Zimmer Biomet Holdings Inc

NYSE:ZBH

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 5, 2025. [Operator Instructions]

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

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2025 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our 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 first quarter earnings release, which can be found on our website, zimmerbiomet.com.

With that, I'll turn the call over to Ivan.

Ivan?

Good morning, everyone, and thank you for joining today's call. I would like to start today the way that I always do by taking a moment to recognize and to some gratitude to the over 17,000 Zimmer Biomet team members who move our business and mission forward every day.

Thank you for your tireless work, your strong performance. And most importantly, thank you for your commitment to serving our customers and our patients. As I always say, the Zimmer-Biomet workforce and the culture that we have truly is 1 of our key competitive advantages.

During my prepared remarks this morning, I'm going to cover 4 things. First, the first quarter results of secondly, our drivers of performance for '25 and beyond. Thirdly, the usual update on our 3 strategic priorities, and then I'll close with an update on the recently completed Paragon 28 acquisition. After this, Suki is going to cover our financials in more detail, and we'll make sure to leave plenty of time for questions at the end of the prepared remarks.

To begin, we grew first quarter sales 2.3% constant currency, with standard results in U.S. hips, which were up nearly 4%, a mid-single-digit growth in SEP. This performance was against the backdrop of 1 less selling day in the quarter which, as we mentioned in the past, represented a meaningful headwind. The U.S. hip performance highlights the opportunity with our magnificent 7 product cycle and the impact that these products will have in accelerated position as the global leader in Hips and knees.

Specifically in the U.S., the combination of Z1 or triple taper hipstemfor direct interior procedures, Her or Surgical Impactor and orthogrid or AI-driven surgical guidance system for total hip replacements has put on the offensive once again. Notably, roughly half of Zen users in the U.S. are conversions from competitive accounts, a trend that we expect to continue.

In U.S. Knees, we expect personal or cementless knee and the Oxford partial cementless knee to drive accelerating growth throughout 2025. We have now has 25% penetration with cementless knees in the U.S. and expect that trend to accelerate now that we have performed widespread customer and sales rep training and have ample supply to drive increased penetration. Similarly, the European launch of Persona Revision, the leading revision implant in the U.S. should continue to gain traction throughout the year.

Looking at 2025, we are maintaining our full year organic constant currency revenue growth expectations of 3% to 5% and which excludes contribution from the Paragon 28 acquisition. We anticipate Paragon 28 to contribute 270 basis points to sales growth in 2025. And -- we are updating our 2025 adjusted EPS guidance to $7.90 to $8.10 from the previous 15 to $8.35, which contemplates first, the impact from tariffs being fully offset primarily by the weakening of the U.S. dollar, shift in discretionary spending and other operational strategies that our team is undertaking. And then secondly, modest dilution of less than 3% from the Paragon 20 acquisition as was previously mentioned.

Suki is going to provide more detail on guidance in his prepared remarks. As we progress throughout 2025, our priorities have not changed. We're going to continue to over index on people and culture, operational excellence and innovation and diversification. Firstly, in the priority of people and culture, we're going to continue to ensure that we have the right people in the right jobs. To that end, at the senior leadership level of the organization, we recently added 2 new leaders to take over the key functions of our strategy, innovation and business development as well as communications. In addition to that, we have also hired new commercial leaders in key countries in Asia Pacific, have made changes in U.S. general management in key geographies and have hired strong capabilities in pricing.

As we move towards the end of the year, we plan to make additional changes in the U.S., knowing that we got to do better. ensuring that every territory is led by a strong player who is solely focused on driving Zimbamed's performance in the assigned geography. Secondly, in alignment with our strategic priority of operational excellence, we remain committed to elevating our performance in the very critical U.S. market and to that end, are making changes to optimize our U.S. sales channel.

We're going to continue to specialize our [ SP ] set field team to ensure that we're capitalizing on the high growth opportunity that this market represents while bolstering our leadership position in the [indiscernible] through expanded product offerings and capabilities and are also meaningfully expanding our robotic platforms through innovation and committing additional commercial resources.

As a reminder, all of these changes are contemplated within the giving guidance range for the year from both a revenue and EPS standpoint. In addition to driving sales growth, we continue to prioritize margin improvement while also reducing inventory needs. That way, we can increase our free cash flow generation. We like what we are seeing when it comes to DOH, days on hand and reduction that we've seen in the and expect to move from around 370 days today to a much lower number in the quarter years to come. As a reminder, our DOH number was north of 400 early in 2024. In our third priority of innovation and diversification, now that we have no gaps left in our core portfolio after the introduction of the Magnificent 7 products, we are now refocusing our innovation efforts in addressing unmet needs within musculoskeletal health and adjacent areas.

4 key problems that we're going to solve for. Number 1 is awareness. Less than 5% of patients address their osteoarthritis. To empower patients to seek treatment, we're executing a bold direct-to-patient program in partnership with our Chief Movement Officer, Arne worsen. During the first quarter of 2025, we launched our new Urban campaign. And we continue to partner with key societies to educate patients around the world about joint replacement, while also expanding our digital marketing program in key geographies and territories.

The second part we're trying to solve is safety. Very prosthetic joint infections or PDIs occur in roughly 1% to 2% of primary cases. and around 4% to 5% of revision joint replacement procedures and can be devastating. As a matter of fact, mortality rates, once you do get these PDIs can be higher than some cancers. We're committed to addressing this ametnib through technology such as iodine surface-treated implants to prevent bacterial colonization and biotonformation. Excited to be launching the first iodine surface-treated hyperemin Japan later this year. And at some point, it will come to the U.S. where the opportunity is pretty large.

Beyond iodine surface devices with investing in technology that aims to drive faster surgeries to reduce exposure to infection, while in the operating room, our OneTeam acquisition executed late 2024 is an example of this strategy. The third key area where we're going to focus our innovation efforts is around efficiency. One aim of our innovation engine is to lessen the bar of care for all key stakeholders by capturing patient data with smart implants, making a city scan an option for robotic implants with our platform ROSA. And by reducing surgical times through utilizing AI technologies such as Orthogrid, we target to improve the quality of life for patients reduce the cost of care for payers and providing doctors more time to perform other surgeries.

We believe we can be faster and smarter when it comes to the episode of treatment for the multiple patients that can benefit from our devices. The fourth key area where we are focusing our innovation efforts is around outcomes. -- we strive to continually improve patient satisfaction. With the recent PMA approval of the Oxford partial cementless knee, patients in the United States now have access to a partial knee backed by robust clinical data. data on nearly 15,000 patients from the National Joint Registry for the U.K. demonstrated 93% survivorship at 10 years.

This is a statistically significant improvement over the 90% with cemented partial implants. We have now trained several hundred customers on Oxford Partial cementless and expect robust adoption as we exit 2025. In addition to internally developed solutions, we will also look to address these needs through inorganic opportunities that fear strategic, financial and risk return metrics and we do remain committed to our aspiration of achieving a 5% Wingard weighted average market growth rate environment by the end of 2027. As a reminder, today's Wingard AzimaBiomed is around 4 to 4.25. We have built best-in-class integration capabilities at Zimmer-Biomet and are ready to take on the right opportunities at the right time.

Speaking of successful integrations, I want to end today discussing the closing and integration of the Paragon 28 acquisition. As of April 21, Paragon 28 is now part of the Zimmer Biomet family and we're very proud of this achievement. This successful integration of the acquisition has been and will continue to be a top priority. And I'm very happy to report that Paragon 28 Chairman and CEO, Albert DaCosta as well as his entire senior commercial leadership team have now joined the Zimmer-Biomet family.

Abertand the team have created a highly energetic, entrepreneurial and committed culture which we intend to preserve here at Zimmer Biomet. I could not be more excited to have the Paragon 2018 on board, allow what they bring to Seb and I look forward to the ongoing journey. In addition to adding the senior leadership of Paragon 28, the entire U.S. sales channel of Paragon 28 has now signed up for the Zimmer-Biomet journey, creating minimal disruption to the success that they have achieved over so many years.

In conclusion, we are very proud of the progress in our organization, and we look forward to continuing to execute and build momentum has moved throughout the year. A lot of the fact that were impacting the lives of millions of people, and I'm deeply inspired every day in Norway, the Mathias and I are leaving the Zimmer-Biomet mission of Alivium pain and improving the quality of life for people around the world.

And with that, I'll now turn the call over to Suketu. Thank you very much.

Thanks, and good morning, everyone. As Ivan mentioned, we closed a solid quarter that demonstrated the early impact of our new product cycle. Despite the selling day headwind, we grew sales 2.3% on a constant currency basis. delivered adjusted earnings per share of $1.81 and generated $279 million of free cash flow. Looking at this quarter's results, unless otherwise noted, my statements will be about the first 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 guidance commentary will exclude any projected impact of the recently closed Paragon 28 acquisition. .

Net sales were $1.99 billion, an increase of 1.1% on a reported basis and 2.3% excluding the impact of foreign currency. Consolidated pricing was 10 basis points positive, marking the fifth consecutive quarter of positive pricing. Our U.S. business grew 1.3%, driven by nearly 4% growth in both hips and ST. As Ivan mentioned, we continue to make changes to bolster our U.S. performance. This includes new leadership in key geographies, sales rep specialization, expanding our ASC offerings and committing additional commercial resources in robotics. Internationally, we grew 3.7%, driven by mid-single-digit growth in knees and high single-digit growth in ST. Our SET business continues to outpace knees and hips. And with the closing of the Paragon 28 transaction, it will now be larger than our hip business. This aligns with our strategy of diversifying into faster-growth markets.

Global Hips grew 2.4% with the U.S. growing 3.7% and international growing 1%. We are particularly pleased with the U.S. results given the selling day headwind -- as Ivan mentioned, our U.S. performance was driven by the combination of Z1, HAMR and Ortho grid. The Z1 launch has exceeded our expectations, and we have seen rapid uptake from both existing customers and competitive accounts. Global Knees grew 1.9% in the quarter with U.S. growing 0.2% and international growing 4.2%. We continue to anticipate an acceleration in U.S. needs throughout 2020 and driven by increased penetration of our persona osteo else and the full launch of our Oxford Partial cementless need.

Next, our SET segment grew by 4.9%, led by CMFT and Sports growing in the low teens and high single digits, respectively. This marks the sixth consecutive quarter of at least mid-single-digit growth in SET, a trend we expect to continue. Finally, technology and data, bone cement and Surgical declined 3.5% and due to tough comps from the prior year and a mix shift towards ROSA volume-based placements versus outright sales. Turning to our P&L.

We reported GAAP diluted earnings per share of $0.91 compared to GAAP diluted earnings per share of $0.84 in the prior year. This increase was driven by higher sales and lower restructuring charges. On an adjusted basis, we delivered diluted earnings per share of $1.81 compared to $1.94 in the prior year. As previously guided, earnings were down due to higher COGS capitalization from 2024 and higher upfront investments for new product introductions, higher interest expense and an FX headwind of about $0.03. Adjusted gross margin was 71.5% and adjusted operating margin was 26.2%, and both lower than the prior year, but in line with expectations. Adjusted net interest and nonoperating expenses were $59 million, above the prior year driven by higher debt and higher interest rates on refinance debt that matured in 2024.

Our adjusted tax rate was 18.2% and fully diluted shares outstanding were $199.7 million, down year-over-year due to the share repurchases, of which we executed another $230 million during the quarter. Turning to cash and liquidity. We had another strong quarter of cash generation with operating cash flows of $383 million and free cash flow of $279 million, representing robust growth versus the prior year. Our working capital initiatives targeted towards inventory reduction continue to pay off as we reduced days on hand by almost 47 days compared to Q1 2024, ending at approximately 370 days of inventory on hand. We ended the quarter with approximately $1.4 billion of cash and cash equivalents which includes the proceeds from debt issuance to support the acquisition of Paragon 28.

Regarding our outlook for 2025, there are a number of moving parts that impact our guidance. First, at recent rates, FX is now expected to be a tailwind to our full year outlook. Additionally, we incorporate our initial estimate on the negative impact of global tariffs as well as the closing of the Paragon 28 transaction into our guidance. When accounting for these changes, we now expect 2025 reported sales growth of 5.7% to 8.2%. EPS $7.90 to $8.10 and free cash flow of $750 million to $850 million. On revenue, we are reiterating our 2025 organic constant currency revenue growth of 3% to 5%. Inside of this, we expect average selling prices to be roughly flat for the full year and selling day differences to be a modest headwind to growth. With the recent weakening of the dollar at current rates, we anticipate FX to be flat to a 50 basis point tailwind in 2025.

We an improvement from our prior guide. On Paragon 28, we anticipate the acquisition to contribute about 270 basis points to growth in 2025, resulting in consolidated reported revenue growth expectations of 5.7% to 8.2%. Regarding the cadence of expected revenue results. We continue to anticipate that second half organic constant currency growth will be higher than the first half due to more favorable comps related to the 2024 ERP challenges, new product uptake and no selling day impact. We expect second quarter organic constant currency growth to be slightly higher than the first quarter constant currency growth. which incorporates tougher year-over-year comps, the shift of orders from the second quarter into the second half in certain emerging markets inside of EMEA and continued optimization of the U.S. channel.

Now addressing tariffs. Let's just say that the situation remains fluid. Based on current administration proposals, we anticipate a $60 million to $80 million headwind to operating profit in 2025. We with the majority of the impact in the second half of the year. This estimate contemplates our latest view of mitigation efforts currently underway and that the announced European reciprocal tariffs will go into effect after the 90-day stay period. I will note that our 2025 impact should not be used as a run rate for 2026 due to a variety of factors and that our estimate around the impact of tariffs in 2025 could change as the macro environment continues to unfold. Given tariffs and the Paragon 28 acquisition, we now anticipate full year adjusted operating margins to be down approximately 100 to 150 basis points versus 2024. The second half adjusted operating margins up slightly from the first half and the fourth quarter still having the highest adjusted operating margin.

Adjusted net interest and other nonoperating expenses are expected to be approximately $305 million, reflecting borrowings for the Paragon 28 acquisition and higher interest rates on refinance debt. 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. We project the 2025 tariff headwind to be offset primarily by a combination of the weakening U.S. dollar and corresponding FX tailwind, a decrease in discretionary spending and other operational strategies. Given these dynamics and factoring in the dilution from the Paragon 28 acquisition, which is in line with our original expectations. Our fully diluted adjusted earnings per share is expected to be $7.90 and to $8.10. We now anticipate 2025 free cash flow of $750 million to $850 million, down from $1.1 billion to $1.2 billion due to tariff-related headwinds and onetime costs associated with the recently closed Paragon 28 acquisition.

This reduction in free cash flow is projected to be roughly 50-50 between tariffs and the closing of the Paragon 28 deal. And again, the Paragon 28 impact should be onetime in nature. I would like to close by thanking the entire ZB team for their continued hard work and dedication. We continue to make meaningful positive changes across the business and continue to invest to accelerate long-term growth while navigating an uncertain environment.

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

Thank you, Siki. Operator, let's open up for questions. In order for us to take as many questions as possible, please limit yourself to 1 question.

Operator, please go ahead.

We'll take our first question from Robbie Marcus with JPMorgan. .

Congrats on the good quarter. I want to start on the topic du jour tariffs, I would say that's a much smaller impact than most we're expecting on EPS. So maybe Suky, if you don't mind walking through what the mitigation efforts are, how you're offsetting the tariff headwind, and you made the comment about the 2025 run rate is not a good exit trajectory to calculate 26 tariffs. Maybe you could just expand on that and help us understand what the right run rate is.

Yes. Robbie, thanks for the question. Yes, it is the topic de jure, isn't it this season. I would say that we -- first of all, going back to some of our earlier comments from the beginning of the year, Recall that the majority of our production and manufacturing is actually done in the United States. And that's been the case for quite some time for Zimmer Biomet. So that overall lower our exposure, some bit. But we have already taken some early steps to mitigate the impact of tariffs. A couple of the big ones are optimizing our view of country of origin as well as transfer pricing. .

Secondly, we've made adjustments to our sourcing through our dual sourcing and redundant sourcing where it makes sense. And then thirdly, we've moderated some of our discretionary spend in areas that don't really impact near-term or long-term revenue growth. So those are some of the levers that we're pulling to overall lower our impact. As we said in our scripted remarks, we expect that to be the impact of tariffs this year to be somewhere between $60 million to $80 million. The impact in Q2 is going to be quite small, less than $5 million over -- a little over half of the impact will be in Q4. So I think that gives you a good view into the cadence of how the tariffs are expected to impact gross margin and operating margins and overall profit for this year.

As we move into 2026, I'd say it's difficult to predict exactly where tariffs will end up. There are a lot of moving parts, as you know, the impact on our COGS gets capitalized and will roll into future periods through inventory. So that's a potential headwind, other headwinds could be you obviously have the annualization next year, full year of tariffs versus a partial year this year. And then we're also assuming that the 90-day day period expires in early July, which would be a headwind into next year because you wouldn't have that 90-day cause. There are some tailwinds, however, as we think about 2026. The first thing is we're going to continue to look at potential sourcing changes to continue to lower that overall number, potentially some portfolio optimization exchanging portfolio opportunities across knee, hip and set, where it makes sense. And then, of course, we're going to always, as we've done, look at potential discretionary savings on discretionary spending savings, I should say, to help offset tariffs.

So while 26% is still a moving barge, Overall, you could expect it to be higher because of those tailwinds than what we're seeing in '25. But I will say I'm very, very happy with how the team has reacted even before the tariffs were put in place to start to plan to get us in a position to optimize things. So overall, we do see it as a manageable headwind to this year. And as you'll see from our guidance, excluding the impact of Paragon 28, which is right in line with expectation, we are fully offsetting the tariff impact.

I'll take our next question from David Roman with Goldman Sachs. .

I'm struggling a little bit to put some of the moving parts together in the quarter and the outlook. I certainly appreciate that Q1 matched your expectation was very consistent with what you presented in February. -- but the absolute level of growth is still below what we saw last year pretty much in most of the quarters before ERP disruption. At the same time, you're highlighting the positive impact of new products countered by what appears to be performance-related commercial leadership changes. But how long should it take to digest all these variables? And what are you seeing specifically today but you can exit the year above 5% growth to get to the midpoint of the guidance you're issuing for organic revenue. .

David, thanks for the question. So let's maybe unpack this part by part or piece by piece I'll start and Skibamains, feel free to add. So I start with Q1, if you add to Q1, the 2.3% constant currency, if you had the impact of the 1 day less in Q1 of '25 versus 24. That number is between 3.5% to 4%. So close to the midline or a mid-single-digit growth commitment. Q2, we do have some timing events in EMEA, Europe, Middle East and Africa, that some orders that are getting later in the year. We do have the most difficult comp versus Q2 of 2024. So recall that we grew 5.6% ex FX near 6%. And we do have still some new products that are not in a full launch mode.

The second half of 2025 is mid-single-digit growth. based on comps to your point on the ERP, the vac that we had in '24 and just a lot of new products happening in the second half. We're going to see of partial cementers here in the U.S. at full speed. We got personal revision in Europe at full speed. We got many launches happening in the CE category in the second half. And we do have personal at that point, probably close to 30% penetration in the U.S. So it's a lot happening in the second half of 2025 when it comes to new products. And we feel extremely confident that those new product introductions are going to materialize.

We're tracking the number of product trainings that we do. We are weekly tracking supply chain dynamics, making sure we have the right amount of sets in the market. We're tracking our contracting capabilities, making sure that these new product introductions are going to happen. So again, net-net, we are extremely confident that new product execution, new product launch execution is going to materialize. So when you look at that, and again, in the backdrop of easier comps, we feel very confident that our current guidance of 0% to 5% is going to get executed upon. And hopefully, a quarter from now, we're talking about a higher commitment in terms of where we fall within the guidance. So again, anything to add?

I think that's well Sunrise.

We'll take our next question from Chris Pasquale with Nephron.

Ivan, you highlighted a nice performance in U.S. hits, which was certainly encouraging. I just wanted to clarify -- when you say that 50% of Z1 users today have been competitive accounts, are those true new to Zimmer surgeons? Or does that include surgeons who were maybe already customers on the new side? And then just to put a finer point on that second half growth driver list you just ran through should we expect to see the impact from new products on the knee side to come through as soon as third quarter? Or is it going to be later than that? .

Chris, I'll start with the second question. I do believe we're going to see some of the uptick of new products in is within Q2 here in the U.S. So I don't think we need to wait to or think we need to wait until Q3. However, obviously, given the quantity of new products in the second half is going to be higher in the second half. But you should expect to see some net growth momentum in the U.S. with Early in the quarter, we've already seen that. Relative to your first question on hips, these are true new customers. There might have been some customers that we lost years ago. But yes, 50% of the growth in the U.S. in hips that 3.7% is through new conversions, customers that are not users of hips for simian [indiscernible] and we expect that number to continue to grow as we get into Q2, all the way through Q4 of 2025.

We'll take our next question from Matthew O'Brien with Piper Sandler.

I wanted to ask a little bit about pricing. So last 4 quarters of pricing have been up 80 basis points, 70, 60, and now up 10 basis points. And I'm just wondering if -- and that plus 10 is off a flat Q1 of '24. So -- are we to the point now where the tailwinds we're seeing on the pricing side are largely behind us? Are we going to start to see that roll over and get negative like we've seen historically? And I guess with all these new products coming out that are higher priced than this ASP tailwind you should be getting, is it going to make it more difficult to really sell those products in an environment where pricing starts to get a little bit tougher.

Yes. So Matthew, thank you for the question. This is Sue. First, I'd start with, we entered the year with the guidance assumption that pricing would be flat to down 50 basis points. So delivering on the first quarter at positive 10% is a little bit better than what we originally expected. And therefore, we're improving our outlook on overall pricing to be flat for this year. I would say, as compared to 2024, you're right, the number perhaps step down, but that's something we anticipated, as I said, with our initial guide.

A number of sort of onetime items outside of the U.S. that we're creating a much more favorable pricing environment, which we did not expect to repeat in '25 and beyond. And so you're seeing that play out. As we move forward, again, we -- the majority of our business is contracted. So we have good visibility into how we expect pricing to operate or perform for the rest of this year, and that gives us confidence in that outlook of being about flat. Then as we move forward, we continue to see the pricing environment be relatively stable compared to our historical norms. And that's really one you're seeing really good pricing out of our new products and those pricing that pricing hold. Two, I think you're seeing a much better competitive sort of response to overall pricing. And third, just internally from a capabilities and governance standpoint, we're a much better company when it comes to price than we have been, in fact, even incenting to ensure that the field force operates with a strong sense of margin in addition to revenue growth.

So those are all the factors that give us confidence that, that pricing is stable, at least in the near term. relative to tariffs, I think it's too early to call at this point. We're closely monitoring input costs. We're closely monitoring third-party contract manufacturing costs have not seen anything out of the ordinary on either one of those fronts. We are looking ourselves at potential opportunistic price increases across our portfolio. I would not count on that as a major offset to overall tariffs, but we're going to be opportunistic where we see a light there. So really [indiscernible] That's our view on pricing just to bring it back. We're doing a little bit better than our original guide for 2025.

Thank you. We'll go next to Matt Taylor with Jefferies.

I did want to just follow up on the tariffs and clarify. When you said the $60 million to $80 million headwind for 2025 includes some mitigation. I guess I just wanted to ask if you could give us about what the headwind would have been without mitigation? And maybe just talk through some of the main sources of the headwind, so we can understand assuming things continue to change how your exposure may continue to change with the policies around different geographies?

Yes, Matt. Thanks for the question. So again, the mitigations have really been around, again, optimizing across our portfolio for a country of origin, which is the key driver that determines tariffs in addition to transfer pricing. So actually, where you produce is directionally indicative of overall tariffs, but it does come down to country of origin and transfer pricing. So our internal teams have done a really nice job of driving optimization there. And secondly, we've made changes in how we source product.

China remains our largest exposure when it comes to tariffs. So we put a good bit of inventory into the country before the tariffs were enacted. And secondly, we're evaluating continuing a source for China in -- from Europe as opposed to the United States, where it makes sense. So those are some of the levers that we're pulling. So again, we're just looking for any opportunity we can to offset that. relative to, again, where is the impact? I'd say China is the largest impact that's both products shipping into China as well as product coming out of China into the United States.

So as we see movements in policy there are tariffs that could be a large driver of future changes on overall tariff profile for the company. But yes, so overall, I think we're pleased with where we started. I think there's more work to be done relative to our ability to mitigate future tariffs.

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

Just Suky, one clarification. Your commentary on 2026 wasn't clear on the net impact of the tariffs and the and the tailwinds you mentioned? And just for my question, Ivan, if Stryker's recon growth, particularly, its U.S. knee growth, continues to be a lot higher than the other 3 competitors. And we can all see that, obviously. We did a lot of channel checks around AAOS, and we continue to hear that the difference is really just still Mako. So how much do you think that's the case? And what are you doing to make ROSA more competitive? Talk about the 3 new modalities coming in and the implications. .

Sure, Larry. I'll start with that. And I don't know if Suky, you want to provide more clarity on 2026. So the thing we said planning around 2026 tariffs. Hey, we got to do better when it comes to our new performance in the U.S. Nobody here is pleased with 0.2% growth in the quarter. That said, none of us are surprised about the new performance or the number in the quarter. We knew that there was going to be a phasing with nice performance in the U.S. And we're very confident the second half is going to be better.

Relative to ROSA, we've done 350,000 surgeries with ROSA as we launch. We are the #2 player in the U.S. We continue to see acceleration of penetration quarter-by-quarter. A couple of weeks ago, we submitted our 510(k) submission a 90-day approval submission. What we call Rose V15. We believe that's going to be a dramatic transformation of ROSA in itself. The value proposition of ROSA M15 is going to enhance surgical accuracy and repro visibility by improving soft tissue laxity, a different user experience.

The platform has the ability of doing a Kinamericaknee. It has a new auto balance procedures faster, it's simpler. It's streamlined. So we believe there's going to be an improvement on the current version of Rosa. On top of that, right after, we're going to be submitting at some point for the Cityscaplatform as well as down the road a different part platform. As we continue to evolve ROSA, we also have partnerships with think Surgical for those surgeons and some of our competitors do like CT scanning. So we have that optionality as well through our partners within surgical.

So look, I don't think the robot is the main reason of why we are behind when it comes to knee performance in the U.S. It has to do with the fact that we have the largest share and the fact that we're going to do better when it comes to commercial execution, and we're going to prove upon that. And as I mentioned in my earlier answer, I do think already within Q2, you're going to start to see some improvement in U.S. needs. And as we get into the second half of 2025, I think you're going to see acceleration when it comes to our U.S. knees.

Yes, Larry, thanks for the question. I'll go back to some of my earlier comments and maybe try and rephrase the -- so I did say that 2025 should not be used as a run rate for 2026 and that you should expect 2026 tariff impact to be higher than 2025. And we're not ready to size that at this time because there are a number of puts and calls in and uncertainties that would prevent us from size in that with precision at this point. But there are some headwinds and tailwinds to help shape that discussion. From a headwind perspective, First, you're going to have annualization, right? So you only had tariffs for part of the year this year. So assuming you have for a full 12 months next year, that would be a headwind.

Secondly, like most companies, the tariffs impact cost of goods that gets inventoried at some level and then capitalized and rolled into the P&L in future periods. That would be a headwind as we moved into 2026. The third element is we're assuming that the retaliatory tariffs go back in place once the 90-day pause period ends in July of this year. So assuming that, that pause period doesn't happen in 2026, that could also be a potential headwind. Again, the environment is fluid, but we're giving you what we know based on the most recent assumptions and announcements from the administration.

From a tailwind perspective, we're going to continue to look at sourcing changes that could minimize or improve the tariff impact. Secondly, we're going to look at portfolio optimization. So certain products, for example, in our knee portfolio are sourced from different locations. We may choose to emphasize 1 product versus another 1 based on tariff profile. And then the third 1 is we're going to constantly, as we always do, look at discretionary spending to potentially offset tariffs. So again, we're not ready to size 2026. I don't think any company has been out there sizing '26. But what we did want to do is give you some of the headwinds, tailwinds that could shape that profile for next year.

We'll take our next question from Josh Jennings with TB Cowen.

Thanks for Ivan, was hoping your team could help us think through Zibi's performance and in the ASC versus the hospital channel. Should we be thinking that set and joints are performing kind of relatively similar in those 2 channels? Or is 1 -- is to be outperforming in 1 versus the other. Just wanted to get a handle on that as this ASC migration is taking a bigger interest?

Thanks a lot, Josh. So roughly today, I would say 20%, if not slightly above 20% of our sales here in the U.S. come from the ASC environment. used to be somewhere around 2% to 4% prior to Covis. So definitely, there's been a shift. We continue to believe that the number is going to grow. The data that we are translating shows that between 40% to 60% of sales in the next 5 years are going to come from an ASC environment. We like the trend with the introduction of the magnificent and some of the acquisitions we've done in SET Paragon 28, but before that, within the sports medicine, we believe we are well positioned to continue to grow above market in that ASC space.

In terms of what are we doing better? We are historically have been and are the #1 reconstructive company in the ASC space for nice and hips. And so we've done better, but we're growing now at a faster patient set, so notice in the quarter, we grew globally said 5%. It's the sixth quarter in a row that we grow and said that mid-single digit or above. frankly, that number would have been higher in the quarter, but we had to deal with some onetime events in -- or sports medicine business in the U.S. So growing at a nice clip at a faster and pacing asset, and we believe that's going to accelerate as we exit the year. Thanks for the question.

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

I wanted to ask about Q2. The slightly higher comment. Was that higher than the 2.3% constant currency? Or are days adjusted and then any quantification on the shift of orders from Q2 into the second half? Is that worth 50 basis points or more or less? .

Yes, it's off of the constant currency number, the $2.3 million number we posted in the first quarter. And we're not sizing the overall impact for those orders. We're not really giving quarterly guidance, but we just wanted to give some directional shaping for your models.

We'll take our next question from Joanne Wuensch with Citi.

Your other category was relabeled technology data, bone cement and Surgical. I'm always curious when people change the name of things. curious why you chose to do that? And how do we think about those bits and pieces? Is this an area also for when you talk about portfolio optimization or M&A?

On -- we like the new name better than the other name, Pontintended, used to be called other. And we have in their bone cement, we have surgical and then we have enabling technologies. And enabling technology is 1 of the fastest-growing businesses at Zimmer-Biomet. So to bucket that into the category of other is probably not appropriate. So that's the reason why we changed the nomenclature on the category.

Our other category as you saw in the quarter, actually declined. That has to do with heavy comps versus Q1 2024, so we grew that category around 10%, 12% in that quarter. Not much to read into the data point other than heavy comps. We continue to see robotic adoption being very, very high. but we're installing more units in the quarter than selling. So a quarter ago, we had a lot of sales in -- for ROSA. And this quarter, we had a lot of installs. So that's the main reason why we declined in the quarter. And that's the rationale behind the nomenclature change.

Thanks for the question.

We'll go next to Catlin Cronin with Canaccord Genuity.

Just to touch on the Paragon acquisition. I mean any kind of early news there and kind of updates on the time line for the integration.

Well, it's going -- Calin, thank you for the question. It's going far better than expected. So we had 2 or 3 goals at the onset of the journey. Goal number 1 was to retain the leadership team Alberta Costa, former Chairman and CEO of Paragon 28, their Chief Commercial Officer, Barb and the entire again, commercial leadership team checked on that, all of them have signed with Zimmer Biomet. Goal #2 was to have minimal disruption in the field close to the customer. They have around 250 sales reps that have been growing that business strongly in the teams.

We wanted to make sure that we could sign every 1 of them and checked on that as well. So all of them have transferred over to Zimmer Biomet. And then goal number 3 was to preserve the innovation journey, the innovation platform. They have a lot of new product launches happening and we're not disrupting any of them. We're going to keep the design center for Paragon 28 other in Denver. We're not integrating their processes into Simabaameout of the gate. We want to make sure that we're doing things quickly, safely by quickly. So I will say as on that as well.

We closed the integration on April 21, great momentum early in the year, and we look forward to updating you as quarters go. But this is a great acquisition, and so far, everything is going fantastic.

Thank you. We'll go next to Richard Newitter with Tourist Securities.

I wanted to just add, I thought I heard earlier in the prepared remarks something about a sales force reorganization or optimization -- if you could just elaborate a little more on what exactly that is? What prompted it? It sounds like that's new. And is there any negative impact that's contemplated in granted you reiterated your constant currency guidance for the year. Is there anything that's implicitly contemplated from a headwind on that standpoint incrementally now? .

Thank you, Richard. So first things first, start with the final part of your statement. So no, we're not changing guidance. There is no impact whatsoever on either revenue or EPS associated with the evolution of the change. And I want to emphasize that word evolution. We've been doing this for a while. We're going to go faster at it. Why do we need to make changes in the U.S.? Well, you cannot grow the U.S. new business 0.2%. So we're making changes.

We're making changes in terms of some leaders. We're making changes in terms of the quantity of territories. We have made changes in terms of the incentive plan as a result of the lack of growth. Certain individuals will be exiting the organization fairly soon. And we just changed the whole in that regard when it comes to the U.S. dynamic. We've been talking about specialization for a while. We need to have the right amount of people behind the right businesses. We believe we can grow faster in set. We have additional capabilities. So we're going to be deploying more people into SEP.

We know we can do better in robotics. We have the right quantity and quality of individuals. So that's another change we're making. And then the ASC. We're growing strongly in the teams, and we believe we can do better. So we're going to add additional people in the ASC environment. So again, change is making sure we have the right quantity and quality of leaders, changes around the incentive plan. I know this is not something that is new. We're just going faster at it because we deserve to grow at a faster pace in the U.S.

We'll take our next question from Sean Singh with RBC.

I was wondering if you can elaborate on your appetite for M&A post the Paragon 28 acquisition. More specifically, how are you thinking about further boosting your position in the and then also expanding potentially into new adjacencies, maybe in and out of the hospital as you think about raising your weighted average market growth further beyond the mid-single digits. .

Thanks for the question. So we -- even after doing Paragon 28 and in the backdrop of tariffs, the firepower is pretty strong here at [indiscernible]. We have a very strong balance sheet. -- post-Paragon 28, our leverage ratio is in the mid-3s in a couple of quarters, given the strong cash flow generation of the company is going to go to the losses again prior to Paragon, it was in the low shoes. So again, there is plenty of ammunition to do smart M&A, deals that make strategic and financial sense, we're going to take a look at acquisition similar to Paragon 28, where we can keep EPS dilution to we've seen 3% on year 1, neutral by the end of the year 2. We've got to do those deals, deals that make sense.

We know that we can integrate. We're going to look at them. It is going to be the #1 recipient of our capital allocation strategy, and we can go at it. We have built best-in-class integration dynamics. We got the proper governance. We've got a new head of business development with ample experience in this area. So yes, we're going to be responsible at the right pace, but it will be the #1 priority for Zimmer Biomet. In terms of areas that we like, it's a pretty repetitive speech. Yes, anything that happens in the ASC, we like. Anything that makes sense we then SEP, we like faster growth categories we've seen orthopedics, data technology, we like. We do need outside of our core musculoskeletal health for the time being. And at some point, we will. We want to be in a 5% WinGuard environment by the end of 2027. And as we exit the decade closer to 2030, the number needs to be higher.

So the appetite is high. We're going to be responsible, but we're going to go at it.

We'll take our next question from Rick Wise with Stifel.

I was hoping you could expand a little more on your progress with the Oxford Partial cementless knee. You sound excited. You've trained several hundred customers -- my impression, if I remember correctly from AUS that you hope to train maybe 1,000 by year-end. Are you on track with that? And talk about the training and interest and -- how long do you think it takes for the Oxford cementless here in the U.S. to match the 60% of the mix in Europe. .

Thanks for the question. I think this is 1 of the most exciting products that we're going to be launching for a Jan. As a reminder, it's the only PMA-approved partial cementless system in the U.S. I do think we're going to be north of the 1,000 trainees by the end of 2025, already done close to 400. We've done training events in Dallas. We had around 250 people there. Chicago, we're going to be Nashville coming up.

So I do think that the number -- it's going to be north of 1,000. You got now a lentil deal. So after you train couple of cases you're good to go. So it will be north of 1,000. We are putting the product in many contracts, I think our contract penetration is around 50%, 55% today. That number is going to be around 70%, 80% as we enter into the second half of 2025. And again, I think this is going to be 1 of the most exciting product launches here at Zimmer Biomet.

We'll take our next question from Jeff Johnson with Baird.

Maybe 2 clarifying questions, just if I could squeeze them into 1 if possible. So Suky, you talked about opportunistic price increases. Just any kind of color you could provide there. I would assume that's probably more on the capital side maybe than on the implant side, but any clarification there. And then just, again, not to go back to the 2026 tariff, but I'm going to -- just as I hear your kind of explanation thinking about your inventory turns, you talk about greater than 50% of that $60 million to $80 million in the fourth quarter. if you were us on the sell side, we have to put models out. I know you're not quantifying, would it be crazy to run kind of an absolute $40 million a quarter throughout 2026 if the tariff impact, just as a starting point to have something that's holding placed in our model?

Yes. So let me start with the first question on the opportunities pricing. I think it is going to be more in the capital area. So our recon business tends to be heavily contracted. So there's less near-term opportunity there. So it's really areas where you don't have contracting, which is CapEx surgical, those are probably good surrogates for the areas where you can take a better price.

On the run rate, I would not use Q4 as a run rate moving into next year. Remember our capitalization, while it's different product by product segment, we have about a year's worth of inventory. So it is going to take a bit longer for that run rate to manifest itself because by the time we get to Q4, you're only about halfway, a little bit more than halfway year through the tariffs.

Take our final question from Mike Matson with Needham & Company.

Yes. van, I wanted to ask about the antimicrobial technologies in the Idon coating. I mean this seems like something that could potentially really differentiate Zimmer Biomet. I don't know if any of the other companies are really working on this stuff. So can you maybe just talk about what you're hearing from the FDA in terms of [indiscernible], what you're going to have to do to get that launched in the U.S.? And then are you willing to look at any kind of outside technologies in terms of acquiring or partnering with other companies? .

Thanks for the question, Mike. So first things first, the approval of the iodine treated hip that we launched in this year is outside the U.S. This is in Japan. It will come in the U.S. at some point. We'd rather not speculate here today, but we do have a pathway to get this into the U.S. And it is going to be transformational. It is the only platform in the world. that has data on preventing bio biofilm formation on the implant or phase diluting over a prolonged period of time. So tons of data in that regard on an implant that has stable fixation. So we do this to be transformational.

We're not doing just coded implants. We got technology that expedites surgeries. We have external investments in companies that are working on infection, as I mentioned in my prepared remarks, it's 1 of the key footprints that we're trying to solve. So it's more than coated devices. It's more than technology. It's a lot of different things, a lot of shots on goal when it comes to infection. So -- but again, we will be launching iodine at the end of 2025 here in Japan, outside of the U.S., and we have a plan to get this into the U.S. as soon as we can.

That will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Ivan for any additional or closing remarks.

Thanks, Katie, and thanks, everybody, for joining the call. I know there's a lot going on. I don't mbe your jobs these days. But blame a minute, I'd like to recap the quarter where Zimmer Biomet is today in 5 very simple bullet points. Number one, the markets remain strong. We continue to see that the waiting list for proceeding, especially in the U.S., is very long. As a matter of fact that we in lease is in the top 10 institutions almost twice what it used to be prior to COVID. I know this is no backlog from COVID. So healthy markets is data point number one. Data point number two, we are today reaffirming our constant currency organic revenue guidance of 3% to 5% which we feel extremely confident of achieving. And then on top of that, thanks to Paragon 28, we're going to bring an additional 270 basis points of revenue growth for the year.

So again, keeping the guidance, we have permitted the guidance with a high degree of confidence. Data point number 3, as you heard Fran Suki and I over and over, we're fully offsetting the EPS dilution related to tariffs, while minimizing the EPS dilution associated with the acquisition of Paragon 28, just like we said that we will do, so the EPS dilution with Paragon 28 is less than 3% on year 1 and is a EPS neutral at the end of year, too. So doing a solid job in navigating this turbulence around tariffs and acquisitions.

Data point number four, we're really encouraged with the performance of key new product introductions. We've seen great momentum with Hips, almost 4% growth in hips in the quarter in the U.S. as we get into Q2, Q3, we're going to continue to see that just not in hits, but also in knees. And we are very confident about the ramp-up in new products in the second half of 2025.

We're very pleased -- the next data point, we're very pleased with the integration with Paragon 28. So data point #3, we're very, very pleased with how Paragon 20 is going. And we expect the growth in the teams that this company has had to continue here at mean -- so that's the core 5 mentions I'd leave you with other than gratitude for joining the call. Thanks a lot.

Thank you. That will conclude today's call. We appreciate your participation.