Zimmer Biomet Holdings Inc (ZBH) 2002 Q1 法說會逐字稿

Good morning. My name is Teresa, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Zimmer Holdings First Quarter 2002 Sales and Earnings conference call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key.

I would now like to turn the call over to the Chairman and CEO, Mr. Ray Elliott. Thank you. Mr. Elliott, you may begin your conference.

Good. Thank you, Teresa.

You may have noticed, if you're listening, Teresa did not read the Safe Harbor language. I don't think she had a copy there, so we'll take for granted that the listeners accept the call under that guidance.

Good morning, everyone. Welcome to Zimmer's First Quarter 2002 conference call. We're pleased to be hosting this call to discuss not only another good quarter but also our third quarter as a new public company. Today's call will be scheduled for one hour and should allow ample time for detailed disclosure and questions.

Joining me on today's call are Sam Leno, our Senior Vice President and Chief Financial Officer, and Jim Crines, our Vice President and Corporate Controller. I hope you received a copy of our issued earnings release. If not, you can obtain a copy at our Website, www.zimmer.com. Alternatively, feel free to contact Sam, and he'll have a copy faxed to you and have you added to our e-mail distribution for future releases.

We'll begin today's call with comments related to our first quarter results including an update on operations followed by Q&A discussions. Unless otherwise noted and to keep things simple we will be discussing our reported results compared to prior year pro forma basis. We will continue to communicate with you structurally, as we did in our first two calls, including discussions of new product progress, some hot topics, issues analysis, and often asked questions.

Let me begin with the fundamentals of our consolidated P&L and balance sheet performance for the quarter. Consolidated sales for the quarter were 319 million, an increase of 12 percent over prior year, sequentially up 2 percent over a very strong fourth quarter 2001 and almost 10 million higher than consensus Street expectations. Ex in the Japanese yen headwind, sales for the first quarter 2002 would have registered a robust $325 million. Sales in constant currency increased 15 percent. This continued solid performance was led by volume mixed growth of 11 percent and worldwide price improvement of approximately 4 percent. As points of interest for Zimmer, worldwide price in the first quarter of 2002 remained solid, sequentially matching fourth quarter 2001. And the Americas, once again at 5 percent, matched the fourth quarter.

Secondly, the 15 percent constant currency growth can be viewed against the tough comps of 16 percent in first quarter 2001 versus 2000. Our Americas business continued its excellent growth at 17 percent, as did Europe with 15 percent reported growth but 19 percent constant currency. We believe all of our geographic segments are driving share and local currency. Diluted earnings per share for the first quarter were 28 cents, an increase of 27 percent over prior year and 3 cents over consensus Street expectations. Cost of goods sold increased only 4 percent versus a 12 percent increase in sales based on favorable product mix, price, and our continuing successful efforts to reduce manufacturing costs through automation and process improvement. Gross profit margins versus prior year increased by 180 basis points to 74.7 percent. This gross profit margin of 74.7 was sequentially an increase of 130 basis points from fourth quarter 2001. We believe that at almost 75 percent margins excluding [[inaudible]] business, we have the finest orthopaedic margins in the industry.

SG&A expenses were well managed at 41.0 percent, a 110 basis point improvement over first quarter 2001, and for your reference a 340 basis point improvement from first quarter 2000. Although up sequentially by 90 basis points from fourth quarter 2001, this is far less than Zimmer's longstanding fourth quarter to first quarter sequential increases of 200 to 300 basis points due in part to the AAOS product releases and multiple major medical education events around the world. Given double-digit sales force additions, to be covered later under hot topics, and the completion of all corporate and public company functions transferred from our former parent, we are very pleased with the leverage gain from sales. Each incremental sales dollar in the first quarter 2002 cost only 32 cents of incremental SG&A costs. This compares to two major public competitors spending 46 cents on average for each of their new sales dollars in their most recent quarter. We continue to operate our working dollars model successfully. We also continue to invest in R&D at the top of our industry with a target of 6 percent of sales. And this quarter at 6 percent on a strong sales base was no exception. Our R&D investments increased by 2 million in absolute terms for the first quarter 2002 versus first quarter 2001 and reached $19.1 million. Operating profit grew in the quarter by 25 percent over prior year and, as a ratio to sales, increased by 290 basis points to 27.7 percent versus 24.8 percent in first quarter 2001. Similar to the comments on SG&A, we are very pleased with the leverage provided by profitable sales growth. On the $33.1 million of sales growth in the first quarter 2002 versus 2001 we delivered $17.4 million of operating profit or 53 cents of operating profit for each new sales dollar. This is more than double the 23 cents of operating profit on average for each new sales dollar by our two major public competitors in their most recent quarter. Net earnings in the period increased by 30 percent assisted by declining interest expense. Diluted EPS increased 27 percent to 28 cents based upon 195.7 million average diluted shares outstanding. Although Sam will be adding additional thoughts, I would like to provide some brief introductory cash flow and balance sheet highlights. Pre-cash flow for the quarter was 26 million versus 31 million in 2001. It should be noted, however, that we elected to absorb one-time cash outflows in the first quarter 2002 of $9 million related to funding of retirement liability from our former parent assumed at the spin. In general terms we've reinvested our net earnings gains into new product inventory and instrument pipeline builds essentially to our organic growth. On a normalized basis excluding the retirement funding pre-cash flow improved by 12 percent to 35 million.

In the quarter inventory has been increased by 20 million to a level of $220 million and in days from 221 to 245. It is our intention to operate the business at approximately 250 days while our pipeline is turning out almost 40 projects, 20 of which will be released in 2002. Additionally, we are pleased to report that our net debt has declined as per our expectations by $129 million from $450 million at spin to 321 million at the end of the first quarter 2002. We believe the combination of our global receivables at 65 days, our 36 day performance for the Americas, and our average in all of Asia and Europe combined of less than 100 days are a result of having the best receivables and asset management team in orthopaedics and medical devices in general. Let's review sales in a little more detail. Worldwide sales of reconstructive implants-and by Zimmer's definition that's hips, knees, shoulders, and elbows-for the first quarter increased to 245 million representing a reported increase of 15 percent over prior year, 18 percent constant currency, strong sequential increase over the fourth quarter of 4 percent. If, as many analysts believe, on a reported basis the worldwide reconstructive market grew approximately 8 percent in calendar 2000, 10 percent in 2001, and looks to be stabilizing around 9 or 10 percent in 2002, then Zimmer continues to grow at a rate of 50 percent or more faster than the market.

In the Americas despite the large base and increasingly more difficult comps with an increase once again of 20 percent or more we remain the fastest growing major reconstructive business, as we have been for the last nine straight quarters. It's clearly not a title we will give up easily. Let's take a look at each global product and geographic segment more closely. First in products in the knee category on a worldwide basis in the quarter knee sales increased a reported 19 percent to 136 million versus prior year, a very strong 21 percent constant currency and sequentially up 4 percent versus fourth quarter 2001. We believe at 21 percent constant currency Zimmer is growing 60 to 70 percent faster than the worldwide knee market. These are continuous and significant market share gains, particularly in the US knee market. And we'll discuss this more in the geographic segment of our call.

Our knee growth philosophies remain consistent, as they have, posterior stabilized market strength, develop minimally invasive techniques, lead revision market needs, create lifestyle designs to enhance, not inhibit, patient expectations. With the potential of Trabecular Metal we hope to add another philosophy, to deliver an exceptional Fixation Porous Tibial System.

With respect to PS Zimmer's been the market leader. Our PS brand femorals on a worldwide basis grew 27 percent in the first quarter, potentially double the world growth rates for posterior stabilized systems. In addition to that overwhelming PS success we are pleased to announce for first quarter 2002 after 18 months of research and development the successful introduction of [Prolong], the specially designed highly crosslink polyethylene for NexGen cruciate retaining knees. It's really paying off, as [Prolong] is already targeted to become a multimillion-dollar product line with significant premiums to standard NexGen articulating surfaces. Like its sister product, Longevity Cup Liners, when they were introduced some two years ago, we are having the pleasant problem of keeping up with the early release demand. We believe that our exclusive FDA claim of improved resistance to the lamination will prove to be a powerful competitive advantage and allow us to focus to market on one of the major issues with needs, subsurface fatigue.

Competitors with new femoral coatings are attempting to direct attention to wear from poly debris, more common and truly important for hip articulating surface discussion. Focus on poly debris wear in knees and not on the real problem of subsurface fatigue is the orthopaedic equivalent of fixing already good roads when what you really need is a new set of radial tires. In knees [Prolong] is that new set of tires.

Our Zimmer minimally invasive M/G Uni Knee helped initially position our MIS knee strategy. And with our just launched EM instrument, it's even less invasive.

We know it's a little more crowded Uni market out there, but our MIS Unis have grown on a worldwide basis another 101 percent in the first quarter and sequentially up another 16 percent versus the fourth quarter 2001. All these results were measured against the large, existing Zimmer Uni base currently at almost 15,000 units per year.

In reviewing our latest understanding of the market and the recent public reports of our competitors the domestic market for Unis appears to be growing at annual rates of approximately 50 to 60 percent. And Zimmer, as the leader, is growing at nearly double the market rate and at nearly double the number two player, who most recently reported their results for the second consecutive quarter in a row at only 50 to 60 percent growth.

While this market is getting a little more crowded, our share base, growth rate, the December 2001 US release of our new extramedullary or EM instrument and the ultimate addition of Trabecular Metal to the Uni along with our recent press release on MIS total knee replacement, should keep things very exciting.

What we didn't describe in the MIS total knee press release was a surgical technique to move interoperatively and decisively from MIS Uni to MIS total knee. We think both patients and surgeons will recognize the potential of our newest efforts. Our NexGen LPS Flex Knee originally designed for Asian and Eastern lifestyle patients and to accommodate a potential of 155 degrees of flexion has continued its winning ways as another exciting addition to our concept of lifestyle designs for new, more active patients. LPS Flex units grew by another 186 percent in the first quarter. As with our MIS Uni Knee, our new LPS Flex direct to consumer campaign has already attracted extensive participation with several thousand prospective patients seeking a Zimmer surgeon Web locator in their area.

We had indicated on our fourth quarter call that we had expected to sell more than 10,000 units of our LPS Flex Knee worldwide in 2002 but crossed the 10,000-unit mark before Christmas Day 2001. We also said that we would set new sights for 2002. We have, and we will be looking into unit growth again by more than 100 percent in 2002.

Lastly, during the first quarter we saw a glimpse of what we believe may be the market's answer to solid, early fixation, no micro motion, revisable porous tibias. We implanted under trial our first Zimmer Trabecular Metal monoblock tibial trays.

Let's take a closer look at hip. On a worldwide basis in the quarter hip sales increased 10 percent to 101 million. We finally had that record first time ever $100 million hip quarter. And we grew 14 percent in constant currencies.

Importantly, our hip units were up sequentially almost 5 percent versus a strong fourth quarter 2001. Our Zimmer growth philosophies in hip also remain consistent. Capitalize on the shift to porous technology; respond fully to revision needs; develop minimally invasive techniques; and provide designs that improve patient lifestyles and quality of life. Porous stem sales continued their almost two year long growth run and increased by 18 percent in the first quarter and sequentially another 4 percent versus fourth quarter 2001. I'll discuss the continued role of cemented to porous mix further under hot topics section. We are pleased to report that ZMR, our modular hip revision system released primarily in the Americas and Europe, continues to grow well with units up 42 percent for the first quarter despite reaching a real period of tougher comps. Zimmer primary acetabular [shells] grew 13 percent in the first quarter, and we reached a milestone, our first ever quarter of sales of more than 1,000 Trabecular Metal [shells]. Despite extremely tough comps, premium price Longevity highly crosslink polyethylene liners increased by 33 percent in the first quarter and a significant sequential increase again of 10 percent versus the fourth quarter 2001. We believe that acceptance will grow with the introduction of large head articulations currently underway, the release of preliminary new [RSA] data from Sweden, and new MIT/Harvard/Massachusetts General data demonstrating on retrieval virtually no material wear or debris generated. We continue to maintain premium price levels consistent with Longevity's initial release.

In upper extremity joints Zimmer's Bigliani/Flatow Shoulder, unranked only 12 months ago, has continued to take significant market share in the world with 27 percent growth in the first quarter, strong sequential growth, a gain of 15 percent versus fourth quarter 2001. We will continue shoulder project development with the use of both highly crosslink polyethylene and Trabecular Metal [glenoid]. On a worldwide basis trauma sales were a little disappointing with increases of only 4 percent constant currency and flat as reported-a little disappointing but not surprising. The soft winter and the completed closure of our Japan trauma plant with production moved to our low-cost Puerto Rican operations may have exacted a short-term impact on sales and a loss of the local production selling features. But the decision created more than offsetting profit increases. It remains a better and more profitable long-term strategy.

We were asked numerous times after a fellow competitor reported significant declines in their trauma business whether this was a meaningful industry trend. It is not. For the quarter our other Asian, Americas, and Europe businesses had on a combined basis a solid 10 percent growth in trauma. Our fellow competitors reported decline within the trauma business represents close to 20 percent of their total sales. Japan Trauma, although down, as expected, represents less than 2 percent of Zimmer's total sales. In fact, US Trauma demand versus billings were sufficiently strong that we have accelerated our hospital in-service strategy a full-time [blitz] team in order to meet demand.

Major IM nailing demands should improve with the second and third quarter release of the ITST Nail and our ongoing penetration of the [X fixed] market.

Our Zimmer Periarticular Plates continue to make excellent penetration against the world fracture leader with 34 percent growth in the first quarter following 36 percent growth in the prior quarter. Our new ZPS, Zimmer Plates and Screws line, has grown by 180 percent in its early stages versus the older product line it replaced.

Our Zimmer growth driver philosophies in trauma remain consistent-full and complete line but with innovative designs in the key competitive areas, enter the external fixation market, develop transformational change in hip fracture fixations, develop unique Trabecular Metal trauma applications to potentially improve patient quality of life. In orthopaedic surgical products ORTHOPAT, our perioperative auto transfusion system designed specifically for orthopaedics grew at 85 percent and has already reached the status of a $10 million product line. Let's switch to our new product development update. As you know, we currently have some 40 major projects in a robust pipeline with more than 50 percent of those scheduled for release before the end of 2002. Our goal is to provide you with project name, quarter of release, and whether or not the release continues on schedule. Release in our terminology means just that, inventory on the shelf, approvals complete, and capable of generating revenue. We will, of course, from time to time add new projects on our conference calls and make you aware of their name, implication, scope, release date, and schedule reliability. In knees our patented rotating hinge salvage knee, the RHK, 80 new implants due second quarter 2002, continues on schedule with more than 40 hinges successfully implanted clinically in Europe; Trabecular Metal Tibias for the NexGen LPS, 34 implants due second quarter 2002 on schedule; [Prolong], our highly crosslink poly for knees due first quarter 2002 and, as mentioned earlier, released ahead of schedule with current demand almost exceeding supply.

We have initiated three new knee projects as follows-CR-Flex, following in the footsteps of the highly successful LPS-Flex, targeted for quarter one '04; a new patella femoral project with cadaver work already initiated; and, of course, MIS Total Knee, our first surgeons in surgeries were announced recently by press release, but more on this later under hot topics.

Now let's move to hips. The Poly Stem project, 340 new porous hip stems due for phase in release fourth quarter 2001 through third quarter 2002; fiber metal taper extended offsets including project with [HATCP] coating and [beaded mix] coat released on schedule in the Americas in late fourth quarter 2001 and January 2002 respectively. More than 100 of the 340 stems in this product line have already been released on schedule.

Trabecular Metal modular cup-48 implants due fourth quarter 2002 on schedule; [CPT2], our new polished taper stem primary system with 30 implants due third quarter of 2002 on schedule, although we have added eight new revision in small stems have been added to the scope of this project for fourth quarter release.

According to the FDA the final ruling and guidance on the [constraining] liner down classification will be issued in May not March due to their workload. Zimmer has not seen any material approval slowdowns in any other requests.

Our exciting new MIS hip program is a total of 87 new instruments and some significant updates. This much we know. Our MIS Mini Hip released at the 2002 Dallas AAOS on schedule has now had more than 1,000 surgeries in the last four years of development. The stem of choice for this procedure and for the 2-incision hip is the Zimmer VerSys fiber metal taper. And stem sales of this longstanding product are up more than 50 percent in the first quarter.

In hip we will be initiating a new segmental oncology system utilizing Trabecular Metal. Its early applications as a custom product particularly in juvenile orthopaedic cancer indications have produced some terrific observed results.

And in fracture management [Periarticular 2], our [contra] plating system with 289 new implants for phase-in release fourth quarter 2001 through second quarter 2002-all plates are complete and being released on schedule.

The ITST, intertrocantaric/subtrocanteric retrograde femoral nail with more than 200 new implants to be released second quarter 2002 was identified in our third and fourth quarter calls as being 30 to 60 days delayed from our original plans and continues at risk on that delayed schedule.

The ZPS, enhanced Zimmer Plate and Screw System, with more than 750 implants due for phased in release fourth quarter 2001 through second quarter 2002-this project's worldwide phasing is early and just completed.

The [Transfix] external fixation system with more than 250 new implants is on schedule for phased in release through first quarter 2002. The large and intermediate systems were released in the Americas on schedule. The small sets were released as planned during the first quarter of 2002, while the mini sets will be 30 days late and released in the second quarter.

Our new blade plates with 105 implants will be released in the fourth quarter of 2002 on schedule. In total on a rolling 36-month basis new products represented 18 percent of our sales in the first quarter 2002 consistent with both fourth quarter and full year 2001 at 17 percent and our long-term goal to have new product sales between 15 to 20 percent. Let's look briefly at the geographic segments, first in the Americas. We delivered another excellent quarter in the Americas. Revenue for the quarter was 224 million, up 17 percent over prior year and sequentially up almost 12 percent from a very strong fourth quarter 2001. Twelve percent of our growth in the Americas was driven by increases in unit volume and mix while the remaining 5 percent was derived from price increases.

Our Americas reconstructed growth in the quarter of 20 percent included an outstanding knee growth of 24 percent and sequential quarterly growth of more than 12 percent. This 23 percent knee growth should be just against a tough comp of 21 percent growth in first quarter 2001 versus 2000. Since there is little mix associated with knees, this would indicate a raw unit growth for Zimmer knees in the Americas, a gain of almost 20 percent.

Hips in the Americas increased 14 percent including strong sequential growth of 9 percent versus fourth quarter 2001. As a point of interest with respect to Zimmer hips in the Americas, for the first time in 15 years porous stems at 51.5 percent have now surpassed cemented stems in unit sales and not just in dollars.

We are continuing to outpace the reported rate of growth for the Americas reconstructive market by some 50 percent and based on publicly reported figures in knees by more than 60 percent. We have been growing the Americas' reconstructive products at more than 20 percent for nine consecutive quarters. Fracture management product sales for the quarter accelerated by 8 percent featuring our new Periarticular Plate, VPS, Zimmer Plate and Screws, and the release of [External Fixation], but offset by a soft winter and a backlog for in-service training work by our new fracture [blitz] teams.

In patient care ORTHOPAT, available only in the Americas, continued its rapid acceptance, as described in my earlier remarks.

The Americas set another important record. They generated their first ever quarter with more than $100 million in operating profit at 102.4 million, an increase of 20 percent from first quarter 2001. The Americas operating margins increased by 130 basis points to 45.7 from 44.4 in first quarter 2001. Twenty of 25 US distributors delivered double-digit growth in the quarter, 8 distributors delivered growth in excess of 20 percent, and every distributorship grew in total. The Americas continues to fire on all cylinders. On a daily basis every single day during the first quarter 2002 Zimmer Americas sold approximately 100 million [plants] that were not in our base during the first quarter of 2001. Now let's look at Asia Pacific. Revenue for the fourth quarter was 58 million, representing a decrease of 6 percent from prior year and in constant currency increased 6 percent. Asia Pacific price was 1 percent positive in the first quarter, and we expect that trend to continue. Because Japan was important to both the global orthopaedic market and Zimmer, I'll review the yen, Zimmer's performance, pricing, and government negotiation separately in my upcoming remarks under hot topics. Returning to Asia Pacific in total, during the first quarter our business was led by constant currency hip growth of 8 percent reflecting the continued conversion to porous, the continued successful introduction of Longevity highly crosslink poly, and early sales of ZMR, our modular revision hip system. When combined with new growth of 13 percent driven by LPS-Flex, Asia Pacific reconstructive scales grew at constant currency 10 percent and above the reported market. Excluding Japan, every single major Asia Pacific country and region, Australia, New Zealand, Korea, Taiwan, and the reset of Asia, delivered a minimum of double-digit constant currency growth in the first quarter. Asia Pacific operating profits in constant currency increased by 17.1 percent to 25.6 million versus 21.9 million in first quarter 2001. Operating margins in the region increased by an outstanding 510 basis points to 40.8 in 2002 from 35.7 in 2001. Japan led this planned leveraged operating margin growth with an 18 percent increase due to our sales force and distributor redesign, higher margins in reconstructive, and notably higher margin fracture products due to the successful shift in production to Puerto Rico. Now in Europe, Europe had another excellent quarter with revenue of 37 million representing a 15 percent increase over prior year as reported and 19 percent in constant currency. For the quarter our sales growth in Europe was led by 15 percent plus growth in all of the following countries and regions-the UK, Central and Eastern Europe, Scandinavia, France, Spain, Germany, and Italy. We believe almost double-tiered market growth was attained in our Italian, French, British, and Spanish businesses. On the product front in the quarter reconstructive implants grew by an outstanding 20 percent led by hip growth of 24 percent and solid knee growth of 18 percent. Hip and knee gains reflected the continuing acceptance of Longevity crosslink polyethylene, ZMR revision hip, which grew at more than 100 percent for the quarter in Europe, the introduction of European hip designs, as well as the early clinical evaluation work on Zimmer's new RHK, the NexGen Rotating Hinge Knee. Europe operating profits increased by 145 percent to 7.3 million in the quarter and, with more than 1,000 basis point increase over prior year, reached our preliminary return on sales milestone for Europe of 20 percent.

Now let's go to what's hot and what's not from Zimmer's perspective. We'd like to cover the following five subjects-Japan, the yen; Zimmer performance in clean fracture, and the final results of government pricing; mix, an update on the role of mix change reflected in Zimmer's global results; our external development activities, Zimmer sales associate adds, an update on our plan and actual additions in the first quarter; and our minimally invasive surgery activities and developments. Let's expand on Japan first. In the first quarter with our yen rates operating at an average of 132.3 compared to prior year at 114.4 we lost on the revenue line approximately $6 million through translation. As noted earlier in my comments, worldwide sales would have been a brisk 325 million had it not been for the yen. Our philosophy has been both as a division of our prior parent and as an independent company to manage our business with minimal volatility.

As a result, we utilized forward hedge contracts on the yen rather than risk a free-floating currency structure. These contracts hedge our transactions and, therefore, by definition generally cover our cash flow related to Japan. Sam will provide you with additional currency during his comments. With respect to Zimmer's hip and knee business sales performance, our business continues to be healthy in Japan with reconstructive sales up 7 percent in local currency and a market believed to be growing at low single digits in units but generating some negative price through 2001 and early 2002. We continue to gain market share in reconstructive products and were up sequentially from the 6 percent recorded in the fourth quarter of 2001. Our Zimmer mix is excellent with continuing 20 percent plus increases for LPS-Flex, Unis, PS Knees, and porous hips. Return on sales at the operating profit line was up some 1,000 basis points from prior year and, as a ratio to sales, surpassed 50 percent. AR days are well under 100 and inventory days below the corporate average with superb cash flow. The reorganization of our sales force is complete and performing very well. As I commented earlier, our fracture issue is understandable and is limited to Japan and reflects the decline in our traditional compression hip screw sales partly through the closure last year of our [Gatemba] manufacturing operating and its subsequent move to our low cost Puerto Rican operation. Additionally, current year first quarter sales for [MD&L] are compared to the prior year quarter of introduction in Japan. While the short-term loss of sales is no surprise, it's enough to temporary depress our worldwide fracture figures. But in the end Japan fracture represents less than 2 percent of Zimmer's total sales and is neither material nor a trend. The significant increase in Japan's bottom line and margins are in part reflective of the decisions we made regarding plant consolidation into low cost production areas. Our plans to introduce our new ITST Nail, the ZPS Zimmer Plate and Screw System, new dealer programs, and fracture specialists, should more than improve sales results in Japan fracture while continuing to increase profitability. Let's switch to the final Japan pricing changes for 2002 and early 2003 effective April 1, 2002. We couldn't be more pleased given the size and mix of Zimmer's Japan business. The bottom line for us is this. As you know, orthopaedics was spared extraordinary reductions thought to be anywhere from 0 to 10 percent. As previously communicated, they were negotiated to 0 percent based upon our position of being under the desired foreign reference guideline of 1-1/2 times US list price. This was not the fate of other medical devise categories.

The normal biannual reductions of 2 to 4 percent were recently resolved and based upon Zimmer's mix are expected to be between break-even to 1/2 point positive versus the 2 to 3 percent reduction we had anticipated. This outcome for Zimmer is based upon the Japanese MHIW decision to increase pricing on porous stems, porous cups with poly, total knee tibias, and to return to a policy of significant incremental reimbursement of 210,000 yen on bipolar cups, a category in which Zimmer leads the market. These increases were offset by declines in reimbursement for general revision procedures, [inaudible] stems and elbows. Net/net we are very, very pleased with the outcome. Next, an update on the role of mix change reflected in Zimmer's results-all calculations, unless otherwise specified, are in sales dollars on a worldwide basis. Mix continues to play a strong role in improved sales and profitability and from our perspective really focuses on three comparisons.

First, standard polyethylene mix conversion to Longevity highly crosslink polyethylene-1999, 11 percent crosslink, 90 standard; 2000, 59 percent crosslink, 41 percent standard; 2001, 77 percent crosslink, 23 percent standard; and first quarter 2002, 84 percent crosslink, 16 percent standard, a cumulative shift of 22 points to crosslink over first quarter 2001, up 7 percent sequentially from fourth quarter with still room to grow. Why? Because this is only hip, it doesn't yet reflect the long-term potential of [Prolong] for knees, shoulders, and elbows of crosslink poly combined with trabecular metal.

Second, cement to hips conversion to porous-1999, 61 percent cemented 39 percent porous; year 2000, 58 percent cemented, 42 percent porous; 2001, 55 percent cemented, 45 percent porous; and first quarter 2002, 50/50, 50 percent cemented, 50 percent porous. Cumulative shift at 5 more points to porous since year-end 2001 for Zimmer, but we believe the market in general is at 55 to 60 percent with the potential well in excess of 70 percent conversion. This leaves Zimmer with considerable room to grow. Third and last, revision as a percent of Zimmer's total hip sales-1999, 3 percent revision, 97 percent primary; 2000, 5 percent revision, 95 percent primary; 2001, 6 percent revision, 94 percent primary; and first quarter 2002, 8 percent revision, 92 percent primary, well on our way to reaching our double-digit goal for 2002. In external development our external development activity for the most part involves spine, critical mass in Europe, arthroscopy, pain and blood management, computer assisted surgery, pharmaco marketing, and cartilage related biologicals. These target areas are consistent with our original road show and the many presentations and investment conferences we do today. We continued very active in our assessment strategies and discussions for spine and increasing critical mass in Europe. We've continued to communicate that we will be intelligently active in 2002 and will share our anticipated actions in due course. We did indicate in our fourth quarter call that we hope we would be able to announce important contractual agreements on our MIS computer assisted surgery in the second quarter. We believe that target remains on schedule for May. Pharmaco marketing remains in discussion, but various forms of disarray in the pharmaceutical segment is hampering our ability to close a satisfactory deal. Sales associate adds for 2002-with the subject of sales force additions continuing to be active at major healthcare meetings and during conference calls, we indicated to you during our fourth quarter call that we would add some 100 reps during 2002 composed of 40 new sales and service associates, 15 new service only associates, 20 new trauma specialists, 15 new pain and blood management specialists, and 10 all other. During the first quarter we added 26 new sales personnel composed of 16 reps, 4 specialists, and 6 surgical techs to insure continuity of hospital operating room support. We are on plan to add 100 or more sales personnel in 2002. Minimally invasive surgery activities-Zimmer has established itself as the orthopaedic gold standard for MIS procedures, products, technology, and training. We expect that our leadership position will both allow for maximum surgeon conversion, positive patient outcomes, cost structure changes through the delivery of orthopaedic care, and sustainable loyalty to Zimmer's MIS efforts. We are pleased with our progress in our three-year-old MIS program.

First in the MIS Mini Hip we've completed more than 1,000 successful surgeries with excellent results. We have a seven-surgeon team that has completed work on the Mini including the release of 86 new instruments at our Vail conference in January. Surgeon observations at this point include no significant complications, reduced blood loss, 15 percent reduction in rehab, average surgical time 45 minutes, average hospital stay three days. Incision sizes are consistently in the 8-centimeter range.

While the Mini provides experience and important instrument based reproducibility for our surgeons, it cannot compare with the potential of our now famous 2-incision procedure. We continue to have very encouraging news related to the Zimmer MIS 2-incision hip. We have now completed over 100 cases by seven different surgeons from Chicago, Portland, Baltimore, San Francisco, Pittsburgh, and Tampa in the US and Montreal in Canada. It is clearly no longer two surgeons providing data for an investigational procedure. During April 10 new surgeons, for a total of 17, are being trained and they will represent Atlanta and San Diego but also our first invitees internationally from Italy, Germany, the UK, and Australia. It is our intention to close the (RAB) study including a procedural evaluation by July 1 and move forward with commercialization strategies.

We have made significant progress, as well, in both the educational training model and the health, economics, and reimbursement model. With respect to education and training, on May 1, 2002 we will review the detailed plans to develop the first orthopaedic MIS institute including locations, US international satellite academic partners, our education strategy, and advisory panel partners by city and country around the world. These clinical partners will help develop best practices for MIS procedures supporting anesthesia, pain management, and physical therapy for the goals producing superior clinical pathways.

Several major corporations have submitted quotes to film the process and develop interactive procedure training videos, transpositions to animation, and tactile virtual reality modules. Taping dates will be in May and June.

We will additionally review our new worldwide MIS field training plan and a new medical education structure to support the effort. Zimmer has long been recognized as the leader in orthopaedic medical education.

We have joined with Deloitte and Touche as our advisor in reimbursement strategy, healthcare economics, and patient quality of life outcomes analysis. Deloitte and Touche will analyze our Zimmer MIS 2-incision hip procedure to assess hospital and system cost drivers such as time, activities, materials, and labor. Support services such as pre-op patient prep, inter-op anesthesia protocols, post-op recovery care, pain management, and physical therapy data will be developed at several participating hospital. Data will also be gathered to analyze specific examples of actual procedural costs charged relative to reimbursement received on a per patient basis.

Collectively this data will help us develop a universal model to demonstrate both economic and patient quality of life benefits with the new Zimmer MIS orthopaedic procedures. Ultimately we hope this data will support new reimbursement methods and coding worldwide for both hospital and outpatient environments in a variety of different country healthcare systems.

Continuing with the subject of minimally invasive orthopaedic reconstruction, while our two total hip programs and a third known as [T2] for hip fracture were announced first, two weeks ago we began the active initiation of our MIS Total Knee Program. We have signed research and development agreements with two major design houses in developing surgeons. We intend to add others from around the world.

We have, in fact, as of yesterday, completed some 14 surgeries since January utilizing Zimmer LPS-Flex Knee through 4-inch incisions. Many patients are demonstrating full flexion and leg raises two hours post-op. Our development group has filed instrument, procedure, and in this case implant patent requests. We will keep you informed of our progress.

It's now my pleasure to turn the meeting over to Sam Leno, our Chief Financial Officer, for additional financial comments related to our 2002 first quarter-Sam.

Thanks, Ray. With Ray's comprehensive discussion of sales together with geographic and product results I'll focus my comments on a few key areas of the profit and loss statement, the balance sheet, and the cash flow. Throughout 2001 we discussed the results of Zimmer's operations on a pro forma basis, adjusting to add a full year of interest expense and also to eliminate the $70 million of cost incurred to separate from our former parent. During this call our actual results for 2002 will be compared to the pro forma financials that we reported last year. The pro forma results of the first quarter 2001 included $6.2 million of interest expense and excluded $14.3 million of separation costs incurred during the period.

All of the functional support provided by our former parent has now been either absorbed or created within Zimmer in the normal course of business last year, and we executed those transitions flawlessly. The only exception to the transition timing issue is in information technology. At the time of the spin Zimmer had completed phase one of a three-phase ERP system conversion to J.D. Edwards. General ledger and reporting was converted in August of 2001. Manufacturing systems will be converted as phase two in the third quarter this year. And finally, our order to cash or revenue cycle will be completed as phase three in the first quarter of the year 2003. The negative effect of foreign exchange movement reduced our consolidated sales growth by 3.1 percent or $9 million in the first quarter. In constant currency sales growth for the quarter was 15 percent, as Ray mentioned.

The yen weakened in the first quarter of 2002 compared to the first quarter of last year by 13.5 percent. At the same time the Euro weakened by 3.9 percent and the pound sterling weakened by 2.4 percent. We utilized forward hedge contracts for both the yen and the Euro. As we indicated to you in our previous call, our 2002 yen position is covered with monthly forward hedge contracts averaging 1.17. Generally we have put in place forward hedge contracts for 2003 with the yen an average of 1.28. Averaging both years together we have locked in a blended yen rate of 1.23 over the two-year period. For the moment 1.23 looks very good. In the final analysis it may or may not be, but it remains our philosophy to manage the business and allocate resources, and set our priorities based on the maximum number of knowns as opposed to speculative currency effects.

Additionally we have hedged the Euro through the end of 2002 with monthly hedge contracts average .86. Under our former parent we were required to record the settlement of foreign exchange hedge contracts in SG&A. This year, however, we've decided to record them more conventionally in cost of goods sold; therefore, we have reclassified them for the four quarters of 2001 from SG&A into cost of goods sold in order to maintain consistency in reporting between the periods. Our all in effective interest rate for the quarter was 3.7 percent resulting in interest expect of $3.6 million, reduced from $6.2 million of pro forma interest expense in the first quarter last year and down from the $4.4 million in the fourth quarter of last year. Our effective tax rate for the first quarter was 35.5 percent, and that's in line with the guidance that we provided during our fourth quarter earnings call. As a result of the tax strategy already developed, we should be able to gradually work down our effective tax rate over time. And, in fact, we may even see some reduction in our effective tax rate later on this year. And certainly we continue to actively manage all lines of our profit and loss statement taking advantage of expense savings opportunities at every chance that we get and growing cost of goods sold and SG&A expenses at a slower rate than sales. We grew consolidated net sales for the first quarter by 11.6 percent while growing cost of goods sold at 4.1 and SG&A at 8.7 percent. This led to a 14.3 percent growth in gross profit, a 24.5 percent growth in operating profit, and a 30.3 percent growth in net income. Turning to the balance sheet, we continued to deliver a strong performance in DSO particular through the United States. Consolidated DSOs for the first quarter was 55 days, which is seven days below the same period last year. In the US we finished the quarter with 33.9 days of receivables, 1.4 days below the 35.3 days that we delivered at the end of the first quarter of last year. Our US credit team collects in excess of three-fourths of $1 billion in cash from US hospitals every year. As Ray indicated, we believe these results are substantially better than any of our competitors. Inventory days on hand increased to 245 days at the end of the first quarter and as we continued to invest in inventory to support new product launches expected to occur throughout this year and into next. This level of days is 50 days above our normal inventory asset management target for our Zimmer businesses; however, it is still some 60 to 100 days below industry averages. Our planned inventory increase strategy is further substantiated by the fact that our absolute finished goods dollars for base and existing products has actually declined slightly over the last two quarters despite a $30 million plus increase in sales.

Our equity balance has grown to $134 million at the end of the first quarter, up from essentially zero as of the August 6th spin-off date from our former parent. We remain pleased with our strengthening balance sheet, and equity should build rapidly in the coming quarters while at the same time our free cash flow will be available to us to either pay down debt or become a source of acquisition capital. Operating and free cash flow for the quarter were 32.5 million and $26 million respectively. During the first quarter of this year we paid $9 million to fund the retirement liability that we assumed from our former parent as of the spin date. Excluding the retirement funding catch up payment our operating cash flow for the first quarter of 2002 was equal to the first quarter of 2001. And as Ray indicated earlier, free cash flow increased 12 percent in line with sales growth. Cash flow should continue to strengthen in the back part of this year as our investments in inventory base to support new product introductions begins to level off. Capital expenditures were $6.5 million during the quarter compared to $10.1 million in the first quarter of last year and are targeted to be approximately 35 to $40 million for the full year 2002. Overall our balance sheet continues to strengthen. We began our life as a new public company with zero equity, $450 million of net debt, and investment grade credit ratings of -BBB and -Baa3. During the eight months since our August 6th spin-off date we've grown our equity to $134 million, we've decreased total debt by $108 million to 342 million, and we've decreased net debt, in other words total debt net of cash, to $321 million. Our debt to total capital at the end of the first quarter is 72 percent. Using the $1.12 EPS Street consensus for the full year together with our expected cash flows for 2002 we should complete this year with an estimated 40 percent debt to total capital ratio excluding any acquisitions that may be completed by the end of the year.

On the investor relations front we published our very first annual report in March, and we will be holding our first annual shareholders' meeting on May 9th in Chicago.

And now I'll turn it back over to Ray for a few final comments.

Good. Thanks, Sam.

It was a strong quarter and one that we're very proud of. As we said in our press release, it was the start we were looking for in 2002. We continue to drive the same strategies for success that we've communicated for four years both internally and externally during the turn around, the spin out, and our ongoing development as a 75-year-old new public company. Those strategies are new geographies with greater critical mass in Europe; new markets to external development in spine, pain and blood management, and image guidance for MIS; and, of course, developing new products for that growing baby boomer population. We'll meet that new patient's needs through lifestyle design, revision solutions, innovative materials, direct to consumer communications, biological solutions, and setting the gold standard for minimally invasive surgery in orthopaedics. We'll also keep driving the Zimmer business model, superior reconstructive growth rates, increased margins through close attention to price mix and manufacturing standards, our working dollars formula, improving SG&A ratios, industry leading R&D investment, leveraged earnings, strong free cash flow generation, improved returns on working capital investments in equity, and, of course, aggressive management action and execution. On that note we'd like to officially use our most recent press release and this forum to increase our guidance for the full year 2002 to 10 to 11 percent growth in sales and 17 to 20 percent growth in earnings per share.

Thank you for your time. We look forward to your questions. We will be enforcing the one question per person followed by only one directly related follow-up question.

I'll turn it back over to Teresa.

At this time I would like to remind everyone in order to ask a question please press star then the number one on your telephone keypad.

Your first question will come from Katherine Martinelli from Merrill Lynch.

Hello. Good morning. Congratulations on the quarter.

Ray, you gave a lot of great data in terms of where your cemented volume had gone, cementless volume. I was wondering if you had any sense, given the big up tick in procedure volume, what the profitability profile was looking like for orthopaedics for hospitals, and have they seen a corresponding improvement? Even though they're facing price increases it seems it would make sense that even with that the overall profitability must be stepping up, and that could make it easier going forward in terms of the price profile.

Katherine, we do actually have involvement in that, and we have had several discussions. If you take the already reasonably well-run hospitals and take a look at their scenario, there's no question there's significant improvement in their profitability. Orthopaedics is a very positive contributor to that.

The only down side I see on it-and it's something I'm hopeful we're going to pursue more aggressively [[inaudible]] is the issue of tort reform and the cost of malpractice insurance. And to the extent that the hospital shares in that burden with the surgeon I think it's an issue for them. But I think if you look beyond that, we're not seeing anything at this point that doesn't lead us to continue to believe that orthopaedics is a big contributor to their growth and profitability. And it should stay that way for some time.

Thank you. For my follow-up, just a clarification-the 5 percent reconstructive price increase you quoted in the US, is that pure price, or did that include mix?

No, that's pure price. We document pure price here on a by SKU basis. So that's price only.

Could you give any sense then for what portion of the volume was mix versus pure unit growth?

No, we don't break that out, Katherine. We never have. And we'll continue to keep that volume/mix combination to ourselves.

Okay, fair enough. Thank you.

Thanks very much, and again echoing Katherine's congratulations, great work.

Quick question on minimally invasive-I'm wondering if you can give us kind of an update on the timeline for commercialization of the minimally invasive. The 2-incision hip program, last time you spoke about some time late in 2003.

And then also I'm wondering if you can give us an idea of- you know, help us with an understanding of the proprietary nature of the minimally invasive procedure. How much of it is training the docs on a new procedure versus building the instrumentation that allows them to do those procedures?

And then finally on minimally invasive, what are the prospects for a new DRG code above and beyond 209 for these new systems?

Okay. On timing, I don't know that it's changed much. My inclination is more towards the middle of 2003, Bob. But that's going to be really dependent on what we see over the next two, three, four months. My guess is I'll do a better job of updating you on that probably on the next call, if not that one after that, certainly the one after that.

In terms of the proprietary side of this, I think it's a combination of things. It depends on what we're talking about. In the hip side at this point we have proprietary instrumentation. But at some point people can copy that. We are certainly not going to allow hospitals and/or surgeons to use our instrumentation with other people's implants, so to the extent that that can be protected for a period of time.

The training, and technique, and deliver of this, and I think particularly as we get into image guidance to get to a broader group of surgeons, will be certainly proprietary, not inconsistent with if you watched the US Surgical in the Eighties or have read or seen the history on that. I mean, I think it's a very similar situation.

Knee is different- sorry, let me finish on hip. We are also designing some implants that are propriety, but we've not filed on those yet. We're still in the design stage.

The knee side is different. On the total knee side we have both proprietary instrumentation and teaching practices, which at some point somebody could certainly duplicate. But on those we have filed patents on the implant side of the total knee for minimally invasive, so it's a little different status than the hip.

In terms of reimbursement code, we're going to work hard on that. I don't have an answer on that right now. That's why we brought in Deloitte. And we're certainly going to work hard.

I think the direction we want to take on that is not so much a reimbursement code, although that will be important-but every country doesn't work on that basis-but rather an assurance that the system will reflect the lower cost and there'll be greater opportunities for surgeon reimbursement, which has been penalized over the more recent years. And, of course, we obviously want to maintain high profitability in it as well. So reimbursement code is part of it, but I think it's a bigger story than that.

Great. Thank you very much.

You're welcome.

Your next question comes from Bruce Jacobs of Deutsche Bank.

Hi. Congratulations as well. A quick first question just on the spine market, your interest there-can you just talk about whether or not you've given more thought to how you'll build that business and what form it will take?

We are in discussions with some companies at this point on the opportunity. I don't think at this point it's changed much, Bruce. We have opportunities to build the base product line either by in effect licensing somebody else's blueprints for the lack of better terminology and putting a Zimmer name on. We will acquire the rights to the more esoteric products, [Artificial Disc Work], [Cage], those are not in our strength areas. It's not mainstream for us. So I think what it comes down to is do you end up doing your own system licensed in or do you get fortunate enough in one or more deals to be able to incorporate a base product line, a Pedigal screw system and so on that comes as part of the deal. And I think that'll depend upon who we ultimately buy. But the same set up of opportunities and the same two scenarios that we've been running from the beginning we're still running now. The only difference is obviously we're in some conversations with people.

Okay. And then just a quick follow-up I guess for Sam-can you just comment on the extent to which the gross margin you saw this quarter is sustainable? And then did I hear you right saying that the hedging cost will show up in gross margin? And I'm just wondering what kind of impact those will have throughout the balance of the year.

Yeah, it's not the hedging cost so much, it's the settlement of hedging contracts. And depending on which way the yen moves in relationship with those contracts it could be a cost or an income. So we have reclassified, as I said, all four quarters of last year. As relates to gross profit margins, as you know, we don't give guidance on gross profit. But we have, you know, been very fortunate, as Ray indicated, with both mix and price going our way, which has helped to bolster margins. And our focus continues to be in those areas.

Okay. Great. Thank you, guys.

Your next question comes from [Avay Horvay] of J.P. Morgan.

AVAY HORVAY]: Good morning, guys. Congratulations as well.

Hi, [Avay].

AVAY HORVAY]: I'm going to focus my question really on guidance. It appears that the mid single digit price increase you implemented on January 1st is really sticking. The 10 to 11 percent revenue growth guidance you gave for 2002, does that still exclude the contribution from pricing?

Always.

Our guidance is consistent to the extent that price for the year, currency for the year, and acquisitions for the year are not in our guidance. So, if you take a look at-and I haven't got it here in front of me, but off the top of my head-if you take a look at the net percent growth overall in price in the first quarter, subtract from-we had no acquisitions obviously-subtract from that the negative effects of exchange, you should get to the top end of our range. And I think it comes in right around 11 percent, if I'm not mistaken. So yes is the answer to your question. Just remember to subtract the foreign exchange from it when you do it.

AVAY HORVAY]: And just a quick follow-up-really the sustainability of both your top or bottom line guidance for 2002, I think coming into this quarter we were looking for closer to 10 percent at the top line growth longer term and, you know, 13, 14 percent earnings growth. How sustainable is 17 to 20 percent? I'm assuming longer term we're not going to go there, but do you think that your longer term growth rates should edge up a bit after what we saw this quarter?

If you're asking for 2003, 2004 guidance, we're not giving it yet. It's sustainable through the end of this year because that's obviously the guidance we're giving.

We're upbeat, you know, clearly on Zimmer. We're also upbeat on this industry. So I think our guidance is reflective obviously out through the end of the year of what we see, and that's probably as far as we can see right now. But I will tell you we continue to be-we're biased obviously-we continue to be very upbeat on this industry and see the positive factors that are going there.

AVAY HORVAY]: Okay, thanks.

Your next question comes from Rick Wise of Bear Stearns.

MILTON SHUE]: Good morning, guys. It's actually [Milton Shue].

Hi, Milt.

MILTON SHUE]: Hey. Continued automation of your facilities and maybe a ramp up of lower costs Puerto Rican facilities-I know you don't give guidance on gross margins-but have we already seen the majority of impacts of these strategies?

No. I mean, the clear answer is no. I think for anybody who's toured our plant we have some very unique robotics. We have a fully robotic integrated foundry, so that foundry portion is I guess pretty much completed. But, if you look around the rest of our plant operations both Puerto Rico and Warsaw, I would speculate that less than 10 percent is automated and that we have considerable additional opportunities to move products to Puerto Rico, to move new acquisition potential products to Puerto Rico. And, as Sam mentioned, he's additionally working on a redesign of our tax structure that begins to take advantage of some of those opportunities. So I don't think we've, frankly, scratched the surface on some of those subjects yet.

Yeah, one more issue-I mentioned that our estimated cap ex for this year is 35 to $40 million. That by and large is maintenance capital. But as we replace old equipment, we do replace old equipment with an eye toward further and more accelerated automation. So our investments in cap ex will also continue to drive our gross profit margins through automation and cost reduction.

MILTON SHUE]: Okay, thanks.

No, I think given the results of some of the other folks it's more than just the smaller players. I don't think there's any one specifically we're seeing. But, you know, if we're growing at-and we are as far as we can tell the numbers-if we're growing 50 percent faster than the other major companies in reconstructive, if not the market I should say, you know, I would suggest we're taking it from a pretty broad range of people.

MILTON SHUE]: Okay, thank you.

Your next question comes from Scott Davidson of US Bancorp.

Hi. Good morning, and congratulations.

Thanks, Scott.

Ray, relative to the very strong share gains particularly in the US and Europe, can you talk about just sort of the dynamics of where they're coming from? And specifically, are you seeing more up side in terms of incremental business in existing accounts or conversion of competitive accounts?

Yeah, it's a good question. The answer is both. And what we've been able to do and been really successful at is coordinating our distributor strategies to be focused with us as a company. In other words, we target together where we want to go. And I think what we're seeing is, yes, some procedural up tick in the major institutions. There's no question that the industry in our opinion is healthy from a procedure point of view. But we're really getting some significant growth in some of the targeted geographies that we've not been strong in in recent years at Zimmer. Florida, the Southeast is a great example. Germany is a great example. So it's a combination of the two.

I haven't looked at-and actually it's an interesting question-I haven't looked at it from a pure growth by account point of view, the percent that's base business versus absolute accounts. And I'll have a closer look at it. But I do know it's from targeted geographies and areas that we were not as strong in before.

Thanks. And then a follow-up specifically on Europe-you talked about it and have spoken in the past about the goal of really gaining a bigger presence over there. How do we think about that? Do we think about in more in terms of maybe, you know, an even further increase in direct investment over there, or could that be a potentially fertile area for an acquisition as well?

I'm inclined, and I have been in the past, to lean more toward acquisition. Our people are doing a terrific job as you can tell from the numbers on the page. But at the end of the day we're a powerhouse in Spain and Italy. There's no question about that. We're a pretty good company in the UK. And we are not as strong in France and Germany, although our growth rates there are excellent on a somewhat smaller base.

In order to grow in the major countries my guess is unless we're all prepared to do it over the next 20 to 30 years or something in order to get the growth in critical mass we want in the bigger countries I think we're going to have to go the acquisition route. And that has been our position really through the entire spinout and through the road shows and everything. So nothing's changed on that.

Thank you.

Your next question comes from Lynn Pieper of Thomas Weisel Partners.

Good morning.

Good morning, Lynn.

I have just two quick questions. When you look at your trends in mix in the recon line, looking at the trend toward porous, crosslink, and revision, where do you see the most up side from current levels? And have you set distinct targets other than for their vision market as where you hope to be by year-end?

I have to answer them one at a time because I think they're different. Crosslinking, of course, has had a lot of dollar conversion to it, as I indicated. So our goals in crosslink are not so much, you know, let's see if we can get from 84 percent to 90 percent in cups. I mean, we probably will do that. But our policy now and our position now in crosslinking of course is to drive [Prolong] in the knee, then put it into PS then put it into shoulders, then combine it with Trabecular Metal. So the extension of crosslink poly as a science goes way beyond hip. I think on porous we have tended to be well behind the industry because we didn't have a strong porous product line. And of course we're building that now. So, if you look at our 50/50 and the industry is at 55 or 60, and the opportunity is somewhere north of 70, if you believe in the history that occurred here during the late Eighties, then I think we have to believe that our target has to be north of 70s.

Revision, as I've mentioned, we had zero revisions really at Zimmer, if you go back four or five years ago other than [LTCK] knees. We had absolute zero hip revisions. Our target of '02 is to have 10 percent of our business. We're in line to do that. We have not set targets as a percent of totals beyond 2002, but we'll do that in our next strategic planning process.

Okay, great. Thanks. And then just secondly, as you look at the strong growth you're seeing in your recon business and diversifying into this line or potentially other areas, what should we be thinking about as a long-term goal of revenue mix as a percent of sales looking at reconstructive implants?

That's a tough question because it depends on who we buy and how much buying you get into and, therefore, what percentage it is. I would probably-and this is a guess because we haven't done it the way you're asking it-but I would think over the next three, four, five year I would expect to see recon be more in the two-thirds range as opposed to 75 percent. I think that's probably logical.

Okay, great. Thanks a lot.

Your next question comes from Kurt Kruger of Bank of America.

Hi, guys.

Good morning, Kurt.

You know, if you could address the trend line in the recon-you know, you hit, what, almost 15 percent growth all in-do you think that's likely to continue up in that sort of mid teen or low teen rate?

And then coupled with that, if I could ask about the trend in trauma, that was disappointing and, as you say, about flat year-on-year. Is that likely to bounce back, I mean, you're hopeful it'll bounce back, or should we trend line that out flat over the next couple quarters?

Well, I think the recon growth as far as we can see at this point looks solid. And that's built into, obviously, our forecast at this point. I'll answer a little differently. We're operating on the assumption right now, right or wrong, that the market in recon is growing around 10 percent, maybe a little under that-I have to check other people's numbers first, we haven't got everybody's numbers yet, but something in that order of 9 to 10-and that in the US it's somewhere around 13. And therefore, in order to drive the business the way we have to with our size of recon we want to be up in those numbers.

The trauma, when I said it was disappointing, I was being a little facetious. It's not really that disappointing, frankly. If you look at everywhere but Japan, we're growing double digits. My guess is trauma's growing in the 8 to 10 range. It was a very soft winter. And unlike-it sounds like a funny way of saying it, but it is true-unlike hips and knees where you go in through pain, trauma is affected essentially by, you know, nasty car accidents, and guns, and knives, and all that sort of stuff, so it affected by different things. The only negative or down side I see is the short-term impact of trauma in Japan. And in Japan trauma represents 2 percent of our total business. I'm, in fact, you know, basically very satisfied with our trauma business everywhere but Japan. And I believe Japan is a short-term, meaning a quarter or two, situation. So I don't think you need to change any trend lines in trauma.

Okay. So that will probably register growth this year of mid single digits you think-trauma?

Absolutely, or I'll be making a lot more trips over there than I am right now. I mean, of course it's going to grow.

Okay. Well that's helpful then because that coupled with-I don't know if I'm maybe disconnect here-but if recons drawing teens, that's growing mid single digits, then might you have slightly better than 10 to 11 percent on the corporate total?

Well, all things are possible, but the guidance is 10 to 11.

Okay. Well thank you very much. That's helpful.

Your next question comes from Bill Plovanik of First Albany.

Thank you. Great quarter, gentlemen.

Thanks, Bill.

My question is in regards to the foreign exchange. What was the nominal impact to gross margins in the quarter? And then also have you seen- for your product liability insurance, have you renewed that yet, and was that in your first quarter?

I'll let Sam answer the first one, and then we'll answer the insurance one.

Yeah, Bill, we don't quantify that level of granularity in any of our lines either cost control or SG&A. As I mentioned to one of the callers earlier, it does vary from quarter to quarter based on where the spot rate is or the average rate vis-à-vis the hedge rate. And we did, in fact, to be consistent with prior year, as I stated before, restated the first quarter.

I think on the insurance one-and maybe Jim Crines want to jump in here since we've got some meetings coming up on it-we have planned in our thinking for accelerated insurance costs. I doubt that there's any way to avoid that given what's gone on in the industry in general. But I would tell you that those accelerated costs, should they occur, are already [[inaudible]] into our forecast as part of our structure, so there's no additional sort of expense surprise to come there that we haven't already planned for.

Do you want to add some comments?

Yeah, I would just add to what Ray said that we do anticipate some significant increases in insurance collection. We've taken that into account in our guidance. And as well and what's important to understand, the most costly program that we have is our excess liability program. And large portions of that were locked in for a three year period back in August of last year. So it may be less of an impact than you would otherwise expect at this time.

Okay. Sam, my question on the FX impact, I'm really trying to get a feel for what the sustainable gross margins are. It seems like at 74.7 percent it's extremely high, and there's obviously an impact from the foreign exchange benefit. And I'm just trying to get a feel, you know, is a 73 percent product gross margin excluding the FX impact more realistic?

Yeah, I understand the question. The reason that we use the hedge contract is to lock into the foreign exchange rate. So the theory behind that, as you know, presumably, if the yen moves around a lot, it does have an affect on the raw gross profit margin because sales and cost of goods sold move up and down.

Okay, thank you.

Your next question comes from [Greg Simpson] of AG Edwards.

GREG SIMPSON]: Yeah, good morning, guys. Thanks for a very impressive quarter. It makes for a better day for most of us on this call. Most of my questions have been answered, so let me ask kind of a specific one here on the Uni knee market. Can you give us your take on the size of the market and maybe your projections on your growth in that market as it becomes a little more crowded?

The size of the market is tough outside of the US because I don't think statistically we have the information. I think we've worked under the presumption that numbers are anywhere I've seen from 35 or 40 million to 50 million, in that range. And I think that makes some sense. We're not seeing- I know that companies have introduced a new product. And, of course, in this industry it takes some time to see impact. We have not, to be honest with you, seen a lot of attention from them at this point. And, as you can tell, with 100 percent growth rate, again, obviously those growth rates are not going to be sustained at 100 percent. But we're still seeing dramatic growth rates. And one of the things I look for is sequential. I keep a very-as you can tell from our presentations-we keep a close eye on sequential differences. We're still seeing, you know, very strong sequential growth.

I think the other thing we may see more of is as Unis become more popular, you may see some up ticks in total knees because it draws the patient in to see a surgeon that they may not have gone in that early. And they may find out that they're not a candidate for a Uni, in fact, need a total. So I think there's some residual benefits here from high Uni activity that we can't correlate just to the Uni numbers.

GREG SIMPSON]: Okay. Thanks, guys.

Your next question comes from [Blake Vidner] of [Bridger] Capital.

BLAKE VIDNER]: Hey guys, congratulations. Just a question regarding- just back to mix-you highlighted sort of three elements that are impacting mix, the shift to highly crosslink poly, the shift to porous, and then the revision market. I'm wondering if I can just get a little better sense for sort of how to quantify each of those three? In other words, your volume in mix this quarter in the Americas was 12 percent of the 17 percent growth. Which of those three elements is adding the most to mix so that I can just get a sense on going forward, you know, how I can sort of model this forward? I mean is the highly crosslink poly the majority of that right now and then we're shifting more to porous, or are they equally weighted?

Well, I'm not going to breakdown real numbers for you, but in order of event at this point I would say the conversion to porous stem is probably the most significant factor. For us revision will become stronger, but it's a big part of the market. But, as you can tell, we're starting from a virtually no base in revision. So that's becoming much stronger.

Crosslink poly in hip, there's becoming less of it because we're getting to a higher penetration rate. But, of course, [Prolong]'s going to start to kick in.

But I think to answer your question in order right now my answer without looking at the absolute detail would be porous first, revision second, and crosslink poly third in sequential dollars from the prior quarter.

BLAKE VIDNER]: Okay, great. And then just one follow-up-where is the market with respect to revision compared to where you are? You're at 8 percent you said?

That's a good question. I think we think the market in revision is growing around 14 or 15 percent versus, if you will, the recon growth of 10 percent. So think of it as 40 or 50 percent higher rate of growth than primary. My guess is our competitors-and it's hard for me to guess that level of breakdown numbers-but I would guess our competitors are in the 11 or 12 percent range now of their business, something in that range, maybe even 10 to 12, while we're still at 8, although, as you can tell, we've doubled from 4 to 8 in a very short space of time.

BLAKE VIDNER]: Okay, great. Thanks so much.

Your next question comes from Norman [Craner] of [Craner] Investment Management.

Good morning.

Mr. [Craner], your line is open.

It sounds like we lost him, Teresa. Maybe he can try again or we can move on.

Okay, sir, at this time there are no further questions.

Okay. Well, that's great. Thank you again for all those listening. We appreciate it.

Thanks for the handling of it, Teresa.

Sam and I are going to be around all day, so, if we can give you some additional thoughts, feel free to give us a call. Thanks again.

This concludes today's Zimmer Holdings 2002 Sales and Earnings conference call. You may now disconnect.