Zimmer Biomet Holdings Inc (ZBH) 2003 Q3 法說會逐字稿

Good morning.

My name is Kimberly and I will be your conference facilitator today.

At this time I would like to welcome everyone to Zimmer's third quarter 2003 financial results conference call.

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

After the speaker's 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.

If you would like to withdraw your question, press the pound key.

This presentation contains forward-looking statements within the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 based on current expectations, estimates, forecasts, and projections about the orthopedics industry, management's beliefs and assumptions made by management.

These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions including, but not limited to, our ability to successfully integrate Centerpulse AG that could cause actual outcomes and results to differ materially from those in the forward-looking statements.

For a list and description of the risks and uncertainties, read the disclosure and materials filed by Zimmer with the U.S.

Securities and Exchange Commission.

Zimmer disclaims any intention or obligation to update or advise forward-looking statements whether as a result of new information, future events, or otherwise.

This presentation also contains certain non-GAAP financial measures.

A reconciliation of such information in the most directly comparable GAAP financial measures will be furnished in our Form 8-K filed with the SEC and may be accessed from the Zimmer Web site at www.zimmer.com.

Thank you.

Mr. Elliott, you may begin.

Thanks, Kimberly.

Good morning everyone and welcome to Zimmer's third quarter 2003 conference call.

We're pleased to be hosting this call to discuss a solid quarter.

Today's call will be expanded to 90 minutes, our apologies particularly to those on the West Coast.

Joining me on the call today are Sam Leno, our Executive Vice President and Chief Financial Officer, and Jim Crines, our Vice President and Corporate Controller.

I hope you received a copy of last night's earnings release.

If not you can obtain a copy from our Web site at www.zimmer.com.

Alternatively, please feel free to contact Sam.

He'll have a copy faxed to you as well.

And add you to our e-mail distribution list for future releases.

We'll begin today's call with brief comments related to our third quarter results, including an update on operations followed by Q&A discussion.

All results discussion are based upon the asset method of accounting for instruments for 2003 and the expense method for 2002.

We're pleased with the consummation of the Centerpulse AG and InCentive Capital AG acquisitions on October 2.

We will, however, be focusing our conversation with you on our Zimmer stand-alone results for the quarter.

While it's not our intention to devote time to the stand-alone Centerpulse results, we do want to focus during the call on both integration activities and combined guidance.

Having said that I do want to once again publicly thank our Zimmer team.

The ability and task of negotiating and closing a complex cross border deal without allowing the company to become defocused from its quarterly financial goal and obligations is a tremendous accomplishment in the face of tough, competitive, daily environment.

Given the challenge, in many ways we're more proud of this quarter than any other since we became a public company.

As I have in multiple venues during the last few weeks, I would also like to publicly welcome the Centerpulse family to our family.

We believe it really is the perfect fit.

Let me begin with the fundamentals of our Zimmer consolidated P&L and balance sheet performance.

Consolidated sales for the third quarter were $398 million, an increase of 18% over prior year.

Absolute dollar sales in constant currency were above sequentially the same as the second quarter and approximately $6 million higher than consensus Street expectations.

Worldwide sales in constant currency increased 16%, an acceleration from the previous quarters 14% growth.

This continued solid performance was importantly led by real volume mix growth, up 13% in the quarter, which was 1% better than both prior year second quarter and the previous quarter sequentially.

Worldwide price improvement remained firm at 3% and the America at 4%, both slightly better than anticipated.

We continue to believe that price will settle in at rates of 2-3% for 2004.

Our Americas business accelerated its excellent growth in the quarter to 20% and Europe continues to dramatically increase reported growth to gain versus prior to 30% despite a market growing in high single digit units of surgery and brutal comparisons, more on Europe later.

We experienced improvement in Asia Pacific sales growth of 5% and a fuller growth market.

On a year to date consolidated basis, worldwide sales increased 20% reported to $1.2 billion and 16% constant currency with the Americas and Europe delivering the strongest results at 18% and 40% respectively.

It's a nice place to be with our size at 20% reported growth year to date.

Diluted earnings per share for the third quarter were extremely strong at 43 cents, an increase of 30% over prior year and two cents better than first call consensus Street estimates.

Year to date diluted EPS results are $1.28, an increase of 35% over prior year.

We continue to be very pleased with our company's efforts to drive each line of the P&L to an earnings growth always greater than sales and of course excellent free cash flow.

In the third quarter, cost of goods sold increased only 14% versus an 18% increase in sales.

Gross profit dollars increased by 19% and gross profit margin versus prior year improved by another 90 basis points to nearly 76%.

We believe that at 75.6% in the quarter and year to date, our gross margins remain the best in the industry.

SG&A expenses set a new record low of a ratio to sales and continue to be very well managed at 36.9%, a 270 basis point improvement over third quarter 2002 and a sequential improvement of 90 basis points from the second quarter, 2003.

For your reference, over a full three-year period, we have delivered almost 500 basis points, or five full points, of cumulative improvement in SG&A from the 41.8% ratio recorded in third quarter of 2000 to the 36.9% this quarter.

During the third quarter, as with the second quarter, we recorded $1.7 million in period acquisition and integration expenses or approximately half a penny of EPS.

For the quarter and consistent with the type of performance we're looking for, SG&A expenses increased only 11% despite an 18% increase in sales.

Year to date SG&A expenses to sales are 37.8% a 240 basis point improvement over prior year.

We continue to be very pleased with the positive earnings drop through gains from our new sales.

Excluding acquisition and integration costs, each incremental sales dollar in the second quarter cost only 22 cents of incremental SG&A spending, our lowest cost per new sales dollar since we became a public company.

This translates into, with our current gross profits, some 54 cents in new operating profit for each incremental dollar of sales above our prior year and well over or 50-cent target.

Our building delivers significant positive drop through operating earnings from every new sales dollar has long been a driving force.

We continue to successfully operate another key strategy, our working dollars model, defined for us as driving down cost to goods sold, G&A expenses, and cost of working capital while simultaneously investing in higher ROI sales expansion and prolific premium products pipeline.

This particular model is entering its fifth year of successful use.

Consistent with that working dollars philosophy we are executing our plan to invest in R&D at the top of our class, with our target at approximately 6% to sales and this quarter at 6.1.

Perhaps a better measure of this quarter, our R&D investment at $24 million, increased by $3.8 million or 18% in absolute terms versus the third quarter 2002.

On this base, we are very close to annualizing at $100 million per year in R&D investment.

Our year to date R&D ratio is 5.7% with R&D spending up 16%, just slightly higher than local currency year to date sales growth.

We are pleased to report that operating profit grew in the quarter by 31% over the prior year, accelerating an increase of 320 basis points versus the 290 basis point increase reported in the prior quarter.

These results continue to reinforce our strong belief in the capability of Zimmer to repeatedly deliver accelerated earnings in a positive sales environment without sacrificing any key sales, marketing, or R&D investments.

These results, again, contribute to the over achievement of one of our original internal milestones, the 30% operating profit margin.

This quarter we matched our Zimmer record of 33% operating margin to sales excluding acquisition and integration costs and year to date operating margins are at 32%.

EBITDA for the third quarter was 38%.

Net earning in the period were strong and increased by 31% based on solid operating profit and a declining interest expense down to only $700,000 for the quarter.

Net earnings not only reached $85 million for the quarter, but as important, driven by a 200 basis point improvement over prior year, easily surpassed another original internal milestone of a 20% ratio to sales.

During the quarter we matched our record of 22% net earnings ratio to sales, a gain excluding acquisition and integration expenses.

As noted in our press release, all three key profit ratios, EBITDA, operating, and net, delivered a match to our, or greater than, our all-time Zimmer records.

As previously mentioned, diluted EPS in the quarter increased 30% to 43 cents with $199.6 million average diluted shares outstanding.

We are particularly pleased with these results because they once again reflect strong performance on not one or two lines but rather on every single line of the P&L and in the midst of a major acquisition.

Year to date EPS was $1.28, an increase of 35%.

At this point I'll provide some very brief introductory cash flow and balance sheet highlights.

Free cash flow for the quarter and year to date was at the favorable end of our expectations registering $57 million and $219 million, respectively.

Cash flow for Zimmer tends to be a little lighter in the third quarter, primarily due to the timing of our federal tax payment.

Operating cash flow in the quarter was just slightly under $100 million and $326 million year to date.

In the quarter, inventory has been increased by $11 million to $294 million due to the building of multiple new product pipelines including eight new product releases for the fourth quarter alone and our seasonal preparation for our largest quarter.

At 273 days, inventory is currently operating for this quarter at the high end of our forecasted range of 250-270 days.

Consistent with prior quarters, our fill rate accuracy is more than 98% and our global forecast accuracy is more than 90%.

Asset management focus, dedicated infrastructure, and attention to specific working cap matrix continue to drive effective performance.

Our industry leading receivables collection continues to provide support for superior cash flow production.

In the third quarter we continued our U.S. receivables at close to record levels with 32 days for a $1 billion hospital business with terms of net 30.

We should also recognize the contributions of Zimmer's international businesses that help deliver a third quarter receivables number of 58 days globally.

For us, though, it's the exciting news on the P&L was our ongoing record profit margins and 43 cents in EPS.

The exciting news on the balance sheet continues to be about net debt, although with the October 2 Centerpulse acquisition closing, not for long.

We are pleased to report that we are in a net positive cash position of almost $100 million, produced by the combination of $177 million of cash on the balance sheet, offset by $80 million of very inexpensive GAAP and EZN debt.

In less than two years as a public company, we fully paid down our original net debt, the reduction of almost half a billion dollars, and delivered in addition another $100 million in positive net debt.

This is a testimony to the cash flow production potential of not only Zimmer, but ultimately the new Zimmer and Centerpulse combined.

Let's review the quarter sales in a little more detail.

Reconstructive sales for Zimmer is the revenue recognition of hips, knees, shoulders, and elbows implanted into patients during the reporting period.

For the third quarter worldwide reconstructive sales increased to $313 million, representing strongly reported increases with 21% over prior year and accelerated constant currency growth of 19% versus the 17% growth recorded last quarter.

The 19% constant currency increased over prior year in the quarter is a particularly important accomplishment since the second quarter of 2002 versus 2001 comparison with an equally difficult 19%.

A 19% over 19% is the toughest local currency reconstructive comp performance by far in the industry and will prove to easily be the top constant currency reconstructive growth in the quarter versus our major competitors, with a solid achievement in light of Zimmer's reconstructive sales base of well over $1 billion.

Year to date reconstructive sales were $949 million, an increase of 23% reported and 19% constant currency.

Many analysts believe that on a reported basis the worldwide reconstructive market grew approximately 15% for 2002.

Based on the public reports of our major competitors, we can assume local currency worldwide reconstructive market growth in the third quarter 2003 was the same as it was in the second quarter at approximately 14%.

Based on this fact, Zimmer has at 19% local currency, expanded its rate of growth faster than the global market of gain by more than 35% this quarter.

Let's take a look at each global product and geographic segment more closely.

First, products.

In the knee category on a worldwide basis on the quarter, knee sales increased 23% to $175 million versus prior year and an excellent 20% constant currency.

These results compare to a 20% constant currency growth achieved in second quarter 2002 versus 2001.

In other words, 20 over 20 a gain as a local currency knee comp.

In dollars on a reported basis, this represents Zimmer knee gains of more than $2.5 million per week versus the prior year quarter.

Or stated differently, there are more than 100 new Zimmer knees implanted each and every day of this current quarter than that same quarter last year.

Our global knees strategies are obviously paying off with consistent and significant market share gains.

Not in a few countries, but in 14 different countries and regions.

In the third quarter, the Zimmer businesses in the domestic United States, Canada, Germany, Poland, Denmark, the United Kingdom, the Philippines, Malaysia, Thailand, Australia, China, the Middle East, Africa, and the Mediterranean all remarkably delivered not reported but local currency knee sales growth in excess of 20% to prior year.

Of course virtually all of our countries and regions delivered reported growth of 20%.

The successful introduction of Prolong, the specially designed Crosslinked Polyethylene for NexGen Cruciate Retaining Knee articulating services is simply contained to deliver great results.

In one year on the market, Prolong in the quarter represented 13% of total knee articulating surface sales and nearly 40% of all cruciate retaining articulating surfaces.

The market update for Crosslinking and Zimmer NexGen CR knees is only slightly below what early stage longevity Crosslinked Poly Liners were for knees, or for hips.

Excuse me.

In addition to early Prolong success, we have recently Trabecular Metal Monoblock Tibial Trays.

The annual trend on this single product has doubled in only three quarters to $20 million per year with demand at this point at stripping supply.

Our early success with Trabecular Metal Tibial Trays reflects a changing market, less likely to tolerate osteolysis and last quarter's down classification of coarse knees will only enhance broader acceptance.

At Zimmer MIS Uni knees have grown on a worldwide basis another 15%, an acceleration from last quarter's 14% as a result of beginning to lap prior year consecutive 50-100% growth comps.

The Zimmer MG Uni with both EM and IM minimally invasive instrumentation, finished the quarter with sales continuing to project to more than $40 million annually in 2003 and clearly remains the most popular single brand in the world.

Our NexGen LPS Flex Knee, a Zimmer lifestyle designed product, continues quarter after quarter to gain share in dramatic fashion.

On a worldwide basis this quarter, LPS Flex femorals grew by another 46% versus prior year.

And even grew sequentially from the second quarter.

I'll update you on the progress of assisted products, the CR Flex during our project development section.

On a different version of our Flex knee and thanks to continued competitive sub segment marketing on surface, hard, and knee femorals, we also enjoyed a 38% increase in our NexGen

flex knee sales during the quarter.

We are now expecting to approach a potential $20 million in annual

flex sales for the most part without the domestic U.S. market.

is a five-year-old Zimmer patented process that permanently hardens the surface of a cobalt chrome femoral caused by controlled exposure to nitrogen.

While Asia has been successful proponent of this product, we will of course take a fresh look at the large domestic U.S. market.

Knee revision continues its upward trend with the NexGen LTC gate system, delivering a 25% increase over prior year and accelerating from the prior quarter's 21% growth.

Our RHK rotating hinge has quickly become a $10 million product line in the very early stages of its product life cycle.

There is exciting progress in the Zimmer minimally invasive knee front and I'll update those activities later under hot topics.

Let's take a closer look hips.

On a worldwide basis in third quarter, hip sales increased 19% to $129 million and grew 17% in constant currency, accelerating from the prior quarter's 15% growth.

On a year to date basis, hips grew 21% to $388 million and 17% constant currency.

Zimmer

stems continue to make meaningful market share gains and to accelerate their more than two year long growth run with an increase of 33%, again this quarter,

Our Zimmer versus Fibro Metal Taper stem, longest standard in our line up, grew more than 60% in dollars in the quarter.

This product has become the stem of choice for Zimmer MIS 2 incision hip procedures.

We'll take a look at its historical three-year unit growth later and the impacts of MIS procedures on this classic stem.

Our new Apollo Beaded Porous stems are really taking share from the beaded stem primary and revision market leader.

With growth in the quarter up 111% led by the six-inch beaded full coat at a remarkable 190% growth.

The Apollo project of beaded stems will deliver more than $25 million in new annualized run rate sales versus last quarter's projection of $20 million.

Porous revision stems along with revision cups and liners continue to be an area of focus for Zimmer.

And our sales supported that with an increase of 27%.

These results include our ZMR product line, which on a stand-alone basis remain solid for the above prior year.

With the new

support design enhancements for ZMR now released, we can anticipate an improvement in sales for Zimmer's entire revision hip line but particularly over time for the ZMR in Europe.

Zimmer's primary acetabular shows grew another 21% in the third quarter.

Trabecular Metal Monoblock cups alone has quickly become a new $10 million plus product line.

Despite extremely tough comps, significant penetration, and the U.S. competitive introductions of ceramic and ceramic alternate bearings, premium price, longevity highly crossed and polyethylene shell liners increased by 36%, sequentially up 2% in absolute dollars for the second quarter and accelerating a gain in growth rate from the 33% recorded in the prior quarter year over year comparison.

Our longevity product line is annualizing for the first time at more than $50 million per year.

We believe competitive surgeon acceptance is growing specifically since we have long since converted our own Zimmer surgeons to longevity and the liner market clearly is not growing and units are mixed anymore than 15% or less than half our growth rate.

Our national marketing campaign entitled Limit Wear, Not Options has favorably reviews longevity highly crossing poly capabilities versus ceramic and ceramic limitations continues to have a great reception with many surgeons.

The proof, of course, is always in the pudding.

All Zimmer liners in the quarter, regular poly, highly crosslinked, and revision were up 32% to prior year, accelerating from the 28% growth we saw last quarter.

In operating ceramic joints, Zimmer's Bigliana/Flatow Shoulder continue to take market share worldwide with 15% growth from third quarter and 23% year to date.

Still well above market but reflective of the new competitive shoulders released and in trial over the last several months.

Based upon our year to date results, our annual sales projections for shoulders and elbows continues toward $50 million.

On a worldwide basis, trauma sales for us have continued along the same trend line with third quarter sales up 8% and year to date 8% in markets that we believe are growing 10% plus.

Our review of the market, schedule new products, early surgeon response to the ITST retrograde femoral mail and potential account conversions does not seem to indicate any significant long-term negative underlying issues provided that the ITST can help recover some loss mail share in both the U.S. and Japan.

And our new locking plates compete effectively.

With Centerpulse, Zimmer will strategically acquire a titanium nail line to compete more effectively.

Several sub segments within our trauma product line are delivering excellent results.

Our Zimmer Periarticular Plates continue to their strong penetration against

the trauma market leader with 23% growth in the third quarter.

however, as mentioned, continues to perform very well with the enhanced locking plates.

In our orthopaedic surgical, Orthopath, our perioperative autotransfusion system, designed specifically for orthopaedics, increased again by more than 50% in the quarter and continues to generate sales of more than $20 million annually.

Let's look to product development update.

As you know we currently have more than 30 active major projects in our robust pipeline with many of those scheduled for release during 2003.

Included in the 30 plus projects we have 12 new projects added to full development, another half dozen or so still under phase one review.

Our goal is to provide you with project name, scope, and whether the release continues on schedule.

In knees development commercialization, our patented rotating hinge knee, the RHK, was released and is already projected to be a $10 million product line for 2004.

Specter metal NexGen LPS tibial components, 32 new implants were released and are projected to be a $20 million product line.

We have of course in recent times initiated three new knee projects as follows.

Both a CR Flex fit and mobile continue on plan.

The commercial rollover to CR Flex product line was initiated in all regions in the quarter.

CR Flex is Zimmer's high fluxion entrant into the CR market and joins LPS Flex as we strengthen our product offering in the high flexion part of the market.

In addition to being MIS friendly, the CR Flex system of 141 implants includes unique, patent pending, minor sized femoral components, which assist the surgeon with ligament balancing and the achieving of high knee flexion without additional bone cuts.

Year to date, minus sized femoral components have been used in 46% of CR Flex surgeries, pointing the strong clinical benefit provided by minus sizes.

With its global appeal and MIS friendly features, the CR Flex is well positioned as a major new entrant in the CR market.

The opportunity is a huge one.

Globally the knee market is still almost 50% cruciate retaining.

And as a precedent, we already have annualized sales of more than 22,000 for series stabilized flex units.

A new patella-femoral project with some 15 implants and 50 instruments and potentially unique clinical solutions, continues to make progress.

Our new fixed and mobile bearing units incorporating both trabecs and metal and Prolong Crosslinked Poly, completed two full cadaver sessions and the more than 200 new implants and 300 new instruments remain on schedule for phase really through 2004 and five.

MIS PPA systems, minimally invasive knees, are MIS mini and QS quads bearing knee updates will be covered under hot topics.

Now let's move to hip development and commercialization.

The Apollo stem project, 358 new porous hip stems due for phase and release though 2003.

The new Apollo stems have been released, have already jumped in sales to $25 million product line as previously mentioned.

The remaining 114 stems, including extended offsets, as well as the eight inch and 10 inch straightened bowed stems are scheduled for limited release in the fourth quarter of 2003 with the majority of the new product sales impact in 2004.

This will complete the Apollo beaded porous stem project.

Trabecular Metal Modular Cup, this project has been increased in size by 13 implants to 61 implants from the original 48.

The project released had been delayed during our first quarter conference call to the third quarter of 2003.

I'm pleased to report that we have now billed our inventory of more than 51 different implants and 422 new instruments.

With our full release holding in September, our third quarter billings were already nearly $1 million.

Our new mayo conservative hip stems, with and without HATCP coating and more many years a Zimmer staple, growing the low double digits was released with new MAS instrumentation in August and delivered a unit growth in the quarter of almost 50%.

Our original Zimmer resurfacing projects have been put on hold due to the Centerpulse acquisition and the ability to market their exciting

brand globally.

As VMR large junctions composed a 58 implants were launched with both the taper and porous components ahead of schedule late last quarter.

ZMR should recover lost sales due to this significant technical change.

We have accelerated the release of the 72 new implants of the MLT Taper, or lock taper system project, for December 2003.

And we expect these products to potentially generate significant movements in market share relative to this philosophy.

And in trauma development and commercialization, Periarticular Two, our concrete plating system with 289 new implants for phase and launch has just completed final release.

And is already quickly contributed in part to our 40% plus growth in peri plates year to date.

Fracture blade plates were released last quarter and a new foot and ankle set is ready for November.

Importantly, new Zimmer peri locking style plates are being prepared as a key 2004 trauma new product, with releases phase from January through June.

We believe the innovative concepts contained in these products will potentially provide some interesting 2004 challenges for the trauma market leader.

A major license agreement has been signed for a new external risk fixation system called Restore that we're expecting for 2004.

During the second quarter we purchased 100% ownership of

product line with sales quickly returning to almost $1 million in the quarter.

And we have additionally signed a long-term agreement for Permacol, which has demonstrated significant improvement as a non-reversible patch for rotator cup tears.

Permacol has five 10-K clearance.

In extremities, our new and unique trabecular metal

for the Bilangi/Flatow Shoulder was shipped for limited release in Europe and Asia.

We have initiated 12 new internal R&D projects, some of which we've already provided initial comments on.

Although for the most part, it is too early to provide real project status reports, I would remind of their content.

The projects themselves represent a very specific insight into Zimmer's organic growth strategies.

Trabecular metal stem, dedicated MIS stems, and Zimmer's seg metal oncology systems, new MIS unis, unique design concepts with three consecutive advance levels of our MIS total knee, a new technology shoulder with trabecular metal, MIS spine, MIS transformational hip fracture solutions, and a myriad of co-development investment opportunities and biologic to miss guidance and the operating room of the future.

In short, they represent innovative premium price products and procedures, rich in Zimmer intellectual properties, and designed for profitable market share gain and landscape change in orthopaedics.

When we add a strong reconstructive trauma, spine, and dental pipeline from Centerpulse and look at the cumulative effect, it's difficult not to be enthusiastic about the future.

In total on a rolling 36-month basis, new products represented 17% of our sales in the third quarter, consistent with our long-term strategic goal since 1999 to have internal new products between 15 and 20% on an annual basis.

We have never missed this goal in more than 20 straight quarters since its inception.

Let's look briefly at the geographic segments.

First in the Americas, our congratulations to Zimmer Americas for yet another stellar quarter, revenue for the third quarter was $276 million, up 20% over prior year.

Sequentially up in absolute dollars versus the second quarter and that 20% growth is measured against the difficult comp of 17% for the second quarter 2002 versus second quarter 2001.

We continue to be very pleased with our progress in the Americas.

Fifteen percent of growth in the Americas was driven by increases in unit volume and mix, 12% was derived from price increases.

Our Americas reconstructive growth in the quarter was 24%.

This would imply that the Americas during the quarter Zimmer had mid teens level gain and pure surgical procedure unit volumes for hips, knees, shoulders, and elbows.

Included in our 24% Americas reconstructive growth, knees delivered exceptional results again with a 25% increase to prior year.

Most importantly, though, this 25% knee growth should be judged against the incredibly tough comp of a 22% knee growth in second quarter 2002 versus second quarter 2001, a 22% growth over a 26% growth.

Next in the LPS Flex, MIS unis, Trabecular Metal Tibial components, NexGen LTC cave revision knees, all made substantial contributions to the Americas knees performance.

Since there's only modest mix, such as Prolong, associated with knees, this would indicate once more that surgical procedure unit growth in the quarter for Zimmer knees in the Americas of over 20%.

Hips to the Americas increase 23% with Zimmer porous stems at 60% of mix, surpassing for the last trailing five quarters cemented stems in unit sales.

A 23% growth in hips should make us particularly interesting competitor but at some point in the future we hope to have all the well-known alternate bearings in our line up.

In total we've been growing the Americas reconstructive products at an average of 20% or more each quarter for three years.

Based upon our results in the already released public reports of our three major competitors,

, J&J

, and Stryker, we believe that market growth can domestically construct the price to the quarter has not declined but rather accelerated slightly to 16%.

Of course we also believe that at 24% reconstructive growth Zimmer's continued to outpace the rate of market growth the Americas by a whopping 50%.

Trauma product sales improved as with last quarter by only 5%.

Impacted positively by our new periarticular plate offerings and very early ITST activity but significantly offset by solid competitive IM nail releases and locking plates from the trauma market leader.

Although a much smaller segment, we have work to do here in both IM nail penetration and new products, several of which we anticipate for first half 2004 releases.

In patient care, OrthoPAT available only in the Americas continues its rapid acceptance and became a $20 million annual product line, as described in my earlier remarks.

Our relative success in the Americas is truly broad based.

In the quarter every U.S. distributorship grew significantly but 18 of our 26 U.S. distributors grew their knee business by more than 25% and 11 of 26 grew their knees, amazingly, by more than 30%.

In hips, 17 of 26 were over 20% and 10 of 26 over 30%, a great job.

Importantly the Americas operating profit margin the quarter increased by 380 basis points to 51.7% from 47.9% in the prior year.

Fifty percent earnings ratios are the real pay off for the real market share gains.

In Asia Pacific, revenue for the third quarter was $72 million and they gained a reported increase of 5% but the same 2% constant currency growth from the previous quarter.

On a year to date basis, we achieved $218 million in sales, 12% reported and 4% constant currency.

Asia Pacific had flat price in the third quarter, as we anticipated.

Struggling healthcare budget deficits in South Korea and Taiwan have moderated the small popular growth in previous quarters with 10-11, 10-12% government-funding declines in two of our number one markets.

While price was flat as expected, the SARS epidemic residual effects as indicated in our press release, have improved noticeably in September.

We do not, however, expect to see our coverage to normal until the fourth quarter due to conservative and sensible operating room precautions in the key affected markets.

Our strong number one market share positions in Taiwan, Singapore, and Hong Kong and to a lesser degree in China, create a little more pronounced impact on Zimmer than perhaps on other competitors.

The addition of these sales would have returned Asia Pacific to our expectations of mid to high single digits growth and a market growing at mid single digits in local currencies.

During the second quarter our Asia Pacific business was led by reconstructive growth of 6% with knees very strong at plus 12%, reflecting above market growth in LPS Flex knees, particularly with our

hardened femorals, Trabecular Metal Tibial components and the NexGen CR knee.

We expect a new CR Flex will be particularly successful in the Asia Pacific region.

Hips were flat in constant currency as with last quarter, primarily due to mix changes between hips and trauma and pricing in Japan, Korea, and Taiwan.

We believe the Asia hips local currency market is currently low single digit based upon these factors.

Australia, once again, delivered a minimum of double digit constant currency growth for all Zimmer product segments combined in the third quarter.

Explaining excellent earnings in

and sales, Asia Pacific operating margin remained solid at 42%, down slightly from prior year due to previously mentioned pricing affects in Japan, Korea, and Taiwan.

Europe had another very strong quarter highlighted by market share gains across the board.

In the quarter, revenue of $51 million represented a 30% increase over prior year and an outstanding 19% constant currency growth.

We believe almost twice the Serb market growth was obtained by most European businesses for all priors combined and 10 of 16 European businesses delivered reconstructive growth in excess of 20% constant currency.

On the product front, as you can anticipate, reconstructive implants on a reported basis grew by a solid, market leading 27%, led by hip growth of 32% and knee of 25%.

Even with respectable comparative reconstructive numbers for Europe in the third quarter, it is clear we are growing more than double the market rate with our without currency.

These gains reflect the continuing acceptance of longevity, highly crosslinked polyethylene, the introduction of our European hip and cup designs, augmenting the ongoing market share gains for the NexGen knee brand, and trauma this quarter up 43% in local currency.

Europe's performance has proved to be consistent over time.

If we look at Zimmer Europe for the last several quarters in local currency, every quarter is close to 20% growth and the average is 23.

If we eliminate price and look only at volume mix, the average increase in the same quarter as in the gain is almost 20%.

This is an exciting ongoing sales story with tremendous future potential to be added by the Centerpulse combination.

For the quarter, we delivered improved European operating profits that increased by 68% to $13.4 million in the quarter and a third quarter record operating profit to sales ratio of 27%.

I'll try to cover the following hot topics briefly.

Mix and update on the role of mix change as reflected in Zimmer's global results.

Zimmer's sales associate has an update on our actual additions for the 2003 third quarter, year to date, and the remaining plans for the year, pricing, our latest interpretations, Zimmer minimally invasive efforts, a detailed update on our activities and developments, and lastly a new addition, Centerpulse integration a quarterly update on the integration goals, process, highlights, and outcomes versus our expectations.

First on mix, mix continues to play a key role in improved sales and profitability.

For 2003 I would remind you that we've expanded our discussion with you by adding Trabecular Metal penetration as a new category and also by combining knees and hips together in both revision and crosslinked poly conversion analysis.

First standard poly conversion to longevity to highly crosslinked, in liners we've moved from 85% at the end of 2002 to 90% in the third quarter and therefore 10% standard.

In Prolong articulating surfaces, no prior history of course.

I just mentioned 13% crosslink, 87% standard.

In summary, a cumulative shift of five points to crosslink and hips for the second quarter versus year end 2002.

Given our ongoing penetration of market share gains in hips, cups, and liners, it's evident that we continue to have the potential for dollar and mix growth through competitive surgeon conversion to longevity.

Since Prolong for the knee is only available in cruciate retaining and Zimmer has a stronger share in posterior stabilized, we have tremendous potential mix shift dollars still in front of us.

As a reminder, Prolong represents 40% of cruciate retaining articular surface sales but as indicated only 13% of total articulating surfaces.

Prolong for PS procedures will be available for limited release in late 2003 but with a major new product impact in 2004.

On cemented hip stem, conversion to porous stems, 405 to mended at the end of the quarter, 60% porous, 57% at the end of 2002.

A cumulative shift of three points to porous units for a third quarter 2003 versus the end of 2002 for Zimmer and we believe the market in general is now at approximately 66% or two-thirds porous.

This still leaves us with room to grow.

With more than 100 remaining Apollo porous stems still to be released, the distribution pipeline complete for our EPOCH composite stem, the potential growth in Trabecular Metal, metal stem applications, and the exclusive use of porous stems in minimally invasive mini and two incision hip surgeries.

We still have many more opportunities for cemented porous conversions.

With a better than 30% growth in porous stems in three consecutive quarters, we moved only three points in porous cemented mix and remain six to seven points below the market's relative porous to cemented mix in total.

Revision as a percent of Zimmer total, 2003 third quarter 11% end of 2002 9% in hips and in knee femorals no prior history, 9%, revision 91% primary.

In summary, we've overachieved our double-digit revision preliminary goal of 10% for combined hips and knees in the third quarter.

The hip revision progress from 3% of sales in 1999 to 11% in third quarter 2003 has been excellent given the size of Zimmer's base and total in sales.

We continue to have tremendous new potential in only 9% of sales and both a new rotating hinged knee and international expansion our LTCK knee system well underway.

The modest change from second quarter is not due to less than expected revision growth, but rather the Americas 24% strong overall growth in primary hips and knees in the market with our most significant revision strength.

metal as a percent of recon sales end of 2002, 1.6%, end of third quarter 2003, 3.3%.

Summary Trabecular Metal is more than doubled in the third quarter 2003 from 2002 as a percent of Zimmer's reconstructive sales.

But this does not include the fact that the main currently really is outstripping production.

We clearly believe with good reason that this is the next great porous platform.

These results do not, as yet, include seven new Trabecular Metal related projects and we'll target more than $50 million in annual Trabecular Metal sales.

Our potential to grow this product line with premium and expanded utilization and not only traditional recon but also spine, dental, and trauma will provide significant mix expansion capability for several years to come.

On sales associated ads, in 2003 we would expect to hire an additional 80-90 sales representatives for a total of roughly 100 additions, including unfilled openings at the end of 2002.

In the second quarter we added 10 international and 21 Americas for a quarter total of 31 and a year to date total of8 80.

During our third quarter we added 23 sales associates and nine product specialists for a total of 112 for the year minus three additions that replace sales managers previously covering accounts for net total additions in 2003 of 109.

This puts us in great shape with respect to both the Centerpulse integration and heading into 2004.

Pricing, Zimmer's position on pricing is unchanged since we spun the business out in August of 2001.

Our own theory has been that price in 2003-2005 period will stabilize a positive 2-3% with most major geographies in positive price territories and the U.S. leading the way at 3% or so.

With a few exceptions such as Korea and to a lesser degree Taiwan, we see absolutely no sign our price will not remain meaningfully positive.

Internally, our business is built and budgeted around little price with the exception of known and previously contracted major hospital agreements.

One point worth noting in the U.S. for 2004, the DRG groupings, primarily DRG 209, have been characterized as being negative to prior year in contrast to an anticipated slight increase.

This conclusion has been well publicized in articles and updates on the industry but in practice is a little bit misleading.

Large, urban teaching hospitals, generally with disproportionate share payments, will actually receive higher payment in 2004 than 2003.

These are the institutions that have been under the most profit and performance pressure.

This pressure has been partially relieved with the increase.

These same large, urban, academic institutions are all receiving an ever-increasing proportion of revisions.

Therefore the increase will accommodate more fiscal balance on a procedure that more often than not loses money.

Conversely, community based hospitals that are non-teaching, are not in the service area of greater than one million will receive a reduction in payment, primarily due to reduction in the geographic wage index indicator.

While these are still the institutions that represent many of the DRG 209 cases on an annual basis, they in general tend to have less financial pressure and therefore are more potentially favorable price elasticity.

Again, price for Zimmer during the third quarter was 2.9% and just within the 2-3% we anticipated the fell in rate for 2004.

Minimally invasive surgery activities, we're very pleased with the progress in what is now nearly a five-year-old program in MIS.

During this section of the call we'll update you on several different aspects of our MIS program.

First, the Zimmer institute continues to run full out with five MIS two incision hip courses in September for a total of 37 surgeons, four nurses, and 34 sales associates trained.

Year to date we have trained 245 surgeons, 61 nurses, and 215 sales associates.

Of the 245 surgeons trained this year on two incision MIS, 60 were from Europe and 19 from Asia.

In addition to the MIS two incision procedure, we delivered many hip and knee training for an additional 19 surgeons in the quarter and 129 year to date.

Total surgeons trained on MIS in 2003 year to date has reached 375 surgeons.

Our plan for 2004 is to train 1,100 surgeons, 700 at the institute in Warsaw, and 400 at satellite partners, more about partners in a minute.

We were pleased during the quarter to have Dr.

, Director of Continuous Medical Education, better know as the CME, audit our class number 31 of the MIS two incision.

Dr.

provided two great improvement suggestions, but also gave our courses very high marks and granted approval for CME accreditation.

We would expect that certificates of attendance for all prior and current attendees before year end.

As a follow up new addition, we have produced a new two incision training video with facilitator commentary and more than 1,000 copies ready for distribution in the near term.

Since conception, we have trained 287 surgeons on the two incision and 178 are now listed on our Zimmer national physician locator system.

Of the 281 surgeons trained on the mini hip, 261 are now listed on that same physician locator system.

We are pleased with the quality and sold out status of the institute.

But it's only a part of the process.

Zimmer provides both surgeon-to-surgeon visits to view various MIS procedures as well as preceptorships and proctoring, such as when an experienced hand is scrubbed in and available for guidance during the initial procedures.

During September, we supported 43 surgeon-to-surgeon visits around the world and more than 300 surgeon to surgeon visits year to date.

Our problem is not interest in Zimmer MS procedures; it's in the sheer demand.

As of September 30, we have 354 official requests for surgeon-to-surgeon visits an product procedure reviews of which we believe almost 40% have been originated by surgeons and in some cases institutions that we would classify as competitive or partially competitive.

So validation of MIS hip impact remains brisk.

Our versus fiber metal paper products clearly remain the stem of choice for Zimmer MIS hip procedures.

During 1999, 2000, and 2001, we consistently sold 5,000-7,000 units per year and prior history showed stable growth a 4-5% per annum.

In the September year to date period for 2002, last year, we sold a little over 13,000 units.

And this year September year to date our sales are 22,000 units.

This isn't just mix or price or foreign exchange but rather triple the number of raw surgical units from just under two years ago.

MIS sales and share conversion presenter is real and should continue.

Make no mistake, after five years and more than $30 million invested, we are continuously seeing gains and economic benefit.

Much of this will be public in 2004, but as competitor market small incision is the goal, we continue to not only market but deliver improved patient quality of life and MIS leadership break throughs.

We hear occasional stories about the increased complications with the M, with the Zimmer two incision but it just isn't so.

Here's the AOA results on more than 300 patients follow up with the Zimmer two incision, fractures, 1.3%, dislocations, .7%, and revisions, .3%, all at the low of comparable normal range.

Here's a sample of six different Zimmer MIS breakthroughs accomplished in the third quarter alone.

Firstly, a major Oregon provider has joined Illinois in the full reimbursement approval of the Zimmer two incision only.

Secondly, our MIS hip fracture system, called T2 for transformational technology, you may recall received a great deal of attention during our spin off road shows.

The Zimmer T2 MIS hip fracture system has been approved for its first human surgery in Australia during the first quarter of 2004.

There are more than 500,000 hip fractures worldwide per year so a far more serious co-morbidity and near-term mortality rates than anything you see in hip replacement.

Under patent, we'll talk more about T2 intellectual property news.

Thirdly, Zimmer has just purchased 100% ownership of an exclusive technology license agreement for a technique that when combined with our own efforts should lead to painless total knee surgery.

Painless in this case meaning the day one, in fact minute one, post surgery elimination of measurable pain and specifically the replacement of narcotic pain relievers with over the counter products as part of our mini and QS quad spreading knees.

Partly, and speaking as many in quad sparing knees, we will be submitting our four year data for publication on the Zimmer mini knee before year end.

We doubt anyone else has much more than one year.

And during the last quarter we issued not 100 but 1,000 Zimmer knee, mini knee instrument sets for a global market.

That's more than 1,000 sets of low profile femoral finishing blocks for use in Zimmer mini incision and quad sparing MIS PPA procedures that would deploy globally in the quarter.

These low profile finishing blocks are being rolled out at the rate of 300 sets per month in support of the rapid adoption of MIS TKA surgical techniques.

The roll out of the Flex version of this finishing block will begin during the fourth quarter.

Two MIS PPA quad sparing surgeon-training programs were successfully completed in the quarter.

Three additional surgeon-training programs are scheduled in the fourth quarter.

A new 200 patient multi center IRB study has been initiated, but with data collection focused on immediate post-op pain and quality of life activities.

The general launch of Zimmer quad sparing instruments is scheduled for the double A less in March of 2004.

Perhaps more important with ongoing technique refinement, two our Zimmer quad sparing surgeons have successfully sent more than 20 patients home with new knees in less than 24 hours.

It sounds familiar.

Fifth, we are pleased to inform you that negotiations are substantially complete with two major North American institutions to become MIS institute teaching partners.

First in Canada with the Vancouver General Group and the University of British Columbia, one of the top orthopaedic institutions in the world, the

Institute in Vancouver will be under the direction of Dr.

, Chief of Orthopedics and the President of the Canadian Orthopedic Association.

In the U.S., a name you'll really recognize.

Consistently ranked within the top three to four orthopedic institutions in the world and for 10 straight years ranked as the number one hospital in the country, Johns Hopkins.

Johns Hopkins University, founded in 1876 and the School of Medicine in 1893 has been sited many times with quality, international leadership, and innovation through research based education.

The institute and center of excellence will be under the leadership of Dr.

, Chief of Orthopedics.

Zimmer has not significant prior relationships with either institution.

Both announcements will be the subject of press releases to follow.

And lastly on MIS patents.

We're really excited about this breakthrough in the quarter.

We have filed over the last four years or so a total of 18 U.S. patent applications for MIS technology, composed of six on the MIS hip, with 139 pending claims, six on the MIS knee with 315 pending claims, and six on our T2 MIS hip fracture technology with 206 pending claims filed.

We are pleased to announce patent issue on both the T2 hip fracture contoured polymer filled implant and also on polymer filled fracture devise, which includes 22 issued claims.

Congratulations to our folks as we head into our first human clinicals as previously mentioned.

But here's even bigger news.

We have been advised by the U.S.

Patent Office that the have allowed our patent application for, and I quote, the MIS two incision method and apparatus for performing total hip arthroplasty including all 17 related claims.

As tough as U.S. methods patents for medical procedures are to come by, we've done it.

And we expect the patent issue late this year or early in 2004.

Zimmer will, of course, exercise our rights to fully protect several years of research and financial investments in Zimmer's MIS two incision hip procedure.

At this point I'd like to turn your attention from my comments in the quarter to the status of our integration process with Centerpulse.

We have initiated our integration process and completed the work on all key issues and objectives identification including our integration principle.

We have publicly announced our new executive team with the corresponding operating committee and completed - and are completed new Europe and Asia structures are due for internal and external announcements over the next two weeks.

We have evaluated and hired all external consultants including the Boston Consulting Group as project lead and manufacturing ops and

for compensation and benefits.

With respect to the latter, all severance and retention program will be reviewed and completed next week.

The integration steering committee, the integration management office, and 11 functional teams have concluded leadership selection, chartering goals development, and most of their team selection.

More than 30 full time roles for six to 24 months and some 75 part time roles for up to three years for a total of more than 100 people will be required to successfully integrate the Centerpulse business.

We have completed the first 24-week action plan master calendar including strategies for amongst other things, conformity of financial controls, manufacturing procurement optimization, a weekly internal and external communications plan, and more than 500 other required activities.

Our reception from the Centerpulse employees and the overall attitude despite the grueling two years that they've been through has been nothing short of exceptional.

I'm particularly pleased to announce that we have already completed with Centerpulse our co-design of the new U.S. distribution group.

And formed all those involved and substantially conclude discussions favorably for more than 75% of their entire distribution system, all in less than two or three weeks.

By January 1, 2004, we will be fully operational as a combined sales force in the U.S. with almost 1,000 sales people.

We expect to be a single, new powerful Zimmer.

Sam, let turn the call over to you.

Thanks, Ray.

I'm also very pleased to be able to report another terrific quarter for Zimmer.

In addition to adding a bit more detail to Ray's comments, I will address our guidance for the fourth quarter of 2003 and full year of 2004.

I'll also touch directionally on earnings per share growth of both 2005 and 2006.

In the area of foreign exchange, a continued weakening of the U.S. dollar across most currencies compared to prior year contributed 2.3% or $8 million to our sales growth for the quarter.

By comparison, the effect on sales growth in the second quarter was 4.7% or $16 million.

The end strengthened by only 1% over the third quarter of last year compared to 8% last quarter and the euro strengthened by 14% over the third quarter of last year compared to 24% of the last quarter.

We had four hit contracts in place this year for the yen at an average for 2003 of 126 and for 2004 of 120 and for the euro at .95 U.S. for 2003 and 1.04 U.S. for 2004.

As a result of these contracts and 2003 weakening of the U.S. dollar, one of the modest, positive effect on our operating profited growth is 2004 over 2003.

We also have forward contracts in place with other less significant currencies for Zimmer for 2004 including the Australian dollar exchange rate of .647 U.S. and the Canadian dollar at a rate of 1.40 Canadian.

We used these simple hedging tools to manage risks from year to year and we took full advantage of locking in position as we began the operating plan process for 2004.

On the interest front we have been net debt free as Ray mentioned since the end of the second quarter and at the end of the third quarter we have $97 million of net cash in the balance sheet.

To fund the Centerpulse acquisition, we put in place a new $1.75 billion credit facility.

The interest rates for this facility are liable based with point spreads ranging from 87.5 basis points to 112 basis points based on our current ratings from S&P and Moody's.

We had estimated debt to draw down on this new facility at the expected close it was going to be a little over $1.4 billion.

As a result of stronger cash flows generated in Q3, the initial draw against the facility on October 2 was $1,357,000,000.

With the expected cash flow from the combined company, we are targeting to be debt free again in three years by the end of 2006.

As expected, Standard & Poor's did raise their corporate credit rating on Zimmer to triple B flat while at the same time Moody's reaffirmed their B double A three rating.

Zimmer's affected tax rate for the third quarter was in line with the first six months at 33.5%.

This compares to last year's third quarter tax rate of 31.5% and last year's full year tax rate of 33.7%.

At the end of third quarter of last year, you may recall, we lowered our full year affected tax rate expectations to 33.7% and as a result, the third quarter rate incorporated the year to date reduction required to achieve that forecast for the year.

The 28 basis point improvement from the full year rate in 2002 is the result of establishing a more tax efficient U.S. legal structure in the middle of 2002 combined with continued strong growth and production from Puerto Rico manufacturing facility.

Thirty-three point five percent should continue to be a good rate to use in your Q4 forecasting models for Zimmer as a stand-alone company.

But I'll discuss the expected consolidated tax rate from Zimmer and Centerpulse together as a part of the guidance section of this report.

Our overall P&L results for the third quarter continued to demonstrate our commitment to deliver sale and growth in excess of market growth and to leverage costs to goods sold and expenses to grow at slower rates than sales.

As a result in the third quarter we were able to deliver sales growth of 18%, 15.7% constant currency, gross profit growth of 19.4%, operative profit increases of 31% or 32.7% if we exclude the $1.7 million in acquisition and integration costs, and diluted earnings per share up 30%.

Excluding the affect of the change in the economy for instrumentation from an expense-based model in 2002 to an asset based model in 2003, EPS would have grown 27%.

With the strength of our traditional GAAP measures of margins, we believe that at 37.6%, our corresponding EBITDA margins are better than any of our direct competitors.

Turning to the balance sheet, we continue to deliver best in class performance in DSO, particularly in the United States.

Consolidated DSO for the third quarter was 58 days, which is three days over the same period last year, and one day higher than the second quarter of this year.

Principal contributors to the increase in DSO include a seasonal payment slowdown in our international markets, continued sales growth in Europe at a faster rate than the U.S.

The translation effect of the quarter end balance sheet at weaker U.S. dollar rates than the average rates used to translate third quarter sales.

And a slight increase in U.S. DSO.

Continuing to highlight our strong performance is our U.S. collections team, finishing the quarter at 32 days, sales outstanding.

Days inventory on hand were 273 days, five days higher than the end of the third quarter of last year, and up 16 days in the second quarter of this year.

The increase in days is a direct result of the traditional seasonal inventory build.

Eight new product launches plan to take place between September through January, as well as slower sales than anticipated in Japan.

Accounts payable days has increased to 65 days, up three days from the end of last quarter, and up four days from the third quarter of last year.

Operating cash flow for the quarter was $99 million.

Capital expenditures for the quarter were $42 million, consisting of $34 million from instruments, and $8 million for all other fixed asset additions.

Free cash flow, which is operating cash flow, less capital expenditures was $57 million for the quarter, as Ray indicated typically cash flow of the third quarter is not quite as strong as the other three quarters for the year, due principally to the timing of tax payments.

On the Centerpulse acquisition front today, we have capitalized $27.9 million of costs related to the Centerpulse acquisition.

Year to date we have also expensed acquisitions and integration costs totaling $3.2 million, $1.7 million of which was expensed in the third quarter.

The balance of the acquisition related transaction costs will be incurred, and recorded during the fourth quarter.

Moving onto guidance, in our press release last night, we provided updated fourth quarter 2003 and full year 2004 guidance for both sales and earnings per share.

We also commented directionally on our earnings per share growth rate for 2005, as well as 2006.

As a reminder, the comps do get increasingly more difficult throughout the balance of the year, and the favorable effect of foreign currency on year-to-year growth rates has been diminishing due to the weakening of the U.S. dollar throughout all of last year.

Our guidance for 2004 incorporates the expected effects of

growth

pricing, and due to the volatility of foreign currency, rate fluctuations dropped this year, have assumed that foreign currency movement will have zero effect on the full year 2004 growth rates.

Because we use forward hedge contracts to manage risks from foreign currency movement, swings will be made to variance in foreign currencies tend to have very little effect on our earnings expectations.

We have targeted and will continue to grow revenue at one to two percent above anticipated reported market growth rates in line with past expectations.

As we indicated last quarter, we expect Zimmer sales with Centerpulse to grow 15% in the fourth quarter, to approximately $425 million from $370 million reported in the fourth quarter of 2002.

Centerpulse had previously disclosed that local currency sales growth and certain of the major European markets were flat in the first six months of this year, and we expect this trend to continue for them in the last six months of 2003.

Therefore we expect Centerpulse and stand alone sales in U.S. dollars for the fourth quarter to increase in the range of eight to ten percent.

And that incorporates a less significant effect in foreign currency rate fluctuations in the fourth quarter than was experienced earlier in the year.

This implies Centerpulse sales for the fourth quarter of approximately $244 million, and that's up from the $224 million last year.

Fourth quarter sales on a consolidated basis before giving us back the potential sales dissynergies of approximately $10 million that may be experienced in the integration of Zimmer and Centerpulse are expected to be approximately $669 million.

And that represents an increase of 12 to 13% from $594 million pro forma reported in the fourth quarter for both companies together in 2002.

As mentioned earlier, we're continuing to drive Zimmer's sales growth to outpace our competitors by one to two percent.

As a result, we expect Zimmer sales growth in 2004 without Centerpulse to increase 12 to 13% to approximately $1.83 billion, including two to three percent of price increases.

Centerpulse stand alone sales for 2004 are expected to increase about nine percent, to approximately $1.01 billion, 2004 consolidated sales, before giving effect to potential sales dissynergies that may be experienced during the integration of Zimmer and Centerpulse are expected to approximately $2.84 billion.

And that represents growth of 11 to 12% over pro forma 2003.

As discussed during many of our public presentations since we announced our intention to acquire Centerpulse, and they may experience $40 to $50 million of sales dissynergies throughout 2004 as we integrate our distributors and sales representatives of both companies.

Including this level of sales dissynergies in 2004, we would generate sales of approximately $2.79 to $2.8 billion, which represents 10% growth of a prior year.

We will invest heavily as we talk about the foreign product training over the next six to twelve months for a combined sales force of over 2,000 sales representatives.

And this training should begin to show up in our sales growth performance as we exit 2004 and enter 2005.

During 2005 we do expect that half of any dissynergies realized in 2004 will be earned back.

From when the time we enter 2006, we will earn back the other half.

Diluted earnings per share from Zimmer without Centerpulse for the fourth quarter 2003 are expected to be approximately 45 cents per share, excluding acquisition and integration costs and that represents a 22% increase over prior year.

Consolidated diluted earnings per share including Centerpulse are expected to be approximately 44 cents.

This reduction of one cent per share in the first quarter, after the acquisition, is very consistent with the pro forma results as reported in Zimmer's S4 registration statement back in June of this year.

Separate third quarter results for Centerpulse are not required to be released due to Centerpulse's status as a foreign private issuer in the United States.

Consolidated diluted earnings per share for 2004 are expected to be approximately $1.99, representing a 16% increase over 2003.

Diluted earnings per share estimates for the fourth quarter of 2003 and the full year 2004 all exclude acquisition and integration costs, and certain non-recurring purchase accounting adjustments, such as the write off of in process R&D and the inventory step up costs.

In 2004, the potential negative earnings impact on sales dissynergies are expected to be offset by the first year of positive expense synergies with the ultimate effect resulting in the same 2004 diluted EPS as in our stand alone.

Simply stated, excluding the effect of acquisition and integration costs, and accounting as was required by U.S.

GAAP purchase accounting standards, 2004 EPS results for Zimmer, together with Centerpulse, should be the same as Zimmer stand alone would have been without the acquisition of Centerpulse.

By 2006 we expect to have earned back and sales dissynergies realized in 2004, and we should also be realized the full effect of the $70 to $99 of expected positive pre tax expense synergies.

We expect 2004 to be a very good year for Zimmer, delivering earnings per share growth of 16% while setting up accelerated performance in 2005, and 2006.

EPS for 2005 is expected to increase to a range of 2o to 25%, fueled by accelerating sales growth as well as incremental expense synergies.

And by 2006, we have the potential for EPS growth to exceed 25%.

In addition to the many strategic advantages, the acquisition of Centerpulse provides, we believe that the acquisition will also provide average annual growth and diluted earnings per share over the next several years, while in excess of 20%.

We expect to deliver $70 to $90 million of annual pre tax expense synergies by integrating Centerpulse into Zimmer.

Twenty-five to thirty million dollars of those expense synergies will come to us in costs that get sold, and that also has shown that we have no manufacturing plant closures in our plan.

Twenty to twenty-five million dollars of the synergies will come to us through G&A, $10 to $15 million in marketing and distribution, $10 to $15 million in R&D and a much smaller number because of the lack of seller overlap $5 million in selling expenses.

Approximately $20 million of these total synergies should be realized in 2004, and approximately $60 to $65 million in 2005, and the full $70 to $90 million in 2006.

There are several major accounting entries required by U.S.

GAAP related to this acquisition that I'd like to touch on.

We are required to compute and write off in processed R&D.

This entry will be made in the fourth quarter of this year, and our initial estimates of this one time non-cash cost, as disclosed in our S4 statement was $166 million.

We will finalize that number by the end of 2003.

We're also required to step up all required assets to fair market value.

In the case of acquired inventory, fair market value is defined as estimated selling price, less the cost of bringing the products to market, less a normal distribution profit.

Stated differently, the acquired inventory, when sold, will essentially contribute zero manufacturing operating profits.

Centerpulse has over 300 days of inventory, which means that there will be no manufacturing operating profits in the sale of the acquired Centerpulse inventory for about the first year until all of the acquired inventory has been sold.

While this is a non-cash charge, unlike in process R&D that is written off on day one, the inventory step up will distort the P&L for as long as it takes to sell off all the acquired inventory.

Given Centerpulse's gross profit margins, our original estimate of the value of inventory step up and the corresponding reduction in normal manufacturing operating profit also as disclosed in our S4, will be finalized by the end of 2003.

But in the S4 we got to estimate that that number would be about $80 million.

We'll also step up the value of acquired fixed assets and this in turn will increase annual depreciation costs for the Centerpulse portion of our business by about $3 million.

By the end of 2004, Zimmer will have spend approximately $100 million on all costs associated with completing the acquisition transaction, including financial, legal, tax accounting and public relations advisory fees to the separated with tender

, do diligence, exhaustive do diligence, debt financing, change of control payments of certain acquired Centerpulse employees, printing, mailing and registration fees and a wide variety of other related costs.

Virtually everything required throughout this entire transaction had to be done in three languages, English, German and French.

Included in these costs are the costs of debt financing and approximately $20 million.

The cost of debt financing will be capitalized and amortized ratably over the three separate traunches and those related tranche time frames.

As a reminder, the $1.75 billion credit facility consists of the $400 million 364-day revolver, and $800 million for a year revolver and a $550 million five-year term loan.

The guidance that we have provided for perks that is computing annual interest expenses on 4% interest per year, a now standing balance plus the amortized financing fees.

Under U.S.

GAAP, goodwill is no longer amortizable; instead the total purchase price must be allocated to a wide range of categories, one of which is amortizable and tangible.

While the final number is still being refined and will be completed by the end of 2003, we currently estimate, and was also disclosed in our S4, that approximately $30 million of annual amortization expense will be recorded under Zimmer combined P&L going forward.

The 2003 effective tax rate for Zimmer stand-alone is forecasted to be 33.5%, and that's equal to the first nine months of our performance.

Going forward on a combined basis, we estimate that the ETR, effected tax rate, will be approximately 32.5% in the fourth quarter of this year.

That will drop down nicely into about 31% in 2004, and beyond that, a reduction of about 50 basis points per year for several years beyond 2004.

Capital expenditures for the combined company will increase by approximately $20 million per year for the next two years during the integration phase.

These added investments will allow Zimmer to realize best manufacturing and distribution preferences worldwide, and will also fund the integration of our information systems.

For those of you who are trying to perfect your

of the combined companies, and also may suffer from insomnia, I encourage you to read pages 88 through 108 of Zimmer's S4 registration statement.

These pages provide exhaustive detail related to the creation of assets pro forma financial statements for the combined companies, and also identifies critical purchase accounting entries required in the U.S.

GAAP accounting.

The creation of your models for the combination of Zimmer and Centerpulse is very complex.

The purpose of Zimmer providing you with this level of detailed guidance is to assist each of you in creating those models.

As you know, even though the construct for sales guidance builds a consolidated sales base by looking at Zimmer and Centerpulse as stand alone companies for both 2003 Q4 and for the full year Q3 and for the full year 2004, will not report Zimmer's separate from Centerpulse in the future.

We will, however, disaggregate our reported results and identify and quantify the unusual effects of acquisition and integration costs, the inventory step up impact on gross profit, and anything else unusual and non operational during our quarterly earnings calls in the future.

The integration of the two companies has already begun and we will quickly lose the ability to identify them as distinct business entities as they were prior to the acquisition.

Going forward, we are one Zimmer, and a brand new Zimmer.

Thank you for your time, and for enduring this lengthy call, we look forward to your questions.

Kimberly, we'll turn the call back over to you for questions and answers.

Thank you.

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

Your first question comes from Katherine Martinelli of Merill Lynch.

Good morning, can you hear me?

Yes, just fine.

Just a couple questions, maybe, first, with respect to the integration, specifically looking ahead to 2006 when you guys have put up some pretty robust earnings growth estimates in the north of 25% range.

Can you just give us a little bit better sense for what you're assuming for sales synergies or for being able to leverage the products across both product lines because it looks like if you just go based on the high end of the expense savings of $90 million, you get to something closer to the low 20% earnings growth.

I'm just trying to understand where the rest of the earnings leverage comes from, and if we should assume that's really starting to capitalize at the top line from the combined company.

Yeah, I think what's missing, Katherine, we have a slide that we don't show to you, and we don't show publicly called sales upside.

Our basic S4 guidance and anything we've done prior to this and today is take the two companies, put them together, take the market growth, take what Zimmer expects to do incremental to that or proportional to it by country, and then minus from it $50 million in the first year of $40 to $50.

What's not in there and what you haven't seen and what we haven't described yet is the impact not only of the stand alone company's pipelines going out through the years, beyond any growth above market we've described, but in fact the synergies to those pipelines relative to both cost and fail.

That's number one, number two, we have assumed zero cross selling basically.

We've assumed that from a selling profile we're almost as if we were still separate.

And in fact, we do know from cross training purposes and the potential we see in accounts that are only partially converted by either company that there's lots of potential there.

So there's a long list of sales upsides as we've simply haven't completely numerated in our own case and are unable share with you right now.

And in fact, we haven't done all the work on what the effects could be.

But the inclusion of those, Katherine, is what gives us the ability in 2005 and 2006, is the close the gap for any sales dissidences that we may experience in 2004.

Okay, that's helpful.

And then, just more, some specifics on the numbers.

Sam, just looking at the current exchange rate parities, could currency accelerate and actually be the biggest dollar impact in the fourth quarter right now?

Could currency, you mean, foreign exchange acceleration?

Yeah, just based on where the current parities are.

Could you see the biggest quarterly impact in the fourth quarter at the top line?

You mean compared to the other three quarters?

Yeah.

No.

I mean, it was something like $8 million, could that accelerate into the fourth quarter?

Well, if you look at the first two quarters, Katherine, it was much more dramatic, and in fact, in Q2 her call is about 4.5%, dropped down to 2.3% in Q3.

It may accelerate a bit if you want to guess at what the foreign exchange rates are going to do, but who knows, they're bound to run pretty volatile right now, and we don't have a crystal ball, either.

It's funny you asked that question because we are not used to ourselves talking about ourselves as a combined company yet.

And I keep looking at the Yen and the huge proportions.

If you look at Japan in the combined company, it's less than 10% of our sales.

We're no accustomed ourselves yet to talking about the combined business, because all of a sudden now, we have a huge amount of organic currency offset as you work your way through the P&L, obviously in Europe now.

So we don't think so, but we're still getting used to ourselves looking at the meaningfulness of foreign exchange on a combined basis given a multi-million dollar European business now.

If sales do increase because of currency because of the extensive use of the hedge contracts for the big currencies, it really has minimal effect on our operating profit or EPS.

Okay, and then just one last question and I'll hop back into line.

Just looking at your reconstructive business, and maybe we're missing something, but it does look like once you back out the worldwide hip and knee number that you gave that your extremities and other declined in the quarter.

Was there some discontinued product because it sounded like you sure the business was up.

So I'm just a little confused at what the disconnect is that would bring that other line down.

I don't know what we're missing, I'll have to look at it.

Shoulders are up 16% in the quarter, elbows historically for the last while have tended to be single digit, so I'm not sure what the disconnect is either.

There's nothing else in there that I'm aware of that's included in the total.

Okay, we'll follow that up.

Give me a follow up call, I'll double-check it.

But as far as I know, it's 16 shoulders, I haven't got elbows in front of me off the top of my head, and hips and knees you know.

Okay, great, thank you.

You're welcome.

Your next question comes from Bruce Jacobs of Deutsche Bank Securities.

Thanks, Ray, can I get you to expand on your comment about having completed the sale and co-design of the sales plan.

I'm particularly just wondering what sort of redundancies you've eliminated, what sort of redundancies if any you will keep and just what the complexion of the sales force will be going forward.

I'll give you some general comments first.

We're not going to describe it in total until it's complete because at

% we're still in negotiations with some people and I don't want to put us or them in an awkward position.

But I can tell you that Bruce

and David Floyd have combined together with all the distributors with face to face meetings with a geographic outline with a comparison of how we traditionally have formulated our distribution system and how we like to run it versus how they have ran theirs, both on an individual and group basis.

And they have laid out a structure, which we have now gone and talked to everyone about, every single person.

Our distributors, their distributors, we have laid the structure out, we have negotiated and concluded negotiations with basically 75% of the sales value.

It's not necessarily 75%, but 75% of the sales value we have concluded negotiations with or will in the very short term.

With the remainder we're working on a variety of geographic alignments and product discussions and contractual.

They in many cases, as you might imagine, individual contractual agreements, as businesses with the prior centerfold.

So it takes a little while to work our way through the bullet points.

But we will do a much better job than I've described for you.

Keep in mind, we've basically done all of that in two or three weeks.

We did not have the advantage of two or three months of work ahead of time on this.

So, the reason I'm excited is the absolute ground we've covered in two or three weeks is phenomenal.

But we will do a better job but I don't want to do it right now if I can help it.

Can I just add to this to say that generally there will not be a lot of overlap that you'll maintain between what before the merger was two separate sales forces that might have been calling on the same accounts?

That's very fair to say.

And Ray, you've obviously done a good job of it over the last couple quarters but can you talk just a little bit about how you keep the organization focused on driving the growth in each of the individual businesses with the inevitable distractions that come from the integration.

We illustrate traps.

No, we align our work and carve the work up.

What we've done is we've separated the two by workload.

So if you take, whether it's Sam or myself or Jim, we reallocate and reload other individuals with work.

We've brought in individuals to help us.

We've done surprisingly little with consulting, which I'm grateful for.

Not from a cost point of view, but the fact that I feel we know our business better.

But we specifically separate the two activities as being clear and distinct from each other with the possible exception of a group of hard working people in finance that have to do a number of crossover projects.

But, the catch to this does not allow people to think they have two or three different jobs, but, to in fact, to separate them.

And that's what we've done, including my work, frankly.

Last quick, just housekeeping question.

Sam, I assume that the inventory step up charges were not in that earnings per share guidance.

In other words those are considered kind of extraordinary items for the purpose of the earnings guidance you gave, is that correct?

Yes, yes, that's correct.

Okay, great, thanks guys.

And we will break those out, we'll finalize the number by the end of the quarter because we use outside independent services for that and most of the time, I remember, we'll re communicate that.

And also break it out separately so no one gets confused.

It is a non-cash charge.

Thanks guys, congratulations.

Thank you.

Thanks Bruce

Your next question comes from Bob Hopkins of Lehman Brothers.

Hi, thanks, can you hear me?

Yep, good morning Bob.

Hi Bob.

Good morning, bright and early here in San Diego.

Yeah, sorry.

Just two quick ones.

First, on the dissynergy of the sales that you're assuming.

Is it safe to say that most of those will come from the U.S.?

And then second question, first of all congratulations on a Hopkins agreement and secondly, are there any guaranteed share agreements in that announcement that you're making in terms of traditional hip and knee sales at Hopkins?

Well, no, not really.

It depends, there's a lot of facets to these agreements, and again, they're substantially complete, they're not all signed up.

So there's a lot of facets in there from the MIS institute to other things.

I guess the implication of share that there would be is we obviously don't allow on MIS, on the actual doing of the surgeries, and of course on the training, we don't allow the use of anybody's implants.

So I guess there is an implication there of that.

On any other facet of the business, Bob, as you know, you cannot tie, and never can tie sales to any other forms of agreement due to the laws, so only to the extent that MIS for us must use our own product.

And the other part of your question Bob, the $50 million of potential sales dissynergies.

Those are not necessarily limited to the U.S., that can happen anyplace because the combination of the distributors and the sales reps are current throughout the world.

Yeah, it is a good question, one of the things that we have to remember is we're in 80 countries.

It's not so much that there will be a necessarily a $10 million distributor, but the fact of the matter is, it's $300,000 here and $500,000 there.

And it doesn't take long to add up.

So we think it's a pretty rational number.

If we beat it in a

from that, that's great.

But, you know from experience having watched the industry, that as much as we'd like to keep all the sales, it's very difficult to do, and these kind of deals, and the kind of size you're dealing with here.

Thank you for that, and just finally on MIS, you talked about intellectual property, but I'm just curious.

It sounds like you've got some

coming on the two incisions.

But how do you enforce the protection of that?

Well, you enforce protection not through the surgeon obviously, which we don't do, but through competitors so if in fact there was a procedure covered by the patent, the same as you would a material intellectual property.

The method is the same, that if in fact there is use of a method that corresponds to ours or in fact crosses over the patent then you do the same normal process you would in any other way.

Methods patent is no different than a material patent.

You still have to prove that somebody is stepping on your patent and therefore using your methodology as indicated in the claims.

It's based upon the claims that are issued obviously.

So there's no real difference.

Thanks very much.

Okay.

Your next question comes

of

Global Partners.

Congratulations gentlemen, there's so much actually.

The U.S. method patent that sounds like a very good step.

Also, relationships with the institutions, particularly Hopkins, could you characterize in addition to maybe having thought leaders on board, where you see the real benefit coming from, in terms of that Hopkins relationship, and the one in Vancouver.

And then, additionally Sam, would you help us think about how we should debt pay down over the next couple years?

Should that just be fairly linear?

Okay, I'll do the first one.

I won't speak out to, because we have a number of these undergo, so I'll give you the general answer in part because the universities want to approve and review any kind of product development related things or whatnot, so we're not allowed to talk about that right now, and not allowed to do a press release.

So let me give you a general answer on what we're doing with these institutions.

There are six or seven factors that are part of these agreements if you will, and it's everything from working with the surgeons, working in the development of new procedures for MIS, training, sometimes in a geographic sense, sometimes beyond that, but sometimes geographic responsibilities for training.

And satellite training.

The development of new materials, the development of written and change techniques.

Original research into MIS, the co-marketing if you will of Zimmer MIS as an opportunity for patients and co-marketing was between obviously our brand and the institutional brand.

There's five or six or seven things.

There's a long, long list that we actually, we don't use as much anymore, I might put it back into our presentations now since it's more useful.

We actually have a slide that we do on investor presentations that actually covers all the things we'll do, and I think I will put that back in since it's become a hotter topic as of now.

Perfect.

The other half of your question,

, it is not linear, in fact it starts out a little lighter and finishes stronger for three principal reasons.

One is we'll have obviously the heart of level the more interest expense we pay, and that's a cash outlay that gets better over time.

We have an improving tax rate, which will generate more cash over time.

Then the integration costs will occur, more largely in 2004, with some spilling into 2005 as well.

And those are cash outlays.

So it's not a linear thing, it builds up gradually throughout the three-year period.

Okay, very good, thank you.

You welcome, thanks.

Your next question comes from Ben Andrews of William Blair.

Good morning.

Good morning, Ben.

Good morning, Ben.

Can you talk a little bit about trends and centerfolds in the business, you sort of gave us an eight to ten percent overall trend, but can you break that down in terms of are there any real differences between recon and trauma, as you're seeing them, as you're starting to roll the business up.

Yeah, I think the key issue is let me expand it into recon, trauma, dental and spine, because I don't think I can answer you unless I do it that way.

The recon strength is primarily, they have a very small Asia business, let me comment on geographies first.

So it's largely, as you know, a Europe business and combined with U.S. business.

Their U.S. business is performing pretty well, not quite the sale strokes we had, but certainly consistent with market growth and as you know, they've done very well at recovering key surgeons and what not from the inter-op situation.

Europe, as Sam mentioned, has been for a couple of quarters, pretty much flat in local currency and the growths you see reported are not local currency sales but rather a fair amount of that is foreign exchange.

We see that continuing on for the next quarter or two as we put the businesses together and we've incorporated that into the guidance that we've provided to you.

Spine has been pretty much flat and we don't see that changing in the near term.

Obviously we're thrilled to have that as a base business, there's lots of opportunity there, both in the pipeline and with some of the new products.

But we've modeled that in pretty much as continuing on for a while flat.

Obviously in the future we see that business growing substantially in 2005/2006, but not particularly in 2004.

And then dental is around 10 to 12% growth with nice healthy earnings.

We see that continuing, we've got a nice base pipeline of new products.

Business is well run and should continue.

So there's a lot of sort of geographic and product differences in there that mix into that eight to ten percent if you will.

But what I just described to you somewhat quickly, we've done fairly lengthy detail on it, is represented by the guidance we provided publicly.

Okay, just one open ended question to sort of wrap up on my side.

What have been the surprises for you?

We've heard a lot of positive things that are happening, but what has surprised you in the process?

Thanks a lot.

Gee, I don't know.

I don't know that there's any surprises at this point.

We've mentioned to so many people in the past, we've done so many deals historically and the reason we use pre synergies return, less than 24 months, or to accretion, is simply because you do get those.

I don't know if there's anything huge in there.

You're always constantly getting surprises that are differences between the companies.

One of the things we really want to do that will help us a lot is getting common financial controls and conformity we can place on financials so that our analytical databases can be refined at a point that we can do more analysis and answer that.

But I'd tell you if I could think of it, I'm just trying to come up with something that's big and surprising, but I don't know that there's anything in there.

That's fine, thanks Ray.

Your next question comes from Joanne Wuensch, Harris Nesbitt.

Thank you very much, two questions.

The first one is about, it seems to me given the strength in the quarter and guidance for the fourth quarter that your guidance for Zimmer stand alone in 2004 at 12 to 13% revenue growth is somewhat low.

Is there anything that we could look into that at?

And then the second one is more of a qualitative question which is that, when you're integrating an international entity, as you mentioned, you had to translate everything into three languages, just to give some do diligence.

Could you just sort of talk us through some of the steps which you are taking to make that integration a little bit easier.

Let me do these, the first one first, no, I don't think there's anything in that forecast.

This is what I talked about on investor presentations, about investor psychology.

If you reconcile us backwards from where we begun, it's not dissimilar in many ways to what we're doing now.

Look at it this way.

If, first of all, it includes zero foreign exchange, and we've been running at four percent.

We always want to have one to two percent growth over the market.

In fact we won't review plans here that don't show that kind of growth.

We believe price as I've said now for two years, and I admit I've been wrong for two years, but I'm going to eventually be right here, that price will settle in at two to three percent.

We've been running a point, point and a half more than that, and I think there probably is, out of all the mix we do, haunting the market now and probably for us to maybe a half a point of reduction there until some of the new products come out.

If you reconcile us backwards, and use those numbers, you'll add it back up to, something in the order of 17, 18, 19 percent reported gross.

So I don't think there's anything that's changed, although I do honestly worry about investor psychology.

People become accustomed to seeing 17, 18, 19, and it's hard for them to probably understand at times at 13 or 14% really is the same as we focus primarily on local currency.

In insider business, we reported to you obviously real reported numbers.

Inside our business, with our own people, we focus on sales in Yen, and sales in Deutsch Marks and sales in French Francs, we focus local currency.

So I think if you take all that into consideration, take my word for it this time, price will be down a point to a point and a half.

You can reconcile this very easily back up to the kind of numbers we have today.

In terms of your second question

, how can we make it easier, essentially, to integrate, given the language differences.

First of all, the three languages, those were legal requirements that came out of the first takeover board, so virtually everything we've filed had to be in that many languages.

Press releases, legal documents, tender offerings, whatever.

And the purpose of me even mentioning that was it ends up being a very expensive process.

And we had to bear the cost of that.

We knew that going in, but that's now behind us.

In terms of the integration itself, the integration team is being created by forming functional team across both companies, across, spanning different countries as well.

But as we move into any one country, it will be the people on both sides of the fence within those countries, guided by the integration team that we'll deal with in identifying the integration issues.

What we'll have the team be responsible for is coordinating and driving those efforts.

But the actual work and decisions and ideas, bubble up actually from within each country, dealing in their local languages.

So at the grassroots level, it is not that difficult to deal.

And by and large, so many of the people within the country, because we are a global business, all speak English anyway, so it's not that difficult.

Yeah, that's the point I was going to make.

This is the shame on us as North Americans, there couldn't be a country in the world you would rather do a deal with in this language context than Switzerland.

Virtually everybody there speaks three languages, some people speak four.

Their English is excellent and if you're speaking to folks that don't have a strong command of English, they have full time, as I do, and as we all have available to us full time German translators.

So I think that aspect we've really taken good care of.

Thank you very much, and good quarter.

Thank you.

Thank you.

Your next question comes from Mark

of

.

Morning guys.

Morning, Mark.

Morning, Mark.

All I can say is that you're lucky you're not doing the deal in South Africa with 11 official languages.

Anyhow, just, guys, as I looked at SG&A going forward, is a first assumption just to add the separate costs together and then on top of that add an incremental education component, or should I think of it slightly differently?

You talking on the sales side now?

Yeah, on the sales side, yep.

No, I don't think so.

I think you'll find the incremental sales component, the only thing I might say on that, that where I would go your direction is we'll probably compound a little more sales dollars, training dollars if you will, into the first year or so, than the two companies might have together.

But keep in mind, both companies today have very, very large sales training and medical education budgets.

So, other than perhaps some incremental in the first year, I don't see us having sort of any significant impact on SG&A ratios or dollars.

Yeah, in fact we might even get some leverage in that going forward once we get through the initial major training because we'll combine the sales forces, and so instead of having two training events, or two

in a country or for a group of surgeons, we'll have one.

That's kind of where I was going, if you have a look at the hard dollars depot, in terms of a percentage, it does come down nicely, and how much wiggle room is there for next year, because I'm sure a lot of the earnings are going be based on some of the leverage you get off SG&A.

Well, how much?

We give our best shot at about $20 million.

And that really will go to fund any sales dissynergies, Mark.

You know, maybe we'll do better, maybe we won't, that remains to be seen.

But we've given our best estimate probably.

We're actually trying to improve our desperate reputation we have as being too conservative and actually move closer to numbers that everybody can be happy with.

So we're actually trying to make you happy as opposed to this reputation we've undeservedly earned.

Well, maybe I should ask how long is the piece of string?

No comment.

Just lastly, on the spine business, you probably haven't had much time to delve into that.

But is there anything in the Centerpulse pipeline which could come out in 2004, and you guys internally were working on a bunch of stuff.

How should we think of that program moving forward now that you have a footprint in spine?

Yeah, I don't think there's a lot, the whole issue of dynosis and getting into non fusion technologies obviously would be the one that comes to my mind.

There's some nice changes they've made in things they've just released along the cage line.

But as you know, cages are coming down in proportion with higher biological uses of infuse, primarily.

I don't think there's anything in 2004 in either our pipeline or in theirs that can impact 2004 sufficiently.

We've got some nice things in the case of both companies for 2005 and 2006, and we've got some very, very interesting biological approaches that are out beyond that.

But I'd like to be able to tell you there was something hot for 2004, but I just don't think that's the case.

Congratulations guys.

Thank you.

Thank you.

Your next question comes from Robert Faulkner of Prudential.

Thank you, a couple clarifications first.

For one, I wondered if you could just reiterate, this is what you've said, that you've included no price in your budget, or I assume in your guidance that has not been negotiated already.

Or have you in fact assumed your 3% that you've been talking about as an expectation.

I know where you're coming from Rob, we use two to three percent as a public guidance as you know, repeatedly, and that's the guidance we give in our numbers.

Internally, we don't allow our people here to budget price very much in, other than aspirational targets, relative to known managed care situations.

In other words, if we have a four-year deal with Premier, and we're in year two, we know what year three is going to be; up, down or whatever.

And the reason we do it that way is because you can get yourself in a trap if you allow people to use too much aggressiveness on price internally for budgeting.

They will want to have corresponding SG&A investments and so on.

And if that price doesn't happen, you could be in a position where you're over peopled or over spent.

So, one is, the guidance to you, we certainly do include it, we believe it's two to three percent.

Internally, we do not allow the use of it as I just described.

Great, thanks.

Very clear.

And on the sales front, following up on a question from Bruce Jacobs, did you say that you're keeping sales people effectively on the doctors, on whom they're already calling?

The general answer to that would be yes, I mean it's not going to be perfect in every case.

But you don't want to disrupt, as you know very well in this business, it's a huge relationship business.

And you do not want to disrupt relationships, particular relationships that have some time and some background to them.

So we're trying desperately hard not to disrupt any significant relationship.

And I'm not aware that we have done that yet.

But again, we're not complete.

But our goal would be, keep all these salespeople, disrupt no relationships.

That's obviously not going to turn out that way, but that would be our goal.

Great, and finally, on your MIS patent portfolio.

Wondered if you can maybe characterize the, if one can, the effectiveness, your expected effectiveness of the patent on the implant.

Are there any on implants per say.

Do they tend to be on the instrumentation or, and is there anything that you think is blocking, or is it more of a thickitive patent that makes it tough to get in?

No, I think there's some blocking, it depends on which ones we're talking about, but certainly, first of all, to answer your question, they would lean more towards methods and instruments, at this point.

Now, that's not our intention for the future, as you might imagine, we're working on implant themes and in some cases we're well down the road on implant situations that, not so much dramatically changed design perhaps, but incorporate those products and areas where we have control of the technology.

But the ones we're looking at now would be more on the lines of instrumentation and methods patenting.

The number of claims as you could tell from the verbiage, is an excess of 500 claims, and I would suggest to you, although some of the instrument ones are, I wouldn't suggest are blocking, they're more what I would call aggravation patents.

There are some significant blocking type patent applications in there at this point, and it varies by theme.

But if you go, for instance to T2 on the hip fracture for MIS, that is significant, absolute implant design, original implant design that would be a significant blocking patent if in fact, all those patents are issued.

The one we have issued right now are blocking type patents, if you cross into that kind of area.

Great, look forward to it.

Thanks.

You're welcome.

Your next question comes from Greg Simpson of Stifel Nicolaus.

Good morning guys, how are you doing?

Good.

Good morning Greg.

I'll make it quick and simple as we near the two-hour mark.

I'm sure you guys are tired of talking at this point.

Ray, you make fun of yourself because you may have been wrong on price, which I'm sure you don't mind.

But you probably would have been more correct with respect to recon growth than most.

I'm wondering, as it relates to the forward growth that you've given today, looking out to 2006 and beyond, can you give us a sense of what assumptions, with respect to recon growth that you kind of have built into your plan?

Yeah, I won't, it's nice of you to ask me to give you 2005 and 2006 guidance, Great, as I won't.

But thanks for the nice try.

But I'll talk about 2004.

We still see, and I think this is consistent with what has been on the other calls from our major competitors.

We're not seeing any decline in the fundamental units of surgery.

We're still looking at strong units of surgery and we should be heading into the so-called good demographic period.

I won't give you guidance for 2005, but you do know, demographically that 2005 is actually the beginning as we'll see some up tick from the baby boomers.

I'm still looking at fundamental unit and mix growth of seven, eight, nine percent.

I think that's been what has been talked about prior by our competitors.

I'm still seeing that, we're not seeing any change in that at all.

Price, we've talked about.

Positioning it, foreign exchange we use zero.

I'd like to give you some change in the numbers in some ways, but I don't see any changes in that, and I still fundamentally believe the right will write on the two to three percent price.

I think we were just early.

If I'm wrong again, I'm happy to have all of you add a point of growth to our guidance because that's what we'll be doing internally.

But the basic fundamentals, other than a little lighter mix, it's hard to tell, even for us, a number of the analysts have written that mix will come down substantially.

I don't see that.

I think at any given point, as things start to wear out and new things come on and whether they come on as quickly as the old things wear out, there's should be a little shifting down of mix.

We've used a half a point down in mix for ourselves, that's what I've commented on previously.

You add all that together and throw in four percent exchange as a reconciliation, you're right back to the numbers where we are now.

Okay, thanks guys, congratulations on the quarter.

Thank you.

Thank you.

Your next question comes from Jason

of Morgan Stanley.

Hi Guys.

Hi Jason.

First question is, in terms of the Centerpulse dilution accretion for 2004, how should we be modeling that.

In other words, you've got about a penny dilution in the fourth quarter.

For the first and second, should we also be modeling for about a penny dilution then that being offset by one to two cents in the second half?

Yeah, we're not getting into specifics, that's the best way to think about it, Jason.

It starts out modestly diluted and ends up modestly accretive and then break even for the year.

OK, and also, you broke out, you went through

, G&A, MD and all that in terms of what you thought the potential synergies were, and I guess for 2004, if I'm thinking about it, I guess I should be modeling for that $20 million that you're looking for in terms of synergies to be mainly in G&A?

That will be the first figure, G&A, and some degree of marketing costs, because things like AA in the last week, and it's had a little bit of R&D.

Little bit of R&D?

Yeah, the quick

are that the board goes away, a lot of corporate governance costs go away right out of the chute.

Okay, but it sounds like pretty much all of that is going to be offset by increasing in education and things like that so that will basically be as net net zero.

No, we're not saying that, we're saying that those savings really go to fund any sales dissynergies.

And the break even comes from that.

Yes, basically if you do the earnings drop down on the $50 million, you get around $20, and we're suggesting that the synergies will be something just under that, and you end up with, there's people that are bouncing around between net even and net negative a penny.

But that's the tradeoff, is between the earnings drop through on the lost sales matched against the first year of synergies.

Primarily G&A devoted.

One last question, and that's on Centerpulse.

You kind of gave an indication of what you though growth rates would be for the different divisions.

If I could push you a little further, for recon, I guess, could you kind of give us an idea of percentage wise where hips and knees fall within that number and kind of where you think growth rates would be for each?

Well, I'm not going to because we're going to start combining them together so it's going to become confusing as our people start marketing natural knees and their people start getting

.

I'm not even sure I could do that.

The only way I could do it is if we all pretend that this never happened and they were going to carry on for the next couple years and based on their internal

plan or something.

But I don't think it's appropriate for me to put that kind of information out publicly.

Yeah, we don't even break our own Zimmer stand-alone guidance out at that level.

Thank you.

Your next question comes from Mike Weinstein with J.P. Morgan.

Hi, this actually

standing in for Mike.

Just a couple questions actually.

I'm curious to know your strategy to commit to debt pay down by 2006.

In particular, it seems like it's a really good lever you could use going forward as far as margin if you needed it, in a sense.

So I guess I'm curious about the strategies part just committing to have it all paid off in three years.

Do you want to do that?

Yeah, that's more of a mechanical thing,

.

The only thing we had to do with our money is pay down debt or use it for any tuck in acquisitions.

Assuming that there's no further acquisitions, that's what happens with the forecasted cash generation, we pay down the debt.

I think the other thing,

is putting the whole subject of dividend entirely aside, because we're not going to evaluate or talk about that at this point, we differ maybe from a couple of the other companies in that at this level of multiple and with what we think we can do with the company, the only other logical thing we could do is be buy back stock, assuming there is not a dividend, and we're no acquiring anything else.

And I just don't get it with this level of multiple that we have, or the industry has really in general at this point.

If the multiples change dramatically and there was some sort of really perverse sector rotation or something going on where the multiples changed or our performance changed, I think Sam and I would modify what we're telling you and say, okay, there's two uses for our money now.

One is because we believe in the company, is share of repurchase debt, or one is debt pay down.

But at these multiples, the only use of the money is debt pay down.

I guess I could be cynical when I search the Wall Street perspective.

If you're already growing, you're operating profit at 20 plus percent for the next couple of years because of integration going on with Centerpulse to get the extra take from paying down debt in the short term, or you could sort of push that out and sort of get that in the outer years once the operational accretments have sort of worn off.

I guess I'm curious on the strategy of committing to it so strongly up front and whether that's actually a firm commitment or whether you could see pushing that out just a little bit.

Well, we always have the opportunity to look at other ways to invest the money in joint ventures, in biological bets, in some smaller acquisitions, those are all potentials.

We don't really build those things into any of our models or our forecasts.

We assess those opportunities when they present themselves and when we find them.

So, what it is, it's essentially a steady statement that we're making given the amount of cash that this particular combination provides to the two companies now together.

We will in fact generate that much cash, that's our expectation.

Again, over the next three years, if we find other forms of investment that make sense to us and our shareholders, we'll certainly consider that.

Okay,

, thank you very much.

Your final question comes from

with Littlewood

.

In your acquisition of Centerpulse, you picked up a 30% interest in a company called Tutogen.

We did.

Which makes biomaterial for both dental and final implants.

Correct.

My question is, what do you intend to do with that investment?

We don't make public what we intend to do with investments, but I'll try to give you a better answer than that.

We've had a series of meetings with Tutogen, we're familiar with them prior to any Centerpulse relationship and we are trying to sort out where that investment needs to go.

Regardless of the investment itself and the equity of the company, we have a long standing, and I'm going goes up to 2010, I think that's the right year.

We have a long standing distribution agreement in both dental and spinal of products that we like from them very much and that distribution agreement or agreements doesn't change with respect to change and control.

In other words, we can still control that distribution agreement.

So what we're trying to determine now is the question you asked.

What to do with the equity investment while maintaining positive distribution over the next several years of those products.

Great, thank you very much.

You're welcome.

There are no further questions.

Great, thanks Kimberly, we appreciate everybody, sorry for, we're always saying we're sorry we're long and this time we started even earlier, but I do appreciate it, particularly the West Coasters.

We're pleased with the quarter, pleased with the progress we're making in our key areas and obviously pleased with the integration process with Centerpulse and look forward to talking to you again when we see all of you.

Thanks very much.

Thank you for participating in Zimmer's third quarter 2003 financial results conference call.

You may now disconnect.