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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 Fourth Quarter twenty twenty four Earnings Conference Call. As a reminder, this conference is being recorded today, 02/06/2025. Following today's presentation, there will be a question and answer session. At this time, all participants are in a listen only mode. I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Zoom environment's fourth quarter twenty twenty four earnings conference call. Joining me on today's call are Ivan Tornos, our President and CEO and Sukiya Padier, 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 these risks and uncertainties in addition to the inherent limitations of such forward looking statements, please refer to our SEC filings, including those recently filed related to Paragon 28. Please note we assume no obligation to update these forward looking statements even if actual results or future expectations change materially. Additionally, the discussion will include certain non GAAP financial measures, some of which are forward looking non GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our fourth quarter earnings release, which can be found on our website, liverbiomet.com. With that, I'll turn the call over to 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 taking a moment to recognize and to show my sincere gratitude to the over 17,000 Zimmer Biomet team members who each and every day across the globe move our business and our mission forward. Thank you for your commitment. Thank you for your tireless work, your strong performance. And most importantly, thank you for what you do every day to serve our customers and patients.

Thanks to your efforts in 2024, we at Zimmer Biomet were able to impact the lives of over four point three million patients. This is a phenomenal data point that I know continues to inspire all of us to the core, 4,300,000 patients. As I said in the past and as I will continue to say, the Zimmer Biomet workforce and the culture that we have here truly is one of our key competitive advantages. During the call today, I'm going to cover three things. First, I'll provide a general overview of the fourth quarter and broad market dynamics.

Secondly, I'll talk about our 2025 outlook and the drivers of performance for the year and beyond 2025. And then lastly, I'll briefly talk about the recently announced Paragon twenty eight acquisition. After this, Suki is going to cover all financials in more detail and we'll make sure as always to leave plenty of time for your questions. To begin, I'm very happy to report that in the fourth quarter of twenty twenty four, we produced sales nearly 5% constant currency. This marks the twelfth consecutive quarter of mid single digit or better constant currency revenue growth for Zimmer Biomet.

This performance in the quarter was driven by mid single digit growth in HiPS and IS as well as upper single digit growth in ZET. These results are particularly noteworthy given the backdrop of the ERP implementation challenges outlined in September. In line with our expectations, we have now exited 2024 at pre ERP shipping levels as evidenced by the large volume of shipments that we saw in the quarter. Beyond commercial execution and the outcomes of innovative product launches, our performance was fueled by mid single digit growth in our end markets, which we anticipate will continue based on all the analytics that we have at hand involving both primary and second party sources. And aging and increasing active population, technological advancements, improving patient care dynamics around the world, the shift of procedures to outpatient settings like the ASC here in The U.

S, as well as data showcasing best in class clinical outcomes will continue to provide tailwinds to these market dynamics and the growth should continue in the coming years. So again, we see these markets as being very healthy and we do not expect these markets to slow down. It is important to note that with a solid closing of the fourth quarter, despite some of the challenges in the year 2024, including the already mentioned ERP disruption, we were able to manage the business consistent with Autoregional twenty twenty four financial guidance. So this means delivering near 5% constant currency revenue growth, $8 in adjusted earnings per share and free cash flow of $1.05 As we look into 2025, we are providing full year financial guidance of constant currency revenue growth of 3% to 5% and adjusted earnings per share of $8.15 to $8.35 which excludes any impact from the Paragon twenty eight acquisition. These financials are aligned with the LRP long range plan commitments that we highlighted at our investor event in May of twenty twenty four in New York, which as a reminder involves growing revenue at mid single digits over the planned period, while ensuring that EPS is growing faster than revenue and free cash flow is growing at least 100 basis points faster than EPS.

Again, revenue in the mid single digit range, EPS growing faster than revenue and free cash flow growing at least 100 basis points faster than EPS. So he's going to provide more details in his prepared remarks coming up. As we enter 2025, our priorities have not changed. We're going to continue to over index on people and culture, priority number one, operational excellence number two and thirdly, innovation and diversification. Today, I want to break down these three priorities in a more specific fashion in what we call a four point plan across the three key priorities of Zimmer Biomet.

Firstly, in the priority of people and culture, we're going to continue to ensure that we have the right people in the right jobs. To that end, we have added new leadership in key categories across the enterprise, like a new President for Global Heaps, a new president for Global Knees, a new appointed president for OZ business and a new leader for Global Medical Education. Secondly, in alignment with our strategic priority of operational excellence, we are committed to elevating our performance in the critical U. S. Market.

We know that our performance has not been consistent and we're going to do a far better job in this regard. This means specializing more aggressively in set ensuring that we have the right go to market formula in all key franchises with the right productivity and the right talent, adding new capabilities and expanding the portfolio and partnerships in the ASC environment. We like where we are, but want to be bolder in ASCs and continue to launch innovative solutions in robotics, while ensuring that we'll also have the right number of headcounts to drive growth in this vital area. In the background of all of these, we have now announced the boldest direct to patient program in the history of the organization. We know that Arnold Schwarzenegger himself as a Chief Movement Officer, much more to come in this area, truly are excited about the potential here in The U.

S. Thirdly, in the area of innovation and diversification, we plan to launch over 50 new products in the next thirty six months with several of these products being new to the world product launches. So it's not just the quantity of products, but it's the quality and the disruption associated with these products that excites us here at Zimmer Biomet. To touch on a few of those, starting with knees, our U. S.

Portfolio was strengthened in 2024 with the approvals of the Oxford Parcel cementless knee, the clearance of the 30 millimeter, the sole version of Persona IQ and some other place in our knee portfolio. We anticipate Oxford and Persona IQ to contribute to growth in the second half of twenty twenty five. These products combined with the steady adoption of our PERSONA OZUR TIESEMEDLESS Knee will position us strongly in The U. S. Market.

We're very excited in terms of our new portfolio and we really look forward to acceleration of the growth in knees, especially as we enter the second half of twenty twenty five. Internationally, late last year, in 2024, we received the CMR for personal revision. This is already the leading revision knee implant in The U. S. And we expect this launch to accelerate throughout 2025.

'20 '20 '4 was also a transformational year for our hip franchise. We launched Z1 or triple tapered stem and Hemmer or surgical impactor. These two products in addition of the closing of the OrthoGrid acquisition, which enables best in class AI navigation to surgeons, as well as our hip insight portfolio, the only FDA clear mix reality are going to position us to grow Heaps in a very meaningful way as we enter 2025. I also like that with the acquisition of Orthogrid, in conjunction with Heap Insights and ROSA Heap Navigation, we now have the broadest navigation portfolio in hip surgery. Again, very excited about where we are with knees and where we are with hips now having the most robust portfolio in recon since the merger of Zimmer and Biomed going back to June of twenty fifteen.

While we could not be more excited with our knee and hip products, Zimmer Biomed is today much more than just large joints. Within set, ROSA Soldier has the potential to meaningfully expand the shoulder arthroplasty market by improving the accuracy and reproducibility of the procedure. ROSA Soldier was the first robotic shoulder system in the world and it is the only robot in shoulders that can perform both anatomic and reverse procedures. Additionally, in November of last year, we received FDA clearance for Osteofit solder, the first asymmetric stemless solder system in The U. S.

We are in full launch mode as we speak and are receiving great feedback from customers all across The U. S. Finally, Zimmer Biomet continues to innovate within robotics. We We're going to be introducing a number of new ROSA applications in the short to mid term, including CT scan capabilities, kinematic alignment for knees and a posterior hip robotic approach, which is a huge need in the growing international markets. ROSA is already the leading orthopedic robot in Europe.

And with these updates, we anticipate continued global share gains. While we continue to launch innovative solutions to address the needs of our growing markets, we also are going to continue to look for responsible inorganic opportunities that feed our strategic, financial and risk return metrics, which we need to do in order to diversify Zimmer Biomet and in order to realize our aspiration of residing in a 5% Vanguard environment by the end of twenty twenty seven. The fourth point in our plan touches on the strategic priority of operational excellence and specifically on how Zimmer Biomet plans to drive margin improvement over the planned period, while also reducing inventory needs, hence increasing our free cash flow generation. The plan is already in motion. We achieve results according to our expectations in 2024, and we shall see an acceleration as we progress throughout the year 2025.

The execution of these four points mentioned above is going to undoubtedly set Zimmer Biomet for success, not just in 2025, but also in years to come. And by executing on these four things, we'll make sure to deliver on our revenue, earnings per share and free cash flow goals in accordance to the commitments highlighted in our long range plan. I want to close today's call discussing the very exciting news that we shared recently on the M and A front. To complement our product cycle on January 28, we entered into a definitive agreement to acquire Paragon twenty eight, which is a leader in the rapidly growing $5,000,000,000 full and anchor space. I could not be more excited about this partnership.

We maintain our desire to diversify into higher growth segments through disciplined M and A and this transaction checks the growth, accretion dilution and all the strategic boxes that we've been discussing for quite some time. Strategically, once the transaction closes, currently anticipated to be in the first half of twenty twenty five, Paragon '20 '8 is expected to expand our foot and ankle deformity offerings, while bolstering our existing fracture and trauma as well as joint replacement portfolios. It is going to move our WEMGAR in the right direction. It is going to complement Zimmer Biomet global footprint, existing infrastructure within Paragon's twenty expansive portfolio and it's going to help us drive our U. S.

Growth and international growth. One very exciting area of this partnership is going to be the ability to expedite all penetration opportunities in the fast growing ASC market, where foot and ankle procedures carry a very beneficial reimbursement, reimbursement that we're not capitalizing on today, while also creating cross selling opportunities. Lastly, this partnership is going to strengthen Zimmer Biomet's leadership position across musculoskeletal health and lower extremities. I could not be more excited about how we enter in 2025 and we very much look forward to welcoming the great leaders of Paragon twenty eight, including the Chairman and CEO, Albert Acosta to the Zimmer Biomet family. In conclusion, we are very proud of the progress of organization.

And we very much look forward to continue to execute above and beyond expectations. We have a very simple yet compelling plan and we will execute on it. I love the fact that we're impacting the lives of millions of people and I'm deeply inspired every day in knowing that my teammates and I are living the Zimmer Biomet mission of alleviating pain and improving the quality of life for people around the world. And with that, I'll turn the call now over to Suki. Thank you very much.

Thanks and good morning everyone. As Yvonne mentioned, we closed another solid year demonstrating the resilience and winning attitude of our team members. Despite the challenges we faced, we grew sales nearly 5% on a constant currency basis, expanded adjusted operating margins by 40 basis points, grew adjusted earnings per share by 6% to $8 and generated over $1,000,000,000 in free cash flow. Looking at this quarter's results, unless otherwise noted, my statements will be about the fourth quarter of twenty twenty four and how it compares to the same period in 2023. And my commentary will be on a constant currency and adjusted operating basis.

2025 guidance commentary will exclude any impact of the recently announced Paragon twenty eight acquisition. Net sales were $2,023,000,000 an increase of 4.3% on a reported basis and 4.9 excluding the impact of foreign currency. Consolidated pricing was positive 60 basis points, marking the fourth consecutive quarter of positive pricing. Overall, results were underpinned by healthy end markets with good leading indicators on demand for new products. Our U.

S. Business grew 4.7% driven by strong high single digit growth in SET, while international grew 5.2%, driven by high single digit growth in knees and the SET. It's great to see that our global SET growth continues to outpace both knees and hips. Importantly, once the Paragon twenty eight transaction is closed, the combined SCT segment is expected to be larger than our hip franchise and is expected to continue to grow faster than both our knee and hip segments. This aligns with our strategy to diversify into faster growth markets.

Global knees grew 5.6% in the quarter with The U. S. Growing 3.9% and international growing 8%. We continue to see good uptake from our Persona portfolio and increased penetration of ROSA. Global hips grew 4% with The U.

S. Growing 3.2% and international growing 4.8%. While still in early days, we are encouraged by the feedback on Z1 and look forward to accelerating the rollout of HAMR in tandem with OrthoGrid. We now have a complete product portfolio in hips and we'll be accelerating our offensive strategy as 2025 progresses. Next, our SET segment grew 8.4% led by CMFT at 13%, Sports at 22% and upper extremities at 8%.

This marks the fifth consecutive quarter of at least mid single digit growth in SET, a trend we expect to continue. Finally, we renamed the other category to Technology and Data, Bone Cement and Surgical to better represent the revenue within that segment. This segment declined 4.3% due to tough comps from the prior year. Turning to our P and L. We reported GAAP diluted earnings per share of $1.2 compared to GAAP diluted earnings per share of $2.01 in the prior year.

Higher sales and operating profit in tandem with a lower share count were more than offset by higher non operating expenses and higher taxes, including a one time gain in 2023 that did not repeat. On an adjusted basis, we delivered diluted earnings per share of $2.31 compared to $2.2 in the prior year with earnings per share growing faster than revenue. Of note, FX headwinds were more challenging in the quarter than originally expected and accounted for about $0.05 of earnings per share erosion when compared to 2023. Adjusted gross margin was 71.3% lower than 2023 as previously guided due primarily to prior year capitalized cost increases that impacted this year's P and L. Adjusted operating margin was 30.8%, fifty basis points higher than the prior year due to revenue leverage and continued efficiencies across SG and A.

Net interest and other adjusted non operating expenses were $62,000,000 higher than the prior year driven by higher debt and higher interest rates on refinanced debt that matured in 2024. Our adjusted tax rate was 17.5% higher than 2023 driven by the implementation of Pillar two and fully diluted share outstanding were $200,000,000 down year over year as a result of our share buybacks. Turning to cash and liquidity. Our working capital initiatives targeted towards inventory reduction are paying off as we reduce days on hand by almost fifty days ending the year at approximately three seventy five days. This contributed to operating cash flow of five zero six million dollars and free cash flow of $4.00 $3,000,000 bringing 2024 free cash flow to $1,055,000,000 dollars or in the range we originally guided at the beginning of 2024.

We ended the quarter with $526,000,000 of cash and cash equivalents. Aligned with our capital allocation strategies, we repurchased approximately $72,000,000 of shares in the quarter, bringing full year 2024 share repurchases to $870,000,000 We maintain flexibility to continue our share repurchase program and plan to continue returning cash to shareholders on an opportunistic basis over the course of our long range plan. Now regarding our 2025 outlook, we expect 2025 constant currency revenue growth of 3% to 5%. Inside of this, we expect stable end markets, flat to 50 basis points of price erosion for the full year and a modest headwind to growth due to year over year selling day differences. With the strengthening of the dollar at recent rates, we anticipate 150 basis points to 200 basis points of headwind from currency in 2025, resulting in reported revenue growth expectations of 1% to 3.5%.

Now regarding the cadence of expected revenue results, we expect that the second half ex FX growth will be higher than the first half due to more favorable comps related to 2024 ERP challenges, new product uptake and no selling day impact. Importantly, the first quarter will have one less selling day compared to 2024, which we estimate to have about 100 to 150 basis point headwind on revenue growth in the quarter, putting Q1 growth at about 2% ex FX. Also, you should expect Q2 growth to be muted primarily due to tougher comps when compared to 2024. Fully diluted earnings per share is expected to be $8.15 to $8.35 As with revenue, FX has a significant unfavorable impact on our earnings profile, creating an estimated $0.2 to $0.25 headwind on earnings per share when compared to 2024. We anticipate full year adjusted gross margin to be in line with 2024 and full year adjusted operating margins to increase versus the prior year, marking the fifth consecutive year of adjusted operating margin improvements.

As with revenue, margins and earnings will be stronger in the second half of twenty twenty five versus the first half of the year. When compared to 2024, first half gross margin operating margins will be lower than the prior year due to the impact of higher inventory costs and higher expenses associated with new product launches, sales force specialization and direct to patient marketing. As we progress into the second half, margins will be better than 2024 due to sales leverage, lower cost inventory and the impact of ongoing efficiency programs. Net interest and other non operating expenses are expected to be at least $255,000,000 reflecting higher rates on refinanced debt. Our adjusted tax rate is expected to be approximately 18% for the full year and fully diluted shares outstanding are expected to be about $2.00 1,000,000 shares.

Despite the FX pressure on earnings, we expect 2025 free cash flow of $1,100,000,000 dollars to $1,200,000,000 which represents significant leverage versus revenue growth. As laid out in our Analyst Day presentation, improvements in earnings, sunsetting of foundational investments and improvements in working capital are expected to drive improved cash conversion in 2025 and beyond. As Ivan mentioned, we entered into a definitive agreement to acquire Paragon twenty eight last week for an upfront payment of $13 per share in cash, representing an approximate $1,100,000,000 equity purchase price. In addition, Paragon twenty eight shareholders will receive one non tradable CDR, paying out up to an additional $1 per share in cash based on the achievement of certain revenue milestones. The purchase, which will be funded through a combination of cash on hand and debt is anticipated to be immediately accretive to revenue growth, approximately 3% dilutive to adjusted EPS in 2025, about 1% dilutive to adjusted EPS in 2026 and accretive to adjusted EPS within twenty four months following the closing.

We expect the transaction to close in the first half of twenty twenty five, after which we will provide updated guidance for the full year. It is important to note that after the closing, we expect to maintain a strong balance sheet and investment grade credit rating with the optionality to continue to invest against our capital allocation priorities. I'd like to close by thanking the entire Zeebee team for their resilience in overcoming significant challenges in 2024. Through your dedication, we achieved robust financial results with sales growth of nearly 5%, adjusted operating margin expansion for the fourth straight year and over $1,000,000,000 in free cash flow. I look forward to your winning spirit in 2025.

And with that, I'll turn the call back over to David.

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

Our first question comes from Robbie Marcus with JPMorgan.

Great. Good morning and thank you for taking the question. Ivan Suki, not sure who this is best for, but wanted to ask on just the guidance philosophy in general. I think last year it was we're guiding to what we think we could do. This year, we see what appears to be a more conservative guide both on the top and bottom line.

How are you thinking about the guidance range in philosophically and what should we be expecting throughout the year? Thanks a lot.

Hey, thank you, Robbie. Ivan here. Good morning. So I would say that it's somewhat of a different philosophy guidance wise from 2024. And as I said before, we're not going to apologize for the guidance we delivered in 2024 early in the year.

We actually met that guidance as you heard today in revenue, EPS, adjusted EPS and free cash flow. I think we are 20 basis points below revenue. That said for 2025 is a different philosophy. Within the range that we're providing today to be appropriate, I don't know if I'll use the word conservative, but definitely appropriate. Keep in mind that it's one day less in 2025 versus 2024.

And at the same time, Robbie, we see more drivers to bring us to the upper range versus the lower range. With excited about new products, most of them do become far more material in the second half of the year. Excited about the investments we're making in the ASC, ambulatory surgical space. We are adjusting some things in The U. S.

That I believe can bring us to the upper range of the guidance. Let's see what we end up in pricing, four consecutive quarters of our federal pricing. Let's see what happens in 2025. We'll go one quarter at a time. And in the first half of twenty twenty five, you've seen the investments we make in OpEx, so we should see a return on those investments as we get into the second half.

So net net, appropriate guidance. And again, we see more drivers to get us to the upper range than the lower range of that guidance. So extremely confident in the range provided and we look forward to updating every quarter and hopefully exceed those expectations.

you. We'll go next to Patrick Wood with Morgan Stanley.

Beautiful. Apologies for the crackly voice. Thank you for taking the question. Congrats on PARAGON twenty eight. Basically on that side of things, my question is, how are you thinking, A, about

through your distribution sales network, both in The U. S. And OUS and drive it on the top line that side? And B, how you think about managing any potential disruption as you integrate it? Thanks.

Thank you, Patrick. First things first, we're very excited about this acquisition. I spent last weekend in Orlando with the sales team. The culture in our company is second to none. The innovation that they have, I've not seen anything like that in my thirty one years in MedTech.

They have 50 active projects in the space. Upon closing the transaction, we're going to be a leader in six of the key categories in the space and they have an outstanding channel, which we don't. So our thinking is that we are going to preserve that channel fully dedicated to our foot and ankle. We are bringing the management team over to Zimmer Biomet, standing with the CEO, Alberto Acosta. So we see minimal disruption when it comes to commercial execution and the channel in itself.

We preserve innovation. It's a separate design center that is going to continue to fuel innovation to the space. So the two key drivers that are enabling the growth that they have seen, 18% CAGR over a period of time now, we don't see that going away. In terms of the second part disruption, the fact that we're going to run this in isolation, we see minimal disruption. Obviously, we pay attention to the usual suspects.

Do we have the right quality management systems? Are we doing other things we need to do from an operational standpoint around inventory? But again, as we see here today, we're feeling very, very excited. I'm very confident that we can integrate this with minimal disruption. Thanks, Patrick.

We'll take our next question from Steve Lichtman with Oppenheimer and Company.

Thank you. Good morning, guys. Tukey, you provided some color on first half versus second half for this year, but I was wondering if you could talk about guidance cadence a little bit more for the year excluding Paragon? How should we think about sales growth and margin progression during 2025? Thanks.

Yes, absolutely. Thanks for the question, Steven. As Ivan mentioned in his opening remarks and the first Q and A, there are a number of moving parts that are going to impact the cadence. So it's a great question. We try to provide some color.

I'll give a little bit more here. Let me start with some of those moving parts around selling day impact, the FX headwind that we talked about in our prepared remarks, new product uptake, which we're very excited about, some of the investments that Yvonne referenced that we believe is going to drive growth not only later in this year, but beyond this year, And then our continued efficiency profile and push for efficiency and margin expansion. If we start with revenue, we would again 3% to 5% ex FX is the guidance range. There is a pretty steep FX headwind, which then takes our reported guidance to 1% to 3.5% on a reported basis. Inside of that, we project that Q1 will have the lowest FX growth of about 2% and that's primarily due to the selling day headwind that we referenced earlier in our remarks.

That's worth about 100 basis points to 150 basis points. The second quarter growth, which has the toughest comp when compared to last year, will be aligned to Q1 once you adjust for that day rate headwind, okay? And then in the second half of growth, we expect that to be faster than the first half, really because you don't have that selling day headwind. You're going to see much greater ramp up of new products that Yvonne referenced earlier. Then you've got the easier comp related to the ERP, which really impacted us in the second half of twenty twenty four.

As we said, FX is going to play a pretty big factor. And so we expect that to be a headwind. It's roughly about the same in the first half versus the second half, with the first quarter and the third quarter being the biggest impacts and that's around 200 basis points of headwind in each year. So hopefully that gives you a lot of color on the revenue cadence all the way from XFX down to the foreign currency impact. And then if you move on to margins, as we said in our prepared remarks, overall, we would expect gross margins to be in line with 2024 and operating margin to be up year over year, in line with the guidance and the profile we provided on our LRP earlier in 2024.

First half margins will be lower than the first half of twenty twenty four, primarily due to lower gross margin as expected and as we've talked about through 2024 and higher OpEx related to the investments Ivan discussed. Some of those investments are in specialization around SET. We're increasing our critical mass around ASC and robotic commercialization efforts. We're ramping up DTC. All of these things we believe will have a near as well as mid and long term impact on revenue growth positive impact.

Q1 operating margins, we expect to be down about two fifty basis points versus the first quarter of twenty twenty four and Q2 will be down slightly when compared to 2Q twenty twenty four. However, second half margins will be better than the second half of twenty twenty four as well as the first half of twenty twenty five due to better revenue profile, higher gross margins in tandem with year on year efficiency gains. So overall, we're confident in the guidance we're providing. As Yvonne said, we think there are levers to potentially do better than that. We're also very excited to bring in the Paragon asset into our portfolio.

And again, feel really good about where we're headed in 2025.

Appreciate the additional color, Suki. Thanks.

We'll take our next question from Matt Taylor with Jefferies.

Hi, good morning. Thanks for taking the question guys. I did want to follow-up on Paragon and maybe ask you about the way the deal structured with the CVR burnout, it implies that you could grow that business about 16% to 19% and above consensus. So I would love your comments on how you think you might be able to actually accelerate growth or at least beat what the Street was thinking with Paragon? And also maybe talk about your ability to do additional deals as you digest this one?

Yes. So maybe I'll start with the growth portion. So the revenue synergies that we embedded in the model are appropriate. Beyond what we have in the model, we're thinking there is additional synergies. First and foremost, Paragon twenty eight is not a company that today is present or too present in the ASC space.

So there are a variety of opportunities there to do cross selling, extend contracting, so that's definitely a growth lever. There are opportunities from our trauma and biologics business to put those products in the back of the dedicated channel that Paragon twenty eight has. So it's a great opportunity there. And then there are other opportunities internationally. So we have 20% to 30% of the revenue coming outside of The U.

S. We have a large infrastructure outside of The U. S. So again, those are some of the revenue synergies that can get us above the committed growth rate. In terms of your second question around doing other deals, the Far Power is there.

What we want to do right now is to integrate Paragon twenty eight into the company, prove to everyone that we can do this type of deal with minimal disruption and then we'll think about the next deal when it's time to think about the next deal.

We'll take our next question from David Rumman with Goldman Sachs.

Thank you. Good morning, everybody. I want just to spend a couple of seconds here on margins. Suki, at the analyst meeting, you had introduced a trend that expected two years of gross margin headwinds. And I think a big piece of that had to do with the then currency dynamics at play, which have obviously evolved significantly over the past seven or eight months.

So can you maybe firstly update us on how the trajectory of gross margins are trending relative to those expectations? And then secondly, what is the path to turning gross margins around on a reported basis considering where we are today on FX and then some of the other operational matters that you've been undertaking to improve gross margin like inventory turns, etcetera?

Yes. Thanks for the question, David. So first of all, overall, the headwinds, tailwinds as we think about 2025, just stepping back, I talked about gross margins being in line with 2024. Some of the headwinds that we would expect to see is you have normal inflation every year. Fortunately, that inflation rate has stabilized to sort of pre pandemic norms.

So that's good to see. We're continuing to lap in some of capitalized cost increases at the end of twenty twenty three and beginning of twenty twenty four, which will impact the P and L, especially in the first half of twenty twenty five. And we're forecasting that pricing could be a modest headwind to gross margin. Still well better than our historical norms on pricing. I said somewhere around flat to maybe 50 basis points of erosion coming off a year where we're positive.

So we'll see where we end up, but overall a more positive trend, but still a modest potential headwind. So those are sort of your three big headwinds on gross margin. And when you think about the tailwinds, it really sorry, FX as you noted is another headwind inside of that, which we've talked about at length over the last year or so. The tailwinds are really around our efficiency gains, which we continue to make drastic improvement in repositioning our footprint into lower cost markets as well as better utilization of our plant footprint, which gives you more of better absorption. We're improving our mix through new products, but also from a geographic perspective.

And lastly, we're seeing lower E and O, excess and obsolescence, as we continue to improve our inventory positions and we made good really good progress in 2024 on reducing overall inventory. So those are the puts and takes, again, which broadly keep us in line with where 2024 margins were. As you think about the cadence for gross margins in this year, we would expect the first half of this year to be broadly in line with how we exited 2024. So you should think about our Q4 gross margin into the first half of twenty twenty five. And then you should see a sequential step up into Q3 and to Q4 with the largest benefit in Q4 really coming off of those efficiency gains that I spoke to earlier as well as the excess and obsolescence gains.

Now with the FX changes we've seen, right, the strengthening of the dollar that will or should give rise to additional FX hedge gain benefit. Those benefits, however, will likely get capitalized in 2025 assuming rates stay where they are today. It's a dynamic environment. And if that happens, those would then materialize into our P and L into '26. So a lot of moving parts there.

I think the key takeaway is we continue to make fundamental improvements in gross margin, again keeping us flat to 24% despite those FX hedge gain headwinds that I talked about earlier in twenty four percent and we do see an opportunity to maintain that stable environment or potentially improving over time. And inside of all that, we still have a profile where we're looking to expand operating margins this year. And again, that's we're coming off a track record of four consistent years of expanding operating margins. So hopefully a lot of color there gives you what you need there, David.

Yes. Thanks Suki. Appreciate all the detail.

Thank you. We'll take our next question from Larry Biegelsen with Wells Fargo.

Hey, good morning. This is Viken. Question for us on tariffs on Mexico and Canada. Can you provide some color on how much of your manufacturing is coming from either of those two countries and how much flexibility you have to move production elsewhere and also to take price either qualitative or quantitative? Thank you.

Yes. Simple answer. We do no manufacturing in Mexico. We do no manufacturing in Canada. Two thirds of our manufacturing is in The U.

S. So we are evaluating what happens in China. There is single digit volumes coming out of there manufacturing wise. But at present time all the scenario planning that we've done is embedded in the guidance provided.

I think that's the key takeaway. While we don't do manufacturing in Mexico, we do have some third party supply that comes out of Mexico. But as Yvonne said, the impact as contemplated on recent announcements is embedded in our guidance range.

Thank you. We'll take our next question from Ryan Zimmerman with BTIG.

Good morning. Thanks for taking the question. Extremities grew 22%, it was a phenomenal number. Can you just talk about it, Ivan, in terms of what's driving that? How durable you see that?

And we appreciate the color you're giving inside of said and just should we expect similar levels as we move into 2025?

Yes. Just a small correction. Sports grew at 22% in the quarter and the overall segment you said

That'd be good. Yes, yes. Sports 22% set as a whole in the quarter grew 8.4%, Extremities upper single digit. This is now four, five quarters in a row. We're growing mid to upper single digit, mostly upper single digit and we see this as durable.

What's happening here, first of all, we did add a lot of products. So from an organic and inorganic standpoint, I'll tell you the sales back today is totally different than it used to be. In addition to the products, we added a ton of people and we're going to continue to add more specialized people. That's some of the OpEx investments you've seen in the first half of twenty twenty five. We have dedicated resources to the ASC space that we didn't have before.

So it's just a different business altogether. Upon closing as you heard in the prepared remarks, upon closing of the Paragon twenty twenty deal our said business now is going to be as large if not larger actually than our hip business and growing two, three potentially 4x that rate. So again really excited about that said and we do see this business as a durable business growing at least mid single digit likely upper single digit. Thanks for the question.

Zimmer Biomet Holdings (ZBH) Q4 2024 Earnings Call Transcript

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