Zimmer Biomet Holdings Inc (ZBH) 2003 Q4 法說會逐字稿

Good morning.

My name is Tisha (ph) and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Zimmer Holdings' fourth quarter and full year 2003 financial results conference call.

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

After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

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

These statements are not guarantees of future 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 see the disclosure materials filed by Zimmer with the Securities and Exchange Commission.

Zimmer disclaims any intention or obligation to update or revise any 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 to the most directly comparable GAAP financial measures along with the other financial and statistical information for the period to be presented on this conference call, was included in the press release announcing our earnings which may be accessed from the Zimmer website at www.Zimmer.com, under the section entitled Investor Relations.

I would now like to turn the call over to Mr. Elliott.

Thank you.

Good morning, everyone, and welcome to the new Zimmer fourth quarter and full year 2003 conference call.

The new Zimmer of course refers to our first quarter with the Zimmer and Centerpulse operations combined.

We're pleased to be hosting this call to discuss a solid beginning and to reaffirm our belief in our ability to create the perfect fit.

Despite the complexity of the data on a comparative basis and our justified reputation for long conference calls, we will not at least expand the call length.

We have worked hard to both simplify the comparisons and make them relevant.

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

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

If not, you can obtain a copy from our website at www.Zimmer.com.

Alternatively, please feel free to contact Sam.

We'll have a copy faxed to you as well as add you to our email distribution for future releases.

We will begin today's call with brief comments related to our fourth quarter and full year results including an update on operations followed by a Q&A discussion.

Our results discussions are based upon the asset method of accounting for instruments (ph) and all of my comments and comparisons are on an adjusted basis.

Unless otherwise specified for the fourth quarter comparisons and sales, we have combined Centerpulse's actual fourth quarter 2003 and 2002.

Full year results also only include Centerpulse fourth quarter 2003 and 2002 sales.

Our focus and analysis for the reasons stated will be heavily skewed to the quarter.

All discussions, unless otherwise noted, also excludes acquisition and integration expenses, in-process R&D and inventory step up, although Sam will review these in some detail.

We will not include our usual sequential analysis since for this quarter on a combined basis they provide no real insight.

We will provide, where helpful, references (indiscernible) to Zimmer and Centerpulse stand-alone performances to give you a historical reference and individual comments on both Zimmer and Centerpulse brands.

Given the early and effective integration process and the true commingling of expenses and operations there will be virtually no commentary below the sales line on a separate basis but rather almost (technical difficulty) all the discussion points will be on a combined basis for today's meeting and from this day forward.

My apologies for the long financial adjustments intro.

Once again, publicly I wish to thank our new Zimmer team, both Centerpulse and Zimmer employees, for the exceptional work in the last three months and the more than 100 full-time integration people managing more than 250 major integration projects and some 1,700 integration tasks for more than 80 legal entities in 80 different countries.

As I have in multiple venues I would also like to publicly welcome the Centerpulse family to our family.

We really believe it is the perfect fit.

At this point we're slightly ahead of schedule and very pleased with the result, but more on the integration later.

As our press release indicated we take very seriously our commitment to deliver on the expectations communicated when we became a public company in 2001, and our current momentum is strong.

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

Consolidated sales for the fourth quarter were 702 million, an increase on an adjusted basis of 19 percent over prior year.

During January we preannounced sales at a approximately 700 million and at that point in time more than $30 million over consensus street expectations.

The old Zimmer stand-alone delivered a 21 percent improvement and the old Centerpulse, 16 percent.

Worldwide combined sales and constant currency increased 13 percent.

The strong 19 percent combined performance was importantly led by real volume mix growth at 10 percent in the quarter, worldwide price improvement remained firm at 3 percent but with the Americas at 4 percent, better than anticipated.

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

Our combined Americas' business delivered excellent growth in the quarter at 17 percent with the old Zimmer stand-alone at 20 percent growth and the old Centerpulse stand-alone delivered 10 percent growth.

The new combined Europe performed slightly above our expectations at 24 percent reported and 9 percent constant currency.

The old Zimmer stand-alone in Europe delivered results of 34 percent reported and 18 percent constant currency.

The large original Centerpulse Europe business has been flat in constant currency sales most of the year, but delivered positive 6 percent growth in the quarter.

We experienced a nice improvement in Asia Pacific sales growth to 20 percent reported and 8 percent constant currency, with solid results from Centerpulse Japan.

The old Zimmer remained consistent at 5 percent local currency growth on a large base in a slower growth market.

On a year-to-date consolidated basis, worldwide sales increased 39 percent reported to 1.9 billion, 20 percent adjusted and 15 percent constant currency, with the Americas and Europe delivering the strongest results.

Although our time has passed at Zimmer, the original stand-alone business, it is still nice to know with our size that we delivered 20 percent reported growth for the full year 2003.

Adjusted diluted earnings per share for the fourth quarter were extremely strong at 51 cents on $245.4 million average at standing diluted shares, an increase of 38 percent over prior year, 3 cents better than the pronouncement, and 7 cents better than the original 2003 year-end First Call consensus street estimates.

The message is clear.

The acquisition of Centerpulse was accretive before January 1, 2004.

Full year 2003 adjusted diluted EPS results are $1.80, an increase of 37 percent over prior year.

We continue to be very pleased with the new combined company's efforts to drive each line of the P&L, attack integration synergy opportunities early, and of course emphasize our trademark focus on cash flow.

Combined gross profit margin in the quarter for the new company exceeded our own expectations at 74.1 percent, directly related to geographic and product mix, price, and strong manufacturing performance.

Despite the obviously higher European content we believe that at 74.1 in our first quarter together, our gross margin remains one of the best in the industry and are comparable to the stand-alone original Zimmer early in our life as a public company.

However in the spirit of broad disclosure you should also recognize that Centerpulse recorded instrument depreciation in COGS, not SG&A.

We have conformed the entry to Zimmer standards and therefore a more fair comparison would have a slightly lower first quarter combined profit margin, but still above our own internal expectations.

SG&A expenses as a ratio to sales are well-managed at 40.9 percent.

Early in the integration process R&D declined in the near-term to 5.3 percent ratio on a much larger sales denominator as well as quick action regarding R&D structure and ongoing project decisions.

We expect over the next year or two that R&D ratio sales will return to almost 6 percent as investments in spine, biologicals, and new technology increase.

Most of the significant SG&A expense reduction opportunities of course occur as part of the integration process, and I will generally highlight those in a later section.

Consistent with my comments on the gross profit margin with respect to recording Centerpulse instrument depreciation SG&A, a more meaningful comparison SG&A for the quarter would imply a somewhat lower ratio.

On a full year combined basis, the gross profit to sales was 75.1 percent, SG&A 38.8, with R&D finishing the full year at 5.6 percent to sales.

While we obviously after only one quarter can't demonstrate the outcome, we will continue to drive the model for the delivered results for us.

Our working dollars model, defined for us as driving down cost of goods sold, G&A expenses, and cost of working capital while simultaneously investing in high return on investment sales expansion and a prolific premium products pipeline will remain in place as the cornerstone to our successful delivery of cash flow.

This particular model is now entering its sixth year of successful use.

Combined operating profit in the quarter reached almost $200 million and a 28 percent ratio to sales, a good start.

Zimmer has been at best a very sparse user of EBITDA as a comparator.

It is a non-U.S.

GAAP measure that has tended to be overused.

Conversely with the acquisition and the differing implications of both interest and amortization, it may have found usefulness for us in 2004.

EBITDA in our first full combined quarter, is already 34 percent on a previously described adjusted basis.

For the full year EBITDA was 36 percent.

Adjusted net earnings in the period were strong at $125 million or an 18 percent ratio to sales, and on a full year basis net earnings were 381 million or 20 percent to sales.

As previously mentioned, adjust diluted EPS in the quarter increased 38 percent to 51 cents with 245.4 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 line of the P&L despite being in the very early stages of our Zimmer Centerpulse integration.

Adjusted EPS for the full year was $1.80, an increase of 37 percent.

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

Although market share gains and cash flow generation through working capital management have always been our story, it is perhaps even more so true this quarter and remains a powerful strategy for our successful acquisition integration.

Combined operating cash flow for the quarter was at the very favorable end of our expectations, registering $169 million.

The combination of strong earnings, accelerated improvement of working capital statistics, access to cash from the InCentive Capital AG acquisition and monetization of a portion of the Centerpulse net loss carryforwards, all contributed to a total of 255 million in debt paydown for the quarter.

Said differently, we paid down almost 20 percent of the new opening debt balance for the entire Centerpulse acquisition in the first quarter of operations.

Operating cash flow for the full year 2003, with only one quarter of Centerpulse included, was almost half of a billion dollars.

Let's review a few of our fourth quarter ending combined working capital statistics.

Combined inventory days performance has really dramatically exceeded our expectations for this point in the acquisition, while service levels remain high.

Our new combined inventory days on an apples-to-apples basis, i.e. excluding any inventory step up and confirming inventory reserve effects, are already at an excellent 232 days.

Our industry-leading receivables collection will continue to provide support for superior cash flow production in the new Zimmer.

In the fourth quarter with a combined effort, we brought global receivables down to a respectable 62 days, but we can do much better.

Combined U.S. receivable results were outstanding at 35 days.

Conversely, we are wherever possible reluctant to pay our cash out too quickly.

The new companies' combined payables have been appropriately lengthened by six days from prior year Zimmer fourth quarter to 63 days.

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

Reconstructive sales for the new Zimmer is a revenue recognition of hips, knees, shoulders, elbow, and now dental implanted into patients during the reporting period.

For the fourth quarter, worldwide reconstructive sales on a combined basis increased to 572 million, and yes, you guessed it, a 20 percent increase over prior year with constant currency growth of 14 percent.

Although we make no promises to disclose if at all beyond this quarter, it may be helpful for you to know that the old Zimmer had a 23 percent reported recon growth in the quarter and the old Centerpulse a 16 percent recon growth.

We're very pleased with these results versus both the total market and key competitors who have already completed their public reports.

Our combined full year 2003 adjusted increase in reconstructive was 22 percent reported and 17 percent constant currency.

Let's take a look at each global product category and geographic segment more closely, both on a combined basis and, where helpful, retrospectively on a stand-alone basis.

First products, in the knee category.

On a worldwide combined basis in the quarter knee sales for the new Zimmer increased 20 percent to 270 million versus prior year and 14 percent constant currency.

On a full year 2003 combined basis, knees grew 23 percent.

Contributing to the 20 percent knee growth in the quarter, the old Zimmer delivered a 24 percent reported knee growth and the old Centerpulse 11 percent.

After one quarter we have not reached the point from a database perspective where we can consolidate complex subcategories such as posterior stabilized or cruciate retaining very effectively.

We do know however that for the quarter on a combined basis all femorals grew 20 percent, all articulating surfaces grew 22 percent, all tibials grew 20 percent and all patellas grew 24 percent, a nice start to our marriage.

Of course from a brand point of view we can certainly provide useful information.

Zimmer's NexGen LPS Flex is an appropriate place to start.

The world's top-selling high flex knee continued its year-long trend with yet another explosive 50 percent increase to prior year.

That is now a productline approaching 70 million in annual sales a straight line basis.

It is also worth noting that the LPS flex is the knee of choice for our new Quad-Sparing Q-S MIS total knee.

A few more highlights.

The Zimmer RHK (ph) rotating hinge increased another 50 percent plus in the quarter versus prior year and is well on its way to being a $10 million productline.

Prolong, our traditional Zimmer Highly Crosslinked Poly Articulating Surface for the knee doubled sales from prior year and now represents 42 percent of all cruciate retaining articulating surfaces, but still only 14 percent of our total articulating services when posterior stabilized, is included.

While the premium is significant on this product, its ultimate impact and resistance to delamination has potentially far ranging medical and economic benefits.

Director (ph) metal model block tibial trays have taken off as surgeons not only recognize the value of the material but the inherent lack of micromotion which can potentially lead to tibial osciliosis (ph).

TM tibial trays increased 78 percent in the quarter versus prior year and are approaching 25 million in sales on an annual basis.

Turning our attention now to Centerpulse, although overall growth at 11 percent was below the old Zimmer in the quarter, the underlying growth in total knee category exceeded our expectations.

The uni space interpositional device has declined in sales although it represents a small portion of the total.

We have elected to tighten indications for this product while applying our combined technologies to the next generation.

The original Centerpulse interpositional device philosophy is a great concept for sportsmed and really for all surgeons as a potential advancement versus high tibial osteotomies.

Uni space’s (ph) growth has lightened but remains ahead of market.

In total knees (ph), the Centerpulse's primary brand, the natural knee, continues to grow above market with sales increasing more than 17 percent and the INEX (ph) a new Centerpulse brand with particular strength in its mobile bearing design accelerated by 68 percent in the quarter and is quickly becoming a $50 million brand in annualized sales.

Total knee orthoplasty (ph) within the old Centerpulse brand grew a very acceptable 15 percent reported.

It is our understanding that deficiency letter or not, mobile bearing knees in the U.S. for the first time have a real chance of down classification in late 2004.

Knee revision products at the old Zimmer have shown excellent growth rates of 34 percent increase to prior year in the quarter.

The addition of segmental and oncology systems from Centerpulse will combine for a very powerful armamentarium.

It is clear with combined sales of 270 million in our first quarter together, knees have easily become a $1 billion portfolio within the new Zimmer.

There is exciting progress on the Zimmer minimally invasive knee front and I will update our activities later.

The hot topic section will continue to be a part of our conference call agendas.

Moving on, we are very excited about our first combined hip results, given the competitive new product challenges.

On a worldwide combined basis in the fourth quarter, hip sales increased 22 percent to 257 million and grew 14 percent in constant currency.

The old Zimmer grew 23 percent in hips reported and 17 percent constant currency, while the old Centerpulse grew 20 percent and 10 percent respectively.

On a full year 2003 combined basis, hips grew 21 percent.

Once again as with knees, while our hip databases aren't yet sufficiently refined to deliver complex subcategories, we can analyze both major hip sectors for the new combined company as well as company specific brands.

Given the overall competitive results in hips with particular attention to new products and alternative bearings, here is why we are excited after only one quarter about this new company.

Total hip stems grew 20 percent versus prior year.

Total hip cups grew 25 percent versus prior year and total liner (ph) products, poly, metal, and ceramics combined grew a whopping 30 percent versus prior year.

Much like knees, this is a great way to begin a marriage.

In reviewing our brand performance for the quarter under the old Zimmer, porous stems continue very strong with 31 percent growth.

Our new Apollo beaded (ph) porous stems are really taking share from the market leader with growth in the quarter of over 100 percent, a gain led by the six inch beaded fullcoat at a remarkable 172 growth.

The Apollo project of beaded stems will deliver most $40 million in new annualized run rate sales.

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 more than 25 percent.

These results include our ZMR productline which, as predicted on our last call on a stand-alone basis, moved solidly back into the positive territory at 15 percent above prior year.

The new proximal support design enhancements for ZMR have now been released.

The VerSys fiber metal taper stems, the absolute product of choice for MIS 2-Incision surgeries, has once again shown dramatic growth of 44 percent in the quarter.

Remarkably at current rates of growth this hip stem family could become a $100 million productline in 2004.

Zimmer brand primary acetabular shelves accelerated significantly from prior year with growth of 29 percent.

Tribeca (ph) metal cups have almost doubled the gain in the quarter and will quickly become, at current run rates, a new $20 million productline.

Despite extremely tough comps, significant internal penetration, and the U.S. competitive introductions of ceramic and ceramic alternative bearings, premium priced longevity Highly-Crosslinked Polyethylene shell liners increased by 36 percent.

Since there is little difference between our longevity dollar growth and unit growth, it is clear that our continued excellent sales represents real surgical procedure penetration.

If we like the longevity results in Highly Crosslinked Poly Liners, we love Centerpulse's companion product, Durasul (ph), up 47 percent in the quarter.

Our longevity productline, when combined with Durasul, is analyzing for the first time at more than $80 million a year.

We believe competitive surgeon acceptance is growing, specifically we have long since converted our own traditional Zimmer and Centerpulse surgeons and the liner market clearly is not growing in units and mix anymore than about 15 percent or well below half our growth rate.

Our national marketing campaign titled, limit wear (ph) not options, that favorably reviews our highly cross-linked poly capabilities versus ceramic and ceramic limitations, continues to have a great reception.

Of course we do believe ceramic and ceramic will be a good niche product for the young active patient.

We also note here in our first quarterly analysis that any softness associated with Zimmer's new metal on metal product, Metasul, does not appear to be at all as a result of ceramic on ceramic penetration but rather due to the lack of the important size 32 head, which will be released this quarter.

The proof of course is always in the pudding.

All Zimmer and Centerpulse liners in the quarter, regular poly, highly cross-linked, metal on metal, ceramic on ceramic, and revision were up 30 percent to prior year.

Enough said.

In reviewing the very strong traditional Centerpulse hip stem offering, the results are clear.

With the Alloclassic reimulert (ph), the CLS and the (technical difficulty) straight stems, up a combined 21 percent, and all Centerpulse cups up 20 percent.

Of interest for the future, our Centerpulse brand unique hip resurfacing system, Duram (ph), reached its first million dollars in sales this quarter without the U.S. market.

In upper extremity joints, Zimmer's Bigliani Flatow shoulders continue to take marketshare worldwide with 25 percent growth in the fourth quarter and 24 percent for the full year 2003, well above market rates.

On a worldwide combined basis in the fourth quarter, trauma sales had a very strong revival driven by share gains with amongst other, our new ITST femoral nail.

Combined trauma sales in the quarter grew 17 percent reported and 11 percent constant currency in a market that we believe is growing at 10 percent local currency.

Combined full year 2003 sales grew 11 percent.

Our review last quarter of the trauma market, scheduled new products, early surgeon response to the new ITST femoral nail and potential account conversions did not seem to indicate any significant negative underlying issues, provided that the ITST could help recover some lost nail share in both the U.S. and Japan.

It is clear that that has happened.

The ITST nail went from almost no sales to an annualized $10 to $20 million productline with current run rates.

All Zimmer brand IM, intramedullary nails, jumped by 35 percent in the quarter versus prior year, while Centerpulse brand trauma products did better than that.

They increased by 40 percent.

Several other subsegments within our trauma productline are delivering excellent results as well.

Our Zimmer periarticular plates continue their strong penetration against the trauma market leader with 21 percent growth in the fourth quarter and our transfix, External Fixation System, improved by 40 percent.

Our Zimmer spine division sales increased by 12 percent in the quarter to 34 million or 10 percent constant currency.

Cage sales were flat to prior year in the fourth quarter and appear to have stabilized as anticipated after several quarters of steep decline.

Sales of the new ST360 (ph), thoracolumbar pedicle fixation system have offset the silhouette system.

The new Trinica (ph) Select, our anterior low-profile cervical plate system and the continued clinical trial use of the Dynesys dynamic stabilization system, both provided 40 percent increases.

Sales of tudigen (ph) bone allograph (ph) products increased solidly by 35 percent to prior year.

In our orthopedic surgical products sales increased 13 percent for the quarter to 52 million led by orthopad (ph), our perioperative autotransfusion system designed specifically for orthopedics.

Orthopad sales increased by 47 percent in the quarter and continues to generate sales well in excess of 20 million annually.

Zimmer recently signed a new five-year distribution deal for the orthopad system with the Haemonetics Corporation.

In our dental division, sales increased 21 percent to a little under 30 million in the quarter, supported by 60 percent plus growth in both the standard and taper SwissPlus design implants and particularly strong Japanese sales.

Let's switch to our new product development update, which will now include some insights into both dental and spine and, where appropriate, orthobiologicals and sports med.

Prior to the acquisition, the old Zimmer had more than 30 active major projects in a robust pipeline and more than 60 active projects in total, with many of those scheduled for release during 2003.

In addition to the 30 plus major projects, we had added 12 new projects to full development and another half-dozen or so under Phase I review.

To give you some reasonable appreciation for how prolific the new company will be, in reconstructive and trauma alone our combined new product development operations, Warsaw, Winterthur, and Austin (ph), released for launch in the fourth quarter 2003 and for the first two quarters of 2004 39 new product projects, of which half to be considered major, and the number increases to over 50 if you add dental and spine to the mix.

This same group initiated 14 new approved projects in the fourth quarter for ongoing development in 2004 and 2005.

In our efforts to consolidate new product development projects, our databases will, of course, over a quarter or two allow us to return to the detailed new product disclosure we've reinitiated since our original spinoff.

These processes are driven by the proprietary trademark Pace engineering and development system.

In the meantime let me share with you the fourth quarter launches by the new combined company.

As a matter of completeness, the old Zimmer concluded 2003 with fourth quarter new products representing 18.9 percent of sales, at the high-end of our quarterly and annual 50 to 20 percent goal in place since 1999.

The Warsaw (ph) Development Group launched 15 new projects to the market for the fourth quarter 2003 and for the first two quarters of 2004.

A few examples of the products launched include the Apollo 7.5 inch and 10 inch straight porous stems, new CPT2 MIS instruments, the new ML taper stem for both open and MIS philosophies, more than 1,500 sets of MIS mini high flex knee finishing guides, a neutrovector (ph) metal glenoid for the shoulder, our ITST femoral nail, a new foot and ankle set, and international releases of the Zimmer Medtronic codeveloped image guidance software for both the mini and two incisions surgeries.

Our 5/10-K is pending in the U.S.

From our Winterthur, Switzerland development group a new (indiscernible) plastic offset stem, Duram (ph) hip resurfacing, various options of the MX (ph) knee including the Navitrax (ph) CT-less guidance version and a titanium serous proximal femoral nailing system.

From our Austin development group, new MIS hip and uni spacer instruments, a Durasul constraining liner and an anatomical shoulder removable head, to name just a few.

Of the 14 new projects initiated in the quarter, highlights include highly cross-linked poly hip liners including 40 millimeter obliques and eccentrics, transfix external fixation line extensions, and CT (technical difficulty) assisted uni's, as well as Duram hip resurfacing.

Spine development work continues on artificial disk (indiscernible) products, T2 transformational spine, and when the Implex close is complete, the transfer of trabecular metal spine cages and related products to our Minneapolis-based Spine Development Group.

In the dental area work is underway for 2004 with respect to new tapered implant sizes, surgical tools, and composite abutments.

In our Zimmer Orthobiologics Development Group, (indiscernible) cartilage has proceeded to three concurrent large animal studies, the Centerpulse de novo (indiscernible) cartilage graph team has initiated chamber for production of large graphs of a clinically relevant size and new surgical cases have been completed with de novo C (indiscernible) site transplants in Italy and Spain.

New studies have been initiated for condra-fix brand, xenagraph (ph), a repair study for our matrix plus brand scaffolds and the use of regant (ph) CMI as a collagen based scaffold.

Surgical technique processes are complete for the Permacol rotator cuff patch.

We have filed a 510-K for use of our dicol (ph) brand as a bone void filler.

Lastly (technical difficulty) Orthobiologics, Zimmer was advised last week that of 109 applications to the State of Indiana's 21st Century Fund, we received the only award for research in medical devices.

The grant is valued at $2 million and is awarded to Zimmer to pursue the development and commercial treatment of articular cartilage and miniscule (ph) damage using gene therapy.

This is great news for our Zimmer Orthobiologics team and will be the subject to separate press release.

Let's look briefly at the geographic segments.

As with product segments, we will try to provide combined fourth quarter information with individual highlights from both Zimmer and Centerpulse where they are deemed to be helpful.

First, in the Americas, our congratulations to the new combined Zimmer Americas for another strong quarter.

Revenue for the fourth quarter was 392 million, up 17 percent over prior year.

The composition of our growth from a historical perspective was as follows.

The old Zimmer standalone delivered 20 percent sales improvement while the old Centerpulse delivered 10 percent.

Combined sales for the full year 2003 for the Americas' business was 1.2 billion, or a growth rate of 18 percent.

We continue to be very pleased with the distributor integration progress in the Americas, now virtually complete.

Thirteen percent of our growth in the combined Americas was driven by increases in unit volume and mix and 4 percent growth was derived from price increases.

Our Americas' reconstructive growth as a combined business in the quarter was 19 percent.

This would imply that in the Americas during the quarter Zimmer had approximately 15 percent gains in pure reconstructive surgical procedure unit and mix.

As a matter of reference, the old Zimmer business grew recon at 23 percent and the old Centerpulse at 9 percent.

Included in our combined 19 percent Americas reconstructive growth, knees delivered excellent results with a 21 percent increase to prior year.

Again as a matter of historical reference, the old Zimmer business grew knees at 25 percent in the quarter and the old Centerpulse at 8 percent.

NexGen (indiscernible) LPS flex, acetabular metal tibial components, Centerpulse's natural knee and NexGen LCCK revision knees all made substantial contributions to the Americas' knee performance.

Since there is less mix such as Prolong associated with knees, this would indicate a surgical procedure unit growth in the quarter for the new Zimmer knees portfolio in the Americas of over 15 percent.

Hips in the Americas increased 19 percent with Zimmer porous stems at more than 60 percent of mix, surpassing cemented stems for the last trailing six quarters.

Once again as a matter of historical reference, the old Zimmer hip portfolio grew in the Americas for the quarter at 21 percent and the old Centerpulse business at 12 percent.

Hip reforms in the Americas, as previously mentioned, benefited from across the board solid growth in primary porous stems, revision, trabecular metal cups, highly cross-linked poly, both longevity and Durasul, augmented by new product leases in both brands.

Our dental business in the Americas grew a solid 17 percent in the quarter to round out reconstructive.

Sadly postacquisition, we can no longer say that we have been growing the Americas reconstructive products at an average of 20 percent or more each quarter for more than 12 straight quarters, but we can still say that we have been growing recon at 19 percent or more for 12 straight quarters.

Given the size of the deal, we can live with the one point difference.

Still a great record.

Based upon our results and the already released public reports of our three major competitors, BioMed, J&J DePuy and Striker (ph) as well as the remaining market players, we believe the market growth in domestic reconstructive products for the quarter has remained firm to slightly up at approximately 16 percent.

The new combined Zimmer reconstructive, which we anticipated lagging the Americas' market for a year or so, would appear to be outpacing the market growth rate by more than 20 percent in our first full quarter.

Our recon growth rate has been broad-based.

Of the old Zimmer distributor group, 19 of 26 distributors grew knees in the quarter at 20 percent increases or greater, while 16 of 26 distributors grew hips at 20 percent or better.

Americas trauma product sales on a combined basis improved nicely in the quarter to 26 million or a growth of 9 percent versus last quarter standalone Zimmer of only 5 percent.

We are positively impacted by our new periarticular plate offerings and early but strong ITST femoral nail gains.

Our new spine business in the Americas finished the year on a positive note with 29 million in sales for the quarter, an increase of 12 percent supported by the (technical difficulty) decline leveling off, (indiscernible) cervical plate growth and the continued Dynesys trial.

In patient care, orthopad available only in the Americas, continued its rapid acceptance and was a primary contribute to our orthopedic surgical product, 36 million of sales in the quarter and a solid 10 percent growth to prior year.

On January 1, 2004 we began operations with our new combined U.S. distributor lineup in-place with the exception of friendly discussions to complete the complex Florida market and less friendly discussions regarding the very southernmost part of Texas.

In short, on a U.S. sales integration basis, we are 97 percent of the way there.

Here's a statistic we're really proud of on behalf of both the old Zimmer and the old Centerpulse Americas' businesses.

The new combined Americas' operating profit margin in our very first-quarter together, came in at 50.4 percent, or almost $200 million in profit.

As a matter of reference, that is more than double the 95 million in Americas' profit that the original Zimmer recorded in the fourth-quarter 2001, shortly after becoming a public company.

Once again, as it was for Zimmer standalone, it is for our new combined Americas' business, 50 percent earnings ratios are the real payoff for real market share gains.

Let's look to Europe.

Europe had a good quarter in our first combined effort considering the fact that the old Centerpulse business had been flat in local currency sales all year, and was much larger than the traditional Zimmer year of business.

In the quarter combined European revenues increased to $200 million versus prior year, a 24 percent reported increase over prior year and a 9 percent constant currency growth.

From a historical perspective, the old Zimmer standalone business grew 34 percent reported and 18 percent constant currency, while the old Centerpulse business grew 19 percent reported and 5 percent constant currency.

Combined sales for the full year 2003 for our European business was $366 million, a reported growth of 30 percent and constant currency growth of 15 percent.

Constant currency growth for the quarter in Europe for the combined business was derived from 8 percent volume and mix and positive 2 percent price.

On the product front, Reconstructive Implants on a reported basis grew by a solid and market leading 23 percent, led by hip growth at 27 percent and knee growth of 18 percent.

As a matter of historical reference, the old Zimmer reconstructive business in Europe grew at 35 reported and 19 percent local currency for the quarter, and the old Centerpulse grew recon at 18 reported and 5 percent local currency.

With competitive reconstructive numbers for Europe already reported in the fourth-quarter, it is clear that we're not significantly lagging the European reconstructive market at this time, although we expect to do so for the first year or so given the complexity of the combination.

However we still fully expect notable sales to synergies in France, Italy, and Germany during 2004.

These combined gains reflects a continuing acceptance of both Durasul and longevity highly cross-linked polyethylenes, the increased impact to minimally invasive hips in Europe, more than ten fourth-quarter new product releases from Winterthur and ongoing market share gains for the NexGen knee brands.

To round out recon, about 30 percent of the dental division sales are contributed from Europe and fourth-quarter reported sales increased by 24 percent.

Combined trauma this quarter, with more 1,000 ITST nails placed in Europe already, grew by 37 percent.

Spine sales in Europe are important and continue their trend of being down to prior year in absolute local currency dollars.

Postclosing of the acquisition, we eliminated and replaced the European spine division head, the spine VP of marketing and the spine VP development.

We clearly expect progress in 2004.

If we look at the combined Zimmer Europe for the quarter, several of the new (technical difficulty) businesses performed well on a local currency basis versus the competition.

The UK at 20 percent local currency growth, and Italy at 21 percent local currency growth, are particularly noteworthy, but eight countries or regions delivered double-digit local currency growth.

While Europe will be a challenge for the near-term, this is an exciting ongoing sales story with tremendous future potential, to be added (ph) by Zimmer Centerpulse and Zimmer combination.

For the quarter the combined business improved European operating profits to $46 million, a solid operating profit to sales ratio of 23 percent.

Obviously this ratio has the opportunity to materially expand as infrastructure and operating synergies are implemented over the next two years.

In Asia Pacific, revenues for the new Zimmer in the fourth-quarter were 109 million, indicating a combined increase of 20 percent but a significant improvement improvement to 8 percent constant currency growth versus previous quarters.

As a matter of historical reference, the old Zimmer business grew 18 percent reported and the old Centerpulse business an excellent 33 percent.

On a full year combined basis which achieved $327 million in sales, 15 percent reported, 5 percent constant currency.

Asia-Pacific has slightly negative price in the fourth-quarter as we anticipated.

Struggling health care budget deficits in South Korea and Taiwan have moderated the small positive growth from previous quarters.

We will review both global and regional price appreciation prospects for 2004 under the hot topic section.

In the meantime we continue to believe that the Asia-Pacific market is growing at mid single digits in local currencies.

During the fourth-quarter our combined Asia-Pacific business was led by reconstructive growth of 20 percent with hips and knees both performing well at 18 and 19 percent, respectively.

LPS flex knees, particularly with our (indiscernible) hardened femorals, trabecular (ph) metal tibial components, the recently released NexGen CR-Flex Knee and the strength of the Centerpulse Natural Knee for crushette retaining procedures, were all positive procedures.

Hip sales improved considerably with the addition of the Centerpulse brands.

You may recall that in the third quarter (technical difficulty) reported the old Zimmer standalone as flat in local currency for Asia-Pacific hip sales.

Trauma has shown dramatic improvement with combined a 28 percent increase in the quarter, but better than that, 15 percent local currency.

Our attention to specific Asian style ITST nails and the anniversary of our manufacturing transition to Puerto Rico, have now past.

While our dental business is small in Asia-Pacific, it did deliver a 38 percent sales increase in the quarter.

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

Displaying excellent earnings drop-through from sales, the new Zimmer Asia-Pacific operating margin ratios improved with accommodation to $51 million in the quarter or a 47.1 percent operating profit to sales ratio.

Let's move from products and geographies to hot topics.

For this quarter I would like to narrow that down to a detailed discussion of only two topics, minimally invasive activities, and of course a Zimmer Centerpulse integration update.

I fully expect to reinstitute the discussion of mix and its impact on the combined new businesses coincident with our first quarter 2004 conference call report.

For the record we have seen nothing to indicate that the positive trends and mix won't continue, but it will take us one to two months to refine our database.

Salesforce adds, losses, and plans will be incorporated into the integration update each quarter, as appropriate, and pricing for the combined Zimmer appears solid at positive 2 to 3 percent for 2004.

If price in fact maintains a 4 percent plus level, I will once again be pleasantly wrong.

We expect Japan pricing to decline 4 to 6 percent in mid to late 2004 versus the more traditional 2 to 4 percent decline, but with our new combined business we have a myriad of strategies and synergies to easily offset any negative impacts through 2004 and 2005.

On minimally invasive solutions, we're very pleased with the progress in our, what is now nearly a six year old MIS program.

During this section of the call we will update you on several different aspects of our MIS program, medical education and training, MIS hip, MIS (indiscernible) bearing knee, MIS ortho guidance or image guidance systems, our international activities, and lastly health technology, reimbursement and procedure tracking.

First in medical education and training, the Zimmer Institute continues to be extremely busy with 70 surgeons, PAs, and nurses trained on the MIS 2-Incision hip and MIS Quad-Sparing Q-S knee in the normally slower December period alone.

We've been fortunate to contract Tucson (ph) Orthopedic Institute as an institute location to handle additional classes and posttraining proctoring.

Year-to-date we've trained 502 surgeons, PAs, and nurses on the MIS 2-Incision hip and the MIS Quad-Sparing Knee, with 407 of the 502 individuals being surgeons.

Surgeon to surgeon visits for the year totaled 464 to do surgery with the truly remarkable doctors, Richard Berger (ph), from Chicago's Rush Presbyterian, and Mark Hartspan (ph) from Hackensack, New Jersey receiving more than 100 guest surgeons each, respectively.

In total 37 different surgeons receive visiting surgeons and augment our MIS efforts in the U.S. alone.

We currently have a total of 447 requests for surgeon to surgeon MIS visits, or about a one year wait with our current capacity.

Needless to say, we have to continue to expand our internal and external capabilities.

Our plan for 2004 continues to be to trained 1,400 surgeons at the Institute in Warsaw and its satellite partners.

Speaking of partners, we're proud to mention again briefly the multiyear partnership focused on minimally invasive orthopedic solutions between Zimmer Holdings and the Johns Hopkins University School of Medicine.

The University will not only become a full Zimmer Institute teaching facility but will also participate in MIS research, product, and technique as well as economic value added analysis, amongst other shared roles.

Our two great names in orthopedics have joined together because we have a common vision for MIS advancements in the future.

Johns Hopkins University was founded in 1876 but the medical school consistently ranked in the top two in the nation and the hospital itself ranked number one for 13 consecutive years.

Our Zimmer Johns Hopkins MIS partnership was the subject of a February 3, 2004 press release.

Our 20 global partnership targets are complete for 2004 and have reached varying stages of progress and negotiations.

Next I would like to talk about MIS hips.

Zimmer MIS hip activity levels continue to increase significantly.

We would like to really focus today's discussion on year-end on a single topic, a full year review of success and publicly reaching the patient while working with our surgeons.

First, as a general update on MIS public relations for 2003, we have 138,000 visits to the dedicated Zimmer owned site, pacewithlife.com, that resulted in 32,000 find a doc requests and almost 8,000 Zimmer MIS consumer marketing packets mailed.

On our MIS ad word campaigns we had almost 6,000 click-throughs on 166,000 impressions, nice returns on some very low-cost DTC.

Of the 686 surgeons now trained by Zimmer on the MIS mini hip or the 2-Incision hip, 561 surgeons are listed on pacewithlife.com physician locator system.

Our six-month national PR campaign in 2003 completed the year with 170 placements and reached audiences of almost 15 million people.

In addition, we added 44 online Internet placements.

Twenty-nine surgeons in 21 different cities were featured on television or the newspapers with respect to Zimmer MIS hips.

U.S.

News and World Report and the New York Times and most others, ran full page stories.

Even the National Enquirer on December 9, ran a full page story on the MIS 2-Incision and a local patient from Chicago.

Mercifully for us it was not entitled, the hip from outer space.

Instead they chose the rather more academic title of major medical breakthrough.

Finally on MIS 2-Incision, we just completed our first DVD available through the Zimmer Institute with development of an interactive DVD underway.

After almost four years of development, our MIS G2 transformational procedure for hip fracture fixation will go live in surgery for the first time ever earlier this year in Australia.

Switching to the MIS Quad-Sparing knee, more than 1,500 sets of low-profile femoral finishing blocks for use with the MIS mini and MIS Quad-Sparing total knee were deployed globally in the latter part of 2003.

These low-profile sets are being rolled out at a rate of 300 sets per month in support of the rapid adoption of Zimmer MIS total knee techniques.

As important, if not more important, late in the fourth quarter of 2003 we began the rollout of the high flex version of the low-profile blocks.

In addition modifications to both the NexGen 4 in 1 and IM intramedullary instruments will expand the total knee surgical philosophies adaptable to Zimmer minimally invasive total knee techniques.

In 2004, 60 Quad-Sparing training programs will be made available to Zimmer Institutes with the general release of the new Q-S knee in March at the San Francisco AAOS.

A 300 patient RIB multicenter study was initiated earlier in 2003, with the outcome's focus directed at immediate postop pain reduction and various QOL, or quality of life metrics.

We're continuing our review of a potentially new, patentable, painless MIS total knee protocol that aspires to eliminate narcotics based pain killers.

Lastly during the first-quarter 2004 the Rush Presbyterian University Medical Center in Chicago and Dr. Rich Berger of the Zimmer 2-Incision hip design team, will issue public data on outcomes with their first 70 Zimmer MIS Quad-Sparing total knees.

Zimmer has been preadvised that similar to the 2-Incision hip more than 80 percent in the patients are returning home the same day and return to work recovery times have been reduced from two to three months to two to three weeks.

Fourthly, Zimmer Orthoguidance, our image guided MIS surgery programs.

During December we initiated the limited release of the Zimmer Medtronic (ph) MIS 2-Incision image guided software first to Innisbrook, Austria, followed by Berlin, Germany, followed by all of Europe and then to Australasia with our U.S. 510-K filed and approval expected soon.

Less than two weeks ago in Israel we successfully performed our first live MIS 2-Incision surgery utilizing this new proprietary Medtronic software and instrumentation exclusive to Zimmer.

The procedure went well and surgeries in Australia are to follow immediately.

Prototype instrumentation of the more futuristic Medtronic electromagnetic or EM image guided systems, have already been completed for Zimmer on the distal femur, proximal tibia, femoral finishing guide and tibial rotation.

International MIS activities, for the full year 2003 we trained almost 80 surgeons from Europe and Asia on the 2-Incision hip.

In previous conference call scripts, much of the MIS commentary has been focused on the U.S. where most of the activity has been, but this is changing.

Each quarter beginning with this one I will pick a different part of the world of talk about Zimmer's MIS progress and activities.

This time let's take a brief look at MIS and Asia Pacific.

In Australia we initiated agreement with key universities to perform and evaluate for research Zimmer 2-Incision hips in live surgery utilizing the new co-developed Medtronic image guidance software and proprietary implementation.

In Korea and Singapore we have completed the MID training for nine university-based surgeons and two of these surgeons will initiate a clinical study for the use of navigation for their first 100 MIS Quad-Sparing total knees.

In Taiwan the first nine hospital surgeons were successfully trained with all staff surgeons and nurses witnessing the clinical surgery and patient quality results on the last Saturday in November.

In mainland China we delivered the very first local lectures, videos, and didactic sessions on minimally invasive hips of any kind.

Lastly in Japan for 2003, of the new customers trained in MIS to date we saw a 251 percent increase in their business, which happened to represent 30 percent higher than our own internal expectations.

A total of six Japan-based (technical difficulty) courses are scheduled in 2004, the first in Chiba prefecture has already been completed.

A total of 115 Japanese cases in December alone used Zimmer mini hip or 2-Incision techniques.

Lastly on MIS health technology intellectual property and procedure tracking, Zimmer has now developed a new full-time department called Health Technology Assessment and Reimbursement.

This department has supported the applications for higher reimbursement to private insurance companies with some previously noted and continuing success.

As an example of their work in the fourth quarter, a response from a key Canadian hospital executive review panel indicated that the panel recognized and verified and I quote, "the inherent savings of the Zimmer 2--Incision hip procedure within the current health care cost structure".

In January 2004 in the U.S., we have initiated the process to obtain a higher CPT code for the Zimmer 2-Incision procedure.

This process will become an integral part of the overall strategy to develop data with respect to improved DRG209 payments.

Separately, Medtronic utilizing our codeveloped image guided software and instrumentation in combination with their hardware, is pursuing reimbursement changes based upon coding and net patient benefits, specifically related to the Zimmer 2-Incision hip procedure.

Lastly, we just completed our first look at our index case data, the more than 300 MIS 2-Incision hip cases that we have been recently tracking.

The data suggests that the ongoing and continuous improvements we have made to the 2-Incision process has in fact reduced complications related to the surgeons learning curve relative to volume.

In short, there is now little outcome difference between surgeons who perform 25 to 50 hips per year and those who do 100.

Improved teaching has also reduced the risk of more serious outcomes such as femoral palsy or dislocations, both as an example, not surprisingly seen in small percentages early in the learning process.

We hope to continue to prepare meaningful data from both our trademarked MIS patent patient diaries tracking patient quality of life and our beta site, MIS economic value or EVA studies, in time to share a part of them with you at this year's San Francisco AAOS.

On the subject of intellectual property we're obviously very pleased with the unique issuance of patent number 6,676,706 granted to Zimmer Holdings Inc. by the U.S.

Patent and Trademark Office for the Zimmer MIS 2-Incision procedure.

The patent issuance is broad and entitled and I quote, "Method and Apparatus for Performing a Minimally Invasive Total Hip Orthoroplasty, including 17 improved claims".

In addition to be the issued patent, five more Zimmer 2-Incision patents are pending with a total of 122 additional claims identified.

Similarly and equally important, the U.S.

Patent Office has issued patents 6,425,923 and 6,446,514 for our transformational G2 MIS hip fracture fixation system with 22 claims approved and five patents and 239 claims outstanding.

Again similarly, Zimmer has seven patents pending on our unique MIS Quad-Sparing or Q-S total knee procedure with a total of 395 claims.

Finally under MIS last quarter we talked about having an MIS procedure tracking device to accurately document actual surgeries performed utilizing Zimmer techniques and products.

During November and December we 100 percent U.S. field tested the process with not only the old Zimmer distributors but also the new distributor team and have concluded that it is accurate within 2 percent.

At the end of the first-quarter 2004, we will provide in our conference call preliminary assessments of Zimmer's MIS impacts.

If we have enough data we may even provide a sneak preview at our AAOS analysts meeting.

This completes our review of Zimmer minimally invasive activities for the fourth quarter.

In 2004 we will spend more than $28 million on our minimally invasive program excluding the cost of instruments.

We will now turn our attention to a very brief progress review of the Zimmer Centerpulse integration since October 2, 2003.

Firstly in integration, a brief thank you if I can to the hundreds of employees from both Zimmer and Centerpulse, actively and positively participating in the integration process.

In fact as you now know, more than 11 teams with more than 100 full-time people have worked on the integration each day since October 2, managing and executing more than 250 discreet projects and 1,700 individual required milestones from an integration playbook that is cumulative to reach more than 500 pages.

As employees, our future together is the perfect fit but it is also a fast, centralized, emotional, and energy sapping process.

Although at times fearful and frustrated, the vast majority of the people are getting their work done and getting on with their lives successfully.

It is not our intention to go into great and graphic on the integration each quarter over the next year or so, instead we really want to focus on key activities, problems, and successes with useful and practical insights for you.

Let's set the stage for future quarterly conference call updates.

The Zimmer Centerpulse integration team is structured like a division with an organization chart headed by a corporate vice president along with a global integration steering committee, boasts of Sam, David Dvorak, our chief counsel and head of corporate services, and myself.

The entire group analyzes, manages, and executes for silos of activity.

Silo one is process, training, templates, playbook control, meeting cadence and subteam tracking in its simplest form.

Complex, detailed, documented integration (indiscernible) milestone, everything in the process on a daily and weekly basis.

Number two, financial.

Costs, ROIs and reconciliations.

Sam will describe more on the integration work projects to date by the finance department.

Thirdly, human resources and issues, everything from complex cultural issues, compensation benefits and severance in 80 countries, career plans in the new Zimmer, training and development, and headcount baselines to things as simple as who is angry or yes, even who needs a hug.

Lastly number four, synergies.

The cataloging and quantifying of synergies booked to date by country templates and by synergy parameters, (indiscernible) tracking tools and reports, always accountable to a single current Zimmer or ex-Centerpulse employee.

Of the 250 major projects we are immaterially behind schedule on three with only minor reconciliation items left open to completion.

Here's a short list example of some of the projects.

Closure of the Zürich head office, the restructure of Europe's (technical difficulty), automated financial consolidation and conformity, global tax strategy for more than 80 legal entities, insurance pooling, manufacturing sourcing and distribution network optimization, benefits optimization and consolidation, global quality systems, R&D project strategy by science category, spine division operational improvements, maximization of prior Centerpulse tax loss carryforwards and individual tailored by-country integration plans for some 80 countries and more than 100 different distributors just to name a few.

And yet it is on schedule and will produce, we believe, synergies at the high-end of our three-year range, i.e. from 80 to 90 million, not from 70 to 90 million.

But conversely, we continue to believe the sales to synergies of $50 million remain accurate for 2004 and are an active part of our model.

We are on schedule, on target, and view our acquisition now as accretive very early and certainly very much the perfect fit.

Sam, we'll turn it over to you for some further financial thoughts on the quarter and on the integration process.

Thanks, Ray.

With the acquisition of Centerpulse completed on October 2, the fourth quarter has been very busy for Zimmer's financial and information technology teams throughout the world.

Highlights of some of the more significant activities include the following.

We converted Centerpulse businesses from international accounting standards to U.S.

GAAP, completed a full balance sheet audit for all of Centerpulse as of September 30, 2003, completed the initial purchase price allocation for the Centerpulse acquisition as part of purchase price accounting, tightened the internal controls and financial performance standards throughout the Centerpulse organization, and converted all of the Centerpulse to Zimmer's internal accounting policies.

We closed the quarter for the entire company using Zimmer's financial consolidation system, but also closing the Centerpulse entities in parallel on the Centerpulse consolidation system in order to ensure the financial integrity of our expanded consolidation process.

We finalized the details and began the rapid implementation of our integration synergy plans to ensure that we achieve our targeted synergies in 2004, 2005 and 2006.

We made significant progress in transferring the Centerpulse corporate accounting and finance activities from Zürich to Warsaw and Vienna.

We are proud of what we have accomplished during the last 120 days, and in addition are very pleased to be able to report yet another terrific quarter for Zimmer.

As a result of the inclusion of Centerpulse financial results in our consolidated statements for the first time, the historical results that you have all been tracking for Zimmer over the past ten quarters will no longer look the same.

Our year-to-year results are not comparable because we have Centerpulse in our results for one quarter this year but not at all in last year's results.

We've included in our fourth-quarter results several large purchase accounting related entries that make it difficult to understand our results from normal operations.

As you may recall in the first-quarter 2003, we implemented a change in accounting for instruments and moved to an asset-based model for 2003 instead of the expense base model that we had in 2002 and prior.

We closed our third-quarter net debt free and then on October 2nd we drew down $1,357,000,000 of new acquisition related debt from our new credit facility.

During my part of this discussion I will try to separate out the large acquisition related transactions and clearly communicate our financial results from normal operations for the combined company.

I will also briefly discuss our new updated guidance for 2004.

Many factors contributed to this strong quarter including the underlying sales growth for both Zimmer and Centerpulse products being better-than-expected, a weaker U.S. dollar resulting in more favorable foreign currency effects on the translation of international sales to U.S. dollars, earlier than expected realization of the low-paying accrued portion of targeted Centerpulse expense reduction synergies and delay in realizing expected negative sales for the synergies.

In our press release last night we included in tabular form for both the fourth quarter and the full year ,2003 reported sales growth as well as growth on a combined basis, combined as if Centerpulse had been included in our sales results for the fourth quarter of 2002.

In total reported consolidated sales of $702 million for the fourth-quarter grew by 90 percent over prior year and when comparing these results against the combined sales of $588 million for the fourth-quarter of 2002, sales increased 19 percent.

As Ray indicated, contributing to the 19 percent were 3 percent pricing, 6 percent foreign exchange and 10 percent in volume and mix.

Within this 19 percent combined sales growth for the quarter, the Zimmer product portfolio continued with the strong growth that we have seen all year, finishing the quarter at 21 percent over prior year while the Centerpulse product portfolio also grew at a faster rate than expected at 16 percent over prior year.

In the area of foreign currency, continued weakening of the U.S. dollar against most other currencies resulted in the fourth-quarter contributing the highest sales growth from foreign currency than any other quarter in 2003.

By comparison the effect on sales growth in the third-quarter was only 2.3 percent or $8 million in sales.

The yen strengthened by 10 percent over the fourth-quarter of last year, compared only to one percent last quarter.

The euro at the same time strengthened by 19 over the fourth quarter of last year, compared to 15 percent last quarter.

You all know that we have forward hedge contracts in place for 2004 for the yen at an average exchange rate of 120 yen per dollar and for the euro at an average exchange rate of 1.04 U.S. dollars per euro.

As a result of these contracts, the weakened U.S. dollar throughout 2003 will have only a modest positive effect on the operating profit dollars in growth rates created by the former Zimmer standalone businesses for 2004 over 2003.

We also have forward contracts in place for other less significant currencies for 2004, including the Australian dollar and the Canadian dollar, and we use these simple hedging tools to manage risks from year-to-year.

We took full advantage of locking in those positions as we began the operating foreign process for 2004.

We do not have cash flow hedge contracts in place for the Centerpulse portion of our business in 2004.

Reported gross profit margin for the quarter was 68.1 percent.

The U.S.

GAAP purchase accounting requires that the inventory acquired with the Centerpulse acquisition be stepped up to market value as of the acquisition date.

Market value of finished goods is defined as the estimated selling price to the customer less the cost of disposal and a normal distribution margin.

Stated differently, the normal manufacturing margin associated with the acquired inventory is not recorded to the P&L.

This step up is then expensed as a non-cash charge to the P&L as the inventory to which it is associated is sold.

After the step up has been fully expensed, the reported gross profits will return to normal manufacturing margins.

The total inventory step up reported as of October 2, when the acquisition was completed, was $95 million.

In the fourth quarter, $43 million of the inventory step up was expensed to cost of goods sold and had a negative impact on gross profit margin of 600 basis points.

This $43 million pretax expense, $28 million net of taxes, equates to an EPS reduction of 11 cents in the fourth quarter.

Excluding the effect of inventory step up expenses, the gross profit margin for the fourth quarter was 74.1 percent.

The remaining $52 million of inventory step up will be reported to the P&L as non-cash expenses during the first three-quarters of 2004.

For those of you who may not have estimated -- who may have estimated lower consolidated gross profit margins and also lower operating expense margins, Centerpulse recorded instrumentation expense in cost of goods sold.

In our consolidated results for the fourth-quarter and for all future quarters, we have permanently reclassified the Centerpulse instrumentation expense from the cost of goods sold to SG&A expenses.

Reported operating expenses for the fourth-quarter were 58.7 percent of sales.

U.S.

GAAP purchase accounting requires that in-process R&D be expensed immediately at the time an acquisition is completed.

This onetime non-cash charge of $11.2 million, which has no tax benefit, was recorded in the fourth quarter and reduced earnings per share by 5 cents.

Also included in operating expenses for the quarter were acquisition and integration expenses totaling $76.4 million pretax, $49 million net of tax, or 20 cents in earnings per share.

These expenses include distributor termination costs, integration related consulting and professional fees, severance and other integration related expenses.

Excluding the impact of the in-process R&D write-off and also excluding acquisition and integration expenses, the adjusted operating expenses as a percentage of sales was 46.2 percent.

This includes the permanent reclassification of Centerpulse instrumentation expense from cost of goods sold to SG&A.

Reported operating profit margins were 9.3 percent and excluding the impact of the inventory step up of $43 million or 6.1 percent of sales, also excluding the in-process R&D write-off of $11.2 million or 1.6 percent of sales, and finally the acquisition and integration expenses of $76.4 million or 10.9 percent of sales, adjusted operating profit margins were 27.9 percent.

We have been net debt free since the end of the second quarter of 2003 and at the end of the third-quarter we had $97 million of net cash on the balance sheet.

On October 2, 2003 we completed the Centerpulse acquisition and drew down $1,357,000,000 of (indiscernible) acquisition debt with interest rates of LIBOR plus spreads ranging from 87.5 to 112 basis points.

We have estimated that the drawdown on the facility at the expected close date was going to be a little over $1.4 billion, but due to stronger cash flows generated in the third-quarter, the initial draw against the facility on October 2 was less than anticipated.

As a result of continued strong operating cash flows in the fourth-quarter together with cash acquired as part of Centerpulse AG and InCentive Capital AG transactions, we were able to reduce nearly 20 percent or $255 million of our initial acquisition related borrowings in the fourth quarter, our first quarter of combined operations with Centerpulse.

Zimmer's effective tax rate for the first three-quarters was 33.5 percent.

Due to the Centerpulse effective tax rate as a stand-alone company being lower than Zimmer's, we had expected the blended rate of the two companies would be 32.5 percent in the fourth quarter.

The reported tax rate for Q4 was 34 percent.

Without the effects of the inventory step up, in-process R&D write-off, or acquisition and integration expenses, the adjusted effective tax rate for Q4 would have been 33.2 percent, slightly higher than our forecast due to more income being sourced in higher tax rate jurisdictions and other onetime effects of specific tax issues resulting from the acquisition of Centerpulse.

We are actively working on developing and implementing a more tax efficient model for 2004 and beyond and should have our new model in place by mid 2004.

As a result we expect to be able to deliver a 31 percent effective tax rate for 2004 with a higher rate in the first half of the year than the second half.

The total purchase price of Centerpulse AG and InCentive Capital AG was $3.4 billion consisting of cash and newly issued Zimmer shares.

As a result, Zimmer issued 44.5 million new shares of Zimmer stock resulting in a total number of diluted shares outstanding for the fourth-quarter being 245.4 million shares.

Reported earnings per share for the quarter and the full year 2003 were 15 cents and $1.38, respectively.

Excluding cumulative effect of the adjustment for the change in accounting principle for instruments which occurred in the first quarter of 2003 and added 26 cents to reported earnings per share in 2003, and also excluding the Centerpulse purchase accounting acquisition related entries, namely inventory step up, in-process, research and development write-offs and acquisition integration expenses, fourth-quarter and full year 2003 earnings per share were 51 cents or $1.80, respectively.

Turning to the balance sheet, we continue to deliver excellent working capital (technical difficulty) management, which contributed to our strong operating cash flow for the quarter.

For the former Zimmer stand-alone businesses, we achieved DSO of 52 days equals to fourth-quarter of 2002 and down six days from the 58 days reported at the end of the third quarter.

On a consolidated basis, with Zimmer and Centerpulse businesses together, we achieved 62 days sales outstanding.

The Centerpulse businesses have a greater proportion of revenue generated in Europe and customers throughout the various countries of Europe typically pay much slower than in the United States.

The Centerpulse businesses, however, do not have the same collection discipline in some cases as do the Zimmer businesses.

As a result, our 62 day consolidation finish at the end of 2003 represents a reasonable beginning and also an opportunity to improve the velocity of collections, which will drive DSO down and generate incremental operating cash flow in future quarters.

Today's inventory on hand were 232 excluding the effect of the inventory step up.

This represent a 41 day reduction from the 273 days reported at the end of the third quarter and a 15 day reduction from the 247 days reported at the end of 2002.

This reduction was due to December traditionally being a lower manufacturing output month due to the holidays, coupled with a stronger sales quarter than originally forecasted.

As we continue to introduce new products coming out of the R&D pipeline, as Ray discussed during his remarks, we do expect inventory days to increase periodically back into the 250 to 260 day range.

Accounts payable days to pay were 63 days, down two days from the end of the third quarter and up six days from the end of 2002.

Operating cash flow was a healthy $169 million for the quarter and $495 million for the year.

Major contributors to our strong cash flow in the quarter were better-than-expected earnings, excellent working capital results, and the early monetization of a portion of the acquired Centerpulse tax loss carry forwards.

Capital expenditures quarter were $51 million, consisting of $29 million for instruments and $23 million for all other property, plant, and equipment fixed asset additions.

For the year, capital expenditures were $159 million, consisting of $114 million for instruments and $45 million for all other property, plant, and equipment fixed asset additions.

Free cash flow, which is operating cash flow less capital expenditures, was $118 million for the quarter and $336 million for the full year.

As a result of the acquisition and the related $490 million amortizable intangibles reported at the acquisition date, amortization expense for the fourth quarter was $11 million and depreciation expense was $30 million.

Amortization expense is reported in the SG&A.

In our press release last night we provided updated sales and earnings per share guidance for 2004.

As a result of our stronger sales finish than forecasted for 2003, we are increasing our sales expectations and guidance for 2004 to a range of $2,950,000,000 to $2,900,000,000.

This represents an increase of approximately 53 percent on a reported basis.

Centerpulse recorded $688 million of revenue in the first nine months of 2003 prior to our acquisition.

Using a full year of revenue for both companies, our combined sales for 2003 were $2.589 billion.

Our sales guidance incorporates our expectation that Zimmer will lose approximately $50 million in sales dis-synergies as a result of the integration of Centerpulse into Zimmer.

Approximately 50 percent of sales dis-synergies experienced in 2004 will be earned back in 2005 and the remaining 2004 sales dis-synergies will be earned back in 2006.

Excluding the effect of sales dis-synergies, consolidated sales are expected to increase approximately 14 percent, with Reconstructive growing a faster rate than other product categories and 1 to 2 points greater than the market.

Trauma and orthopedic surgical products are expected to grow in the low double digits.

And spines should be relatively flat year-to-year as we increase our spending in R&D in order to rebuild the new product pipeline for spine.

For reference purposes, the combined sales for both Zimmer and Centerpulse for the four quarters of 2003 were $622 million in Q1, $645 million in Q2, $620 million in Q3, and finally $702 million in Q4.

We also finished 2003 over our earnings per share expectations in the fourth-quarter.

We expect that the Centerpulse acquisition would be one penny dilutive to EPS in the fourth-quarter of 2003 and would be neutral to Zimmer's stand-alone EPS expectations in 2004.

We did not experience a material sales dis-synergies (ph) in Q4 of 2003 and were able to deliver the low hanging fruit portion of expense synergies a bit earlier than expected.

It is now clear that the Centerpulse acquisition was accretive on day one.

As a result, although we still anticipate experiencing $50 million in sales dis-synergies in 2004, we are also increasing our earnings per share guidance by an additional 3 cents to a range of $2.07 to $2.10 for 2004, excluding the effect of non-cash inventory step up and acquisition integration expenses, which we estimate to be approximately $53 million pretax or $34 million net of tax and $128 million pretax, $79 million net of tax, respectively.

During our third-quarter 2003 conference call we also commented directionally on earnings per share growth rates for 2005 and 2006.

Even with our increased guidance for 2004 we expected to be able to increase earnings per share in 2005 over 2004 in a range of 20 to 25 percent, and by 2006 we have the potential for earnings per share growth to exceed 25 percent.

We will invest heavily in product training for our combined sales force of over 2,000 sales reps during the next 6 to 12 months and this training should begin to show up in our sales growth performance as we exit 2004 and enter 2005.

We are also increasing our spending on MIS activities well beyond 2003 spending levels.

By continuing to advance our position in MIS, we believe that we will continue to be able to outgrow the reconstructive market by taking additional market share from our competitors.

Now I'll turn it back over to Ray.

Great, thanks Sam.

I will ask Tisha, our operator, to take back control here and we will be happy to respond your questions.

(OPERATOR INSTRUCTIONS).

Katherine Martinelli.

Good morning.

Just first one question on the guidance for this year.

The first part of it is just what you are assuming for the FX contribution in that revenue guidance of the 185 to 1.9 -- or 2.85?

The simple answer is 4 percent, but Sam to you add anything additional?

No, I think 4 percent but I think it is anybody's guess what direction the foreign currency is really going to travel.

If the dollar strengthens obviously it will be less than that.

We're thinking there might be some strengthening but it obviously is just guessing, so we're playing around inside with 3 to 4 percent, but the proper answer to you is 4 at this point.

Just Ray, on your comments regarding your conviction that you're still expecting to see that $50 million of sales dis-synergies, can you reconcile that with the comments about there has been a delay so far, the integration is going better-than-expected, you've got 97 percent I think you said, of the sales force integrated now.

Why would you still expect to see that sales dis-synergies if it hasn't materialized yet?

It seems the more time that goes by, the less likelihood of it.

That is a great question.

The 97 percent of course is just the U.S., that was a comment on U.S. distribution, but I think your question still applies.

If you think about that period from October through December and you put yourself in the position of sales reps, our own belief, in fact our knowledge is that they would unlikely be exiting unless they got really extravagant offers and decided to run, number one.

Number two, a lot of them had retention agreements that were set in place by Centerpulse, not us, that ran through the end of the year.

It was unclear who was going to get which hospital, which surgeon, who the distributor was going to be and so on and so on.

So I firmly believe that what we saw starting with the U.S. is that environment and the 50 million of course is first of all a global figure.

I think we will see the loss of some folks and it is really not sales reps so much because it is business that varies by rep.

If a senior rep leaves, he may take 60 percent of business.

If a very junior person leaves, they may take to 10 or 20 percent.

So I think we have to be careful when we talk about reps leaving.

It is really relative business.

In Europe it is a little longer process to get -- because of the combinations of direct versus distributor over there, it is a little more actually complicated process and I think those kind of people leaving and dissatisfactions and/or our good competitors stealing reps from us, I think all of that takes a little bit of time.

The other thing we don't talk about is, it's not just reps, it may be surgeons.

Not everybody loves us obviously and there may be surgeons who don't particularly want to be with Zimmer now that Centerpulse and Zimmer have joined together.

So I think what we are looking at is a lagging indicator.

We have modeled -- we recognize the fact we get accused occasionally of being conservative, but I think people have to model that 50 million in based on our good judgment of the time that it takes for these things to happen.

And by the way, 50 million for us is appropriate.

This is a big business in sales and I think that is something we have to expect in orthopedics.

That color is very helpful.

One quick product question, more of a clarification.

Are you launching -- sorry if I misheard, 32 millimeter or was it the 38 millimeter head for the Metasul because my sense the growth in the metal on metal market was more tied to the 38 millimeter.

It is, but they didn't have -- I actually said the 32, and I meant the 32 because that was not even available in the U.S and it is now available.

But you are correct, although in metal on metal a lot of that has been Bill Harris and highly cross-linked polyethylene moving to the large head strategy if you will.

But I think it also does apply to metal on metal and therefore to your point, we will need to move to larger heads.

But the test work we did on the lagging sales of metal on metal was directly related at least at this point to that head not being available.

Would we have the 38 millimeter this year you think?

I don't know.

I have to look that one up for you separately, Katherine.

I don't know that one off the top of your head.

It is a Winterthur based product, but I will look it up for you.

Thanks, I will hop back in the queue.

Bruce Jacobs.

This is Jason Robbins, filling in for Bruce.

Sam first off, I was wondering can you give us a sense of how the inventory step up will play out over the year in '04.

Is most of it weighted toward the first two quarters?

It really depends, no -- most of it should be weighted for the first two quarters, yes.

It may not be equally spread among the three quarters, however, depending on where the inventory at the step up is associated with it, is sold and how fast it sells out.

If I had to guess, we have a disproportionate amount in the first two quarters than we would see in the third quarter.

Fair enough.

Next question, was the accounting system for the instruments at Centerpulse switching over to an asset-based model?

What would be the incremental impact we would expect based upon the gross margin line in '04?

Let me clarify what you said.

Centerpulse was not on an expense level, they were also on an asset-based model.

They also sold some instruments.

They have a mixed bag of issues.

Probably the best way to address the question is look at the total depreciation expense that we now have for all instruments.

We have a total of $10 million for amortization in the quarter and $30 million of instrument depreciation for a combination of both Centerpulse and Zimmer, and all of that is recorded in SG&A.

The real issue was conforming it to SG&A.

Fair enough, thanks.

Mark Landy.

Hello.

Sam, just walk through the gross margin comments again.

Would it be fair to assume that probably what we saw in Q4 could be a low on the gross margin from a combined entity perspective?

I would not say that.

It is low only because of the step up that was expensed to cost of goods sold.

Without that the 74.1 percent gross profit margin is what I would call a normal margin, and the question is can we improve from there?

I think the obvious answer is as we continue to focus at synergies and driving mix and if we get price squared away, there is always an opportunity to improve margin.

So would it be unfair to assume that you could probably exit next year close to 75, 75.5 again?

Mark, it is Ray.

It would be unfair to ask but you did anyway.

All right.

Then just in terms of your history that you always outperform, which we are grateful for, looking at the 20 to 25 percent earnings per share growth in 2005, should we continue to believe that that would be the case even if you did execute ahead of plan in 2004?

We look at that as well because one of the things we wanted to make sure of, not so much '05 but '06, we wanted to make sure that as we jumped all over what Sam described as low hanging fruit and whatnot early in the process here, which we are happy we did, we wanted to make sure that we weren't cutting off the back end of our growth in '06.

And we have gone through what we see in the way of upsides, downsides, and done that analysis.

We are very comfortable as you can tell from our guidance to reaffirm '05 and '06 as described.

I don't think any amount of early attention to synergies in '04 is really going to have any effect on '05 at all.

It would have been on the back end of '06 if anything.

Just lastly, you did a good job in taking a big chunk out of the interest payments.

How should we think of that going forward?

Is it just to pay it down on the same schedule just at a lesser amount, or is there a plan in place to accelerate that pay down and to be done with the debt ahead of plan?

We have not changed our expectations at this juncture of being able to pay the whole debt balance down by the end of '06.

Obviously if we continue to have very strong cash flow it would happen earlier than that.

Right now we're still targeting to have it complete by the end of '06.

Lastly Sam, the 31 percent would obviously be good in '05 and '06 too, the tax rate?

Once we demonstrate our ability to deliver 31 percent, and as I mentioned, I'm just going to point this out for everybody as well, because there are some tax planning and execution required, the 31 percent I targeted for '04 is for the full year but we'll start the year higher in the first half we the install our new plans and new structures, then the back end will be lower.

So going into '05, we'll be at that lower rate that we achieved in the back half of '04.

So it would step down a bit in '05 and perhaps a bit more in '06.

Just to quantify that, Sam, would we see a reconciliation in Q4 '04 to bring the tax rate down or should we model through it coming down maybe Q3 and Q4 to a net effect the year out at 31 percent?

That's a good question.

Under U.S.

GAAP we're required to always record the full year expected tax rate in the current quarter and until we actually changed our structure, we will start the year with the expected full year rate as if we don't have a tax plan coming up.

Once we install the tax plan we will then have a true-up in Q3 to book to the full year effective rate and then Q4 should be the same 31 percent.

So it will look a little odd in Q1, 2 and 3, but Q4 it will look normal.

Awesome job.

Thanks very much.

Ruth Wick (ph) with Dedadra (ph).

This is (indiscernible) for Bob Hopkins.

I have a couple quick questions.

First things, for the transparency.

The first question is some of your large competitors in hips are growing in the single digits and you're growing as quickly as Striker (ph) which is (indiscernible).

We know why Striker is taking share and our question is how much of your ability to continue to taking share is related to, specifically to that trabecular metal.

Then I have a follow-up question on the Hopkins relationship.

I think it is a number of things.

If you look at that trabecular metal growth in numbers, while it still represents a relatively small part of our total sales, you can tell from the percentage growth and the run rate sales information I try to share, that it is sort of doubling on a quarterly basis.

Obviously I don't want to commit to that every quarter, but historically it's doubling and it is running up into some pretty big numbers now, 20, 25, 30 million.

That is a significant factor.

Thirty percent growth, 31 percent growth to be precise, in porous is significant because we track market share in dollars, so therefore you are creating a premium sale.

Highly cross-linked polyethylene continuing to grow at 36 percent is certainly a factor because again it is a premium sale.

And fiber metal taper and the impacts of MIS and the new ML taper coming out are all porous products, as is the whole Apollo productline that we brought out on the beaded side.

So what you are looking at is the implications of higher dollar sales and more positive outcomes, but driving dollar share because we measure it in dollars.

So we look at all of that and say that constitutes a good support mechanism for driving dollar share growth in the U.S. and elsewhere.

Second question, is how much business in the traditional hip and knees did you do with Johns Hopkins University?

And if there is any guarantees for share gain from this relationship?

The answer to the first one is easy, zero.

The second part is not estimatable.

There is no contract for sales of any kind.

This is an MIS Institute and therefore is a teaching center.

What they do have to do because we license, assign and license our MIS technology to institutes and to people and groups of people is, they have an obligation under the licensing agreement and under MIS-only to use our instruments and implants.

But in the broad general sense of -- I don't even know what they do, that's probably about 1,200 or 1,300 total joints done at Hopkins.

There is no commitment or relationship related to that.

Thank you.

Milton Hsu.

This call is getting kind of crowded.

Ray, first question, any plans to leverage some of the Zimmer technology into Centerpulse productlines such as maybe Prolong, Longevity, Trabecular metal?

Basically I just want to get a sense to see if there is any opportunity to drive mix shift in Centerpulse loyal customers?

Absolutely, Milton.

In fact our science group as we speak are putting together a merged R&D plan which we will be looking at pretty soon which is going to in fact do exactly that.

There is also opportunities coming the other way.

It is not a one-way street with Zimmer.

They have also some very fine technology on the premium side.

As an example, we were looking and trying to think our way through more carefully on hip resurfacing.

They have got what looks to be a great hip resurfacing product already out in the non-U.S. market.

So yes, there is a plan being built for that.

Some of it was done during due diligence, but I want to emphasize it truly is a two ay plan.

Is that something that will be slowly phased in or just priority for this year, the next 18 months?

The plan, very much like the integration, will be spread over the next three years, with those best opportunities to take share.

Our focus is share and cash flow, as you know, and therefore we will focus on those things that will allow us to take share and put them in prior year order, or conversely if we feel we are weak somewhere we may focus on something to defend ourselves.

Okay, and one question for Sam.

In the quarter on the SG&A line, were there any extraordinary costs that might go away going forward, sales force retention packages, anything like that?

Can SG&A return back to a more normalized 39, 38 percent?

There is nothing notable in the quarter that we haven't already disclosed.

I would say though that as you look forward clearly a big target zone for synergies is SG&A, so SG&A would not go down in the future because of anything unusual that happened in the fourth quarter but it clearly would go down as a result of driving synergies.

Let me add to that.

Although we don't specifically G&A and, although we don't break out G&A ratios in dollars, I can tell you there is a dramatic ratio to sales differential between fully loaded stand-alone old Zimmer and fully loaded stand-alone Centerpulse.

And we tend to run at Zimmer, as you know from talking to us, we are very, very tough and generally miserable on the G&A line.

So that in fact does create a real opportunity although we don't share the absolute line break out with you.

I have heard Sam rations paper clips over there, so.

You have to fight them for one.

Mike Weinstein.

This is actually Rog Tanaway (ph) for Mike.

A question on the R&D line.

You mentioned it is going to go to 6 percent, you're thinking for next year.

How should we think of the complexion of that?

I imagine those are going to hit 6 percent later in the year.

I don't think I said next year.

I think I said over the next year or two was the -- I will double check the language of my script.

If I did say over the next year, I didn't mean to.

I think it is over the next year or two is the correct language and my belief is that it is going to stay sort of mid-fives as we see things this year.

It could be even a little under that because of the big jump in denominator and some of the reduced R&D effort as Centerpulse was struggling in earlier times.

As we reinvest through the end of '04 and all of '05 and out through '06 in spine, biologicals to the extent it's internal and sports med, the comment I was making was that I believe it will trend back up to what has been our target area of 6 percent, but I think it will be in different categories.

I don't think we will be investing at 6 or 7 percent or something in recon.

I just won't make sense because we filled in a lot of the gaps with the acquisition.

And then just a question on the method patents you have been awarded.

I'm curious how is that going to be enforced in a sense?

Is that a patent OB upheld against surgeons who use a 2-Incision hip -- (indiscernible) incision procedure with a competitor's hip?

How does that play out?

The answer is no.

We do not -- while we license people to use our MIS and the patent does appear to be very broad and strong, Zimmer's policy is never to go after surgeons, individuals and hospitals.

And in fact, the laws in this country I believe under patent laws, exclude them from those kind of situations, particularly where it in involves patient good.

This is strictly a mechanism relative to our competitors.

But I think like most of us, competitors included, we don't spend time in litigation.

I think the marketing value of this far exceeds the litigation value and I don't say that in a legal sense, but simply because we have an independent body in the U.S.

Patent and Trademark Office saying hey, Zimmer, you've got something really unique here and we're going to give you a patent.

So I don't get awfully tied up in the litigation aspect, but I am interested in their opinion and the granting of the patent, if you will.

Great, thank you very much.

Jason Whitt.

A couple questions.

First off, on days of inventory, I guess you implied that it would be going up this year to between 250 and 260, I guess.

Could you just explain what the rationale behind that is?

There are always fluctuations from quarter-to-quarter based on what is going on with holidays and manufacturing plant shutdowns and that sort of thing.

All we're simply saying is we saw our traditional year-end wind down of inventory as we sell more than we make.

That is quite normal.

A little better performance because of the strength of our sales took place at the end of '03 than we had experienced in previous year for example.

But as we look forward and continue to roll out a whole rack of new products that Ray detailed, those new products can only be rolled out if you perceive sales with inventory replacement.

Certainly building inventory for those new product rollouts and as we saw last year at the peak of the rollout, about midyear, I think we actually crossed in about 267 days of inventory.

So during the really peak periods of inventory being rolled out in advance of sales for new products, it would not be unusual to see us climb back up to the 250, 260 range and when the new products slowdown we should drop below 250 just like we did at the end of the year.

Jason, let me add to that.

You really have to look at it by quarter and see what we are rolling out.

It is going to bounce around.

What we focus on obviously is putting out higher return products, but what we focus on making sure from a competitive basis too that we are well below our competitors on pure orthopedic, pure reconstructive comparisons.

But whether it fluctuates 20 or 30 days on any given quarter really doesn't bother us very much as long as it is new product introductions that is causing it.

And we said through most, I think all three of the calls that we had earlier in '03 that a range of 250 to 260 was a pretty normal range during new product rollouts.

It sounds like that should be the number we're using for most of 2004 and even beyond?

As long as we keep our pipeline churning through and putting out new products, that would be a fair assumption.

And in terms of DSOs, I think you implied 62 days -- do you have some room in 62 days?

Sixty-two days is a starting point.

We have some room there.

Any indication of how far that could go?

No, I don't think we will ever see the days of Zimmer stand-alone because of the disproportionate amount of the European revenue and receivables that comes to us with the Centerpulse acquisition.

But there is clearly room for improvement.

I think the U.S. is a good indication.

We work hard to get to 32.

First quarter out of the box, we’re at 35 right now.

So from a U.S. perspective, those are good numbers.

I think as Sam says, there is room for improvement, but given the European mix it may be tough to get down to some of the historical stand-alone numbers.

In terms of debt paydown, I guess you implied it was about 255 million paydown this quarter.

Is that a good assumption rate to use for each quarter this year or is that --?

No, No.

If you are looking at the contributing factors we mentioned, it was not only good earnings and good working capital management, but we have available to us -- we acquired cash for example with InCentive Capital.

They had $100 million of cash on their balance sheet and we didn't have access to that cash immediately, so we acquired cash with cash.

So $100 million of that was simply being able to get our hands-on the InCentive Capital acquired cash, some three or four weeks into the acquisition.

What is a good assumption for 2004 in terms of debt paydown?

I think you just have to work through your models and whatever you want to assume will be the performance for the balance sheet and your income, I think you just need to generate your own cash flow.

So assume as much as you can, you will paydown?

At the moment we have nothing else to do with our cash other than pay down debt.

We're not going to buy back stock.

We're not going to move to a dividend program.

If we do any other acquisitions we have a choice of doing those for cash or with stock or a combination of both.

But for now in a steady-state, our cash generation will go to pay down debt.

I will also say we're not in a hurry to get to a net zero position because we think from an investor point of view maintaining our ratings in the BBB family is probably the best way to provide the best return for the shareholders, to have some leverage in the balance sheet, but for now it is coming down pretty quickly.

One last question and that is ceramics in the U.S.

What is your timeline or outlook for that for Zimmer?

Well, I don't want to say it the wrong the way, but I mean it is not at the absolute top of our list given other things we have to do.

We have PMA potential obviously underway and available to us we think because there's a number of opportunities.

We have Trilogy (ph) in the AB form in Europe for the last several years and we have European data.

Obviously Serosal (ph) has a huge amount of European data, so part of that depends upon the U.S.

FDA being willing to accept European data under a PMA format.

That is one opportunity.

There's a bunch of things going on with metal on metal that we think will give another offering in our bag obviously of an opportunity at an alternative bearing.

And then we have a model block trabecular metal ceramic that has been worked for about two years that is ready for submission to the FDA, as well as part of the Implex deal.

So there is activity going on, but it is truly not in our top two or three things to do.

We recognize it's a neat niche product.

If you ask me, would I like to have one right now?

The answer is sure I would because we're in the solutions business, but there is a bunch of other things we're working on as well.

Thanks a lot.

I will hop back in the queue.

Just a couple questions.

Sam, the P&L impact of Centerpulse, I guess Centerpulse was not hedged in the fourth quarter and I think you said you don't have plans on hedging any of that currency going forward.

Can you walk us through what the P&L impact of that would be?

Also can we expect any further acquisition and integration expenses rolling through the year and then CAPEX for '04?

First of all, let me talk about foreign exchange for Centerpulse.

What I said was we have no hedges in place right now for them.

We're still looking at the evaluating whether or not it make sense to have hedges.

There's a bit of a different issue there.

We have foreign source manufacturing now as we have product that goes the other way, coming into the country instead of product going out of the country to foreign operations.

So we just need time to analyze that and see what makes the most sense going forward.

But because we have no hedges in place in that business, you can probably run your own models.

Whatever you have in your model for 2004 for Centerpulse stand-alone if you built your model that way, you can just translate it at varying foreign exchange rates and get both the sales as well as the earnings impact of the movement of exchange rates.

It is as simple as that.

That's the first part.

Your second question was -- sorry, acquisition integration.

We will have, I think we have about another 70 million or so expected next year in acquisition integration costs, something like that.

128 million pretax

128 million pretax for next year, and that will come to us throughout the course of the year.

In our guidance you'll see that we gave guidance on both a reported basis as well as an adjusted basis and the difference between the reported basis and the adjusted basis, is that number, that number as well as the balance of the inventory step up being expensed.

The last question was CAPEX for '04.

CAPEX in '04 should be what we and Centerpulse have been running together, with an additional 20 million or so on top of that for '04, as well as '05.

The additional 20 million will be investments in IT platforms to expand those, an expansion of our distribution capabilities, as well as driving to best practices from a manufacturing point of view.

We think it will be somewhere in the area of $75 to $80 million for the traditional property (technical difficulty) equipment.

Great, thank you very much.

Christopher Warren (ph).

A question for you, within the context of a very strong reconstructive quarter I noticed that on a constant currency basis European knees was 4 percent which was a significant deceleration for stand-alone Zimmer.

Could you give us some color on that?

I don't know where you got your numbers from because Zimmer stand-alone knees was not at 4 percent.

You may have misheard me.

I will have to lookup --.

In the third quarter it was higher than 4 percent and then combined for this quarter it was 4 percent on a constant currency basis.

You're saying on a combined basis?

Yes.

I'm sorry, I thought you said Zimmer stand-alone.

Stand-alone in the third quarter.

That threw me off, I'm sorry.

On a combined basis the old Zimmer, if you will, has continued to take significant market share in knees on a 10, 11, 12 percent constant currency basis.

But the fact of the matter is that Centerpulse knee brands have been losing share and in fact have been flat to negative and you have to remember some of 10 to 12 percent local currency knees and about 27 percent on a reported base that Zimmer was taking was from Centerpulse, so you've got a little bit of a trade-off here because until we owned them they were one of the people we were obviously trying to take share from.

On a settle-in combined basis, it is 4 percent right now but that is really driven by the larger Centerpulse business.

We think with our knee marketing and country structures in-place, the advent of MIS Quad-Sparing knees and a much stronger image guidance program, obviously that number is going to go up.

Great, thanks.

Also just within the spine franchise, I know it's small as a percentage of revenue, but can you talk a little bit about what your top two or three opportunities there are in the next 12 to 24 months?

Sure, I think so.

A couple I've mentioned, Dynesys which is a dynamic neutralization system, dynamic stabilization if you will, becomes an interesting aspect in terms of nonfusion strategy.

That is obviously a big opportunity.

The trinic (ph) select interior, the cervical plate system, that we just put out from an internal point of view, the fact that the sales force is now expandable and we have in fact given this spine line to six of our traditional Zimmer distributors who are in areas of less geographic concentration, the ability of us to bring MIS.

We've got six years, almost six years of experience, five years of experience at MIS now from a technology and design point of view that we think we can take over to the folks in Minneapolis.

Trabecular metal when we get the Implex deal closed there is a number of really interesting Implex spinal products, so there's five or six quick ones.

There is a pretty long list if we had the time.

Thanks.

I wondered if you could comment on two favorite topics, U.S. recon pricing and then adoption of your devices by MIS trainees.

First on pricing, what are the prices you are seeing on new contracts in the United States specifically on hips and knees?

Give us some idea of what the new contracts coming into that pool are doing to the pricing.

Well, new contracts is a tough one to answer because mostly what we've got is that is contractual of any size are the major hospital group programs and most of those are on rotating two and three-year programs, so we may be in the new year negotiation but we could be in the year two or year three, so maybe a little misleading.

We haven't seen anything that takes us off the 2 to 3 percent I mentioned and the 3 percent going forward.

We talk with a lot of hospital groups.

We see them in their entirety, not just individual hospitals.

I still believe there will be some pressure on the less efficient institutions and on some of the academic institutions because what we're seeing is revision procedures, an example, which typically are money losers, being shifted between institutions.

There will be shifts in those that do and don't want to accept Medicare versus cash or insurance.

I still -- I recognize that we are still the most conservative of the groups and we have also been wrong, but I think you also have three careful too.

Depending upon which of our competitors you're talking to, their contract mix may be different and when they say for them this year it's 4 percent, there isn't necessarily a conflict in the market because that may in fact reflect their mix and if that is the case, that is good for them.

We are still seeing 2 to 3 percent with pressure on academic institutions.

Striker mentioned that they are getting as much as six in the U.S. at this point.

Do you think that is because they are raising prices on ceramic on ceramic in particular or is there some other dynamic going on?

You have to ask them.

As I recall, I am not often invited to listen to their conference call but if I (technical difficulty) recall what they said at the time it was, they were getting six, but I recall Dean Verdi (ph) or somebody jumping in and saying perhaps some of that is mix related to ceramic.

One of the things you have to be careful of, (indiscernible) Striker but he also -- our system is the only one I know and ours is discrete on price by SKU.

So when we pull price, it is discrete price only, no mix by SKU accumulated.

I don't know what other people's systems are like but expect Dean's comments probably make some sense from their perspective in that it may have had some mix.

I doubt -- and you will have to ask Stryker (ph) -- but I doubt that they are going out in getting 6 percent stick rates across new contracts and across their entire business in recon.

That would be tough to believe.

Okay, and on the MIS program, you mentioned some great statistics in Japan for adoption or increases in utilization or maybe you have similar for market share by surgeon or institution.

What are some of those metrics, if you have any, for the U.S. for example?

The U.S. is much larger and much more complicated, and that's why I said -- and I am not ducking it, Rob, I'm simply -- we field tested it in November and December.

I'm hopeful to have a sneak preview at the AAOS analysts meeting but at the very least I have committed to comment on it at the end of the first-quarter.

It's not we don't have some data, but until I'm sure that data relative to proportion of mini's versus 2-Incisions and Quad-Sparing versus mini's and all that sort of definition I have resisted commenting on it until then, but I haven't committed to do it in that timeframe.

Thanks, terrific job.

Just quick follow-up.

I appreciate you giving guidance all the way out to 2006.

I noticed that it was pro forma guidance, at least that is what the press release indicated.

Can you indicate what charges are going to be put out in 2006?

If you look at the three years together, I will give you a bit longer answer than you bargained for on this one. 2004 -- 2003, 2004 and 2005.

In 2003 we had virtually everything you could possibly have from a purchase accounting point of view.

We had in-process R&D write-offs, we had inventory step up being expensed to cost of goods sold, and we had a line called acquisition integration costs.

As we go into 2004, one of those drops away.

We have two of the three.

We no longer have in-process R&D.

That is a one time event.

As we go from 2004 to 2005, inventory step up drops off and the only thing left in 2005 and in 2006 is the residual acquisition and integration costs, which by then should be a much smaller number than we saw in either 2003 or 2004.

Do you have dollar amounts for those numbers?

No, we don't.

But do you have -- I guess in '04, do have that amount?

Yes we do, that is what I mentioned earlier.

The acquisition integration is 128 million pre-tax, 79 million after-tax.

And the inventory step is the remaining --

53 million pre-tax, 35 million after.

Speaker:

Thanks a lot.

Paul Carollo (ph).

Sam, you mentioned product training for the field.

Can you explain your plans for what the focus will be on and if that doesn't include sales training, can you explain what you think the field needs from a business skills or business acumen standpoint?

This is Ray.

I would be happy to hear Sam explain that too.

The plan is -- has several million dollars, first of all reserved in those acquisition and integration expense lines that Sam and Jim were just talking to, and it is for the most part -- it started November 10 when we had our first national sales meeting with all 1,000 reps and we have proceeded from there and it is a laid out plan which goes in order of priority depending upon which sales force you came from.

In other words, if you are from the old Zimmer sales force the first thing you get training on might be Metasul here, but it could be hip resurfacing in Australia.

So it is a very definitive plan laid out by country and depending upon where you came from.

That plan is composed of not only didactic training but in several cases requires either science model or even some cases cadaveric training.

The lagtime between the training -- and the assumption here is we will complete that training over a six or seven month period.

The issue with that is not so much the training itself but rather the amount of time it takes for a person to become confident in surgery using and selling the other fellow's original product as opposed to just learning it in a course.

We believe that that takes a total of about 18 months.

The only other cross-training going on is of course, we're bringing in some new trauma -- excuse me -- well that is true too, trauma and spinal specialists, but I was really going comment on spine, where we have added six distributors from the original Zimmer group and there is a requirement there to do more fundamental spine training and bring in some additional spine specialists.

So it is a fairly long double-digit million, to give you a feel for the cost of the kind of program that will take anywhere from November 10, 2003, out about a total of 18 months.

But most of it is product and technical training versus business skills and understanding more about how the hospitals, what the pressure and issues are in the hospital?

The answer to the question if yes, although we do do a lot of work on the latter too especially as it relates to operating the distributorships and driving profitability margin management, all these kinds of things.

But the general answer to your question is yes.

Thank you.

At this time, we have a follow-up from Bill Plavonic.

I just wanted to see if I could stretch this out to two hours.

We're notorious for it and you're getting worse.

No question.

Thank you.

Thanks, everybody.

We appreciate the attentiveness and I know they are long sessions.

This is very complex, complicated work, but we sincerely are doing our best to be transparent on it, and therefore requires a lot of detail and a lot of time probably sadly from your perspective.

We do appreciate it.

Thanks for all the calls, questions, and attention we get.

We look forward to talking to you next time.

Thanks.

This concludes today's Zimmer conference call.

You may now disconnect.