Zimmer Biomet Holdings Inc Q4 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Robbie Marcus - JP Morgan - Analyst : Ivan, Suky, not sure who this is best for. But wanted to ask on just the guidance philosophy in general. And 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 in -- philosophically? And what should we be expecting throughout the year?

Question: Patrick Wood - Morgan Stanley - Analyst : Congrats on Paragon 28. Basically on that side of things. And my question is, how are you thinking, A, about the opportunity to push it through your distribution sales network, both in the US 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?

Question: Steven Lichtman - Oppenheimer & Co. Inc. - Analyst : Suky, you provided some color on first half versus second half of this year, but I was wondering if you could talk about guidance, cadenc a bit more for the year, excluding Paragon. How should we think about sales growth and margin progression during 2025? Suketu Upadhyay - Zimmer Biomet Holdings Inc - Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain Yeah, absolutely. Thanks for the question, Steven. As Ivan mentioned in his 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 it 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% ex FX 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 ex FX growth, excuse me, of about 2% and 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 impact, 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 ex FX 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. First REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, ZBH.N - Q4 2024 Zimmer Biomet Holdings Inc Earnings Call half margins will be lower than the first half of 2024, primarily due to lower gross margin as expected and as we've talked about through '24 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 believe we'll 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 '24. And Q2 will be down slightly when compared to 2Q '24. However, second half margins will be better than the second half of '24 as well as the first half of '25 due

Question: Matt Taylor - Jefferies - Analyst : I did want to follow up on Paragon and maybe ask you about the way the deal is structured with the CVR earnout. 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 beat what the Street was thinking with Paragon? And also maybe talk about your ability to do additional deals as you digest this one.

Question: David Roman - Goldman Sachs - Analyst : I want just to spend a couple second on margins. Suky, 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 7 or 8 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, et cetera? Suketu Upadhyay - Zimmer Biomet Holdings Inc - Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain Yeah. Yeah. 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 norms. So that's good to see. We're continuing to lap in some of capitalized cost increases at the end of '23 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 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 were 3 big headwinds on gross margin. And when you think about the tailwinds, it really -- and 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, 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 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, right, 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 '26. So a lot of moving parts there. I think the key takeaway is we continue to make fundamental improvements in gross margin, again, keeping it flat to despite those FX hedge gain headwinds that I talked about earlier in '24, and we do see an opportunity to maintain that stable environment or 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, ZBH.N - Q4 2024 Zimmer Biomet Holdings Inc Earnings Call

Question: Ryan Zimmerman - BTIG - Analyst : Extremities grew 22%. It was a 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 S.E.T. and just should we expect similar levels as we move into '25.

Question: Danielle Antalffy - UBS - Analyst : Ivan and Suky, I wanted to start a little bit more into the ASC opportunity because I think that's a potentially meaningful growth driver as Zimmer focuses their efforts on Paragon for that. So I wanted to see if you could maybe give us an update on percent of revenue today or maybe procedure volumes that's going through the ASC, and how now with Paragon is the product portfolio that can help you win in the ASC?

Question: Travis Steed - Bank of America - Analyst : I guess I just wanted to kind of push a little bit on the EPS growth and the guidance. Like I know you said you 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. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, ZBH.N - Q4 2024 Zimmer Biomet Holdings Inc Earnings Call Suketu Upadhyay - Zimmer Biomet Holdings Inc - Chief Financial Officer & Executive Vice President, Finance, Operations & Supply Chain Yeah. 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 in my prepared remarks of being sense, which is not insignificant. 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 the reported earnings per share leverage. So that's really where we are 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 continue to find efficiencies through 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 in my prepared remarks that overall share count remained 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.

Question: Rick Wise - Stifel, Nicolaus & Company, Inc. - Analyst : Ivan, just one of those four excellent points you made, is as to why we're going to see a stronger second half, revolves importantly around innovation. And I was going back to your slides that 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 in 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 Z1 triple paper stem hip seems like one to me, but which should we focus on. And in providing guidance today, to what extent are you providing an optimistic view of what seemed like truly impactful product portfolio, launching on a broad front.

Question: Matt Miksic - Barclays - Analyst : So I had a couple of questions on the Paragon 28 acquisition, just one on the sales force and integration and what your thoughts on that look like given that it's one of these independent exclusive but independent field force organizations. And the other one, 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 acquisition seems to have involved somehow divesting in ankle. Just would love to get your thoughts on that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, ZBH.N - Q4 2024 Zimmer Biomet Holdings Inc Earnings Call

Question: Jayson Bedford - Raymond James & Associates Inc. - Analyst : Just two quick questions. I think there was -- in the second half of '24. I think it was impacted by about $50 million because of the ERP issue. We assume that -- you're assuming this business is lost? Or is there some sort of recoupment embedded in the '25 guide. And then just quickly on the new product question. When will you be in full (technical difficulty)

Question: Jayson Bedford - Raymond James & Associates Inc. - Analyst : Yeah. Sorry, the second two questions, sorry. When will you be in full launch mode with Oxford Cementless?