Zimmer Biomet at Goldman Sachs Conference: Strategic Growth and Challenges

On Monday, 09 June 2025, Zimmer Biomet (NYSE:ZBH) participated in the Goldman Sachs 46th Annual Global Healthcare Conference. The company shared its strategic vision, highlighting its confidence in achieving revenue growth targets and addressing potential tariff impacts. While new product launches and the Paragon 28 acquisition offer promising growth opportunities, the company remains cautious about external economic factors.

Key Takeaways

• Zimmer Biomet aims for 3% to 5% organic revenue growth in 2025, driven by new products.
• Tariff impacts are estimated at $60 million to $80 million for 2025, with potential upside.
• The Paragon 28 acquisition is successfully integrated, boosting cross-selling opportunities.
• New commercial leadership and product innovations are expected to enhance market share.
• The company is open to opportunistic stock buybacks, prioritizing M&A for capital deployment.

Financial Results

• Q1 2025 saw organic constant currency revenue growth of 2.3% to 2.4%.
• Adjusted for day rate, Q1 growth is closer to 4%.
• Earnings have consistently grown 5% to 9% over the last four years, excluding COVID impacts.
• Gross margins are expected to remain stable, aided by volume leverage and manufacturing changes.

Operational Updates

• The "Magnificent Seven" products did not all launch in the first half of 2025.
• US sales reorganization and direct-to-patient investments are anticipated to drive growth.
• Strong Q1 performance in hip sales in the US, with continued momentum in Q2.
• Paragon 28 integration is on track, with no talent loss or sales disruptions.
• Robotics penetration is 20% to 23% in the US, with cementless knees nearing 30%; aims to increase to 60% in three years.

Future Outlook

• Q2 2025 is expected to outperform Q1.
• Growth driven by hips, knees, and new systems like Persona Osteo Tie and ROSA robotics.
• International orders anticipated in the second half of 2025.
• Targeting a 5% weighted average market growth rate by 2027 through organic growth and M&A.
• Manufacturing repositioning to lower-cost countries is underway.

Q&A Highlights

• Kevin Thornow announced as new head of US Commercial, bringing expertise to the role.
• M&A remains the primary focus for capital deployment.
• Stock buybacks are considered opportunistically, with a goal to reduce leverage ratio to the low 3s.

Readers can refer to the full transcript for more detailed insights.

Full transcript - Goldman Sachs 46th Annual Global Healthcare Conference:

David, Analyst: Okay. Good morning, everyone. We’ll go ahead and get started here. Very pleased to welcome Ivan Tornos, Chairman and CEO of Zimmer Biomet and Sukhi Upade, Executive Vice President and CFO. As with all of these sessions, if you have a question, feel free to raise your hand.

I certainly have have plenty to keep us to keep us going here, but obviously, we wanna keep this as interactive as possible. So why don’t we start with with a topic that I think is on ebbs and flows, whether it’s on people’s minds depending on how religious you are in in following True Social. But you seem very eager to talk about tariffs. So I’ll turn it to you to you. Maybe maybe we’ll start with tariffs, and then we can go on to the actual business, after that.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Understands me anyway, so I don’t know. I don’t need a microphone, but thank you. Maybe maybe Suvi can start summarizing the impact of tariffs, and then I can I can elaborate? Yes. Yeah.

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: I think you can hear me okay with this. Correct? Yes. Good. Excellent.

So on our first quarter call, we had made a statement estimated our overall tariff impact to be somewhere between 60,000,000 to $80,000,000 for full year 2025, with most of that impact happening in the second half just the way the tariffs were implemented from a timing perspective. Inside of that, the key assumptions were that we have the 10% baseline assumptions across the world. We had assumed that for Europe, the reciprocal higher taxes would go into effect at the end of the ninety day stay period, which would be early July. We also assume that the higher taxes or higher tariffs, I should say, on product from China into The US at a 45% and product from The US into China at a 45% would go back to their higher levels at the end of the ninety day stay period. And we had no assumption of any benefit from the from the Nairobi protocol, which seems to be the hot new item in our segment.

So those were the assumptions that underpin that 60,000,000 to $80,000,000 impact for this year. We continue to evaluate the Nairobi impact and the applicability across our portfolio. We’ll be in a position to give an update on that on our second quarter call. But sitting here today, I’m I’m I’m hoping that overall our assumptions were were conservative. The the situation continues to remain fluid and, dynamic.

But, again, those those are the assumptions that underpin it, and we’ll give an update in a short month or so.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So the the only thing that, that I’ll add is that, again, if you look at how we’re thinking about tariffs and you compare our position versus others, and I’m not gonna name others, we’re taking what I will deem a more conservative approach. We’re not speculating on Nairobi protocol. We’re not speculating on 2026 because we don’t know. So that’s, that’s a key takeaway.

David, Analyst: So, I I have I have to push a little because, you know, that’s that’s the deal here. So the guidance on tariffs that that you’ve established so far, you you would you would say has taken the approach of this is what what we know, but at the same time, we’ve left yourself room for upside. So if I if I think about what what what know today versus what we knew at the time of your call is that we have a 10% tariff on products going into China. We have a 30% tariff on on products coming out of China in in, into The US. Those assumptions, were not reflected in the guidance you you you had provided.

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: They were for a time being, but we assumed that at the end of the stay period, they would go back to the higher level. So I think where you’re going, David, is if those if those lower tariff levels stayed in effect for the rest of the year instead of increasing at the end of the stay period, yes, there would be upside to our

David, Analyst: And if Nairobi protocol didn’t did end up being applicable to orthopedics, that would be a source of upside relative to the 60 to eighty eighty and and and how how do you figure that out? Like, this Nairobi protocol thing sorta I don’t wanna say it came out out of nowhere, but it is obviously an esoteric exemption from, like, the early eighties Yeah. Which some companies, hearing aids and diabetes, have been able to very clearly fall under. But what determines eligibility or applicability of that protocol?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: So what you what you have to do is you, obviously look at the the actual protocol or or the, the policy or law that’s in effect, which is definitional. But beyond that, like with any, any any policy or law, you then look at precedent, right, and what other products have been applied and have gotten exception under that. And then you draw parallels or similarities or dissimilarities relative to that case law and then take a position. We then get, legal opinions inside of that. We talk to a variety of outside advisers and then make a determination as to where that where that standard applies and where it does not.

David, Analyst: Okay. So it’s not like USMCA where you need to file and get approved, as an exemption. It’s just it’s a judgment call?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: It it is. And who makes

David, Analyst: the judgment? CBP or you? The Customs and Borders Patrol or or the companies?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: The the the company will take the original position, will claim the exemption, and then CBP then has the opportunity to either accept it or to or to deny it or to

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Adjust it.

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: Adjust it.

David, Analyst: Yeah. And are you claiming the exemption now under Nairobi protocol for products coming into The United States?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: Like I said, we’re still evaluating the applicability of Nairobi across our portfolio.

David, Analyst: I want to move on from tariffs, but are there any audience questions on the topic?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Okay. We can come back

David, Analyst: to that if someone thinks of one. But maybe we’ll switch over to the business here. And as we think about the balance of the year, we came into 2025 on with the view that you have a series of new product launches that will start to impact the portfolio across the course of the year. I think as we look at the first quarter, ’1 of the questions that I get a lot is how do we get confidence in the balance of the year when the first quarter growth came in, in line with what you had projected? But your second quarter guidance sort of implies a deceleration when you adjust for selling days.

So how do we gain confidence in the ramp of these products and the impact that has on the balance of the year?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So maybe I’ll start with the entire picture, 2025, and then we’ll break it down quarter by quarter. So for 2025, we are extremely confident that we’re gonna be able to deliver on our guidance. We we guided, organic, constant currency revenue growth of three to five, and we’re very confident, extremely confident we’re gonna get there. You may not like the phasing of the quarter, but it is what it is or the phasing of the year. Q one, it was roughly 2.3, two point four percent growth.

When you adjust for day rate, the number is closer to 4%. And we always knew that the quarter was gonna look like that because timing of new product introductions, again, the day rate impact, and some of the changes that that we’ve been making to our US sales organization. We said that Q2 is gonna be better than Q1, and it will be. But we said also that the second half of twenty twenty five is where you’re gonna see that the solid growth rate, call it, in five range in that direction, plus potentially. Why is that?

Because we had the comps in the second half of twenty twenty five. We had a ERP malfunction in the second half of twenty twenty four. The comps are very positive. We do have the impact of all these new products. We launched what we call the Magnificent Seven, and not all of them hit in the first half of twenty twenty five.

And then you got, less of an impact from a day ready standpoint. On top of that, not reflected as an absolute in the guidance, we have opportunities when it comes to all the investments we made on direct to patient, all the investments we made around specialization of sales reps in The U. S. That’s why our OpEx is higher in the first half. So again, those are the reasons to believe.

We’re extremely confident that we’re going to get there. And I hear you, the phasing, we’d love to have a solid first half and a weaker second half, less stress. It is what it is, and we’re very confident we’re to deliver.

David, Analyst: So I just want to make sure I understand the comments on the second quarter that do we compare a better second quarter to the 2.3%, two point four % or to the 4%?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: The second quarter is going to be better than the first quarter. I’m going leave it at that. Okay.

David, Analyst: So but in all seriousness, on the day rate basis dynamic, if you do like 3% in Q2, I’m making this number up. Q two, why shouldn’t people view that as a step back in in performance?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Some day rate dynamics as well in q two, we’re not gonna get into now. We’ll talk about it, when we do, when we do report in q two. They are new product introductions that materialize in a very significant in the second half of twenty twenty five. Already in hips, we saw a strong Q1 in The U. S.

I believe we’re going to see a very strong Q2 in that category specifically. But when it comes to niche performance, Oxford parts and cementless, opportunities with Persona, Oceotag and other products, it’s more robust in the second half of the year. We spoke about the timing of some international orders as well. We’ve been very clear about it. We don’t talk about timing often.

The fact we’re talking about timings will tell you that it’s pretty significant when it comes to international business, and that gets realized in the second half of twenty twenty five.

David, Analyst: And on the new product introductions, what are some of the leading indicators that you watch to give you confidence in the ramp? Is it contract signing? Is it physician training? Instrument orders or sets? Like how do you what are some of the things you use for either sales quota planning or other things that you watch internally?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: All of the above. As you can imagine, we have pretty robust KPIs. We look at, first things first, how many trainings we’re doing versus the committed trainings. And for the key products, I will tell you those are going above expectations. We look at the percentage or the contract percentages.

Are we in ten, twenty, 50, 90 percent of the contracts, again, per city, per region, per state? And so far, so good in that regard. We look at the list of what we call the early adopters. How many do we see getting into the funnel? And again, so far, the dynamics are where they need to be.

And then we also look at the inventory that we have. Are we delivering the right amount of sets into the territories? Are we seeing the rotation that we expected, etcetera, etcetera. So our customer dynamics, our internal dynamics, and so far, everything that we see gives us the confidence I keep talking about that we’re gonna be seeing the new acceleration in the second half of twenty twenty five.

David, Analyst: And maybe we could go into some of those new products, starting with hips, which we did see already in the first quarter. And one of the things that struck me when we went to observe cases with you in February was how was the enthusiasm for a triple taper hip stem? And just that seems to be an obvious market gap for you, but also one that you can fill pretty quickly. And I think you are filling it pretty quickly. So maybe you can sort of give us your reflection on that product launch and then the extent to which we can sort of templatize that onto the other product launches or the extent to which there might be similarities or differences that we need to consider.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: I love that word templatize. Don’t know if it’s

David, Analyst: a word, but yeah.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: I made it up, but I want to use it. So we did gain market share, in q two in hips, in US hips. We saw great momentum out of the gate with z one or triple taper, but also with Orthogrip, which is AI navigation, and also with HEMR or surgical impactor. I will tell you that momentum has accelerated in the second quarter. And as we look at the second half of twenty five, we should see even greater acceleration in hips.

For knees, repeating myself, we always said that the first half was gonna be, slower. But we’re very confident that Oxford Parcels and Semendes, given the training adoption, given the contract situation, given the inventory that we have, is going to have very robust growth in the second half of the year. We said all along, David, that the single largest opportunity for us is actually Persona Osteo Tie in conjunction with, ROSA. Penetration of robotics is 20%, twenty three %, in The US. Ore penetration of cementless is, north of 25%, approaching 30%.

Just getting those two numbers to 60%, I know that’s not going to happen in the year, but it’s going happen within the next three years, is a tremendous opportunity in Nice. So second half of twenty twenty five, given the introduction of ROSA one five, given ample inventory with Personal Shotae, we shall see accelerated penetration increases for both robotics and Personal Shotae. And if we sort of

David, Analyst: think about market size, I think on Z1, this is a multibillion dollar segment that you’re entering where you really have no participation right now in the direct interior approach. So that one and that does seem to be the increasingly preferred approach where I think J and J has done reasonably well. So that one seems to be one that has it is ramping quickly. It sounds like you’re gaining traction further here in Q2. How about I get the opportunity on robotics cementless, but one of the things that came up in some of our physician conversations is that when you think about cementless, it is maybe a narrower subsegment of the population where you have to have enough sort of bone integrity and tissue integrity already.

Is there any how should we think about the ultimate sizing of that in terms of the population eligible?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: It is underpenetrated as you state. So I will tell you single digit, if not double digit, low double digit penetration needs of cementless in general when you think about all knees done in The US. With the shift to the ASC, I think the number is going increase dramatically. With all the data that is coming out in terms of fixation rates, I think the number is going to continue to go up. As an example, Oxford partial cementless, this is the only partial cementless knee in The US.

We got twenty years of data from outside The US that shows that ten year joint survivorship, so how well is your knee fixated, is in the ninety five percent range. So using less metal inside your body, reducing your surgical time, which again is applicable into an ASC, and getting better fixation rates equals pretty significant penetration. It’s a market development opportunity. I don’t foresee that we’re gonna go from the current rates to thirty percent, forty percent, fifty percent overnight. But I do think similar to your example of direct anterior surgeries, these will become the gold standard in orthopedics, cementless knees, and within cementless knees, partial cement.

And as we

David, Analyst: think about contextualizing these overall new product launches, the right way to think about this, phase one, maybe that’s 2025, is utilizing these products to get mix upgrades within existing accounts next year? Or as you look beyond, would be about gaining competitive share capture? And then kind of year three might be about marketing. I mean, how can you kind of how should we think about the phasing of these products?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: That’s a sequence. Right? So first is friends and family, share of wallet. I need to go to all my existing users of knees. I’m moving from cemented knees to cementless knees, ideally, partial cemented.

For clinical and financial reasons for the company, same as we’ve with hips, and you’ve seen the numbers for q one. Then it’s a gain sharing, which is obviously more difficult than a share of wallet. But if you had the right data, the right commercial strategy, you’ll get there. And then it’s market development and new entrants. We are actively involved now in fellowship, residency programs.

We’re doing a lot of great work from a clinical angle. And these investments, you know, will yield a return, you know, three, five, seven years from now.

David, Analyst: And then on the competitive front, know, obviously everyone looks at different data. The best data, unfortunately, that we have access to companies are reporting publicly in dollars, which I appreciate may not be the full representation. But as I look at the first quarter, it looks like there was sort of a clustering of performance amongst you, Smith and Nephew and J and J, and then Stryker continues to be in share gain mode. But I was a little bit surprised to see even companies like Smith and Nephew start to catch up a little bit in their relative performance. How are you thinking about the competitive landscape right now?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So we we respect our competitors. And the the quarterly data, we don’t pay too much attention to because it changes. You know, one quarter, it looks like we get we get a ton of share, and there may be contracts, there may be mix, there may be other elements. And the next quarter, you know, it looks like we’re falling behind. I will tell you we remain the number one knee company in the world, the number one hip company in the world.

And with the engine of these new products, we’re confident that we’re going to remain number one.

David, Analyst: Okay. And then maybe this is a good segue to talk about The U. S. Commercial leadership changes. I think you just announced a new head of the U.

S, former CEO of Nevro. Maybe talk about the commercial leadership changes you’re making. And if you could just sort of frame that for us. So you’ve been CEO now a little over a year and a half or so? And then are you done making leadership changes?

And do you have the right team in place?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So very pleased to have announced that Kevin Thornow, Nevro, but also a strike at Analogic for twenty five years. He’s joining the company July. He brings a level of commercial expertise that that we need to have. Look, we’re not doing radical things in The US channel, and think that was the message that came across in the earnings call. It’s not that we’re blowing things up left and right.

It’s more evolution than revolution. We’ve been adding specialized reps for a period of time. We’re accelerating that. We’ve been adding people in ASCs, salespeople, to focus on ASCs. We’re doing that on steroids.

We’ve made some changes in terms of, how we pay people that, for a variety of reasons, we had to suspend, like in 2024 given the ERP debacle. And in 2025, we’re not doing. So it’s adding, it’s accelerating what we’re doing, it’s putting robust incentive plans, it’s bringing new talent, but this is not a let’s blow The US up and whatever happens, happens. And by the way, as we said in the earnings call, and I’ll say here today again, all these changes that we’re making are contemplating the guidance that we’ve given for the year ’20

David, Analyst: And when you think about your broader leadership team and the overall organization, are you confident that you have the right team in place execute both the 2025 plan and also the LRP that you’d laid out last year?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Extremely confident. We did replace strategy business development. We added, obviously, a new leader for the global businesses for The Americas. We’re there. And again, contemplating the guidance for ’25.

And I actually think the talent that we’re bringing into Zoom environment, if anything, is going help us accelerate our growth moving forward.

David, Analyst: And maybe let’s talk about Paragon twenty eight a little bit because I think there are multiple sort of pieces to that acquisition. One is the strategy to enter higher growth categories. I think the other is also bringing in new capabilities, to your point about talent and leadership. Maybe talk to us a little bit about how Paragon’s going and and and how we should both quantitatively and qualitatively think about the business.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So it’s a great example of the right deal done correctly. So the model that we put in place has been is being executed, has been has been achieved. The integration, candidly, David, is going better than expected. We’ve not lost any of the talent. We’ve seen no disruptions, knock on wood, in The US sales channel.

Internationally, we have more opportunities than we thought. Paragon twenty eight, before it became a Zimmer Biomet company, was minimally present in the ASC environment in The US, and we’ve seen a lot of good opportunities in that space. What Paragon twenty eight gives us is the confidence that we can do more deals that look like that, that increase our WEM guard, continues to amplify our position in an ASA space, that create a platform to scale up. You know, with Paragon twenty eight, we can cross sell trauma devices, biologic devices. We can have a better, category leadership position in ASC.

So we like this deal, and, more deals to come that, are similar to Paragon twenty

David, Analyst: And can you talk about other ways you can leverage Paragon twenty eight? I think you’re keeping their facility in Colorado. Can that become another Zimmer R and D hub? How are you thinking about utilizing Paragon to accelerate performance in the rest of the business?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So I think you can leverage Paragon twenty eight from a strategy standpoint, from an operations standpoint, from a culture, the talent that we brought standpoint. But to your first point, yes, we’re keeping this facility in Inglewood, Colorado. We we’re gonna do all the R and D for Paragon twenty eight there. And we’re actually bringing some other innovation platforms over to Inglewood, Colorado. I believe I generally do believe that Paragon twenty eight gonna mark a before and after for Zimmer Biomet, and that’s how we do deals.

We’ve, got a playbook that is getting executed. Everything is isolated from Zimmer Biomet to preserve what they do well. So, again, dedicated management, dedicated on the dedicated, sales channel, And we’re getting the synergies in other areas.

David, Analyst: And is this the beginning of a period of a multiyear M and A strategy? How does does how should we think about Paragon sort of in context?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: So we said a year ago in New York at the Analyst Day that we had an ambition to reside in a 5% WEMGARD weighted average market growth rate environment by the end of twenty twenty seven. I will tell you today, more than ambition is a very strong goal. I won’t call it a commitment yet, but clearly, we need to get to a 5% WEMGARD, sooner rather than later. This does not mean that we need to buy our way into a 5% WEMGARD that is planning the pipeline organically, that already diversifies us organically into a higher growth environment. But, yeah, it’s gonna require responsible M and A.

You should not expect that we’re gonna be now going left and right doing deals every other quarter, But responsible M and A is the main source of capital deployment moving forward for Zimbabwe.

David, Analyst: Okay. And then if I think about the LRP, you guided 4% to 6%. I think that was 24% to 27% growth. Your first twenty four percent, you’re in the middle of the range ish, 25%, depending on where you land in the guidance, you’ll be potentially toward the below or at the lower end of the range or maybe at the midpoint. So that starts to put increased onus on 2627%.

So from where you sit today, are you confident that you can be in the mid to upper end of that LRP to reach the average?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Very confident. And you need to look at the past to believe the present and the future. So, again, let’s go to ’21. In ’21, we delivered 10% growth. Obviously, comes COVID helped out.

Then in ’22, we delivered six and a half. In ’23, ’7 and half. I’m talking about constant currency organic revenue growth. And then in 2024, the year of the ERP malfunction, challenge, problem, debacle, whatever objective comes to mind, we delivered a 4.8%, almost 5%. So we’re very confident that in ’25 with all the new products and everything in place, we’re going to get to that guidance, ideally, hopefully, at the upper range of that guidance.

As we look at 2026, ’20 ’20 ’7 and 2028, the twice the size of the pipeline in 2018. So there’s plenty of ammunition to continue to grow organically, hence the commitment, delivering at least that mid single digit revenue growth. Putting their responsible M and A on top of it, I think it becomes a very exciting story.

David, Analyst: And before we go to kind of margins and the financial story, you and I have had this debate several times about are you spending enough? And one of the things that we’ve looked at and asked you about is there seems to be a pretty high correlation between the growth in how much the growth rate of spending and the growth rate in the top line and much less so the level of spending and top line growth. So why would Zimmer be different?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Well, of all, don’t do spending. We do investment. I’m not trying to be cute, but we’re really looking at every dollar we deploy, are we getting a fair return? And I will tell you, at Zimmer Biomain, we don’t have a quantity of investment problem. We may have an allocation challenge when it comes to the spending or the investment.

Public information or OpEx is 42.6%. I’ve been doing this for a while. I have not been around many companies that have been in business for a hundred years, and they operate with 43% OpEx. So we’re doing a lot of allocation of that OpEx from noncritical categories, noncritical geographies to new product development and commercial execution in the right geographies. When you look at our inventory position, there is a lot of cash tied to inventory.

Our DOH is three hundred and seventy five or three hundred and sixty five days. Don’t wanna operate in that environment, so there’s a lot of cash that we need to put in other areas. But I will tell you, David, when you look at the dollars that we have, whether it’s balance sheet dollars, whether it’s OpEx dollars from the P and L, we don’t need to add more dollars. We just need to move

David, Analyst: it into other areas. But

Ivan Tornos, Chairman and CEO, Zimmer Biomet: some

David, Analyst: of this takes time. I think we get the premise of reallocating reallocating resources. But the whole idea of, okay, we have too much G and A, I’m making this up, Western Europe, for example, and we’re going to put take those dollars and put those into R and D in The U. S. Firstly, it takes forever to execute that restructuring outside The U.

S. And then unless you’re going to have duplicative spending and hire the people first, there is a gap between the reallocation savings and the reinvestment. So how do balance the timing of that?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: Yes. I think we’ve been doing it all along for the last five years, David. In the top line that Ivan talked about going back to 2021, which is very healthy, robust, above market growth, we’ve been growing earnings faster. And that’s just because of this constant recycling and remix of our investment base. So you’re right.

It does take time, but it’s not like we’re just starting initiatives today. We’ve had initiatives that have been in the pipeline for several years that are coming due every year, just like any r and d pipeline. So I don’t think there’s a time delay because we’re not starting here and now today.

David, Analyst: Okay. That’s helpful. So I

Ivan Tornos, Chairman and CEO, Zimmer Biomet: was gonna make a comment that we didn’t start yesterday. And then again, to your question on are you investing enough, every year we’re investing roughly $1,000,000,000 in innovation, dollars $05,000,000,000 organically out of the P and L, another $05,000,000,000 through acquisitions, Orthogrid, Reline in sports medicine, OmniSuite in sports medicine, A and E, CMFT, cranio maxillofacial thoracic. So I will say that we got plenty of innovation dollars.

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: Yeah. Having said that, David, I think you’re hitting on a a key point, which is, look, top line growth gets rewarded in med tech when it comes to valuations. Right? So if if it does come down to a situation where we need to make investments to accelerate that top line, as we’re doing with Paragon twenty eight, we’re effectively keeping that cost base there. We’ve not made any substantive changes to their investment levels in r and d, in commercialization because we understand that top line is important, we will make those disproportionate investments.

And as we move forward, we need to invest more as an organization, we will.

David, Analyst: And on the earnings point, what does it take to break out of this eight dollars EPS cycle? I if you I know there have been ins and outs, but if you go back to earnings have been $8 ish, ups and downs for like eight years now. So how do break out of this cycle?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: I think we have been for the last four to five years, right? You take COVID off the table for a moment. You take the divestiture of Spine and Dental, which was a dilutive transaction, but we think the right one strategically and from a growth perspective. You look over the last four years, I think we’ve been consistently growing at somewhere between 5% to 9% on earnings. We expect that on an underlying basis before tariffs, before Paragon twenty eight to again replicate that this year.

So that moves forward. And it really goes back to our LRP, which I think is actually quite reasonable. Right? If we’re able to grow at the mid single digits on the top line organically, again, four to 6%, between the just the sheer leverage of that top line on our fixed cost base, in addition with stabilizing gross margins, which we’ve been able to demonstrate now even in the backdrop of a hyperinflationary environment and negative pricing, albeit slightly better lately, And through SG and A efficiencies, we’ve been able to grow that. So I it’s there.

We’re going to continue to push forward on that.

David, Analyst: And on the gross margin, I think at the Analyst Meeting last year, you laid out expectations for two years of gross margin compression before, I think, flattening in 2027. Obviously, a lot has changed since then. Take tariffs out of it for a second. Currency rates have moved. You did an acquisition.

Product mix is shifting. How should we think about gross margin from here?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: Yes. So on an organic basis, again, taking all those other components out, as you said, we said in our LRP that gross margins should be relatively stable even in a price decline environment, which means you’re getting efficiency in gross margins. And we continue to see that play out. I’m not going to put a marker as to where we think we can get to and where because it’s going to depend on the mix of our business, volumes, price. There’s so many variables that to just pinpoint on one and say things will be up and down, think, would be an incomplete story.

But here’s how we think about headwinds, tailwinds. Right? So just from a from a headwind perspective, you know, foreign currency can be a potential headwind as we as we move forward. Obviously, tariffs could be a a a potential impact. We’ll see where that that all net.

Pricing, we’ve assumed negative pricing over our LRP period. So far, through the LRP period, we’ve been better than that. So we’ll see where that actually nets out, potentially a tailwind. So and then, of course, you have annual inflation every year, and we’ll see what inflation looks like in this new tariff global tariff environment. So that those are those are some of the headwinds.

On the on the tailwind perspective, you know, if we can deliver 4% to 6% from a volume perspective, the ability to leverage fixed costs is gonna be a tailwind. Two, we’ve just gone through with our board an opportunity to reposition a sizable piece of our manufacturing out of high cost countries into lower cost countries. That’s going to take a couple of years to mature and matriculate, but that is going to be a tailwind.

David, Analyst: So sorry. Just for you. That is a that’s an incremental CapEx investment?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: That that will be incremental CapEx investment, but already baked into the cash flow assumptions that we’ve made as part of our LRP. K. So you should not see anything extraordinary to what we’ve already what we’ve already stated from our run rate perspective. And then and then we we’ve got other benefits, where we believe the complexifying wrong choice of words, but making our portfolio less complex through portfolio rationalization is gonna be another big tailwind. And we still spend about a hundred and $75,000,000 in excess and obsolescence every year.

As we continue to show improvements on our inventory, as we did from ’23 into ’24 and ’24 into ’25, that reduces that E and O burden. That’s going to be another tailwind. There’s a number of, again, headwinds, but we’ve also been able to demonstrate and find and pull the tailwind levers to keep that gross margin stable. That’s the LRP, and and and we still remain confident in it.

David, Analyst: Okay. Maybe in our couple of minutes left here, I just want to sort of maybe if I can recap a few of the takeaways here and make sure that we kind of accurately capture what you’re messaging here, which is, first, second quarter total revenue growth should look better than the first quarter. You’re not going to tell me whether better than the 2.3% or better than the 4%, but

Ivan Tornos, Chairman and CEO, Zimmer Biomet: We’re not going talk about the quarter.

David, Analyst: Okay. Okay. But continue to be confident the second quarter will be better than the first quarter. Second is you’re seeing good pickup in traction in some of the new product launches, most notably Z1, which had very strong performance in Q1 and even better performance here in Q2. Tariffs, they are what they are, but relative to the guidance that you provided, there tends to be more upside than there’s more upside risk with tariffs than downside risk.

And then lastly, Paragon twenty eight integration going well. I have not seen any turnover thus far and continue to think that, that acquisition is increasingly additive over time and can help you get into the upper end of that LRP range as we go into 2026 and beyond.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: And I’m not disagreeing with you on investment levels. I just think there is a lot of reallocation internally we can do. Some of we already have done, some of it that we need to continue to do, some of it that is gonna pay back two, three years from now, and some of it that pays back within the year.

David, Analyst: Okay. Only last remaining question I have is, obviously, there’s been quite a bit of volatility in the stock here. Historically, you have been good buyers and aggressive buyers of your stock in periods of heightened volatility. Have you been buying back stock here in the second quarter? And how should we think about that in context of your M and A prioritization?

Ivan Tornos, Chairman and CEO, Zimmer Biomet: We’re always going to look at opportunistic buybacks that we need to do. We’re not going to talk about what we’re doing But when it makes sense to buy stock, we’ll take a look at it. We’ll see how that strategy compares to other capital deployment strategies, call it M and A or other opportunities within the business.

David, Analyst: And do you need to wait to integrate Paragon twenty eight before pursuing other M and A? Or you’re at a point now where you think your your operating mechanisms are supportive of multiple deals?

Sukhi Upade, Executive Vice President and CFO, Zimmer Biomet: I I think our operating mechanisms and our balance sheet are supportive of continuing a string of pearls sort of strategy.

Ivan Tornos, Chairman and CEO, Zimmer Biomet: Okay. I mean, two quarters from now, our leverage ratio goes to the low threes again, given the revenue growth profile and the drop through in this business. Excellent.

David, Analyst: Well, with that, we’ll we’ll wrap up. Ivan and Suki, thank you. Thank you, David. For making the trip.

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