Zimmer Biomet Holdings, Inc. (ZBH) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary presents mixed signals. While there are positive elements like raised EPS guidance and new product launches, concerns arise from declining operating margins and uncertainties in international markets. The Q&A reveals cautious management responses, a choppy U.S. revision market, and market share loss in U.S. knees. Although optimistic guidance and potential premium pricing for iodine-coated implants are positive, the lack of specific guidance for 2026 and cautious capital allocation strategy tempers expectations. Overall, the sentiment is neutral, with potential upside from innovation and strategic acquisitions.
Key Financial Performance
Sales Growth 5% on an organic constant currency basis, with U.S. business accelerating 330 basis points sequentially to 5.6% from 2.3% in the second quarter. This is the best revenue growth performance in the U.S. since mid-2023. However, growth was impacted by nearly 120 basis points due to unexpected weakness in Eastern Europe, Latin America, and non-core segments of S.E.T.
Knees Growth 3.5% in the U.S., up 180 basis points from 1.7% in the second quarter of 2025. This was driven by adoption of Persona OsseoTi (cementless total knee) and Oxford (partial cementless knee). Persona OsseoTi now represents nearly 30% of U.S. total knee implants.
Technology and Data, Bone Cement, and Surgical Sales Increased 20.3% in the U.S., driven by the strongest robotics capital sales quarter in more than a year. Utilization of U.S. ROSA accounts increased, with over half of knee implants now performed robotically, up 400 basis points year-over-year.
Hips Growth 4% in the U.S., driven by the Z1, HAMMR, and OrthoGrid products. Z1 accounted for over 25% of hip stems in the third quarter, and HAMMR utilization rates doubled to 20% through the first 9 months of the year.
S.E.T. Business Growth 6.4% in the U.S., up over 250 basis points sequentially from 3.9% in the second quarter of 2025. Growth was driven by new product launches, despite weakness in restorative therapies.
CMFT (Craniomaxillofacial Thoracic) Growth Over 20% globally, driven by new product introductions in rib trauma, cardiac surgery, and neuroablation.
Adjusted Earnings Per Share (EPS) $1.90, up 9.2% year-over-year, despite dilution from the Paragon 28 transaction, tariffs, and commercial investments.
Adjusted Gross Margin 72.6%, higher than the third quarter of 2024, due to lower manufacturing costs and favorable mix.
Adjusted Operating Margin 26.5%, modestly higher than the prior year, driven by better gross margin, partially offset by increased commercial investments and the addition of Paragon 28.
Free Cash Flow $278 million for the quarter, bringing year-to-date free cash flow to about $800 million. Days of inventory on hand reduced by 10 days compared to the third quarter of 2024.
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Operating Highlights
Persona OsseoTi and Oxford Knees: Persona OsseoTi now represents nearly 30% of U.S. total knee implants, with expectations to exceed 50% penetration by 2027. Oxford partial cementless knee is performing above internal expectations.
Robotics and Navigation: Strongest robotics capital sales quarter in over a year. U.S. ROSA accounts now perform over half of knee implants robotically, up 400 basis points for the year.
Z1, HAMMR, and OrthoGrid for Hips: Z1 accounted for over 25% of hip stems in Q3. HAMMR utilization rates doubled to 20% in the first 9 months of 2025.
CMFT (Craniomaxillofacial Thoracic): Business grew over 20% due to new product introductions in rib trauma, cardiac surgery, and neuroablation.
Monogram Technologies Acquisition: Acquired mBôs, an AI-driven orthopedic robotic system. Clinical protocols started in July, with semi-autonomous robot launch expected in early 2027.
U.S. Market Growth: Sales grew 5.6% in Q3, driven by new product adoption and strong robotic placements.
International Market Challenges: Emerging markets and non-core segments like restorative therapies faced headwinds, impacting growth by over 100 basis points.
Inventory Management: Reduced days of inventory on hand by 10 days compared to Q3 2024, despite higher inventory levels from Paragon 28.
Free Cash Flow: Generated $278 million in Q3, bringing year-to-date free cash flow to $800 million.
Adjusted EPS: Delivered $1.90 in Q3, up 9.2% year-over-year, despite dilution from Paragon 28 and tariff impacts.
Leadership Changes: New leadership in international businesses and U.S. restorative therapies to address headwinds.
Sales Force Specialization: Focused on robotics and S.E.T. categories, with new sales leadership for ASCs and key account management.
Innovation and Diversification: Launched iodine-treated hip in Japan and next-gen foot and ankle products from Paragon 28. Over 20 new S.E.T. products planned.
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Risk or Challenges
Emerging Markets Performance: Weakness in emerging markets, particularly in Eastern Europe and Latin America, negatively impacted growth by over 100 basis points in Q3 2025. Challenges in these regions are being addressed but remain a headwind for the company's performance.
Restorative Therapies Segment: Continued weakness in the restorative therapies segment has been a significant drag on growth, with a low teens decline reported globally. This segment's underperformance is factored into the updated guidance for 2025.
U.S. Revision Market: A modest slowdown in the U.S. revision market for both hips and knees is expected to persist throughout the remainder of 2025, impacting revenue growth.
International Leadership and Governance: Leadership and governance changes are being made in some international businesses to address ongoing headwinds in these geographies, indicating operational challenges.
Tariff Impacts: The company faces a $40 million tariff headwind for 2025, which is impacting operating margins.
Inventory Management: Efforts to reduce days of inventory on hand are ongoing, but higher inventory levels associated with acquisitions like Paragon 28 present challenges to free cash flow.
Interest Expenses: Higher interest expenses due to the Paragon 28 acquisition and increased interest rates are impacting financial performance.
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Guidance & Outlook
2025 Organic Constant Currency Revenue Growth: Updated to a range of 3.5% to 4% from the previous 3.5% to 4.5% range. This excludes the contribution from Paragon 28. The updated range considers continued weakness in restorative therapies, a more measured outlook for certain international emerging markets, and a modest slowdown in the U.S. revision market for hips and knees persisting throughout 2025.
Adjusted EPS Guidance for 2025: Maintained at $8.10 to $8.30.
Free Cash Flow Guidance for 2025: Maintained at $1 billion to $1.2 billion.
Consolidated Pricing for 2025: Expected to remain roughly flat for the full year.
FX Impact on 2025 Revenue: Expected to contribute 50 to 100 basis points of growth in 2025.
Paragon 28 Contribution to 2025 Revenue: Expected to contribute around 270 basis points to reported sales growth in 2025.
Adjusted Net Interest and Nonoperating Expenses for 2025: Expected to be approximately $280 million, down from $290 million due to lower borrowings on better cash flow.
Adjusted Tax Rate for 2025: Expected to be approximately 18% for the full year.
Fully Diluted Shares Outstanding for 2025: Expected to be approximately 200 million shares.
New Product Launches and Innovation: Plans to launch the world's first semi-autonomous robot with Persona implants in early 2027, followed by a fully autonomous platform by the end of 2027 or early 2028. Over 20 new products in S.E.T. are planned over the strategic horizon, addressing safety, efficiency, and clinical outcomes.
Operational Excellence Initiatives: Focus on accelerating revenue growth, improving margins, and increasing free cash flow through inventory management. Days of inventory on hand reduced by 10 days compared to Q3 2024.
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Shareholder Return Plan
Dividend Program: No specific mention of a dividend program was made during the conference call.
Share Repurchase: The company mentioned a lower share count due to share repurchases in 2024 and in the first quarter of 2025. This indicates that Zimmer Biomet has been actively repurchasing shares as part of its capital allocation strategy.
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Key Q&A
Q:How are you thinking about guidance philosophy and what happened in the quarter?
A:Ivan Tornos explained that the company faced unexpected challenges late in the quarter, including distributor order cancellations in emerging markets, missed commitments in the Restorative Therapies business, and distributor challenges in Latin America. These issues collectively impacted revenue by $24-25 million or 120 basis points. He emphasized a more measured approach to external commentary and guidance moving forward.
Q:Does the 120 basis points impact this quarter come back at some point, and how does it affect 2026?
A:Ivan Tornos stated that the revenue from the impacted areas is not included in the guidance for 2025 or 2026. If it returns, it will be a positive surprise, but the company is not counting on it.
Q:What is the capital allocation strategy for next year?
A:Suketu Upadhyay highlighted that the company will prioritize acquisitions and assets that drive growth in faster markets while maintaining discipline. The company has a strong balance sheet with over $1 billion in free cash flow and a net debt leverage ratio in the low 3s. Share buybacks will also be considered opportunistically.
Q:How does the company view the U.S. revision market and its impact on guidance?
A:Ivan Tornos mentioned that the U.S. revision market is choppy and hard to predict. The company will account for this uncertainty when providing guidance for 2026.
Q:How does the 2025 performance align with the long-range plan (LRP) targets?
A:Ivan Tornos stated that the company is delivering mid-single-digit growth in the second half of 2025. He emphasized that market dynamics, innovation, and commercial execution will determine the sustainability of growth in 2026 and 2027.
Q:What is the timeline for the launch of Iodine Technology in the U.S. and Japan?
A:The Iodine Technology has received clearance in Japan and will launch at the end of 2025, contributing to 2026 revenue. In the U.S., the technology has received FDA Breakthrough Device designation, but no specific launch date has been committed.
Q:How is the company structuring its incentive plan to focus on growth?
A:Ivan Tornos explained that the incentive plan now aligns with external commitments on revenue growth, earnings per share, and free cash flow. This applies to all levels, including senior managers and sales reps, who are held accountable for revenue and margin growth.
Q:What are the expectations for the recon market in Q4 and beyond?
A:Ivan Tornos stated that the market is stable and expected to grow around 4%. He refrained from making specific predictions for Q4, emphasizing a more measured approach.
Q:How is the innovation pipeline progressing, and when will it have a significant impact?
A:Ivan Tornos described three waves of innovation: catching up with competitors (Wave 1), customer-centric innovation (Wave 2), and expanding into new areas (Wave 3). Wave 1 is already contributing to growth, and Wave 2 is underway with technologies like iodine-coated devices and robotics. Significant impact is expected as these innovations mature.
Q:What is the outlook for international markets that showed softness in Q3?
A:Ivan Tornos stated that the company is not including revenue from these areas in its guidance for 2025 or 2026, reflecting a cautious approach.
Q:How is the U.S. knee market performing, and what is the outlook for 2026?
A:Ivan Tornos acknowledged that the company is losing market share in the U.S. knee market but at a slower rate than before. He expects the innovation cycle to deepen in 2026, potentially improving market share and margins.
Q:What is the performance and outlook for Paragon 28?
A:Paragon 28 is growing in the upper single-digit range organically and is expected to grow in the teens over time. The acquisition aligns with the company's strategy to enter faster-growing markets and build a platform in lower extremities.
Q:What is the potential impact of iodine-coated implants on pricing and adoption?
A:The iodine-coated implants, with FDA Breakthrough Designation, are expected to command premium pricing and faster adoption due to their clinical benefits and reimbursement dynamics. Similar dynamics are already observed in Japan.
Q:What caused the softness in the Restorative Therapies business?
A:The softness was due to inadequate budgeting, commercial execution challenges, and lingering reimbursement changes in the U.S. The business primarily involves hyaluronic acid injections.
Q:How are personnel changes impacting the company?
A:Ivan Tornos stated that personnel changes are embedded in the guidance and are part of the company's strategy to ensure the right people are in the right roles. These changes are not expected to disrupt performance.
Q:Review of Unclear Management Responses
A:Management avoided providing specific guidance for 2026, repeatedly emphasizing that it is too early to comment. They also refrained from making specific predictions about the U.S. revision market and the potential recovery of international markets that showed softness in Q3. Additionally, no specific timeline was provided for the U.S. launch of iodine-coated implants, despite their FDA Breakthrough Designation.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
HAMMR OrthoGrid
Hips play
Knee
Monogram Technologies
Paragon acquisition
Paragon interest
Paragon transaction
Suky
bone cement
center
class
contemplates
extremity
future
healthcare
hip knee
interest nonoperating
knee implant
mBôs
market hip
navigation
outlook market
play HAMMR
quarter year
revision market
share count
slowdown revision
standard care
suite customer
surgeon technology
tariff investment
technology bone
utilization
weakness therapy
world technology
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