Zimmer Biomet Holdings, Inc. (ZBH) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 5, 2026. [Operator Instructions] I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Second Quarter 2026 Earnings Conference Call. Joining me on today's call Ivan Tornos, our Chairman, President and CEO; and Paul Stellato, our Interim CFO and VP Controller and Chief Accounting Officer. Before I 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 of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for capturing 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.

Thank you, David. Good morning, everyone, and thank you for joining today's call. I would like to start the way that I always do, with gratitude, thanking for Zimmer Biomet team members around the world. Thank you for your commitment, your resilience and most importantly, your dedication to serving our customers and their patients each and every day. I'm truly grateful to have the opportunity to serve alongside you in this journey. Equally important, I'm beyond proud of the work that you do daily. During my prepared remarks this morning, I'm going to cover three things. First, I'll summarize our strong second quarter results. Second, I'll review our upgraded outlook for the year 2026. And then thirdly, I'll provide an update on our three strategic priorities, which remain unchanged. First, people and culture; second, operational excellence; and third, innovation and diversification. To begin, we delivered second quarter net sales of $2.177 billion, which came in above our expectations, representing 4.8% growth on a reported basis and 4% growth on an organic constant currency basis. On an organic constant currency basis, we grew 4.6% in the U.S. while our international business grew 3.1%. The growth in the U.S. demonstrates the strong progress we are making across our IP of fronts including our U.S. sales force transformation. Starting with Hips, we delivered 5.1% constant currency growth including 5.9% growth in the critical U.S. market and 4.2% growth internationally. In the U.S., our hip triple play continues to gain momentum, driven by the continued penetration of Z1 or triple-taper hip stem, which now represents over 40% of our U.S. hip stems and will soon surpass 100,000 implants worldwide. Secondly, we've seen greater utilization of HAMMR or Surgical Impactor which is now used in over 25% of our U.S. primary hip cases. And thirdly, we have seen increased adoption of OrthoGrid or AI-based navigation solution for direct interior heat procedures. OrthoGrid had its strongest quarter to date and the first half of 2026 saw as many cases as the entire full year 2025. We expect growth to accelerate in this platform in quarters to come. Outside the U.S., our iodine core hip launch in Japan is exceeding expectations as we are seeing robust demand from both existing surgeons and competitive accounts. We expect this first to the world technology to be a meaningful growth driver in the second half of the year 2026 and well beyond 2026. We're actively pursuing pathways to bring this game-changing technology to additional markets outside of Japan. MIS increased 0.1% in the quarter with U.S. growth of 1.4%, offset by a 1.5% decline internationally, which was heavily impacted by China and core emerging markets. We continue to see traction with new product launches and are very confident that the specialization work being done in the U.S. and go-to-market changes in key OUS markets will lead to improved performance. S.E.T. grew 3.4% on an organic constant currency basis in the quarter, which was a 180 basis point acceleration from the first quarter of the year. In the U.S., we delivered mid-single-digit growth and Paragon 28 sales increased mid-teens. This was driven by differentiated and innovative product portfolio, strong execution healthy market dynamics and the successful integration of the acquisition. CMFT, Cranial Maxillofacial Thoracic once again grew double digits led by our thoracic franchise, while upper extremities reported another quarter of upper single-digit growth. These compelling results were partially offset by continued pressure in both trauma and restorative therapies. Technology & Data, Bone Cement and Surgical grew 21.5%, demonstrating that our strategy of offering a comprehensive suite of customer-centric solutions is resonating with customers. We delivered record capital sales this quarter, driven by both ROSA with Optimize [indiscernible] saw early contribution from the much-anticipated next-generation ROSA shoulder launch. ROSA shoulder is the only robotic sounder system in the world that can perform both anatomic and reverse procedures and reset both the glenoid and humeral side of the joint. Surgeon feedback from the first run of cases is very strong, we look forward to doing many more cases in quarters to come. U.S. technology sales grew over 50%, and we continue to have a very robust capital equipment pipeline demonstrating surgeon enthusiasm for their differentiated product offerings and a healthy CapEx environment. Turning now to our outlook. With a strong first half, the transition to a dedicated and specialized U.S. sales channel progressing as planned, continued new product momentum and healthy underlying markets we are raising our full year organic constant currency revenue guidance to 2.25% to 3.25% from the previous range of 1% to 3%. We are also increasing our adjusted earnings per share guidance to $8.47 to $8.59 in from the previous guidance of $8.40 to $8.55. Paul will provide more detail in his prepared remarks. With that, let's turn to our three strategic priorities: people and culture, operational excellence, innovation and diversification. First, in the area of people and culture, which is a key pillar of our strategy, we are doing great things. This is our top priority as a company, underpinning all that we do. And allow the fact that this is truly, and I mean surely becoming a competitive advantage for Zimmer Biomet. Over the last year, we were recognized by leading global publications such as Time magazine and Forbes as one of America's best companies. We're also highlighted by Fortune Magazine as one of America's most innovative companies. And we are multiple great places to work certifications and best workplaces awards all around the world. These recognitions not only cement or status as a best and preferred place to work, but they also help us recruit top performers in key roles while maintaining high engagement and low people turnover. Our people and culture first imperative extends to the acquisitions that we do. When we acquired Paragon 28 just over 12 months ago, our goal was to strike the right balance between integration and preserving the fast, agile an entrepreneurial culture that has been central to the success of Paragon 28. More than a year after the close, Paragon 28 is growing mid-teens with commercial integration largely completed and negligible turnover among key team members. Paragon 28 now represents the template for future acquisitions as we identify a target that makes sense strategically and financially, accelerates our WAMGR and creates a growth platform, has like Paragon 28 has done for Zimmer Biomet. We have successfully brought Paragon 28 into the company, combining the best of both organizations, and we are now very confident of the capabilities in place to do future deals with similar dynamics to this one. Finally, our people and culture first imperative is central to how we're approaching our global commercial transformation. In the U.S., our transition to a dedicated and focused sales organization, one specialized around key call points and growth areas is progressing as planned, 6 months [indiscernible] with less customer disruption and sales force turnover than initially expected. We have confidence to accelerate our transformational efforts in certain territories. We firmly believe that once these efforts are completed at the end of next year, Zimmer Biomet will be a stronger company with a far more productive commercial channel and a more durable, diversified and scalable growth engine. Our second priority is operational excellence. We continue to take actions to drive efficiencies. This includes shifting certain R&D spend to our newly opened global capability center in India, where we can access a strong talent while improving our cost structure. Additionally, we are excited to open a new manufacturing plant in Costa Rica, which furthers our strategy of increasing supply chain resilience while gaining access to lower cost geographies. Construction in Costa Rica is well underway we are scheduled to establish the initial manufacturing lines next year. Lastly, to drive long-term margin improvement, we're aggressively implementing AI, artificial intelligence initiatives to address our operating expenses cost base. Our third strategic priority is innovation and diversification. We remain very excited about our pipeline and the differentiated technologies we are bringing to market. As previously mentioned, we are encouraged by the early launch of our iodine core hip implant in Japan, which is designed to help address the risk of [ periprostheric ] joint infection after total joint replacement. Within the overall 0.5 billion Japanese hip market, this first-to-the-world technology is driving share of wallet and also competitive conversions. Looking ahead, in the U.S., we continue to make excellent progress with monogram and anticipate filing the 510(k) for monogram in the very near future. Beyond these two transformational product launches, we expect to introduce over 50 new products in the next 36 months, with many of these launches being first to the word introductions. While we could not be more enthusiastic about our current product cycle, we are deeply committed to being the boldest innovator in Musculoskeletal Health for years to come. Our role as the exclusive orthopedic investor in the mobility revolution fund, a musculoskeletal venture capital fund launched through a collaboration between [ Deerfield ] Management and the hospital for special survey in New York City is an example of this commitment. Throughout the fund, we'll have the opportunity to invest in disruptive technology ranging from AI and data applications to cartilage repair with the potential to redefine orthopedic care and further our mission to alleviate pain and improve the quality of life for people around the world. In addition to our organic innovation strategy, we are going to continue to look for responsible opportunities to diversify through M&A as we continue to aspire as a company to have a WAMGR weighted average market growth rate of 5% to 6% by the end of this decade. All in, we delivered strong second quarter results made strong progress on our key strategic priorities, and we increased our outlook for the year 2026. The work that we are doing to transform our company, starting with our critical commercial channel is well underway. I'm very proud of the team. I'm very proud of our progress, and I'm very excited with the momentum that we have as we advance our customer-centric strategy and address the most challenging problems in health care. I truly do mean I want to say that the boldest chapters for this company remain ahead. With that, I'll turn the call over to Paul. Thank you.

Thanks, and good morning, everyone. As Ivan reviewed, we grew sales 4% on an organic constant currency basis in the second quarter, driven by strength in hips, high-growth segments of S.E.T. and robotics. We reported GAAP diluted earnings per share of $1.03 compared to GAAP diluted earnings per share of $0.77 in the second quarter of 2025. Higher revenue and lower acquisition-related costs, along with a lower share count were the primary drivers of the increase. Our adjusted earnings per share were $2.07, in line with the prior year quarter as higher revenue and lower share count were offset by the expected dilution from the Paragon 28 acquisition and investments in the U.S. commercial organization. Pricing was an 80 basis point headwind in the quarter, within our guidance range of up to 100 basis points of pricing pressure for the year. Adjusted gross margin was 71.1%, down 120 basis points year-over-year and in line with our expectations. This decrease was driven by increased manufacturing costs, partially offset by geographic and product mix. Adjusted operating margin was 25.7%, down 210 basis points year-over-year and in line with our expectations as we continue to invest in our U.S. channel. Adjusted net interest and nonoperating expenses were $71 million, modestly below the prior year. Our adjusted effective tax rate was 18% and fully diluted shares outstanding were 192.8 million, down year-over-year due to $500 million in share repurchases during the first half of 2026 and including $250 million repurchased during the second quarter. Now turning to cash and liquidity. We had another strong quarter of cash generation, with operating cash flow of $448 million and free cash flow of $308 million, up 18% and 24%, respectively. We ended the quarter with approximately $410 million in cash and cash equivalents. Regarding our updated outlook for the full year 2026. As Ivan mentioned, we now expect organic constant currency revenue growth of 2.25% to 3.25% and up from 1% to 3% previously. We continue to anticipate foreign exchange to be an approximate 50 basis point tailwind to the full year revenue growth. In addition, given Paragon 28 strong performance, it will contribute 110 basis points to full year reported sales growth, above our initial expectation of around 100 basis points. As a reminder, the Paragon 28 transaction closed on April 21, 2025 and is now included within organic growth. We now expect 2026 reported sales growth to be 3.9% to 4.9% and up from 2.5% to 4.5%. The updated revenue guidance contemplates a healthy orthopedic procedural market and new product momentum, balance with the continued risk of disruption from our U.S. and international go-to-market changes and up to 100 basis points of pricing erosion. From a phasing perspective, we continue to anticipate third and fourth quarter constant currency growth rates to be consistent while foreign exchange is expected to be a 50 basis point headwind in the third quarter. Shifting to the P&L. for the full year, we continue to expect gross margin to be around 71%, and we now forecast operating margins to decline a little more than 50 basis points, reflecting the aforementioned investments in our U.S. commercial organization. Within that, we anticipate third quarter operating margins to be down slightly on a sequential basis from the second quarter. Our assumptions for full year net interest and other nonoperating expense and tax rate remain unchanged and at $295 million and 18%, respectively. And as previously announced, we now plan to repurchase up to $1 billion of shares this year, an increase of $250 million from our initial expectation. As a result, we now anticipate having about 193 million fully diluted weighted average shares outstanding for 2026. Taking all of this into account, we are increasing our adjusted earnings per share expectations for the year to a range of $8.47 to $8.59 and versus our prior guidance of $8.40 to $8.55. We continue to expect to grow free cash flow 9% to 11%. We remain focused on delivering solid results this year while continuing to position the company for long-term success. With that, I'll turn the call back over to David.

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

[Operator Instructions] We'll go first to Rick Wise with Stifel.

It's terrific to see all the positive progress and see the quarter's healthy beat and race performance. Of course, I'm inclined to credit your tornado to our efforts is helping in particular, the U.S. sales team get all jazzed up. But share with us, if you would, upon some more of your updated the latest thoughts about the sales force transition. It seems to be going well, but maybe help us better understand what's left to do. The growth implications since it seems to be going better than expected. But also maybe help us understand. It seems like you're making a deliberate choice to reinvest some of the sales outperformance margin outperformance in higher SG&A spend. How do we -- is that a conscious decision? Is there something we need to understand better? And maybe just about the implications going forward in the second half and 2007.

First and most important, I'm going to invite you to the next tornado tour, even a lot of it, five states in 5 days, seeing countless reps, managers and distributors. So [indiscernible] because it's an intense week. I'll tell you the sales force transition, the go-to-market changes are going better, if not much better than expected. And I think that's evidenced in the numbers that we posted for the quarter. We delivered almost 6% growth in Hips ,5.9%. Our technology business, we invested a lot -- added a ton of reps in the channel, grew 53% in the quarter. When you look at S.E.T., there is a lot to unpack in S.E.T., as you know. But our shoulders business or upper extremities business delivered upper single-digit growth. Again, that's the outcome of the specialization changes that we're making, and we're going across the board. Surgical had a great quarter. So again, across the board, the dedicated specialty structure is yielding results, 4.6% growth in the U.S. So you see that the changes that we're making are increasing productivity. The number of cases per week are increasing. And again, we've seen the return on these investments. Beyond the financials, we look at all kinds of people metrics or attrition rates or people turnover rates are the lowest that we have seen in a while. And engagement is very high. We are on track to complete all of these by the end of 2027. So we're going at the right pace. We always say we're going to have three stages. The first one is done, which was the lower or lowest risk. We are now in the second stage, and we're taking our time to understand what is the pace, what is the level of investment that we need to secure. And then quickly going to move into the third stage and again, repeating myself, will be done with this project. We'll have a fully dedicated unspecialized structure by the end of 2027. So everything is on track, and that's what you see us today raising our guidance. In terms of your second question, the SG&A question Look, we said from the one that we're not going to be penny-wise and pump pools. This is not a cost savings strategy, the go-to-market changes in the U.S. This is a growth strategy. We want to have the best sales force in orthopedics, and we're building just that. So to not be penny-wise pump poles. We got retention agreements across the board. We'll obtain the top 6 independent distributors. We have added 200 tech reps or we're adding 200 tech reps probably midpoint into recruiting those 200 reps. We've invested heavily in sales excellence programs across the board. We got what we deem the best comp plan in orthopedics today, which is enabling us to recruit medtech top reps from across the board. We're excited about the people that we're bringing here. So that's why the SG&A is modestly up. We like this investment. We like these investments. We know that are going to help us go at pace derisking the go-to-market changes. And most importantly, we know that these investors in '26 are going to yield better results in 2027. So I love what we see everything on track, and thank you for your question.

We'll go next to Larry Biegelsen with Wells Fargo.

Ivan, you know the recon market question is coming, and you talked about healthy underlying trends. So when we aggregate the data, it looks like the retail market did slow in the first half looks like it slowed in the U.S. and outside the U.S. So my question is, what do you attribute that to? And you know there have been concerns about the ACA since some cities expiring in the Medicaid cuts what are you assuming in the guidance? And I know you framed it is kind of low single-digit percent of your U.S. procedures for both the ACA exchanges and educate but that's still, call it, in the aggregate, maybe 5%. If those declines, say, 20%, it could still be a 1% headwind for you. So how are you thinking about this?

Look, this is my second stint in orthopedics 8 years now at Zimmer Biomet, previously with [ PO ] for a few years. The one thing I've learned is that markets don't change 1 quarter to the other. So we don't look at 1 quarter dynamics. The second half of '25 was stronger than the first half of '26. Hips was very strong in the second quarter. We continue to see Knees, the Knee market in the U.S. around 3% or 4% on so again, we don't look at 1 quarter dynamics. We know that in Q1, there were some acute events. Some of that got resolved in the second quarter. I'm talking about some of the strikes, talking about some of the external changes. We are not concerned about market health. We continue to peg the overall market at 4% to 5%. Otherwise, we'll not be growing 4.6% in the quarter in the U.S. Relative to the ACA, we keep monitoring this. I tell you, for us, the exposure to ACA and exchanges is low single digit. Our single largest payer or our largest payer for [ Simberi ] Medicare. As you know, the population age matters. The average heat page in the U.S. is 65 years old, for [indiscernible] 67. So these are Medicare patients. When you throw on top of that commercial, that's virtually the entire payer ecosystem. So low single exposure to [indiscernible]. We track all cases of data. As the largest orthopedic company in the world, we look at waiting list, which remain unchanged. Average in the top 10 hospitals in the U.S. is 3 to 6 months, that is waiting times. We look at cancellation rates. This is a metric that we started to monitor during COVID. What percentage of times to patients cancel the procedure at 1 point was 40%, 50% for the last 5 years, it's been in the teens. That tells us that when a patient commits to a procedure, 85%, 90% of the time, they will go through the procedure. So that's no change. We look at referral cycles. From the time you go to see a primary care doctor to the time you sketch of the surgery, what is the waiting cycle and again, remains pretty much the same. So you may have some mix elements, Hips are stronger 1 quarter, Knees after 1 quarter. Again, overall, we are not concerned. We like what we see as we look into the second half of the year 2026. And internationally, there's all kinds of events, whether it's tenders, whether it's geopolitical dynamics in the Middle East. So we're not concerned about market health, and that's why we're raising guidance for the second half of 2026.

We'll go next to Mathew Blackman with TD Cowen.

I just want to drill and go down a little bit on some of your latter comments in response to Larry's question and specifically on the hip market, it was a noisy quarter in that market globally. Everyone's growth decelerated with the exception of Zimmer Biomet. So just hoping to get your perspectives, first, on the U.S. market, anything notable in terms of volumes or share or mix? And then OUS, obviously, you've got new products, particularly in Japan, and I appreciate that OUS is a lot of different geographies. But just help us understand the opportunity OUS for the Zimmer hip franchise and the health of underlying key underlying markets there.

Well, let me just piggy back to that first comment that Zimmer Biomet did grow in the quarter. Again, I'll tell you -- that tells you that it's all about execution. The markets are not a problem. The innovation story is compelling here. So as long as we continue to execute, our expectation is that we'll continue to deliver the performance that we can deliver. Relative to new product hits and the opportunity outside of the U.S. and here in the U.S., let's start with iodine. It's one of the most transformational products that this company has launched. Very [indiscernible] infections are the #1 cause for readmissions. Infection is a multibillion dollar to all health care systems. Japan is the second largest hip market outside the U.S. roughly $0.5 billion in value. And the launch has gone much better than expected. Candidly, I mean, we're struggling to supply at the patent supply. The demand is very high. we expect to convert the lion's share of the entire market over to iodine core devices. We get a 40% premium every time that we move from noncoated, non-iodine hip to a core hip, we are converting not just Zimmer Biomet customers, but also competitive accounts. So the launch is going really, really well. We are in active conversation with the FDA to understand the pathway to bring this to the U.S. and we've got a pipeline of countries all over the world where we're going to be bringing this rapid technology. Here in the U.S., look, we don't have idea today, but we do have the hip triple play, what we call the hip triple play platform, Z1, HAMMR or Surgical Impactor and OrthoGrid. All three of them are taking market share, also them are going better than expected, and that's why we delivered 5.9% growth in Hips in the U.S. this quarter. So that's hips, I'm not going to ramble through the rest of the portfolio, but we have an innovation story. And again, I'll leave you with one word, execution. We got to execute better. That we're making the go-to-market changes. And then we'll be able to deliver quarters like this, if not much better than this.

We'll go next to Patrick Wood with UBS.

Ivan, you obviously said there's a lot to unpack and set. So I'd love to just drill into that a little bit better. Obviously, a bit of a sequential acceleration on that side. I know there's a lot going on between shoulder and sterno closure. So anything you can give us a sense for how -- what drove that acceleration? How you're thinking about that for the balance of the year and moving into 2027?

Thanks, Patrick. We love this business. We delivered a 4% plus in the U.S., we're slightly behind mid-single-digit growth globally in set some timing with Sports Med that is going to move on to the second half. As you heard in my prepared remarks, Paragon 28 is growing close to 50% or upper extremities business growing strongly, close to upper, if not up actually upper single digit or the CMFT business is growing in the teens. I don't know how many quarters in a row. This is driven by our thoracic business the opportunity here is $2 billion plus when you move from wires to refixes or wires 3D fixes from wires to refixation for standard closure. So it's a standard of care change -- so again, CMFT growing in the teens. Sales on upper single digit, Paragon 28, still a growth at almost 15%. We expect bigger growth in the second half. So we like where we are with [indiscernible]. We do have two headwinds. We've been very candid about the two headwinds, those being trauma and restorative therapies. Actually, if you take those out, the U.S. growth would be solidly in the upper single digit year-to-date. So we're addressing the changes that we need to make in those two businesses, trauma and restated therapies. Net-net, the second half of 2026, we expect to have a much better asset growth profile. But again, very pleased with the progress and congratulations to the team, especially Paragon 28 for an stellar performance in the second quarter.

We'll go next to Vijay Kumar with Evercore ISI.

I guess I'll focus on Bone Tech and [indiscernible] north of 20%, really strong. How much of this is being driven by Zimmers tech strategy resonating in the marketplace versus any onetime or trade? Did you benefit from any bone semen competitors being off the market? If so, could that be a comped when you think about?

Look, there's a lot in this other category. I particularly don't love the name other for everything. The lion's of the growth is technology. Technology in the U.S. grew 30% in Q1. in the second quarter grew 53%. As we look at the second half of 2026, the pipeline technology, both in the U.S. and actually the U.S. is very strong. So I'll tell you, the lion's share of the growth is technology. Our bone cement business is a tiny fraction of that category. There were some onetime events in some international markets. But no, the growth here comes from technology, number one, and surgical, I referenced the surgical, the first quarter 2026 and the second quarter has been much stronger than in the past. That is part of our ASC strategy. So now it's certainly not bone, it's technology. And I'll tell you, there's two different dynamics here, one internal and one external. On the external front with technology, the CapEx environment is very healthy. As you probably heard now from all competitors, we all have a strong pipeline of robots that we're selling. The CapEx, again, is very, very healthy, mostly in the U.S., but in some countries out of the U.S. And the second dynamic is here internally. We have the most comprehensive suite of solutions. Whether it's handhelds that are cordless, whether it's city scan devices, non-city scan devices, mixed reality, large footprint robotics, if I can speak, whether it's the launch of ROSA Optimize, whether it's ROSA Shoulder, it will take an hour to go through it. We've got a best-in-class portfolio in technology, and we're in the early stages of gaining the market share that we can gain with our technology.

We'll go next to Travis Steed with Bank of America.

I'm looking at kind of comp-adjusted growth. Q2 was a nice acceleration. If you end up beating the guy in the back half, you'll have another acceleration in the back half of the year on the total company growth. Is that the sales force transition getting better and the execution getting better? Is it new products? Just curious what's driving that kind of acceleration over the course of the year. When you look at '27, what gets better, what gets worse? Is the sales force acceleration? Or is the sales force, less of a headwind than '27 or new products more of a tailwind? Is there -- is pricing better or worse in 2027? Just trying to think about the factors of '27. We can make our own call on kind of market growth rates, but kind of the Zimmer specific factors on '27 that you could kind of call out what is better or worse.