Zimmer Biomet Holdings, Inc. (ZBH) Earnings

Management highlights

- People and Culture (Top Strategic Priority) - Recognized by Time Magazine, Forbes, and Fortune as a top workplace and most innovative company, supporting low turnover and strong top talent recruitment. - Paragon 28 integration is complete, with negligible key team turnover and sustained mid-teen growth, creating a template for future acquisitions that balances integration and preservation of target company culture. - U.S. commercial transformation to a specialized, dedicated sales force is progressing better than expected, with lower customer disruption and sales turnover than initially planned. The full transition is on track to complete by the end of 2027, and management is accelerating rollout in some territories. - Operational Excellence - Shifting R&D activity to the new Global Capability Center in India to access high-quality talent and improve cost structure. - New manufacturing plant construction in Costa Rica is underway, supporting the company's strategy to boost supply chain resilience while accessing lower-cost operating regions; initial manufacturing lines are scheduled to launch in 2027. - Aggressively rolling out AI initiatives to reduce operating expenses and drive long-term margin improvement. - Innovation and Diversification - The first-in-world iodine-coated hip implant launch in Japan is exceeding expectations, with robust demand from both existing Zimmer Biomet and competitive accounts. Management is actively pursuing regulatory pathways to launch this technology in additional markets, including the U.S. - Next-generation ROSA Shoulder robotic system has launched, with strong early surgeon feedback; it is the only robotic shoulder system globally that supports both anatomic and reverse procedures and can resect both the glenoid and humeral sides of the joint. - OrthoGrid AI hip navigation saw its strongest quarter ever, with first half 2026 case volumes matching full year 2025 volumes, and accelerating adoption is expected in coming quarters. The Z1 hip stem now represents over 40% of U.S. hip systems and will soon surpass 100,000 implants worldwide. - 510(k) filing for the Monogram personalized knee platform is expected in the near term, and the company plans to launch over 50 new products in the next 36 months, many of which will be first-to-world innovations. - Zimmer Biomet is the exclusive orthopedic investor in the Mobility Revolution Fund, a musculoskeletal venture capital fund that provides access to early-stage disruptive technologies from AI to cartilage repair. Management remains committed to M&A to diversify growth and hit a target weighted average market growth rate (WMGAR) of 5-6% by the end of the 2020s.

Guidance

- Full year 2026 organic constant currency revenue growth guidance was raised to 2.25% to 3.25%, from the prior range of 1% to 3%. Reported full year sales growth guidance is now 3.9% to 4.9%, up from 2.5% to 4.5% previously. - Foreign exchange is expected to be a 50 basis point full year tailwind to revenue, with Paragon 28 contributing 110 basis points to reported growth (up from the prior expectation of 100 basis points). - Adjusted full year 2026 earnings per share guidance was raised to $8.47 to $8.59, from the prior range of $8.40 to $8.55. - Full year 2026 authorized share repurchase guidance was increased to $1 billion, up $250 million from the initial plan, resulting in an expected 193 million fully diluted weighted average shares outstanding for the full year. - Pricing erosion is expected to remain within the prior guidance range of up to 100 basis points for the full year. - Full year 2026 adjusted gross margin is expected to remain around 71%, with adjusted operating margin expected to decline slightly more than 50 basis points year over year due to planned U.S. commercial transformation investments. - Full year free cash flow growth guidance is maintained at 9% to 11%. - Management expects 2027 full year performance to improve over 2026, driven by completion of the U.S. commercial transformation, easier year-over-year comparables for weak 2026 performance in China and other emerging markets, and new product tailwinds.

Segment performance

Overall Q2 2026 net sales were $2.177 billion, with 4.8% reported growth and 4% organic constant currency growth. U.S. organic growth reached 4.6%, while international organic growth hit 3.1%. - HIPS: 5.1% constant currency overall growth, 5.9% U.S. growth, 4.2% international growth. Contributed ~28% of total net sales based on core franchise sizing. - Knees: 0.1% overall constant currency growth, with 1.4% U.S. growth offset by a 1.5% international decline (driven by weakness in China and core emerging markets). Contributed ~23% of total net sales. - SCT (Spine, Sports Medicine, and Thoracic): 3.4% organic constant currency growth, an acceleration of 180 bps from Q1 2026. U.S. delivered mid-single-digit growth, with Paragon 28 (acquired foot and ankle portfolio) growing mid-teens. SCT makes up ~18% of total net sales. - CMFT (Cranio Maxillofacial Thoracic): Double-digit overall growth, led by the Thoracic franchise, contributing ~9% of total net sales. Upper Extremities delivered another quarter of upper single-digit growth, while Trauma and Restorative Therapies continued to face headwinds that offset some CMFT/SCT gains. - Technology and Data (cement and surgical solutions): 21.5% overall growth, with U.S. technology sales growing over 50%. This segment contributed ~10% of total net sales, driven by strong capital equipment sales for robotic systems including ROSA.

Risks & headwinds

- International knee performance remains under pressure from ongoing weakness in China and core emerging markets. - The U.S. commercial transformation continues to require incremental upfront investment, which is pressuring near-term operating margins. - Up to 100 basis points of full year pricing erosion remains expected, consistent with prior outlooks. - Proposed 2027 Medicare PFS rate cuts create potential long-term pricing pressure, though management does not expect material changes to current pricing trends in the near term. - Trauma and Restorative Therapies continue to face ongoing operational and market headwinds that drag on overall segment performance.

Analyst Q&A

• Q: The U.S. salesforce transition is going better than expected. What work remains, and is the higher SG&A spend a deliberate long-term choice? /

  A: The transition is proceeding in three stages, with the first low-risk stage complete and the company now in the second stage. Full completion is still on track for the end of 2027. Higher SG&A is a deliberate, growth-focused investment: the company has locked in top independent distributors, added 200 new technical reps, rolled out an industry-leading compensation plan to recruit top MedTech talent, and invested in sales training. Management expects these 2026 investments to drive higher growth in 2027, and early results already show higher productivity and case volumes across specialized sales teams. (368 chars)

• Q: The iodine-coated hip launch in Japan is exceeding expectations, what is the global opportunity for this product and what is driving U.S. hip growth today? /

  A: Iodine-coated hips are one of the most transformative products in the company's history, addressing periprosthetic joint infection, a leading cause of readmissions and billions in annual healthcare system costs. Demand is so strong in Japan (a $500 million market) that the company is struggling to keep up with orders, with 40% price premiums and high conversion of both existing and competitive accounts. The company is in active regulatory discussions with the FDA to bring the product to the U.S. In the U.S., the Hip Triple Play platform (Z1 stem, Hemer impactor, OrthoGrid navigation) is driving 5.9% quarterly growth via consistent market share gains. (469 chars)

• Q: What is your strategy for offering such a broad portfolio of robotic and navigation technology, and how do you manage the support costs of this approach? /

  A: Only 20% of U.S. orthopedic surgeons use robotics, so the company positions itself as a full-spectrum technology company, not just a robotic company, to serve all surgeon preferences. One size does not fit all: surgeons have different needs for CT vs. imageless systems, large vs. small/portable robots, and non-robotic navigation. The broad portfolio of options (including mixed reality and AI navigation for non-robotic users) is resonating with the market, as shown by 53% U.S. technology growth in Q2. Management will evaluate the portfolio over time and may prune less successful offerings as standards of care evolve, but currently values the optionality of the broad suite. (457 chars)

• Q: What M&A deal types are prioritized for Zimmer Biomet now that Paragon 28 integration is complete, and do you plan to pursue larger or out-of-vertical deals? /

  A: The M&A strategy remains consistent across three core vectors: tuck-in acquisitions in high-growth segments of core reconstruction (infection, technology, data), high-growth opportunities within SCT (foot and ankle, sports medicine, CMFT), and small adjacent opportunities that align with the company's core orthopedic ASC-focused procedures. The preferred deal size is up to $2 billion, similar to Paragon 28, and any acquisition must immediately add to WMGAR, be EPS accretive by year two, and deliver double-digit ROIC by year five. Most growth to hit the 5-6% WMGAR target by the end of the decade will come from organic R&D, but the company is now prepared to pursue more deals after proving its integration model with Paragon 28. (476 chars)