Zimmer Biomet Holdings Inc (ZBH) 2002 Q2 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time I would like to welcome everyone to Zimmer Holdings Incorporated 2nd quarter 2002 earnings conference call.

All lines have been placed on mute to prevent background noise.

After the speakers' remarks there will be a question and answer period.

If you would like to ask a question, press star and 1 on your telephone key pad.

Questions will be taken in the order received.

If you like to withdraw, press the pound key.

We will read the following Safe Harbor Statement.

Zimmer would like to note the statements made in this conference call that are not based on historical pacts are forward-looking statements in the meaning of the Private Securities Litigation Reform acts of 1995.

This factors and cautionary statements concerning considerations that can cause actual results to differ materially than those in the forward-looking statements that are filed in the Securities and Exchange Statement and the press release earlier today.

They make though claim based on new information, future events or otherwise.

Mr. Elliott, you may begin.

Good morning, everyone and welcome to the Zimmer's 2nd quarter 2002 conference call.

We are pleased to be hosting the call to discuss a solid quarter.

This quarter marks the 75th quarter in orthopedics since we began in 1927 and the 1 millionth implantation of the Zimmer knee.

This call should go one hour and allow ample time for discussions.

Our Senior Vice President, Sam Leno.

I hope you received a copy of the earnings release or you can obtain one at www.zimmer.com or contact Sam and we will have a copy faxed to you and add you to our email database for future releases.

I'll begin the call with brief comments related to 2nd quarter results including an update on operations followed by Q&A.

We willing discussed results for the 2nd quarter of 2002 compared to prior years' results.

We will communicate as we did in the first three calls including financial disclosures, new products announcements and hot topics and issues analysis.

Let me begin with the fundamentals of the consolidated balance sheet performance.

Consolidated sales were there $346 million, 17% over prior year and sequentially up 8 percent per over strong first quarter 2002 and $20 million higher than the original expectations.

Of huge importance, 2nd quarter sales were 11% better than 4th quarter 2001 and considered to be justifiably at the time the high water mark for Zimmer and the industry.

Worldwide sales increased 18% for the quarter.

This continued solid performance was lead by accelerated volume mixed growth of 14% in the quarter with worldwide price continued firm as with previous months 4%.

As a point of interest for Zimmer, the Americas price increases were at 5% and matched the previous two quarters.

Most importantly our 18% constant currency growth can be viewed against a very tough comp of 17% growth in 2nd quarter 2001 versus 2000.

The Americans business continued an excellent growth a gain of 20%.

Europe dramatically increased to 26% in the quarter.

We experienced improvement in Asia Pacific sales to 9% local currency.

We believe and are comfortable and all segments are driving increases in local currency.

On a year to date basis, sales increased to 665 million, 15% over prior year reported and 16% constant currency.

By America's business in Europe lead the way with 18 and 21% respectively.

We will discuss Zimmer's performance in the individual category and geographic sections.

Diluted earnings per share for the second quarter were 34 cents, an increase 36% over prior year, 4 cents over current consensus and 5 cents over original consensus street expectations prior to the preannouncement June 17.

Year to date EPS of 62 cents and increase of 32% over prior year.

Cost of goods sold with a 17 increase in sales based on product mix, price, and successful efforts to reduce manufacturing cost through automation, insourcing and process improvement.

We may have many more projects underway to reduce costs of goods sold, to date we automated prep and doubled capacity.

Automated knee femoral and processes.

Robotized polishing and applied automated welling of fiber metal in knees. 100% resource for lcc femorals, unifemorals, polies for the flex knee and shoulder heads to name a few.

Gross profit margins increased by 170 basis points to a record 75.3%.

This gross profit margin of 75.3 was sequentially an increase of 60 basis points from 1st quarter 2002.

We believe that over 75% year to date our gross profit margins are the best in the industry.

SG&A expenses were well managed at 39.9, a 20 basis point improvement of 2001 and at for your reference, a whopping 450 basis point improvement over two years from the 2nd quarter 2000.

Results reflect 110 basis points, there were 20 basis points over the 39.7 we would have originally expected internally.

The analysis is simple.

We elected to absorb $1 million of one-time expenses for a good reason.

These one time costs in the quarter are attributable to two important areas.

First a major corporate tax restructuring project and the benefits of which you can see on the bottom line and the balance associated with various external development potential opportunities.

Year to date, SG&A expenses are 44.4%, 70 basis point improvement.

We are pleased with the leverage gain from sales..

Each cost only 36 cents of incremental SG&A cost.

This translates into 46 cents in operating profit for each incremental dollar of sales over prior year base.

We continue to operate working dollars models successfully and driving down cost and cost of capital while investing in sales and pipeline development.

We continue to invest in R&D at the top of the class with a target of 6% of sales and at 5.6% on a strong sales denominator.

R&D investments increased by 2.8 million in absolute terms for 2002 versus 2001 and reached 19.2 million.

Year to date, the R&D ratio to sales is 5.8%.

We are pleased to report that operating profit grew and the real record performances is to absolute dollars.

For the first time ever, Zimmer achieved more than $100 million in operating profit and for the first time ever a 30% operating margin to sales ratio.

These results represent an increase of 200 basis points over the prior year and 220 points from the 1st quarter 2002.

Year the date operating margins are slightly under 29%.

Net earnings in the period increased by 35% with declining interest expense to 3.3 million and a significant reduction in tax rate from 35.5 to 34.2, providing a quick return on the one-time tax restructuring cost previously mentioned.

Year to date net earnings have increased 33% as previously mentioned diluted EPS increased 33% to 34 cents based on 196 million average diluted shares outstanding and year to date EPS is 62 cents.

Although Sam will be adding additional thoughts, I would like to provide brief introductory cash flow and balance sheet highlights.

Free cash flow for the quarter were on target at 41 million and 67 million respective respectively.

Inventory increased to a level of 2 stpropb million and days from 245 to 254.

As we indicated on the two previous calls, it is our intention to operate at 250 days of inventory for the foreseeable future and the pipeline is turning out almost 40 projects, 20 of which will be released in 2002.

We continue to believe that Zimmer can and has successfully operated at high levels between 200 and 220 days.

This represents, with our product line, a 75-100-day advantage over competitors.

The primary reasons we believe in and delivered these are fill rate and forecast accuracy.

The unit fill rate accuracy 98.4% and our global forecast accuracy on thousands of SKU's is 91%.

We developed an arrangement with Michigan State University for advanced forecasting.

Additionally our net debt declined by 164 million dollars from 450 million at the spin off to 286 million at the end of the 2nd quarter 2002.

Our leading receivables collection continues to provide for ready access to a large cash flow base and supports the top metrics in the medical device industry as a whole.

Let's review sales in a little more detail.

Given the business world we live in, it's worth repeating definitions and hips, knees shoulders and elbows implanted in the patients during the quarter.

No spinal, dental or hai injectables included.

No exclusion of disopinioned products or continue shipments to warehouses.

For the 2nd quarter, worldwide sales increased to 268 million, a reported increase of 20% over prior year. 21 % constant currency and a strong sequential increase over 1st quarter 2002 of 9%.

This represents a 13% increase over what was a stellar 4th quarter, 2001.

Year to date sales are 513 million, increase of 18% reported and 19% constant currency.

Many analysts obviously a reported basis the worldwide reconstructive market grew 8% in 2000 and 10% in 2001 and for 2002 and local currencies around 14-15% in the quarter and approximately 13% year to date.

If this is the case, Zimmer has continued a consistent pattern at growing at a rate 14-15% faster than the market.

Based on results of 513 million, Zimmer sales are straight lining at more than $1 billion a year.

Despite the large base and difficult comps. our game increased by 20% or more for the tenth straight quarter.

Let's look at each product more closely.

First products in the knee category on a world wide basis, knee sales increased 22% to $148 million versus prior year. 22% constant currency and sequentially more than 9% versus 1st quarter of 2001.

On a year to date basis, knee sales increased 20% on a reported basis to 284 million and 22% constant currency.

These are continuous and significant market share gains in all geographies.

Our knee grow philosophies remain consistent.

Developmentally invasive techniques and market needs and create life styles to enhance patient expectations and reproduceable teubial fixation.

We think the strategies and execution are paying off with two notable points.

As previously mentioned, Zimmer sold its one millionth knee and secondly, despite the sheer size of the merger, we moved back into a unit market share tie for number one in the US market at approximately 27% share.

Successful introduction of prolong and polyethylene for retaining knees continue and delivering great results and significant results with early sales in the millions.

We continue to have the pleasant problem of keeping up with early release demand.

I believe that Zimmer's FDA claim with improved resistance to delamination would be a powerful advantage and proven to be correct based on early marketing results.

The Zimmer MG Uniknee helped position the strategy.

Three interesting notes for the month and the quarter.

The published result and rates the MG Uniknee number one in the world at 93% survivorship versus 86%.

This is a significant difference.

Secondly we completed the first fully web based training session on um and im implementation.

We reached and executed training of more than 200 individuals for less than $5,000.

More importantly we will broadcast the first ever live global unisurgery with web cast's Aaron Rosenberg in Chicago.

It's apparently a more clouded market out there, but uniknees have grown on a world wide basis another 80%, up sequentially another 16% versus 2002 and increased year to date by 89%.

All of these results were measured against tough comps and a large existing base trending to between 17 and 18,000 worldwide units on an annualized basis.

In reviewing the market, the domestic U.S. market appears to grow at annual rates of approximately 50-60%.

Zimmer continues in the US to grow at almost 90%.

We believe the math and the market shares are crystal clear.

Our next flex knee, a Zimmer life style designed product designed to accommodate 155 degrees of flection continued winning ways in the quarter.

On a world wide basis LPS units grew by 97% in the 2nd quarter.

As with MIS uniknee they directed a consumer campaign and directed extensive participation with several thousand prospective patients seeking Zimmer surgeons in the area.

Phase two of our national knee public relations campaign, will be covered later in to the topics with updates on total knee.

We indicated on the 1st quarter call we expected to sell more than 10,000 units of flex knee world wide in 2002, but of course crossed that 10,000 unit mark in 2001.

At current rates, we could approach 17,000 to 18,000 units.

Lastly we expect to add the LPS flex this summer as priority one to brain lab's next issue of the software revisions.

Let's take a closer look at hips.

On a worldwide basis, hip sales increased 17% to 111 million and grew in the constant currency.

Year to date hips have increased by 14% to 212 million and have grown 16% constant currency.

The Zimmer growth philosophies in hips remain consistent and capitalize and respond fully to revision needs and have minimally invasive techniques and provide designs that improve patients lifestyles and quality of life.

They continued to more than two-year growth run, an increase by person 29%, up another 14% versus a good 1st 2002 and interestingly enough, 21 per percent better than what was considered to be the high water mark for 4th quarter 2001.

We will discuss the continued role of cement and pourous mix under the hot topic section.

Pourous revision stems with cups and liners grow very well with sales up 29% in the 2nd quarter.

Zimmer shows 20% growth in the 2nd quarter and the previous quarter we had sales of more than 1,000 shells.

During the 2nd quarter we increased that by 30% in units.

Word is really getting out in this great new pourous flat form.

Premium price in longevity liners increased by 43% in the 2nd quarter, a significant sequential increase of 11% versus the 1st quarter of 2002 and 22% over a strong 4th quarter 2001.

We believe this acceptance is growing with both the introduction of large head articulations and specific analysis as it relates to Zimmer's longevity brand.

In the first quarter, we released the first threaded cup for the large German market.

Five leading surgeons will implant them and come training centers with full launch in the 4th quarter.

Similar to robotics previously mentioned, Zimmer will add the entire versus hip system, pourous and cemented to the brain labs robotic surgery software.

During the 2nd quarter, we are excited to report that Zimmer released the models on the versus hip system utilizing a filmless radiology, including digital templating.

This is the way of the future versus manual templating.

In upper extremity giants, Zimmer's shoulder has taken significant market share with 31% in the and 29% year to date.

We will continue to enhance with the addition of tribeckular metal.

Trauma sales improved with an increase of 6% reported and 7% constant currency.

Our Japan trauma business is small and will take time to recover from the production of Puerto Rico.

The other Asian, Americas and European business his on a combined basis, a sold 16% growth in the quarter and 12% year to date.

We believe both of these exceed trauma growth rates by 50 and 35% respectively.

Zimmer is making accelerated penetration against the world fracture leader with 61% in the 2nd quarter following 31% in the and 48% year to date.

Thanks in part to the new flips teams, the new ZPS, Zimmer Plate and Screw Line grew by 160% versus the older product line they replaced.

Transfix external fixation sales increased 41% sequentially over the first quarter.

New developments in global ITST nail should offset current softness in compression hip screws.

The driver philosophies in trauma remain consistent.

With innovative designs in the competitive areas and enter the market and improve quality of through transformational change and fixation and develop applications.

In orthopedic surgical products, orthopad designed specifically for orthopedics increased 79% in the quarter, 82% year to date and reached the status of a $10 million product line.

Let's switch to our new product development update.

We have 40 major products in the robust pipeline with 50% scheduled for release before 2002.

We will of course from time to time add new projects on the calls and make it with the implications, scope release date and schedule reliability.

Although they will not be reviewed on this call, we completed the evaluation of major products for the second half of 2003.

We announced accelerated plans for the general lease of the Zimmer 2 incision hip procedure and the MIS institute in a press release this week.

I will cover those more fully under hot topics.

In these, patented rotating knee, RHK, 80 new implants in 2nd quarter 2002 continues on schedule, but we expect to have difficulty meeting demand until the end of August.

More than 70 hinges have been imp planted with 51 of the surgeries completed in Germany.

The first was successfully performed in Akron, Ohio with the patient experiencing more than 100 degree flection in the first week post op. 32 implants due second quarter in 2002 and released on schedule June 19.

As indicated, they were released ahead of schedule to rave reviews and almost exceeding supply.

They initiated new knee problems and following in the footsteps of the highly successful lps flex.

They are on schedule for late 2002.

A new patella femoral project with projects going to cadaver work this August and September on schedule.

And Mistka, the surgeon team and first surges were announced in a press release recently and I will update the status under hot topics.

Now to hip development and commercialization.

The apollo stem project 350 stem phase in release through 2002. 160 stems have been released in 2002, including fiber metal taper with HATCP code and beaded mid-coats.

The balance of almost 200 stems will be released along with full instrumentation during third and 4th quarters of the year.

Tribecka modular cup has been increased by 10 implants to 58 implants from the original 48.

The project release date is moved by 30 days in 4th quarter 2002 to January 2003.

Cpt 2, the new polished stem primary system with 30 implants to 3rd quarter 2002 is on schedule.

Eight new revisions were added last quarter and and remain on schedule for 4th quarter 2002 release.

According to the FDA, the final ruling on the constrained line or down classification was issued.

Zimmer has significant product on the self and applications complete.

We anticipate the first sales on the deproved down classification in September.

In commercialization, perry articular 289 with new implants for phase and release 4th quarter 2001 through 2nd quarter 2002 completed the final release.

The itst retro grade femoral nail with 200 new implants was identified in the as being delayed from the original summer release and continues at risk on that schedule.

We expect strong 4th quarter sales.

The transfix system with more than 250 new implants will schedule for phase in release through first quarter 2002.

The systems were released in the Americas on schedule.

The many sets were identified as being 30 days late and were released as indicated.

We have initiated studies on cardolidge and 1 to look at mobilization with the graft at protocol and a second study to look at immigration at six months.

They initiated a search for a full time director of orthopedic biologics.

On a rolling 36 month basis, new products represent 18% of sales and 18% year to date 2002.

Slightly above full year 2001 at 17% and consistent with long-term goal to have new product sales between 15 and 20% on an annual basis.

Let's look briefly at the geographic segments.

In the Americas we delivered another excellent quarter.

Revenue was $230 million, up 20% measured against the difficult comp of 21 percent per for 2nd quarter 2001 versus 2nd quarter 2000.

We are extremely pleased with our progress. 15% of the growth in the Americas was driven by increases and unit volume mix.

The remaing 5 percent was driven by price increases.

America's reconstructive growth of 22% include an outstanding knee growth of 26% and sequential growth of more than 5% against a strong 1st quarter of 2002.

This 26% knee growth should be judged against 28% knee growth in 2nd quarter 2001 versus 2nd quarter 2000.

Nexgen lcck revisions made substantial contributions.

Since there is little mix associated, this indicates a raw growth in the quarter for Zimmer knees in the Americas of more than 21%.

Hips in the Americas increased and stems in the Americas at 52 percent of mix continued for the first time in 15 years surpassing stems in unit sales and not just dollars.

At 21% reconstructively growth where they continued a rate of market growth for the America again by some 40% and based on publicly reported figures of more than 50%.

We have been growing the productions at more than 20% for 10 consecutive quarters.

Management sales accelerated by 17% and impacted by new plates, zps, Zimmer Plate and Screw and the release of external fixation.

Somewhat offset by the problem of a backlog for insurface work on new conversions.

Patient care available only in the Americas continued rapid acceptance as described in my earlier remarks.

On a year to date basis, Americas increased sales by 18% to $458 million year to date with knees increasing 25%, hips 15% and fracture management 12%.

Operating margins increased by 30 basis points to 46.6% from 46.3%. 22 of 24 U.S. distributors delivered double digit growth and 19 distribute distributors in excess of 15% and every grew in total.

Day in and day out as it has for more than three years, they follow on all cylinders.

Asia Pacific revenue for the 2nd quarter was 69 million.

A report increase of 6%, up 9% constant currency and excellent increase of 19% versus 1st quarter 2002.

Important because a sequential difference between 2nd quarter 2001 and the 1st quarter 2001 was only 5%.

Asia pacific was 1% positive in the 2nd quarter as it was in the first quarter and we expect that to continue.

Japan is important to the global orthopedic market and I will review the Yen, pricing and government relations separately in upcoming remarks.

Returning to Asia pacific in total, businesses lead by outstanding hip growth of 15% reflecting continued revision to pourous and introduction of longevity and early sales of ZMR are modular revision system.

When combined with solid knee growth of 10%, Asia pacific reconstructively sales grew at constant currency of 13% and well above high single digit growth for the region, including Japan.

Excluding Japan, the remaining composed of Australia, New Zealand and other regions were Korea, Taiwan, Thailand, Malaysia and Singopore.

They delivered growth in the 2nd quarter.

Asia pacific increased by 16% constant currency and operatinggins increased by 30 basis points to 41.6% in 2002 from 41.3% in 2001.

An increase of 80 basis points compared to 2002.

Japan led this plan to leverage growth with a 460 point increase.

Following nearly a 1,000 basis point increase in the 1st quarter.

In Japan it was due to the sales force and distributor redesign.

Higher margins and products andnotablyighr margins and fracture productions due to production of Puerto Rico.

Year to date Asia pacific sales increased 1% to 127 million, but 8% constant currency.

Increasing by 12% with continuing declines in tprabgt ur.

Operating margin growth has been 17% compared to 8% constant currency growth in sales.

In Europe, they had an exceptional quarter marked by market share gains across-the-board.

Revenue of $43 million was a strong 26% increase over prior years and 24% constapblt stand currency.

For the second quarter it was lead by 20 % or better in all of the countries and regions.

The UK, Central and Eastern Europe, Norway, Sweden, Finland, Iceland, Spain, France, Austria, Germany, Switzerland, Italy and the Mideast and Africa.

Almost twice the served market growth was obtained by 13 of 16 businesses. 10 of those are well over half of Europe grew reconstructively results by a spectacular 30% or more in the quarter.

On a product front, reconstructively implants grew by 27% lead by hip growth of 35% and knee growth of 22%.

Even with solid competitve reconstructive numbers for Europe, it's clear we are growing at 50% faster than the market.

Hip and knee gains express longevity and hip designs as well as work on the rhk nexgen rotating knee.

Europe operating profits increased by 83% to 8.8 million in the quarter. 640-point increase following more than 1,000 basis point increase over prior year in the previous quarter.

At 21%, they surpassed a gain for the second month in a row.

The minimum return on sales milestone for 20%.

It was set prior to the spin off when ratios were between 12 and 15% and required improvement of 50%.

A great job by Europe.

Let's go to issues and analysis and our own hot topics.

We have a brief look at Japan with the Yen improving with Zimmer's performance and the government negotiations complete, this is less of a hot topic.

Next an update on the mix change with the global results.

External development and sales associate ads and update on additions and minimally invasive and transformational developments.

There is lots to talk about there.

First a look at Japan.

Later in the 2nd quarter with Yen rates in the 116 to 120 range compared to prior year of 125, we lost over 5% in translation, a manageable deficit given coverage at 118.

With so many issues plaguing the general business news, the Japan Federal Trade Commission announced that all orthopedic companies have been pronounced innocent due to a cartel from last October.

Good news and good pr and a decision by the government.

Our business continues to be healthy in Japan with sales in the quarter up almost 11% and sequentially up a terrific 23% over the 1st quarter 2002.

And market believed to be growing at low to mid-single digits.

Prices the negative in early 2001 and now slightly positive and we continue to gain market share.

They have a continuing 20 percent per increased for flex,uniys and pourous hips.

Return on sales at the operating profit line was up more than 400 basis points and as ratio to sales continues to surpass 50%.

Inventory days are below corporate average with cash flow.

The reorganization was completed in the and performing well.

An up date on mix change reflected in Zimmer's results.

I will explain unless otherwise specified are in dollars.

Mix continues to play a keyroll and focuses on three compare sons.

Standard mix comparisons of longevity.

From 99 at 11% 2000, 59% and 2001, 77% and second quarter year to date 84% in 2002.

A shift of seven points year to date from year end 2001.

Zimmer's crossing represents tremendous potential and the results only represent hips and do not take into consideration of the knees just released, shoulders or elbows or when combined with metal. 39% pourous in 99 and 42% pourous in 2000, 45% in 2001 and 2nd quarter year to date 2002 is 51% pourous.

The cumulative shift of 6 more points from year end 2001 for Zimmer and we believe the market in general was at 55 to 60% with a potential 70% conversion.

This leaves Zimmer with considerable room to grow and represents the first time on a global basis that primary hip stems have a pourous revision.

Third and last of total hip sales 19 and 3% and 2001, 6% and 2nd quarter year to date is 8%.

Solid performance to a double digit goal for 2002.

Almanac activity for the most part involves minimally arthroskopic procedures, computer assisted urge surgery and cartilage related biologicals.

These are consistent with the presentations and investment conferences.

We currently had three individuals involving technologies and businesses in the target areas.

The current portfolio had various stages of discussion and include 5 spinal businesses for technologies.

We indicated in the call we hoped we would be able to announce in May important agreements on computer assisted surgery in the 2nd quarter.

We of course were able to complete the goal on May 31 with the announcement of a long-term arrangement with meonic to codevelop software and facilitate the performance using Zimmer implants.

The exclusivity relates directly to MIS.

Zimmer and medtronic will partner to distribute the necessary software and hardware to customers.

We work long-term with the development of software beginning this summer.

Medtronic will work on MIS hips and MIS knees.

Sales associate ads with the additions continuing to be active, we indicated in the 1st quarter call we would add 100 reps consisting of 85 sales associates and specialists and a total of 15 operating room surgical support teches.

Year to date, we hired 34 new associates and specialists.

We have currently six open requisitions and eight teches with one current opening for a total of 42 hires at the halfway point against the target of 100.

Zimmer established itself procedures, technology and training.

We expect our leadership will allow for maximum surgeon conversion, positive out comes and cost structure changes to the delivery of orthopedic care.

We cannot be more pleased.

We will update you on several aspects of the program, the mini hip, two incision hip, hip another ROS copy, t 2, the MIS technology for hip replacement and MIS knees.

I will provide further financial contractual on the Zimmer institute incremental to this week's press release.

First the mini hip.

We completed 1200 surgeries utilizing the tech tphaoebg with excellent ruls.

The first course occurred during June in San Francisco.

Former accredited courses are planned for Chicago, New Jersey, Florida, and Mexico.

These courses willcodate 300 to 400 surgeons.

Based on the sell out crowd, additional curriculum will be added on patient selection, anesthesia and te haing ever patient expectations.

Developing surgeons in Chicago, Salt Lake and elsewhere are developing protocols for the mini hip and two incision.

We have already shipped 150 sets of new mini hip instrumentation through June.

Let's turn to the market research and public relations aspect of the mini hip.

They direct surveyed total hip candidates and 84% responded favorably that they would discuss a procedure that advertised a smaller surgery and a shorter stay, but no other benefits.

We will add the mini hip with dot-com websites.

This was a major reason for the success and the LPS flex confirming the ability tow drive potential patients to a Zimmer surgeon in the area.

We have terrific news related to the revolutionary hip, including the press release earlier on 50 consecutive patients from a single surgeon.

Here's a few of many highlights.

We have completed the study with 202 patients by 20 surgeons from 17 different sites.

They have typical percentages of osteoarthritis and others.

Study demographics were unremarkable and age and weight were lighter respectively.

A 50% rbgz basis and 1-15 and a predictable learning curve.

They compare well with outcome studies in which the average time in more than 2,600 cases is 75-80 minutes.

This applied to complications and we had no in recent time and the early early experience consentrated in each of first 10 surgeries with an interoperative fracture rate.

This is common and a normal review of existing literature had fracture rates far higherment we are very pleased with almost two years of cadaver and clinical work.

We are thrilled by the first assessment of 50 patients in which 75% went home the same day and 100% in 23 hours or less.

Home is the operative word.

Not one required disposition.

The two-incision knee, design companies are preparing pre-oppative and interoppative animations.

It's our understandings that Peter Jennings' new team intend to do a television story based in Chicago this summer or early fall.

We will keep you advised to the extend we can on the dates.

On the health economics front, they completed a preliminary assignment.

The next work plan focuses on global development on economic data relative to total hip surgery laying the ground work to cpt codes including surgery reimbursement changes and to finalize, patient quality of life assessment tools and data collection methodology.

Additional plans will be initiated fornlvment and hospital pilot flights and hospital training sites and direct a patient channel strategies.

On the academic front, the single most important is the development approval of the Zimmer MIS a 15,000 square foot teaching center, the 16 satellite and video link tables for saw bones and full cadaver utilization.

It provides curriculum, brand and materials for more than 30 academic institutions working with Zimmer.

Subject to individual country laws, these will provide a creditation in MIS procedures.

We will announce an institutional team publicly.

It will employ four full time employees by year end 2002 and 10 by June 2003 and be operate bide an institute director combined with a surgeon board.

Capital expenditure by 2003 will be 1.5 million with operating costs of 2.5 to 3 million.

All costs in 2002 have been included in the new guidance provided to you.

In our early budget work for 2003.

They will plan to train more than 500 surgeons on a total hip alone in the first full year of operation.

Lastly and fairly exciting, if the remainder of patient that is correlates well on the first 50 patients, we intend to launch the procedure for use only with swreurpl implants in the 1st quarter of 2003.

Let's look at two or three others that will find their way to being taught through the Zimmer institute and colleagues.

With hips, after more than two years we moved the t 2 hip fracture product.

Our fixation device and instruments made excellent progress in the quarter.

This has potential to improve and minimalry invasive technology by open debilitating procedures with large hip screws.

We initiated a new project with partners.

The technology is unique and the business case is due at the end of the summer.

We will update you in the 3rd quarter conference call turning to knees, the total knee project is making excellent progress and reaching consensus on the rational and verifying the hraoeflt invasive approach.

Design the academic technique and completing a 100 case clinical study and publicly reporting on the technique by mid-2003.

Phases two and three involve traditional and nontraditional and various levels of com pattability.

As with the many incision hip, the total knee instruments will be made available.

On the media front, the total knee designers review outside proposals for two books and a live surgery request from Japan.

We initiated a next generation project incorporating search for fixed and marketing.

Polyethylene and other unique material and design changes.

Lastly although not necessarily a hot topic, but a good topic, the main war sawapptis received a quality audit.

This is a no room for problems audit.

I'm pleased to say that we passed with flying colors.

Now let me turn over Sam Leno for additional thoughts in the balance sheet and financial operations.

I will try to add more granularity to Ray's comments and focus on a few key areas.

The balance sheet and cash flow statements.

We discussed the results on a proforma basis, adjusting to add a full year of interest expense and eliminate the $70 million of cost.

During this call, actual results for 2002 will be compared to financial that is we reported last year.

The pro forma results of the 2nd quarter 2001 includes $6.3 in interest expense and excludes 13.1 million of separation costs incurred in the period.

Before I move into the financial statements, I would like to provide a brief update on the ERP conversion.

As mentioned, phase one that consists of general ledger purchase and accounts payable was converted in August.

Phase two consists of the manufacturing systems and still on schedule to be completed by the end of the 3rd quarter this year.

Palette that is give us the ability to parallel tests and the new system against the old have already begun for phase 2.

Once they are completed, we will identify any issue that is need to be addressed and make modifications necessary to ensure that it yields the same results as the study we will begin the conversion of phase two.

Finally phase 3 that consists of the order to cash is on schedule to be completed in 2003.

In foreign exchange, the weakening of the U.S. dollar has all but eliminated the foreign currency translation on sale that is we experienced last year.

The negative effect movement reduced consolidated rate by $1.3 million or 4/10 of 1% in the 2nd quarter of this year.

Sale growth was 17.9%.

Although the yen has been strengthening all year, it was still weaker in the 2nd quarter of 2002 compared to the 2nd quarter of last year by 4.5%.

At the same time the Euro strengthens.

If exchange rates hold, they have a favorable act of 1.9% or 5.4 million for Q3 and 2% or 6.3 million for the 4th quarter.

As a result of the short-term volatility of foreign exchange and currencies, we excluded the effect differences for the balance of the year up or down in our 13-15% full year revenue growth guidance.

As I mentioned during the 1st quarter earnings conference call, we were required to record the settlement of foreign exchange in the SG&A line.

We decided to record them and therefore we reclassified them for the four quarters of 2001 and SG&A in order to maintain consistency reported between periods.

The evening of that change on the 2nd quarter of last year was $800,000 of movement between SG&A and cost.

The interest rate continues to be low at 3.7%, resulting in interest expen of 3.3 million, reduce by 6.3 of proforma expense in the 2nd quarter of last year.

Also down from 3.6 million in the 1st quarter of this year.

We have been developing a long-term tax strategy and I'm pleased to say we have begun.

It's one of the multifaceted strategies July 1 and will lower the full year effective tax rate of 35.5% we recorded in the 1st quarter.

Our effective tax rate for the second was 34.2% bringing the year to date down 34.8%.

We may see additional benefits in the form of lower rates.

It's too early to predict.

We should be able to shave an additional half to a full point off the 34.8% through the first six months of this year by the end of 2003.

As we mentioned during the 1st quarter conference call.

We are viewing all the presentations we make at health care conferences and manage all lines in the profit law statement, taking full advantage of expense-saving opportunities every chance we get and a at slower rates and sales.

We grew consolidated net sales by7.4% while growing cost of goods sold by 9.5% and SG&A at 16.7%.

The effective growing cost lead to a 20.3% increase and 26.1% growth in profit. 34.8% in net income and a 36% growth in earnings per share.

We were able to achieve the record-breaking profit margin in the quarter.

Turning to the balance sheet, we continue to deliver strong performance in outstanding growth particularly in the United States.

Consolidated DSO was days below last year.

Day of improvement and consolidated DSO.

In the U.S., we finished with 33 days of receivables.

Three days below the 36 we delivered at the end of the 2nd quarter of last year.

We celebrate the team success by taking the entire credit department to lunch as they achieved collection goals for the quarter.

We celebrated strong collections for the quarter by hosting the 18th quarterly luncheon.

It was two days higher than the due entirely to the strong growth in international businesses which operate with a lower collection cycle than the U.S.

Leading I the way was sales growth of 26% over prior year of the 2nd quarter.

Inventory base was 254 days at the end of the 2nd quarter, an increase of days over 245 reported for the first.

This growth in inventory is attributable to investment and the launch expected to occur throughout this year into next.

As Ray indicated, this level of days is about 50 days boost normal asset management targets for the members businesses and still 50-100 days above averages.

The equity balance has grown to 205 million,up from essentially 0 as of the August 6 update.

We are pleased with our strengthening balance sheet and equity continues to grow while at the same time our free cash flow will be a source of acquisition capital.

Operating and free cash flows were -- due to the timing of certain tax payments and others, operating cash flow is usually stronger in the second half of each year.

We also indicated many times before, 150 to 200 million of free cash flow annually on track to achieve them this year.

Capital expenditures were 8.5 million in the quarter and 15 million year to date and targeted between 35 and 40 million by the end of the year.

Over all the balance sheet strengthens.

We started [inaudible] and equity and 450 million of net debt.

During 11 months since the August 6 spin off date, we have grown to 205 million and decreased debt by 137 million to 313 million.

Decreased net debt by 164 million to 286 million.

Our debt to total capital at the end is 60% and by the end of the year should be down to 40% excluding the use of cash for acquisition that is should be completed between now and the end of the year.

Interest coverage is significant at 34 times.

Return assets is 29% and 170%.

We have been asked to quantify the impact accounting for stock options.

The effect on year can be found in footnote 10 in the 10-k.

Based on the total options issued as of today, the full year effect on 2002 if we were to expand points would be a reduction in net income and the reduction of six cents in earnings per share.

I will turn it over to Ray for a few final comments.

It was a strong quarter on one we are pleased with.

As we said, we continued to execute the plan.

We will celebrate our 75th anniversary in business and first year as a new public company.

We continue to drive the same strategies for success that we communicated for 4 o years.

They are new geographies in Europe, new high growth to external development and of course developing new product fist for the growing baby population.

We will meet the needs with style designs built in and revision choices, innovative material solutions and direct patient programs including the standards for surgery.

We will drive the models.

Superior growth rates, industry-leading margins through intense close attention to price, mix, and manufacturing cost opportunities.

The working theres models and top of the class R&D pipeline development.

Zimmer will continue to have leverage earnings and prove returns on working capital and aggressive action and excoug.

We would like to reconfirm last night's press release and the guidance for the year 2002 to 13-15% growth in sales and 25% EPS over 2001 pro forma. 1.22 to 1.23 for share.

We expect to go to 2002 to be the traditional later in the third heavier in the 4th quarter pattern.

We released a new brand campaign entitled confidence in your hands.

In this time with our new campaign, it will be as meaningful to investors as surgeons.

We would appreciate one question per person and one directly related follow-up.

At this time I would like to remind everyone in order to ask a question press star and 1 on your telephone key pad.

We will pause to compile the roster.

The first question comes from Bruce Jake.

Congratulations.

Obviously tremendous results.

My first question just given the significant upside to the numbers this year since the spinout, I'm wondering if it caused you to reassess your growth objectives.

You raised guidance for 02 and I'm thinking about 03.

Whether or not the growth in low teens expectations on the bottom line are appropriate and weather you are now aping higher.

This was the first question.

I think the answer is we had our 2nd quarter board meeting, Bruce.

That was yesterday and had a bit of that discussion and the work we will complete will be in September and then guidance.

We haven't done the work.

We had the first major struggle that was yesterday.

The guidance is as it stands, but obviously it's implied and impacted by the current results.

I will have to do that.

I don't have sufficient information to give you.

But then I guess as my follow-up, essential certainly all the positive trends seem to be continuing and you have foreign currency working in your favor.

The arrs are pointing in the right direction.

That's a fair assumption.

Related to the growth outlook, I'm intrieged at what the minimally invasive product would be.

You can talk about the impact on your financial picture that would have in terms of margins and average selling prices and in which there might be canniballization or not.

The revenue forecast I won't touch.

The margins are equal to or higher than margins.

There is no issue with margins and canniballization is not really an issue at least in the big cost of things which is in implants.

At this point we are using a whole variety of things from current standard implants.

Down the road as we take a look at the opportunities to make more MIS friendly implants than I think that gets into different implications.

At this point there really isn't any issues.

Our strategy is not to cannibalize our products, but as you might imagine cannibalize competitors.

You are doing a good job so far.

Thanks so much.

The next question is from Katherine Martinelli.

Thank you.

My question more on the European side of the market.

I have been surprise by how robust your results were in europe, but across-the-board.

It's the first thaoeupl we heard positive commentary regarding pricing.

Is there a catch up finally playing out in Europe in terms of the makeshift to hire margin products or a bag log of patients to try to get a sense of what exactly is driving the growth and how sustainable it is.

Good question.

It's a number of factors I don't know how to weight them.T brand in our case significant conversion or em products.

On a country basis, certainly significant inputs of government funding to support the UK.

That would be the best example I can come up with.

Conversions and movement in some cases the public and private mix changes by country.

That mix is favorable to our business and then Steman.

Certainly people anticipate the change in Germany that hasn't taken place, but favorable to orthopedics.

If you add all of that together in some movement between countries of patients across border and recovering those elsewhere, all of that plays out.

In terms of sustainability,I'd see all of those going away immediately.

I see it as being sustainable to the best of my knowledge.

Maybe as a follow-up, the input or the increase in government funding is that very specific to the UK or just trying to get my arms around.

We tend to hear there is no money available for health care or new technology coded stents.

I am trying to understand what point might have opened up that funding channel.

I think the politicians would tell you they're trying to reduce long lines and increase patient satisfaction.

The higher probability is these things tend to flow on a country basis with election years and really excessiblely long lines.

I think it will move around country to country.

Certainly in the UK there is no doubt that there is increased and publicly announced additional support of dollars several device areas.

Orthopedics is.

I'm not stem is one.

Orthopedics is.

So then is that mixed shift where we see in Europe tends to be 90%.

Are you going to see stems is that mix holding steady?

At least in Zimmer's case, I don't have Europe.

That's tougher to come by great research on a country basis.

In Zimmer's situation, there is movement to both pourous and premium and both of those combined.

Great.

Thank you.

Your next question is from Kurt Krueger.

Could I ask about the shifts towards the less invasive procedures and the unit compartmental knee.

Is that done by a different surgery and do you think you will get growth from extending to sports medicine?

Also on the knee, you are really starting to drive towards J and J is the leader in knees.

Can you talk about your relative physician in the knee market?

Will you close on them and are you the second place player?

Okay.

Going back to the uniknee, they are done by orthopedics and I have not seen or heard about people doing scoping and spores med.

I had a lot of phone calls inquiring about it, but I doubt to the best of my knowledge they're not doing many.

They remains an opportunity or an internal competition within the market place.

Knees in general I would suggest that we don't have current global information so I'm not sure on a unit basis where as relative to J and J. My information is based on 2000 and about half or three quarters of 2001.

I would suggest to you on the U.S. where we have more readily available data and we can do it more quickly with our research group as I commented during the presentation.

We believe on a unit basis that we reached a virtual tie despite the merged sides at about 26-27%.

We are clearly number two in the world.

There is virtually no doubt about that.

Thanks.

Operator: The next question is from Avi.

Good morning.

I will focus my question on roll out expectations for next year.

There is a learning curve associated with the MIS product and you will have to be cautious on how you roll it out.

On the other side of that with the direct to consumer advertising starting up today and patients coming to their surgeon and asking for the product, how do you balance those 2 as you roll out the product if you wanted in Q1 of '03.

The answer to the question is we are very, very tough in specific parameters around the training of surgeons and we will release the incision to them.

We have been doing minies first.

They will have to go through specific training.

You can tell from the level of investment and training we put into the planning that it's going to be a very oerbg straeutd event.

We provide them with very specific guidelines and for lack of a better term, controls.

They have been gracious about accepting around the degree ofcal marketing and type that we were willing to allow to proceed.

A certain amount we can't control because it's patient or mediabut we have been conciousuous about wanting to drive market share and maintain the lead we have in the establishment of MIS and not allowing this to become an inappropriate circus.

A lot of documentation and planning around this that ensures we keep control.

Do you have a goal of how many surgeons you want using the product bite end of 03?

Not how many we want, but capability plans at the end of this stage will be at least 500 surgeons on the MIS 2 incision.

We are training now in the student environment.

We will train many more than that on the uniknee.

We will start with about 500 and that should give us tremendous potential.

They will not all be existing.

Many will.

Can I just finish up here with a quick comment on the guidance for the second half of the year.

It would reflect if you go by the guidance a significant infiltration in EPS, but if you look at the trends, gross margin continues to come in well above what anyone has been expecting.

The tax rate is going down and the top line comes in well above really anyone's expectations.

Is there anything happening in the second half of the year or should we change the guidance for Q3 and Q4 as being conservative?

I don't know that I would say conservative.

You know us from the beginning.

We put out numbers we feel strongly we can deliver on and are cautious of the variables.

I don't know of anything specific.

The MIS dollars are huge and we included them in the guidance for you so that it's relevant.

Sam commented on the fact that we have not used foreign currency favorability on the sales of that as opposed to the EPS.

I am not aware of anything in price.

I have been a believer and have told many of you that we all love the 4-5%.

I think it will be positive, but I don't think it will stay there.

I think we try to put together guidance that we feel is leading the industry in terms of sales and EPS performance and still concious of thing that is flow against us.

If you wanted to find that as conservative, that's your nickel and your call.

Just for the gross margin assumptions with the products mix continuing to shift in your favor, would you suspect a sequential increase?

We don't give guidance on profit margins or specific components between sales and earnings per share.

Let me come back and respond to the first half of your question.

At the top end, it's a 15.4% revenue growth and for the full year, 17.3% growth in EPS.

It doesn't look too shabby to me.

It doesn't look shabby at all.

Very hard to get there.

My point is it's hard to get there.

It's a higher number with the trends you are seeing on the top line and below.

We appreciate your confidence.

Your next question is from Scott Davidson.

Good morning and congratulations.

Can you talk about theeimemt of MIS when we have seen other types of things convert from open to minimally invasive.

We have a period of time seeing hospital reimbursement rates go down.

Is that something that you are looking at and things you can do to prevent that from happening here?

That's a great question.

Since I grew up in cardio and not orthopedics, the reference is to cardio and the old days are all quite correct.

There are differences.

We are working heavily on it with the light.

We have done analysis by country of reimbursement and coding systems and factors that drive that.

Initiation of code change.

I think the one big difference that I see will are our ability to mobilize the surgeon group behind this.

This is more complex surgery with a more difficult learning curve.

This is a tre mendous gift to the patient, but the difference here will be as you looked at a lot of the procedures that changed.

They changed to a not only reimbursement, but a simpler procedure.

I don't see this as simpler, but having incredible patient advantages.

I think the ability to sell a concept to governments and insurance companies and others, this is more complex surgery and there has to be a balance between income relative to more complex skills versus a dekline in surgeon return for less complex operations.

That would be a major factor and we are putting a ton of time into health economic analysis and devising strategies to ensure it doesn't go that way.

Great.

One follow-up also on MIS.

Relative to the agreement with medtronic, you can help to better understand on the ion system.

You can help us to understand how you are dealing with that?

Sure.

The deal and I don't know about the conat the present time, but it's a general deal for open architecture as many of the people have.

It's like brain labs or many, many others.

Our specific deal with medtronics is different.

It has the open architecture and we put in others.

The unique part is we are exclusive long-term for minimally invasive procedures on hips and knees.

No other -- in other words the reverse is no other company will be able to establish the utilization of medtronic systems for guidance on a global basis using MIS procedures.

We think that is key.

That's one thing.

We are codevelopers with them on a new technology for MIS and I can't disclose it here, but it's not any of the things that you would know about and be aware of.

Those two make it unique compared to the architecture deals they may have.

Next question comes from Rick Weiss.

Quick question about gross margins.

You automated a certain percentage of manufacturing facilities.

Has this taken place and is it reflected in the 5.3% gross margins.

Going forward, do you have more plans to automate?

Is there room for improvement there?

Um, we do.

The things I used as referencesare in the 75.3 for the most part.

Not all fully complete, but they either are completed or will be.

We have another list that I won't share with you for competitive reasons.

Significant number of automation to improve in the strategic plan we presented yesterday to the board for initial discussion.

Another list of insourcing strategies that are also an equally long list.

None of the new ones are in the 75.3 because they are not funded yet, but will be over the next couple of years.

I look at the plant and we consent rate and only have two large plants on the implant size of things.

I look at the opportunities to be -- we have a lot of plans to continue improvements in operations.

I quick question on SG&A with the initiatives in the MIS institute.

How is that going to affect SG&A as you train surgeons and operating the training programs and so forth?

It's already built into the guidance we have given.

We don't give specific guidance on sg&a, but it is built into the guidance as provided and will be built in the guidance we give you for 2003.

You will see it reflected in both the sales line of course and ultimately the expense contribution.

You will see it in total and not individually.

Thank you.

The next question is from Bob Hopkins.

Mostly everything has been addressed.

I have one quick confirmation here on the financial side.

Given the tremendous success you have had in improving operating margins over the last couple of years, I'm wondering and think you just mentioned this, but confirming, with the asset mix you have today, do you believe you can continue over the next couple of years to see operating margin improve ams or shifting towards revenue growth as a primary driver?

That's tough on the answer because it depends on the time frame.

I continued to see the revenue growth being positive.

That is taking share on a regular basis.

That's the primary goal.

Margins will valley.

I don't know that every single quarter will be a sequential increase.

The quarters themselves vary.

What we may be doing and the costs of goods category may cause ups and downs of basis points.

I don't think you want to sit here and say absolutely for the next 20 quarters we see consecutive increase in gross margins.

I don't know that you can answer that for one thing.

I will tell you we will drive profitable market share on the revenue and any fluctuations we see if we do skpwaoe on the gross profit line will not be material in how we run the business.

They will be inflections.

Not just product mix, but geographic mix.

Lower profit margins.

That will play a role, seeing revenue and operating profit because we have two more line that is we put them on the interest expense.

We are in the tax rate.

We make no bones about it.

That can will be managed and there is opportunity there going forward as well.

Then just one quick follow-up and thank you for that.

That was helpful.

I was wondering if you can just as you have done in the past reprioritize for us on the m and affront, you always had a list of four or five things you are consider to greater exposure to Europe.

As a priority risk change and can you run through that or is that not appropriate.

No.

We won't discuss targets, but the topics are quite appropriate.

We update that and should update it now.

Image guidance has not moved down in priority, but with assign and medtronic and unique situations, it's coming cely in hand.

That is becoming more accomplished.

Spine through a variety of businesses and or technologies is clearly number one, although I would argue that tied for number one or close to it is critical mass tpwroegt in Europe.

The others were lesser at this stage or tied for number two and number three.

Pain and blood management.

Ibs would form the category.

Another ros coppy we have interesting things going.

We still have very interesting conversations with people, but with all the flux going on right now in the farm area, it's to have a folk you used conversation.

It's a good one, but it's really difficult to do right now with those companies.

I would put it at the bottom because of the reality of the situation.

If you want to phoning us on two things.

Thanks and congratulations.

Your next question comes from Phillip Gross.

I had.

Most of these questions have been answered, but some ofe basics around the MIS to incision hip.

I wasn't sure how many doctors you expect to have trained at launch at the beginning of 2003 when you launch it.

That's when the dtc will hit as well.

What happens to the operating time after the 15 procedures and the revenue to Zimmer to get at the cost and the reimbursement issue that you spoke about?

Does it converge to a standard open procedure time for a doctor after 15 or is it still longer?

Although you are using the same hip tuesday, standard swreurpl product, is there another revenue to Zimmer from the procedure in terms of instrumentation and disposal instrumentation?

Those are all good questions.

The plan at this stage depends upon when launch is in the 1st quarter.

We would be showing it at the aa lesson.

It's probably some 50 to 100 surgeons and that strategy is being worked out right now on the revenue side.

The implant side, that will probably not change a great deal until we get into projects we have looking at the friendly instrument skpaeugz advanced productions and disposal com ponens excluding the implants.

That leads you into stkugs.

I maybe should have added this tow scott's.

The assumption at this point is you continue to cell on an orthopedic basis and implants.

Woo are looking at other options to put this in a kit where the ans the only variable.

Do you sell it on case rate instead of per diem opportunities with the hospital.

I think that's a realistic potel.3-n surgey time, we discovered at 50 patients consecutive.

We are looking at almost a 50% drop in operating time between the first sort of 1-10 surgeries roughly speaking and the ongoing after that.

The resulting time at this point is around 100 minute that is make its at least slightly longer than a huge database we have of existing versus implants.

A very appropriate time in the general context of being able to drive more units of volume through the hospital should not be an issue and of course you don't have peripheral costs.

In terms of anything outsidelet the surgery itself, it's not likely we would be participating that much.

Most of the areas outside of the operating surgery itself will tend to be dramatically reduced.

Rehab time and cost.

Blood donation and all those things should come down dramatically as a cost.

I think I answered all the questions.

If I department, you let me know.

I think is there a difference in the blood usage as well in this database of surgeries?

In the 200 procedures and rel testify open procedures?

There is, but I wouldn't give you perspective information at this point.

I can tell you what we observed and we will verify through a test.

That's a dramatic drop in the need for blood during the surgery and therefore in the theoretical need for donation.

If you look in this country at the cost and cut and wear and tear on the patient, but the cost television as well of predonation and management of blood.

Anywhere from $0 to $800 on a couple of pints.

Right off the bat, assuming we are correct in observations held up over scientific tests, there is seug 95 cant cost savings.

The last follow-up.

Is the speed and the time of the procedure connected to this idea of getting disposalable or instrumentation and cust oplized?

If I'm a doctor and you walk in with a GIS you revenues, what am I getting or what's the hope as you develop that and when might we see it being introduced?

The hope for us of course is incremental.

Today we don't of course for the most part charge for instrumentation and the hope is to have unique components which I am grouping under instruments.

That may be a misnomer.

Assisted devices to surgery.

The win for us is clear.

Sales on something today.

We giveaway the loan to the hospital for use in the process.

The win for the hospital and we have not done this work at all.

I am giving theoretical information.

As you look at the labor cost and the infectious rate potential and the management of all that instrumentation and the movement on it, very much like 25 and 30 years ago going from reusable to disposable and the benefit to the hospital and supplier were equal and mutual.

That's an area we will look into closely.

We have not done sufficient.

It's more of the sterilization side rather than ging the procedurer the doctors as a result of the customized disposalable instrumentation.

If you can come up with unique device.

I don't see it as a huge speed addition.

Phillip.

Your next question is from Bill.

My questions have been answered.

Your next question is from Robin Young.

Hello.

On the pricing side, you indicated so far this year volume has been 14% and pricing represented 4% of the revenue growth.

I was thinking about your goal to the future revenue or have new products represented about 20 or so percent of future revenues.

What does that imply about future increases, particularly if some of those move in the way of metal on metal or ceramic on metal or ceramic on ceramic or biologic or any of those.

Who does that imply for future price increases.

I will ask you to qualify your question.

I'm not sure whether we are mixing together price and mix.

The way we carve up the business and in the computer system is units mixed and price.

We don't disclose and only disclose price as broken out.

The new product target we have at 15.20% on a rolling basis.

If you are referring to it switching to a more premium product and more change to higher priced product.

For us that follows under mixed analysis and for us is the unit and SKU change on an annualized basis.

Were you talking about the change-a.> actually that's a good clarification question.

I was going in two directions.

One is sort of a base line on estimate where prices will go for the rephaeupder of this year.

As you look beyond.

If you continue this rich pipeline of new products coming to market, how is that going to affect expectations as to price increases?

I understand esku points, but will for example if your cross link polymer products or the metal shelf f all those become a higher percentage of for example European business and the japanese business or biologics become a bigger part of theus business, over all does that change your outlook for price increases.

I don't think it changes the outlook.

It changes revenue assuming equal or higher units of those items.

I sort of have been on the record since prior to doing the spin.

We did the road show and in believing we all ought to be grateful for the 4% price and 5 in the U.S. that we seem to be running around as competitors.

I believe that while prices will stay positive, I believe that will settle to a lower number.

I used the number 3.

I don't have a better crystal ball than you do, but I tend to think that price will settle a little bit and stay positive.

Is that because you think that reimbursement will push or do you think that's just given the competitive environment you operate in, that's as good as they will accept?

It's more of the later.

I hope we will always out driving to the market and what they will accept.

I don't know that it will be heavily influenced by e imbursement as long as it doesn't get into excver.

If it does like any other government or hostile situation, they will react.

Thanks so much.

There no further questions.

Mr. Elliott, any closing remarks?

That will be fine.

I appreciate the help and look forward to seeing you next time around.

Thank you.

This concludes today's conference calls.

You may disconnect.