ZBH - NYSE

Good morning, ladies and gentlemen, and welcome to the

Thank you, operator, and good morning, everyone. Welcome to

Good morning everyone and thank you for joining today's call. I would like to start today the way that I always do by taking a moment to recognize and to show my sincere gratitude to the over 17,000

Thanks and good morning everyone. As Ivan mentioned, we closed another solid year demonstrating the resilience and winning attitude of our team members. Despite the challenges we faced we grew sales nearly 5% on a constant currency basis, expanded adjusted operating margins by 40 basis points, grew adjusted earnings per share by 6% to $8 and generated over $1 billion in free cash flow. Looking at this quarter's results, unless otherwise noted, my statements will be about the fourth quarter of 2024 and how it compares to the same period in 2023, and my commentary will be on a constant currency and adjusted operating basis. 2025 guidance commentary will exclude any impact of the recently announced Paragon 28 acquisition. Net sales were 2 billion and 23 million, an increase of 4.3% on a reported basis and 4.9% excluding the impact of foreign currency. Consolidated pricing was positive 60 basis points marking the fourth consecutive quarter of positive pricing. Overall results were underpinned by healthy end markets with good leading indicators on demand for new products. Our U.S. business grew 4.7% driven by strong high single digit growth in S.E.T. while International grew 5.2% driven by high single digit growth in knees and S.E.T. It's great to see that our global S.E.T. growth continues to outpace both knees and hips. Importantly, once the Paragon 28 transaction is closed, the combined S.E.T. segment is expected to be larger than our HIP franchise and is expected to continue to grow faster than both our knee and HIP segments. This aligns with our strategy to diversify into faster growth markets. Global knees grew 5.6% in the quarter with the U.S. growing 3.9%, and International growing 8%. We continue to see good uptake from our Persona portfolio and increased penetration of ROSA. Global Hips grew 4% with the U.S. growing 3.2% and International growing 4.8%. While still in early days, we are encouraged by the feedback on

Thank you. Sukhi. 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.

Thank you. [Operator Instructions] Our first question comes from Robbie Marcus with JPMorgan.

Oh great. Good morning and thank you for taking the question. Ivan, Sukhi not sure who this is best for, but wanted to ask on just the guidance philosophy in general. I think last year it was we're guiding to what we think we could do. This year we see what appears to be a more conservative guide both on the top and bottom line. How are you thinking about the guidance range philosophically and what should we be expecting throughout the year? Thanks a lot.

Thank you. Robbie, Ivan here. Good morning. So I would say that it's somewhat of a different philosophy guidance wise from 2024. And as I said before, we're not going to apologize for the guidance we delivered in 2024 early in the year. We actually met the guidance as you heard today in revenue, EPS, adjusted EPS and free cash flow. I think we are 20 basis points below revenue. That said, for 2025 is a different philosophy. We deem the range that we're providing today to be appropriate. I don't know if I'll use the word conservative but definitely appropriate. Keep in mind that it's one day less in 2025 versus 2024. And at the same time, Robbie, we see more drivers to bring us to the upper range versus the lower range. We're excited about new products. Most of them do become far more material in the second half of the year. Excited about the investments we're making in the ASC ambulatory surgical space. We are adjusting some things in the U.S. that I believe can bring us to the upper range of the guidance. Let's see what we end up in pricing. Four consecutive quarters of federal pricing. Let's see what happens in 2025. We'll go one quarter at a time and in the first half of 2025 you've seen the investments we make in OpEx. So we should see a return on those investments as we get into the second half. So net, net appropriate guidance. And again we see more drivers to get us to the upper range than the lower range of that guidance. So extremely confident in the range provided and we look forward to updating you every quarter and hopefully exceed those expectations.

Appreciate it. Thank you a lot. Thank you.

Thank you.

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

Beautiful apologies for the crackly voice but thank you for taking the question. Congrats on Paragon 28. Basically on that side of things, my question is how are you thinking A about the opportunity to push it through your distribution sales network both in the U.S. and OUS and drive it on the top line that side. And B, how are you thinking about managing any potential disruption as you integrate it? Thanks.

Thank you, Patrick. First things first, we're very excited about this acquisition. I spent last weekend in Orlando with the sales team. The culture in the company is second to none. The innovation that they have, I've not seen anything like that in my 31 years in Medtech. They have 50 active projects in the space. Upon closing the transaction, we're going to be a leader in six of the key categories in the space. And they have an outstanding channel, which we've done. So our thinking is that we are going to preserve that channel fully dedicated to foot and ankle. We are bringing the management team over to

Love it. Thank you.

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

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

Yes, absolutely. Thanks. Thanks for the question, Steven. As Ivan mentioned is opening remarks and the first Q&A. There are a number of moving parts that are going to impact the cadence. So it's a great question. We try to provide some color. I'll give a little bit more here. But let me start with some of those moving parts around selling day impact the FX headwind that we talked about in our prepared remarks. New product uptake, which we're very excited about. Some of the investments that Ivan referenced that we believe is going to drive growth not only later in this year, but beyond this year. And then our continued efficiency profile and push for efficiency and margin expansion. If we start with revenue, we would again, 3% to 5% XtraFix is the guidance range. There is a pretty steep FX headwind which then takes our reported guidance to 1% to 3.5% on a reported basis. Inside of that, we project that Q1 will have the lowest XtraFix growth, excuse me, of about 2%. And that's primarily due to the selling day headwind that we referenced earlier in our remarks. That's worth about 100 to 150 basis points. The second quarter growth, which has the toughest comp when compared to last year, will be aligned to Q1 once you adjust for that day rate headwind. Okay. And then in the second half of growth, we expect that to be faster than the first half. Really, because you don't have that selling day headwind, you're going to see much greater ramp up of new products that Ivan referenced earlier. And then you've got the easier comp related to the ERP, which really impacted us in the second half of 2024. As we said, FX is going to play a pretty big factor. And so we expect that to be a headwind. It's roughly about the same in the first half versus the second half with the first quarter and the third quarter being the biggest impacts. And that's around 200 basis points of headwind in each year. So hopefully that gives you a lot of color on the revenue cadence all the way from XtraFix, excuse me, down to the foreign currency impact. And then if you move on to margins, as we said in our prepared remarks, overall we would expect gross margins to be in line with 2024 and operating margin to be up year-over-year in line with the guidance and the profile we provided on our LRP earlier in 2024. First half margins will be lower than the first half of 2024, primarily due to lower gross margin as expected. And as we talked about through 2024 and higher OpEx related to the investments Ivan discussed. Some of those investments are in specialization around S.E.T. We're increasing our critical mass around ASC and robotic commercialization efforts. We're ramping up DTC. All of these things we believe will have a near as well as mid and long-term impact on revenue growth positive impact. Q1 operating margins, we expect to be down about 250 basis points versus the first quarter of 2024 and Q2 will be down slightly when compared to Q2, 2024. However, second half margins will be better than the second half of 2024 as well as the first half of 2025 due to better revenue profile, higher gross margins in tandem with year-on-year efficiency gains. So overall we're confident in the guidance we're providing. As Ivan said, we think there are levers to potentially do better than that. We're also very excited to bring in the Paragon asset into our portfolio and again feel really good about where we're headed in 2025.

Appreciate the additional color, Suki, Thanks.

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

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

Yes, so maybe I'll start with the growth portion. So the revenue synergies that we embedded in the model are appropriate beyond what we have in the model. We think there is additional synergies. First and foremost, Paragon 28 is not a company that today is present or too present in the ASE space. So there are a variety of opportunities there to do cross selling, extend contracting. So that's definitely a growth lever. There are opportunities from our Trauma and Biologics business to put those products in the back of the dedicated channel that Paragon 20 has. So it's a great opportunity there. And then there are other opportunities internationally. So they have 20% to 30% of the revenue coming outside of the U.S. we have a large infrastructure outside of the U.S. so again, those are some of the revenue synergies that can get us above the committed growth rate. In terms of your second question around doing other deals, the firepower is there. What we want to do right now is to integrate Paragon 28 into the company. Prove to everyone that we can do this type of deal with minimal disruption and then we'll think about the next deal when it's time to think about the next deal.

Thanks, Ivan.

Thank you.

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

Thank you. Good morning everybody. I want just to spend a couple of seconds here on margins. Suki, at the analyst meeting you had introduced a trend that expected two years of gross margin headwinds. And I think a big piece of that had to do with the then currency dynamics at play, which have obviously evolved significantly over the past seven or eight months. So can you maybe firstly update us on how the trajectory of gross margins are trending relative to those expectations? And then secondly, what is the path to turning gross margins around on a reported basis, considering where we are today on FX and then some of the other operational matters that you've been undertaking to improve gross margin like inventory turns, etcetera?

Yes, yes. Thanks for the question, David. So first of all, overall, the headwinds, tailwinds as we think about 2025. Just stepping back, I talked about gross margins being in line with 2024. Some of the headwinds that we would expect to see is you have normal inflation every year. Fortunately that inflation rate has stabilized to sort of pre pandemic norm. So that's good to see. We're continuing to lap in some of capitalized cost increases at the end of 2023 and beginning of 2024, which will impact the P&L especially in the first half of 2025. And we're forecasting that pricing could be a modest headwind to gross margin still well better than our historical norms on pricing. I said somewhere around flat to maybe 50 basis points, points of erosion coming off a year where we're positive. So we'll see where we end up. But overall a more positive trend but still a modest potential headwind. So those are sort of your three big headwinds on gross margin. And when you think about the tailwinds, it really sorry FX as you noted, is another headwind inside of that which we've talked about at length over the last year or so. The tailwinds are really around our efficiency gains which we continue to make drastic improvement in repositioning our footprint into lower cost markets as well as better utilization of our plant footprint, which gives you more better absorption. We're improving our mix through new products, but also from a geographic perspective. And lastly, we're seeing lower E&O excess and obsolescence as we continue to improve our inventory positions. And we made good, really good progress in 2024 on reducing overall inventory. So those are the, those are the puts and takes again, which broadly keep us in line with where 2024 margins were. As you think about the cadence for gross margins in this year, we would expect the first half of this year to be broadly in line with how we exited 2024. So you should think about our Q4 gross margin into the first half of 2025, and then you should see a sequential step up into Q3 and to Q4, with the largest benefit in Q4 really coming off of those efficiency gains that I spoke to earlier, as well as the excess and obsolescence gains. Now with the FX changes, we've seen the strengthening of the dollar that will or should give rise to additional FX hedge gain benefit. Those benefits, however, will likely get capitalized in 2025, assuming rates stay where they are today. It's a dynamic environment. And if that happens, those would then materialize into our P&L into 2026. So a lot of moving parts there. I think the key takeaway is we continue to make fundamental improvements in gross margin, again keeping us flat to 2024, despite those FX hedge gain headwinds that I talked about earlier in 2024. And we do see an opportunity to maintain that stable environment of potentially improving over time. And inside of all that, we still have a profile where we're looking to expand operating margins this year. And again, that's we're coming off a track record of four consistent years of expanding operating margins. So hopefully a lot of color there gives you what you need there, David.

Yes. Thanks, Suki. Appreciate all the detail.

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

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

Yes, simple answer. We do no manufacturing in Mexico. We do no manufacturing in Canada. Two thirds of our manufacturing is in the U.S. So we are evaluating what happens in China. There is single digit volumes coming out of there manufacturing wise. But at present time all the scenario planning that we've done is embedded in the guidance provided.

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

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

Good morning. Thanks for taking the question. Extremities grew 22% it was phenomenal number. Can you just talk about it, Ivan, in terms of what's driving that, how durable? You see that and we appreciate the color you're giving inside of CED and just, should we expect, similar levels as we move into 2025?

Yes, just a small correction. Sports grew at 22% in the quarter and the overall segment S.E.T.

Yes, that'd be good.

Yes. Sports. Yes, sports. 22% S.E.T. as a whole in the quarter grew 8.4 extremities upper single digit. This is now four, five quarters in a row. We're growing mid to upper single digit, mostly upper single digit. And we see this as durable. What's happening here? First of all, we did add a lot of products. So from an organic and inorganic standpoint, I'll tell you, the sales back today is totally different than it used to be. In addition to the products, we added a ton of people and we're going to continue to add more specialized people. That's some of the OpEx investments you've seen in the first half of 2025. We have dedicated resources to the ASC space that we didn't have before. So it's just a different, a different business altogether. Upon closing, as you heard in the prepared remarks upon closing of the Paragon 20 deal or S.E.T. business now is going to be as large, if not larger actually than our heap business and growing 2, 3, potentially 4x that rate. So again, really excited about that S.E.T., we do see this business as a durable business, growing at least mid-single digit, likely upper single digit. Thanks for the question.

We'll take our next question from Danielle Antalffy with UBS.

Hey, good morning, guys. Thanks so much for taking the question. Really appreciate it. Ivan and Sukhi, I wanted to dive a little bit more into the ASC opportunity because I think that's a potentially meaningful growth driver as

Good morning. Thank you, Daniel. It's a huge opportunity, the ASC. So back in 2019, roughly 2% to 3% of sales here in the U.S. came from the ASC environment. Today, the number is quickly approaching 20%. We remain the number one company in hips and knees in the ASC space. And with the addition of the sports portfolio, now, foot and ankle portfolio, and other categories, we think we can elevate the growth profile in the ASC space. The things that we're doing, as I just mentioned, we have added people, we have added partnerships. CBRE comes to mind. Already signed up a deal with CBRE in that space. We have active partnerships with [Indiscernible]. We have active partnerships with Hill-Rom. So there's not a single product gap that we have when it comes to contracting. And then lastly, products, we continue to innovate with the ASC in mind. What are products that make the surgery faster? What are products that make the surgery more efficient? What are products that deliver not just a clinical outcome, but also an economic outcome which is paramount in the ASC. Relative to Paragon 28, that's revenue synergy that we didn't contemplate meaningfully in the model, but it is real. Bronium [ph] procedures here in the U.S. have very favorable reimbursement. As I mentioned earlier, Paragon 28 has not been that present in ASC. We are very present, as you know, in the ASC. So we deem that to be a very meaningful opportunity moving forward. So net, net very excited about where we are. And then relative to your question on the volumes, we deem that roughly 40% to 60% of all the in co orthopedics are going to be moving to the ASC in the next three to five years. And again, it's not lost to me that's a wide range but that is the third party research that we've done so it's meaningful. Thanks, Danielle.

Thank you.

We'll take our next question from Travis Steed with Bank of America.

Hey, thanks for the question. I guess I just wanted to kind of push a little bit on the EPS growth in the guidance. I know you said you'd still get some margin expansion this year. I want to make sure, just like why was the EPS guide kind of where it was? Why can't you do like a buyback or something to get to offset some of the headwinds this year just to give investors a little bit more EPS growth? And when you think about the revenue ramp over the second half, what's going to give you the confidence kind of in the second half revenue ramp here over the course of the year. Thank you.

Yes, why don't I take the EPS question and I'll let Ivan talk about the revenue ramp in the second half. The biggest part of the EPS guide and not having as much growth in the bottom line is really around the FX impact, which I think I talked about on my prepared remarks being $0.20 to $0.25, which is not insignificant. We, we are going to expand margins this year. We contemplated potentially driving more but then in the backdrop of investments we think are critical to drive the business and the growth not only this year but beyond. We think that the profile still hits our overall LRP metrics of expanding operating margin and driving reported earnings per share leverage. So that's really where we are on the, on the earnings per share side. On operating margin again, we feel very comfortable in our ability to drive that operating margin expansion this year, especially based on my earlier comments, maintaining stabilized gross margin and continuing to find efficiencies through SG&A. On your question around share buybacks, our current assumption is that we don't have any share buybacks. We assume right now in the modeling and the in my prepared remarks that overall share count remain flat. The good thing is coming out of the Paragon 28 transaction, we're going to have a very strong balance sheet which is going to leave us optionality to continue to pursue our capital allocation strategies. As I laid out back at our LRP, which is a balance of M&A and return of capital to shareholders. In 2024, I think we returned over $850 million so we're well on that pathway of at least 65% back to shareholders and we're going to continue to evaluate that and be opportunistic based on market conditions and free cash flow, which is very strong for this year and going forward.

Second part of the question on the revenue acceleration on the second half lots of things that I can dance around but maybe I'll frame answer in four bullet points. First, pretty obvious the second semester of 2025. The second half is going to benefit from the comps versus the ERP challenge that we had in 2024. Recall that we took a beating of 60 to 80 basis points due to the ERP. So you have a comp benefit in the second half. The second piece is new product introductions. As you probably have heard and as you have seen, a lot of these new products that we're talking about got their approval. Whether it is CE mark in the case of personal revision or 510 approvals, they late in 2024. So the first half is about training, it's about getting the S.E.T. together, it's about doing all the things we need to do. And you really do see the ramp up of most of these new products in the second half of 2025. The third one is the return on the OpEx investment that we're making in the first half of 2025. Whether it is sizable investments in direct to patient activities, whether it is the training associated with all these new product launches, both internal and external trainings, whether it is the marketing materials, there's a lot of investment in the first half of 2025 that pays back in the second half. And then lastly the fourth bullet point is really timing for international business. We're going to see acceleration of international growth in the second half of 2025. So really excited about where we are in the year, especially as we get into the second half of the year. Thanks for the question.

Thanks a lot.

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

Good morning Ivan. Hi Suki. Ivan, just one of those four excellent points you made as to why we're going to see a stronger second half revolves importantly around innovation. And I was going back to your slides you presented at JPMorgan and you presented a slide on the pipeline and six major products launching. And it seems clear these are big markets. These are areas where you haven't had the appropriate products or technology or some cases any technology. Each one of them seems like it carries a price premium, like 10%, 15% kind of price premium. Help us understand, I guess two parts. One, which of the products we should which of the products in the second half are going to be most impactful? The

Great question, great challenge. And no, I don't think today we're providing an optimistic view on the impact of these new products. C1 is a meaningful opportunity. Recall Rick that we got the initial launch of this product in Q3 of 2024. We get into full launch mode as we speak. I would say C1 is going to be very meaningful in the second half of 2025. You should see us getting back to gaining share in U.S. heaps, which is something we've not done for a while. It's a $1.5 billion market and we believe we have a differentiated offering. So definitely pay attention to that one which by the way in combo with our surgical impactor drives meaningful growth. So I would say those two, HAMMR and

Thank you, Ivan.

We'll take our next question from Matt Miksic with Barclays.

Hey, thanks so much for taking the question. So had a couple of questions on the Paragon 28 acquisition. Just one on the salesforce and integration and what your thoughts on that look like given that it's one of independent, exclusive but independent field force organizations and the other on the Total Ankle. I know it's not obviously the reason, the only reason you'd go after an asset like this, the way they're growing, but every one of these small, lower extremities, acquisitions seems to have involved somehow divesting an ankle and just love to get your thoughts on that. Thanks.

Thanks, Matt. I'll take both of them. So starting with the salesforce, yes, they are exclusive. Yes, they are 1099s. We also have exclusive 1099 sales forces here at

Great, thank you.

Thank you.

I'm sorry. We'll take our final question from Jayson Bedford with Raymond James.

Thanks. Good morning. Just two quick questions. I think there was in second half of 2024, I think it was impacted by about 50 million because of the ERP issue. Do we assume that you assume this business is lost or is there some sort of recoupment embedded in the 2025 guide? And then just quickly on the new product question, when will you be in full launch mode with [Indiscernible]? Thanks.

Can you repeat the second part of the question? I got the ERP, but I didn't get the second part.

Yes, sorry. The second two questions, sorry. When will you be in full launch mode with Oxford Cementless?

Okay, so I'll start with the second one. Second half of 2025, we have the S.E.T., we have the training done. So that's full launch mode for Oxford Cementless. So being a PMA centric device, we have a policy of no train, no use and we're running extensive training throughout the first half of 2025. So second half is when you are already in full launch mode. In terms of the ERP a lot of moving parts. Did we lose some business in areas like surgical in components of sports medicine? Yes, we did lose some business given the ERP. In other areas like Recon, Knees and Hips there might have been some delays. Certainly we had an impact on new product introductions in the second half that now have moved towards first, second half of 2025. So it's a lot of moving parts and it's hard to quantify.

Okay, thanks.

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.

Yes, I started with gratitude this morning. I want to close with gratitude to the sales force and to the employees of