgeons that are doing 25 or less per year. So that's 2 per month. Everybody talks about democratizing technology in orthopedics. This will democratize technology. Ease of use means that after you done 2 to 3 because it's a very intuitive surgical algorithm, because it's very easy to use, as I mentioned, number two, the adoption could be very high even with a lot of the non-robotic users. Number 4 is reproducibility. It's the whole idea that once you one 2 or 3, you've done them all. You don't need to impact your surgical algorithm. The tweaks that you need to do to your conventional practice is minimum. And then lastly is accuracy in the last 1.5 minutes here. All the data that we got so far in the prelaunch or in the preclinical trials shows that the accuracy is 40% better than some competitor devices. So when you're doing surgeries in very small real estate like the knee to achieve a 40% accuracy is very compelling. So safety, efficiency, ease of use, reproducibility and accuracy is the bold bet that we make it with Monogram. We're going to take our time to make sure that surgeons are involved in the launch. We're going to make sure that segmentations are adequate. We should be submitting the 510(k) at some point in the not-so-distant future, and we're very excited about 2027.

When you think about utilization, a lot of questions on ACA and all that. Just curious what you're seeing on the utilization front.

I mean I can go back to 30% growth in capital in Q1. And again, the trends continue as we get into Q2 and so forth. We're not seeing a slowdown in capital purchases. HCA, the Medicaid business subsidies is less than 1%, 1.5%, 2% of our business. We're not seeing an impact. This is a very resilient market. Orthopedics is not going anywhere. I always quote, and I believe you got the data as well, Travis at Bank of America. If you go back to 2008, the Great Recession in the world with unemployment in the U.S. at double-digit rates, over the 3-year period, 2008 to 2011, we lost 1% of all orthopedic volumes. So -- and that's with inflation at a different level, unemployment at a different rate. So again, this is a very resilient market. The amount of patients waiting in the sidelines continues to be high. I know these are not COVID patients. This is just demand. And the average wait list in the U.S. for the top 10 centers in the U.S. continues to be between 3 to 6 months. So no, we're not seeing the impact.

Okay. Helpful. Any last closing comments in the last second.

I'll let Paul, he speaks better English, close the fireside chat.

Well, look, thank you, obviously, for having us today. I'm very excited about where we are. A lot of opportunity for us ahead and something that I'm certainly to having -- the finance team is all set to back it up. But again, great position. Thank you.

Thank you.