Zimmer Biomet Holdings, Inc. Stock

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, November 4, 2026. [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 Third Quarter 2026 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Paul Stellato, our Interim CFO and VP, Controller and Chief Accounting Officer.

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 third quarter earnings release, which can be found on our website, zimmerbiomet.com.

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

Thank you, David. Good morning, everyone, and thank you for joining today's call. I would like to start, as I always do, by thanking the more than 17,000 global Zimmer Biomet team members for your commitment, your resilience and most importantly, your dedication to serving our customers and their patients each and every day. I'm grateful to work alongside you, and I'm proud of the noble work we do to alleviate pain and improve the quality of life for people around the world. Roughly 6 months from now, we will be celebrating our 100-year anniversary as a company. And as I often tell all of you, we are just getting started. Our boldest chapter remains ahead.

During my prepared remarks this morning, I'll cover 3 things. First, I'll review our third quarter performance. Second, I'll discuss our increased outlook for 2026. And third, I'll provide an update on our 3 strategic priorities, which remain the same: people and culture, operational excellence and innovation and diversification.

To begin, we delivered total net sales of $2.63 billion, resulting in 3.1% reported growth and 3.7% constant currency growth in the quarter compared to the third quarter of 2025. Excluding the negative impact of our China distributor network consolidation strategy, a onetime headwind in fiscal year 2026, our constant currency growth in the quarter will have been 4.7%. Notably, in the period, 2/3 of our book of business grew at least upper single-digit or double-digit rates, validating the strength of our innovation cycle, the improvement in our commercial execution efforts and the resilience of our global market environment.

In addition, these results are a testament to our efforts to diversify our portfolio over the last 6 years as we continue to shift from a primarily joint reconstruction company to a broadly diversified business with leading platforms across S.E.T., technology and higher growth segments within core orthopedics. We are very proud of the quarter results as our Hips and S.E.T. businesses grew upper single digits and technology and data, bone cement and surgical grew in the teens, driven by 20% growth in robotics, data and AI solutions.

Furthermore, we are thrilled with the performance of our Paragon 28 acquisition, which continues to grow at roughly 3x the foot and ankle market, approaching 20% growth, which we do believe is sustainable. Altogether, this broad-based performance more than offset the expected challenges in our knee business and China.

Turning to our product categories and starting with Hips. Our global hip business grew 7% on a constant currency basis in the third quarter with growth of 5.8% in the U.S. and 8.2% internationally. U.S. hip growth continues to be driven by our new product cycle strength, which includes Z1, our triple taper hip stem, which now represents over 50% of all U.S. hip stems, up from about 40% in the second quarter of this year. HAMMR, our surgical impactor, which is now being used in nearly 30% of all U.S. primary hip cases is also a major catalyst. And third, OrthoGrid, which delivered its strongest quarter to date with over 2/3 of sales coming from recurring revenue. OrthoGrid is a clear differentiator for Zimmer Biomet, and we look forward to its global expansion.

Outside the U.S., we continue to build momentum with our iodine-coated hip stem and cup in Japan. This launch has far exceeded our high expectations, and we are rapidly increasing supply to meet the greater-than-expected demand from both existing customers and the new accounts that we're opening. In addition, we're working on launch plans for other geographies outside of Japan.

Turning to Knees. As anticipated, the Knee business continued to face headwinds during the quarter, with sales declining 2.6% on a constant currency basis, including decreases of 2% in the U.S. and 3.4% internationally. The U.S. results reflect the known impact of our sales force transition and a highly competitive knee implant market, while international knees continue to face pressure, most significantly from China headwinds without which global knees will have been flat year-over-year this last third quarter.

While we continue to expect ongoing pressure in the near term in our knee business, we are confident in our strategy and plan to return to sustainable growth over the long term by, number one, improving commercial execution. It's important to note that the U.S. sales force transition is nearing the halfway mark, and we started to see pockets of meaningful improvement across a variety of U.S. territories. Second, expanding our suite of robotics and enabling technology to meet the diverse needs of a wide array of surgeons around the world. We recently announced a multiyear limited distribution and supply agreement with THINK Surgical to distribute an exclusive version of the only wireless handheld TMINI robotic system compatible with Persona Knee.

Most excitingly, we expect to file Monogram's 510(k) application with the FDA very soon, which is significantly ahead of schedule. We now anticipate that we can launch a surgeon-guided, fully autonomous version of Monogram in the first half of 2027 as opposed to the original expectation of a 2028 launch. We truly believe that this technology will represent a dramatic leap forward for the future of orthopedic care. We will be bringing Monogram to the American Association of Hip and Knee Surgeons Annual Meeting later this week in Dallas to obtain additional feedback on the system's workflow from surgeons. Our plan to have at least 225 robotic sales specialists also remains very much on track.

Lastly, from a global standpoint, the China-related headwinds will anniversary in January of 2027, giving us visibility into improved global knee performance. S.E.T. accelerated to 7.1% growth on a constant currency basis in the quarter, including mid-single-digit growth in the U.S. We continue to see strength across our key franchises, including foot and ankle, sports medicine, CMFT, craniomaxillofacial, thoracic and upper extremities, all of which grew between mid-single digits and high teens in the period. Critically, Paragon 28 sales grew over 18%, demonstrating the successful integration of the business and representing a blueprint for future acquisitions. These results were partially offset by continued pressure in trauma and restorative therapies, both of which declined in the quarter as expected.

Technology & Data, Bone Cement and Surgical grew 13% on a constant currency basis in the third quarter, once again led by the strong demand for robotic offerings, including ROSA with OptimiZe and TMINI. Technology and data sales increased over 30% in the U.S., which validates our strategy of offering a comprehensive suite of customer-centric solutions to surgeons.

Turning now to our updated outlook for the remainder of 2026. With 3 solid quarters behind and an organic constant currency growth rate of 3.5% year-to-date, we are once again increasing our full year outlook. We are now raising our organic constant currency sales growth guidance to a range of 3% to 3.5% from 2.25% to 3.25% and raising also our adjusted earnings per share guidance to $8.50 to $8.60 from the previous guidance of $8.47 to $8.59. This increased outlook captures our expectations for consistent global market dynamics ongoing risk of U.S. sales force disruption, China-related headwinds to the tune of nearly 100 basis points in the fourth quarter and roughly 50 basis points for the full year 2026 as well as continued pressure in knees.

With that, let's turn to our 3 strategic priorities: people and culture, operational excellence and innovation and diversification. First, people and culture. We continue to make steady progress as we transition to a fully dedicated and specialized sales force in the U.S. We started this initiative in earnest earlier this year, and I'm happy to share that 3 quarters into an 8-quarter journey, we are proceeding ahead of our expectations with over 75% of our U.S. sales force now being fully dedicated. While we are seeing some disruption associated with this transition, particularly in our knee franchise, overall, it has been less disruptive than we initially anticipated.

As part of this strategy, we continue to add sales reps across key growth franchises such as upper extremities, sports medicine, CMFT, robotics and foot and ankle. We're going to continue to invest back into the business to support a smooth transition, and we're going to manage this project with the rigor that it requires. One key data point that reinforces our confidence in the pace and success of this transition is the sales rep turnover rates, which remain at healthy single-digit levels.

Moving on to our second priority, operational excellence. Over the last several years, we have improved manufacturing efficiency through SKU rationalization, technology advancements and better planning. With demand continuing to grow, we are reshaping our U.S. manufacturing network to make it more nimble and efficient. This effort includes closing select underutilized manufacturing sites and consolidating operations into several facilities in Warsaw, Indiana, home to our global headquarters. We're also reinvesting in our Warsaw facilities, bringing in more advanced manufacturing processes. Together, these actions reflect our continued commitment to both Warsaw and U.S. manufacturing.

At the same time, we continue to consolidate our international manufacturing footprint into lower-cost geographies while working with third-party experts to thoughtfully implement artificial intelligence capabilities. All of these initiatives are designed to address and improve our operating expense cost base, which at 46% OpEx to sales leaves room for dramatic improvement. We expect these strategies will improve flexibility, help us meet growing demand more efficiently and provide a long-term margin tailwind as the work progresses.

Our third priority is innovation and diversification. We remain committed to investing both organically and inorganically to diversify our portfolio and increase our exposure to faster-growing markets. As part of this strategy, we have launched a strategic venture platform focused on identifying and investing in early-stage technologies with the potential to redefine the standard of care. Beyond capital, we will leverage Zimmer Biomet's strong capabilities across R&D, clinical, regulatory and commercialization to help accelerate the development and adoption of these exciting innovations. By expanding access to breakthrough technologies, this strategy reinforces our strong commitment to alleviating pain and improving the quality of life for people around the world.

While early in the process, we are already evaluating several differentiated technologies to invest in and expect the number to grow in quarters to come. We generally believe that the combination of our organic innovation programs, the advancement of this new venture platform plus the work in our partnership with Deerfield Management and HSS, a $300 million investment commitment over 8 years will accelerate our WAMGR weighted average market growth rates towards an aspiration of 6% by the end of the decade. Beyond these endeavors, we remain committed to responsible M&A to accelerate our diversification efforts, pursuing deals that can replicate the strong success of our Paragon 28 acquisition.

In summary, our results reflect the strength of a diversified global business with 2/3 of the portfolio growing at upper single-digit or double-digit rates as evidenced by strong results in Hips, S.E.T. and technology and data. We are highly encouraged by the progress that we are making as an organization, while we also understand that there is still room to improve. Our focus now is on finishing the year strong and entering 2027 from a position of strength with the objective of delivering accelerated performance, leveraging the great transformational work that we have done in 2026.

With that, I'll turn the call over to Paul. Thank you.

Thank you, and good morning, everyone. As Ivan discussed, third quarter sales grew 3.7% on a constant currency basis, driven by continued strength in Hips, S.E.T. and data and technology, bone cement and surgical, partially offset by the expected challenges in Knees. We reported GAAP diluted earnings per share of $1 compared to GAAP diluted earnings per share of $1.16 in the third quarter of 2025. Higher revenue and a lower share count were offset by an increase in SG&A associated with our sales force transformation, earn-out adjustments from prior year acquisitions and a modest step-up in manufacturing costs.

Our adjusted earnings per share for the third quarter was $1.90, flat with the prior year quarter as higher revenue and a lower share count were offset by the investments in the U.S. commercial organization and expected higher manufacturing costs. Pricing was a 70 basis point headwind in the quarter within our guidance range of up to 100 basis points of pricing pressure for the year. Adjusted gross margin was 71.7%, a 90 basis point decrease from the prior year quarter and slightly ahead of our expectations. The year-over-year decline was primarily related to higher manufacturing costs, which were partially offset by a product mix benefit.

Adjusted operating margin was 25.1%, down 140 basis points year-over-year, reflecting our continued investment in the U.S. commercial organization as we execute our sales force transformation. Adjusted net interest and nonoperating expenses were $77 million, a modest step-up from the prior year, primarily due to currency fluctuations. Our adjusted effective tax rate was 17.6% and fully diluted shares outstanding were 191.4 million, down year-over-year due to $500 million in share repurchases in the first half of 2026 and an additional $79 million during the third quarter.

Now turning to cash and liquidity. The third quarter marked another strong quarter of cash generation with operating cash flow of $560 million and free cash flow of $372 million, both up about 34% on a year-over-year basis. We ended the quarter with approximately $400 million in cash and cash equivalents.

Turning to our outlook for 2026. As Ivan mentioned, we are raising our organic constant currency sales growth expectation to 3% to 3.5%, up from our prior range of 2.25% to 3.25%. Given changes in currency rates, we now expect foreign exchange to be an approximate 25 basis point tailwind to full year revenue growth, down 25 basis points from our prior expectation, and we continue to anticipate Paragon 28 to contribute 110 basis points to full year reported sales growth. Given this, we now expect 2026 reported sales growth to be 4.4% to 4.9%, up from 3.9% to 4.9%.

Shifting to the P&L. For the full year, we now expect adjusted gross margin to be around 72%, 100 basis points higher than our prior expectation, driven by manufacturing efficiency initiatives and favorable product mix. We anticipate adjusted operating margin to decline a little more than 50 basis points year-over-year, consistent with our prior commentary, which reflects continued investments in our U.S. commercial organization. We now expect full year net interest and other nonoperating expenses to be $300 million, modestly higher than our previous expectation of $295 million and continue to anticipate a full year adjusted tax rate of approximately 18%. In addition, we remain on track to complete approximately $1 billion of share repurchases during the year, and we still expect around 193 million fully diluted weighted average shares outstanding for 2026.

Taken together, these factors support another increase in our adjusted EPS outlook. We now expect adjusted earnings per share of $8.50 to $8.60 for the year, up from $8.47 to $8.59, which contemplates continued investment in our commercial organization, and we continue to anticipate free cash flow to grow 9% to 11% for the year. We remain focused on executing our strategy, delivering on our commitments and positioning the company for sustainable long-term growth.

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

Thank you, Paul. 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.

[Operator Instructions] We'll go first to Mathew Blackman with TD Cowen.

Can you hear me okay?

Yes, we can.

So Ivan, it's clear that a majority of the franchises are performing well. So maybe can you just talk a little bit more about some of the successes you're seeing in hips and S.E.T.? Are these sustainable sort of near and intermediate-term growth rates? And then knees, what's the path forward to get back to market growth? And should we be more confident in your ability to turn that business given what we're seeing in hips, for instance, but also the broader commercial initiatives you have in place? Just any color on those 2 topics would be great.

Thanks for the thoughtful question here, Matt. So look, I've been on this role now for 3 years. And often, I get asked the question of what are investors missing? It's a great question considering where we are from a multiple perspective. And I'll tell you, there is one thing that resonates. I think investors don't realize that we are no longer just a knee company. We are no longer a company that is mostly a reconstructive company. So when you break our organization into parts and pieces, today, knees, global knees is roughly 1/3 of our entire book of business. U.S. knees is around 20% of our entire book of business and then 2/3 of the company is something else. We, over the last 5, 7 years, built what I call a world-class portfolio around S.E.T., S-E-T, which is a lot of stuff. You got sports, you got extremities. You got a great CMFT business. We built what I think is the leading foot and ankle company growing 18% this quarter. And we've got a great technology portfolio that read is the quarter is now growing 20%, 30%.

So we're no longer a knee company, and all of it is working really, really well on these businesses as evidenced by the upper single digit of double-digit growth, which to answer your question directly, I do think it is sustainable. Not ready to commit to growing this S.E.T. business every quarter, upper single digit like this quarter or double digit. But there is plenty of market growth in these areas. There is plenty of innovation in these areas to continue to deliver significantly above market growth rates.

Now all of these data points is not to tell you that we don't care about knees. We got work to do. We're not pleased with the U.S. knee performance, but we expected it. We know we got some challenges we need to address, and we're addressing those. And those are around 2 key areas. One is the go-to-market dynamics. We've known for a while that most of our reps in the U.S. have been pretty much just doing knees and little else. We know we got commercial execution deficit that we need to resolve. That's why we're changing incentive plans. That's why we have changed leadership. That's why we are converting independent nondirect representatives to direct. So that's one area that we're working on.

And then the other one is around innovation [indiscernible]. That's why we've done the things that we're doing. We extended our partnership with TMINI. We launched ROSA OptimiZe, which is tracking very nicely. And as you heard in my prepared remarks, we are getting ready for the submission of the 510(k) for a Monogram. So all of this to tell you, we're no longer just a knee company. We're growing very nicely in 2/3 of the company. By the way, global knees, excluding China, would have been flat. And we got work to do in the U.S., and we are doing the work, and we're going to get better. So that's the summary of all parts and pieces. Again, thanks for the short question, Matt.

Our next question comes from the line of Rick Wise with Stifel.

Good to see the constructive progress this quarter. You've given us a lot to ask about, but I guess I have to -- I have to focus on the macro recon environment. I don't have to tell you, I'm sure you know, one of your major competitors indicated that they're seeing slower procedural growth, concerns about higher insurance premiums and deductible, increased pre-authorization denials, et cetera, et cetera, et cetera. I'm not picking up on that kind of perspective in your prepared remarks. How do you see the market? Are we stable? Are we getting worse? And how are you thinking -- how are you factoring all that into the outlook for this year and maybe potentially into next?

Yes. Thanks for the question. Great to have you with us this morning, Rick. Look, it's going to be a bit of a repetitive answer. We don't look at 1 quarter or even 2 quarters to claim that our market is growing or slowing down. Certainly, some noise around knees, but nothing really that will tell me structurally, this market is changing. I'm not sure that I'm ready to declare a market slowdown when our hip business grew 7% globally, 5.8% in the U.S. when a lot of categories within S.E.T. were growing double digit. And again, we have, yes, one competitor with a lot of issues in the year. But we have another competitor growing 3%, 4% in U.S. knees. So I'm not sure that I'm ready to say this is the end of the knee market growing at a certain pace. We continue to put all parts and pieces, what we call the WAMGR at 4% to 4.25%. That number is similar in the U.S., 4% to 4.25%. We like where we are in other categories in S.E.T. We also like what we see in the ASC environment where we're growing double digit. The largest ASC operator in the U.S. just reported 13% growth in volumes year-over-year.

So again, I think there is plenty of data points to suggest that there may be some light choppiness within the quarter in a certain segment, but this is by no means the end of our market growth rate. So Recon, we peg it to be in the U.S., call it, between 2.5% to 3.5%, somewhere in there. And again, we did see better performance in hips than knees. Specific to us, I will tell you that probably 90% of our underperformance expected, but underperformance in knees is commercial execution driven. So that's how we think about the market. We're tracking things like cancellation rates, which are pretty much steady over the last, call it, 5 years. We look at things like pricing. One of the leading indicators that a market is about to slow down as you see pretty significant price erosion. And we saw that in 2008. We saw that in 2012. Obviously, we saw that during COVID. Our pricing performance this quarter is actually better than last quarter. So again, we're not ready to call it a market slowdown. We've got work to do around commercial execution, and that's what we're going to focus on.

We'll go next to Patrick Wood with UBS.

I'd love to jump on Monogram, Obviously, coming in timing-wise ahead of where we all thought that it would, pretty unique platform in that way. Ivan, I'd love to hear the strategy around the go-to-market, how you're thinking about the initial rollout, the pace and really communicating the value prop to surgeons. Anything you want to call out on Monogram would be great.

Patrick, great to have you with us. Look, we're very excited. At the same time, we got to be careful what we say because this is not a product that is being approved. We do expect, as I highlighted in my prepared remarks, to submit the 510(k) very, very soon. And when I say very, very soon, I'm talking very, very soon. We like the fact that given the clinical work that we've done around validation and verification, we can actually leap forward to a fully autonomous indication. So no longer we need to have a breach of a semiautonomous and then move to a fully autonomous. So that's definitely transformational. We are validating or have validated key features around safety, very smart surgical boundaries. And by the way, being in Dallas later this week, I love for you to join the demonstrations that we're doing.

So safety is one of the key competitive advantages here. In the clinical trial, we saw 0 patient safety reports. We love the efficiency, second feature of the platform, fast registration, fast bone preparation. We will try to make the claim that this will get us to time neutrality versus conventional. So extremely efficient, less than 3 minutes for bone cutting that if that is not enough to say on this topic, I don't know what else we can claim.

Ease of use, this is a robot that you don't need to have a complex surgical algorithm. You need to rethink your surgical algorithm. So really democratizing robotics for the masses. Highly reproducible, the fourth claim. And then we've seen in a lot of the clinical work we've done, we've seen a reduction or an improvement rather in accuracy. So again, safety, efficiency, ease of use, reproducibility and accuracy are the 5 key claims.

Today, in the U.S., roughly 80% of surgeons don't use a robot for a variety of reasons. That number is close to 90% outside the U.S. So we see a dramatic opportunity to focus on the blue ocean opportunity of those surgeons that are not using a robot. Then obviously, we believe that this is going to be a second segment, an opportunity for us to convert competitive accounts. In the U.S., CT scanning is a must. Ease of use is a must. And again, I'm not going to repeat the whole speech I just gave you. We're going to get that done through a Monogram. And then there'll be a third segment of some ROSA users that in the U.S. may want to move to Monogram. That is not the primary segment. ROSA is going to continue to be part of the portfolio, and we're very, very excited about Monogram. So again, if you're in Dallas, I love to see you there. We're very excited about where we are with this platform.

We'll go next to Vijay Kumar with Evercore ISI.

Congrats on a nice print this morning. I guess I had one on the outlook kind of question. Your updated guidance for '26 at 3.25% at the midpoint. That includes China headwinds and your sales force transition headwinds, right? When you think about '27, why wouldn't '27 get better versus the 3.25% for '26? Or should we be thinking of other one-off items and any other go-to-market strategy change or perhaps the sales force transition headwinds accelerating into next year? Any variables you could point out for '27 will be helpful.

Yes. Thanks, Vijay. As you can expect, we're not going to get into a lot of detail here on '27. So I'm just going to repeat the things that I said publicly in the past. 2027 should be a better year compared to 2026, and that's based on some obvious factors. We've been very public about the noise in China. China is 2% of the revenue of the company, 1% of the EBITDA of the company, but it's been declining at massive rates in 2026, given all the changes that we have implemented in the country. This quarter, China cost us 100 basis points of growth this quarter that being Q3. And in Q4, it's going to cost us another 100 basis points. For the year, it's 50 basis points. So obviously, that's something that in January of 2027 anniversaries.

Then the second major tailwind in '27 is going to be Monogram. And again, we're not going to comment on whether we get 3 quarters, 2 quarters or what's going to be. But the expectation is that, that's going to be a catalyst. Paragon 28 in 2027 is going to be a full year of organic growth versus a couple of quarters plus in 2026. So again, that's a platform that is growing close to 20%. We don't see that slowing down. So again, we get a full year benefit there.

So those are 3 very obvious factors that lead us to believe that ' 27 will be better. Not to mention that, obviously, a lot of the work we've made or a lot of the work that we've undertaken in the go-to-market changes in the U.S. will benefit in '27. At the same time, as always, there'll be some headwinds that we're going to have to manage. And again, in early '27, we'll talk about those headwinds and tailwinds and what the guidance looks like.

What I will leave you with is that we're going to be very consistent. Once we provide guidance in '27, we're going to be very consistent with the philosophy that we got here or the philosophy that we have for 2026. We're going to take a measured approach as we did for '26. And the goal will be, as always, to exceed expectations to say less and to do more. So that's the color that I'll offer on 2027. Thanks for the question, Vijay.

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

You've been talking about getting to 6% market growth rate by the end of the decade. So likely going to take M&A. And so just curious how you're thinking about the M&A environment, the willingness to kind of take dilution right now. And then even excluding M&A, like how do you think about the ability to get EPS leverage next year? Is this a year where EPS is probably more in line with revenue growth or the ability to grow EPS faster given that's kind of where the Street is modeling today?

Yes, I'll start with the second one. The simple answer is we're talking about EPS leverage in '27. So there's going to be a lot of moving parts and pieces. You got tailwinds, headwinds. So again, EPS, let's leave that for the early 2027 call. On the aspiration of 6% WAMGR, we don't need to do that entirely in an inorganic way. As you heard in my prepared remarks, there's a couple of pathways to get there. We have reshuffled the R&D investments for the last 3, 5 years towards higher growth environments. That is one major reason why our S.E.T. business is growing at the rate that it's growing. The last data point that we offer externally is that 85% to 90% of our R&D is in markets growing north of 5%, 6%. So again, organically, we're getting there. Then we have this partnership with Deerfield and HSS with a lot of investments in really high-growth areas. We recently launched strategic ventures, making investments from a DevCo standpoint in high-growth areas. So again, there is a lot of things that we're doing organically and inorganically, not just buying companies.

All of that said, yes, M&A, responsible M&A will be part of the equation. This company has now operating cash flows nearing $2 billion per year. Operating cash flow is close to $1.3 billion -- or free cash flow is close to $1.3 billion. Free cash flow conversion in the quarter was north of 100%. Year-to-date, 77%. So very proud of the work we're doing around cash. And we're going to put that cash to work. In '26, it's been around buybacks primarily. In 2027, we'll be doing responsible M&A. And the formula, the algorithm has not changed. We're going to focus on high-growth segments of Recon. Similar deals such as OrthoGrid, Monogram, HAMMR at one point. The second area of focus is going to be higher growth areas within S.E.T. We love the acquisition of Paragon 28. We love what we've done with Embody, with A&E in CMFT, Jace Medical. So a lot of deals that we don't talk about that we've done in S.E.T. that are working very nicely. So that's the second area. And then we look at adjacencies. We look at things like what happens in an ASC environment given the migration there.

So those are the 3 key areas, high-growth segments in Recon, high-growth areas in S.E.T. and then we look at adjacencies. Financially, the same algorithm as well. Ideally, up to $2 billion in acquisition price, whatever we acquire has to be obviously immediately revenue and WAMGR accretive. Similar to Paragon 28, EPS accretive by the second year, by the end of year 2. And then we're going to target acquisitions that will provide double-digit ROIC return on investment capital by year 5. So we're going to be very disciplined around the deals around where we invest, but also the deals in terms of the financial returns. And again, we got a great proxy now with Paragon 28 that is working above expectations. So the level of confidence is very high that we can reload and do another strategic deal again.

We'll go next to Robbie Marcus with JPMorgan.

Congrats on a good quarter. Ivan, maybe I'm just looking at headlines from the Democrats that they'll seek to reverse Medicaid cuts and restore ACA subsidies. How do you think the negative cuts to health care in the U.S. have impacted your end markets? Where do you think your weighted average end market growth is right now given some of the changes in the knee end market? And how are you thinking about weighted average end market growth going forward? And how much does that change if the health care cuts are reversed?

Thank you, Robbie. Look, obviously, too early to start discussing what's going to happen here with the Senate and the House here. And look, we'll talk about it when we get more information. So I'm going to talk about what I know. We know and we validated this externally that our global WAMGR is around 4% to 4.25%. We've also validated that it's a similar number here in the U.S. Even if you go with the bear case that our Recon business in the U.S. is moving towards the 2.5 that competitors are claiming or the 3.5% that we believe is the reality in the U.S. We still see a WAMGR environment of 4% to 4.25%.

ACA subsidies, we've not seen a material impact. As a reminder, the average patient that goes through procedures is 64, 65 years of age. So that's a Medicare patient. As of right now, the expectation is that Medicare reimbursement will go up in early 2027. DRGs are very healthy. Pricing is moving in the right direction. The implant price as a percentage of the DRG is at an all-time low. So I will tell you right now, the variables that we look at continue to be very healthy. So we'll see what happens with everything that happened last night here in the U.S. But again, as a reminder, we do more than selling hips and knees to patients in the U.S. Thanks for the question.

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Ivan, there's obviously been a lot of media reports of private equity interest in certain ortho businesses and potential combinations of ortho businesses. How is this media speculation affecting Zimmer and its employees? And how are you thinking about potential options in light of all this interest we're reading about?

Thank you, Larry. Obviously, I'm not going to get into a lot of speculation around the deals that are happening elsewhere. What I'll tell you is that our employees are laser-focused on driving growth. And you've seen that in the print for the quarter. Where, again, 2/3 of our book of business is growing upper single digit, double digit. In the U.S., we delivered growth approaching 4%. I like where we are in the U.S. year-to-date, growing at 3.8%. I like the fact that our turnover in the U.S. is single digit. We love the fact that the transformation of the channel is going better than expected. So clearly, the focus is there, the performance is there.

Disruption in other parts and pockets of med tech, we'll leverage that when we can. We continue to hire a tremendous amount of people from great companies. And right now, we are laser focused. As far as what others are doing in terms of private equity and whatnot, we're not going to get into a lot of detail there. We're just going to continue to do what we're doing, which is to focus on innovation and commercial execution. Thank you, Larry.

We'll go next to Matt Taylor with Jefferies.

I wanted to ask one on Monogram. I know you're not going to talk about the contribution in 2027. But maybe you could give us some updated thoughts longer term on the kind of share you think Monogram could drive towards Zimmer or just other ways to think about the growth driven by Monogram as it complements the rest of your robotic strategy?

Thank you. Look, we expect Monogram to be a major catalyst for the company. I know we're not ready to talk about what is going to mean in '27 or beyond. But I'll bring you right back. As you think about modeling the opportunity, I'll bring you right back to those 3 segments that I was talking about. 90% of surgeons outside of the U.S. don't use a robot. And if you bring a robot that is going to drive efficiency, accuracy with a great safety profile, and the economic and clinical benefits can be validated, I do think the number is going to increase. There will be more surgeons outside of the U.S. where they'll jump on a robotic platform. And in the U.S., even with the great work that we've done here, still only 20% of surgeons are using a robot. So you get an 80% blue ocean opportunity. So as you can imagine, we spend a lot of time in understanding what it is that we need to do to drive more adoption.

Beyond that, we've not done the job that we could have done when it comes to converting accounts. We've done some of it. But for a variety of reasons, we've not been able to gain meaningful share from competitors. I believe -- we believe that Monogram, given everything that we have seen changes that dynamic. So that's -- those are the 2 key buckets that I'll leave you with as you model the opportunity.

Beyond that, it's not just Monogram, right? I keep talking about the suite of solutions. Today, we have the most comprehensive suite of solutions in technology. If you want a CT scan platform, we have it. If you don't want to do CT scanning, which is the preferred surgical algorithm, the preferred formula outside the U.S., we have that as well. If you want to have a large footprint robot, we have it. If you want to have a smaller one, we have it. If you don't want to do robotics and you want to do navigation, we have all forms of navigation from OrthoGrid to FDA-approved mixed reality. So it's much more than Monogram. But that said, we believe that the Monogram opportunity is going to be very compelling.

Not to mention that now we're going to have a best-in-class robot with the world's #1 orthopedic implant. We're moving very fast on making sure this is not just a one indication platform or robot. We expect to have the partial knee and the hip application and the shoulder application at a very rapid pace. So again, lots of excitement as you can imagine, when it comes to Monogram. And I hope -- once again, I hope you're going to be in Dallas so we can share more about this launch. Thank you.

We'll go next to Richard Newitter with Truist.

Congrats on the progress this quarter. I guess I just wanted to get a better feel for -- because it sounds like you have kind of 2 things that should lead to -- 3 things lead to an acceleration of knees at some point next year. One, you have easy comps. Two, you have Monogram coming and that's getting pulled forward. And then three, there's the sales force changes that you're making that are clearly having impact in other parts of the business. I would imagine sooner than they're actually showing up in knees. So the question is, when can we expect to start to see realistically U.S. knee acceleration show up next year? And is it entirely based on Monogram adoption? Or can we start to see easier comps and some of the sales force impact actually show up on improved knee performance.

Thank you. So let me read those 3 things here for you. So obviously, the comps are the comps. So you're right in that regard. On your second point on Monogram, look, we got to get an approval first. Filing a 510(k) does not mean an approval. So let us go through the work and then we know what is the impact of monogram in 2027. And then on the sales force, this is a tale of 2 cities, right? On the one side, you will see the benefit of some of the changes that we made in 2026. We've been very public around the fact that it takes 12 to 18 months to see the benefit. So yes, a lot of the work in '26 becomes a tailwind in 2027.

At the same time, we've also been very public around the fact that the third stage of this go-to-market transformation is the riskiest, which is the one that we're going through right now. So hard to quantify at this point what's going to be the balance between the tailwind and the headwind. But you're right about those 3 things. So we do expect that knees will perform better at some point. We're not ready to commit exactly in what quarter, but the expectation is that knees will improve. But no, it's not just 1 or 2 things. It's probably broader than that.

Our next question comes from the line of Chris Pasquale with Barclays.

Ivan, you mentioned you're about halfway through the sales force reorganization. And so far, the disruption has been less than expected. As you think about bringing that process to a close, and it sounded like you hinted to this a little bit with the response to the last question, how much is it really derisked? Did you start with the easiest parts and now the tough pieces are left? Can you apply what you've learned so far to mitigate the risk going forward? Would just love any color you can provide as we think about the potential impact from that piece in '27.

Sure. Look, is working better than expected. You see that in the numbers. I refer you to the growth in the quarter, 3.6% growth in the U.S., 5.8% in hips. We delivered, I think it was 32% growth in data and technology. That's the people that we add in. We really don't talk about the S.E.T. number in the U.S., but it was mid-single digit in the north side of mid-single digits. So again, the numbers reflect the fact that this is working better than expected, low single digit or single-digit turnover. We're doing all the right things. What are we learning? We're learning that we got to go at a certain pace, and we are doing that. We've always talked about the 3 stages of the transformation.

Stage 1 was the low-risk, low-hanging fruit. So no, we did not start with the risk, yes, that's done. The second stage was moderate risk, which we closed. And now we are early in the third stage with the higher risk. So that's where we are right now in terms of the 3 stages. We very much believe that this project is manageable. We've not been penny-wise pound fully. You see that we're making compelling investments. That's why our EPS growth is not higher than what it was in the quarter. We're going to continue to that. We're going to invest to make sure that we derisk the project.

We recently appointed Todd Becker. Todd Becker was the #1 distributor in the U.S. as the key leader running this project. We call the Project Optima internally. Todd is doing a heck of a nice job here. So I will tell you, Chris, that the governance is there, the leadership is there. The investments are there. How we're thinking about staging the project, it's worked out very, very well. But we got one final stage to go through, which is the higher risk, and that's what we had.

We'll go next to Caitlin Roberts with Canaccord Genuity.

Just on the think agreement, any changes to note in the extension there? And how is the launch going and seeing anything from handheld competition in the marketplace?

Thanks for the question. We love the partnership with THINK Surgical and TMINI. We just extended the partnership. We believe that a cordless portable robot, cordless being the key highlight, CT scan based is a need. So we now have this exclusive distribution agreement, which we extended. We can use it with the #1 implant in the world, that being Persona Knee. We love the fact that the CT technology is extremely smart with an active overhead tracking everything that's happening in the procedure with unrestricted patient access. It's very easy to integrate the actual surgical algorithm or the technology into the surgical algorithm.

One of the key claims that we continue to hear from surgeons that it takes minimum operating room setup. So in a world of ASCs, this is a massive opportunity. We just had a very strong quarter, Q3 in technology. A lot of that had to do with the team in sales. So again, we love the partnership. We love the people that we work with. We love the fact that this complements our portfolio. So we don't see an end to this partnership. We like where we're at, and we look forward to continue to update you on the progress. Thank you.

Our next question comes from the line of Steve Lichtman with William Blair.

Ivan, you talked about OpEx being an area where you're looking to drive improvement. Just wondering what the levers you see to drive that. I know obviously a lot going on with the sales transition and investment in robot sales specialists. Do you see leverage coming through after getting through those processes? Anything else that you're focused on looking ahead?

Yes. Thank you. I'll throw a couple of bullet points, and then we'll let Paul comment here on the different vectors of opportunity. I'll start with the fact that in May of 2027, we're going to celebrate 100 years in the business, and our OpEx still is roughly 46%, 46.5%, so certainly, there is an opportunity here to drive efficiencies. Roughly of the $3.8 billion in OpEx, $1 billion is variable compensation. So you got $2.8 billion of things that we're looking at.

To that extent, we're partnering with sophisticated partners in AI implementation that are looking at what are things that we can work on around reengineering processes, what are opportunities for us to drive revenue, given the fact that we collect more data than any other company for [indiscernible] orthopedics. We're looking at transactional work. There's a lot of opportunity when you look at shared services, how we do things from a demand planning standpoint, how we engage in customer services or customer service. So a lot of a lot of opportunities there that we'll update you on. But Paul, do you want to talk about different parts and pieces here?

Sure, sure. That's -- technology will be a big part of it. We also -- we've recently opened up a global capability center in India that's going to allow us to kind of leverage the cost base there and get some very, very great talent to help drive some of the different initiatives within the business. That's something that actually, Ivan was there recently, had a chance to visit the team. We're up and running and things are in great shape.

As we've looked at the -- with Project Optima, a lot of the investments that we've been making -- some of those kind of stay with us in the near term, but those start to anniversary out at some point. So that's going to provide some level of operating leverage as we go through. And then look, at the end, it's just good old-fashioned efficiency, right? It's continuous improvement. We've got some great teams that can sit in and drive process efficiency, leveraging the data that we have so that we can just do things on a more cost-effective basis. So good opportunities, and we're looking forward to it.

Our final question will come from Jayson Bedford from Raymond James.

It's Zach on for Jason. Just a quick one here for you. Can you guys update us on your large joint traction into the ASC setting and then also the stability of the implant pricing in the channel?

Absolutely. I didn't quite catch the second part, but let me answer the first one, and then maybe you can ask the second part again. ASCs today roughly growth in the space for us in large [indiscernible] is upper single digit, if not double digit in the case of hips. On S.E.T., we're growing very nicely, and I don't remember the actual breakdown. But I will tell you is in some categories, double digit as well. Foot and ankle, upper extremities for sure, sports medicine. So we like the migration to ASC. Roughly around 25% of our book of business today is going to an ASC, and we're seeing double-digit growth in that regard. Technology, the efficiency we drive with technology is a major competitive advantage. So that's another tailwind as we think about the shift to the ASC. So we like where we're at. And then can you ask again the second question?

Sure. Yes. Just the stability of implant pricing into the ASC channel.

Okay. Got it. Thank you. Well, look, as I referenced earlier, the implant cost today as a percentage of DRG is at the lowest point in 22 years. So we don't think there is more to squeeze in that regard. When you look at the bundle of care in orthopedics, the implant is actually less than 15%. The other 85% are things around efficiency, labor costs, readmissions, sending patients that don't need to be sent to an inpatient unit post procedure.

So when you work with a company that's thinking holistically around the entire piece of care, that's a competitive advantage. We very much look forward to January of 2028 when CJR-X kicks in. So we believe that the current pricing dynamic is steady. Our price erosion in the third quarter was 70 basis points, which is 10 basis points better than the second quarter. The guide that we provided for the year was flat to 100 basis points. We're very extremely confident that we're going to obviously deliver on that guidance. And as we look at '27, '28, and we have a lot of leading indicators, a lot of data, we don't see anything that dramatically changes our perspective on pricing. So we like where we're at.

This concludes today's question-and-answer session. I would like to turn the call back over to Ivan Tornos for any closing remarks.

Thank you. We started the call this morning with gratitude. I want to close with gratitude. Gratitude to the 17,000-plus team members here at Zimmer Biomet, who are doing a stellar job in delivering on our mission of elevating pain and improving the quality of life for people around the world.

From a performance standpoint, Q3 was a solid quarter. I love the fact that 2/3 of Zimmer Biomet grew at upper single-digit or double-digit growth rates, delivering a beat on revenue, gross margin, EPS and giving us the confidence to raise guidance for the rest of the year. We got work to do in our U.S. knee franchise, and we're doing it. I love the strong innovation cycle, which is about to get amplified with the launch of Monogram, pending approval, of course. And the transformation of the U.S. go-to-market channel is going better than expected. So with roughly 50 days to close the year, we like with that, we look forward to the next update in early 2027. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, August 5, 2026. [Operator Instructions] I would now like to turn the conference over to David DeMartino, Senior Vice President, Investor Relations.

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Second Quarter 2026 Earnings Conference Call. Joining me on today's call Ivan Tornos, our Chairman, President and CEO; and Paul Stellato, our Interim CFO and VP Controller and Chief Accounting Officer.

Before I 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 of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for capturing these measures is included within our second quarter earnings release which can be found on our website, zimmerbiomet.com. With that, I'll turn the call over to Ivan.

Thank you, David. Good morning, everyone, and thank you for joining today's call. I would like to start the way that I always do, with gratitude, thanking for Zimmer Biomet team members around the world. Thank you for your commitment, your resilience and most importantly, your dedication to serving our customers and their patients each and every day. I'm truly grateful to have the opportunity to serve alongside you in this journey. Equally important, I'm beyond proud of the work that you do daily.

During my prepared remarks this morning, I'm going to cover three things. First, I'll summarize our strong second quarter results. Second, I'll review our upgraded outlook for the year 2026. And then thirdly, I'll provide an update on our three strategic priorities, which remain unchanged. First, people and culture; second, operational excellence; and third, innovation and diversification.

To begin, we delivered second quarter net sales of $2.177 billion, which came in above our expectations, representing 4.8% growth on a reported basis and 4% growth on an organic constant currency basis. On an organic constant currency basis, we grew 4.6% in the U.S. while our international business grew 3.1%. The growth in the U.S. demonstrates the strong progress we are making across our IP of fronts including our U.S. sales force transformation.

Starting with Hips, we delivered 5.1% constant currency growth including 5.9% growth in the critical U.S. market and 4.2% growth internationally. In the U.S., our hip triple play continues to gain momentum, driven by the continued penetration of Z1 or triple-taper hip stem, which now represents over 40% of our U.S. hip stems and will soon surpass 100,000 implants worldwide.

Secondly, we've seen greater utilization of HAMMR or Surgical Impactor which is now used in over 25% of our U.S. primary hip cases.

And thirdly, we have seen increased adoption of OrthoGrid or AI-based navigation solution for direct interior heat procedures. OrthoGrid had its strongest quarter to date and the first half of 2026 saw as many cases as the entire full year 2025. We expect growth to accelerate in this platform in quarters to come.

Outside the U.S., our iodine core hip launch in Japan is exceeding expectations as we are seeing robust demand from both existing surgeons and competitive accounts. We expect this first to the world technology to be a meaningful growth driver in the second half of the year 2026 and well beyond 2026. We're actively pursuing pathways to bring this game-changing technology to additional markets outside of Japan.

MIS increased 0.1% in the quarter with U.S. growth of 1.4%, offset by a 1.5% decline internationally, which was heavily impacted by China and core emerging markets. We continue to see traction with new product launches and are very confident that the specialization work being done in the U.S. and go-to-market changes in key OUS markets will lead to improved performance.

S.E.T. grew 3.4% on an organic constant currency basis in the quarter, which was a 180 basis point acceleration from the first quarter of the year. In the U.S., we delivered mid-single-digit growth and Paragon 28 sales increased mid-teens. This was driven by differentiated and innovative product portfolio, strong execution healthy market dynamics and the successful integration of the acquisition. CMFT, Cranial Maxillofacial Thoracic once again grew double digits led by our thoracic franchise, while upper extremities reported another quarter of upper single-digit growth. These compelling results were partially offset by continued pressure in both trauma and restorative therapies.

Technology & Data, Bone Cement and Surgical grew 21.5%, demonstrating that our strategy of offering a comprehensive suite of customer-centric solutions is resonating with customers. We delivered record capital sales this quarter, driven by both ROSA with Optimize [indiscernible] saw early contribution from the much-anticipated next-generation ROSA shoulder launch. ROSA shoulder is the only robotic sounder system in the world that can perform both anatomic and reverse procedures and reset both the glenoid and humeral side of the joint. Surgeon feedback from the first run of cases is very strong, we look forward to doing many more cases in quarters to come.

U.S. technology sales grew over 50%, and we continue to have a very robust capital equipment pipeline demonstrating surgeon enthusiasm for their differentiated product offerings and a healthy CapEx environment.

Turning now to our outlook. With a strong first half, the transition to a dedicated and specialized U.S. sales channel progressing as planned, continued new product momentum and healthy underlying markets we are raising our full year organic constant currency revenue guidance to 2.25% to 3.25% from the previous range of 1% to 3%. We are also increasing our adjusted earnings per share guidance to $8.47 to $8.59 in from the previous guidance of $8.40 to $8.55. Paul will provide more detail in his prepared remarks.

With that, let's turn to our three strategic priorities: people and culture, operational excellence, innovation and diversification.

First, in the area of people and culture, which is a key pillar of our strategy, we are doing great things. This is our top priority as a company, underpinning all that we do. And allow the fact that this is truly, and I mean surely becoming a competitive advantage for Zimmer Biomet.

Over the last year, we were recognized by leading global publications such as Time magazine and Forbes as one of America's best companies. We're also highlighted by Fortune Magazine as one of America's most innovative companies. And we are multiple great places to work certifications and best workplaces awards all around the world.

These recognitions not only cement or status as a best and preferred place to work, but they also help us recruit top performers in key roles while maintaining high engagement and low people turnover. Our people and culture first imperative extends to the acquisitions that we do.

When we acquired Paragon 28 just over 12 months ago, our goal was to strike the right balance between integration and preserving the fast, agile an entrepreneurial culture that has been central to the success of Paragon 28. More than a year after the close, Paragon 28 is growing mid-teens with commercial integration largely completed and negligible turnover among key team members. Paragon 28 now represents the template for future acquisitions as we identify a target that makes sense strategically and financially, accelerates our WAMGR and creates a growth platform, has like Paragon 28 has done for Zimmer Biomet. We have successfully brought Paragon 28 into the company, combining the best of both organizations, and we are now very confident of the capabilities in place to do future deals with similar dynamics to this one.

Finally, our people and culture first imperative is central to how we're approaching our global commercial transformation. In the U.S., our transition to a dedicated and focused sales organization, one specialized around key call points and growth areas is progressing as planned, 6 months [indiscernible] with less customer disruption and sales force turnover than initially expected. We have confidence to accelerate our transformational efforts in certain territories. We firmly believe that once these efforts are completed at the end of next year, Zimmer Biomet will be a stronger company with a far more productive commercial channel and a more durable, diversified and scalable growth engine.

Our second priority is operational excellence. We continue to take actions to drive efficiencies. This includes shifting certain R&D spend to our newly opened global capability center in India, where we can access a strong talent while improving our cost structure.

Additionally, we are excited to open a new manufacturing plant in Costa Rica, which furthers our strategy of increasing supply chain resilience while gaining access to lower cost geographies. Construction in Costa Rica is well underway we are scheduled to establish the initial manufacturing lines next year.

Lastly, to drive long-term margin improvement, we're aggressively implementing AI, artificial intelligence initiatives to address our operating expenses cost base.

Our third strategic priority is innovation and diversification. We remain very excited about our pipeline and the differentiated technologies we are bringing to market. As previously mentioned, we are encouraged by the early launch of our iodine core hip implant in Japan, which is designed to help address the risk of [ periprostheric ] joint infection after total joint replacement. Within the overall 0.5 billion Japanese hip market, this first-to-the-world technology is driving share of wallet and also competitive conversions.

Looking ahead, in the U.S., we continue to make excellent progress with monogram and anticipate filing the 510(k) for monogram in the very near future.

Beyond these two transformational product launches, we expect to introduce over 50 new products in the next 36 months, with many of these launches being first to the word introductions. While we could not be more enthusiastic about our current product cycle, we are deeply committed to being the boldest innovator in Musculoskeletal Health for years to come. Our role as the exclusive orthopedic investor in the mobility revolution fund, a musculoskeletal venture capital fund launched through a collaboration between [ Deerfield ] Management and the hospital for special survey in New York City is an example of this commitment.

Throughout the fund, we'll have the opportunity to invest in disruptive technology ranging from AI and data applications to cartilage repair with the potential to redefine orthopedic care and further our mission to alleviate pain and improve the quality of life for people around the world.

In addition to our organic innovation strategy, we are going to continue to look for responsible opportunities to diversify through M&A as we continue to aspire as a company to have a WAMGR weighted average market growth rate of 5% to 6% by the end of this decade.

All in, we delivered strong second quarter results made strong progress on our key strategic priorities, and we increased our outlook for the year 2026. The work that we are doing to transform our company, starting with our critical commercial channel is well underway. I'm very proud of the team. I'm very proud of our progress, and I'm very excited with the momentum that we have as we advance our customer-centric strategy and address the most challenging problems in health care. I truly do mean I want to say that the boldest chapters for this company remain ahead.

With that, I'll turn the call over to Paul. Thank you.

Thanks, and good morning, everyone. As Ivan reviewed, we grew sales 4% on an organic constant currency basis in the second quarter, driven by strength in hips, high-growth segments of S.E.T. and robotics.

We reported GAAP diluted earnings per share of $1.03 compared to GAAP diluted earnings per share of $0.77 in the second quarter of 2025. Higher revenue and lower acquisition-related costs, along with a lower share count were the primary drivers of the increase. Our adjusted earnings per share were $2.07, in line with the prior year quarter as higher revenue and lower share count were offset by the expected dilution from the Paragon 28 acquisition and investments in the U.S. commercial organization.

Pricing was an 80 basis point headwind in the quarter, within our guidance range of up to 100 basis points of pricing pressure for the year. Adjusted gross margin was 71.1%, down 120 basis points year-over-year and in line with our expectations. This decrease was driven by increased manufacturing costs, partially offset by geographic and product mix.

Adjusted operating margin was 25.7%, down 210 basis points year-over-year and in line with our expectations as we continue to invest in our U.S. channel. Adjusted net interest and nonoperating expenses were $71 million, modestly below the prior year. Our adjusted effective tax rate was 18% and fully diluted shares outstanding were 192.8 million, down year-over-year due to $500 million in share repurchases during the first half of 2026 and including $250 million repurchased during the second quarter.

Now turning to cash and liquidity. We had another strong quarter of cash generation, with operating cash flow of $448 million and free cash flow of $308 million, up 18% and 24%, respectively. We ended the quarter with approximately $410 million in cash and cash equivalents.

Regarding our updated outlook for the full year 2026. As Ivan mentioned, we now expect organic constant currency revenue growth of 2.25% to 3.25% and up from 1% to 3% previously. We continue to anticipate foreign exchange to be an approximate 50 basis point tailwind to the full year revenue growth. In addition, given Paragon 28 strong performance, it will contribute 110 basis points to full year reported sales growth, above our initial expectation of around 100 basis points. As a reminder, the Paragon 28 transaction closed on April 21, 2025 and is now included within organic growth.

We now expect 2026 reported sales growth to be 3.9% to 4.9% and up from 2.5% to 4.5%. The updated revenue guidance contemplates a healthy orthopedic procedural market and new product momentum, balance with the continued risk of disruption from our U.S. and international go-to-market changes and up to 100 basis points of pricing erosion.

From a phasing perspective, we continue to anticipate third and fourth quarter constant currency growth rates to be consistent while foreign exchange is expected to be a 50 basis point headwind in the third quarter.

Shifting to the P&L. for the full year, we continue to expect gross margin to be around 71%, and we now forecast operating margins to decline a little more than 50 basis points, reflecting the aforementioned investments in our U.S. commercial organization. Within that, we anticipate third quarter operating margins to be down slightly on a sequential basis from the second quarter. Our assumptions for full year net interest and other nonoperating expense and tax rate remain unchanged and at $295 million and 18%, respectively.

And as previously announced, we now plan to repurchase up to $1 billion of shares this year, an increase of $250 million from our initial expectation. As a result, we now anticipate having about 193 million fully diluted weighted average shares outstanding for 2026.

Taking all of this into account, we are increasing our adjusted earnings per share expectations for the year to a range of $8.47 to $8.59 and versus our prior guidance of $8.40 to $8.55. We continue to expect to grow free cash flow 9% to 11%. We remain focused on delivering solid results this year while continuing to position the company for long-term success.

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

Thank you, Paul. 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. .

[Operator Instructions] We'll go first to Rick Wise with Stifel.

It's terrific to see all the positive progress and see the quarter's healthy beat and race performance. Of course, I'm inclined to credit your tornado to our efforts is helping in particular, the U.S. sales team get all jazzed up. But share with us, if you would, upon some more of your updated the latest thoughts about the sales force transition. It seems to be going well, but maybe help us better understand what's left to do. The growth implications since it seems to be going better than expected.

But also maybe help us understand. It seems like you're making a deliberate choice to reinvest some of the sales outperformance margin outperformance in higher SG&A spend. How do we -- is that a conscious decision? Is there something we need to understand better? And maybe just about the implications going forward in the second half and 2007.

First and most important, I'm going to invite you to the next tornado tour, even a lot of it, five states in 5 days, seeing countless reps, managers and distributors. So [indiscernible] because it's an intense week.

I'll tell you the sales force transition, the go-to-market changes are going better, if not much better than expected. And I think that's evidenced in the numbers that we posted for the quarter. We delivered almost 6% growth in Hips ,5.9%. Our technology business, we invested a lot -- added a ton of reps in the channel, grew 53% in the quarter. When you look at S.E.T., there is a lot to unpack in S.E.T., as you know. But our shoulders business or upper extremities business delivered upper single-digit growth. Again, that's the outcome of the specialization changes that we're making, and we're going across the board. Surgical had a great quarter. So again, across the board, the dedicated specialty structure is yielding results, 4.6% growth in the U.S.

So you see that the changes that we're making are increasing productivity. The number of cases per week are increasing. And again, we've seen the return on these investments.

Beyond the financials, we look at all kinds of people metrics or attrition rates or people turnover rates are the lowest that we have seen in a while. And engagement is very high. We are on track to complete all of these by the end of 2027. So we're going at the right pace. We always say we're going to have three stages. The first one is done, which was the lower or lowest risk. We are now in the second stage, and we're taking our time to understand what is the pace, what is the level of investment that we need to secure. And then quickly going to move into the third stage and again, repeating myself, will be done with this project. We'll have a fully dedicated unspecialized structure by the end of 2027.

So everything is on track, and that's what you see us today raising our guidance.

In terms of your second question, the SG&A question Look, we said from the one that we're not going to be penny-wise and pump pools. This is not a cost savings strategy, the go-to-market changes in the U.S. This is a growth strategy. We want to have the best sales force in orthopedics, and we're building just that.

So to not be penny-wise pump poles. We got retention agreements across the board. We'll obtain the top 6 independent distributors. We have added 200 tech reps or we're adding 200 tech reps probably midpoint into recruiting those 200 reps. We've invested heavily in sales excellence programs across the board. We got what we deem the best comp plan in orthopedics today, which is enabling us to recruit medtech top reps from across the board. We're excited about the people that we're bringing here. So that's why the SG&A is modestly up.

We like this investment. We like these investments. We know that are going to help us go at pace derisking the go-to-market changes. And most importantly, we know that these investors in '26 are going to yield better results in 2027. So I love what we see everything on track, and thank you for your question.

We'll go next to Larry Biegelsen with Wells Fargo.

Ivan, you know the recon market question is coming, and you talked about healthy underlying trends. So when we aggregate the data, it looks like the retail market did slow in the first half looks like it slowed in the U.S. and outside the U.S.

So my question is, what do you attribute that to? And you know there have been concerns about the ACA since some cities expiring in the Medicaid cuts what are you assuming in the guidance? And I know you framed it is kind of low single-digit percent of your U.S. procedures for both the ACA exchanges and educate but that's still, call it, in the aggregate, maybe 5%. If those declines, say, 20%, it could still be a 1% headwind for you. So how are you thinking about this?

Look, this is my second stint in orthopedics 8 years now at Zimmer Biomet, previously with [ PO ] for a few years. The one thing I've learned is that markets don't change 1 quarter to the other. So we don't look at 1 quarter dynamics. The second half of '25 was stronger than the first half of '26. Hips was very strong in the second quarter. We continue to see Knees, the Knee market in the U.S. around 3% or 4% on so again, we don't look at 1 quarter dynamics. We know that in Q1, there were some acute events. Some of that got resolved in the second quarter. I'm talking about some of the strikes, talking about some of the external changes. We are not concerned about market health.

We continue to peg the overall market at 4% to 5%. Otherwise, we'll not be growing 4.6% in the quarter in the U.S.

Relative to the ACA, we keep monitoring this. I tell you, for us, the exposure to ACA and exchanges is low single digit. Our single largest payer or our largest payer for [ Simberi ] Medicare. As you know, the population age matters. The average heat page in the U.S. is 65 years old, for [indiscernible] 67. So these are Medicare patients. When you throw on top of that commercial, that's virtually the entire payer ecosystem. So low single exposure to [indiscernible].

We track all cases of data. As the largest orthopedic company in the world, we look at waiting list, which remain unchanged. Average in the top 10 hospitals in the U.S. is 3 to 6 months, that is waiting times. We look at cancellation rates. This is a metric that we started to monitor during COVID. What percentage of times to patients cancel the procedure at 1 point was 40%, 50% for the last 5 years, it's been in the teens. That tells us that when a patient commits to a procedure, 85%, 90% of the time, they will go through the procedure. So that's no change.

We look at referral cycles. From the time you go to see a primary care doctor to the time you sketch of the surgery, what is the waiting cycle and again, remains pretty much the same. So you may have some mix elements, Hips are stronger 1 quarter, Knees after 1 quarter. Again, overall, we are not concerned. We like what we see as we look into the second half of the year 2026. And internationally, there's all kinds of events, whether it's tenders, whether it's geopolitical dynamics in the Middle East. So we're not concerned about market health, and that's why we're raising guidance for the second half of 2026.

We'll go next to Mathew Blackman with TD Cowen.

I just want to drill and go down a little bit on some of your latter comments in response to Larry's question and specifically on the hip market, it was a noisy quarter in that market globally. Everyone's growth decelerated with the exception of Zimmer Biomet.

So just hoping to get your perspectives, first, on the U.S. market, anything notable in terms of volumes or share or mix? And then OUS, obviously, you've got new products, particularly in Japan, and I appreciate that OUS is a lot of different geographies. But just help us understand the opportunity OUS for the Zimmer hip franchise and the health of underlying key underlying markets there.

Well, let me just piggy back to that first comment that Zimmer Biomet did grow in the quarter. Again, I'll tell you -- that tells you that it's all about execution. The markets are not a problem. The innovation story is compelling here. So as long as we continue to execute, our expectation is that we'll continue to deliver the performance that we can deliver.

Relative to new product hits and the opportunity outside of the U.S. and here in the U.S., let's start with iodine. It's one of the most transformational products that this company has launched. Very [indiscernible] infections are the #1 cause for readmissions. Infection is a multibillion dollar to all health care systems. Japan is the second largest hip market outside the U.S. roughly $0.5 billion in value. And the launch has gone much better than expected. Candidly, I mean, we're struggling to supply at the patent supply. The demand is very high. we expect to convert the lion's share of the entire market over to iodine core devices.

We get a 40% premium every time that we move from noncoated, non-iodine hip to a core hip, we are converting not just Zimmer Biomet customers, but also competitive accounts. So the launch is going really, really well.

We are in active conversation with the FDA to understand the pathway to bring this to the U.S. and we've got a pipeline of countries all over the world where we're going to be bringing this rapid technology.

Here in the U.S., look, we don't have idea today, but we do have the hip triple play, what we call the hip triple play platform, Z1, HAMMR or Surgical Impactor and OrthoGrid. All three of them are taking market share, also them are going better than expected, and that's why we delivered 5.9% growth in Hips in the U.S. this quarter.

So that's hips, I'm not going to ramble through the rest of the portfolio, but we have an innovation story. And again, I'll leave you with one word, execution. We got to execute better. That we're making the go-to-market changes. And then we'll be able to deliver quarters like this, if not much better than this.

We'll go next to Patrick Wood with UBS.

Ivan, you obviously said there's a lot to unpack and set. So I'd love to just drill into that a little bit better. Obviously, a bit of a sequential acceleration on that side. I know there's a lot going on between shoulder and sterno closure. So anything you can give us a sense for how -- what drove that acceleration? How you're thinking about that for the balance of the year and moving into 2027?

Thanks, Patrick. We love this business. We delivered a 4% plus in the U.S., we're slightly behind mid-single-digit growth globally in set some timing with Sports Med that is going to move on to the second half.

As you heard in my prepared remarks, Paragon 28 is growing close to 50% or upper extremities business growing strongly, close to upper, if not up actually upper single digit or the CMFT business is growing in the teens. I don't know how many quarters in a row. This is driven by our thoracic business the opportunity here is $2 billion plus when you move from wires to refixes or wires 3D fixes from wires to refixation for standard closure. So it's a standard of care change -- so again, CMFT growing in the teens. Sales on upper single digit, Paragon 28, still a growth at almost 15%. We expect bigger growth in the second half. So we like where we are with [indiscernible].

We do have two headwinds. We've been very candid about the two headwinds, those being trauma and restorative therapies. Actually, if you take those out, the U.S. growth would be solidly in the upper single digit year-to-date. So we're addressing the changes that we need to make in those two businesses, trauma and restated therapies.

Net-net, the second half of 2026, we expect to have a much better asset growth profile. But again, very pleased with the progress and congratulations to the team, especially Paragon 28 for an stellar performance in the second quarter.

We'll go next to Vijay Kumar with Evercore ISI.

I guess I'll focus on Bone Tech and [indiscernible] north of 20%, really strong. How much of this is being driven by Zimmers tech strategy resonating in the marketplace versus any onetime or trade? Did you benefit from any bone semen competitors being off the market? If so, could that be a comped when you think about?

Look, there's a lot in this other category. I particularly don't love the name other for everything. The lion's of the growth is technology. Technology in the U.S. grew 30% in Q1. in the second quarter grew 53%.

As we look at the second half of 2026, the pipeline technology, both in the U.S. and actually the U.S. is very strong. So I'll tell you, the lion's share of the growth is technology.

Our bone cement business is a tiny fraction of that category. There were some onetime events in some international markets. But no, the growth here comes from technology, number one, and surgical, I referenced the surgical, the first quarter 2026 and the second quarter has been much stronger than in the past. That is part of our ASC strategy. So now it's certainly not bone, it's technology.

And I'll tell you, there's two different dynamics here, one internal and one external. On the external front with technology, the CapEx environment is very healthy. As you probably heard now from all competitors, we all have a strong pipeline of robots that we're selling. The CapEx, again, is very, very healthy, mostly in the U.S., but in some countries out of the U.S.

And the second dynamic is here internally. We have the most comprehensive suite of solutions. Whether it's handhelds that are cordless, whether it's city scan devices, non-city scan devices, mixed reality, large footprint robotics, if I can speak, whether it's the launch of ROSA Optimize, whether it's ROSA Shoulder, it will take an hour to go through it. We've got a best-in-class portfolio in technology, and we're in the early stages of gaining the market share that we can gain with our technology.

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

I'm looking at kind of comp-adjusted growth. Q2 was a nice acceleration. If you end up beating the guy in the back half, you'll have another acceleration in the back half of the year on the total company growth. Is that the sales force transition getting better and the execution getting better? Is it new products? Just curious what's driving that kind of acceleration over the course of the year.

When you look at '27, what gets better, what gets worse? Is the sales force acceleration? Or is the sales force, less of a headwind than '27 or new products more of a tailwind? Is there -- is pricing better or worse in 2027? Just trying to think about the factors of '27. We can make our own call on kind of market growth rates, but kind of the Zimmer specific factors on '27 that you could kind of call out what is better or worse.

Look, the numbers when you see the numbers, we understand the details can mislead you. If you look at 2025, if you look at last year, the first half of 2025, when you adjust for the selling day impact dynamics of the first half. The growth in the first half of 2025 is 3.6%.

Now when you look at the second half of 2025, when you adjust for the ERP comparable versus '24 and I'm going back in history. Now the growth rate in the second half of 2025 is around 4%, 4.2%. So 3.6% growth, real growth in the first half of '25 and 4.2% growth in the second half of '25. So a 60 basis point acceleration from the first half of the second half.

What gives us confidence that we're going to deliver that, if not more. we've seen great momentum with our go-to-market changes, again, as evidenced by the results. We continue to see an uptick in [indiscernible] acceleration or S.E.T. business, as I referenced earlier during my answer Patrick, it is going to accelerate. We don't have the supply chain we have with the sports medicine. We continue to see Paragon 28 delivering strongly. Early in Q3, they continue to do really well.

So a combination of commercial execution, innovation and the fact that the growth is not as secure as it may look at face value, give us confidence on delivering on the second half of 2026.

Relative to '27, look, we're not going to get into commentary around what '27 looks like. I will tell you. If you ask me today, we are confident that the performance should improve in the year 2027. To begin with, by the way, will be mostly done with all the go-to-market changes. We will not have the struggles that we have in China today. China is only 2% of the revenue of Zimmer Biomet, 1% of EBITDA. But it's a country that has been declining 20% this year. So we're going to have favorable comps as we get into 2027.

We also have some noise in emerging markets. Those disappear as we get into 2027. So again, the U.S. would perform better given the go-to-market changes we're not going to have some of the headwinds that we got today in a variety of international regions. So we do believe 2027 is going to be better. But we'll talk about 2027, when you stand to talk about 2027.

We'll go next to Robbie Marcus with JPMorgan. .

I wanted to ask, following up on -- you were talking about all the different tech and robotic platforms you have. How do you think about coalescing that as a strategy to drive revenue growth? And balance that I have to imagine there's a decent amount of support dollars that go in to having so many robotic platforms. So how do you think about all of those? Do you focus on a few? Do you keep the broadest offering? And how do you think about returns and support for those platforms?

Look, we've taken a very data-centric approach to what is the best pathway when it comes to technology. We don't call it a robotic company we call us as a technology company. So we segmented all kinds of technology within orthopedics. Percentage of surgeons that use robotics in the U.S. remains 20%. So 80% of surgeons don't use a robot in the U.S.

When you look at OUS dynamics, 10% of surgeons who use a robot, 90% do not. So we don't want to be a robotic company. We want to be a navigation company, and that's why here in the U.S., we offer surgical guidance for nonrobotic users, we have FDA-approved mixed reality. We recently acquired 3 quarters now, 4 quarters ago, OrthoGrid for direct interior and similar technologies outside the U.S.

When you look at the percentage of surgeons that use roads, again, the 20% in the U.S., 29,000 orthopedic surgeons, 20% new robots here in the U.S. One robot does not fit all. we do extensive market research. You got some surgeons that prefer CT scan. You got some the preferred imageless. You got some that like small portable to move the robot [indiscernible], one operating room to the other one. So we had that optionality. Again, we've got large footprint, small footprint, portable, which by the way is cordless, city cans, it can, we got all kinds of robots.

And similar dynamics is actually the U.S. to the U.S., the preference is for CT, scanless robotics, and we have that. So that's why you see such a comprehensive suite of solutions.

In terms of the cost, look, we're evaluating that. as we launch monogram, as we continue to track, which products are doing better than others as we see where the standard of care is going to evolve towards. We may start to prune the portfolio have a more simplified portfolio. But right now, we like the optionality of having such a comprehensive site solutions. And look, 53% growth in the second quarter tells us that we're doing something right.

We'll go next to Matt Taylor with Jefferies.

Ivan, I want to ask you about other since you don't like that, but -- let me ask another technology-based question. I have an update on ROSA shoulder, how that is going. Maybe you could talk about the rollout the uptake that you expect and how that's differentiated from other technology-driven shoulder solutions?

First of all, I do like a category other. I just don't like the name because we do a lot of [indiscernible] we've seeing what we call other. So do we continue on that versus solid is going better than expected early in the launch, but were a great opportunity. Solar arthroplasty, as you know, is one of the fastest-growing areas within orthopedics.

Today, only about 20% of doctors perform solar arthroplasties because it is a very difficult procedure. The real estate and the shoulder is minimal. The accuracy needs to be very high is very complex.

And reimbursement is very high. It's actually the highest of our core orthopedic procedures. So you're bringing a solution to a complex problem that you can monetize, you're going to get rewarded. And that's what robotics are bringing to the space.

As you know, earlier this year, we received a clearance for next-generation ROSA Shoulder. We launched the original version, I want to say 1.5 years ago. We did a very extensive limited market release. We learn a ton. And with the learnings, we reconfigured parts of ROSA and now we launched ROSA Shoulder next generation, what we call Version 1.1. It is the only system that can do both reverse and anatomic procedures, reverse is roughly 70% of all solar at pastis around the world, especially in the U.S. But you got 1/3 of surgeons that prefer an atomic approach. And again, we are the only company that offers both.

It's also the only system that can do both the humor and the [ cleaner ] resection, where that gives you is more accuracy in the cash that yields to a better outcome and faster recovery. Generation 2 versus generation 1 is a much simpler and improved interface. Again, we took our time. I know we've been talking about the LMR for, I don't know, 1.5 years, now we're moving into a full market release as we speak in the next couple of weeks. And again, only a month into the launch, but we have seen great adoption. We're getting outstanding feedback and early to make commitments, but if we do the word I believe we're going to do, we expect the penetration of robotics to go faster than it did when robots were launching needs back 10, 12 years ago. So a great bit of opportunity and a great bad form, and we look forward to updating you every other quarter.

We'll go next to Ryan Zimmerman with U.S. Bancorp BTIG.

But I want to ask about pricing in the quarter. If you look at pricing over the last 3 quarters, the headwinds have increased a little bit. It's still within the range of what you expect. But when you think about Medicare is your largest payer, the [ CJRx ] program, the PFS rates that are proposed for which are down potentially up to 20% right now. Is it your assumption that pricing headwinds will increase in Orthopedics because of these dynamics, it just seems like that it will increase the shift of ASC and potentially put some pressure on implant pricing. So I would appreciate your thoughts there.

Relative to pricing, look, the ongoing question the ongoing question for 5 years now, 20 quarters, I've been asked whether I thought the pricing was going to get worse, and it hasn't. It is very much within the guidance that we provided of flat to 100 basis points. Pricing dynamics are not changing, all the maths in the ASC environment. As you know, most of these ASCs are owned by surgeons or private equity companies or to operators that understand that the implant is only around 14% to 15% of the overall cost, so the conversation is not about the implant. The converse is around reduction of surgical time, ensuring that you're not sending the patient to an inpatient unit, lowering readmissions, et cetera, et cetera.

So we continue to track pricing dynamics in patient HOPD, hospital outpatient departments and stand-alone ASCs, and they're very comparable. If you look at the data going back 20 years, the implant right now as a percentage of [ DRG ] remains at the lowest point. So I'm not sure that you get much more to squeeze in those implants. And with the conversations we're having now around CGR expansion, Comprehensive Gene Registry expansion, with the focus right now, not on the surgery alone but the entire recovery, the entirety of the treatment, I don't envision that anyone who understands data is going to choose lower price implants or is going to try to negotiate lower pricing. It's going to be around the comprehensive baler and companies that drive efficiency, companies that enable best-in-class clinical outcomes are going to win.

With all that rambling, I'll tell you, we don't expect the second half to be an uptick when it comes to price erosion. 85% of our book of business is contracted. We got visibility into the second as well as 2027, and we're very confident on our guidance of flat to 200 basis points and worse price erosion. Thanks for joining the call.

Go next to Steve Lichtman with William Blair.

Ivan, you touched on M&A in your prepared remarks with Paragon now fully in the fold. Could you give us your latest thoughts on the type of deal that makes sense for Zimmer Biomet right now. Are you thinking about going further outside of your verticals? And any comments on [ Bai's ] preference in terms of a tuck-in or could we see something larger?

Look, it has not changed. It's the same story, I believe that we've been telling for now 2 to 3 years. Our M&A strategy remains consistent across three vectors. First, we're going to focus on the higher-growth segments of recon. Not all recons credit equal. You got segments within Recon that are higher growth data, technology, infection. And that's why we have acquired companies like Ortho obviously monogram, surgical impactors and other data technology plays. So that's vector #1.

We will continue to invest in higher growth segments of Recon, where we own the call point where we are the leading company globally.

The second vector is going to be higher growth areas within S.E.T. Again, for an ankle, sports machine, upper extremities, CMFT, and there's a lot of optionality there. We've done some deals there. You referenced Paragon 28, which is going great. but also embody in sports medicine is going great or acquisitions in CMFT are going much better than expected. That's why for, again, 5 years, CMFT has been growing strongly in the teams. So again, our second vector is going to be S.E.T.

And then thirdly, at some point, we look at more adjacent areas to are the businesses peripheral to neuro that we want to look into. S.E.T. happens, most of these proceeds happening in ASC, what are some other opportunities. So those are the three vectors we're going to go at pace, we're going to be both as a team, but not reckless.

In terms of criteria, you call that is similar to Paragon 28 up to $2 billion acquisition price, ideally, that's. Needless to say whatever we acquire needs to be immediately accretive to revenue and WAMGR or Weighted Average Market Growth Rate. Similar to Paragon. It has to be EPS accretive by the second year. We're looking for a double-digit return on investment capital or invested capital ROIC by the year 5. So we're going to take our time. We have an ambition to have a WAMGR of 5% to 6% by the end of the decade. That doesn't mean we need to buy or delta from 4.25% today to 6%. There's a lot of organic work that we're doing to move into higher-growth WAMGR environments from an R&D perspective. But yes, now that we know that we can do effective R&D or M&A. Now that we've learned that we can integrate, given what we've done with Paragon 28, we're going to continue to look at this.

We'll go next to Joanne Wuensch with Citi.

I'm a little curious how you're thinking about guidance philosophy and how you're thinking about the raise for the second half of the year and as you think about setting 2027, the company in a very short period of time has gone through a number of changes, the sales force change and new product pipeline a couple of stumbles not worth mentioning. How do you think about pulling all of this together when you do give the guidance? And should we think about your commentary in the phrase of conservative, realistic or hopeful?

Look, I say that my guidance or guidance philosophy is going to be to say less and do more. We're going to take a measured approach, given all the variables that we continue to analyze, and that's what we're doing. We're confident on the guidance for the second half lots of puts and takes. We see certainly more upside than downside when we look at where we finished the first half, but we're going to go 1 quarter at a time. We'll take the same philosophy for 2027. And at the right time, we'll talk about 2027. But the philosophy is going to be to say less and to do more as we did in the second quarter of 2026. .

We'll go next to Vik Chopra from BMO.

Ivan, I wanted to ask where you are with your CFO search and what specific attributes you're looking for in a permanent CFO?

Thank you. Look, we have a great interim CFO who's sitting here to my right. Paul Stellato has been a great business partner for 4 years. A lot of the transformational work that this company has gone through over the last 4 years. It's been led by Paul. So I am in no hurry here because I got a stellar interim CFO.

Obviously, we're looking also at external candidates. We're looking for someone who wants to be part of this transformation. Some are going to be in the tranches. Some is something like an operator, somebody with experience in value creation. Some of who brings credibility from a street perspective. a true business partner. So that's what we're looking for. But again, we're going to take our time. We've got a great interim CFO here at Zimmer Biomet, and everything is very much on track as we think about the search on the process question.

This concludes the question-and-answer portion of today's call. I would like to turn the call over to Ivan Tornos for any closing remarks.

Thanks, operator. Look, we started today with gratitude, and I'm going to close with gratitude. I want to thank, again, all the employees, 17,000 of you at Zimmer Biomet who do so much every day. I'm grateful for your hard work. your dedication, the results, the progress and most importantly, for what you do for patients and customers every day.

In closing, we're very pleased with the results in the second quarter. The transformation of the company is going as expected, if not better than expected. We are extremely confident on the guidance rates that we provided this morning. And most importantly, we're really excited about the changes that we're making in 2026. We always say it was a transitional year. It will be a transitional year. And as we entered in '27, '28, we're going to have a totally different company. So very excited, very part of the team. And I thank everybody for joining the call this morning.

This concludes today's call. Thank you for your participation. You may now disconnect.

Good morning, everyone. We'll go ahead and get started here with the next session. I'm very pleased to welcome the management team from Zimmer, Ivan Tornos, Chairman and Chief Executive Officer; and Paul Stellato, Interim Chief Financial Officer. I obviously have a bunch of questions, but happy to open it up to others should you have questions. We'll just get you a mic for those participating on the webcast so they can hear.

Maybe I'll just kind of start with a very dynamic year for Zimmer Biomet with the sales force transition. And one of the things that you clarified recently was this investor dialogue around 1099 versus FTE and dedicated and non-dedicated. Maybe just set the record straight like what are you actually doing? Why are we doing it? And where are you in that?

All right. Well, first of all, good morning, everybody. Thank you for hosting us. So the go-to-market changes in the U.S. maybe let me just take 3 minutes, give you a longer answer than you anticipated to break down and summarize what is the problem we're trying to solve. So as a company, we do roughly $8.5 billion in sales, Zimmer Biomet and roughly 60%, 6-0 percent of our book of business here in the U.S., not to mention most of the EBITDA comes from the U.S. So call it, $4.5 billion already in the U.S. and again, most of the profit.

We've been operating forever with what we call an independent channel and independent is mostly 1099. We've been operating mostly with a non-specialized channel, which basically means that we take a multi-platform approach. I get up in the morning, I go sell Hips, Knees, until recently, Foot & Ankle, Shoulder, Sports Medicine, whatever.

We have a productivity challenge in the U.S. on average rep in the U.S. that has 7 cases per week, 7 cases per week versus our leading competitor doing 16.7 cases. So again, mostly independent, non-dedicated, only 1/4 specialized and a productivity dynamic of doing less than half the number of cases of our competitors. What are we trying to do? -- our key principles behind what we call Project Optima internally, the best version of our commercial execution journey.

Principle number one, everybody has to be fully dedicated to Zimmer Biomet. Everybody has to be fully dedicated. That doesn't mean everybody has to be at 1099 or rather at W-2. Not everybody is going to convert from 1099 to W-2. So that's probably something that early on in the journey, we confused people with 1099, W-2. Everybody has to be fully dedicated. That means that at the end of the transformation, there is a percentage of the channel that remains 1099.

As long as they're fully dedicated, exclusive to Zimmer Biomet, we're okay with that. We run a business called CMFT, Craniomaxillofacial and Thoracic that is all 1099. That business is growing 15%, 16% for beginning amount of years. So principle #1, fully dedicated, exclusive to Zimmer Biomet. That in principle #2, we are going to specialize 100% of the channel. So the days of selling different products across the board are over.

We're going to be best-in-class when it comes to focus. So we're building verticals around shoulders, sports medicine, recon, Hips and Knees, already got a vertical on CMFT. Through Paragon 28, we got another vertical on Foot & Ankle. So that's principle #2. Principle #3, we're going to add all kinds of capabilities in areas where we didn't have those capabilities. We're hiring 200 people in technology to sell ROSA OptimiZe, ROSA Shoulder, [indiscernible] Monogram.

We're adding a ton of people when it comes to ASC, Ambulatory Surgical Centers. We're adding a ton of people when it comes to market access and doing contract in a different way. So again principle #3. And then #4, we are going to have a different level of governance. So we have had inconsistent incentive plans or operating mechanisms, the way we manage the channel have not been great for a variety of reasons. So we changed that as well. So the sum of all parts, we will see our productivity going up. We'll see our focus going up. And those 2 things alone should drive better performance in the U.S. than the performance we have seen here for the last, call it, 3, 5 years.

Can you maybe visualize for us or give some examples of what non-dedicated looks like for someone because sometimes you use terminology on calls that is disconnected from the way we look at things. Is this like someone sitting around selling hips and knees and like a crypto trader on the side, like they're running a laundromat on the side? Like what is it actually...

Understood by the crypto, but the laundromat, yes. So non-dedicated is somebody who may have 2, 3 jobs other than Zimmer Biomet. And that's real, right? If you got 1099 independent agent, you're kind of like a franchisee of the company. So you represent all products in a given geography, but you do other stuff. And going back to data, we got 2/3 or we had, now it's a different number. We had 2/3 of the company at the beginning of 2026 that were non-dedicated to Zimmer Biomet, mostly 2,500 reps in the U.S., more numbers coming your way. 2/3 at the beginning of 2026 were independent agents.

And 2/3 of the 2/3, you can start breaking down the funnel here, had at least a second, if not a third job. And yes, not cryptocurrency, but we got people with Dairy Queens, spendy, that's a loss, got people with distribution agreements for other medical device companies. So the focus is not there. And again, that's why we do 7 cases per week versus some of our competitors doing 16.7 cases per week. We got people that work sometimes 2 days a week, whereas you got competitors that are doing cases 5 days a week. So that's the whole dedicated and non-dedicated focus, non-focus dynamic.

And how do you avoid, I guess, unintended turnover? Because if you're in one of those positions, like it sounds like a pretty good gig, I guess, to cover some cases for Zimmer Biomet, it's run this other cash flow business on the side. Like how do you avoid losing the right people?

Well, with a lot of data and a lot of caution, not to mention best-in-class project management. We segmented the project, this Project Optima in 3 stages. Stage #1 is what we call non-regret moves, right? You got territories that have grown less than 1% for 5 years. You got territories that grew nothing in 2025. And in those territories, we know that we have a focus, a commercial execution challenge. So we're moving faster in that stage #1. We've done most of that already in 2026.

And again, it's gone better than expected. Now you move to the second stage, which is, hey, it's a bit of a mixed bag here, right? Not everybody in the states is having commercial execution challenges. There may be some contracting dynamics. The company also has done what we have done when it comes to supply over the years. So we're going to be careful with retention agreements. We buy some of the business that the people have. We guarantee certain extensions of geography and product lines in some conversations. So that one, we've been more careful.

And then you got Stage III, which is the, hey, this may be risky. We're going to go slowly. We're going to guarantee certain things in advance. I've made public remarks around how 6 independent distributors at Zimmer Biomet. We already had a conversation with those 6 distributors tenure extensions with guarantees, but the trade-off is that you can no longer represent a second or third company. You have to be fully exclusive to Zimmer Biomet. So again, segmentation in different stages, conversations territory-by-territory. Yes, money matters in this conversation. We're doing what's right for these territories.

The thing I'd add is the attention to change management has been critical on this. And that's also been the governor on how fast we go. So if we haven't checked all the boxes on have we had the conversations, do we know the potential repercussions we're not going to move forward until we're comfortable with that. I think that helps kind of make sure things stay on track.

And as you make these decisions to give longer-term guarantees or and invest in your people, does that create a disconnect or mismatch in the P&L where you're deploying resources, but you're not seeing the revenue return yet from the shift to from non-dedicated to dedicated?

So first of all, the reason why we guided EPS the way that we did in '26 is because we knew we're going to have some expenses associated with the transformation of the channel. When we move from non-dedicated, and let me use 1099 again to W-2 is more expensive, right? W-2, you fully burdened, you got benefits and whatnot. But then again, the assumption and so far, the assumption has been validated is that as you increase your number of cases and you increase your revenue, there is an absorption dynamic there, right? So net-net, it's a much better investment. But yes, there's some short-term variances when it comes to the cost dynamic here.

And then on the top line, obviously, you have the guidance this year of 1% to 3%. You started a little bit better than that. I know it kind of comps and days and things like that. But maybe how are you assessing whether this is successful or not? Is it going to be the pace at which you get reps converted? Is it going to be hitting the 1% to 3%? Is it going to be doing it faster? Like...

#2 is getting better financial performance, right? There's all kinds of qualitative inputs. But ultimately, we got to see cases going up. As we see cases going up, we're going into the right accounts, not just servicing cases. Not all cases are created proof. So that's ultimately the definition '26 seen a much better productivity per rep, both in terms of the quantity and the quality of cases.

And we appreciate all the numbers. We love numbers, as you know. Have you -- is there -- maybe it's not the way to think about it, but tell me if it is. Is there like a certain percentage of the U.S. revenue covered that's been converted, not just looking at bodies, like?

Yes. We -- again, we locked in at least 40% of all the independent -- 40% of the revenue that is driven by all the independents. I quoted that earlier. By eliminating the Stage 1 dynamic already covered another 20%. So you could say we're 50%, 60% done.

Okay. And I think you've talked about this being a 2-year process to complete?

We want to exit '27 with this fully behind us.

Okay. Does that mean that '27 will be a similar year of revenue disruption?

I don't know. Too early to talk about 2027. I mean, look, some of the changes we're making in early 2026 are going to be a tailwind for 2027. Some of these 200 people that we're hiring FTE are going to be a tailwind for 2027. Some of these retention agreements that we put in 2026 are going to be a tailwind for 2027.

And then you have the conversation of, are you going to lose -- as you get into the riskier areas, are you going to lose some of these commercial partnerships? Too early to talk about 2027. Very excited about '26, very excited about the reset that we're making here. What I can tell you is that once we're done with this, the U.S. is going to be growing at the pace that the U.S. deserves to grow.

And what is that number?

Mid-single digit or above. I mean it's almost by elimination, right? If the market is healthy and it is, right? Growing 4% to 5%. If the innovation is compelling, and it is launching 50 new products in 3 years. There's not a single gap in the portfolio. Then by elimination, the one thing that is broken is the U.S. commercial channel, the product in the U.S. channel. So as you fix that, if innovation is there and the market doesn't retract, which you will not, then you should be growing at least at market growth rates, if not slightly above. So mid-single digit or above.

That's a good segue, I think, to dive into some of the innovation. If you look at some of the products that you've launched so far across the suite that you're describing as the Magnificent 7, I mean it looks like a couple of them like hits, Z1 and HAMMR appear to be killing it on the upside. Maybe I'm sure you always want more. But those seem to be doing great. We don't seem to be seeing an impact yet on some of the other ones. Maybe just kind of frame for us where you are in kind of the journey of some of these product launches and how they're doing and what we should expect?

Sure. You make it sound so cool. Z1 and HAMMR are killing, I feel like we should give T-shirts we that. It's more than Z1 and HAMMR. OrthoGrid is growing strongly in the double digits. So the 3 key hip launches as part of the MAG 7 are overperforming. We grew hips in the U.S. in Q1 5%. Second half 2025 was mid-single digit plus, upper single digit for one of the quarters. So solid plus in terms of execution of those launches. In Knees, it's not that we're not seeing the growth of Persona, OsseoTi, or partial parts of cementless is that you got some bad guys in the mix, right?

You got some headwinds within the knee portfolio. We've got to do better. Commercial execution has not been great. But that's not to say that those product launches are not being successfully launched or they're not working out well for us. Hips is doing better than Knees. I wouldn't say that the Knee product launches are not working out.

Okay. Maybe just before we go on to Paragon 28, I want to maybe just talk about the competitive environment because there's a lot happening. There's always a lot happening, but it seems to be especially unique now where Stryker seems to be steady cybersecurity dynamic. But then you have 2 other competitors who continue to go through a lot of change. So how are you seeing just the competitive landscape unfold?

The competitive environment has always been intense and it's not going to slow down. Four companies account for 82%, 84% of the revenue, and the fight is on. I like where we are. We didn't have a portfolio. We have it today. We didn't have some of the dedicated structure that we're building, and we're building it. So I like where we're at. I like our chances as we exit 2026 and into 2027. So I welcome the fight.

Okay. Maybe going on to Paragon and just the whole SET business in general, you're about a year-ish into closing Paragon. Talk about how have things gone? What are you seeing in the business now?

It's been a very exciting journey. So we closed the deal in late April 2025. So we anniversary recently. This is a business that is growing double digit now. It's a business that prior to being acquired was growing in the mid-teens. We strongly believe that's the growth rate as we exit 2026, starting to see that as we hit midpoint in 2026. There is a bolus of innovation coming out of that business in a variety of fronts. We just reviewed the LRP, the long-range plan with the Board. We believe we have a strong pathway to become #1 in Foot & Ankle by the end of the LRP or LRP is 4, 5 years. The integration is going better than expected.

So we're not seeing disruption from a channel dynamics standpoint. Our turnover in that business is very low. No slowdowns, as I mentioned, innovation. The same management team that we had or they had at Paragon 28, Albert and the team, Matt Jarboe and whatnot, they are the managers running this business. So far, a year behind, every single financial commitment is being delivered when it comes to level of dilution from an EPS standpoint, integration cost, and the same is going to apply for the second year. So I think this is a great validation point for Zimmer Biomet. This shows that we know how to do deals, we know how to pick the deal strategically, we know how to integrate the deal operationally, and this will serve as a proxy for future deals to come.

And how are you thinking about M&A just in the context of the commercial changes that you're making? Where does M&A fall in the priority scheme? And what does the environment look like?

So we're always going to look for responsible diversification, and that means M&A. '26, we said that it was not the year to do M&A because we had a lot going on, right? This is a Herculean project in the U.S. changing a chunk of 2,545 reps, building on the capabilities that I went through, dealing with all these contract extensions, there's a lot of work, right? So that is the primary focus of the organization, starting with myself for 2026.

In the backdrop of that, we're integrating OrthoGrid, another deal that we did. We are integrating Monogram 28, first of the world surgical autonomy. We are integrating other smaller deals that we've done over the years. So Paragon plus Monogram plus smaller deals, plus the channel is a lot. So in '26, we said that we're going to deploy -- capital allocation is going to be deployed towards buybacks. As you know, capital allocation tends to be fluid and opportunistic at times. And when you get the multiple that we got and you generate the cash flow that we do, we're going to prioritize differently.

And this year, we're doing $1 billion in buybacks. As we enter '27, the responsibility to diversify continues, and we'll embrace other deals similar to Paragon 28. By the way, in 2026, we also committed to a $300 million investment with Deerfield Management and HSS to look for other conduits of innovation. So it's a lot that we have going on. I mean this is not a company that needs more innovation. It's a company that needs better execution.

And what would be those other conduit of innovation? Is that like a venture portfolio? Is it...

We're looking at early-stage cartilage repair opportunities, restoring versus replacing. We're looking at as the world's -- I would say, as the company that collects the most data in the world in orthopedics before surgery and after, what can we do with that data early on foundational models, the whole ability to predict versus explore different surgeries, rethinking the dynamics post-discharge. What are some of the different contracts that we can reinvent or engineer doing contract in a different way. We are investing with Deerfield in a variety of fronts around biosurgicals and whatnot.

So there's a lot of stuff that we're doing now with the Deerfield Management team. So again, that's a long-winded speech to tell you the same thing. We got a lot going on innovation. That's not to say we're not going to do M&A. The time will come. The cash flow generation in this business is great. But in '25 and '26, we've done a lot.

And we've talked a lot about some of the near-term and recent launches. And maybe we could go a little bit further out. You referenced Monogram. You did a demo at AAOS in February. Maybe just remind people the time lines for Monogram and then also just the commercial strategy around how Monogram fits with your broader robotic strategy.

Sure. So Monogram, we completed the clinical trial. We are in preparation mode to submit the 510(k). We still expect to launch early '27 the semiautonomous and late '27, the fully autonomous with the caveat, I said this publicly that we may be able to bring the fully autonomous sooner to market. The feedback so far has been extremely compelling. We're going to take our time because this is new technology, again, first to the world, surgical autonomy in orthopedics. But there are 5 key vectors of the thesis that we validated in the preclinical trial. #1 is safety.

We have 0 patient safety-related events. The surgical boundaries within these 2 with the Monogram robot are outstanding. It's as smart as you get. So #1 is safety. #2 is around ease of use. This is a robot that has fast registration. This is a robot that reduces preparation time dramatically versus conventional robotics. Bone cutting preparation of the actual surgery is less than 3, 4 minutes. So very easy to use, very efficient. We believe at some point, we can bring time-neutrality to cases. One of the main reasons why 80% of surgeons don't use a robot is because they don't want to slow down their cases or change their surgical algorithm.

And again, early in the conversation, but we're seeing that we can get into a time-neutrality, so efficiency. Reproducibility, the whole dynamic, once you done 3 cases, you don't 300, exaggerating for effect, but you get it. This is not, again, something that requires a lot of complex changes. And then accuracy. We've seen in the clinical trials a totally different level of accuracy, 40% improvement in accuracy. So safety, efficiency, ease of use, reproducibility and accuracy. Again, look forward to the 510(k) submission.

And then in terms of the business model, how we plan to commercialize Monogram, there are 3 key opportunities or business cases. One, I just referenced 80% of surgeons in the U.S. don't use a robot. There are 29,000 orthopedic surgeons in the U.S. So 20% use a robot. That's 5,800. You got a chunk that do not. We believe it's a blue ocean opportunity in that first business case to bring this technology to the 80% and increase penetration or adoption of robotics. The second vector or the second business case is obviously attacking competitive accounts.

We have had mixed results versus some competitors, given a variety of reasons from a product standpoint that are mitigated with Monogram. And then the third business case is going to be some of these ROSA users moving on to a Monogram. We don't think that's going to be the premier opportunity because ROSA is very sticky. It's the #1 robot outside the U.S. and those who use ROSA and like ROSA don't switch, but it's a share-of-wallet opportunity, if you will, titrate up to a higher revenue type of robotic platform. So 3 very specific business cases, lots of excitement. We look forward to launching in early 2027.

And can you just give us a little more detail on the comment you just made about the dynamics with robotic competition? It sounds like there are gaps, maybe gaps on ROSA in the U.S.

I wouldn't call them gaps, but the reality is that in the U.S., there is a preference towards CT scanning with a segment of users. That's why we remediated that gap with our partnership with TMINI and we're launching a ROSA that is CT-scan-based as well. But yes, for those users that prefer CT scan versus imageless, Monogram is going to be another wedge point that we're bringing to market. For those surgeons that rather have less involvement in the case, some call it half the technology, less surgeon involvement, whatever you want to call it, Monogram should become a very desirable choice.

But then again, outside the U.S., it's the opposite dynamic. Outside the U.S., CT scan is not reimbursed in a lot of countries. Radiation is a deep conversation. 5% I was reading an article or a study rather that 5% of all cancers are CT scan radiation based. Some surgeons out of the U.S. pay attention to those dynamics. So we're going to have one thing that I believe is going to be a major competitive advantage, optionality. We're going to have all kinds of robotic applications in all kinds of preplanning with all kinds of preplanning methodology plus mixed reality plus data quantification, so optionality.

Okay. And I guess the last question here just on -- as you think about the segmentation of the market, that 80% don't use a robot. Is there a profile of that type of surgeon, those low-volume surgeons, high volume? How would you describe -- or is -- maybe there isn't a way to homogenize it.

Well, we've done, as you can in mind, extensive VOC, most customers, and we run very large market research studies. 29,000 surgeons in the U.S., 20% adoption robotics, 80% do not. 110,000 surgeons outside the U.S., 10% penetration robotics, 90% do not use robots. And by the way, the 110,000 is probably not every country in the world, but it's the largest 10 to 15 countries. Focus in the U.S., 4 or 5 reasons why I don't use a robot. #1, I mentioned this earlier, it slows me down, right? I'm a high-volume user. I want to go fast.

I can't just change my surgical technique algorithm and slow my cases down, right? Robotics are not reimbursed. I want to do more cases. That's #1. #2, it's complex. I got to change my surgical algorithm. Number three is expensive in my health care system, a hospital in my ASC, I'm not going to be able to acquire that. That is getting mitigated because we do a lot of installations. And then #4, you alluded to this, my volume doesn't qualify. 75% of orthopedic surgeons in the U.S. are doing less than 25 knees per year.

So again, all kinds of data here today, David, but 29,000 orthopedic surgeons, 75% of those orthopedic surgeons are doing 25 knee cases per year or less. So that's roughly 2 per month. So what you do in those volumes, are you going to have a MAKO, ROSA or whatever? That's a great opportunity for Monogram. And again, we have to think about the economic strategy here. But if you believe what I just told you that it's very intuitive, it's very easy to use. You don't have to change your surgical algorithm, and this is really democratizing robotics, then those users or those surgeons that are doing 25 knees per year are going to embrace this and potentially do more volume as they get more confident with Monogram.

Okay. That's great. Maybe we can turn over to the P&L. Obviously, a strong first quarter gross margin. There are some tariff dynamics in there. But maybe you could peel apart the 73% gross margin and give us a sense where you think the underlying profitability was and how that maps to the 70% to 71% guidance for the year?

Yes, for frank. Good question. Yes. So as a reminder, in the first quarter, we did recognize a $0.20 upside relative to the Supreme Court ruling on tariffs. And that gave us a little over 200 basis points of outperformance, right? And that's mostly all at that gross margin level. So that kind of gets you back in line with what you'd expect. So yes, that's the -- for the balance of the year, we've got everything else kind of baked into the guidance that we gave all the right data points so you can kind of trace how things kind of flow in for the balance of the year. We did have a little bit of inflation that we had factored in, right, that we knew that coming in, and that was, again, why we've guided to where we are.

But even with that dynamic in Q1, that 70% to 71% sits below where you were kind of trending last year, too. Is that because of timing of recognizing higher-cost inventory flowing through the P&L? And how does that shake out as we exit this year into next year?

Yes, exactly. So it's -- as you know, things kind of come in through the P&L on a lag as it goes through there. So that is kind of flowing its way through. And then we're doing a lot of different activities to try to drive cost out heading into next year. Obviously, we're not going to provide any guidance as it relates to '27. But we're always trying to drive those productivity measures and other kind of activities to make sure that we're in as good a position as possible heading into next year.

And then maybe just taking through the rest of the P&L, even Paragon, as you mentioned, annualized, you still had Q1 without Paragon last year and with Paragon this year, but you've sort of seen R&D flatten out in dollars. How are you funding some of the innovation if we're not seeing -- how do we interpret the growth in R&D?

Well, as I mentioned earlier, we got different ways to bring innovation to market, right? So if you go back the last 3, 5 years, we've invested roughly $0.5 billion organically as the 5% in R&D. We've done at least $0.5 billion inorganically. Not to mention, we have development agreements in a variety of fronts. We spoke about Deerfield. We also have an innovation partnership with Water Street. We launched 3, 4 products with them. One of them is actually Z1.

Another one is going to be ROSA Pinless, the first pinless robot to hit the market very soon by the way. So this is not a story of just the 5% in the P&L is the conduit to innovation. As I tell people, we don't do just research and development, we do search and development. And again, different partnerships, different conduits. A lot of that R&D historically that you saw there was sustained engineering. So when I joined the company in 2018, late 2018, 60%, 65% of R&D was sustained engineering. Now it's like reverse, 60%, 65% is new product development.

A lot of our sustained engineering is move out of the U.S. to other geographies. We've got a technology center in Bangalore in India that is going to be doing a lot of the sustained engineering. So I believe that the percentage does not represent the dollars that we're investing in innovation. That said, we're able to reshuffle things as we go. We operate with 46.1% OpEx. So there is plenty of room for us to reshuffle things from one category to the other. And we're not going to compromise the innovation journey as we seek to deliver EPS.

And the other thing I'd add too is we did have a restructuring activity that we announced, which that kind of phases in, right? Some of these are a little bit of a longer tail, some are overseas. So you don't start to see those savings kick in until the back half. So that kind of helps.

Very helpful. And as you think about kind of wrapping 2026 together, should we view this as kind of a transition year on back to the mid-single-digit growth? Like how do you contextualize '26 for people? How much of what you're seeing this year is really isolated to 2026? And when do you think we get back to a normalized growth trajectory?

Yes. I think that's a very fair way to recap it. 2026 is a transition year. I mean if you go back to the last 5 years, -- we have been delivering mid-single-digit growth or above, right? I always go back to 2021. We delivered 10% growth. Okay, as COVID comes, it doesn't count. I mean you got to next year, we delivered 6.5% top-line growth. And then in '23, we delivered 7.5% organic constant currency revenue growth with nice, by the way, EPS leverage of 200 basis points. Adjusted EPS in '23 was 9.5% growth. Then '24, the year of the ERP debacle, we delivered 5% organic growth, 4.8% to be exact.

And then last year, with unique challenges in a variety of fronts, we delivered 4%, 3.9% was again to be exact. So this is not a story of we're missing commitments. We're not delivering the growth. This is a story of inconsistency. So we're going to address the inconsistency that this business has had. You cannot drive consistency in an $8.5 billion business if the U.S. is not delivering that mid-single-digit and above. And the U.S. is not going to deliver mid-single-digit and above if we don't have a dedicated, specialized, well-operated channel. So that's what we're doing in 2026. We're fixing that.

And then outside of the U.S., the usual challenges that we had in a variety of pockets, we're addressing those as well. So yes, I will call '26 a year of transition. We're going to make the changes we need to make on commercial execution. We're going to clean up the last things we got to do from an operational standpoint. And as we emerge out of that, you should see this company delivering mid-single digit or above in a durable, consistent manner.

And just on the earnings side, since you took the tariff refund this year, is that a headwind you have to overcome next year?

So I'd say it's a fair question, right? And obviously, for this year, we've kind of talked about the dynamic. A bunch of what impacted us favorably in Q1, we actually anticipated some of that in the second half already. There's not much -- we're obviously not going to go direct on providing '27 guidance, but I wouldn't expect a refund to recur, right? So that's certainly a fair comment.

The other thing I'd add, though, is we are -- we did step up our share repurchase. We're committed to $1 billion buyback this year. We've talked about the timing. We're going to try to align that as best we can with cash flows that's largely back-end loaded. We'll always be opportunistic, right if that's -- we don't want to restrict ourselves. But if you think about in the next year, that would be one of the EPS levers.

So a bad guy on the tariff, a good guy on buybacks and good guys on a variety of other fronts that we'll talk about when the time is right.

Webcast, time could be right, but...

When the time is right, we will give guidance for 2027.

Understood. All right. I had to try. So maybe just to wrap up here. I know a lot of times, there is a short-term dynamic sometimes. Maybe more than you'd like. But maybe just take a step back and think about -- you gave this LRP in May '24. A lot has changed since then. When do you think you'll be in a position where you want to recast a longer-term view? And -- or are you going to do that?

So 37 seconds left on the clock. I'll just comment quickly on the LRP that we gave in May of 2024. We said on average, revenue should be mid-single-digit growth in the absence of M&A for 4 years, which, by the way, 2 years into the LRP. I go back to the numbers that I provided, 4.8%, 3.9%, we're doing there. EPS 1.5 in the absence of M&A. We did M&A, so that's how. And then in May of 2024, none of us knew how to spell [indiscernible]. So the revenue has been there. The other dynamic is M&A [indiscernible] is complicated the LRP.

Very soon, we'll be providing the next 3 years of what the LRP looks like. And at that point, we'll talk more around with the go-to-market changes address in the U.S. and the bolus of innovation and the launch of Monogram, what does this company look like for the next 5 years? And I will tell you, it's going to be a totally different company.

Excellent. We look forward to that. I look forward to the next update in July, August.

Thank you so much, David. Thanks, everybody.

Thank you.

Thank you.

Everybody knows Ivan Tornos, CEO. And we also have Paul Stellato, Interim CFO. So welcome. I think this is probably your first fireside chat as Interim CFO.

Yes.

So maybe we'll start with you kind of give a quick introduction and kind of how you're thinking about the interim CFO role and setting guidance and all that.

Sure, sure. So I'll be very brief because I know we're all here to see Ivan, obviously. But again, very, very happy to be in the role. It came up very quickly, but it's something that we've been planning within the organization for some time. We've always had succession planning as something that Suky took extremely seriously, and we all had to be ready. So from my perspective, what I look forward to is I know we won from a finance team perspective, we've had a lot of strength. Our leadership at the different disciplines, whether it's treasury, a lot of folks don't know Pradipto here, FP&A, business finance, tax, we've got a first-class team. So that makes the transition pretty manageable, and it's something that I'm actually looking forward to.

In terms of the health of the business, that's the other piece, at least from a balance sheet perspective, inheriting something that's very strong and something that we can build off of -- and something that actually we've been very, very proud of. So from a business perspective, that's kind of how we see things and why it feels very, very comfortable kind of coming into the role. And then from an experience perspective, when I think about when I got hired into the role, I believe one of the things they appreciate about my background is they didn't have a typical Chief Accounting Officer, Controller type background. I've spent a lot of time in FP&A. I spent some time in Investor Relations, I have public accounting within there. So as I think with diverse background is one of the things that brought me to the role in the first place. So in the event something this happened, we can do this very smoothly. Hopefully, it's invisible to the organization -- to the outside world as we go forward.

Maybe Ivan, just off Q1, good quarter, beat the guidance. I think there's a lot of kind of factors in Q1 in total. So if you kind of walk through some of those puts and takes.

Sure. That's quite a change from this curriculum to Q1, but straight into Q1. Look, we're happy with the first quarter of the year. We guided for the year 1% to 3%, and we came at the top of the range, 3% revenue growth -- organic revenue growth in the first quarter of '26. The U.S. was north of that at 3.2%. And that's in a quarter was rather unique. I'm not going to go through all the drama of what happened in the first quarter. I think now everybody has seen the results of all the orthopedic companies, combination of weather, strikes in California. There were a couple of events that probably distorted the reality of the quarter. That said, pleased with the U.S. performance, pleased with the evolution of the sales force. I'm not pleased -- I'm sure we're going to talk about the U.S. Knee number, 2.2% Knee growth. We will do better than that. We have to do better.

A couple of elements that we can discuss, but very happy with the 5% in U.S. Hips. International at 2.5% was pretty much in line with our expectations. We've gone through some changes in some markets. But net-net, we guided 1% to 3% came at the top of the range. If you're asking me the implied question, why are you not narrowing or raising guidance? It's early in the year. We're going through some transformation in the year. We're going to be prudent. We like where we ended the quarter. We like where we started the second quarter. We like what we see from a market standpoint. And again, the major transformation initiatives that we're undertaking are going as expected, if not better.

And kind of drilling down in the Knee 2.2% in the quarter, how did that kind of play out versus expectations?

Below expectations. So we're never happy growing below market. And again, a unique quarter. There were some competitors that were out of the market. There were some onetime events. But the market, when you normalize for everything, it still is around 4% to 4.25% for Knees. So don't believe the high that all the sudden the market has slowed down from Q4 to Q1. I mentioned publicly, there were 2 or 3 things that impacted our Knee growth number. One is Kaiser, a major strike in California. We are the #1 player in the West Coast at Kaiser. We had a couple of accounts that if we end up losing for the rest of the year, which I don't believe so, by the way, could be up to 50 basis points. And again, most of that impact happened within the first quarter. And then we had some changes that we made in the quarter that we anticipated and maybe they were more acute than initially anticipated. And as we enter the second quarter that have been resolved. Happy with 2.2% U.S. Knee growth? No. Do we think we're going to do better? Absolutely.

And then there was 2 accounts that you did mention on the call. And I think we talked about a little bit last night, but maybe it sounds like there's maybe even an opportunity to get some of those back over time.

I got to learn to shut up and say less in these calls, and that's ongoing work because, hey, we did lose 2 accounts. We also gained a lot of accounts. Guys knows what those 2 accounts look like for the next 3 quarters. I like the trends like what we see. Again, if we did lose those accounts for the rest of the year, the impact to our U.S. knee number is less than 50 basis points on growth. we got all kinds of other things that become tailwinds. I like where we are with ROSA OptimiZe, which obviously is going to carry pull-through of U.S. Knees. In the first quarter of 2026, we placed a record number of robots. We also sold an [indiscernible]. Our Technology business grew 30%, three-zero in the quarter. Our Oxford Parcel cementless knee continues to move above expectations. I like where we are with the Magnificent 7. So again, I wish would've never talked about 2 accounts being lost. We have 29,000 accounts in our database. So I like our changes as we get deeper into the year.

One other quick thing I'd add for those 2 accounts specifically, that was known, right? It's like that played out in the quarter. So it was something we knew kind of going into the guidance period, there wasn't going to be pressure on Q1 related to it. So that was in.

And you said the impact was 15, one-five?

Could be up to five-zero.

Five-zero, 50. Okay. I just wanted to make sure I heard that number correctly.

I'll say this publicly, I don't think there's going to be an impact.

Okay. And you don't think those 2 accounts are being lost as a trend of any sort either, right?

No, there were competitive dynamics relative to some price deals that I'm not going to entertain. For what is worth it, we are not seeing that dynamic of going out there and discounting massively permeating the market. Point in case, our price performance in the first quarter was 40 basis points of erosion. We continue to see the main competitors being very responsible when it comes to pricing strategy. So I will call this a 2-time event within the quarter.

Okay. And then kind of digging into the new products, last night at dinner, we talked a little bit about the iodine coated hip in Japan, but it little bit targets to the U.S. Anything you kind of dig into the new product cycles that you want to highlight?

Sure. There is a lot going on. So beyond the -- what we call the magnificent 7, 7 pretty compelling product launches, whether it's Oxford Partial Cementless, revision systems in Europe, whether it's next-generation cementless, Persona also we got a lot going on. I will tell you, Travis, that most of them are going above expectations. The one product you're talking about iodine-coated hip implants, that is groundbreaking. We are the only company that has an iodine-coated hip implant starting in Japan. which is the second largest market in the world, worth around $1.2 billion to $1.4 billion. The ramp-up of that product in the second half is pretty compelling. It's actually one of the growth drivers in the second half of the year for Zimmer Biomet.

The next competitor is probably 5 to 7 years away in a best case scenario. At some point, we'll bring the technology over to the U.S., but that's very unique. Biofilm -- prevention of biofilm formation. You carry a 40% price uplift. So you just converting legacy hips to coated hips with iodine, you get a 40% reimbursement premium, again, in the second largest orthopedic market in the world. So excited about that. Really excited about ROSA OptimiZe. We talked a lot about autonomous robotics that coming in early 2027. But ROSA OptimiZe platform is the only robot that can do truly a personalized kinematic alignment procedure. And again, the adoption of this technology is better than we expected out of the 30% growth that we had in the first quarter.

So again, I could spend an hour talking about innovation, but Magnificent 7s are working. Our suite of technology is going better than expected. And now we get into bolder plays, whether it's anti-infective platforms or other things we're doing around digital ecosystems.

Is your market share in Japan pretty similar to the U.S.?

We are the #1 company in Japan, again, second largest orthopedic market and the second largest revenue-generating country for Zimmer Biomet. We're #1 in hips. We're #1 in knees. We're also the fastest-growing technology company in Japan.

And so you see the 40% price uplift with the iodine coated hip. You also kind of seeing -- starting to see share gains as well on the volume side?

Absolutely. Absolutely. So this is a country that should be growing upper single digit in 2026.

Okay. That's helpful. On S.E.T., it was weaker in Q1. I think we had a little bit of debate last night on the kind of the prior quarters, how much is strong versus weak. This is lot of businesses within the S.E.T. business. So help us kind of walk through the moving parts in that.

Sure. So back in May of 2024, when we did our LRP presentation at the Analyst Day, we committed to growing S.E.T. to mid-single digit. And if you go back to that, [indiscernible], May 29th, 2 years ago, we have had, I think it's 10 quarters, if not 9 quarters out of 12 or now the last 10, 11 growing at the rate. So go back to early '23, go through '23, '24, '25, most quarters have been mid-single digit. And that's excluding Paragon 28. Obviously, if you put Paragon 28 in there, you are solidly in the mid-single digit, not upper single digit. Q4 of 2025 was softer than expected. And I'll talk about those segments in a second. And yes, Q1 of 2026 is not the best S.E.T. quarter. Two reasons for both the last quarter of '25 and the first quarter of '26 being softer than expected. We continue to see our trauma business declining at an upper single, double-digit rate.

So trauma is a $0.5 billion business for us, declining double digit. It's not great. And biologics or restorative therapies, HA, hyaluronic acid injections have also been declining at a double-digit rate. That's a platform that used to have preferred reimbursement and is being commoditized. So those 2 platforms have been a headwind for the last 1.5 years, 3 years, and we're addressing that through investment and thinking about other portfolio management in place. But what was outlined in the last quarter of '25 and the first quarter '26 is that we had some supply challenges with sports medicine. That's a business that has been growing double digit for quite some time. We've done 3 acquisitions. And then Q4 and Q1, we did have some shortages. We moved from a vendor in Europe to Mexico, and that creates some disruption. That has been resolved, and we expect sports medicine to get back on track.

Net of that, CMFT continues to -- cranium, maxillofacial thoracic, continues to grow double digit. We have a tremendous opportunity with sternal closure and other growth drivers within CMFT to continue to grow double digit. Our Paragon 28 acquisition is going very well. I think I said in the earnings call that you should expect moving forward to have solid double-digit growth. I like where we are with shoulders with Identity launch, OsseoFit, again, upper single double digit. Just got a [indiscernible] and Restorative Therapies and Sports Medicine has been resolved. That's a long answer to tell you that I do think that S.E.T. should get back to a mid-single-digit growth.

When do you think it kind of returns back to that normalized growth?

Second quarter of 2026.

Okay. And then Paragon 28, I guess it's been almost a year, a little over a year?

It's a year. We anniversary in April of this year.

How is the integration from a sales force perspective going? Kind of what have you learned over the last year in terms of, one, being able to do and integrate acquisitions; and two, just from owning that portfolio and kind of integrating those sales forces.

Sure. Well, I think I kind of answered that already. We expect Paragon 28 to grow double digit starting the second quarter of 2026 and continue that trend moving forward. We've not lost any material number of representatives -- sales representatives or accounts in the combination in the merger. We have kept the entire management team over in Denver, Colorado. So from the former CEO, who is doing a great job, to the former Chief Commercial Officer, Matt, who continues to do an amazing job. We kept the people. We're growing double digit. We are not delaying any product launch. So the pipeline remains robust, and we're delivering on the financial commitments. So we committed to being EPS neutral by the end of year 2. That's on track.

Our integration acquisition costs are better than expected. One of the reasons why we raised cash flow last year. And again, this year, we're raising cash flow. So that's going better than expected. So what are we learning with this? We're learning that we now have a muscle that we didn't have before in terms of integration. About 1.5 years ago, we put a different management team behind integration. That's working well. Beyond Paragon 28, we're also integrating, obviously, OrthoGrid and now working actively on the integration of Monogram. So we believe that we're ready to do these type of deals. And at the right time, we're going to continue to do these type of deals.

And then when you think about capital allocation of your stock price with all of the med tech sector at a record low valuation. So is buyback still part of the plan? Why not accelerate buybacks? I think you actually had an announcement this week increasing your buyback authorization.

That sounds like a leading question. Yes, yes. When you look at the multiple that we got and you see the cash flow generation of this business, it's a no-brainer that we need to be buying Zimmer Biomet. Not to say that we're going to stop our diversification effort. We're going to do that, continue to do that in a responsible way. But right now, we're integrating 3 companies. We're integrating Paragon 28, again, only 1 year behind. We're integrating OrthoGrid, which is a smaller acquisition, but one that requires a thoughtful approach in terms of how we penetrate this surgical AI technology in key markets, starting with the U.S. And then Monogram.

I mean Monogram will be transformational. And there is extensive work that is happening around segmentation, spending time with customers, thinking what is the right message, when we launch the technology, working on reimbursement pathways early on, really thinking of the surgical algorithm. We're working in tandem on the semiautonomous and fully autonomous indication. So that's something that is going to take some effort. And we don't want to complicate our lives adding a fourth acquisition as we've done all of that. So that's why we announced the $1 billion of buybacks in 2026. We think that's a responsible way to allocate capital.

Okay. That's helpful. Maybe touching on the U.S. sales force changes. Maybe to start, why now? Why are you doing this? And kind of where you expect to be on the other side of the changes?

I think it's fairly commonsensical that you can be a best-in-class med tech company by not having a dedicated channel in the world's largest market. So I'm going to stop right there. We do $8.5 billion in revenue, 62% of the revenue of the company is in the U.S., 53% of the EBITDA of the company comes from the U.S., given allocations and whatnot. And our channel in the U.S. has been non-dedicated. And I want to make sure I'm not confusing people. It's now 1099 W-2 is dedicated, right? 1.5 years, 2 years ago, roughly 2/3 of the U.S. channel were non-dedicated. They worked for Zimmer Biomet and they worked somewhere else through mostly a 1099 type of contract.

Some of our sales reps, 2,545 reps actually had as many as 3 jobs. So now the mandate is everybody that works at Zimmer Biomet needs to be a dedicated employee of the company. I don't have a second or third job, and I expect people that work with me to be fully dedicated to the journey here. Then 1.5 years, 2 years ago, only 20% to 25% of the organization was specialized. So this, Travis -- was I'm going to sell everything to everybody approach. I'm sure that you agree with me that in med tech, you only win if you have people that every day wake up one call point, one portfolio that they sell, one bag that they are selling. And the mandate here is I want to make sure that everybody is specialized. The other dynamic is 1.5 years, 2 years ago, there were different incentive plans given the legal angles that we have, the legal aspects that we had.

There were different ways to look at compensation. Now the mandate is going to be that everybody gets paid the way that I get paid on growth. So those are the changes that we're making. It's going to take another year and change. So we should be done by the end of 2027. Why now? We're about to launch Monogram. We got a cadre of new products that we're launching. We have launched a ton of new products. And clearly, we have a commercial execution issue. So we -- the average rep does 7 cases per week. Our competitors have 16 cases per week. And again, that goes back to the fact that all of them are working 5 full days a week. So we're addressing that productivity. We got what we need from an innovation standpoint, and we like what we see. So that's the why.

You've been traveling all over the country, meeting with reps and distributors and stuff. How have the conversations gone? The receptivity to some of the changes in the sales force?

Look, I think most, if not almost all sales reps get it, get the why. Everybody gets the why. We can't have a channel that is all over the place. This is not customer centricity, and this is not the best way to run the business. They get the why. Conversation as I travel, and yes, I've been going left and right all over the U.S., the conversation around how we do it and what does this mean for me, right? So how -- are you going to take my entire Shoulder business? Are you going to compensate me for that? Are we going to transition this in a responsible manner? Am I going to be able 3, 5 years from now to continue to make the money I was making, if not more.

And again, so far, the business case is that you will make more as a dedicated specialized representative. So we spend a lot of time, Travis, on the how we do this, what are the time lines and what are you going to do for me to make sure that I don't have a financial headwind here in the short term. And when you have these conversations in the same room and you talk to individuals, they get it.

Where are we in the transition in kind of thinking about like where is the risk along the way? And I think you've highlighted end of '27 for it to be finished. So where are we today in the different phases?

I'll reinforce that this is going better than expected. We brought down the project on 3 tiers. Tier 1, no regret moves, low-hanging fruit, opportunity, go fast, underperformers, where we have contracts, we have the presence that we need, we're moving fast in that regard. And I would say we are done, if not mostly done with that first tier of the change. Then it's the middle of the road. We're going to have to be careful and we're going to have to go at the right pace and make sure that we're responsible in terms of the conversations we're having. And that's what we're doing right now. And then the Tier 3 is the -- either we leave it as it is for a period of time or we become bolder when it comes to the type of negotiation agreements that we put in place.

And I said publicly that on the Tier 3, which is later in '26 and '27, proactively already have locked in a lot of that business. So there are 6 independent distributors in the U.S. that account for 40% of the revenue, 6 general managers, and we have locked in those agreements for the next 7, 10 years. So now already working with some of those individuals and making sure that a level below and a little below, we're converting their sales forces to a fully dedicated. So again, done with Tier 1, working on Tier 2 middle of the road and then some of the stuff, the higher risk stuff is going to be later this year or as we enter 2027.

And you were talking about earlier your rep...

Stating the obvious, all of that is contemplated in the guidance that we provided. So this is not an event where in the second half of 2026, we slow down and then hey, it the sales force changes that we implemented.

Right. And your rep productivity right now, you mentioned basically half of your competitors. Like as you go through these changes, does that increase linearly, like increasing going forward?

We've seen it. I mean it's -- again, I keep using the word commonsensical, but if a rep Travis in Atlanta, Georgia is doing 7 cases because Travis doing two, if not three other jobs, and now we convert it to fully dedicated 5 days a week. If you're a W-2 employee, you're part of all the operating mechanisms, you are going to do more cases. So in those areas where we have converted individuals from nondirect, nonexclusive to Zimmer Biomet to exclusive, you see a dramatic pickup in productivity. And obviously, I know with the productivity, you see an improvement in revenue.

So, that's like almost like a positive tailwind that you have in the business that maybe is not even factored into the guidance.

Yes, but then you also have to offset the potential disruption that maybe there'll be a Travis in Atlanta who says, I don't want to work 5 days a week for Zimmer Biomet because I have these 2 other jobs. So there may be an offset. So the balance of those 2 is the reason why we guided the way that we did. And candidly, the balance of those 2 is the reason why, although we like what we see, although we had the quarter that we have, we're waiting to have better guidance.

Makes sense. Maybe transitioning to the robot sales force that you're building out. Just help us understand where you are in hiring those reps, where you're getting them from and what they're going to be doing that's different than what you've been doing from the capital side?

Yes. So with the upcoming launch of Monogram, we really are building what I call a world-class organization in technology. And I say technology it's not just robotics. We are a company that collects data before, during and after surgery, and we got digital models to monetize the data at the provider and payer level. We got a suite of technology with small robots, large robots, CT scan, non-CT scan with obviously every indication under the sun from hips to shoulders to you name it. And then we're looking at other technology plays. So we're building a technology organization. We're hiring up to around or 200 reps in the U.S. alone, maybe potentially more as we enter 2027.

We have our ASC organization, which we have built, which will have obviously access to that technology. We built a best-in-class account management platform. We recently announced we've hired Jonathan Vigdorchik -- Dr. Jonathan Vigdorchik, who is one of the most prominent global key opinion leaders when it comes to AI technology. So he's helping us with that launch. So all this rambling to tell you that we had a ton of people. We've got a portfolio that I believe is a major competitive advantage. And as we enter 2027, you should see a large sales force organization selling a cadre of technology that we didn't have before.

How are you thinking about the whole portfolio of robotics and segmenting it and even keeping the message clean to different surgeons?

Well, it's working, right? 30% growth in Q1 and now or what we call our suite of technology, the optionality that we're providing is something that our competitors are paying attention to. And candidly, some of them are doing some of the same, moving from having one platform to, hey, maybe portability, smaller footprint matters as well. Maybe at some point, it's not the robot, it's some sort of modern navigation device. I like our strategy. We believe in optionality. We believe that not everybody is going to be a robotic user, but most surgeons will be doing some sort of navigation.

We believe that some users will want to have less to do in the procedure, simplifying autonomy, whereas some others will always like to be more involved and have more of a cobot cooperation between the machine and the surgeon versus just a fully autonomous robot. So we will be the company that offers that optionality. And then obviously, as time evolves, we'll make our portfolio choices. Maybe at some point, we don't have to have the broad suite of technology that we have today, something smaller. But right now, all the research that we've done and the results that we achieved in the first quarter suggest that our strategy is working, and we're going to continue that strategy.

And on Monogram, show it's a lot of surgeons. What's been some of the feedback you've got? And then you had like 5 pillars, I think, on Monogram?

5 what?

5 pillars of kind of how -- what it take to make Monogram -- so if you kind of want to walk through those too.

Yes. I got 3 minutes and 58, so I'm going to speak faster than usual and nobody is going to understand me. We have demoed Monogram to around 1,000 surgeons between Academy and Hip and Knee society, and the feedback has been very compelling. Obviously, we get the usual questions of what's going to be my role in an operating room. Are you selling a driverless car to a taxi driver? That's not what we're doing for the record. We're not selling a driverless car to taxi driver. This is surgeon-enabled autonomy, but the feedback has been very compelling. Five things that I keep mentioning, safety. We believe that because the automation of the device, because of the less human involvement, the safety profile is best-in-class.

The surgical boundaries, the intelligence of the platform to detect soft tissue is like nothing you've seen in orthopedics, dare to say medical technology. So safety is number one. Number two is efficiency, really fast registration, landmarking in 60 seconds or less, bone cutting preparation in 3 to 4 minutes and then a really fast procedure. So at some point, this achieves time neutrality, dare to say you could make surgeons faster. So that's efficiency. Ease of use, 75% of all the Knees done in the U.S., according to 29,000 surgeons earlier, are done by surgeons that are doing 25 or less per year. So that's 2 per month. Everybody talks about democratizing technology in orthopedics. This will democratize technology. Ease of use means that after you done 2 to 3 because it's a very intuitive surgical algorithm, because it's very easy to use, as I mentioned, number two, the adoption could be very high even with a lot of the non-robotic users.

Number 4 is reproducibility. It's the whole idea that once you one 2 or 3, you've done them all. You don't need to impact your surgical algorithm. The tweaks that you need to do to your conventional practice is minimum. And then lastly is accuracy in the last 1.5 minutes here. All the data that we got so far in the prelaunch or in the preclinical trials shows that the accuracy is 40% better than some competitor devices. So when you're doing surgeries in very small real estate like the knee to achieve a 40% accuracy is very compelling. So safety, efficiency, ease of use, reproducibility and accuracy is the bold bet that we make it with Monogram. We're going to take our time to make sure that surgeons are involved in the launch. We're going to make sure that segmentations are adequate. We should be submitting the 510(k) at some point in the not-so-distant future, and we're very excited about 2027.

When you think about utilization, a lot of questions on ACA and all that. Just curious what you're seeing on the utilization front.

I mean I can go back to 30% growth in capital in Q1. And again, the trends continue as we get into Q2 and so forth. We're not seeing a slowdown in capital purchases. HCA, the Medicaid business subsidies is less than 1%, 1.5%, 2% of our business. We're not seeing an impact. This is a very resilient market. Orthopedics is not going anywhere. I always quote, and I believe you got the data as well, Travis at Bank of America. If you go back to 2008, the Great Recession in the world with unemployment in the U.S. at double-digit rates, over the 3-year period, 2008 to 2011, we lost 1% of all orthopedic volumes.

So -- and that's with inflation at a different level, unemployment at a different rate. So again, this is a very resilient market. The amount of patients waiting in the sidelines continues to be high. I know these are not COVID patients. This is just demand. And the average wait list in the U.S. for the top 10 centers in the U.S. continues to be between 3 to 6 months. So no, we're not seeing the impact.

Okay. Helpful. Any last closing comments in the last second.

I'll let Paul, he speaks better English, close the fireside chat.

Well, look, thank you, obviously, for having us today. I'm very excited about where we are. A lot of opportunity for us ahead and something that I'm certainly to having -- the finance team is all set to back it up. But again, great position. Thank you.

Thank you.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet First Quarter 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, April 28, 2026.

Following today's presentation, there will be a question-and-answer session. [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. Good morning, everyone. Welcome to Zimmer Biomet's First Quarter 2026 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Suky Upadhyay, our CFO, to be 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 details this can involve 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 of these measures to 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, as I always do, by sharing my gratitude to our Zimmer Biomet team members around the world, your determination, your discipline and your dedication to customers and patients are what moves our business and our mission forward. We're off to a strong start to the year, strategically, operationally and financially, and that momentum is a direct reflection of the strength of our team the resilience of our business and the impact that we can have where we stay focused on innovating and executing for our customers. Once again, my sincere thanks to the Zimmer Biomet team members. .

During my prepared remarks this morning, I'm going to cover 4 key areas. First, I'll start by summarizing our first quarter results. Second, I will provide an update on our U.S. go-to-market changes. Third, I will discuss our 2026 outlook. And then lastly, I'll briefly cover the progress that we continue to make across the 3 key strategic priorities of the company, those being people and culture, operational excellence and innovation and diversification.

Starting with the first quarter results. I'm proud of how the team began the year, making strong progress to our 2026 sales growth commitments, EPS and free cash flow commitments. In the first quarter, we grew sales 2.9% on an organic constant currency basis at the upper end of our annual 2026 revenue guidance range. And we delivered adjusted EPS of $2.09, which was up 15% year-over-year. Notably, the first quarter saw a $0.20 benefit from tariff-related items relative to our expectations.

As we get into the details of these results, unless otherwise noted, all statements on this call will be about the first quarter of 2026 high compared to the same period in 2025 and all commentary would be on a constant currency and adjusted operating basis. First quarter 2026 organic constant currency commentary excludes the impact from the Paragon 28 acquisition, which we closed in April of 2025.

Looking at the first quarter results in more detail. Our U.S. business increased 3.2% and while international grew 2.5%. These results reflect healthy end markets, strong technology sales, which once again grew in strong double-digit rates and continued momentum from our recently launched new products. Importantly, this performance was against the backdrop of changes to our go-to-market strategies in both the U.S. and some designated international markets. U.S. knee growth of 2.2% in the quarter reflects a greater than 20% increase in partial knee cells driven by our Oxford Partial Cementless Knee, the only partial cementless knee on the market in the United States.

This performance was partially offset by pressure in our legacy Toran Knee implants, such as NextGen and [indiscernible], which we continue to phase out as part of our brand rationalization strategy. International Knees grew 1.3% for the quarter. Our U.S. hip franchise grew 5% in the quarter as we are seeing increasing traction of our hip triple play of one which now represents nearly 40% of our U.S. Hips temps, OrthoGrid, or AI-based hem navigation platform, a HAMMR or surgical impact. International Hip sales increased by 1%. The -- while still early in its launch, we are seeing rapid adoption in Japan, the second largest market for Zimmer Biomet or for first of the warm iodine core hip implant, which is designed to help address the risk of very prosthetic joint infection after total joint replacement.

Our technology and data, bone cement and surgical business grew nearly 12% in the quarter. Our strategy of offering a comprehensive suite of technology solutions is paying dividends. as we are seeing continued strong ROSA and TMINI sales across the board. To further this one-stop shop approach at the American Academy of Orthopedic Surgeons in March in New Orleans, we hosted technical evaluations of boss or fully autonomous AI-driven orthopedic robotic system, which we acquired via the Monogram acquisition. Surgeon feedback was overwhelmingly positive as the potential gains in safety, efficiency, ease of use, reproducibility and accuracy resonated very strongly with the customers that we engage.

We recently completed enrollment in our 102-patient clinical study, we continue to expect U.S. approval and the launch of the semiautonomous version in early 2027, followed by the fully autonomous version in late 2027 or early 2028. In anticipation of the mBos launch, we're increasing the number of robotic clinical sales representatives targeting to hire over 200 by the end of 2027. Finally, SCP growth of 1.6% was once again led by our U.S. CMFT and Upper Extremities businesses, partially offset by continued challenges in restorative therapies and in our trauma business. Double-digit CMFT growth in the U.S. was driven by our external closure franchise which continues to perform very nicely above market per extremities increased upper single digits in the U.S. as both our OCF stemless shoulder and our Identity total shoulder platform continued to gain momentum.

Moving on now to discuss the U.S. got market changes. In the U.S., the transition to a dedicated and specialized sales channel is progressing as planned. While the quarter did see some modest disruption, it was in line with our expectations. And importantly, we are seeing rapid increases in productivity in those territories that we have transitioned. We remain on track to complete the transition by the end of 2027. Internationally, the evolution of our go-to-market models, particularly in emerging markets, is ongoing and also is performing in accordance to the plan and the expectations that we have. While we did see an impact on growth in the quarter, this was very much accounted for internally.

While our commercial changes are progressing as planned, given that it is still early in the year, we are maintaining our full year 2026 organic constant currency revenue growth guidance of 1% to 3%, with growth roughly consistent throughout the remainder of 2026. Instead of this, our assumption of up to 100 basis points of price erosion is unchanged. We continue to anticipate an approximate 50 basis points FX tailwind to full year revenue growth with the second quarter being a bit neutral at current rates and Paragon 28 to contribute around 100 basis points to reported sales growth in 2026 before being reflected in organic growth.

As a result, our reported sales guidance also remains unchanged at 2.5% and to 4.5% for the full year. We now expect 2026 operating margins to be better than anticipated, down slightly less than 50 basis points from 2025, which still contemplates lower gross margins, dilution from the Paragon 28 acquisition and increased investments in our U.S. commercial channel. We anticipate operating margins in the second quarter of 2026 being down roughly 200 basis points from the second quarter of 2025. In the third quarter, operating margins being down around 50 basis points sequentially from the second quarter.

Our guidance for interest expense, tax rate and end of year shares outstanding, which we continue to assume up to $750 million of share repurchases remains unchanged. Given these dynamics, we are raising both our EPS and free cash flow growth expectations for the year 2026. We now expect adjusted EPS to be $8.40 to $8.55 from the previous guide of $8.30 to $8.45. And we expect our free cash flow growth to be in the range of 9% to 11% versus the previous guide of 8% to 10%.

As I said, all in, the year is off to a very strong start, and I could not be any prouder or excited about what the remainder of is going to bring to Zimmer Biomet.

Turning now towards 3 key strategic priorities for the company, people and culture are being number one; operational excellence, number two; innovation and diversification number three. People and culture remain the key competitive differentiator for Zimmer Biomet. And we continue to focus on placing the right talent in the roles to advance our strategy. With that in mind, I'm very pleased to share that Dr. Jonathan [indiscernible] reknown surgeon from the hospital for special surgery has joined Zimmer Biomet as Chief Science Technology and Medical Affairs Officer reporting to me.

In this role, Dr. [indiscernible] will lead the strategy, delivery and management of our global portfolio spanning AI-enabled robotics, software and data, smart implants and connected technologies while also overseeing or global medical education.

On our second priority of operational excellence, we continue to make great strides in improving operating efficiency through expanding our manufacturing footprint into lower-cost geographies. In addition, we're making very meaningful progresses on reducing working capital by lowering our days of inventory on hand while at the same time accelerating a very robust SKU rationalization program. We expect these combined efforts to strengthen our industry-leading margins while meaningfully continue to improve our free cash flow conversion rates.

On Pillar #3, from an innovation perspective, we recently committed to becoming the exclusive orthopedic investor in the mobility revolution fund, a musculoskeletal venture capital fund launched through our collaboration between Deerfield management and the Hospital for Special Surgery in New York City. This is going to give us the opportunity to invest in technology that has the potential to truly change the standard of care from AI data applications to cartilage repair solutions.

Speaking of the latter, we're also teaming up with some of the world's leading researchers in this groundbreaking opportunity. It is inspiring to see how rapidly we're advancing our commitment to solving some of the key [indiscernible] orthopaedics whether it's awareness, safety, efficiency and outcomes today and in the future.

Lastly, on diversification, our recent acquisitions are all seeing positive momentum. Paragon 28, first quarter growth accelerated around 200 basis points from the fourth quarter of 2025 and is trending back towards double-digit growth performance. OrthoGrid delivered its strongest quarter to date, with significant growth and accelerated adoption, solidifying OrthoGrid as a core driver of our digital ecosystem and interior hip triple play.

Finally, with enrollment complete in the Monogram clinical study, we remain on track to bring this very exciting first-to-the-world technology to market. In conclusion, we are very proud of the progress that we're makeing so far in 2026. We continue to prioritize our go-to-market commercial transformation in the U.S., and we continue to focus on driving robust adoption of our new product innovation cycle.

Before I turn the call over, I want to comment on the announcement that we made this morning regarding Suky's decision to leave Zimmer Biomet for a new opportunity in the biotechnology space. For nearly 7 years, Suky has been a value partner and disciplined operator, helping us in improving our WinGuard weighted average market growth rate profile through organic and inorganic portfolio optimization driving a top quartile margin profile for Zimmer Biomet, strengthening the balance sheet and significantly improving the free cash flow conversion and growth. I'm thankful for his leadership and contributions. And we think continued success in his next chapter. Above all, I'm thankful for his friendship, which I know will continue for many years to come.

During this transition, Paul Stellato, our current Controller, Chief Accounting Officer and Head of Corporate FP&A, will serve as Interim Chief Financial Officer. Paul is a seasoned business leader bringing more than 20 years of financial and IR Investor Relations experience to the role. Since he joined Zimmer Biomet in 2022, Paul has been instrumental in translated our strategy into disciplined capital allocation, including our share repurchase program and recent acquisitions as well as leading the creation of global search services around the world. I'm extremely confident that he is the right leader at the right time, and I'm confident he will provide a steady direction and leadership as we continue to conduct a search for a successor, and I look forward to our continued partnership. With that, let me turn the call over to Suky. Thank you.

Thank you, Ivan, and good morning, everyone. I'm proud of what we've accomplished together over the past 7 years. I believe Zimmer Biomet has a clear strategy and meaningful opportunity ahead. I would also like to take a minute to thank the entire Zimmer Biomet organization for all of the hard work and dedication that you put into advancing our mission while delivering on the company's objectives. The dedication and resiliency are impressive. I wish you continued success.

Now turning to the results. Reviewing the first quarter results, net sales were $2.087 billion, an increase of 9.3% on a reported basis. and 2.9%, excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 40 basis points negative in the quarter, in line with our expectations. Growth in the quarter benefited from opportunistic end-of-quarter purchases above historical levels, continued momentum from our recently launched products, as Ivan noted, and strong robotic sales.

Turning to our P&L. We reported GAAP diluted earnings per share of $1.22 compared to GAAP diluted earnings per share of $0.91 in the prior year quarter. Higher revenue and lower restructuring costs, the previously mentioned tariff benefit and lower share count were partially offset by modestly higher taxes in the quarter due to geographic mix. On an adjusted basis, we delivered diluted earnings per share of $2.09 compared to $1.81 in the prior year. This increase was driven by higher revenue, the aforementioned tariff benefit and a lower share count, which were partially offset by increased commercial investments.

Adjusted gross margin was 73% and higher than the first quarter of 2025, driven by favorable mix and a benefit from tariffs. Notably, a portion of this tariff benefit included refunds that we had anticipated in the second half of the year. Adjusted operating margin was 27.3%. Adjusted net interest and nonoperating expenses were $71 million above the prior year driven by higher debt related to Paragon 28. Our adjusted effective tax rate was 18% and fully diluted shares outstanding were 195.8 million, down year-over-year due to $250 million of share repurchases in the first quarter.

Now turning to cash and liquidity. Another strong quarter of cash generation with operating cash flows of $359 million and free cash flow of $246 million. We ended the quarter with approximately $424 million in cash and cash equivalents. As Ivan had covered the rest of year outlook, I would like to close by again thanking the entire ZB team for their hard work and dedication.

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

Thank you, Suky. Operator, let's open up for questions. [Operator Instructions]. Operator, please go ahead.

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

Going to miss you, Suky. From my perspective, the year is off to a good start, you outperformed Ivan in the quarter, you beat sales, strong gross margin speeds. But just since I only have 1 question, but you didn't raise by overall by the beat, you left sales unchanged EPS less than the EPS beat. I appreciate you keep talking about being more balanced and tempered as you think about guidance. But it's the start of the year. Is there -- are you seeing anything in the business or the market or competitively or in your sales transition that prompts that conservatism beyond just again, your desire to stick with your tempered guidance.

Rick, thanks for the question. So as you highlighted, we had a very strong first quarter. And as I sit here looking at the next 3 quarters, the word that comes to mind is confident. I'm very confident that we're more in the right direction. We continue to see the sales force changes progressing as planned. We had some disruption in the quarter early in Q2, but everything is going in accordance to plan. We have a solid pipeline in technology. You saw the growth in technology, continue to see great momentum with new products. We've got a very robust list of new customer targeting strategies that are materializing. So from a revenue standpoint, I'm very confident that we are moving in the right direction.

On EPS, we did raise -- maybe didn't raised by the entire bid. We're also investing in a variety of fronts, namely in the sales force and model changes. And we did raise free cash flow. So again, very solid first quarter everything move in the right direction. So why are we not raising our guidance now because it's early in the year. This is a year of transition. We said so. We are making fairly substantial changes in a variety of fronts, go-to-market models here in the U.S. some changes in emerging markets, namely China. We're making investments in innovation at a ball pace. We're hiring people. We're making talent changes. So we feel, even though the first quarter was very strong, it's probably prudent to wait, let's call it, 90 days and then have the conversation again. But again, I'll leave you with 1 word confident, very confident that we move in the right direction. Thank you for the question.

We'll go next to Vijay Kumar with Evercore ISI.

Congrats on a nice print here. And Suky, I wish you the best. Maybe 1 sort of high level, Evan,Ivan, and you mentioned U.S. sales force transformation is on plan. Any -- you also made some interesting comments about you're seeing rapid increase in productivity in regions where you're seeing this transition. Any further details that you can share on other metrics that you're tracking perhaps, things like attrition rates, what percentage of sales force now dedicated or direct, if you will, in sort of on the similar line and any macro impact that we need to think of outside of the sales force reorg anything from Middle East .

Absolutely. So let me give you some of the key public metrics that we've been sharing. So at the beginning of the journey, early 2026, we mentioned that roughly 66%, so 2/3 of the U.S. sales force, roughly 2,500 people were 1099. At the end of Q1, the number is already slightly below 60%. And -- it's already roughly a 10% reduction on the number of 1099s. And obviously, that implies that these 1099s are now fully dedicated to Zimmer Biomet. So no longer they're doing Zimmer Biomet 1 or 2 other jobs. So a fairly significant decrease in the number of nondedicated individuals.

We started the year with roughly 25% of the sales force being specialized. So 1 of every 4 reps carrying a dedicated sales back. Another number is approaching, if not exceeding 30%, 3-0. We loin, I believe and I spoke about this, Vijay, the top 6 independent distributors accounting for roughly 40% of sales. They're in extension of no less than 7 years with Biomet. So that was a fairly significant risk that we retired.

Relative to turnover rates, we had a target of no more than 12% turnover given the changes and our turnover rate is in the single-digit range. So again, early in the year, only 9 days behind, but everything is progressing in accordance to plan. To the point that we're thinking that perhaps we could go a bit faster as we get into Q2, Q3 and the rest with the commitment is still being we're going to close the entire transformation by the end of 2027. I believe you had a second question or part 2 of the question. Anything else, any follow-ups there.

Just on the macro piece, Middle East, any impact?

Okay. Middle East. From a macro standpoint, obviously, like everybody else, we continue to monitor what's happening in the Middle East. Today, we have seen no material supply disruptions, a minor freight cost increase in the quarter that we're able to absorb. From a supply standpoint, most of our key products are dual source, if not 3 sources. We got at least 1 year of poly. So this is not something that we're concerned about. So we're not seeing any distribution challenges there. So again, so far, life is good. .

And then from a sales impact standpoint, we didn't see any impact in the first quarter. So that's on the Middle East. And then you got a variety of other macro or deals that we're monitoring, but nothing that it was impactful in the quarter, and nothing that we see has been impactful in the second quarter and beyond. Thank you for the question, Vijay.

We'll go next to Matthew Blackman with TD Cowen. .

You hear me okay?

Yes, we can. .

Great. Ivan, Vijay actually asked this, I think, in those list of questions, but I'm not sure that you touched on it. You did talk to seeing increasing productivity in some of the geographies where you're doing the sales force work. I was just hoping maybe you could expand a little bit on that, just maybe in general, talk to some to the extent that you're seeing any green shoots, let's call it, from the work that you've done maybe sort of in the latter part of 25 or maybe even early here in 2026. That's worth calling out that gives us confidence in the lift that you still have ahead of us -- ahead of you.

I appreciate the question, Matt. So we probably could spend an hour going through data points. As you can imagine, given the magnitude of the project, we're tracking all gaps of KPIs, but I'll give you maybe 3 or 4 reasons to believe. In the territories that we did switch from nondedicated to dedicated. So again, a 10% reduction, we've seen fairly dramatic improvements in productivity. Nationwide or average [indiscernible] around 7 cases our lead competitor is in the 16, 17 cases per week run in the territories where we made the switches already are in double-digit ranges for the number of cases. So that's pretty encouraging to see very quickly that improvement, no surprise.

When you go from spending 2, 3 days, are we doing cases to 5 days, you can imagine the product that is going to increase. along with productivity increases we've seen sales improvement in those dedicated structures. Our average extremities shoulder number for the quarter was strong. that is directly correlated to the number of shoulder specialists that we have added, both in an inpatient HOPD structure as well as in ASC, and we continue to see great momentum in shoulder. So productivity is improving a number of cases. Sales is improving in those territories. The lower turnover rates that I was [indiscernible] to Vijay is mostly coming from some of these story changes, higher engagement once we come fully part of the company. So again, plenty of reasons to be in that we're in the right direction. .

We'll go next to Robbie Marcus with JPMorgan.

Suky, I'll add, I guess, my sadness and congratulations. You'll be missed. I wanted to follow up, IvanIvan, maybe on a couple of things you mentioned. And it really comes down to what is and what isn't maybe onetime in the quarter? It seems like there were some product discontinuations in these, maybe a little bit of end of quarter purchasing and then perhaps maybe some benefit in gross margin. Wondering if you could size any of those? Any other potentially onetime items in the quarter and how to think about that resolving over the rest of the year? .

Absolutely. Thank you, Robbie. So I'll touch on U.S. needs and what happened in the quarter? And then maybe Suky, you can comment on gross margins and how durable they are. So look, it was not the greatest quarter for U.S. knees, but it was definitely in alignment to our expectations. We knew we were going to be going through some of these changes related to the go-to-market transformation, and we accounted for those. So I would say the single largest reason why the USD number was no higher than the 2.2% is some of the changes that we made in the U.S. organization. We lost 2 accounts in the quarter, fairly large. We believe going to be able to recoup some of the business, but we'll see as we get into the rest of the year. There was a Kaiser strike in the West Coast where we had the highest share in knees. So while that was disrupted for everybody, it was more disruptive for us. .

In my prepared remarks, Robbie, mentioned how we are moving from legacy brands. namely NexGen and Vanguard to making the transferring to a one new franchise, that being persona. And as we went through that, we saw some disruption. So I will tell you, probably mostly in line, except a couple of the accounts that we lost -- and that's the body. We got to do better, and we expect to do better than growing 2.2% in U.S. knees.

Relative to quarter-end deals, all the staff, those are in line with what we typically do. It was not a significant onetime event. We do strategic purchases. We try to convert ASCs. There is demand in the market for bundled deals, we include technology, implants and whatnot, and we're going to continue to do those.

Suky, do you want to comment on gross margin?

Robbie, on gross margin, we saw a very strong quarter. largely driven by the invalidation of the IEEPA tariffs, which contributed about $0.20 to results in the quarter. We were beyond that a little bit better on underlying performance as well. The way you should think about the gross margin line is of that $0.20 that we benefited in Q1, we had originally assumed about half of that would be credited in the second half. So that was a bit of a pull forward. And so the remainder of that $0.20 drops $0.10 to the bottom line and is largely the driver of the beat or the raise, I should say, on earnings per share.

As you think about gross margin for the full year, we still expect it to be down modestly versus prior year at around 71%, give or take. And the way you should think about the cadence is that it's going to be roughly consistent for the remainder of the quarters. So again, underlying performance on gross margin is as expected. The biggest driver in Q1 was the invalidation of those tariffs.

Our next question comes from Travis Steed from Bank of America.

Just to follow up a little bit on Robbie's question. I guess looking at the U.S. knees specifically, comps do get 400 basis points tougher in the back half. And so just how do we get confidence that in the kind of the back half acceleration in U.S. Knees? And I don't know if I heard correctly, was there -- did you say in the earlier question, you saw some disruption early in Q2. I don't know if that was an early Q1 misspeak or maybe I missed it wrong?

No, no. The disruption was on Q1, Travis. So when you look at the changes we made in the first quarter, I noted a reduction on nondedicated representatives there was some disruption. We did lose 2 fairly large accounts in the quarter. So no, I did not comment on disruption on the second quarter.

Your main question, what gives us confidence that we're going to accelerate our net growth in the second half is the ramp-up of our new products is the fact that we continue to place and sell a lot of technology, 30% growth in technology in the first quarter, all in with the rest of surgery, bond cement is 12%, but the actual technology growth in the first quarter, and that's TMINI is 30%. So once you start growing technology at those rates, obviously, implants fall at some point. So the account conversions that we've seen in the technology sales, the changes we're making from a go-to-market standpoint, new product acceleration gives us confidence that the numbers should increase. Thank you, Travis. Thank you.

We'll go next to Chris Pasquale from Nephron.

It didn't come up in your prepared remarks, but 1 of your competitors have been dealing with an issue that impacted their ability to serve customers for a few weeks at the end of the quarter. doesn't appear to me at first glance like you benefited much from that dynamic. But could you just talk about what you've seen in the market and whether you think that has any implications for your business, either here in the first quarter or what you're expecting in .

Yours. First things first, it's very unfortunate that companies go through those dynamics. So I'll start with a No, we did not see any material impact. So we do not see the fact that we had a competitor going through such dynamic impacting our business in a meaningful way. .

We'll go next to David Roman with Goldman Sachs.

Maybe we could unpack a little bit some of the trends outside the United States. I think this is the first quarter in quite some time that OUS growth has trailed the U.S. and likely trailed where end markets look to be performing. So could you maybe help us think through some of the factors influencing those geographies to the extent to which there might have been any type of intermittent disruption versus what might be a change in the trajectory of that franchise?

[indiscernible] you, David. So a couple of things. Number one, the comps in the first half for international are more difficult than the second half. So that's one part, and I would like to talk what comes, but it is definitely an element here. Secondly, we've made, as we announced at the end of 2025 and as we said in 2026 early in the year, we made and we're making some distributor changes in geographies such as emerging markets, Middle East and Europe and China primarily, where we have gone from a large network of distributors to having one, if not true partners. And that's obviously brought some disruption.

And then thirdly, there were a couple of onetime events that have been orders in certain geographies internationally that didn't come or wait. But all of that said, the expectation is that we're going to be growing international mid-single digit in the second half of 2026. Thanks for the question, David.

We'll go next to Larry Biegelsen with Wells Fargo.

I guess for my 1 question, I'd love to hear about the rollout of Monogram. I know it's early, but it's an important product for you. So once you launch the semiautonomous system with Persona early next year, how should we think about the pace of the rollout? Will there be a limited launch initially at select centers and how that might impact ROSA. Just help us think about that, please. .

Larry, I love the fact that you always got a technology-related questions about the future of the company. So thank you for that. Very excited about Monogram. As I mentioned in my prepared remarks, we completed the clinical trial. So we are deeply focused now on the preparation of the 510(k) submission. And we continue to anticipate that we're going to be in a position to launch this new-to-world technology in early 2027.

What should we expect of Monogram? If what we've proven is right, the fees remain there going to be launching the most efficient readout there in what we can do cases under 4 minutes procedure times. We believe that it's going to have the highest amount of safety given the enhanced surgical boundaries. We believe that it's going to really democratize orthopedic cases from a technology standpoint, very consistent when it comes to a procedure is very reproducible. The learning curve is very short. So it is easy to use.

And then again, the level of accuracy we've seen with the robot is like nothing that I've seen in my many years dealing with technology. So we believe we got a bulk platform that can get scale up fairly rapidly. And to that point, we are going to invest to make sure that's the case. So we are hiring north of 200 sales reps behind the launch of Monogram in addition to the many reps that already got in the field. We are investing heavily on clinical evidence. We recently announced that we hired Dr. Jonathan [indiscernible], who happens to be 1 of the world's global key opinion leaders when it comes to technology, some of who's actually been an entrepreneur as well. We're also investing in rethinking or rather thinking, not just the clinical strategy, but also the economic strategy.

So I can spend an hour talking about it, but I will say this is going to be a very bold launch, one that we're prepared already as we speak. What's going to happen with ROSA. We are committed to having a suite of technology solutions. So ROSA with TMINI was recently launched. One of the reasons why technology is growing 30%. We're going to keep that. It is the #1 robot outside of the U.S. where CT scan is not CT scanning. It's not the preference. We love what we're seeing with our partnership with Finsurgical and TMINI. So we strongly believe that the combination of Monogram plus ROSA plus TMINI, it's going to give us a competitive advantage. Very excited about Monogram. Thanks for the question.

We'll go next to Matt Taylor with Jefferies.

I actually wanted to ask a final question about the tariff impact you saw the benefit here in Q1. I guess what are you assuming for the rest of the year with regards to EPA tariffs or tariffs in general? And what do you think could happen with the 232 investigation. Just asking a curiosity more than anything else.

Yes. Matt, good to talk to you. So we are assuming that the 122 tariffs remain intact for -- into the second half of the year. we are assuming that the EPA remain invalidated. And therefore, we took the benefit of that $0.20 in the first quarter, as I mentioned. And moving forward on the 232, I think it's still evolving and dynamic and no material updates at this point, but the overall situation remains fluid, and we'll keep you posted as things unfold. .

I'll just add Matt, quickly. On the 232, the validation we're getting from our IT sources is that it's not going to impact those companies that operate under the Nairobi protocol. So we're feeling pretty confident that we've got a pathway to mitigate that. Thank you. .

Our next question comes from the line of Richard Newitter with Truist Securities. .

One of the innovations that feels most innovative for you guys that's exclusively in your hands. It's the Canary smart implant that's embedded in Persona IQ. But just noticed it doesn't get a ton of airtime even on this call. And I know you had some positive clinical trial updates at AAOS for this technology. It seems like there's potential to generate real savings to the system here, better patient management post surgery. I know in the most recent CMS inpatient rule proposal, the CCJR is extending some of those initiatives that would seem to lend themselves in favor of a technology like this.

I'd just love to hear kind of where you are on this particular product subsegment? Why we're not hearing about it more? How and if this can be leveraged as a more meaningful differentiator moving '26 into '27?

A lot of the question, Richard. Thank you. Look, early on, probably, we talked too much about Persona IQ without having the data. Now we're taking a different approach. We're going to get all the data. we're going to get everything validated, and they want to talk about it. I will tell you, overall, everything is tracking in accordance with expectations. As you mentioned, we did publish some very robust data on what Persona IQ brings in terms of lowering cost, improving outcomes, et cetera, et cetera. So that was published, I think it was 4 to 6 weeks ago.

I've seen with some of the changes around IPPS and the CJR expansion, this is the kind of product that can make a robust impact. There is an increase on DRGs or expenditures, as you say, with DRGs, 469, 470 for those companies that perform better. So now we will be in possession of the implant that can, in an objective way, track whether our implant is performing better. So companies that have connected data before, during and after the procedure. Companies that can being objective data around outcomes, promo whatnot, and they can validate that can reduce the cost of care I believe they're going to be meaningfully rewarded. So we continue to invest in a variety of fronts to make sure that we are the company that can validate all of the above. So committed to the space, the technology, and we like what we see.

We'll go next to Caitlin Roberts with Canaccord Genuity.

Just to touch on ROSA shoulder. Any updated color on the launch and when will move to a broader launch?

Thanks for the question. We are now fully on the full market release. I was actually done in Florida, where we've been demo in the technology. The feedback continues to be very strong. It is surgeon center. So we're not launching a technology that only certain surgeons can use. So if you are an anatomic or reversed type of surgeon case technique you can use ROSA Shoulder for both types of surgery. We are getting really solid data around the accuracy of the platform. So we can robotically do surgeries that impact the land as well as the humoral, -- so we can do both the gleno and human resection. It is extremely efficient. We already are actively working on version 2 that's even more efficient than the first generation of ROSA Shoulder and it is fully integrated to the rest of the ROSA ecosystem.

So again, another example going back to the question that Rich had of collecting data before doing after surgery with ROSA Shoulder and being able to engage in proms, conversations, outcomes and whatnot. So again, we move from limited market release to full market release, and we're going to scale up the number of units that we're going to be deploying in the U.S. and other markets. Thank you, Caitlin.

We'll go next to Matt Miksic with Barclays.

Follow-up on Paragon. You mentioned some acceleration there. If you could talk about what's driving that and whether you expect to maybe exit the year on double digits? And how we should think about the time line for another potentially paradigm like strategic investments? .

Thanks, Pat. So we actually -- the first quarter almost a double digit when it comes to Paragon 28. And early in the second quarter, we are in the teens. So the growth is accelerating. We also saw a 200 basis point sequential increase from Q4 of 2025 to Q1. And to answer your question succemely, what's driving this is focus. We live in Albert and the Timalon. They're getting robust investments behind the platform. The launching products at a rapid pig the hiring reps in a variety of fronts. So focus is what's driving the growth here. And we expect to exceed 2026 strongly in the double-digit growth.

In terms so when are we ready to do the next deal. Look, we've got a lot going on here. We are changing the go-to-market model here in the U.S., integrating Paragon about to launch Monogram, which is going to be very disruptive and it's required a lot of focus. And then we've got another deal called [indiscernible] also doing really well that we're integrating. So we're going to pause. We're going to continue to do buybacks. And at the right time, we'll execute on a deal similar to Paragon, which I think is prone to be very solid for Zimmer Biomet. Thanks for the question, Matt.

We'll go next to Steve Lichtman with William Blair.

Suky, all the best to you. Ivan, where do you think we are at on underlying hip and knee market growth? Are there any incremental headwinds to market growth in the U.S. that you're seeing on elective procedures or willingness of your hospital customers to purchase bigger ticket items like ROSA? .

We continue to track the market growth rates and it's very solid. We pick the overall recon market to be growing north of 4%, not 4.5%. So obviously, we got to do better in Knees. We are where we need to be, but we're going to accelerate in hips. We've not seen any material impacts. I get the question around what's happening with Medicaid, ACA and whatnot, we track cost of data. First of all, Medicaid is low single digit for us. So said differently, I think it's about 1% of our revenue comes from Medicaid, less than that. And then in terms of ACA, is less than 12% of our cases. .

We track the top 10 accounts in the U.S. to 10 accounts being hospitals like Mayo, Cleveland, HSSC New York and Other. We continue to see waiting lease being fairly long. So I would say the market is 4%, 4.5% durable. Pricing dynamics continue to be where they need to be. So we had a quarter of 40 basis points of price erosion overall, in line with our expectations. So we don't see anything from a market perspective that we're concerned about. Thank you.

We'll go next to Jeff Johnson with Baird.

Suky, best of luck. Ivan, maybe on the sales transition. I know we covered a lot of this last quarter, but I just want to make sure I'm understanding a couple of things. we've heard in some conversations. I think some of your reps that were not 100% dedicated, you're kind of truing up and giving them guarantees this year. That extra stub that you may be guaranteeing some of those reps. Are you excluding those costs from non-GAAP EPS and margins, just I think about how to set my model up for next year or this year and next year?

And then secondly, in some of those conversations, we've heard if those guys were trued up and given a guarantee this year, it might be more next year they think about, do they stay or not without that guarantee. So -- how are you thinking about the disruptions from the sales transition? Is that more of a 26% impact? Could some of that continue into '27? Just wondering how you think kind of these disruptions gate out between this year and next year?

Thank you, Jeff. Look, we go through sales force changes in a variety of ways and magnitudes often. So this is not something we exclude. So going back to why OpEx is slightly higher and what is the EPS going. We're investing in making sure that this works out. So that's number one. We have offered 2-year guarantees that are backed up from a revenue standpoint, in some cases, 3-year guarantees. But I would tell you, Jeff, the single largest guarantee that you can offer a sales rep is to let him or her now that it is going to be a long-term future for the employee. So money may cover 2 to 3 years. But when you have technology that you're launching like Monogram, when you have the full [indiscernible] in Orthopaedics you're making the investments that we're making, most reps see this as the place to be for the next 2 years. We can also with jobs every other year. Money is not going to keep you there. But having the feature that they feel they have a Zimmer Biomet was keeping them here. .

So I will tell you in my conversations we sold reps all over the U.S., and I'm spending 70% of my time on the road visiting every single territory. That's what we hear. -- if you give me a bank that is robust, if you made me part of something that is going to be great for the long term. money matters in the short term, but my career is probably more important. Thank you, Jeff.

We'll go next to Matthew O'Brien with Piper Sandler.

And Suky, best wishes in your future endeavors. Just on the pricing side, Ivan, you mentioned down 40 bps in Q1, but I think you said you're sticking with the down 100 for the year. I guess why stick with the 100 bps should we expect things to get progressively worse throughout the course of the year and then exit the year down even more than 100 basis points and kind of continue forward at a higher rate than we've seen historically? Or are you just still going to be still trying to build in some conservatism with that metric here this year and then going forward? .

Well, first of all, that is the range that we've been given for a while, flat to 100 basis points. In '25, we did better than that. There were a couple of onetime events in international markets. As we enter 2026, we guided flat to 100. We closed the first quarter, but it's a similar answer to revenue and other elements of the guidance. We're going to wait and see there are macro events happening. There are changes in a variety of international markets. There is competitive pressure here in the U.S. So we're going to wait and see. We like where we are at the end of the first quarter. We'll update you on pricing again in the August call. Thank you.

This concludes the question-and-answer portion of today's call. I would like to turn the call over to back over to Ivan Tornos for any closing remarks.

Sure. I want to thank everybody for joining the call today. And most importantly, I want to thank the Zimmer Biomet team for the strong execution in the first quarter. I give you 1 word confidence. We -- I am very confident we were in the right direction, not just into 2026, but most importantly, how we are making the company future proof when it comes to the strategy that we have how we think about operating the company for the future and the commitments that we're making.

I would like Suky, my friends okay here to close the call, given the fact that this is going to be the last time that he represents Zimmer Biomet as the CFO. So Suky?

Yes. Thanks, Ivan. So I've learned and taken a lot of away from you over our 7 years together. And the 1 thing that's most impactful is your approach to gratitude. So I'll start there. I'd like to thank you, the ZB team, the Board and all of our many partners for an amazing 7 years. We've accomplished a lot in a really tough environment. But Ivan, we've built a strong foundation from which to grow. -- and I'm confident that under your leadership and with the team's execution, you will take ZB to the next up. I wish you all the success and I'll be shining from the sidelines.

I'm going to miss you. Thank you. Thanks, everybody. Bye-bye. .

This concludes today's call. Thank you for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to the Zimmer Biomet Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, February 10, 2026. [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 Fourth Quarter 2025 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, 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 fourth 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 with the way that I always do, by sharing my gratitude to our Zimmer Biomet team members around the world who move our business and mission forward each and every day. Thank you for your tireless work. Thank you for your dedication to solving the most pressing challenges in health care and thank you for your relentless commitment to serving our customers and their patients. Today, Zimmer Biomet is a totally different company than it was just a few short years ago, and this is no doubt thanks to your efforts.

During my prepared remarks this morning, I'll cover 4 key areas. I'll start summarizing our fourth quarter results and the results for the fiscal year 2025. Second, I'll provide an update on the plan which we are executing upon to evolve our U.S. commercial organization. Thirdly, I'll introduce our 2026 guidance. And lastly, I'll briefly cover the progress that we have made across our key strategic priorities, those being people and culture operational excellence and thirdly, innovation and diversification.

Starting with the year and the fourth quarter, I'm proud of how the team ended the year 2025, delivering on our commitments on sales growth, EPS and free cash flow. We're navigating quite a complex challenge in the year, tariff headwinds and integrating 3 acquisitions within 1 year. From a constant currency organic revenue standpoint, we ended 2025 right at the middle of our initial yearly guidance, marking the fifth consecutive year for Zimmer Biomet growing mid-single digit or above.

Looking at the fourth quarter results, we grew sales on an organic constant currency basis by 5.4% against a mid-single-digit growth comparable with our critical U.S. business increasing 5.7% and international growing 5%. Healthy end markets, new product momentum, the ongoing evolution of our U.S. sales channel, and the recent leadership additions continue to drive an acceleration in our critical U.S. business. US growth of 6% in the quarter was driven by increased penetration of Persona OsseoTi or total cementless knee, which ended the year roughly around 35% penetration.

Our Oxford partial cementless continues to deliver above expectations with adoption rates for straining continue to be very high with great conversions from competitive accounts. Notably, our DTP, direct-to-patient awareness campaign in partnership with Arnold Schwarzenegger drove accelerated momentum in the second half of the year with a personalized knee campaign, yielding very meaningful results.

Turning to our huge franchise. Z1 or triple taper STEM penetration of fuel U.S. hip growth of nearly 8% in the quarter, with the implant Z1, now representing over 35% of or U.S. hip stents and gaining meaningful competitive conversions. Next, our robotics and navigation strategy of offering a comprehensive suite of customer-centric technology solutions continues to pay strong dividends. Our U.S. technology and data, bone cement and surgical sales increased over 10% in the quarter driven by the strongest robotic capital sales quarter in over 2 years.

Finally, in S.E.T., our U.S. CMFT, Craniomaxillofacial thoracic business continues to perform strongly, growing mid-teens in the quarter, led by a continued shift in external fixation from wires to [indiscernible]. Upper Extremities had another great quarter of high single-digit growth in the U.S., where our Identity Shoulder and OsseoFit Stemless Shoulder continue to convert competitive accounts.

Looking now at 2026, we're accelerating the transition to a dedicated and specialized U.S. sales channel in order to drive more durable and consistent growth. By the end of 2027, we expect the vast majority of the conversion to dedicated CVH Zimmer Biomet employees to be complete and also expect a substantial increase in the number of reps specialized in the higher growth areas, such as S.E.T., robotics and in our ASC channel, ambulatory surgical center channel. We have already addressed 1/3 of these organizational changes and have best-in-class plans and project management capabilities with third-party help to ensure a smooth transition for the last 2/3 of this evolution.

With a robust innovation cycle in place, we feel is the opportune time to move faster and we will. With that context, we now expect full year organic constant currency revenue growth for 2026 in the low single-digit range or 1% to 3% growth with an adjusted EPS earnings per share of $8.30 to $8.45 which includes the contribution from Paragon 28 beginning April 21, the 1 year anniversary of the deal closing. Suky will provide further details during his remarks. The evolution of the U.S. sales force represents the final core initiative in our transformation. And while it might create some short-term disruption across pockets of our organization, it is by far the most crucial step in order to convert Zimmer Biomet into a durable mid-single-digit plus growth company for the long term.

Turning now to our 3 key strategic priorities for Zimmer Biomet starting with #1 people and culture. We remain committed to having the right people in the right roles to maintain our leading position in the key areas where we compete. By having a dedicated and specialized U.S. sales channel, we will now enhance our ability to consistently and with no surprises, executed a strategy. This will drive increased productivity while enabling us to be more competitive in high-growth segments, as mentioned before, such as robotics, ASCs and the growth drivers within S.E.T., where we have tremendous opportunity ahead, and we are still underpenetrated.

Secondly, -- on the second priority of operational excellence, we believe our disciplined cost management and robust capital allocation strategy will enable EPS growth while allowing us to invest in the business for the long term. Further, given our operating rigor, we expect to continue to grow free cash flow in the upper single-digit to double-digit range in 2026, marking the fourth consecutive year delivering meaningful free cash flow growth. Against the backdrop, we plan to prioritize meaningful return of capital to shareholders over M&A.

Lastly, on our third priority of innovation and diversification, we're making significant advancements. Over the past 2 years, we have closed all core portfolio gaps with the introduction of the Magnificent 7 platform, and we now have the potential to change the standard of care with solutions such as the Oxford Partial Cementless knee, iodine core devices recently launched in Japan, our second largest market globally, ROSA Shoulder and the MBOS, semi and fully autonomous AI-driven orthopedic robotic system that we acquired via the Monogram acquisition.

In addition to this, we continue to invest internally and partner externally to strengthen our pipeline of new product launches, which is today what it was just a few short years ago. Given the strength of our innovation cycle, we feel once again that this is the right time to accelerate the evolution of our U.S. channel. So we can fully capitalize on a dedicated and specialized sales force. I'll tell you having trouble to all key sales meetings across the U.S. in the month of January, the excitement behind our innovation story is very high and so is engagement. It is now up to us to execute on the plans via this transformation.

In conclusion, we are very proud of the progress in our organization, but we are far from being satisfied with where we are at today. In 2026 to closer core turnaround efforts, we are going to be laser-focused on the U.S. coromarket commercial transformation, while we continue to showcase the strength of our robust innovation cycle across the globe. As we then enter 2027, we'll be ready to transform the musculoskeletal space with the launch of MBOS and other disruptive technology platforms while responsibly accelerating or diversification strategy, gaining access to a higher growth market environment. And with this behind in 2028 and beyond, Zimmer Balama will look and act like a totally different company.

With that, I'll now turn the call over to Suky. Thank you.

Thanks, and good morning, everyone. In the fourth quarter, we grew sales 5.4% on an organic constant currency basis. and delivered adjusted earnings per share of $2.42, which was up 4.8% year-over-year despite dilution from the Paragon 28 transaction, the impact of tariffs and continued investments in our commercial organization. On a full year basis, we grew organic constant currency sales 3.9% and generated $8.20 in adjusted EPS and $1.172 billion in free cash flow.

As we get into the details of these results, unless otherwise noted, my statements will be about the fourth quarter of 2025 and how it compares to the same period in 2024. We and my commentary will be on a constant currency and adjusted operating basis. 2025 organic constant currency commentary excludes the impact from Paragon 28 acquisition that closed in April of 2025. Net sales were $2.244 billion, an increase of 10.9% on a reported basis and 5.4% excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 50 basis points negative in the quarter.

Our U.S. business grew 5.7% on an organic constant currency basis, which, as Ivan mentioned, reflects continued momentum for our recently launched products, strong robotic sales and end-of-year customer purchases and capital sales above historic levels. Internationally, we grew revenue by 5% on an organic constant currency basis driven by continued new product momentum and strong robotic sales.

Turning to our P&L. We reported GAAP diluted earnings per share of $0.70 compared to GAAP diluted earnings per share of $1.20 in the prior year quarter. Higher revenue and a lower share count were more than offset by a onetime charge related to a brand rationalization initiative and restructuring charges related to a reduction in workforce as well as higher interest expense associated with the Paragon 28 transaction.

On an adjusted basis, we delivered diluted earnings per share of $2.42 compared to $2.31 in the prior year quarter. This increase was driven by higher revenue, higher adjusted gross margin and a lower share count, partially offset by an increase in SG&A and a step-up in interest expense tied to Paragon 28. Adjusted gross margin was 72.4% higher than the fourth quarter of 2024 due to lower manufacturing costs and favorable mix. Adjusted operating margin was 29.1% lower than the prior year quarter as a result of increased commercial investments and the addition of Paragon 28.

Adjusted net interest and nonoperating expenses were $71 million, above the prior year driven by higher debt related to Paragon 28 and higher interest rates on refinance debt that matured in 2024. Our adjusted effective tax rate was 17.9% and fully diluted shares outstanding were $198.1 million, down year-over-year due to share repurchases in 2025, including $250 million during the fourth quarter.

Now turning to cash and liquidity. We had another strong quarter of cash generation, with operating cash flows of $517 million and free cash flow of $368 million. We ended the year generating $1.172 billion of free cash flow, growing over 11% year-over-year, marking the third consecutive year of at least high single-digit free cash flow growth. We ended with approximately $592 million in cash and cash equivalents. Now regarding our outlook for full year 2026.

Unless otherwise noted, my commentary will be on a constant currency and adjusted operating basis and will include the contribution from Paragon 28 in organic growth beginning in April 2026 marking the 1-year anniversary of the deal closing. We expect organic constant currency revenue growth of 1% to 3% and with growth roughly consistent throughout the year. In addition, we expect adjusted EPS of $8.30 to $8.45 with free cash flow growth of 8% to 10% which would mark the fourth consecutive year of high single digit or greater free cash flow growth, quickly approaching 80% free cash flow conversion.

This guidance contemplates end market growth in line with 2025 and the risk of disruption from the U.S. sales force transition, continued evolution of our international go-to-market models, up to 100 basis points of pricing erosion and a stable tariff and policy environment. Now let's walk through the moving parts that impact our reported revenue guidance.

At current rates, we expect FX to be approximately a 50 basis point tailwind to full year revenue growth, which includes approximately 250 basis points of tailwind in the first quarter. We expect Paragon 28 to contribute around 100 basis points to reported sales growth in 2026 before being reflected in organic growth in April. As we have discussed previously, we expect our operating margins to be down about 50 basis points from 2025, which contemplates lower gross margins, dilutions from the Paragon 28 acquisition and increased investments in our U.S. commercial channel.

Operating margins in the first quarter are expected to be down about 100 basis points from the first quarter of 2025 before increasing sequentially by about 100 basis points into the second quarter. For the full year, we expect adjusted net interest and other nonoperating expenses to be approximately $295 million. Our adjusted effective tax rate to be about 18% and to end the year with about 194 million to 195 million shares outstanding. This share count reflects a share buyback program in 2026 of up to $750 million. I'd like to close by thanking the entire ZB team for their hard work and dedication. We continue to make meaningful positive changes across the business while investing to accelerate long-term growth.

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

Thank you, Suky. 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.

[Operator Instructions] We'll go first to Matthew Blackman with TD Cowen.

Ivan, we're obviously all focused on the near-term impact of the sales force optimization initiatives. But maybe take a step back, and you did touch on this a bit in the script, but tell us why now, how heavy the lift ahead is? And perhaps most important, what could the business look like if this has executed well and where and when across the franchises could we see visible returns? Is it exiting it this year? Is it 2027? Just any color would be helpful.

Absolutely, Matt. So what I'll do here, maybe I'll provide a longer answer than useful and then maybe this says sometime in future questions this morning. But maybe start with what it is that we're doing because I'm seeing some people are confusing the what. And then we'll talk about why we're doing it. I'll directly answer your question of why are we doing it right now. I'll talk about how we're doing it to reassure everyone that we're taking a very prudent approach that is very state-centric and then when do we see the benefits? So I'll break balance in those 4 or 5 key areas.

So what it is that we're doing. We're moving from being a company or rather a channel here in the U.S. that has a lot of nondedicated employees. But on dedicated, this is not a legal 1099, W-2, committed or committed. We got people that have 2, 3 jobs while working at Zimmer Biomet. It's part of the nature of the 1099 model here in the U.S. And that's not something that we want to keep. We want to have 100% of our U.S. sales force being dedicated. Again, not to be confused, W-2 1099, fully dedicated. So that's number one.

We believe in specialization, just like best-in-class companies belief in specialization. You can have a sales rep selling hips, needs components of technology, shoulders, et cetera, et cetera. Today, our current specialization rate is around 25%, I'll unquote what is the end number, but we're going to make sure that we specialize the sales force so that we can compete at the level that we can compete in the higher-growth segments. To that end, we're adding something like 200-plus sales reps in robotics, countless reps in S.E.T., ASC, et cetera, et cetera. So that is the one, moving from non-dedicated to dedicated.

Why are we doing this now? Well, look, we got no gaps in the portfolio. We've done significant work when it comes to technology in data robotics and what not. We've added a ton of new products when it comes to S.E.T. We just got to have dedicated people to leverage that great new product cycle. We couldn't do this 3, 5, 7 years ago because candidly, we didn't have the products. Not to mention, we're dealing with other challenges. So now that we have the products, we have to leverage the channel to sell those products at a higher rate.

Our productivity rates in the U.S. with one of the third-party benchmarks are roughly half of what some of our direct competitors have. So in plain English, we don't have as many cases as some of our direct competitors. And that's something we're going to be addressing. So that's the why. We're doing it because of new products, we're doing it because of timing. We're doing it because we got a pretty significant productivity gap here in the U.S., not to mention our penetration in ASC and S.E.T. still is very high. So low penetration.

How we're going to do it? And we've got third-party resources. We got a dedicated team. We have hired people that have done this in the previous life. I'm personally involved in the project. I'm going to continue to remain involved. So we're going to take a staged approach to getting it done. We've done 1/3 of this transformation already. We have locked in a significant percentage of the organization. So I feel that we've been very prudent when it comes to how we're doing it. We learn a lot from the ones that we've done. It's actually gone better than expected. We did 5 conversions already late 2025, early 2026. Those are going as expected, if not better. And then just to close this summary, Matt, when are we going to get this done by? We expect the entire transformation to lead on as we exit 2027.

So that is the what, the why, the how and the when. And it is the final step in the transformation of Zimmer Biomet, we addressed the operational challenges in the past. We have addressed the leadership gaps that we had. We have built a best-in-class portfolio remedied and all the gaps and now with significant product launches to change the standard of care. If we don't modify our U.S. go-to-market structure, we're never going to have the durability and sustainable growth that I referenced in my prepared remarks.

We'll go next to Rick Wise with Stifel.

Ivan, thank you for all the comments. You highlighted in your comments, Ivan, that the -- obviously, the reality that Zimmer has grown mid-single digits for 4 consecutive years. Now you're offering tempered guidance and guiding to low single-digit growth Help us better understand what's embedded at a high level in that thinking. I mean clearly, you're trying to be respectful of the uncertainties about the transition -- sales transition process but that seems to be going well.

So what have you baked in? And maybe help us think about the year ahead in terms of -- is the disruption greater in the first half and therefore, the second half could be better. Just maybe help us think through those factors.

Actually, this is 5 years of mid-single-digit revenue growth, not 4. And we are very excited with how we exited 2025 growing in the second half, 5 plus but we got to keep it and we're going to make it durable. So to your question on what's embedded in the guidance, really, we're looking at 3 things. Number one, obviously, is the U.S. sales force transition. That is the priority in 2026. If it goes better than expected, obviously, your number exited in 2026 will be higher. If we don't do the job that I expect going to do, then we may move towards the lower range of that guidance. So that's item number 1.

Number two, we pay close attention to the new product cycle and the adoption of these new products namely the Magnificent 7. If you look at the performance in Q4, very solid across hips and knees, similar performance in the Q3. So now we need to make sure that we're going to be able to do the same or better as we enter 2026. So that's the second item we paying attention to.

And the number 3, international. As we've been discussing, it has been a fragile business now for a couple of quarters. Since that 1 quarter, we do really well. The next quarter, something happens. So again, we got to pay attention in making sure that we do have the right go-to-market models. We are focusing the right growth areas in the right country. So those are the 3 things we're paying attention to. The U.S. sales force transition, the new product adoption cycle and the international performance in key geographies.

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

Beautiful. I'd love to just off a slightly boring one, but on pricing, moving to a negative 100 basis points erosion in the '26 guide, inflation is kind of at the same spot as it was before. And I'm guessing your customers are in a pretty healthy spot from procedure volumes. Just curious why thinking pricing stays in the negative territory. I know that's where it was historically, but any outlook on how you think about price mix would be super helpful.

Yes, Patrick, this is Suky. Thanks for the question. So overall, for the year 2025, we ended on flat pricing at a consolidated level, so taking all the regions into account. The fourth quarter, as I said in my prepared remarks, was down about 50 basis points. For 2026, you're right, we're saying up to 100 basis points of erosion, which is consistent with our Analyst Day commentary almost 2 years ago. And as you noted, it is a significant improvement to sort of pre-pandemic price profile.

The reason we expect to see some level of step down from between '25 and 2026, and we talked about this a bit over the last few quarters is we expect to see a moderation in some of the price increases we've been able to take across EMEA. We do expect Asia Pacific to be down year-over-year, primarily because of the Japan biannual price decrease, which happens. It's a normal part of our business. Also, we expect to be slightly down in China as we continue to reconfigure our go-to-market strategies. And the Americas are expected to be down sort of similar profile to what we saw in 2025. So when you put all those together, we do expect to see a modest step down into 2026. But again, well within our overall guidance that we provided at our Analyst Day.

We'll go next to Vijay Kumar with Evercore ISI.

Congrats on a nice execution Q4 on free cash. Suky or Ivan can you give us a bridge from back half, right? When you did mid-singles to 2% guidance at the midpoint for fiscal '26, how much of this is sales force reorg impact. And Ivan, you mentioned that you've already completed 1/3 of this transition. What's been your prior experience rate? Like when you look at the pacing of disruption, was it front loaded. And when does productivity increase to offset this?

Thank you for the question. Look, for 2026, it's all about the sales force transformation. So yes, we exited only growing strong in the mid-single digit as we provide guidance for 2026, we just want to be responsible in realizing that this is a significant transformation we're undertaking I've made public commentary around the fact that in the U.S., we've got roughly 2,500 reps across 34 territories.

There's a lot of legacy issues in the channel that we're addressing and we're going to be responsible. We're going to do it over 2 years. We believe there will be some disruption. So that's why we've given the guidance that we're giving today. So that's the answer on why we're going from, call it, 5 plus in the second half to a midpoint of true here as we enter 2026.

What we have learned as we go through these transitions is that disruption happens sometimes in the early stages. You go and negotiate your contracts with your distributors. And they say, no, we're not interested in the new model and rarely happens towards the end. Once they sign up, they sign up and they stay.

And again, many lessons learned from the work we've done already 1/3 behind, as I referenced in my previous answer to [indiscernible] it was, we already have done 5 additional distributor changes here in the last 4, 5 months, and they've gone really, really well. And we have active negotiations going on with roughly 40% of the channel as we speak, and those are going better than expected. In terms of the -- when would we see the outcomes, towards the end of '27, when you start to see increases in productivity.

We'll go next to Robbie Marcus from JPMorgan.

I know it's one, but I have 2 quick clarification questions. I have a lot of investors asking, so I figure I get it out on the call here. First, really strong fourth quarter performance, particularly in the U.S. across large joints. I just want to make sure there was no onetime items or above normal sales there.

And then Suky, as you think about first quarter and first half, getting the cadence right has been really important, particularly over the past few years. And I know you've mentioned it in the script even. So just how do you want people to think about first quarter and first half top and bottom line. The guide is 1% to 3% on the top and bottom line. and you exited at 5. So help us bridge expectations, how much disruption is built in and help us get the numbers set for the beginning of the year.

Thank you, Robbie. I'll start and then I'll let Suky comment on the phasing for the year. In terms of performance in Q4, the main driver behind the solid growth in the U.S., and I'm frankly very pleased with where we landed OUS is new product acceleration. We did benefit from some additional capital sales in the quarter. We had some modest uptick when it comes to some of the sales that we do towards ASCs. But I would say the lion's share of the performance is better execution.

We did Robbie benefit internationally in knees. If you look at the knee number, we grew 8.2%. That is some of the revenue in Q3. You may recall that Q3 with year end where we expected, some Middle East revenue that got into Q4. But very, very pleased with the execution when it comes to new products, both in the U.S. and international. So do you want to facing.

Yes. So thanks, Robbie, for the question. So on phasing, it's very consistent with what I said in my prepared remarks, which we expect on the top line for growth to be roughly consistent, plus or minus from quarter-to-quarter throughout the year. And that takes into account what Ivan talked about relative to the sort of U.S. phenomenon in sales force and optimization there as well as some of the elements that he's been teeing up for some time around international and go-to-market changes. So both of those have been reflected and sort of contribute to sort of that first -- last -- sorry, second half of 2025 into 2026 step down.

Relative to P&L from an operating margin standpoint, some of the building blocks there are, we do expect gross margin to be down for the full year. We've talked about that for quite some time. We're going to make a lot of that up through SG&A efficiency inside of operating margins, but we do expect that to be down 50 basis points as I talked about in my prepared remarks. Overall, earnings, we expect to grow in line with constant currency organic growth, that's going to be assisted by some of the share buyback that we plan to do this year.

Now taking those building blocks into phasing operating margins, we do expect to be down in the first quarter year-over-year by about 100 basis points. That's largely driven by Paragon 28, which was not yet anniversaried because we did the deal in the second quarter of '25. We're going to have higher commercial investments as part of this overall optimization in the U.S., as Aman talked about, yes, it is specialization, but it's also augmentation where we're adding reps in a couple of key areas. And then as I said, gross margin will be down in the first quarter.

So again, operating margin is down year-over-year in the first quarter, about 100 basis points from there. We expect to see a sequential step-up in the second quarter as we anniversary out of Paragon 28. That will be an increase sequentially in the second quarter of about 100 basis points. And then as we move into the back end of the year, we expect operating margins to be roughly in line with 2025. So hopefully, that gives you a bit, again, top line, roughly consistent growth rate throughout the quarters, plus or minus, and then the operating margins, as I talked about.

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

I just wanted to kind of follow-up on Robbie's question in terms of on the margins, how you're thinking about the cost of the sales force transition. Is there -- what you kind of baked in on the margins from that? And then a question in terms of -- you've already done 1/3 of this transition already. So one question I get often is why does it actually take 2 years to do all this? And when do you start to see some green shoots here.

Yes. So thanks for the call -- or sorry, for the question, Travis. Overall, the impact of the sales force transition, there's a modest impact to overall operating margins inside of SG&A. I think start to see that in the fourth quarter or really the back half of last year, you're going to see that continue into 2026. That near-term headwind has been accounted for in our guidance for 2026 but the opportunity, I think, is more attractive as you think mid- to longer term.

One, it does give us the opportunity to do some restructuring and offset some of that headwind through more productivity, as Ivan talked about, we're at about half of some of our peers. And secondly, the whole idea behind this is that it generates better revenue growth, more durable sort of market to better-than-market growth rates and at those levels that provides a significant amount of leverage into our P&L. So near term, yes, headwind, modest headwind incorporated into the guide mid- to long term, we do see it being a benefit.

Then, Travis, relative to your question on why 2 years and a more complex that we're going to be responsible. As I mentioned, we don't 1/3. So 2,500 reps done a 1/3, that's what, 1,600 reps that we're going to get through across multiple states. So we're going to take our time in understanding it was the right sequence, locking in the contracts.

We have segmented areas by contract status by market servers. So it's a project that we're not going to take lightly. So that's why it takes 2 years. And we're going to go slowly to then go fast later on.

We'll go next to Matt Taylor with Jefferies.

I wanted to just follow up on gross margins. I know you said down for the year, and we touched on pricing, but was hoping that you could go through all the puts and takes on gross margin this year? And also maybe just talk at a high level about the trajectory beyond '26 for gross profit.

Sure. Thanks for the question, Matt. Yes. So we expect gross margins for 2016 to be in the range of 70% to 71%. It is a step down from a pretty good year in 2025. We've been sort of telegraphing that your key drivers are really the biggest one is around the lower growth profile as you see in the revenue. We get a lot of leverage in our P&L when the revenue growth rate is at a higher level. And of course, the opposite works at a lower growth level. So volumes are the biggest contributor to that step down.

Secondly, we've talked a bit about the FX hedge gains that we've seen in 2025 tapering off in 2026 as we've seen a weakening of the dollar through 2025. The next big area, again, is around price and geographic mix, which we expect to be a headwind compared to 2025. And then the last piece is really on tariffs, which on a net basis year-over-year is not a significant increase, but it will be choppy through the quarters. primarily because of certain credits from 2025 that we expect to realize into 2026. So those are moving parts that really step you down from 25 into 26. But I would say we're making up a very large percentage of that through our SG&A restructuring that I talked about in our prepared remarks.

And so while gross margins will be down 100 basis points or more, we're making more than half of that up. through SG&A efficiencies even while we're incrementally investing in some portions of our commercial business. It's too early to tell on gross margin outlook beyond 2026. And I think the largest component which is driving this year, will drive future gross margin, which is really around volumes and sales levels. But beyond that, I can tell you we continue to emphasize efficiency, continue to make great progress in the areas of sourcing improvements. We continue to build out low-cost manufacturing. I think you'll see that in the stepped up PP&E in 2025.

And then lastly, I talked about a pretty large-scale portfolio rationalization charge we took in the fourth quarter. We believe that, that's going to have a significant meaningful midterm and long-term results or benefits, I should say, in the cost of goods. So longer term, a little bit too early to tell. Again, it will depend on revenue growth, but we continue to push very hard on a number of efficiency gains and are making good progress.

Our next question comes from the line of Ryan Zimmerman with BTIG.

I'm going to turn to Paragon actually, because a lot of questions have been asked on guidance. And just as -- I mean, the contribution this quarter was lower than we expected. And if I look at the outlook for '26, I think it's about 100 basis points which, again, is a little lower than we expected. And so Avon, can you just talk about kind of what you're seeing there? I mean we have heard obviously chatter about kind of the health of the foot and ankle market, particularly in '25 being softer. and kind of what you expect and where you're seeing specific parts of weakness versus maybe parts that are offsetting that?

Yes. Thanks for the question, Ryan. So we've been at it for 2 quarters, right? So we've done 2 quarters as a consolidated company. They both came in at -- in the upper single-digit range. Recall that for the year 2025, we say we'll get around 270 basis points of revenue accretion, thanks to -- or due to Paragon 28. We came in roughly 20 basis points behind that. So not a huge gap. We have made a commitment that we're going to grow this business double digit in 2026, early in 2026, but we like what we see.

I would say mostly everything has gone in line. Our revenue, again, is slightly behind what we anticipated but again, only 2 quarters. In terms of the EPS dilution, everything is on track, if not better than expected, committed to a 3% dilution in year came in slightly better, around 1% in the second year. We expect to deliver on that. And then the integration costs and everything associated with Paragon is also better than expected. We're not seeing any dramatic changes when it comes to market growth. We continue to monitor that. If anything, we've seen that the shift to ASC continues to move in the right direction. So we're very excited about the business.

Again, 2 quarters behind, I just left the sales meeting in San Diego a couple of weeks ago. I'll tell you, Ryan, that with 8 new products being launched in 2026 with virtually the same legacy Paragon 20 employees being now with Zimmer Biomet, the excitement is high, and we expect to deliver double-digit growth in 2026.

We'll go next to Danielle Antalffy with UBS.

Just on this sales force transition, I'm just curious sort of what gives you the confidence. Appreciate that third has been done so far. But just coming to the decision to make this move. Was it best practices at competitors, market research, physician feedback? And then I appreciate you probably can't comment on 2027 right now, but should 2027 be conceptually a year of growth acceleration versus '26 wherever you end up just given you'll be further along in the sales force transition? Or are there other factors we should be considering as we put a finer point on '27 on our models today.

Thank you, Danielle. So let's start with the issue one. We're not going to talk about 2027. So that's something we'll do later on in the year. But right now, we're going to focus on 2026. What gives us the confidence that this is the right time and the right project is data. no more complex than that. We look at productivity rates for Zimmer Biomet versus direct competitors that are fully dedicated, fully specialized. And again, I mentioned, when it comes to case load, when it comes to over productivity, will be high. And given the strength of the new product portfolio, the time to do it is now.

We do a lot of bench marketings in terms of those territories that are fully dedicated and specialized versus those territories that are nondedicated and they're not specialized and it's literally night and day. We see a much greater productivity, no surprise there, Danielle, in those dedicated and specialized territories.

If we don't get the U.S. right, -- and by that I mean we don't get the U.S. to be consistently mid-single digit at some point, upper single digit. This company will never realize the aspirations that we have for this company. The U.S. is 62%, 63% of the revenue. is north of half of the profit of the company. We got to get it right. So we got the leadership in place. We made a lot of changes. We got the new product cycle in full motion we're about to enter a new stage when it comes to innovation in 2027 with Monogram. We just have to do it. So it will create some short-term disruption, but it's going to set up the company very nicely as we enter '27 and beyond.

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

So Ivan, I wanted to ask about capital allocation. It feels like a change in terms of prioritizing returning free cash flow to shareholders. over M&A. So my question is, why the change? I think there was a time not too long ago when you talked about diversification and any color on what percent of free cash flow you'll return to shareholders through buybacks each year? And what can we expect on M&A going forward?

Thank you, Larry, and great to hear from you. I wouldn't say it's a change. I would say that is a pause. Recall that we've done 3 acquisitions between Ortho Grid, Late 24, Paragon 28, April and then a few months after that monogram. I mean these are pretty significant projects. And then add on top of that, this transformation of the U.S. channel. This is not a time to add more complexity. This is not the time to run more projects. This is the time to be nimble and laser-focused on getting those 3 integrations right and ensure minimal disruption out of this U.S. transformation. So that is no more complex than that. At the right time, we'll continue to diversify responsibly.

So no, we're not throwing in the white towel. We aspire to have a higher weighted average market growth rate as we continue to evolve the company but reais all about focus on these 3 integrations and this project. As you might have read, we got approval yesterday from the Board to do up to $1.5 billion in buybacks. We like where the stock of Zimmer Biomet is today. We acquired $0.25 billion of shares in the fourth quarter we're going to continue to continue to acquire shares of Zimmer Biomet given the current valuation.

I love the free cash flow generation of this business.

You heard Suky in his prepared remarks, upper single digit to double digit in 2026. If the company generates tremendous cash flow. We got very solid firepower like or the profile. So the right now, we'll get back to doing the things that we need to do. But in 2026, those are the priorities.

We'll go next to Chris Pasquale with Nephron.

Ivan, you highlighted strong performances from CMFT, upper extremities but organic growth for S.E.T. still did step down a bit. Can you talk a little bit about the other S.E.T. segments, how they perform in the quarter? And then how you're thinking about that business once Paragon becomes sort of part of the organic piece going forward?

Sure. Sure. Thanks for the question. So net-net, in the year, S.E.T. delivered mid-single-digit growth again. So now there has been a cadence of quarters and years in where we've seen this business perform. To your point, CMFT mid-teens growth, shoulders, upper single digit, if not double-digit sports in and out of the upper single-digit territory. Obviously, food and ankle is double digit given Paragon. But we do have to problem children or trauma business and/or we started therapies business, HA injections in the U.S. So those are the 2 headwinds that we got. We spoke about that openly in the Q3 call that our HA business in the U.S. has been struggling. We exited the year more or less in line with our expectations, but those expectations were very low.

So as we enter 2026, we're going to continue to invest in the 4 key growth drivers. We are in a ton of reps in shoulder with expanding our CMF team, craniomaxillofacial thoracic cells force. And we put in new processes, new people, to make sure that the true problem children from restorative therapies don't become the headwind in 26 that became in 2025.

We'll take our next question, excuse me, from Caitlin Roberts with Canaccord.

So how do you see ASCs as a part of your revamped year strategy? And where did you end the year with ASC penetration in hips, knees and shoulder?

So we ended '25 on knees and hips. I do not know, to be honest with you, the final number for shoulder, but we exited 2025 in the 20%, 22% range. So 20% to 22% of all the hips and needs that we did in the U.S. were doing an ASC. And I speculate the shoulder number is higher than that. But right now, I don't recall the number, so I don't want to mislead you.

In terms of our strategy, we've spoken about the fact we need to have dedicated people. We need to have their portfolio, how did they have the partnerships. And speaking of people really excited about the additions that we brought to the team in 2025, a new president for ASCs, who is a superstar [indiscernible] seller. He's brought in great people across the entire U.S. we're actively hiring people into the ASC channel. As Suky mentioned, it's not just specialization, it's also augmentation. So think we are rapidly getting the right amount of people and the right type of people to win in ASCs.

As far as the portfolio, there are no gaps whatsoever. We're really excited about the opportunity that Monogram will bring to an ASC environment where speed, efficiency and accuracy matters most. But in addition to that, we got another 7 to 10 products that make a lot of sense in the ASC. And in the partnerships, we continue to see great momentum with our partnership with [indiscernible]. We are doing new contracts. We got a couple of large groups that we are actively involved in final negotiations. So we're very bullish when it comes to ASC strategy. We'll follow up with you on the number for penetration for shoulder.

We'll go next to Joanne Wuensch with Citibank.

I'll put 2 right up front. I'm sorry, I'm only allowed to ask one. One, AOS, what should we be expecting there? And I suspect this is where you'll be showcasing the MBOS system. How do you anticipate folding that into your robotics portfolio and platform.

Thank you, Joanne. As far as I'm concerned, you can ask 5 questions, if you want. But anyway, what do you expect at the Academy meeting in New Orleans, we're going to have a lot of new products there. We're going to showcase again the Mag 7. We're going to show next generation S.E.T. products. But to your point, the main event is going to be Emboss. -- the fully autonomous and same autonomous robot that robotic platform that we acquired from Monogram.

This is technology that we strongly believe that will change the standard of care. It's definitely the step of moving from guided robotics to Smart Robotics. It has best-in-class ease of use. The registration speed that we've seen in the clinical trials is better than anything that is in the market today. You can literally do the cases and I hope you come to the booth in a hands-free approach. The workflow is as streamlined as it gets.

And again, it's highly accurate, extremely reproducible and he's got all the right guardrails to make it the safest robot there. So we'll be talking about all of that. With the Beauty MBOS, the [indiscernible] meeting in Dallas. And since then, we've gotten just tremendous feedback. We expect to have a large group of surgeons when it comes to New Orleans. So looking forward to sharing this extent with you and the other investors. But beyond that, we'll have our entire suite technology, and we'll be describing why it makes sense to have these category depth.

Second part of your question, how you expect to integrate it. Look, we got the optionality of integrating all things into that platform if we choose to do that. But so far, the data and the feedback validates that since not all customers are created equal, not all technologies will be created equal. We believe in optionality. We believe in large footprint robotics, more footprint robotics, it sounds like our competitors do as well now. We believe in CDN for some customers that want to have a city can but we also have a large percentage of customers, namely outside the U.S. that want to use image less.

We got some surgeons that want to be more in control of the surgery, and you got some that are okay with semi and fully autonomy. So we have the optionality to integrate at the right time. But right now, we like to have the category breadth that we have. And so far, as you saw in the results in Q4, it seems to be working out.

We'll go next to Matt Miksic with Barclays.

Just maybe looking at some of the strain in knees in the quarter geographically? And maybe talk a little bit about pockets of strength where you're seeing success, the cadence of the I-9 coated launch in Japan sort of that the geographic could break down? And any color you can provide would be great.

Thanks, Matt. Look, great quarter. Q4 was a great quarter. So we delivered 6% growth in U.S. knees and 8.2% for international. In the U.S. is the combination of all the things that I mentioned in my prepared remarks, Oxford Partial cementless continues to do better than expected, and it's really early in the journey. Recall is the only FDA-approved parcel cementless knee which is gaining tremendous adoption in an ASC setting.

Our Persona OsseoTi, our cementers platform exited 2025, so at around 35% penetration. Again, with very rapid adoption in an ASC setting as well. And internationally, we saw great momentum with personal revision in Europe, exiting 2025. Recall that this is only 2, 3 quarters into the launch. So we think that the ramp-up can be very compelling as it has been here in the U.S. In terms of iodine, we had minimal sales of iodine in Q4. The real launch has happened here in Q1. This is a product that we've been working on for 10 years. with robust data out of the University of Yokohama in Japan.

We expect to have a very meaningful contribution out of this product in international in 2026. We're doing cases pretty much every day now. we get a 40% price uplift when it comes to iodine versus non-iodine. And again, the data around prolonged elution, the fixation stability how this product reacts to bacteria is very, very compelling. So really excited about iodine and we look forward to bringing this product to other geographies down the road.

This concludes the question-and-answer portion of this call. I would like to turn the call over to Ivan Tornos for any closing remarks.

Thank you. I'll close the way that I started with gratitude. Thanks to all of you for being here today, and thank you to the Zimmer Biomet team. Great exit to 2025. We love the performance that we saw in Q3 and Q4, will encourage about the opportunities we have ahead. Excited about '26, will there be some disruption associated with the U.S. coromarket transformation we strongly believe this is the right step to take at the right time so that we can create a company that we all aspire to create. Thank you for your time this morning.

Thank you again for participating in today's conference call. You may now disconnect.

Good morning, everyone. I'm Robbie Marcus, med tech analyst at JPMorgan. Really happy to introduce our next speaker, CEO of Zimmer Biomet, Ivan Tornos. He'll do a presentation followed by some Q&A. Ivan.

Thank you. So good morning. The morning already started in an interesting way because I was getting my microphone on, and I was talking to Cesar, the guy in charge of IT and immediately detected the accent. Asked me where I'm from, I see Madrid, and he proceed to talk to me about how Barcelona beat Real Madrid over the weekend. So at this point, everything has to go uphill.

Look, I know that this is a busy week. I know that in the next 3 to 4 days, all of you probably will pay attention or will try to pay attention to no less than 40 or 50 presentations. So I'm going to try to summarize my entire presentation in the first minute, and then we'll go through the slides in, let's say, 10, 15 minutes, and then the most important part, I'd like to get going with the Q&A. And hopefully, we'll get some questions from the audience as well.

So everything you need to know about Zimmer Biomet in 2026, hard to believe we already are in 2026. Look, we are very pleased, very encouraged with the progress we made over the last 5 years. It was 5 years ago that we changed the company in many ways. I'm going to cover some of those ways here in a second. But we chose to transform the company from a strategic standpoint, moving from products to solutions from an operational standpoint. And most importantly to me or for me, for us, from a cultural standpoint.

And here we are 5 years later, if you go back to 2021, we're not going to talk about how we closed 2025. We've been growing mid-single digit or above for '21, 10% revenue, that is -- probably that comes from COVID help. In '22, we grew 6.5%. In '23, we grew 7.5% with adjusted earnings per share of 9.5%, nice leverage of 200 basis points. And then in 2024, the year we had the ERP blip, we actually delivered 5% growth, nice adjusted EPS leverage and solid free cash flow.

This is not a victory lap. This is to say that we do have a track record of delivering revenue commitments from a yearly standpoint. And yes, we're going to do a much better job when I talk about it in making sure that quarterly, we are creating the right expectations and deliver on those expectations. But again, going back to '21, '22, '23, '24, look forward to talking about '25 in a month. We've been transforming the company and the results at a CAGR of 6.5% over the next last 5 years, the results do show that the transformation or the turnaround is real.

Now as we enter 2026, there are 2 things that we got to work at -- we got to work on. Number one, we have to go faster in the transformation of the sales model here in the U.S. Some of our Board members tell me don't use the word faster, use the word at deliver speed. You choose whatever word you want to choose. We got to go at it. We cannot run a company where we have the hiccups that we had in the U.S. And again, we'll talk about it here today. We have to have the right go-to-market model in the U.S. specialized direct when it matters, full accountability, ownership of the ASC, and we're going to accelerate those changes in the year 2026.

The U.S. is 63% of the revenue and is north of 51%, 52% of EBITDA of the company. If the U.S. doesn't work out, we'll have conference calls talking about emerging markets and all the stuff we talked about in Q3 of 2025. And the second change, we have to build more durable go-to-market models outside of the U.S. So again, pleased with the progress, encouraged with the turnaround and transformation of the company as we enter 2026, 2 key takeaways: make sure that we go faster in the transformation of the sales model in the U.S. and build durable models outside of the U.S. in key markets.

With that, we can go into the presentation. The presentation has 3 parts: past, present and future. Stand with the past, I will not revise. You know what it stands for. So let's talk about Zimmer Biomet in 2018. And I know that 2018 seems like Eons ago. But it's important to go back and reflect on what this company looked like in the year 2018. June 24, 2015, we merged 2 great companies, Zimmer and Biomet. Strategically made a lot of sense. Operationally, it's been somewhat chaotic. We entered what we call the remediation stage of the company. You can read the slide better that I can pronounce it.

We ended up with 3 FDA warning letters. We had a monitorship from the Department of Justice working with us. The result of that is we could not innovate because we're remediating. You see there that we launched 8 products in the year 2018. We're losing people left and right. We had 20% to 0 turnover in the U.S. in customer-facing positions. And as a company, it's somewhere north of 10%. So whether it's innovation, whether it's quality, whether it's compliance, whether it's customer centricity, we didn't have it.

I'm really proud of the work that the management team did. And as you look at 2025, again, not a victory lap, it's a different company. I guess what I'm saying that the turnaround is behind. The transformation is probably in the early innings, but the turnaround of the company, when you look at the hygiene level elements, ingredients of solving the challenges of the integration are behind. We are not losing market share at the pace that we were losing before. We did divest Dental and Spine, increasing our WAMGR weighted average market growth rate from 3% to 4%.

We've gone from launching 8 products in 2018 to launching north of 50 over the next 3 years. In 2025 alone, we actually launched 22 new products, 7 of them, we call the Magnificent Seven, were quite meaningful. We come from losing 20% of our U.S. sales organization and north of 10% of all employees per annum to making it in the year 2025 for the first time to the Forbes on Fortune List for Best Employers in the World. Our engagement scores are higher than ever. We compare those to other S&P 500 companies, we're always in the top tier. So again, remediation behind. Innovation is now a competitive advantage. We've done the portfolio management work that we had to do around Dental and Spine. We continue to evaluate whether there are other opportunities for portfolio management. The turnaround is behind.

So now we move from the past to the present. If I'm an investor, and I am an investor, I'm an internal investor of Zimmer Biomet, I'm thinking of an investment thesis in 3 ways: Market. This is a healthy market. It's going to continue to be a healthy market. Innovation. Can this company change the standard of care? Is this company going to be solving meaningful problems in this market? And then lastly, do they have the right to win? Can they execute? And by the way, that algorithm I just went through is the same algorithm we use internally. Are we in the right markets? Are we allocating capital towards the right markets, both organically and inorganically? Are we solving meaningful problems through our R&D platforms? And then lastly, can we execute?

When you look at the market, look, the market is here to stay. And every once in a while, I get my vice presidents and commercial leaders in the room telling me the market is slowing down. And then all publicly traded companies report, and then we see that the market continues to grow. And you know all the reasons why, demographics, GLP-1's tailwind to why the market is growing. Shift to ASC here in the U.S. Pricing continues to be a good guy or at least not as biased before. The market is at least 4%, if not 4.25% for WAMGR. So that means that when Zimmer Biomet is north of 4%, we're doing okay-ish. And when we're below 4%, we're not doing okay-ish. That's the definition of winning for us. And that's how we -- a year ago, we were talking about LRP being mid-single digit or above. And we'll talk about some of those considerations. So that's the market reality.

When you look at innovation, I am very proud of the fact that we did get caught up with the sins of the past. Again, I'll bring you back to 2018, 8 new products, deep into remediation. When you're remediating with the FDA with 3 FDA warning letters, almost a consent decree, you don't have the new product development capabilities. You're not investing in bringing more products to market. As a matter of fact, our North Campus facility in Warsaw, Indiana actually was pretty much shut down for a period of time. With all of that behind, there is not a single gap in our core portfolio.

I'll say that again, so the action doesn't get in the middle. When you look at the core portfolio of Zimmer Biomet, we've gone from having gaps in cementless knees, revision knees, robotics, we're 5 years late to robotics, partial knees, SCT, we've gone from those days to having 0 gaps when it comes to the core portfolio. So we can't blame lack of products for losing market share. Now we're not satisfied. We're just catching up with innovation from the past. We're moving from what we call competitive-centric innovation. Let's make sure that we don't have those holes. to customer-centric innovation. What are meaningful problems that our customers have, patients, physicians, providers and how do we solve those problems.

And again, in this slide, you can read those problems. One is nonclinical awareness, 5% of the people that have arthritis, 600 million people on earth will actually go see a primary care doctor and eventually get an implant. I'm not here to tell you that 95% of the world that has arthritis, the other 570 million people still get an implant. But I am here to tell you that many of them deserve a better quality of living. So we are focused on bringing those patients into the funnel. That's how we do DtP, Direct-to-Patient. That's why we're investing meaningfully in awareness campaigns to bring those patients to primary care facilities. So that's the nonclinical one.

And you got 3 very compelling problems that we aim to crack before others do. One is infection, a $20 billion problem. Infection kills people, flat out. You're going to get your hip, your knee replace. Yes, it's a low probability. But once you get the PJI, periprosthetic joint infection, there is a high probability that something is going to happen to you. As a matter of fact, the mortality rates associated with PJIs are higher than breast cancers, prostate cancers and melanomas. We want to be the company that predicts, prevents, diagnoses infection and treats infection.

And in 2026, we're launching the very first Iiodine-coated device in the world. Launching in Japan in late 2025 is going to be one of the most transformational products in the year 2026. Japan is a $1.3 billion market, huge opportunity. Yes, at the right time, that product will come to the U.S. But it's not just coated implants. It's how we leverage AI to again predict and prevent infection. It's how we diagnose with platforms like Synovasure, proprietary to Zimmer Biomet, et cetera, et cetera, et cetera.

The next problem is efficiency. Orthopedics is a great space, is a $50 billion, $60 billion market. We're taking care of patients in a meaningful way, but it's very complex. The episode of treatment are way too long. The time in surgery could be less. The rehab could be shorter. I can go on and on and on. How can accompany Zimmer Biomet through smart robotics, through great products, through great surgical algorithms, make everything smarter, faster and better.

Today, we have the most comprehensive suite of solutions in robotics, whether it's handheld devices, whether it's CT scan robotics, whether it's image less robotics, soon, semiautonomous and fully autonomous robotics. We're looking at smart implants in a different way. All of that will bring speed, accuracy and efficiency to the episode of treatment.

And then the last problem we're trying to solve is outcomes. Modern orthopedics has been around since 1967, as the very first implant in South Africa. In the early '70s, there was a lot of innovation around products. Here we are, whatever it is, 50 years later and we still have patients reporting dissatisfaction when it comes to knee replacement up to 20%. You cannot call yourself a mission-centric company and don't deliver high satisfaction rates. So awareness, infection, efficiency and best-in-class outcomes is what we call customer-centric innovation. We're working hard at it.

So now you're telling me that the markets are healthy, which they are, both volumes and price. Now you're telling me that you're satisfied with your innovation. I'll tell you I'm never satisfied, but I'm satisfied with what we've done in the last 10 years. What's the challenge here? Why can you guys not grow in a steady fashion? Why do you have those hiccups like the one that you had in Q3 of 2025, it's called execution. We have to do a better job in making the right commitments and deliver on those commitments. It cannot be a 2% growth rate 1 quarter, 5% in the next quarter. I tell you we're going to do 6% in the quarter, then we do 5% then the next quarter is better. We have to have solid, durable and steady execution.

And as I mentioned, that comes down to 2 things. We have to go faster or move at deliberate speed when it comes to the sales model here in the U.S. We got 2,500 reps in the U.S. Not all of them are direct. Many of them are not specialized. Until very recently, we did not have presence in the ASC, where roughly 20% to 30% of the cases are going. We've invested in technology, but we didn't have dedicated technology people. We're going to change all of the above. And again, we're going to go faster.

From 2015 through 2025, we changed 1/3 of our U.S. sales model. Over the next 2 years, we're going to change the entire U.S. sales model. We already started. There's going to be some short-term disruption. It's going to be very well managed, but we aim to be the company that truly owns the customer. And to truly own the customer, we need to own the channel and we have to have the right specialization. So that's the bullet point there.

The average sales rep in the U.S. that 7 cases per week, 7 cases per week, go back to the 2,500 reps, 7 cases per week. All competitors are doing between 14 to 16. I don't need to tell you that, that's one of the main reasons of why we're not delivering the consistency we need to deliver. Very pleased with the work we're doing in the ASC. We're going to double down. Why are you doing it not before? Because we had the portfolio. We acquired 3 companies in sports medicine. We acquired Paragon 28, which is a great trojan horse into foot and ankle procedures that happen in ASC. We have smart robotics. We had the right to play and win in the ASC. We got to have dedicated people.

And then when it comes to international, it's about making sure that in those core 10 countries that account for 95% of the revenue -- potential revenue of the company, we have the right go-to-market model. Those being the U.S., Canada, Brazil and Latin America, U.K., France, Germany, Italy, my home country of Spain. Then the Middle East, we had a couple of countries we treated as one and then China, Japan and Australia and New Zealand. Those 10 core countries is 95% of the revenue. So instead of depending on 90 countries with tenders, with things that can happen left and right, let's be best-in-class in those 10 to 12 geographies. So that's some of the changes we're implementing in 2026.

We're here to invest. I don't want to invest for 2026. I don't want to solve the challenges of the next quarter. I want to build -- we want to build a best-in-class company. And we're going to be investing in core geographies. So again, you can look at the level of investment. But if you look through '24 to '27, you're going to see pretty significant increases across the board. We're increasing the number of robotic specialist sales force, whatever you want to call them associates by 3.5x. 4x the number of people dedicated to ASCs. That's contracting, that salespeople, that support people, people that used to be in inpatient HOPD, fully dedicated to ASCs.

The same applies to CMFT, Craniomaxillofacial Thoracic. This is a business that we started to build 5 years ago, going back to the things that I'm proud of. It's gone from $100 million of revenue to have $1 billion of revenue today, growing in the upper teens, if not north of 20% as it did in Q3 of 2025. We're going to continue to throw fuel to that fire. We're going to build that business we're going to scale it up.

When it comes to sports and extremities, again, 5x the number of people. And then this number for an ankle actually excludes Paragon 28. We already added 250 reps in the U.S. channel through the acquisition of Paragon 28. We're going to increase the number 1.5x. So again, really excited about the transformation of the U.S. model. All of this is obviously embedded in the guidance. And I like the fact that now we have the products, we get the people, we'll build a long-term durable business here at Zimmer Biomet.

What does all that mean? We're not here to give guidance. We'll talk about guidance in 2020 -- February 10, 2026. But we're going to temper the enthusiasm, and we're going to make sure that we provide guidance that aligns to the level of transformation that's going to take place in 2026. Those 2 factors, the U.S. evolution of the model and the fact that we're going to build some durable businesses in key geographies outside the U.S. So 10% sales growth outlook. EPS will grow. We will invest in U.S. go-to-market capabilities. We invest in those international markets, but earnings will grow at least in line with sales.

Free cash flow continues to be a great story. It grew double digit. We guided double-digit growth for 2025. We continue to see an amazing and meaningful opportunity when it comes to free cash flow generation. Free cash flow will grow 70% over the next 5, 6 years in the strat plan. And in 2026, you should expect free cash flow to grow faster than EPS.

And in 2026, people are asking, again, are you going to be buying companies? Are you going to do more M&A? Look, we bought 3 companies in the last 14 months, 3 companies in the last 14 months. We bought a company called OrthoGrid, which is a direct and clearer surgical AI platform that is already one of the fastest technology products at Zimmer Biomet. We acquired Paragon 28 on January 28, 2025, deep in the integration of that company. And then we announced that we will be first to market with Monogram Orthopedics.

You may think that integration is not complex because it's not a sales force, but it is complex because you will launch a product that potentially would change the standard of care. And the level of clinical evidence required, the thinking around segmentation, around who's going to do semiautonomous, fully autonomous, CT scan, non-CT scan is very complex. And we want to get that right. So in the last 14 months, we acquired 3 companies. We're going to integrate those companies. We're going to prove to you that we know how to do M&A, and then we worry about doing M&A at the right time. So in a year where we're integrating 3 companies, the cash flow generation, we're going to return it to you in different ways.

We've spoken about being opportunistic when it comes to our buybacks. We have Board approval to go up to $2 billion. We're going to take a very hard look at that. We'll talk about it coming February of 2026. But if you ask me what one company would you like to buy? That company is called Zimmer Biomet.

In closing, we spoke about the past. 2018 company was disrupted. The turnaround got done. There is no excuses when it comes to innovation. There's no excuses when it comes to FDA knock on wood, there's no excuses when it comes to compliance. There's no excuses when it comes to anything. That turnaround is behind. In the present, the markets are healthy. They're going to continue to be healthy. It's execution. We -- I have to do a better job in driving a company that executes steadily, consistently every single quarter. And the only way that's going to happen is building a durable international market model and delivering here in the U.S.

So as we look at the future, 2030, we're still going to talk about the same 3 priorities: people and culture, operational excellence, innovation diversification. People and culture. We want to make sure that our people and our culture remains the key competitive advantage for Zimmer Biomet. 71% of the money we spend in this company is on people. We want to make sure we have the right people in the right jobs within the right culture. We want to make sure that Zimmer Biomet remains a destination workplace, a place where people want to come and end their careers at.

In the bucket of innovation and diversification, done with the core problems, moving in the present towards awareness, inflection, efficiency and outcomes. But by 2030, we want to be a totally different company. I want to put Zimmer Biomet out of business. I want to be the company that at some point, cracks the code on cartridge repair. I want to make sure that one day we're talking about not everybody needs to have metal and plastic in their bodies. I want to be the company through a combination of partners that we already are elaborating, cracks the code on restoring versus replacing, keeping what Doug gave you versus the implant that I'm selling you.

I want to be able to leverage the fact that we already collect more data across the episode treatment than any other company in orthopedics. We collect data before surgery through our partnership with Apple. We collect data during surgery through smart robotics and other methodologies. And with the only smart implant component that truly stays with the patient, we are the only company that continues to track data after the surgery is done.

As the #1 player in orthopedics globally, we collect more data through this conduit than anyone else. And we have to do something with that data. And vision at day work through foundational models and through collecting data in the way that we're collecting, we can predict the right surgery for the right anatomy with the right technique for the right patient. And we're working really fast in making sure that, that vision becomes a reality, again, with the right patients -- with the right partners.

And then lastly, by 2030, we'll be more than a core musculoskeletal care company. Once we solve some of the remaining challenges, once we go boldly into restoring versus replacing, leveraging AI, yes, I envision a company where responsibly, we will diversify out of orthopedics into other areas. And we already got some adjacency plays that make a lot of sense and at the right time, we'll move responsibly into those adjacencies.

And then lastly, yes, a best-in-class company delivers mid-single-digit revenue growth or above. It delivers leverage EPS and continues to drive free cash flow in a meaningful way. So that's 2030.

I want to thank you for your attention. And with that, we can go into Q&A. Thank you.

Great. And we have CFO, Suky Upadhyay folks...

Yes. Thanks, Robbie.

Joining us for questions. Ivan, maybe just a couple. You talked about a tempered outlook for 2026. Maybe just give a little more color behind that. What exactly is tempered? Is that you don't feel like the business can perform in 2026? Or any reasons you can help us out with?

First of all, I had to Google the word temper 6 times to make sure that I understood the word temper because there were so many that were using measure realistic, whatever. But -- sorry. What temper means is that it's going to be in line with the level of transformation that we want to take in 2026. That's what temper means. Is the business performing, not performing? Look, in God, we trust, everyone else needs to bring data. I just went through 4 years of data, 10% growth in 2021, again, comps potentially, then 6.5%, then 7.5%. The latest guidance for 2025 is 3.5% to 4%. If we came in at midpoint, that's very close to that mid-single digit. If we came in the upper range, that's mid-single digits.

So this is not a business, this is not a company that is not performing. It's a company that has a cadence of not doing things as steady as we want to. So temper means, look, there's 2 things we got to address. We're going to address those, and we'll provide guidance that is realistic in alignment with those 2 things that we had to change.

Got it. One of the questions that I think has med tech down so far in the conference and getting a lot of questions in the hall is people are concerned there's some third-party data out there, and we love and hate third-party data. Shown volumes came off a lot in December, not just for Zimmer Biomet, but hospital procedure volumes. You talked about a healthy market. I know it's on February 10, we'll get the earnings call. But anything you can comment on just December and how your orthopedic markets held up?

It's only been 2 minutes. We're already talking about Q4. We'll report Q4 in a month. All that I will say, general statement is that in line with 2024, our seasonality in Q4 was very strong. Similar to 2024, Q1 and Q4 of 2025 were the strongest quarters. And I won't comment on December and level of volumes and whatnot. We'll talk about that in February.

So maybe as we just think about top line, bottom line for Zimmer Biomet, there's a whole lot of new products that were launched in 2025, more to come in 2026. Orthopedics is not typically the type of market where one product makes or breaks the company, but a whole portfolio can help move the top line in the right direction. So you gave us a lot here. What are some of the ones investors should focus on and prioritize their diligence on as it can impact Zimmer Biomet?

Yes. So there's a lot to your point, Robbie, but I'll always go back to the Magnificent Seven. There are 7 products that account for most of the growth from an innovation standpoint. Persona OsseoTi, which is our cementless knee. Every time we switch a customer from a cemented knee to a cementless knee, we get immediate revenue uplift. So we don't need to go there and conquer somebody else's accounts. We just got to go to friends and family and just bring the mix from what it is today to something else. And today, it's around 30%, 35%. So Persona OsseoTi is #1.

Oxford Partial cementless is the only FDA-approved partial cementless knee in the U.S. That's a $1 billion market that has limited penetration. So that's number two. Number three is going to be Persona IQ. We remain the only company with a smart implant. And given the IP protection that we have, I don't see any competitors entering that space in the short midterm. And then lastly, Persona Revision in Europe. We are the #1 revision company in the U.S. with a 50% market share, and we're bringing that technology to Europe. So that's on the knee side.

The other 3 products are 2 hip products, Z1, a triple tapered stem HAMR, which is the surgical impactor to drive efficiency into the operating room. And then lastly, it's a bucket of technology, ROSA Shoulder, OrthoGrid and whatnot, what we call the navigation and components. So those 7 categories account for 80% of the innovation growth. In 2025, we saw a meaningful acceleration towards the second half of the year. And as we enter 2026, we got a full year to deploy those launches.

So as we think about top line, obviously, there's volumes is the primary driver, but mix and price are the 2 others. And to me, it seems like there's a potential for volume gains with a lot of these products, but also particularly with revision mix gains as well as you have much higher ASPs than some of the products you typically sell. So maybe you could speak to how Zimmer Biomet is doing on volumes, how these products can help with mix? And then how you expect price to hold up going forward? Because it's been in a pretty steady robust for orthopedics environment in the past 2, 3 years.

Sure. I'll try a couple of soundbites and please jump in here, Suky. So Q3 2025 was the seventh consecutive year -- or seventh consecutive quarter that we achieved -- we were price positive. That's something that you would asked me 3, 4 years ago, I would have never envisioned that in this environment, with some of the external noise, we will continue to deliver price positive quarters. And I think a lot of this has to do with the fact that we are bringing meaningful innovation to market, and we contract in a more strategic way.

As we enter 2026, we're going to continue to go back to the guidance we provided a year ago for the 3-year LRP. We believe we can be between flat to 100 basis points of price erosion. We'll see where we land once we get into specific guidance for the year 2026. So price, we have 2-year data, 80% of the book of business contracted. We feel very confident that we know where price is going to land.

On the mix, you hit it. Look, every time that we do a revision case, we get $22,000 on ASP. We've been very public about that number versus primary care, which is around -- primary knees, which is around $3,500. So when revisions go up, as we have a 50% market share, that moves the needle for us. And we've spoken about how the market has been up and down here in the U.S.

Cementless, repeating myself, you get a 15%, 1-5 uplift every time you move from cemented to cementless. When we go from non-navigated solder procedures to navigated solder procedures, that's another 10% to 15%. When we do robotics, that's another 15%. And there's probably another 4 to 5 mix plays that we're looking at. So yes, we are focusing on market share gains, but the share of wallet opportunity in orthopedics is pretty massive. And that's something that in the past, we're not able to realize because we didn't have the portfolio, and we have the portfolio now. Anything else to add?

The only thing I would add is there's a lot of room and opportunity in everything Ivan said. We're not completely happy with our penetrations in cementless as well as robotics. That's why we're going into investment mode, as Yvonne talked about, specialization with ASCs, with data and technology. And that gives us a pretty unique and special opportunity to take advantage in a bigger way on that mix.

You spent some time in the presentation talking about the sales force and moving from 1099 to direct over a time frame. What are some of the tangible improvements Zimmer Biomet might see? How do we think about this impacting maybe the sales focus, the P&L because it is a different payment structure. And what's sort of the time frame we can expect on the progress here?

Let me start with the last part. We're going to do this over the next 8 quarters or next 2 years. This is not something that one day we got up and say, "Hey, let's do it." We've been working on it since 2015. We started to go faster at it in '24. And in '25, as we highlighted in the Q1 call, we said we're going to go even faster, and we've done that in the year 2025.

What should you expect? Look, there may be some -- there will be some short-term disruption, but there will be a mid- to long-term acceleration. In those territories where we go from nonspecialized to specialized, we're already seeing the growth. I mean it's common sensical, right? I mean if you are selling hips, knees, shoulders, trauma and whatever else, you're not going to have the focus, the word that you use.

In those territories where specialized, you have somebody waking up doing shoulders, maybe shoulders and something else, somebody is doing foot and ankle, the growth is real. In those territories where we have a W-2 model versus 1099, it's mix. It depends on whether the 1099 is fully dedicated to Zimmer Biomet or specialized. But we'll come out with data points that we can set externally that shows that we're moving at the right pace, eliminating or reducing the risk and driving the growth. But we think this is the single largest opportunity for the company to have a fully dedicated channel, specialized who each and every day is thinking Zimmer Biomet, huge opportunity.

If that's number one, where does robotics slot in. And let's spend a minute on robotics because you're coming out it with a portfolio approach. You bought Monogram recently and closed on that. It complements ROSA. You have some other robotic investments through partnerships. Just maybe give us a deep dive in how you're thinking about robotics, how these different platforms all complement each other and where you stand on the progress?

So they're related, right, Robbie. I mean, you cannot have great technology, but don't have dedicated people send the technology. So you got to do both. And when I say the transformation of the channel is the single largest opportunity, I'm just using mathematics. I'll refer you back to the data point I shared earlier. The average rep in the U.S. is doing 7 cases. So my competitors are doing 14 to 16. If I just increase that by 2, 3 cases, you know where the math goes.

In robotics, our vision is to be the most comprehensive company when it comes to using technology. We're not a robotics company. We are a solutions company. We believe in navigation with or without the robot. We believe in fast, inexpensive surgical AI for some customers. We believe in non-CT robotics. We believe in CT robotics. We want to be -- we want to meet customers where they're at.

So I'll throw in some data points, and I can talk about this for an hour, and I'm pretty passionate about this topic. If you look at the U.S., penetration of robotics in the U.S. is 20%, 2-0. Kudos to Stryker, they had the vision in 2015 to get meaningfully into robotics. 10 years later, now 11, I guess, the penetration of robotics in the U.S. is 20%. 80% of people in the U.S. customers, 29,000 surgeons in the U.S. are not using a robot. And we do plenty of voice of customers to understand why. And there is a variety of reasons from it's too expensive to slows me down to I may not like CT scan or I might like CT scan or I don't like to change my surgical algorithm or I don't want to use that implant with a robot. We want to have that optionality so that 100% of users who want to use a robot are able to use it with the right implant, with the right surgical algorithm and the right way.

So in that regard, yes, we have handheld devices through Think surgical. We have CT scan based, Think surgical, imageless ROSA, #1 robot outside the U.S. And now we're going to have fully autonomous, semiautonomous in addition to other forms of navigation. We are the only company in the U.S. with FDA-approved mixed reality navigation through HipInsight. And again, we are now the owner of OrthoGrid, which is the faster direct anterior navigation platform in the U.S. So it's a comprehensive solution so we can appeal to every customer and meet where they're at.

How do you think about the cost to support that? Robotics generally aren't associated with being inexpensive, and you have multiple avenues here. How should we think about the cost? And is that something that's contemplated?

If you look at orthopedics, and I'll challenge everybody in this room to fact check me on this, but in the U.S., I don't know the data outside the U.S. But when you look at the bundle of care of orthopedic treatment in the U.S., 15%, I think it's 14.5% to be exact, but 15%, let's round it up, of the cost is we, the bad guys, implants, medical supplies, pharmaceuticals. The other 85% is surgical time, anesthesia, potential complications, remission rates, staying at the hospital and other stuff. So if you can partner meaningfully with the institutions, with the customer in reducing that 85%, you're winning. This changes the contracting conversation.

If I can bring technology that makes you faster, more efficient, using less labor, semi autonomous, fully autonomous, if I can bring more intuitive surgical tools into your navigation protocols, and I can have that 85%, you and I are not going to be arguing about that 15% that cost going up, down. And I think that's part of the reason why already in the last 7 quarters, we've seen the environment to be more receptive to not lowering the implant cost. So health economics, data, efficiency, I'm pretty bullish about this conversation if you bring the right data and you can demonstrate reduction of that 85%.

Question came in just following up on 1099 versus W-2. How do we think about the cost of each of those?

Yes. So the cost of going to a W-2 with full benefits, let's say, relative to a 1099 that doesn't have all the fringe benefits, remarkably is relatively similar, Robbie. It might be depending on what region you're looking at and case by case, it could be slightly higher. But the gains that you get through that specialization, through the dedication, we believe, more than offset even a marginal increase in that cost profile.

There were some comments in the slides about 2026 on guidance. How should we think about some of the puts and takes as we think about the P&L in next year?

So overall, what you see, as Ivan showed, earnings growing in line or potentially better than sales is a profile of significant efficiency, coupled with significant investment. And I think Ivan showed you the investment side of that. As we work down the P&L, we do expect gross margins to be modestly down. We've talked about that, and I think the Street has embodied that into their models.

Underlying that, that's mostly due to some foreign currency hedge gain losses or not losses, but tapering of foreign currency hedge gains. We're actually driving cost of goods improvement through rationalization of our of our manufacturing force through rationalization of our portfolio, sourcing wins, et cetera. So we're doing really good work there, and I expect that to continue over the mid- to long term.

So with gross margin down, we are finding significant efficiencies throughout SG&A while still reinvesting back into the business. When you take those 2 components and a return of capital, those are really the big building blocks that get you to that earnings growing in line, if not better.

Got it. Let's see if you'll comment here. I think the Street is roughly 4% organic growth on the top, 3% on the bottom. I'm closer to 3% on the top, 2% on the bottom.

We're not going to comment on it. You need to fix the question. We're not going to comment on it. Good try though.

I tried. Free cash flow. I know there's been a lot of progress over the past few years, and this is a point for Zimmer Biomet. How much more is there to go in 2026? And then I'll tie it in given the time, priorities have used.

Free cash flow has been a great story. I think over the last 3 to 5 years, we've consistently grown free cash flow in the high single digits to low double digits. Every year, we've made significant progress and step change in free cash flow conversion. I would expect that profile based on our guidance for '25 to continue and all of the same building blocks should translate into '26 and beyond.

I'm pretty excited about where we can take free cash flow as we sunset foundational investments, and there's still more work to do around working capital, which has improved significantly. So I'm pretty bullish on where we can go on free cash flow.

We'll see maybe tomorrow, we get an answer on tariffs from the Supreme Court. If it happens to be struck down, does that get reinvested in the business?

We'll make that decision once we know more about it.

Okay. Well, great. We're just about out of time. Thank you for a great discussion. Thanks, everyone, for joining.

Thanks a lot.

All right. Great. Thanks for joining us for our next session here at the Jefferies Healthcare Conference. I've been informed that I'm the Jefferies Healthcare Analyst here covering med tech. And I'm pleased to be joined by the management team from Zimmer Biomet. Ivan Tornos, who is the CEO; and Suky Upadhyay, he's the CFO. And we're going to start with some high-level comments from Ivan just talking about state of affairs of the business.

Ivan, if you want to get us going.

Thanks, Matt. Great to be here. So maybe I'll summarize the, let's call it, investment theses of Zimmer Biomet in 4 bullet points or maybe as you call it the state of affairs of Zimmer Biomet.

Looking at the current multiple of 10, probably seeing the reaction to the earnings call, you will think that everything is out of whack here. So maybe it's worth spending 3 minutes, if you allow me to talk about these 4 key components.

So let's talk about market. Let's about innovation. Let's talk about execution, which is both commercial and operational. And then lastly, just talk about the topic de jure. Let's talk about guidance and expectations.

So on market, I think it's very clear by now that these markets, orthopedic markets are not retracting. These are healthy markets, combination of volumes and price. We pick the market to be 4% to 4.25%. And every other quarter, I get asked the question, is pricing sustainable? Do we believe that volume is going to continue to be steady? The answer is yes, yes and yes. We look at pricing 2 years forward. We look at volumes pretty much every other week for a variety of reasons. These markets will not retract. So 4% to 4.25%.

Let's move to innovation. Look, those of you who know Zimmer Biomet, we went through a lot of stuff. We did a deal back in 2015, June 24, to be exact, called Biomet. And in many ways, it was a great deal. In some ways, it did set us back. The integration was complex. We had 1.4 FDA warning letters. We had some compliance challenges and that delayed our innovation journey.

Now fast forward to 2025, we are launching a ton of innovation that we should have launched a while ago. The good news is that we have no gaps in the portfolio. So when you look at our recon portfolio and sale portfolio as opposed to 3 years ago, there is not a single gather I can tell you, we don't have it. Late to robotics, but we got plenty of them. Late to cementless knee, but we have them. Late to SET ASC products, we have them. And now we're entering a new chapter of innovation for the company. We're moving from doing what I call customer or rather competi-centric innovation catching up with competitors to do in customer-centric innovation, we are first to market in anti-infective platforms, we are first-to-market smart implants. We're first to market in shoulder robotics. And we will be first to market in autonomous robotics. So when it comes to innovation, we really are excited in terms of what we did.

This is the third topic, which is execution. And hey, look, it's been inconsistent. We own it, I own it. This is a company that does not miss years. If you go back and look at the guidance we provided in 2019, skip 2020, it was COVID. Look at 2021, 2022, 2023, 2024, soon to be the end of '25, we do not miss yearly guidance. We don't. But we do have some inconsistencies along the way. One quarter is up, the next quarter is down, and that's not how you need to be running a company like ours. We need to deliver consistent results. I will need to avoid the operational surprises that we have had.

On my second quarter as CEO, I was here announcing an ERP debacle, that 10 years working on ERP, and then we got a surprise. In the latest earnings call, we're talking about restorative therapies, Latin America and emerging markets. That's now how you run a best-in-class company. So we got to work on those inconsistent quarters and some of these operational challenges.

And that leads me to the fourth and final point at the end of the summary here. As we work on those operational commercial challenges, we need to be more measured in how we think about quarterly guidance, the comments that we make or don't make about the quarter and then how we set up the year.

So again, recapping healthy markets, best-in-class innovation, about to be bolder with the introduction of new-to-the-world technologies. Got to work on commercial execution to deliver consistent quarters. So not just about a year, it's about the quarter, and again, in the backdrop of all of the above, we will be much more measured when it comes to setting expectations and the comments that we make about different quarters.

Great. Well, good summary. A lot of things to key off of there. I guess I'd like to start with some things that are actually going well, which are seeing the organic growth pick up in Q3 to 5.6% from I think 2.3% in Q2. Can you talk about the drivers of that sequential year-over-year acceleration?

Sure. Innovation in 1 word. We are in the early stages of launching what we call the magnificent 7 products. Some of these products are catch-ups to products that we didn't have, but some are new technologies.

In the third quarter, we delivered 5.6% organic growth in the U.S., the best quarter in the last 2 years. And that's the combination of accelerating penetration for Persona OsseoTi or cementless platform, having 1 of the best quarters we have had in Solder's performance, upper single digit. We did see an increase in robotic penetration. I love the combination of having thing surgical, ROSA and other navigation modalities. We have 1 of the best quarters that we have had 20% growth in our capital sales.

We saw in the quarter an uptick on Persona IQ, we've been talking about smart implants for a while. And the third quarter of was 1 of the best quarters for smart implants. And then when you move to hips, a combination of Z1 or triple-taper system plus OrthoGrid plus surgical impactors delivered a robust number for the quarter.

So again, summarizing, innovation was the driver of the growth in the U.S., and we don't see that fading away.

Super. And then maybe you could just unpack some of the issues that you saw late in Q3. I think investors would appreciate some of those details to understand what happened at the end there.

So look, let me start with the fact that these are not structural issues. So the 3 things that we spoke about in the earnings call, and I'll cover those in a second, are not long-term problems for the company. We saw at the end of the third quarter, specifically on Friday, September 26, we saw that 3 things were happening late in the third quarter of 2025. Number one, distributor orders are at Latin America in the amount of $7 million, we're now going to come in mostly from Brazil.

Number two, we saw that in emerging markets, some distributor orders and a tender coming out of SoFi was not going to be realized in the quarter in the amount of $9 million.

And then number three, the smallest business that we got restorative therapies with around $120 million per year, so call it $25 million to $30 million per quarter. We're expecting some last-minute orders at the end of the quarter, and those did not materialize. Again, noncore geographies, noncore businesses, but when you add all 3 of them late in the quarter, that equals $24 million. If those 3 things would have happened, we'll be talking about a 6.3%, 6.4% growth rate instead of 5%.

The fact that I'm sitting here talking about noncore businesses and noncore geographies is very telling. In any other company, these things will happen by inertia.

So what are we doing about it? We have changed management in some of these geographies. We're changing forecasting practices in some of those geographies. We're eliminating some of these distributors. And we're taking the revenue from some of these volatile areas out of the guidance that we provided for the rest of the year 2025.

But again, this is not a structural issue. This is not something that's going to permeate into 2026. And moving forward, we're going to be more prudent when we account or not for some of this revenue.

Yes. As you talked about being more prudent, can you talk about any changes in the guidance philosophy and how you might give guidance in the future? Are you going to, I guess, I hear cut a little bit more or be a little bit more...

Yes. Look, I'll repeat myself. We don't miss years. And I want everybody to fact check me on this later or send me an e-mail, if I'm saying something is inaccurate. We don't. And we have missed revenue from a consensus standpoint 4x in the last 6, 7 years. Twice because of COVID, once because of this ERP debacle that I mentioned earlier. And then in Q3, we missed revenue by consensus by $9 million. I just want to repeat the number. We missed consensus from a revenue standpoint by $9 million in the quarter over delivery EPS by a couple of pennies in the third quarter. So we don't miss years and we missed a few quarters over the last 6, 7 years.

All of that said, as we get into 2026, we're going to be much more measure when it comes to the outlook for the year. We're going to establish probably a more measured approach for the quarterly guidance that we provide and how we think about the phasing of the quarters throughout the year.

And I guess bringing it back to sort of the core business and some of the changes that you're making, can you talk about changes to your commercial approach in the U.S., anything internationally? And maybe, Suky, you can chime in on how that's going to impact margins.

Yes. So 62% of the revenue of the company and north of 50% of the EBITDA of the company comes from the U.S. We are not going to be a best-in-class company if we don't have a best-in-class organization in the U.S.

Over the years, we have moved from having a channel that sells every product to now specializing, having dedicated people doing SET, dedicated people having doing technology, dedicated people doing ASCs and whatnot. But we need to go faster. We need to go faster. We can be in a position where a large percentage of the U.S. organization continues to meet commitments. If the U.S. was going at a faster pace, we will not be talking to you about Latin America, emerging markets and restorative therapies. So as we enter 2026 in the backdrop of being more measured with guidance, we are going to accelerate some of these changes that we started to implement in the U.S. many years ago.

I want to exit 2026 knowing that I have the absolute best team that we can have in the U.S.. Fully dedicated in the core areas of growth, having the right people in the right jobs when it comes to technology and making sure that across the board, we have best-in-class talent because we do have best-in-class innovation.

Yes. And thanks, Matt. From a margin perspective, our operating margins, our gross margins are much stronger in the U.S. than they are outside of the U.S. And so as we do better there, of course, it helps our earnings profile. You saw that in the third quarter. Mix was 1 of the reasons why we had such a strong gross margin quarter as well as a good earnings profile. And as Ivan said, as we continue to work on accelerating the U.S., that's just going to be better things for our earnings power.

Great. And Ivan, you touched on this in the beginning, but can you talk a little bit more about the health of your underlying markets? Maybe talk about things like the shape of the quarter and the strength that you're seeing. There's been questions about whether like Medicaid is going to impact a few things like the -- talk about your outlook for demand and pricing a little bit more?

Yes, we -- as the largest pure-play in orthopedics, we spend a lot of time, and we engage third party in understanding market dynamics. So first things first, volumes continue to be very strong. And in the U.S., the shift to the ASC, Ambulatory Surgical Centers is creating a double dip in effect. Now you see in a lot of cases moving to an ASC, but you still continue to see a lot of volume going to inpatient HOPD, hospital outpatient departments. And we don't see that slowing down. And I can give you the 3-minute speech on demographics, technology and all that, but you get it.

And then pricing, look, 10 countries account for 90% of the revenue of the company and most of the EBITDA. Those being the U.S., the U.K., France, Germany, Italy, Spain, China, Japan, Australia and New Zealand. And the beautiful thing about these 10 countries is that they operate with either commercial contracts, CMS in the U.S. or tender cycles of 2 to 3 years. So we monitor the contracts. We extend the contracts before they expire. We can see the pricing evolution of these contracts over a 2- to 3-year cycle.

So we see a strong volume. We don't see anything in the horizon for the next 2, 3 years that lead us to believe that pricing is going to revert to pre-pandemic levels. The third quarter 2025 was the seventh consecutive quarter for Zimmer Biomet to deliver a positive pricing. We cannot commit to that moving forward. But we know we're not going back to the price erosion that we used to see.

In terms of Medicaid exchanges and whatnot, Medicaid is less than 3% of our volumes for Zimmer Biomet. Even if we lose that 3%, there is a backlog of patients, noncommon related, just people waiting, patients waiting in the silence to get activated as patients. So we don't see this as an imminent threat for the company. And again, with an extensive research in that regard.

And innovation is a key theme here. So maybe you could talk a little bit more specifically about the innovations you're excited about for 2026 and beyond?

Sure. So as I mentioned, we cut off with all the gaps that we had in the portfolio, right? So there is not a single portfolio gap when it comes to hips, knees or SET, and now we're in a different stage of innovation. We're leaping forward with new-to-the-world technology.

Next week, we're going to be launching the first anti-infective platform in the world in Japan, which is the second largest market for Zimmer Biomet. It's an iodine-coated hip implant that has a coated platform on the surface of the implant. We're going to start with hips that reduces biofilm formation. And again, that's a product that took 10 years to bring to market.

We got a pretty significant competitive barrier over the next-generation technology. This is a product that took 10 years from a clinical standpoint to bring to market. We're going to start in Japan. We're going to bring it to other markets. We already got breakthrough designation in the U.S. via the FDA.

We were first to market with the smart implants and shoulder robotics. Those 2 categories are going to be full launches in 2026. So we're done with the limited market release for both categories.

A week ago, on the 30th of November, we got approval from the FDA to launch ROSA OptimiZe, that's next-generation ROSA with full automation to do a kinematic knee. Not to mention a simpler registration, faster registration user interface. We got, I don't know, 20 new products in S.E.T. that we're launching. So 2026 will be a very exciting year when it comes to our new products. And of course, in early 2027, we expect to be first to market with semiautonomous robotics. And at the end of the year, we'll be the first company to launch a fully autonomous robot with the acquisition of Monogram.

Maybe you could expound on the Monogram opportunity. Talk about why that's so exciting. What are the key aspects that are resonating with customers?

So I got to be careful what I say here publicly because we got to validate thesis. And to that extent, we're doing the largest clinical trial, I believe, in the history of robotics to demonstrate that you get faster registration with monogram. You get higher accuracy because there is less human involvement. And you get better reproducibility because it's a simpler procedure. So Monogram offers all of the above. We believe that this is a standard of care changer. The fact that it's going to be efficient, fast, reproducible, accurate is highly compelling.

Now all of that said, we're not betting on 1 platform alone. I like the category leadership that we have put into play. We have now a CT scan handheld robot via the partnership with Think Surgical. We have a large footprint robot, ROSA, that is non-CT scan-based which is the preference outside the U.S. We have fast navigation, nonrobotic fast navigation with OrthoGrid. And now we had another component with Monogram. We think it's a bold bet. We know it's a bold bet. We're going to prove that it's a bold bet, but it's not the only bet that we're making in robotics or navigation.

Yes. And like you maybe just to underscore the efficiencies that we might see from a Monogram-like solution. Maybe just talk about how that could lead to speeding up procedures and managing an ASC, for example?

Well, that's the thesis, right? In a world that we're looking for efficiency and with the dynamic of the Ambulatory Surgical Center here or there in the U.S., you want to do more cases. At the same time, you cannot compromise quality and accuracy with the speed. And that's what we're going to be demonstrating with Monogram. The fact that Emboss can be doing those surgeries in, I don't want to give percentages because we need to validate it, but at a fraction of current robotic procedures, that's very compelling. The fact that at some point, you can have a surgeon and the staff going around in 2, 3 different operating rooms, while doing robotic cases, has a compelling thesis that we need to validate.

So again, I don't want to get ahead here and make commitments on what the clinical and economic benefit is going to be. We're going to demonstrate it, but the efficiency is that this is going to be faster, more efficient, more accurate and more reproducible.

And you talked about the Iodine hip a little bit. I think everyone understands how preventing infections could be important, but maybe just talk about the differential reimbursement. And now with the breakthrough path, what that could ultimately mean for ASPs in Japan and the U.S.?

So similar to the U.S. in Japan, when you launch a breakthrough technology, you can apply for a different level of reimbursement that triggers different pricing. In this case, we're looking at a 40% to 50% premium on price in Japan, which by the way, is the second largest market, multibillion-dollar opportunity as you expand this technology across the world.

I'm not going to commit to when we're going to be launching in the U.S. But I will say that infection as a program cause the U.S. health care system north of $20 billion. So once you launch the technology, there is a clinical benefit and there is an economic benefit.

So we're going to start with Japan. Then we'll move into the less regulated markets around the world. It will take some time and a PMA to get into the U.S., but we will bring the technology to the U.S. We'll start with hips and then we'll move into knees and other categories.

Great. Maybe I'll shift to margins. Obviously, pricing has a big impact there. Could you talk about what's driven some of the gross margin expansion that you've seen this year and the outlook for gross margin, the biggest puts and takes impacting that going forward?

Yes. So we had a good quarter overall for the full year, we would expect gross margins to be up modestly versus 2024. Some of the puts and takes there, we've seen positive mix, both at a product level but also from a geographic perspective. The teams continue to get efficiency gains. We've seen slightly positive pricing, which has been helpful, all of which has helped to offset the tariff headwind this year.

As we move into -- and you take all that together, Matt, and you look at our guide for earnings, it's kind of funny. We're actually almost right back where we started the year with our initial guidance. But that's after stepping over tariffs, which was new as well as the Paragon 28 dilution, which was new since we first launched this year. So it's great to see that we're almost right back where we started from even after digesting both of those.

As we move into next year, revenue growth is going to be the key driver in determining where our margins go. From a gross margin perspective, there are some headwinds that we have to watch for. I think we've talked about those, which is the annualization of the tariff headwind as well as some pressure from FX hedge gain perspective as we've seen a weakening of the dollar. But we're going to take those things and we're going to continue to work on efficiency gains to try and mitigate those impacts. So it's a little bit on gross margin.

And then like I said, from an operating margin perspective, it will follow revenue. And in the backdrop of that, we're going to continue to invest against the things that are really important to our business, which is specialization of our sales force. We've got more work to do around Paragon 28. It's a very exciting pipeline and a lot more growth to be had there as well as investing more against digital technology and robotics, especially ahead of Monogram.

So putting all those together, again, we'll see where we net out when we give guidance in February. But I like our starting point this year.

Great. And then I guess speaking of Paragon, maybe you could give us an update there and just talk about capital allocation priorities going forward?

Yes. I'll start and Suky, by all means, elaborate. So Paragon 28 is going as expected, if not better than expected. So we committed to be seen in 2025, revenue accretion of around 270 basis points to our core business. And that's exactly where we're going to end at the year, around 270 basis points of revenue accretion which implies that we're going to keep more or less the same growth rates at Paragon 28 had as a stand-alone company.

We said when we announced the deal that we're going to be having 3% of EPS dilution up to 3% on year 1, 1% in year 2 and they were going to be neutral as we start year 3, and that's exactly what's happening. So we are in line to deliver on the EPS dilution associated with the deal.

Cash flow is a better story than anticipated or the integration costs have been lower than expected. One of the reasons why at the end of Q2, we raised free cash flow guidance for the year. So all the financial, some metrics around revenue around dilution and cash flow are more in line, if not better than expected.

From a commercial standpoint, we said that we're going to keep the core channel intact. We said we're going to keep leadership intact. We said we're not going to play around with innovation, we're going to keep the same pipeline, the same R&D center, we're not going to be disrupting the QMAs, quality management system. You can put a check in all of those. The same CEO that was running Paragon 28 is running Paragon 28. The same commercial team is running the organization. We had 256 reps. I'm not aware of many of them that are leaving Zimmer Biomet. So it very much functions as a stand-alone operation.

On capital allocation, here's what I'll say, we've done 3 deals. People forget that in the last, call it, 12 months, OrthoGrid, Paragon 28 and now Monogram. We're going to take all time to integrate these deals. We're going to make sure that we earned the credibility we need to earn associated with M&A. We like the revenue associated with these 3 deals. We believe that these are platforms versus companies. And then in 2025, late '25, 2026, the 1 deal that we like is CVH. At current valuations, it makes sense to buy CVH. We're going to -- we say we're going to be opportunistic around allocating capital to buybacks and we're looking at that. And at the right time, we'll talk about it.

Other than that, I don't think there is much more to add, but capital?

I think that's a good summary.

Well, maybe Suky, you could just add some perspective on capacity and would like to double-click on how you're thinking about buybacks just given where the shares are?

Yes. So capacity continues to be incredibly strong for the company. Just some metrics to put that in frame in context, we have a net debt leverage ratio in the low 3s to high 2s, so still very attractive there. We do about $1.7 billion in adjusted EBITDA. So plenty of capacity when you put those 2 metrics together, and we generate over $1 billion of free cash flow. So a very strong balance sheet, a lot of strategic flexibility and optionality there.

As Ivan said, as we move to 2026 to focus on M&A, it's more about integrating what we've already done versus starting new. And then we're going to be -- as we generate cash flow into next year, a very opportunistic on what I consider to be an attractive valuation for the company.

And maybe just to wrap up, we have just a minute or 2 left, 1 of your big competitors just announced that they're going to spinoff their orthopedic business. And in the short run, I was wondering if that could create some opportunity for you, some frictions. Maybe talk about your ability to capitalize on that as they spend?

I got to be careful what I say, and I got to be respectful to my former company, Johnson & Johnson. But I think all of us have seen this movie before, when you announced a spinoff or an acquisition, you acquire somebody or you are getting acquired, there tends to be disruption across a couple of vectors, right? Customers wonder what's going to happen moving forward. Do I have the same reps, the same contracts, the same whatever. Employees are looking right and left to understand what's happening here. Suppliers and then overall contracts.

So yes, there is disruption in the marketplace. I do think for the next 18 to 24 months, there's going to be some disruption and it's up to some of us to leverage that disruption and serve those customers.

But look, down the road, 18, 24 months from now, you have a stand-alone company, that is not part of J&J, is a worthy competitor with a great CEO. So we are paying attention to that.

Great. Well, I think we have to wrap up here. But thanks, everybody, for your attention and for your interest in Zimmer Biomet. And thanks, guys, for your time.

Thanks, Matt.

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

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

Thank you, operator, and good morning, everyone. Welcome to Zimmer Biomet's Third Quarter 2025 Earnings Conference Call. Joining me on today's call are Ivan Tornos, our Chairman, President and CEO; and Suky 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 about 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 of these measures to the most directly comparable GAAP financial measures and an explanation of our basis for calculating these measures is included within our third quarter earnings release, which can be found on the website, zimmerbiomet.com.

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

Thank you, David. Good morning, everyone, and thank you for joining today's call. I want to start today the way that I always start by sharing my sincere gratitude to the Zimmer Biomet team members around the world who move our business and mission forward each and every day. Thank you for your tireless work, your dedication to solving the most pressing challenges in health care and thank you for your relentless commitment to serving our customers and their patients. Today, Zimmer Biomet is a totally different company than it was just a few years ago, and this is thanks to your efforts.

During my prepared remarks, I'm going to cover 3 key areas. First, I'm going to summarize the third quarter results and review the momentum of our recently launched new products, which is strongly validated our innovation cycle while I'm also going to briefly cover some of the commercial execution improvements that we are making and will continue to make. Secondly, I'll address our updated 2025 guidance. And third, I'll cover the 3 key strategic priorities of Zimmer Biomet, people and culture, operational excellence and innovation and diversification.

Starting with the third quarter, we grew sales 5% on an organic constant currency basis with our critical 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 the middle of 2023, with the U.S. being the largest business here at Zimmer Biomet. That said, late in the quarter, unexpected weakness in Eastern Europe, Latin America and noncore segments of SET, namely restorative therapies, impacted our growth by nearly 120 basis points. for the quarter.

Importantly, we have identified the issues, are moving swiftly to address them and are contemplating these headwinds in these 3 areas in the guidance that we are providing for the year 2025. Overall, we are very confident in our actions and remain highly enthusiastic about the early market reception of our new products and the upcoming launches which we do believe will be catalyst for growth. Equally important, we continue to see healthy market growth rates fueled by demographics, [ circle ] dynamics like the shift to the ASC ambulatory surgical center environment hit in the U.S. and broader adoption of technology.

Unpacking our U.S. performance for the second consecutive quarter here in 2025, needs accelerated sequentially with growth of 3.5% or up 180 basis points from 1.7% growth in the second quarter of 2025. This was driven by adoption of Persona OsseoTi or total cementless knee and Oxford or partial cementless knee, which is performing above our internal expectations when it comes to post-training adoption rates. Specifically, Persona OsseoTi now represents nearly 30% of our U.S. total knee implants and we remain on track to exceed 50% [indiscernible] penetration by the end of 2027.

Next, our robotics and navigation strategy of offering a comprehensive and differentiated suite of customer-centric technology solutions is resonating deeply with surgeons. U.S. technology and data, bone cement and surgical sales increased 20.3% this quarter, driven by the strongest robotics capital sales quarter in more than a year. Importantly, utilization continues to increase with U.S. ROSA accounts now performing over half of their knee implants robotically, up 400 basis points for the year.

U.S. Hips were up 4% in the quarter, as a triple play of Z1 HAMMR and OrthoGrid continues to gain traction. Z1 or triple-taper stem accounted for over 25% of Hip stems in the third quarter of the year and HAMMR or surgical Impactor, the utilization rates double through the first 9 months of the year to 20%. Finally, our U.S. SET business continues to benefit from new product launches, growing 6.4% in the quarter, up over 250 basis points sequentially from 3.9% growth in the second quarter of this year, and this is in despite of the weakness in restorative therapies that I mentioned earlier.

Our decision to invest more in high-growth areas is showing great returns. For example, our upper extremities business increased in the high single digits, driven by our Identity total solder and OsseoFit, a stemless shoulder for which 80% of users were competitive accounts. In addition, one of our most exciting businesses, CMFT, craniomaxillofacial thoracic was up over 20% on the back of new product introductions in rig trauma, cardiac surgery and neuroablation. CMFT continues to be a recipient of investment, and we foresee a bright future for this platform for many quarters and years to come.

For 2025, we're updating our full year organic constant currency revenue growth expectations to a range of 3.5% to 4% from our previous 3.5% to 4.5% range. This excludes the contribution from Paragon 28, while we are maintaining our 2025 adjusted EPS guidance of $8.10 to $8.30. The updated revenue range contemplates, number one, continued weakness in restorative therapies. Number two, a more measured outlook for certain international emerging markets, where we address some of the challenges that we saw late in the quarter here in Q3. And thirdly, the modest slowdown in the U.S. revision market for both hips and knees persisting throughout the rest of 2025. Suky is going to provide more detail on guidance during his prepared remarks.

We are continuing to transform Zimmer Biomet at a rapid pace to achieve our long-term ambitions. Let me start now in closing some of the updates relevant to the 3 key priorities of organization. Again, those being people and culture, operational excellence and innovation and diversification. Starting with people and culture, we are committed to having the right people in the right roles, so we can consistently execute on the strategy without hiccups. We owe this to all of our stakeholders, those being patients, customers, employees and investors. We hold the team to this standard, and we'll continue to make performance-based changes when commitments are not made.

Along with that approach and reflected in the guidance we're providing today for 2025, we are making leadership and governance changes in some of our international businesses to address some of the headwinds that we have seen in these geographies throughout the year 2025. Also in the U.S., our Group President, [ Kevin for now ], continues to drive the U.S. channel transformation at the right pace, showing promising results as we demonstrated in third quarter results. These changes include bringing in new sales leadership for ASCs, ambulatory surgical centers for SET for our key account management, while we also continue to drive a sales incentive plan, which increasingly rewards growth.

Kevin is leading tremendous efforts to drive sales excellence and he and the team continue to implement sales force specialization for key growth categories such as robotics and SET. Additionally, we have installed new leadership in restorative therapies, we have changed reporting lines in some of our U.S. businesses to drive maximum visibility, consistency and accountability. Again, all of these changes are contemplated in the guidance that we are providing. I'm confident that the best is yet to come here at Zimmer Biomet as we continue to merge best-in-class innovation with solid and consistent commercial execution.

Now turning to our second key priority, operational excellence. This strategic pillar encompasses efforts on both the top and bottom line to accelerate revenue growth, improve margins and increase free cash flow generation through inventory management. I'm proud of the work that the team has done in 2025 to drive adjusted EPS and free cash flow. The efforts of the team have enabled Zimmer Biomet to grow adjusted earnings per share in 2025 versus 2024, and this is in the backdrop of executing 2 significant M&A deals, Monogram and Paragon 28 absorbing the impact from tariffs and making meaningful commercial investments that will yield meaningful growth in quarters and years to come. Meanwhile, the focus on reducing days of inventory on hand underpins our strategy to increase free cash flow, and we continue to see progress in this area.

Finally, in the third priority of innovation and diversification, very excited to share that on October closed the acquisition of Monogram Technologies, which is the company behind the MBOs, semi and fully autonomous AI-driven orthopedic robotic system. A few weeks ago, we held initial demonstrations of this technology at the Hip and Knee Society meeting in Dallas, Texas to a selected group of around 10 surgeons, most of them currently using competitive technology.

We [indiscernible] away extremely energized by their feedback. This technology is already changing the conversation and with data and time, we expect it to also change the standard of care. In a health care system, which continues to be constrained by cost and in an orthopedic environment where physicians and staff are desperately seeking more efficient ways to deliver best-in-class patient care, we believe that mBos will offer an elegant and compelling solution.

That said, we're not bidding on just one platform. We believe in optionality, customer centricity and flexibility. The Monogram technology is one part of our very comprehensive suite of customer-centric offerings, which range from simplify navigation such as OrthoGrid to non-CET, non-CAT can base robotics with ROSA to meet the diverse needs of our broad range of global customers. We now look forward to completing the clinical protocols for Monogram, which started back in early July, and to launch the world's first semi-autonomous robot with personal implants, the world's leading knee implant in early 2027, swiftly follow by the fully autonomous platform at the end of 2027 or early 2028.

Relative to our diversification mandate, we continue to see the integration of Paragon 28 moving at the right pace and in the right direction. And our expectations for this business remain unchanged for the year 2025 and beyond. There continues to be a strong excitement for the opportunity as we launch new products and continue to integrate commercially. In addition to Monogram, we continue to deliver on a broader innovation road map bringing new to the world technologies. This includes iodine treated hip in Japan, for which we recently received PMDA approval. This is a first-to-the-world technology that inhibits bacterial adhesion and biofilm formation on the implant surface to address PDIs, very prostheric joint infections.

We're launching before the end of 2025, ROSA with optimized which has a simplified user interface and offers kinematic alignment for the implants. We also deeply in launch mode for next-generation foot and ankle products is coming mostly from Paragon 28 and include fusion plating and other key growth areas within lower extremities. Groundbreaking technology is coming from Zimmer Biomet as part of our digital ecosystem to complement our leading positions and drive core [indiscernible]. And then lastly, we have over 20 new products in SET over the strategic horizon, which address safety, efficiency and best-in-class clinical and economic outcomes.

In conclusion, we are very proud of the progress in our organization and are excited about the future ahead. We're going to continue to bet boldly on innovation that changes the standard of care in high-growth areas while we continue to improve commercial execution. Along the way as we responsibly reposition the organization for higher growth, we're going to remain highly disciplined on capital allocation, ensuring that this company remains synonymous with a strong earnings growth and free cash flow generation.

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

Thanks, and good morning, everyone. This quarter, we grew sales 5% on an organic constant currency basis and delivered adjusted earnings per share of $1.90, which was up 9.2% year-over-year despite dilution from the Paragon 28 transaction, the impact of tariffs and continued investments in our commercial organization.

As Ivan mentioned, we are encouraged by the progress of the U.S. business, which was up 5.6% on an organic constant currency basis year-over-year. driven by our new product cycle. This performance was partially offset by headwinds in emerging markets and certain noncore businesses that negatively impacted growth in the quarter by over 100 basis points. As we get into the details of the results, unless otherwise noted, my statements will be about the third 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 commentary and guidance excludes the impact from the Paragon 28 acquisition that closed in April. Net sales were $2 billion, an increase of 9.7% on a reported basis and 5% excluding the impact of foreign currency and the Paragon 28 acquisition. Consolidated pricing was 20 basis points positive in the quarter.

Our U.S. business grew 5.6% on an organic basis, which reflects increasing customer adoption of recently launched products and strong robotic placements. Internationally, we grew revenue 4.2% where emerging markets represented a headwind to growth. Global Knees grew 5.3% in the quarter with U.S. increasing 3.5% and international increasing 7.8%. This U.S. performance was driven by increasing penetration of our Persona OsseoTi cementless total knee and continued adoption of our Oxford Partial cementless knee.

International growth benefited from new products and the timing of orders in EMEA, which were partially offset by lower growth in China. Hips grew 3.8% with the U.S. increasing 4% and international increasing 3.6%. The U.S. growth was a result of our triple play of Z1 HAMMR and OrthoGrid driving share of wallet and competitive conversions.

Next, our SET segment grew 3.6% globally on an organic basis with low teens growth in CMFT and high single-digit growth in upper extremities, partially offset by a low teens decline in restorative therapies. Finally, technology and data, bone cement and surgical increased 11.3% globally, with strong ROSA placements during the quarter.

Now turning to our P&L. We reported GAAP diluted earnings per share of $1.16 compared to GAAP diluted earnings per share of $1.23 in the prior year. Higher revenue, a decrease in acquisition and integration-related charges and lower share count were offset by higher interest expenses due to the Paragon 28 transaction. and a step-up in year-over-year tax tied to certain onetime favorable items in the prior year.

On an adjusted basis, we delivered diluted earnings per share of $1.90 compared to $1.74 in the prior year. This increase was driven by higher revenue, improved gross margin and a lower share count, partially offset by a step-up in interest expense tied to the Paragon 28 transaction.

Adjusted gross margin was 72.6%, higher than the third quarter of 2024 due to lower manufacturing costs and favorable mix. Adjusted operating margin was 26.5%, modestly higher than the prior year as a result of better gross margin, partially offset by increased commercial investments and the addition of Paragon 28.

Adjusted net interest and nonoperating expenses were $72 million above the prior year driven by higher debt related to Paragon 28 and higher interest rates on refinance debt that matured in 2024. Our adjusted tax rate was 17.8% and fully diluted shares outstanding were $198.8 million, down year-over-year due to share repurchases in 2024 and in the first quarter of 2025.

Now turning to cash and liquidity. We had another strong quarter of cash generation, with operating cash flows of $419 million and free cash flow of $278 million, bringing year-to-date free cash flow to about $800 million. Our working capital initiatives, including inventory reduction continue to pay off as we reduce days on hand by 10 days compared to the third quarter of 2024 despite higher inventory levels associated with Paragon 28. We ended the quarter with approximately $1.3 billion in cash and cash equivalents.

Now regarding our outlook for 2025, we are maintaining our 2025 reported revenue growth guidance of 6.7% to 7.7%. Adjusted EPS guidance of $8.10 to $8.30, and free cash flow guidance of $1 billion to $1.2 billion. We are updating our 2025 organic constant currency revenue growth guidance of 3.5% to 4% from our prior range of 3.5% to 4.5%. Inside of this, we continue to expect consolidated pricing to be roughly flat for the full year and selling day differences to be a modest headwind to full year growth. Importantly, as Ivan mentioned, this updated guidance range contemplates continued weakness in restorative therapies, a more measured outlook for certain international markets and the slowdown in the U.S. revision market for both hip and knee persisting throughout the remainder of the year.

Now let's walk through the moving parts that impact our reported revenue guidance. At recent rates, FX is now expected to be more favorable to our full year outlook than previously anticipated. At current rates, we now anticipate FX to contribute 50 to 100 basis points of growth in 2025. We continue to expect Paragon 28 to contribute around 270 basis points to reported sales growth in 2025. As previously communicated, we expect our operating margins to be down about 100 basis points versus 2024, which factors in our previously communicated tariff headwind of about $40 million.

Adjusted net interest and other nonoperating expenses are now expected to be approximately $280 million down from $290 million, in part due to lower borrowings on better cash flow. And we continue to expect our adjusted tax rate to be approximately 18% and for the full year and fully diluted shares outstanding to be approximately 200 million shares.

I'd like to close by thanking the entire ZB team for their hard work and dedication. We continue to make meaningful positive change across the business while investing to accelerate long-term growth.

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

Thank you, Suky. Operator, let's open up for questions. [Operator Instructions] Operator, please go ahead.

[Operator Instructions] We will take our first question from Robbie Marcus from JPMorgan.

Ivon, I wanted to ask on I would say, guidance in general. On the last quarter call, you talked about scratching 6% in third quarter, which was above consensus at the time and you ended up at 5.0 for organic growth and fourth quarter or the full year guide is ticking down. So really, the question is, how are you thinking about guidance philosophy? What happened exactly in the quarter? And any preliminary thoughts on how we should be thinking about 2026, recognizing that, excluding the easy comp from last year were sort of in a 3-plus percent growth range.

Thank you for asking that question. It's an extremely fair question. So let me unpack a few things here. So -- as said back in August that I would be very surprised within a scratch 6%. And I'll tell you what, I mean, the very surprised that we did overdeliver on such number, not that we didn't scratch it, but rather that we didn't over deliver on that 6%.

For what it is worth, it was actually an under committed and overdeliver comment based on what we believe to be a very strong data at hand at the time with the U.S. in July growing around 7% robust growth across the board, not just in 1 region and in possession of a very solid pipeline of positive things happening across Zimmer-Biomet at that time, almost midpoint into the quarter. So yes, I am very, very surprised.

But speaking of surprises, 3 things have been really late in the quarter with less than a week to go which caused Zimmer Biomet around 120 basis points. And give me just a minute or 2 to go through some of these and they will talk about guidance and philosophy and whatnot. But with a week to go in the quarter, 3 things happened. We saw a large mini cancellation of distributor orders in emerging markets of Europe, mostly from the Middle East and Eastern Europe.

Number two, our Restorative Therapies business, really talk about this business is around $110 million annually, HA hyaluronic acid injections. Here in the U.S. meet some pretty basic commitments by a fairly large amount, especially for the size of that business. And then thirdly, in Latin America, we missed our forecast by north of 15% given some distributor challenges in the region, that's 15%, 15%. And again, it has been really late in the quarter.

So noncore areas, noncore business, but painful Robbie by the time that you put all of them together, the tune of around $24 million to $25 million. So again, just on those 3 things along, you've got another 120 basis points to the 5% that we're reporting today. In any given quarter, as you can imagine, when you run a complex like Zimmer Biomet, in any given quarter, you're going to have a variety of these things happening. But to see all of these events happen at the same time, is unique to say the least, especially when you got just a few days to go to finish the quarter and having budgeted somewhat conservatively for all of these 3 items that are until now here today.

Clearly, this has told me that we or rather I need to be far more measured in our external commentary. And you better believe, Robbie, that such change has started effective today. I own it. As what I said, I had the data that we had, and I don't anticipate that I'll be repeating these type of comments moving forward even when the data sets to be as compelling as it was back in early August. So measure is the word when it comes to commentary and philosophy on guidance or more measure is the word when talking about commentary and guidance moving forward.

That said, Robbie, I will hope that the comments that we made or I made not prudent perhaps in hand sight don't end up turning what was otherwise a very solid quarter. across a variety of key areas. So as you heard in the prepared remarks, we grew our U.S. business by 5.6%, delivering the best quarter in the U.S. in over 2 years. Our largest product franchise needs actually grew 5.3% in globally on an organic constant currency basis, with Hips delivering mid-single-digit growth. We had the best quarter in robots in quite some time, SCP, another consistent quarter with the U.S. delivering close to upper single digit.

EPS, as you heard from Suky was another solid story, even with softer revenue coming from these 3 key areas. We ended up delivering above expectation EPS. And guidance on EPS for the year remains untouched. We've gone back to the regional $8.10 to $8.30, even after dealing with tariffs, integrating 2 companies and absorbing very meaningful commercial investments. So I can go on and on. But again, the comments perhaps not prudent, but the performance was there.

I said what I said, I own it, and I'll make sure there'll be far more mister moving forward. relative to the guidance for the rest of the year to your question, it is very measured. We're very comfortable that we're going to deliver on that guidance. And once we get into 2026, we'll have a conversation around philosophy and what the guidance looks like for 2026. Thanks for the question. Again, it was very fair.

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

One follow-up to that question. I guess the 120 basis points this quarter does that come back at some point? Is it a continued headwind in '26? Is it a positive or negative in '26? And I don't know if you can quantify that? And there were some comments on kind of a slowdown in the U.S. revision market. Does that continue as a headwind into next year as well? And there were also some comments I noticed in the script, you remain highly disciplined on capital allocation. So just wanted to see what that means as you look into next year as well.

Thank you, Travis. I'll let Suky talk about capital allocation in a second. So this international noise? Is it coming back in 2025 in the fourth quarter. Look, as I said, we're going to be measured. So we took that out of the guidance. So we're not counting on that revenue from those 3 key areas to be back in 2025. If it does, that's great. Do we think that's going to continue in 2026. Again, too early to talk about that. But what I will tell you is that as we think about external commitments made for 2026, we're going to stay away from putting some of these revenue from noncore areas external commentary and the external guidance that we're going to be providing.

Suky do you want to talk about capital allocation?

Yes, sure. Let's start with a few data points. So this year, we're going to be generating over $1 billion of free cash flow, quite attractive. We're in excess of $1.6 billion, almost $1.7 billion of adjusted EBITDA, and we have a net debt leverage ratio in the very low 3s. So you can see there are some really strong fundamentals there, a very strong balance sheet with a significant amount of firepower.

The way we think about that capital allocation that is we're going to prioritize businesses and acquisitions, assets that continue to move us into faster growth markets that continue to accelerate near-term as well as long-term revenue. But we're going to do it in a prudent way. And I think you've seen that with the Paragon 28 acquisition, very exciting Monogram transaction that we've done quite recently OrthoGrid which has been a differentiator for us. So we're going to continue that path but in a disciplined fashion as we always have.

But that also that very attractive balance sheet always gives us also strategic optionality to do share buybacks opportunistically as we see fit based on market conditions. So the net takeaway is that nothing has really changed fundamentally on our capital allocation strategy. If anything, it continues to get stronger.

And Travis, your other question there around the revision market that I felt to answer. So look, it's too early to tell. It's fairly choppy. One quarter, we see more revisions than the next. So it's a bit hard to predict. It's too early to tell whether we're going to see softness in 2026 when it comes to revisions. But again, going back to guidance philosophy, we'll account for that at the time we provide guidance for 2026.

We'll go next to David Roman with Goldman Sachs.

I was hoping maybe we could -- you could contextualize the performance in 2025 against the LRP targets that you laid out I guess, about 1.5 years ago now. As I think about the guidance here, the midpoint of the range being in the 3.5% to 4% range and the 4% to 6% that you had provided you would need each of the next 2 years to be in the 5% to 6% range to end up at the midpoint of your LRP.

And I think, Ivan, when you talk through some of the dynamics that came up late in the quarter, those things like that kind of just happened. So does a material acceleration in growth require and everything goes right set of circumstances to get into the LRP range? And is it feasible to see growth in the 5% to 6% range going forward to get back on track with the LRP?

Thanks, David. So present and future kind of question here. So in the present second half of 2025, we are growing mid-single digit or above. So -- actually mid-single digit, not above. So we are there. As we think about '26 and '27, give us a chance to get into February, we'll discuss what '26 and '27 looks like.

I'll tell you, we think of the 3-year plan across 3 components. You got market dynamics, innovation dynamics and commercial execution dynamics. We know that from a market standpoint, the market supports companies delivering mid-single-digit growth, [ 4%, 4.25% ] market dynamics. So the basin is there for companies to deliver mid-single or above.

As you move to innovation, the innovation cycle is working out. That is again why in the second half of 2025, we are delivering that mid-single-digit growth rate. and less evaluate the sustainability or acceleration of that innovation cycle as we get into 26 and 27, but we're very confident that the innovation cycle is real and more things to come.

And then you got the lingering question on commercial execution. Do we feel like today with the fragility we got in some noncore areas with the change we make in the U.S., that can be an accelerator that can be something that is going to drive sustainable mid-single-digit revenue growth. that's something we're evaluating, and that's something that we're going to discuss coming early 2026. But market is where it needs to be, innovation is where it needs to be. We've got to address some execution issues here. Thanks for the question.

We'll go next to Caitlin Roberts with Canaccord Genuity.

I guess just turning to your product pipeline. You received clearance for your IDN technology and hips recently in Japan and then also announced the FDA granted the technology breakthrough device designation in the U.S. you could talk through these developments and just the time line for the launch in the U.S. and/or further indications beyond hip, that would be great.

Thanks for the question, Caitlin. So exciting product launch. We've been working on this technology in Japan for over a decade. It is one of the most complex clinical trials that I've seen in my 31 years in metric. And it's great news that we got approval in Japan. This is a $1.3 billion market, the second largest market as the U.S. We're going to be launching at the end of 2025. And yes, this is going to be a meaningful revenue contributor for 2026. And again, we'll talk about it once it's time to talk about it with really good pricing.

It is differentiated technology. There's nothing like that. It does suppress or prevent bioinformation on the implant with again, robust clinical data for 10 years. It is technology that alludes over a prolonged period of time. So again, unique and something that we think is very compelling. Most importantly, the FDA thinks is also very compelling. This happens to be one product from Zimmer Biomet that is getting the breakthrough designation here in the U.S. That doesn't mean that we're going to be launching immediately, [indiscernible] means that the approval cycle is a bit shorter, but it does mean that we get to work with the FDA, elbow-to-elbow in launching this technology at the right price in the U.S.

I'm not going to commit to a date [indiscernible] old devices, but this breakthrough. So we love what we see. We're going to start with hips and then we're going to move into knees, shoulders and other categories in due time. But again, breakthrough technology, and thanks for the question.

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

You guys mentioned obviously some of the refocusing on growth when it came to the incentive structure. Was that like the rep level? Is that the divisional head level? Just any more details on how you're structuring the incentive plan that kind of pushed you towards growth.

Patrick, [indiscernible]. So this is a company that has gone through a lot over the last decade. You know that. And we fail to put the right incentive plan across the board. And today, we make external commitments around revenue, earnings per share and free cash flow. Yesterday, folks at different levels were not getting paid on those 3 levels of commitment.

Today, I can tell you that every senior manager that owns a P&L here at Zimmer Biomet gets paid on revenue growth earnings per share performance and free cash flow generation. As you click down to the commercial structures, we are paying people on growth. We are paying people on margin. and that goes all the way to the sales rep level. We hold sales reps across Zimmer Biomet accountable for pricing dynamics. And if you're not growing on revenue, if you're not growing on margin, the things that you can control within margin, you're not going to get pay your full compensation.

So this is something that has been choppy over the last, call it, 3 or 5 years, but I can tell you that the discipline is there today. Thanks, Patrick.

We'll go next to Larry Biegelsen with Wells Fargo.

Ivan, it looks like the recon market improved in the third quarter versus second quarter. What are you seeing into Q4. And Suky, you have this goal of EPS of 1.5x sales. Is there anything you would highlight for next year like the tariffs that would make it difficult to achieve in 2026?

Larry, yes, we did see an acceleration in Q3 over Q2. Overall, we look at trends. And if you look at post-COVID dynamics and you take at the backlog, we see the market as being healthy. And I think my peers that have reported already have said the same thing that the markets are stable, a combination of volume and price.

In terms of Q4, look, I'm going to learn my lessons. So I'm going to tell you anything about market dynamics in Q4. I'm just going to tell you that the market overall is expected to be around 4%, Suky?

Yes. Thanks for the question, Larry. I think you'll see this year and if you look back even over the last several years, we've been incredibly disciplined in growing margins and growing our bottom line in concert or better than our top line. As Yvan noted in his prepared remarks earlier, if you look at our earnings per share guidance for this year, we're basically right where we started at the beginning of the year. and that's even after stepping over the tariff burden as well as integrating Paragon 28 as well as Monogram.

So as you can see, we've been quite disciplined throughout the P&L and all the way down to cash flow. It's too early to talk about 2026 at this time. As Ivan said, we'll come out in February and give a lot more color on that. What I will point to, though, is again, the strong performance this year, which marks a number of consecutive years of very strong performance on margin and earnings.

We'll go next to Rick Wise with Stifel.

I'm hoping, Ivan, I can ask you to talk a little bit more about innovation, the very visible innovation that's an innovation pipeline at Zimmer Biomet. I hope you would agree that innovation has done well should drive, again, done well should drive steadily improving pricing, share gain, new accounts, better margins, among many other factors. And I feel like you're well underway with your Wave 1, the MAG 7, and there are others. These are largely launched, still rolling out and much more to go. Wave 2, you're highlighting it to Monogram, the [indiscernible] hip, et cetera, and others.

So my question -- sorry for the long windup is, where are we in that Wave 1 rollout process and impact. I feel like third quarter in the United States is showing -- I mean, please correct me if you think I'm wrong, is showing clear positive concrete signs of that early Wave 1 rollout with, again, more to come. So the bottom line is when can we expect a more significant meaningful impact from the -- your actually impressive pipeline.

I love the question, Rick. So you spoke about waves. So maybe let's segment innovation of 3 waves. So Wave #1 was catching up on certain categories were absent. And that's the lion's share of what we do or what we call the Magnificent 7. And as you saw in the U.S., we delivered 5.6% growth, and this is largely induced by this Magnificent 7. And in my prepared remarks, I offer all case commentary around adoption rates for Oxford Partial cementless above expectations, Z1 triple papers, regaining market share.

I love where we are with OrthoGrid and navigation, lots of accounts that we have lost to competitors that we are regaining. I like where we are with the knee franchise, so Wave 1, catching up Magnificent 7 is working, and it should accelerate as we get into 2026. So that's Wave 1.

Wave 2 is moving from catching up what I call competitive centric innovation, things that others were doing that we fail to do. With that behind, we have moved already into Wave 2, customer-centric innovation. How do we change the standard of care by being first to market in new technologies? That's fully autonomous and semiautonomous robotics, that's next-generation digital ecosystem, which we are doing. That's the example that I provided to Caitlin around iodine core devices, first to market with breakthrough technology. So we are deep already into the second innovation cycle, so called that Wave 2.

And then it's Wave 3. How do we apply these innovation capabilities into spaces outside of core orthopedics. And that's going to come largely or mostly from inorganic means and a lot of the fact that we got the balance sheet that we have to get into that space. So again, 3 different ways of innovation catching up, don't working. Now we need to accelerate it. Customer-centric innovation, and I provided 2 or 3 examples. And yes, we look forward to bringing innovation capabilities outside of core ortho.

We'll go next to Matt Taylor with Jefferies.

I know that the guidance update here includes a more measured outlook for these international markets. in the near term. I guess, would you expect some pickup in those areas that you saw softness in Q3 in 2026 just at a high level?

Thanks for the question, Matt, and I think Travis said something similar and I failed to answer. No, we're taking those hiccups outside of any consideration for 2026. And again, I'm not going to talk on whether they're going to stick around or not, we're going to take them out. That's not in the guidance for 2026, that when we think about guidance today, again, too early. And they're not in the guidance for the rest of 2025.

So as you think about narrowing the guidance from 3.5 to 4.5 to now 3.5 to 4. So thinking a midpoint in around 3.75, I think that's where we're going to land. That's a 25 basis point reduction or roughly $20 million. and that's largely induced by some of this volatility that we have seen in some of these noncore areas.

We'll go next to Joanne Wuensch with Citi.

I'm going to apologize for Advance. I think what you're what many of us are asking today is, given the this on the third quarter and the updated guidance for '25, how should we think about '26? And then respectful, it's too early to give that guidance. But is there a way to give us some maybe headwinds and tailwinds? Anything that you can help to sort of set our models correctly so that when we do get to guidance, we're not surprised.

Thank you, Joanne. No, you don't need to apologize, you are doing your job. So again, early to talk about 2026, but I'll go back to the 3 key components of guidance, markets, commercial execution and innovation. Markets is definitely something that we have a lot of data on and we like where these markets are at. On innovation, as per my answer to Rick earlier, love where we are with Magnificent 7, love the opportunities with things like iodine core devices in Japan and other markets.

I love the fact that we're moving some of this innovation from the U.S. now into the geographies. So that's definitely something that gives us a lot of confidence. We just need to evaluate some of this fragility around commercial execution. So again, the sum of all parts will inform the guidance in terms of what is the right guidance, will be measured we'll make sure that whatever we say externally has a very high probability of being over achieved. Thanks for the question.

We'll go next to Matthew O'Brien with Piper Sandler.

Can we just talk about the U.S. knee market specifically? And I know you've got all these new products coming out. Can you talk about some of the mix benefit that you're getting already from these new products? And then I don't have perfect information in one of your bigger competitors as I reported, I get that. But I'm still showing you're losing market share here in Q3 in the U.S., and it's a trend that's been going on for several years.

So what I'm wondering is with some of these mix benefits you might be getting and maybe volume benefits that you could be starting to realize as you get back into some of these accounts, is that something where there's kind of a lag effect where it could really rebound in '26 from a share perspective? Or do you need something else? I don't know if it's monogram, et cetera, or some of these New ROSA placements to really help you stem some of the U.S. knee share loss?

Another very fair question. So are we losing markets in the U.S.? Let's see what quarter looks like once everybody reports and we're able to analyze all the different dynamics. If we are losing market share. I'll tell you at we're doing so at a much lower rate than we did before, which again validates that the innovation cycle is working out. And as we get into 2026, we're going to be in a much deeper stage of this innovation cycle with more stuff to come. So again, hard to tell what's going to happen in '26.

But I like the momentum. I like the sequential growth we've seen in the U.S. like 5.6% growth in the U.S. like where we are with knees in the U.S. increased quarter-over-quarter now at 3.5%. Hips, look, it was not too long ago, Matt, that we're losing market share at the tune of 500 to 600 basis points and now will grow mid-single digit in the U.S. So if we are losing market share in the U.S. is not at the same pace as before, and this is still early in this innovation cycle.

In terms of margin, yes, every single one, if not most of these new products that we're launching have a better margin profile, whether it's Oxford partial cementless whether it's personal revision in Europe, whether it's Persona OsseoTi where we get better margin and definitely get a share of wallet opportunity. It's not just launch innovation, it's getting a better margin profile with this innovation. And related to 2026, again, I look forward to the conversation in early 2026. Thanks for the question.

We'll go next to Ed Ridley with Rothschild & Company Redburn.

First of all, just a quick one on Paragon. Can you speak to the organic growth there that you're seeing behind the acquisition benefit and the momentum? And given Johnson & Johnson's announcement, a long-duration exit tends to throw up opportunities for others. Can you speak to a little to that and how you think that might be some opportunity there both in terms of personnel or potential geography?

Thanks for the question. So Paragon 28, maybe let's take a step back and recall what the thesis behind acquiring this asset was. We wanted to acquire something that was growing higher we got in a higher market -- or a higher market growth rate, that's Paragon 28. This market is growing solidly in the, call it, 6% to 8% range. We wanted to build a platform, not just buying 1 company. We wanted to build a platform around lower extremities. We've done that, whether it's lower trauma, whether it's foot and ankle and other components, biologics, we got that going on. We wanted to have a more meaningful presence in the ASC space, that's enabling that.

I wanted to buy a company that had innovation today, but a pipeline for tomorrow. And all of that remains true with Paragon 28. The organic performance for the quarter was in the upper single-digit range. We are stabilizing some of the early I guess, contract friction that you can see in this category. But everything is looking solid. We're not touching the guidance for the year 2025. We continue to see great momentum with commercial execution and again launching new products. And we think of this asset as something that needs to be growing double digit for a period of time. There may be some hiccups in every once in a while. But overall, the organic growth of Paragon 28 will remain in the teams.

And sorry, relative to J&J, look, I'm not going to comment on the disruption there. I want to be respectful to my peers out there. But it is disrupted. Every time you go through a spin-off, divestiture, we've seen here at Zimmer Biomet, there is going to be some level of disruption. And there are customers that are going to be asking whether Zimmer Biomet offers a better solution and there may be some short-term opportunities. But again, I'm going to be respectful to my peers and don't comment too much on this.

We'll go next to Matt Miksic with Barclays.

One follow-up on the iodine hip -- iodine coated hip plan and then just a clarification on some of the [indiscernible] that impacted in Q3. So on the sort of new implant line, you mentioned FDA breakthrough designation. Wondering if that's a if that turns into a premium product, understanding that premium and negotiations for implant prices engages hospitals and requires value assessment committees and value and sort of that pathway?

Is this -- does this effectively kind of drive mix in a significant way? Or Ivan, are you thinking about this more as a way of catching more volumes here just because of the clinical benefits the products you tend to bring? And I guess with FDA designation -- or breakthrough destination, is there a possibility for CMS surpass through there to support a price lift. And then I have 1 quick clarification, if I could.

Yes. So on iodine, yes to all of the above, Matt. So again, a breakthrough designation in the U.S. does enable premium pricing, better reimbursement dynamics you go through value committees at a faster pace. And the assumption is that once we have this project in the U.S., it's going to command higher pricing. But let's not talk about the future and focus on the present. This has already happened in Japan. So with this approval in Japan, it's a similar dynamic. We are going to get a pretty significant price uplift in the country.

And again, it's the second largest market for Zimmer Biomet. Are we going to get a level of reimbursement that is far better than other devices in the market? So the answer to iodine is yes to all of the above. Breakthrough does deliver better pricing dynamics, faster adoption opportunities through committees and whatnot.

What was your second question, Matt? I apologize.

Yes, sure. So second, just a follow-up on the restorative therapies, short softness or whatever you would describe it as lower as expected orders. That's -- just to be crystal clear, apologies should hear this problem. But is this bone growth simulators, is this glue. And also I understand there's some additional competition in bone growth, not that it's a business we've been I'm thinking about these days, but was that a factor any color on the product lines and whether -- what the dynamics were around that would be helpful.

Yes, absolutely. So first things first, let me simplify it. We talk about restorative therapies, basically talking $110 million, $120 million of revenue, annual and one product that's HA injection. So that's hyaluronic acid injections. And what happened is quite simple. I would say it's 3 things. One, we didn't budget adequately. So that's a mistake, we're not going to repeat. We had some challenges on commercial execution because the focus has been elsewhere.

And then thirdly, as you probably recall, there were some reimbursement changes in the U.S. through CMS that we thought that were behind, and they're not behind. So it's a really acute element of pricing that impact this business. But I would say, the sum of our parts is mostly commercial execution. And again, as we think about 2026, I keep repeating myself, we're not going to offer commentary. But when it comes to these noncore business, we're going to be far more measured in the expectations that we have from restorative therapy going into the year.

We'll go next to Danielle Antalffy with UBS.

Just a follow-up question, Ivan, you mentioned some high-level [indiscernible] changes and things like that. I'm curious about how far into that you are and sort of how we should think about that potentially impacting the next few quarters as far as any potential disruption or do you feel like those are pretty easily transitional, it's not much of a transition, so we shouldn't expect any issues there.

Thanks for the question. So first things first, the organization is always evolving, going back to strategic pillar #1. We're going to have the right people in the right jobs, people, folks that know how to make commitments and [indiscernible] commitments. And once those things don't happen, we have to make changes at the right pace. Those changes are embedded in the guidance we're providing. So as we think about this guidance on both a the assumption of these changes is already in there.

Commercial changes in the U.S., look, we don't going to be faster than before, but we were working on commercial -- on the commercial channel for quite some time and that's also embedded in 2025, and it will be part of our 2026. So long-winded asset to say is reflected in the guidance, and we look forward to making the changes.

This concludes the question-and-answer portion of today's call. I would like to turn the call back over to Ivan for any closing comments.

Thank you very much. So my closing comments is that we continue to be proud of the evolution of this business, the improvements that we're making in this business. We're going to stick to the 3 key priorities of our organization. And again, as we think about the rest of the year, we're very confident we achieved the guidance.

And as thinking about 2026, we continue to see health when it comes to market dynamics. We are highly encouraged about our innovation cycle. And we will address the fragility that we get in some pockets when it comes to commercial execution. Thank you for your time this morning.

This concludes today's call. Thank you for your participation. You may now disconnect.