Zimmer Biomet Holdings, Inc. (NYSE:ZBH) Q2 2025 Earnings Call Transcript

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) Q2 2025 Earnings Call Transcript August 7, 2025

Zimmer Biomet Holdings, Inc. beats earnings expectations. Reported EPS is $2.07, expectations were $1.98.

Operator: Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 7, 2025. [Operator Instructions] I would now like to turn the conference over to David DeMartino, Senior Vice President of Investor Relations. Please go ahead.

David M. DeMartino: Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet’s Second Quarter 2025 Earnings Conference Call. Joining me on today’s call are Ivan Tornos, our Chairman, President and CEO; and Suketu Upadhyay, 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 Ivan. Ivan?

Ivan Tornos: 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 Biomet workforce and our culture here are amongst our key competitive advantages. During my prepared remarks this morning, I’m going to cover 3 key areas. First, I’ll summarize the second quarter of 2025 performance as well as providing the general update behind our positive adjustments to our yearly guidance.

Secondly, I’m going to cover the 3 key strategic priorities for Zimmer Biomet, providing some examples of our progress. As a reminder, those 3 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 of why we feel so confident on the second half of 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 7-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 U.S. Hips business drove strong results. We grew 5.2% over the prior year, accelerating from 3.7% growth in the first quarter of 2025. Also, U.S. Knees increased sequentially by 150 basis points, growing 1.7% over the prior year period. And S.E.T., 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 S.E.T., 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 3% to 5% range, excluding the contribution of Paragon 28. We continue to expect Paragon 28 to contribute 270 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 range of guidance contemplates 4 things: Firstly, our continued confidence in a second half 2025 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 U.S. dollar, FX benefit.

Suky is going to 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 U.S., 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 3 priorities once again are people and culture, operational excellence and innovation and diversification.

Let me share several recent and very exciting updates on these 3 priorities, and I’ll start with innovation and diversification and our framework to conduct disciplined M&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 mBôs, 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 the 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 planned 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&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 on invested capital by year 5 with increasing contribution starting in year 6. The acquisition of Paragon 28 earlier this year is another way we’re leveraging M&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 food and anchor portfolio to Paragon’s 28 sales team, creating more scale and leveraging the strong commercial channel and capabilities that Paragon 28 is known for. I love the contribution that Paragon 28 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 U.S. to drive consistent above-market growth, improve margins for Zimmer 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 2 significant M&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 Thornal 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 Biomet into the boldest, most customer-centric company in med tech. The progress that we’re making in each of these 3 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’re seeing behind our magnificent 7 product cycle will continue to fuel our growth in the back half of 2025 and beyond. And again, 1 month into Q3, we’re seeing that coming to realization. Here are a few recent trends that are expiring our confidence in the second half acceleration and solid growth over the long-range plan.

In U.S. Hips, we continue to drive robust adoption of our Z1 triple taper stem for direct anterior hip procedures with now roughly 50% of Z1 users converting to Zimmer Biomet from competitive offerings. We believe the combination of Z1 HAMMR or Surgical Impactor Orthogrid, or AI-driven surgical guidance system for total he replacement is going to continue to drive strong growth through the second half of 2025 and beyond. In U.S. Knees, our Persona OsseoTi 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 50% of surgeons trained on Oxford through the second quarter of this year have adopted their implant, our implant in the practice, with 10% 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 end of 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 S.E.T., our embodied line of collagen-based bio integrative solutions continues to exceed expectations while new launches are driving share gains in shoulder arthroplasty. More than 1/3 of surgeons implanting our Identity total shoulder were using competitive systems 2 years ago, while 40% of OsseoFit stemless shoulder users are new to Zimmer Biomet.

These products underscore our confidence in at least mid-single-digit S.E.T. 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 Biomet 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.

Suketu P. Upadhyay: Thanks, and good morning, everyone. As Ivan 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 3% year-over-year despite dilution from the Paragon 28 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 second quarter of 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 28 acquisition.

Net sales were $2.77 billion, an increase of 7% on a reported basis and 2.8% excluding the impact of foreign currency and the Paragon 28 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 Ivan mentioned, this performance reflects contribution from an early customer enthusiasm for several new product launches across our business. Internationally, we grew organic revenue 3.4%. Global Hips grew 4% with the U.S. increasing 5.2% and international increasing 2.7%. The U.S. performance was driven by our Z1 triple taper hip stem, which continues to exceed our expectations.

Z1 in combination with HAMMR and Orthogrid is driving share of wallet and competitive conversions. Global Knees grew 1.8% in the quarter with the U.S. growing 1.7% and international growing 1.8%. This quarter’s U.S. results reflect increasing penetration of our Persona OsseoTi 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 reinforce confidence in the second half acceleration. Next, our S.E.T. 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 28 acquisition, S.E.T. is now our second largest business. Finally, technology and data, bone cement and [indiscernible] 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&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 28 transaction.

On an adjusted basis, we delivered diluted earnings per share of $2.07 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&A and interest expense tied to the Paragon 28 transaction. Adjusted gross margin was 72.3%, higher than the second quarter of 2024, largely due to favorable mix and lower E&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 28, but in line with expectations. Adjusted net interest and nonoperating expenses were $75 million, above the prior year, driven by higher debt related to the Paragon 28 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 198.3 million, down year-over-year due to the share repurchases from last year and in the first quarter of 2025. Now turning to cash and liquidity. We had another strong quarter of cash generation with operating cash flows of $378 million and free cash flow of $248 million, in line with 2024 levels despite closing the Paragon 28 transaction in the quarter. Our working capital initiatives, including inventory reductions continue to pay off as we’ve reduced days on hand by almost 20 days compared to the second quarter of 2024. We ended the quarter with approximately $557 million 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 $8.10 to $8.30 and free cash flow of $1 billion to $1.2 billion.

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 Ivan mentioned, we remain confident in our expected second half growth acceleration driven by no selling day headwind in the second half of 2025, more favorable comps resulting from the ERP implementation challenges in the second half of 2024, acceleration from new product launches, particularly our magnificent 7 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 270 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 million headwind to operating profit in 2025, principally in the second half, which is down from the $60 million to $80 million 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 million, down from $305 million, 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 million. 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 28 acquisition, which is in line with our original expectations, we now expect our 2025 fully diluted adjusted earnings per share to be $8.10 to $8.30, up from our previous guidance of $7.90 to $8.10. 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.

David M. DeMartino: Thank you, Suky. Operator, let’s open up for questions. [Operator Instructions] Operator, please go ahead.

Q&A Session

Operator: We’ll take our first question from Robbie Marcus with JPMorgan.

Robert Justin Marcus: 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 implies an acceleration in second half. 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?

Ivan Tornos: Yes, absolutely, Robbie. 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 basic math, and then I’ll get into some details around new products. But the basic math — as you recall, in the second half of 2025, we don’t have the day rate headwind that we did have in the first half of 2025, and that’s about 100 basis points right there. Secondly, and you’re acutely aware of this, we do benefit from the ERP comparable from a year ago, second half of 2024, we went through the ERP [indiscernible]. And that’s roughly another 100 basis points right there. So between the day rate and ERP, you already got 200 basis points of favorability right there.

Strong July, as I mentioned in my prepared remarks, actually the strongest month so far in the year 2025, where the U.S. actually grew upper single digit in the month of July with mid-single-digit performance in Americas in knees and hips. 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 U.S. that sequentially, we’re growing knees about 150 basis points from Q2 to Q1. Hips continued 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 Q1. The value of that order, which we’ll be recognizing here in the next days is around 50 to 60 basis points for the company in the quarter that shifted from Q2 to Q3 and roughly around 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 Q3 to Q4, while we typically don’t like to give quarterly guidance, I’ll tell you, I’ll be very surprised if Q3 is not a number scratching 6% and then given comes in Q4 of ’24, that number for Q4 of ’25 should be slightly lower.

Robert Justin Marcus: Great. Very helpful. Can I ask — it’s one question. My apologies.

Ivan Tornos: Go ahead, Robbie.

Operator: We’ll move to our next question from David Roman with Goldman Sachs.

David Harrison Roman: Can I just go into a little bit 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 markets have slowed a little bit. Your commentary around July is obviously encouraging for Zimmer, but maybe you could 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.

Ivan Tornos: Thank you, David. Look, I’ve learned over the last 7 years to don’t drive or make any assumptions on market health based on 1 quarter or even 2 quarters. We believe that when you look at the overall market, it still is very healthy, certainly higher than pre-COVID levels, definitely not 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 part is that we’re seeing a high volume of cases coming 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, cases 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 4- to 6-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 there is nothing that we see in the horizon that tells us that orthopedics as a market is slowing down.

Operator: We’ll move to our next question from Jason Wittes with Roth Capital.

Jason Hart Wittes: I want to ask about Monogram. Specifically, 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 Monogram, which obviously you guys are believers in given the acquisition, do you think — as you look across the [indiscernible] 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 going to happen as well with that platform?

Ivan Tornos: Thanks for the question, Jason. So first things first, Stryker and Mako will get a lot of credit for being visionaries 10 years ago and changing how orthopedics get done. So I’ll start with that credit that way. We believe that we are at a moment right now, we can have similar, if not greater impact by changing the standard of care, launching first-toe-world technology that is going to leap us forward into semiautonomous and fully autonomous. And maybe I’ll touch briefly on what an autonomous robot does, and then I can talk about the differentiating features of mBôs, the Monogram platform. So a fully autonomous robot is going to give you precision without the human deviation, the variability of having a surgeon controlling most of the — so that breaking the level of precision.

Number two, the automation or autonomy of mBôs 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 to 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 higher level. And then lastly, scalability. This is going to be a robot fully autonomous that is going to be fully integrated in a seamless way with the rest of the CVH 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 know connecting different parts and pieces of the ecosystem.

It happened seamlessly. So that’s the benefit of having an autonomous robot. We’re acutely aware that maybe not everybody will want to have a fully autonomous robot. That’s why we insist on having flexibility and optionality. And our ecosystem of solutions, including ROSA, will have different approaches to meet different customers where they’re at. Relative to the features of mBôs, and Jason, you know the technology very well. It has a very dynamic [indiscernible] with 7 different degrees of freedom. What that basically means is that you’re going to be able to avoid cutting the patella, which is something that current offerings have some issues with at times. Secondly, it does have a robotic control so that prevents burning and enables reaming.

It is CT-based for both planning and intra navigation. It does have components of AI and machine learning that truly personalizes the entire case, how you plan for it and how you execute the planning. I love the fact that it’s markerless 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 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 2027 for at least semiautonomous version. We hired a ton of people as we speak and doing a bunch of clinical work. So very excited.

Operator: We’ll take our next question from Larry Biegelsen with Wells Fargo.

Lawrence H. Biegelsen: Ivan, you made — on a recent podcast, you made some interesting comments. You said we need to diversify ZBH, and we’re rethinking our capital allocation strategy. You also said Zimmer has been too focused on the short term and EPS dilution. Can you elaborate on what you meant and what that could mean for M&A going forward?

Ivan Tornos: Thank you, Larry. I always wonder who is the one person that listens to my podcast. I thought 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 [indiscernible] 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’s knees, whether it’s hips, whether it’s S.E.T., we got the broadest suite of solutions in robotics navigation with Monogram is going to enable category leadership. So nice about the future. And the future does require diversification. We aspire to have at least a 5% Vanguard environment by the end of 2027 and be in a position to be in a 6% to 7% Vanguard environment by the end of 2030.

So with that framework, our capital allocation has not changed, but it certainly evolved. We want to engage in responsible M&A that will get us into the 5% by the end of ’27 and by 2030 in the 6% to 7%. We’re going to allocate that capital to deals that make sense. We’ve done 2 this year. Monogram technologies, we are doing Monogram technologies and done Paragon 28. And we got ample firepower to do more deals that, again, responsibly, we’re going to get — will get us into those Vanguard environments. We are going to focus more important than the — what is the — how we do those deals. We’re going to solve problems that change the standard of care, just like the answer that I gave to Jason. We’re going to 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 5 years.

Operator: We’ll take our next question from Travis Steed with Bank of America.

Travis Lee Steed: One clarifying question, Ivan, the scratching the 6% growth in Q3, just to clarify, that’s organic, so excluding the F&A acquisition, I just wanted to clarify that. And then your comment on that improvements in ’25 will continue into ’26. Do that mean 2026 revenue growth should be at least as good, if not better than kind of the 2025 organic revenue growth? And if you think that’s kind of the case kind of for knees as well?

Ivan Tornos: Yes. I’ll give this [indiscernible]. So the 6%, the scratching 6%, it is organic. So this is in the absence of Paragon 28. So when I mentioned that Q3 should be around a 6. I’ll be very surprised if not scratching a 6, that is organic, excluding Paragon 28. And then on 2026, as you can imagine, we’re not going to 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 going to engage in run rates and assumptions here today. Thanks, Travis.

Operator: We’ll take our next question from Vijay Kumar with Evercore ISI.

Vijay Muniyappa Kumar: 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. Is Monogram incremental headwind [indiscernible] in FX? And when you put all those pieces together, how are you thinking about margins exiting the year into ’26? Should there still be some headwinds as some of these issues annualize?

Suketu P. Upadhyay: Vijay, it’s Suky. Thanks for the question. I will say it was difficult to hear parts of your question, but I think I got the gist of it. So if I miss anything, just come back. 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 28 acquisition is simply folding that company into our baseline. When we originally provided guidance prior to Paragon 28, 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. So you put all of that into the mix, and we’re almost right back where we started again. So what’s driving our earnings per share increase from our last guide, I’d say it really comes down to 4 key components 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 overall tariff rates than what were originally announced on our first quarter call. We’re now predicting about $40 million of tariff headwind this year versus our original assumption of $60 million to $80 million. So 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 28, and that’s going as expected. We’re also seeing utilization of assets 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 million on our last call to about $290 million this year.

So that’s another major driver. And then the last 2 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 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.

Operator: We’ll take our next question from Chris Pasquale with Nephron.

Christopher Thomas Pasquale: I wanted to follow up on Monogram. Historically, the biggest concern about pursuing a fully autonomous capability for ortho robotics was the perceived onerous regulatory requirements to get sign off from the FDA. I’m assuming that, that was a key focus of your diligence process. So can you talk about your confidence in the mBôs commercialization time line? And could you also elaborate on how the deal is neutral to EPS in the pre-revenue phase? Are you guys making some cuts to internal projects to offset the incremental investment there?

Ivan Tornos: Chris, thank you. First things first, we’ve been looking at this technology Monogram for about 2.5 to 3 years. So we have had ample time to understand regulatory pathway, technology, the opportunity to go from semiautonomous 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. There is a very robust clinical trial associated with fully autonomous north of 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 want to make any assumptions here today, but we understand what we need to do to get there, so that’s piece number one.

And we’re being somewhat conservative when it comes to the assumptions on those product releases, both for the semiautonomous and fully autonomous. Relative to how do you make the deal EPS neutral, a couple of things. Number one, we are reducing expenses in noncore areas. So as you can imagine, we manage an enterprise with around 44%, 45% OpEx. There is always room to take money from noncore areas to investments in critical areas like technology, Monogram being one of them. We’re going to be able to leverage a lot of the R&D engineering, sustained engineering platform. So ROSA is a large platform within Zimmer Biomet and the same folks that are doing a lot of sustained engineering for ROSA are going to be able to do some of these. The same applies for some of the marketing functions, quality, regulatory and whatnot.

So we’re not going to be cutting anything that is customer focused. We’re not going to be cutting anything that is critical for the pipeline, but it has been a reshuffling of OpEx for noncore areas.

Operator: We’ll move to our next question from Ryan Zimmerman with BTIG.

Ryan Benjamin Zimmerman: I want to ask about knee growth, particularly in the U.S., but just also worldwide. I mean, if you look at it this quarter and on a 2-year stack, 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 Ivan, talk to us about what specifically changed there from those past 2 quarters where it was maybe trailing behind some of your other peers. And kind of what, in your mind, sustains that ability to be maybe in that 2 spot versus what was arguably the 3 spot?

Ivan Tornos: Thank you, Ryan, for the question. So first things first, we are encouraged with the acceleration that we’re seeing. I’ll talk about the U.S., then we can talk about international. But Q2 to Q1 in the U.S. acceleration of around 150 basis points. I already mentioned July is stronger than that. So things are moving in the right direction, encouraged by not satisfied. We want to get back to the days where we’re taking share each and every quarter. And we do believe there’s a pathway there through new product introductions down the road, technology like Monogram, technology like the investments we’re making on smart implants. We do believe there is a pathway there. On the second half of 2025, we made a lot of commercial investments in terms of DTP, direct-to-patient initiatives they’re working out.

We’re making leadership changes. We have restructured, as I mentioned, some territories. We have evolved the incentive plan. So our level of confidence to accelerate in the second half our knee business in the U.S. is very high. International is a bit all over the place because you got the tender that moved from Q2 to Q3. So I’m convinced we’re going to post a very strong knee number internationally in Q3. And then as we get into 2026, there is ample opportunity with additional new product introductions, getting Oxford Partial Cementless in other markets, getting Persona Revision accelerated in Europe, Middle East and Africa. So I do think we’re turning the corner. Again, not satisfied where we are, but very encouraged with the trends, Ryan.

Operator: We’ll take our next question from Patrick Wood with Morgan Stanley.

Patrick Andrew Robert Wood: I’d love to hit on Hips and Z1 in particular. The numbers and the strength that you guys have seen there, do you know has that been predominantly on the coxa vara side? Or has that been more broad-based across Hip?

Ivan Tornos: We love what we’re seeing with Z1. We’re actually taking market share with this product. So the latest data point that we got is that roughly 50% of all the Z1 users are competitive conversions. Again, moving into Q3, we continue to see the same trend. We had in late ’24, some challenges with supply. As of right now, there are 0 challenges, 0 shortages when it comes to supply. So we’re doing a lot of trainings. We’re releasing sets. And we think that Z1 is going to continue to accelerate in growth. As you recall, Patrick, for about 5 to 7 years here in the U.S., we were shared donors, and now the trend is changing. So that is the marquee product, but it gets amplified through OrthoGrid, which is an acquisition that is going above expectations. And then our Surgical Impactor HAMMR is also going better than expected. So 2 quarters in the U.S. of 5% growth. And we expect that run rate to be very similar as we exit 2025, if not better.

Operator: Our next question comes from Danielle Antalffy with UBS.

Danielle Joy Antalffy: Ivan, I guess it’s your birthday, so happy birthday. And congrats on a good quarter. So just a question on Monogram. I thought that deal was interesting. And I’m just curious, Ivan, as you look ahead to when you’re launching Monogram, sort of how you think of Monogram and ROSA coexisting, what you think it brings to the robotics market overall in addition to what you have with ROSA?

Ivan Tornos: Danielle, thank you so much, and thanks for the birthday wishes. Look, 2.5 years looking into this, we look at different pathways to get to leadership in robotics. We felt with data that having the most flexible and comprehensive product suite is the way to go. You got non-robotic believers. We have navigation opportunities. You got large footprint robotic believers. We got those small footprint robotics. We have an exclusive partnership with THINK Surgical. There is a strong appetite for autonomous robotics. We’re going to be first to market. And based on all the intelligence that we have, IP-wise, the only one for a while. So we believe that a comprehensive suite of solutions is the way to go. In terms of what this will do for robotics, I do think you’re going to have a lot of surgeons entering the world of robotics.

I think one data point that most people miss is that here in the U.S., 80, 8-0, 80% of surgeons, 29,000 surgeons in the U.S. don’t use a robot. And internationally, that number is actually higher. 90% of surgeons don’t use a robot. So providing those surgeons with an efficient, highly reproductible robot platform that drives all the benefits of autonomy, I think, expands the pie. So we’re going to continue to see growth, market expansion of robotics, and it enables a great share of wallet opportunity for us here at Zimmer Biomet. So very excited about this acquisition.

Operator: Our next question comes from Matt Miksic with Barclays.

Matthew Stephan Miksic: Can you hear me okay?

Ivan Tornos: Yes, Matt, we can hear you.

Matthew Stephan Miksic: Great. So just a couple of follow-ups. Just one on Paragon 28. And I think you’ve talked about bringing that entire organization on and kind of keeping them together as kind of a team intact, which seems to be successful so far. So congrats on that. And I wanted to get a sense, first, is there anything that — any retention or any threshold beyond which we should be thinking about where you may be 100% confident that that’s just going to happen and we’re going to keep it or there’s something end of the year or 12 months out that we get through that threshold and we’re good. And then the second part of it is, I guess, at what point you start thinking about bringing on repeating rinse and repeat on an acquisition like that to drive growth, drive margins, expand the Vanguard, that sort of thing.

Ivan Tornos: Thanks, Matt. Look, Paragon 28 went really well. So we delivered better-than-expected operational efficiencies. That’s part of why the free cash flow position for the rest of the year has improved, delivered lower acquisition costs, nice savings across the board, but they didn’t come from the commercial innovation elements of the deal. To your question, there’s been no management turnover. As you know, Albert DaCosta, the former Chairman and CEO of Paragon 28 is the Global President of that business. I’ve said this in a gazillion forums. So here we go again, I’m pretty much married to Albert for the rest of my life. He brought with him the entire commercial channel. And by that, I mean, the senior leadership in commercial operations as well as the territory leaders.

And I am not aware of any sales rep or distributor or anyone in the channel that actually has left Zimmer Biomet. So they have, it’s not been run to maintain, so it’s not a large number. We recently integrated the Zimmer Biomet, lower extremities, lower trauma, foot and ankle portfolio into that sales channel. So the Paragon 28 or former Paragon 28 sales reps are very excited to have those new products from Zimmer Biomet. There’s been no innovation delays. We are today in Denver, I believe, doing an R&D review. All the feedback we get around innovation is that it’s on track and on time. So net-net, everything is going really, really well. Still expect 270 basis points of revenue growth contribution in the year 2025. And to your later question, is this a rinse and repeat kind of model moving forward?

Absolutely. Absolutely. I think this creates a proxy for other deals, solid innovation, solid commercial execution, keep it away from the mothership, let it run, deliver sustainable growth. Yes, it’s a rinse and repeat model, and we’re going to likely play it again. Thanks for the question, Matt.

Operator: We’ll take our next question from Shagun Singh with RBC Capital.

Shagun Singh Chadha: And I just wanted to ask a question on Monogram. Can you maybe give us a little bit more on the confidence you have in the progress on the fully autonomous portion of the robot. I just wanted to get a sense of what progress has already been made internally? I know you guys have a semi auto that’s FDA approved, it hasn’t launched and then the CVR suggests some development time lines on the fully autonomous. So I just wanted to get a sense of your comfort level. And then just on the competitive landscape and how that might evolve. I think Stryker indicated on their call that they have the ability to be fully autonomous today, but they decided not to turn it on. So I’m just wondering like how do you think about the competitive landscape once you bring this to market?

Ivan Tornos: Well, thank you. Look, I’m not going to comment much on competitors and their abilities or lack of abilities. But if they can turn it on, I will recommend that at some point, they do. Because this type of technology will change the world of orthopedics. Relative to the opportunity or the level of confidence on fully autonomous, we — they — this is not part of Zimmer Biomet yet, just completed the first fully autonomous surgery in the world, I believe it was 2 weeks ago with excellent results. So that’s a very encouraging data point. In terms of our pathway to get there, I alluded to the fact that it is a robust clinical trial. We understand the different steps we got to take to get to fully autonomous. We have hedged when this launch is going to happen.

We continue to work with experts. So our level of confidence is very high. I don’t want to speculate too much yet because we’re early in the journey, but the assumptions that we’re making so far have been validated by the experts. So really, really excited. And semi-autonomous will launch in early ’27. We believe that fully autonomous mBôs will launch in late 2027, if not early 2028. And as soon as we can, we’ll provide more details into how that’s going.

Operator: Our next question comes from Richard Newitter with Truist Securities.

Richard Samuel Newitter: Ivan, I wanted to just ask a little bit more on the robotics portfolio approach. It makes sense. You want to be in a position to go where the market goes and what it wants, and this is an evolving sector. So I appreciate that. But when you were describing kind of there’s something for everyone, you kind of characterize or at least I thought I heard you characterize ROSA as kind of a large footprint robot. You have Monogram, which has advanced capabilities, including autonomous, that’s where maybe the market is going. And then you kind of have a smaller footprint with TMini. I guess, one, is Monogram large footprint is not necessarily something people want. I guess what is it that ROSA is going to do for the marketplace that Monogram isn’t going to use SARPE?

And then as I think about it, it sounds like it’s eventually going to be a Monogram TMini kind of race for you guys. But correct me if I’m wrong there. I’m just trying to get my arms around that.

Ivan Tornos: Thanks for the question, Rich. Look, ROSA is the #1 orthopedic robot outside of the United States. That is a fact. And the reason why a lot of surgeons choose ROSA with approaching, if not exceeding 2,000 installations is because there is a large chunk of surgeons that don’t believe in CT scanning. And again, particularly outside of the U.S. They don’t want to expose the patient to radiation. In some countries, it’s not reimbursed. They don’t want to add another step in the procedure. There is a preference for image less robotics. There is a segment of surgeons that want to be fully in control of the case, and they like ROSA. They like the way that it integrates with preplanning and they’re used to it. So we’re going to keep ROSA, and we got 6 different indications coming for ROSA in the next, call it, 18 to 24 months.

So that’s going to stay there. In terms of — is there a race between TMini and mBôs Monogram, no. There is not a race between our internal offerings. There is going to be a desire to continue to offer different solutions for different customers around the world. And we strongly believe 2.5 years of market research, that optionality, that flexibility will win the race.

Operator: Our last question comes from Caitlin Cronin with Canaccord.

Caitlin Cronin: Just maybe if you could comment on robotic placements in this quarter specifically and then just the pipeline for the rest of the year? And then adjacent to that, how is that think partnership really trending and the ongoing commercialization there?

Ivan Tornos: Thank you, Caitlin. So I’ll start with the second part of your question. We just extended the exclusive partnership with THINK Surgical. So obviously, we like what we see. We like having the optionality of that smaller handheld CT scan base. And there is a fairly large pipeline of deals in the making for THINK Surgical. Overall, robotics, you see that the category declined versus a year ago. That is because of capital equipment sales. Installations remain on track. We’ve been saying for, I don’t know, 4, 5 years that the point of entry is at least 300, and we continue to see that number or better. We like the number coming out of ASCs, especially new ASCs. So everything is going in accordance to plan. And again, as we get into late 2025, — we’re going to be launching next-generation ROSA with the ability to do a kinematic knee with simpler landmarking, with better tracking.

So we think that ROSA knee with what we call Optimize will be an accelerator of ROSA installs as we exit ’25 and going into 2026. Thanks for the question.

Operator: I’d like to turn the conference back over to Ivan Tornos for closing remarks.

Ivan Tornos: Well, thanks, everybody, for joining. I’ll keep my closing remarks under a minute. Number one, starting with gratitude. I do want to end with gratitude to the Zimmer Biomet employees for their progress this quarter, for their efforts, which have enabled us to raise EPS for the year ’25 as well as free cash flow while narrowing the revenue guidance. Number two, I want to talk about the level of confidence that we have, not just for the second half acceleration, given new product introductions, a strong July and whatnot, but just given all the visibility that we have in terms of what’s happening in every country and across every platform. So we are extremely confident on the second half acceleration. But most importantly, we are very confident on the future of Zimmer Biomet.

We’re excited about the future. We have the strongest pipeline that we have had in the 6.5 years that I’ve been here, and that excludes the opportunities ahead as we continue to leverage the balance sheet to drive responsible M&A and bring new to the world technology like Monogram Orthopedics or Paragon 28. So thank you for your time this morning, and we look forward to the next update in November.

Operator: Thank you again for participating in today’s conference call. You may now disconnect, and have a great day.