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Zimmer Biomet Holdings (ZBH): Company Profile, Stock Price, News, Rankings

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Zimmer Biomet Holdings

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Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter twenty twenty five Earnings Conference Call. As a reminder, this conference is being recorded today, 08/07/2025. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen only mode. If you have a question, please press the star followed by the one on your push button phone.

I would now like to turn the conference over to David DeMartino, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's second quarter twenty twenty five earnings conference call. Joining me on today's call are Vaughn Tornos, our Chairman, President and CEO and Suki Apatje, our CFO and EVP, Finance, Operations and Supply Chain. 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.

For a detailed discussion of all these risks and uncertainties, in addition to the inherent limitations of such forward looking statements, please refer to our SEC filings. Please note, we assume no obligation to update these forward looking statements even if actual results or future expectations change materially. Additionally, the discussions on this call will include certain non GAAP financial measures, some of which are forward looking non GAAP financial measures. Reconciliation on these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our second quarter earnings release, which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Yvonne. Ivan?

Good morning, everyone, and thank you for joining today's call. I would like to start today the way that I always do, by sharing my gratitude to the more than 17,000 Zimmer Biomet team members who move our business and mission forward each and every day. Thank you for your tireless work. Thank you for your strong performance. And, yes, most importantly, thank you for your relentless commitment to serving our customers and their patients.

I firmly believe that the Zimmer Palmette workforce and our culture here are amongst our key competitive advantages. During my prepared remarks this morning, I'm gonna cover three key areas. First, I'll summarize the 2025 performance as well as providing the general update behind our positive adjustments to our yearly guidance. Secondly, I'm gonna cover the three key strategic priorities for Zimmer Biomet, providing some examples of our progress. As a reminder, those three priorities are people and culture, operational excellence, and innovation and diversification.

And then thirdly, I'll provide some quantitative data points that will validate our confidence behind our new product introduction performance, which is one of the main reasons or why we feel so confident on the 2025 growth acceleration. Starting with the quarter, we delivered a very solid quarter on both the top and bottom line. This was against the backdrop of an 80 basis point seven day headwind in the quarter with the strongest comps for the year versus 2024, and with the announced significant delay in international orders, which have now moved into the third quarter. In spite of all of the above, we did grow in the quarter sales by 2.8% on an organic constant currency basis. For the second consecutive quarter, our US hips business drove strong results.

We grew 5.2% over the prior year, accelerating from 3.7% growth in the 2025. Also, US knees increased sequentially by 150 basis points, growing 1.7% over the prior year period. And SET, one of our most exciting businesses, reported another solid mid single digit organic constant currency growth quarter, which is now the seventh in a row, at nearly 5% growth. Within SET, we delivered double digit growth in sports medicine and CMFT, craniomaxillofacial thoracic, while delivering high single digit growth in upper extremities within the quarter. This was driven by our differentiated product portfolio and our solid ASC execution.

For 2025, we're updating our full year organic constant currency revenue growth expectations to a range of 3.5 to 4.5 from our previous three to 5% range, excluding the contribution of Paragon twenty eight. We continue to expect Paragon twenty eight to contribute two seventy basis points to our sales growth projection in 2025. We're also raising our 2025 adjusted earnings per share guidance to $8.10 to $8.30 from the previous range of $7.90 to $8.10. This ratio of guidance contemplates four things. Firstly, our continued confidence in a second half twenty twenty five sales acceleration driven by our new product cycle.

Secondly, increased operational efficiency. Third, a lower impact from tariffs than initially anticipated. And fourth, the weakening of the US dollar's FX benefit. Sukhi is gonna provide more detail on guidance during his prepared remarks. Our confidence in delivering this forecast is very high.

And with July now behind, we're even more confident in the acceleration of growth relative to the new products that we're launching, in particular, in The US, where we saw the strongest month so far in the year 2025, that being the month of July. While we are pleased with our solid financial performance, what I'm most proud of this quarter is the strategic and operational progress we're making towards our long term ambitions. We continue to transform Zimmer Biomet at a very rapid pace as we execute on our key priorities from a strategic standpoint. Those three priorities once again are people and culture, operational excellence, and innovation and diversification. Let me share several recent and very exciting updates on these three priorities, and I'll start with innovation and diversification and or framework to conduct disciplined m and a in order to move into higher growth spaces.

On July 14, we announced a definitive agreement to acquire Monogram Technologies, which is the company behind mBOS, the robot with semi and fully autonomous AI driven robotic capabilities. Recently, MONOGRAM's robot became the first robot in the world to complete a fully autonomous surgery using MONOGRAM's implants. This is very exciting and disruptive technology, which is highly complementary to a technology suite of solutions that we have here at Zimmer Biomet. As a complement to our broad suite of robotic and navigation solutions, monogram's first to the world technology has the potential to change the standard of care and transform the future of orthopedic surgery, solving some of the most meaningful challenges in musculoskeletal health, those being efficiency, accuracy, and reproducibility. This plan acquisition of Monogram and our commitment to ROSA and its robust pipeline underscores Zimmer Biomet's unprecedented strategy of enabling today while boldly defining the future of orthopedic surgery.

We have maintained our desire to diversify into higher growth segments through disciplined M and A, and the monogram acquisition meets our stringent financial and strategic criteria. The acquisition is expected to be neutral to adjusted earnings per share from 2025 through 2027 and accretive thereafter. It will contribute to revenue growth beginning in 2027 and will generate high single digit ROIC return invested capital by year five with increasing contribution starting in year six. The acquisition of Paragon twenty eight earlier this year is another way we're leveraging M and A to diversify our company into higher growth segments. We completed the acquisition on April 21, and the integration so far is proceeding as planned.

We recently transitioned Zimmer Biomet's full and portfolio to Paragon's twenty eight sales team, creating more scale and leveraging the strong commercial channel and capabilities that Paragon twenty eight is known for. I love the contribution that Paragon twenty eight is making, and I look forward to our ongoing journey together. Now turning to our second priority, operational excellence. This is a strategic pillar that encompasses efforts on both the top and bottom line. As we work to strengthen our commercial execution in The US to drive consistent above market growth, improve margins for Biomet globally, and reduce inventory for the organization in order to improve free cash flow generation.

I'm proud of the work that the team has done in 2025 so far to drive EPS growth. Their work has now enabled Zimmer Biomet to be able to grow earnings in the year 2025 versus 2024 in spite of executing two significant m and a deals, investing in large commercial initiatives, launching new products, driving the boldest DTP campaign, and absorbing the tariff impact. Of course, none of this progress will be possible without our team. Our third priority is dedicated to people and culture, ensuring we have the right people in the right roles. We recently welcomed Kevin Thornell as our group president for global businesses and The Americas.

Kevin is a very dynamic and seasoned leader who brings a wealth of knowledge and experience in driving growth and commercial excellence within medical devices, including orthopedics. I look forward to Kevin's leadership and contributions as we continue to accelerate growth and transform Zimmer Biomed into the boldest, most customer centric company in medtech. The progress that we're making in each of these three strategic priorities is real and reinforces my conviction in both our planned second half acceleration as well as the long term opportunity that Zimmer Biomet has ahead. We believe that the early customer enthusiasm and adoption that we've seen behind our magnificent seven product cycle will continue to fuel our growth in the 2025 and beyond. And again, one month into Q3, we've seen that come into realization.

Here are a few recent trends that are inspiring our confidence in the second half acceleration and solid growth over the long range plan. In US hips, we continue to drive robust adoption of our z one triple tapered stem for direct anterior hip procedures, with now roughly fifty percent of z one users converting to Zimmer Biomet from competitive offerings. We believe the combination of Z1 HEMR or surgical impact on our Orthogrid or AI driven surgical guidance system for total hip replacement is gonna continue to drive a strong growth through the 2025 and beyond. In US knees, our Persona Oceotie cementless total knee penetration continues to move in the right direction. In addition, we are seeing very strong early adoption of our Oxford partial cementless knee.

Nearly fifty percent of surgeons trained on Oxford through the second quarter of this year have adopted their implant, our implant, in their practice, with ten percent of them being competitive conversions. We have planned countless new training programs for the rest of 2025 and going into 2026. In Europe, the PERSONA Revision knee launch continues to gain traction with more than 100 accounts implanting the system across the key countries of Western Europe. We expect PERSONA Revision adoption to accelerate meaningfully throughout the 2025 with plenty of additional training events scheduled throughout the rest of the year and a very solid supply platform across the continent. Lastly, in SCT or Embody line of collagen based biointegrative solutions continues to exceed expectations, while new launches are driving share gains in shoulder arthroplasty.

More than one third of surgeons implanting or identity total shoulder were using competitive systems two years ago, while forty percent of OsteoFit stemless shoulder users are new to Zimmer Biomet. These products underscore our confidence in at least mid single digit SCT growth going forward. Our team is all in and committed to executing with urgency and excellence for the rest of 2025. And, again, our confidence in the second half revenue growth expectation for the year is very high. In conclusion, we are very proud of the progress in organization, and we look forward to continuing to execute and build momentum as we move through the second half of this year 2025.

I have more conviction in our strategy and team than ever, and I am deeply inspired every day knowing that my teammates and I are living the Zimmer bounded mission of alleviating pain and improving the quality of life for people around the world. And with that, I will turn the call over to Suky. Thank you.

Thanks and good morning everyone. As Yvonne mentioned, we delivered another solid quarter that demonstrated the early impact of our new product cycle. We grew sales 2.8% on an organic constant currency basis despite an 80 basis point selling day headwind. In addition, we delivered adjusted earnings per share of $2.07 which was up three percent year over year despite dilution from the Paragon twenty eight transaction and continued investments into our commercial organization. As we get into the details of the results, unless otherwise noted, my statements will be about the 2025 and how it compares to the same period in 2024, and my commentary will be on a constant currency and adjusted operating basis.

2025 organic constant currency commentary and guidance excludes any impact from the recently closed Paragon twenty eight acquisition. Net sales were $2,077,000,000 an increase of 7% on a reported basis and 2.8% excluding the impact of foreign currency and the Paragon twenty eight acquisition. Consolidated pricing was 20 basis points positive, marking another consecutive quarter of positive pricing. Our U. S.

Business grew 2.3% on an organic basis, driven by over 5% growth in hips and 150 basis point sequential acceleration in knees to 1.7%. As Yvonne mentioned, this performance reflects contribution from and early customer enthusiasm for several new product launches across our business. Internationally, we grew organic revenue 3.4%. Global hips grew 4% with The US increasing 5.2% and international increasing 2.7%. The US performance was driven by our Z1 Triple Taper HipStem, which continues to exceed our expectations.

Z1 in combination with HAMR and OrthoGrid is driving share of wallet and competitive conversions. Global knees grew 1.8% in the quarter with The US growing 1.7% and international growing 1.8%. This quarter's US results reflect increasing penetration of our Prosana Osiotis Cementless Total Knee and early adoption of our Oxford Partial Cementless Knee. While room for improvement remains, we continue to invest in high growth segments such as ASCs and robotics to increase our penetration. The early adoption of our new product launches coupled with ongoing commercial investments reinforced confidence in the second half acceleration.

Next, our SCT segment grew by 4.9% on an organic basis, led by double digit growth in CMFT and sports medicine and a high single digit growth in upper extremities. This marks the seventh consecutive quarter of at least mid single digit growth in S. E. T, a trend we expect to continue as planned product launches accelerate. As a reminder, with the closing of the Paragon twenty eight acquisition, S.

E. T. Is now our second largest business. Finally, Technology and Data, Bone Cement and Surgical declined 2.2% due to difficult comps from the prior year and a mix shift towards ROSA volume based placements versus outright sales. Now turning to our P and L.

We reported GAAP diluted earnings per share of $0.77 compared to GAAP diluted earnings per share of $1.18 in the prior year. Higher revenue and lower year over year restructuring charges were more than offset by acquisition related charges and interest expense due to the Paragon twenty eight transaction. On an adjusted basis, we delivered diluted earnings per share of $2.7 compared to $2.01 in the prior year. This increase was driven by higher revenue and a lower share count, partially offset by a step up in SG and A and interest expense tied to the Paragon twenty eight transaction. Adjusted gross margin was 72.3%, higher than the 2024, largely due to favorable mix and lower E and O, which more than offset higher manufacturing costs.

Adjusted operating margin was 27.8%, lower than the prior year as a result of increased commercial investments and the addition of Paragon twenty eight, but in line with expectations. Adjusted net interest and nonoperating expenses were $75,000,000 above the prior year, driven by higher debt related to the Paragon twenty eight transaction and higher interest rates on refinanced debt that matured in 2024. Our adjusted tax rate was 18.2%, and fully diluted shares outstanding were 198,300,000.0, down year over year due to the share repurchases from last year and in the 2025. Now turning to cash and liquidity. We had another strong quarter of cash generation with operating cash flows of $378,000,000 and free cash flow of $248,000,000 in line with 2024 levels despite closing the Paragon twenty eight transaction in the quarter.

Our working capital initiatives, including inventory reductions, continue to pay off as we've reduced days on hands by almost twenty days compared to the 2024. We ended the quarter with approximately $557,000,000 of cash and cash equivalents. Now regarding our outlook for 2025. We are updating our guidance based on a number of factors and now expect 2025 reported revenue growth of 6.7% to 7.7%, adjusted EPS of $8.1 to $8.3 and free cash flow of $1,000,000,000 to $1,200,000,000 We are also narrowing our 2025 organic constant currency revenue growth guidance to 3.5% to 4.5% from our prior range of 3% to 5%. Inside of this, we continue to expect average selling prices to be roughly flat for the full year and selling day differences to be a modest headwind to growth.

Importantly, as Yvonne mentioned, we remain confident in our expected second half growth acceleration driven by no selling day headwind in the 2025, more favorable comps resulting from the ERP implementation challenges in the 2024, acceleration from new product launches, particularly our Magnificent Seven across all of our business and geographies and the timing of orders in EMEA. Now let's walk through the moving parts that impact our reported revenue guidance. At recent rates, FX is now expected to be a more meaningful tailwind to our full year outlook than previously anticipated. At current rates, we now anticipate FX to contribute 50 basis points of growth in 2025. Second, on Paragon '28, we continue to anticipate the acquisition to contribute about two seventy basis points of growth in 2025.

With our successful efforts to mitigate our exposure to global tariffs and the assumption of China related tariffs remaining at current levels, we are lowering our expected tariff impact for 2025. While the situation remains fluid, we now anticipate about a $40,000,000 headwind to operating profit in 2025. Principally in the second half, which is down from the 60,000,000 to $80,000,000 we estimated during the first quarter earnings call. While we're not providing 2026 guidance at this time, based on current assumptions, we believe the improvements in 2025 will carry forward into 2026 and beyond. We now anticipate full year adjusted operating margin to be down about 100 basis points from 2024 versus our prior guidance of 100 to 150 basis points of a decline.

We still expect fourth quarter adjusted operating margin will be the highest for the year. Adjusted net interest and other nonoperating expenses are now expected to be approximately $290,000,000 down from $3.00 $5,000,000 primarily due to lower borrowings. We continue to expect our adjusted tax rate to be approximately 18% for the full year and fully diluted shares outstanding to be approximately 200,000,000 As mentioned, we project the 2025 tariff headwind to be more than offset by a combination of the weakening U. S. Dollar and a corresponding FX tailwind, supply chain mitigation efforts, proactive actions we're taking to decrease discretionary spending and advancing other operational strategies.

Given these dynamics and factoring in the dilution from the Paragon twenty eight acquisition, which is in line with our original expectations, we now expect our 2025 fully diluted adjusted earnings per share to be $8.1 to $8.3 up from our previous guidance of $7.9 to $8.1 I'd like to close by thanking the entire ZB team for their hard work and dedication. We continue to make meaningful positive change across the business while investing to accelerate long term growth. With that, I'll turn the call back over to David.

Thank you, Sookie. Operator, let's open up for questions. In order for us to take as many questions as possible, please limit yourself to one question. Operator, please go ahead.

Thank you, David. We'll take our first question from Robbie Marcus with JPMorgan. Please go ahead.

Oh, great. Great. Good morning, and and thank you for taking the questions. Two for me, both outlook related. Maybe on the first, as you think about the updated organic sales growth guide narrowed at the midpoint, how do we think about the drivers of the improvement and the cadence of improvement?

It it implies an acceleration in second half. Do you have an easy comp versus second half last year? How do we think about the drivers, the level of confidence and visibility and how to think maybe about 3Q versus 4Q?

Yeah. Absolutely. Good morning, Ravi. So I'll start with the latter part of your question. Level of confidence is very high, and it's very high given a variety of factors.

Let's talk about the, the basic math, and then I'll get into, some details around new products. But the basic math, as you recall, in the 2025, we don't have the day rate headwind that we did have in the first half of, 2025, and that's about a 100 basis points right there. Secondly, and you're acutely aware of this, we do benefit from the ERP comparable from a year ago, 2024. We went through the, ERP, debacle, and that's roughly another a 100 basis points right there. So between the day rate and ERP, you already got 200 basis points of fair favorability right there.

Strong July, as I mentioned in my prepared remarks, actually the strongest month so far in the year 2025, where The US actually grew, upper single digit in the month of July with, mid single digit performance in The Americas in these hits. So those are the basic data points that gives us confidence. As you get into new products, we said from the very beginning of the year that you will see a ramp up. That's given the investments done early in the year. That has to do with the timing of the actual new product launches.

You've seen already in The US that sequentially we're growing knees about a 150 basis points from q two to q one. Hips continue to be a strong performance, so that definitely helps out. And then lastly, the third and final thing I'll say that gives us confidence is the, emerging markets distributor purchase. We mentioned this in q one. The value of that order, which will be recognizing here in the next days, is around 50 to 60 basis points, for the company in the quarter that shifted from q two on to q three and roughly around a 110 basis points for the international segment of our business.

So again, through the combination of, these mathematical data points, the new product performance, the visibility to your point that we're having, we're extremely confident on the second half acceleration. Relative to q three to q four, while we typically don't like to give quarterly guidance, I'll tell you, I'll very surprised if q three is not a number scratching 6%. And then given comes in '24, the number for '25 should be, slightly lower. Thank you.

Oh, can I can I ask a oh, it's one question? My apologies. I'll, get back in queue. Go ahead, Bobby. You

We'll move to our next question from David Roman with Goldman Sachs. Your line is now open.

Thank you. Good morning. I appreciate you're taking the question. Can I just go into a little more detail on what you're observing here with respect to end market trends? I think when you add up the totality of companies having reported earnings through Q2, it does look like orthopedic market has slowed a little bit.

Your commentary around July is obviously encouraging for Zimmer. But maybe you contextualize results here and what you're seeing in broader market trends both through the quarter and what you're observing early here in Q3.

Thank you, David. Look, I've learned over the last seven years to don't drive or make any assumptions on market health based on one quarter or even two quarter. We believe that when you look at the overall market, it still is very healthy, certainly higher than pre COVID levels. Definitely benefiting from the post COVID, market volumes, but certainly higher than, pre COVID levels. As my peers commented, June was somewhat soft, but, May and April were very strong or strong.

And then July has been very, very strong for us. Part of that is comps relative to, ERP. The other parties that we've seen, high volume of cases coming into, into the hospitals. Pricing continues to be very, very favorable, 20 basis points positive for us in the quarter. The volumes going to the ASC are very strong.

We do see a double dip in effect. ACE is going into inpatient, outpatient, HOPD, and ASCs. We continue to monitor waiting list. Those are not slowing down. So large centers across the Northeast, in the Midwest are reporting a four to six month waiting list.

So that is, encouraging. And then outside of, The United States, there is obviously a lot of, seasonality, timing, variability. But again, July started very strongly. So net net, we believe that these markets continue to grow at least 4%, And and there is nothing that we've seen in the horizon that tells us that orthopedics as a market is slowing down. Thanks, David.

We'll move to our next question from Jason Linis with ROTH Capital. Your line is now open.

Hi. Thanks for taking the question. Wanna ask about Monogram. Specifically, I I know Mako and Stryker get a lot of credit for first mover, but a lot of that had to do with their intellectual property and sort of how it placed limitations on a lot of the competition. If you look at Graham, which, you know, obviously, you guys are believers in given the acquisition, do you think if you and if look across our portfolio, do you think it gives you a pretty strong position to maintain both in terms of their cutting and their AI applications? And related to that, I think there's an ultimate goal there to really reduce the time and reproducibility of these procedures. Are you anticipating that's gonna happen as well with that platform?

Hey. Thanks for the question, Jason. So first things first, Stryker and Mako should get a lot of credit for, being visionaries ten years ago and, and changing how orthopedics get done. So I'll start with that credit their their way. We believe that Great.

We at a moment right now, if we can have, similar, if not greater impact by changing the standard of care, launching first to the world technology that is gonna leap us forward into semi autonomous, and fully autonomous. So maybe I'll I'll touch briefly on what an autonomous robot does, and then I can, I can talk about the differentiating features of, emboss, the monogram platform? So a fully autonomous robot is gonna give you precision, with, without the human human deviation, the variability of having a surgeon controlling most of the so that that is breaking the level of precision. Number two, the automation or autonomy of, emboss or a fully autonomous robot, will reduce cognitive, load and, surgeon fatigue. So basically, this improves, well-being and enables that surgeon to engage in a higher level of decision making.

And this is some feedback that we have through due diligence that will be highly disruptive. These are very, very busy surgeons that are looking for efficiency and they're looking to use their operating time to think at a level at a higher level. And then lastly, scalability. This this is gonna be a robot fully autonomous that is gonna be fully integrated in a seamless way with the rest of the CV edge ecosystem. So what you do on plane before surgery goes right into the autonomy of the robot and dictates what happens after.

And now you're not connecting different parts and pieces of the ecosystem. It's happened seamlessly. So that's the benefit of, having an autonomous robot. We're acutely aware that maybe not everybody will wanna have a fully autonomous robot. That's why we insist on having flexibility and optionality and or ecosystem of solutions, including ROSA, will have different approaches to meet different customers where they're at.

Relative to the features of, MBOS and and Jason, you know the technology very well. It has a very dynamic robotic arm with seven different degrees of freedom. What that basically means is that you're gonna be able to avoid cutting the patella, which is something that current, current offerings, have some issues with at times. Secondly, it does have a robotic control saw that, prevents, bearing and enables reaming. It is city based, for both planning and intro navigation.

It does have components, of AI and machine learning that truly personalizes the, the entire case, how you plan for it, how you execute execute the planning. I love the fact that it's marketless tracking, so you don't need all the complex markers in the actual case. And then lastly, and very, very powerful, it is capable of, engaging in fully remote surgeries. So that that in itself we think is disruptive. So again, excited about, where we are in the journey.

It's a major leap forward. We are excited. We're ready to, execute on the launch in early twenty twenty seven for at least a semi autonomous, version. We hire an ton of people as we speak. I'm doing a bunch of clinical work. So very excited.

Oh, thanks, rep, for the detail. I'll jump back in queue.

Thanks, Jason. We'll take our next question from Larry Biegelsen with Wells Fargo. Your line is now open.

Good morning. Thanks for taking the question. Yvonne, you made on a recent podcast, you made some interesting comments. You said we need to diversify ZBH, and, you know, we're rethinking our capital allocation strategy. You know, you also said Zimmer has been too focused on the short term and and EPS dilution.

Can can you elaborate on what you meant and what that could mean for m and a going forward? Thank you.

Thank you, Larry. I'll always wonder who is the one person that listens to my podcast. I I said it was my wife. I'm disappointed to hear that it's you. Look.

The reality is that for quite some time, we've been managing the business, trying to resolve innovation gaps that we had, trying to be a pleased set of different stakeholders. And we're in a different place today. We have resolved all the innovation gaps. There is not a single gap in the portfolio, whether it is knees, whether it is hips, whether it is set. We got the broadest suite of solutions in robotics navigation with monogram.

It's gonna enable category leadership. So now it's about the future, and the future does require diversification. We aspire to have at least a 5% WEMGAT environment by the 2027, and be in a position to be in a six to 7%, WEMGAT environment by the end of, 2030. So with, that framework, our capital allocation has not changed, but it certainly evolved. We wanna engage in responsible m and a that will get us into the 5% by the '27.

And by 2013, the six to seven percent, we're gonna allocate that capital to deals that make sense. We don't chew this year. Monogram technologies, we are doing monogram technologies and done Paragon '28. And we got amplified power to do more deals that again responsibly will gonna get a will get us into those Vanguard environments. We are gonna focus more important than the, what, is the how we do those deals.

We're gonna solve problems that change the standard of care, just like the answer that I gave to Jason. We're gonna move from, doing things in just the current spaces into more, I would say, transformational spaces. So it's not changed. It's evolved. And, I love where we are.

I love the opportunity ahead, and we're excited about the next five years.

We'll take our next question from Travis Steed with Bank of America. Your line is now open.

Hey, thanks for the question. One clarifying question, Yvonne. The scratching the 6% growth in Q3, just to clarify, that's organic. So excluding the F and A acquisition, just wanted to clarify that. And then your comment on that improvements in '25 will continue into '26, does does that mean 2026 revenue growth should be at least as good, if not better, than kind of the 2025 organic revenue growth?

And if if you think that's kind of the case kind of for for knees as well.

Yeah. I'll this to Sam. So the 6%, the scratching 6%, it is organic. So this is in the absence of Paragon '28. So when I mentioned that q three should be around a six, I'll be very surprised if not scratching a six.

That is organic, excluding Paragon 28. And then on 2026, as you can imagine, we're not gonna offer any commentary today other than we like the momentum that we got. We like the pipeline that we have. We've made a lot of investments in '25, and those should materialize as we get in '26 and '27. But we're not gonna we're gonna we're gonna we're not gonna engage in run rates and and assumptions here today. Thanks, Travis.

We'll take our next question from Vijay Kumar with Evercore ISI.

Maybe one on margins here, operating margins. You raised it by 50 basis points versus prior assumptions. Right? But it's still down 100 basis points year on year. Can you give us a bridge on what's changed between tariff and, I think, between the Paragon acquisition, this monogram and the incremental headwind, what's changed in FX?

And and when you put all those pieces together, how are you thinking about margins, you know, exiting the year into '26? Should there still be some headwinds as some of these issues annualize? Thank you.

Yeah. Hey, Vijay. It's Suki. Thanks for the question. I I will say it was difficult to hear parts of your question, but but I think I got the gist of it.

So I miss anything, just just come back. You're you're correct. Margins were down in the second quarter year over year. That's in line with expectations. They were up sequentially from the first quarter, and a little bit better than what we originally expected.

The key driver of why they're down year over year as we've talked about with the Paragon twenty eight acquisition is simply folding that company into our baseline. When we originally provided guidance prior to Paragon twenty eight, we said operating margins would be up slightly. That would have marked the fourth or fifth consecutive year of increasing operating margins. But of course, we did the transaction, which we think is a very attractive long term growth driver for us. As you think about the rest of the year, I'll really turn to our guidance uplift to sort of give you the moving parts there.

And it's actually funny if you go back to the very beginning of the year and you look at where our guidance for EPS is now, we're almost right back where we started even in the backdrop of closing or closing one acquisition, announcing another one with Monogram, very exciting opportunity, and tariffs. They put all of that into the mix and we're almost right back where we started again. So what's driving our our earnings per share increase from our last guide? I'd say it really comes down to four key components in in the order of size. First is our tariff assumption is better than we originally expected as we've had more time to work through our mitigation strategies and we're also seeing lower lower overall tariff rates than than what were originally announced on our first quarter call.

You know, we're now predicting about $40,000,000 of tariff headwind this year versus our original assumption of 60 to $80,000,000. That's a that's a very nice component. Second is, we're doing much better on free cash flow this year than originally expected. We're spending less on the integration of Paragon twenty eight, and that's going as expected. We're also seeing utilization of assets and and better working capital improvements.

That ultimately is leading to lower cost of borrowing and lower borrowings in general. So that's reducing our interest expense from a little bit over $300,000,000 on our last call to about $290,000,000 this year. So that's another major driver. And then the last two are really around operational improvements that we continue to drive in the business. We've been talking about that and that's been delivering operating margin expansion for the last several years.

That continues into this year. And then there's a modest FX benefit from our last call. So those are really the moving parts of why we're increasing our our guidance for this year. But as you said, operating margin will be down primarily because of the Paragon 28 integration, but it won't be down as much as we originally thought.

We'll take our next question from Chris Pasquale with Nephron. Your line is now open.

I wanted to follow-up on monogram. Historically, the biggest concern about pursuing a fully autonomous capability for orthorobotics was the the perceived onerous regulatory requirements to get signed off from the FDA. I'm assuming that that was a key focus of of your diligence process. So can you talk about your confidence in the mBOS commercialization timeline? And could you also elaborate on how the deal is neutral to EPS in the free revenue phase?

Are you guys making some cuts to internal projects to offset the incremental investment there? Thanks.

Hey. Good morning, Chris. Thank you. First things first, we we've been looking at this technology monogram for about two and a half to three years. So we have had ample time to understand regular regulatory pathway, technology, the opportunity to go from semi autonomous to fully autonomous.

So we believe we know the space very well. And we have engaged third party along the journey to help us understand complexity associated with different claims. It is a very robust clinical trial associated with, with fully autonomous north of a 100 patients and enrolling more. We're working hand in hand with the FDA. We have experts that have been part of commercialization efforts in the past for other technology.

So I would say that, the degree of confidence is very high. I don't wanna make any assumptions here today, but, we understand what we need to do to get there. So that's that's piece number one. And we're being somewhat conservative when it comes to the assumptions on those product releases, both for the semi autonomous and fully autonomous. Relative to, how do you make the deal, EPS neutral, a couple of things.

Number one, we are reducing expenses in non core areas. So, as you can imagine, we manage, an enterprise with around 44, 45% OpEx. There is always, room to take money from non core areas to investments in critical areas like technology, monogram being one of them. We're gonna be able to leverage a lot of the r and d engineering, sustained engineering platform. So ROSA is a large platform within Zimmer Biomet, and the same folks that are doing our sustained engineering for ROSA are gonna be able to do some of these.

The same applies for some of the marketing functions, quality, regulatory, and whatnot. So we're not gonna be cutting anything that is customer focused. We're not gonna be cutting anything that is critical for the pipeline, but there has been a reshuffling of OpEx from noncore areas. Thank you, Chris. Thanks a lot.

We'll move to our next question from Ryan Zimmerman with BTIG.

Thank you. Good morning. I wanna ask about knee growth, particularly, you know, in The US, but just also worldwide. I mean, if you look at it, you know, this quarter and and on a two year stack, it it did get a little bit better for you guys relative to maybe some of your peers and what we saw in the fourth quarter and the first quarter. So, Yvonne, you know, talk to us about what specifically changed there from those past two quarters where it was maybe trailing behind some of your other peers?

Zimmer Biomet Holdings (ZBH) Q2 2025 Earnings Call Transcript

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