Zimmer Biomet Holdings Inc (ZBH) 2004 Q1 法說會逐字稿

At this time, I would like to welcome everyone to the Zimmer first-quarter 2004 financial results conference call. (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 expectations, estimates, forecasts and projections about the orthopaedics industry, management's beliefs and assumptions made by management.

These statements are not guarantees of future performance and involve risks and 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. Ray Elliott.

Sir, you may begin.

Good morning, everyone, and welcome to the Zimmer first-quarter 2004 conference call.

We're pleased to be hosting this call to discuss a solid beginning to the year and to reaffirm the belief in our ability to create the perfect fit based on our second full quarter of operations combined with Centerpulse.

We have made much progress.

Despite the complexity of the data on a comparative basis, we have been able to re-create pro forma sales and adjusted earnings comparisons that we believe are 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 and 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 will have a copy faxed to you as well as add you to our e-mail distribution for future releases.

We'll begin today's call with brief comments related to our first quarter 2004, including an update on operations followed by Q&A discussion.

All results discussions are based upon the asset method of accounting for instruments and all comments and comparisons are on an adjusted basis.

Unless otherwise specified, the quarter comparisons and sales have utilized Centerpulse's actual first quarter 2004 and 2003.

Our focus and analysis will be heavily skewed to brand sales detail and of course, earnings.

All discussion, unless otherwise noted, excludes acquisition and integration expenses and inventory step-up.

In process R&D write-offs were already completed during the fourth quarter of 2003.

We will return to including our usual sequential analysis on a combined basis where they provide useful insight.

We will communicate where helpful references in the quarter to Zimmer and Centerpulse stand-alone performances to give you a historical reference.

As with the fourth quarter 2003, given the early and effective integration process and the true co-mingling of expenses and operations, there will be virtually no commentary below the sales line on a separate basis, but rather almost all the discussion points will be on a combined basis.

My apologies for the long financial adjustments intro.

At this stage, it's the nature of the beast.

Once again, publicly, I wish to thank our new Zimmer team, both Centerpulse and Zimmer employees, for the exceptional work in the last six months and the more than 100 full-time integration people managing more than 350 major integration projects and some 3,000 integration milestones for more than 80 legal entities in 80 different countries.

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

As our press release indicated, we take very seriously our commitment to deliver on the expectations communicated, both when we became a public company in 2001 and with the acquisition of Centerpulse.

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

Consolidated sales for the first quarter were 742 million, an increase on a pro forma basis of 19 percent over prior year and an important sequential increase of 6 percent from the fourth quarter, 2003.

On April 2, we pre-announced sales at approximately 740 million and at that point in time, we were more than 35 million over consensus street expectations.

In the first quarter, the old Zimmer business delivered a 24 percent improvement and the old Centerpulse business 12 percent growth.

Worldwide combined sales in constant currency increased 12 percent.

The strong 19 percent combined performance was importantly led by real volume mix growth of 9 percent in the quarter; worldwide price improvement remained firm at 3 percent but with the Americas at 4 percent, still a little 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 at 21 percent growth and the old Centerpulse at 5 percent growth.

The new combined Europe performed above our expectations at 25 percent reported and 6 percent constant currency.

The old Zimmer in Europe delivered stellar results of 38 percent reported and 22 percent constant currency, respectively.

The large original Centerpulse Europe business has been flat in constant currencies sales most of the last two years and maintained the trend despite some anticipated short-term sales to synergies.

Asia-Pacific sales grew by 19 percent reported, 5 percent constant currency with solid local currency results from the old Zimmer at 9 percent.

It was our reasonable belief that we would lag both global and individual geographic markets and sales growth for about 18 to 24 months from October 2003 forward.

At 19 percent reported and 12 percent local currency, this is clearly currently not the case.

At 21 percent growth in recon, this is definitely not the case.

We anticipated losing $50 million in sales to synergies with about 75 percent or 38 million annualized occurring in the first six months.

Our actual annualized synergies have been 34 million to the end of the first quarter.

Our sales over-achievement of 742 million has included early conversions and cross-training and somewhat to our surprise, a list of some 20 key competitive sales reps interested in joining Zimmer.

Conversely in the spirit of full disclosure, our results also include an extra billing day in the quarter that goes the opposite way in the second quarter.

And much of the sales to synergy losses occurred later in the quarter and are not yet fully represented.

Notwithstanding, it is clear that we're very happy with the first quarter and perhaps more importantly, where we expect to be at the end of the first half.

While I would never down play sales, we did contemplate and plan for some sales losses, the heart of the deal itself is devoted to accretive earnings per share over the next several years.

Adjusted diluted earnings per share for the first quarter were extremely strong, at 56 cents on 246.4 million average outstanding diluted shares, or an expansion of almost 1 million shares from prior quarter.

EPS increased 37 percent over prior year, 5 cents better than the most current First Call consensus EPS estimate and 7 cents better than the original First Call consensus street estimate prior to our pre-announcement.

Our first-quarter EPS of 56 cents represented a 10 percent sequential increase over the adjusted EPS for fourth quarter 2003.

The message is clear.

The acquisition of Centerpulse was not only accretive before the beginning of 2004 but we now expect it to be some 15 percent accretive versus Zimmer's stand-alone 2004 First Call consensus estimate of $1.91 at the time of the acquisition.

We are obviously very pleased with the new combined company's effort to drive each line of the P&L, attack integration synergy opportunities early while finding new opportunities, and of course emphasize our trademark focus on both operating and free cash flow.

Combined gross profit margin in the quarter for the new company exceeded our own expectations at 74.6 percent, directly related to geographic and product mix, price and strong manufacturing performance.

Despite the obviously higher European Centerpulse content, we believe that at 74.6 percent, our gross margin remains one of the best in the industry, is sequentially 50 basis points higher than fourth quarter 2003 and has already returned to the stand-alone original Zimmer levels for as recently as 2002.

SG&A expenses as a ratio to sales is well-managed and improving as planned to 40.1 percent, down sequentially 80 basis points from fourth quarter 2003.

Early in the integration process, R&D declined in the quarter to 5.3 percent ratio to sales 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 the R&D ratio to 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 cover these in a later section.

It is, however, worth pointing out that over the next two years, we anticipate being able to reduce SG&A by at least 200 basis points.

Sam will review the actual acquisition and integration costs for the quarter in some detail.

In this new combined business, we will continue to drive the models that have delivered results for us in the past.

Our working dollars model, defined as driving down cost of goods sold, G&A expenses and cost of working capital, while simultaneously investing in higher return sales and premium products pipeline, will remain in place as the cornerstone of our very successful operating cash flow program.

This particular model is now entering its sixth year.

Combined operating profit in the quarter reached more than 216 million and a 20 million or 10 percent increase sequentially from the fourth quarter, 2003.

We were pleased with the 29 percent adjusted operating profit ratio to sales in the first quarter, up sequentially by 120 basis points from the fourth quarter, 2003, and again, not far below our original Zimmer stand-alone performance metrics.

Speaking of original Zimmer metrics, we've always believed at the old Zimmer that we could produce 40 to 50 cents of operating profit for each new incremental dollar in sales, provided there was no excess or unusual reinvestment in the business.

In the first quarter, 2004, this new combined business produced a sequential gain in sales from the fourth quarter of 40 million, and a sequential gain in operating profit of 20 million, for a drop-through rate of 50 percent.

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

It is a non-U.S.

GAAP measure that has tended to be overused by industry in general.

Conversely, with the acquisition and the differing implications of both interest and amortization, it will continue to be useful for us in 2004 and 2005.

EBITDA, in our second fully combined quarter, is already 35 percent on the previously described adjusted basis. and an improvement of 90 basis points sequentially from the fourth quarter, 2003.

Adjusted net earnings in the period were very strong at 138 million or a 19 percent ratio to sales, an 80 basis point sequential improvement from fourth quarter 2003 and basically equivalent to Zimmer on a stand-alone basis for all of 2002.

Over the next year or two, we expect to reduce our tax rate by 3 points or more to deliver significant ongoing leverage.

As previously mentioned, adjusted diluted EPS in the quarter increased 37 percent to 56 cents with 246.4 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 single line of the P&L, despite being in the very early stages of our Zimmer Centerpulse integration.

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

Although marketshare gains and cash flow generation through working capital management have always been our story, it's perhaps even more true now as a powerful strategy for successful acquisition integration, but more important, debt repayment.

Combined operating cash flow for the quarter was at the extreme favorable end of our expectations, registering 194 million with 124 -- excuse me -- 121 million of cash on hand for a net debt position of only 839 million.

Net debt as a ratio to equity has already been reduced to 25 percent.

In the first two quarters, the combination of strong earnings, accelerated improvement of working capital, access to cash from the InCentive Capital AG acquisition and monetization of a portion of Centerpulse net loss carry-forwards, have allowed us to pay down some 400 million in debt, while additionally setting aside more than $100 million for the cash purchase of Implex Corp. completed last Friday.

Our first-quarter combined working capital statistics continue to perform extremely well.

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 apple-to-apples basis, i.e. excluding any inventory step-up, continue to improve and remain well within our acceptable range for the old Zimmer at 228 days, a four-day sequential improvement from prior quarter and one day better than prior year, pre-acquisition for the old Zimmer stand-alone.

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

In the first quarter, with a combined effort, we brought global receivables down to a respectable 64 days, but we can do much better.

Combined U.S. receivable results were very good at 38 days.

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

The new company's combined payables have been appropriately managed at 60 days.

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

First-quarter 2004 reconstructive sales for the new Zimmer is a revenue recognition of hips, knees, shoulders, elbows and dental implanted into patients during the reporting period.

For the first quarter, worldwide reconstructive sales on a combined basis increased to 611 million, a 21 percent increase over prior year, a strong sequential growth of 7 percent over fourth quarter, 2003, and constant currency growth of 13 percent.

Although we make no promises to continue to disclose beyond this quarter, it may be helpful for you to know that the old Zimmer had an outstanding 26 percent reported recon growth in the quarter and the old Centerpulse, 12 percent growth.

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

Again, it's much to do with expectations.

We fully and reasonably expected to lag the recon market and growth for 18 to 24 months, but at 21 percent reported or 13 percent constant currency, that is clearly currently not the case.

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 once again by 20 percent to 293 million versus prior year, 14 percent constant currency and a strong sequential increase of 9 percent versus fourth quarter 2003.

Contributing to the 20 percent knee growth in the quarter, the old Zimmer delivered one of the best historical growths ever at 26 percent and the old Centerpulse at 4 percent, impacted by reduced UniSpacer sales.

After only two quarters, we have already reached the point from a database perspective where we can consolidate subcategories, such as posterior stabilized or cruciate very effectively.

We know that for the quarter on a combined basis, all femorals accelerated 21 percent to prior year.

All articulating surfaces grew 20 percent; all tibials grew to 22 percent; and all patellas grew 21 percent, nice second quarter 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 accelerated its year-long trend with an explosive 55 percent increase to prior year in the quarter versus 48 percent growth last quarter and 50 percent most of last year, and is now a complete knee system exceeding $70 million in annual sales on a straight-line basis.

It's also worth noting that the LPS Flex is the knee of choice for our new Quad-Sparing QS MIS Total Knee.

The new CR-Flex may be even more shocking with no sales at all last year as a new product.

The CR-Flex is already approaching $30 million per year in sales for 2004.

We believe that in cruciate retaining units, we are growing 5 points faster than the market; and with PS and CR combined, Zimmer high-flex knees had annualized sales of $100 million.

A few more highlights.

The Zimmer RHK Rotating Hinge increased another 58 percent in the quarter versus prior year and is well on its way to becoming a $10 million product line.

While the most segmental product line, originally from Centerpulse, increased even better at 79 percent.

Total Uni sales in the quarter have increased almost $11 million despite a $2 million decline in the UniSpacer, due to the clinical application of tighter indications.

Prolong, our traditional Zimmer Crosslinked Polyethylene Articulating Surface for the knee, doubled sales from prior year and now represents 47 percent versus 42 percent last quarter of all Cruciate Retaining articulating surfaces, but still only 17 percent of total knee.

We expect to have the PS version available in the fall of this year.

While the premium is significant on these products, its ultimate impact and resistance to delamination has potentially far-reaching medical and economic benefits.

We are very excited about the new MX Knee product line originated by Centerpulse, with a focus on mobile bearing, it's already exceeding $40 million per year in sales, an increase of 63 percent over prior year.

Trabecular Metal Monoblock Tibial trays have continued to take off, as surgeons not only recognize the value of the material but the inherent lack of micromotion, which can potentially lead to tibial osteolysis.

Trabecular Metal Tibial trays increased 60 percent in the quarter versus prior year and are approaching 30 million in sales on an annual basis.

Our regions performed well in these during the first quarter with 15 countries, including the UK, Italy, Switzerland, Australia and China, amongst others, all posting 25 percent or greater growth, along with a large Americas business at almost 20 percent.

Our mix in the combined company continues to provide great potential for the future, with CR to PS ratios at 36 to 64, cemented to porous at 85 to 15, and revision knees still only 5 percent of our sales, but also a reflection of the quality demonstrated in the Zimmer primary surgery offerings.

Our knee portfolio is now straight-lining on an annual basis at almost $1.2 billion in sales.

There continues to be exciting progress on the Zimmer minimally invasive knee front and I will update those activities under the Hot Topics section.

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

On a worldwide basis -- on a worldwide combined basis -- in the first quarter hip sales increased 21 percent to 276 million, a solid 7 percent sequentially versus fourth quarter 2003 and 12 percent in constant currency.

The old Zimmer hips grew a terrific 26 percent or 3 points of accelerated growth versus fourth quarter and 21 percent constant currency, while the old Centerpulse business grew 15 percent.

Once again, as with knees, as our new hip databases are 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 results in hips with particular attention to competitive new products and ultimate bearings, here's why we continue to be excited about this new company after only two quarters.

Total primary hip stems grew 20 percent versus prior year.

Total hip cups grew 25 percent versus prior year and total liner products, poly, metal and ceramics combined, grew 26 percent versus prior year.

On an old Zimmer stand-alone basis, cups and liners, without the benefit of ceramic-on ceramic or metal-on-metal, grew at a whopping 34 percent!

In reviewing our brand performance for the quarter, the new combined company's porous stems continued very strong, at 25 percent growth with the old Zimmer contributing 34 percent growth.

Our new Apollo porous stems are really taking share from the porous market leader with growth in the quarter of over 85 percent -- gain led by our new beaded products at a remarkable 338 percent growth.

The Apollo project of porous stems is on plan to deliver almost $40 million in new annualized sales.

The VerSys fiber metal taper stems have once again shown dramatic growth at almost 40 percent in the quarter.

The fiber metal taper, along with the new ML taper, are the stems of choice for Zimmer MIS 2 incision surgery.

Centerpulse's Alloclassic taper, with nearly a $50 million per year sales base, grew very well at 25 percent in the quarter.

Remarkably, at current rates of growth, the porous primary hip stem family of Zimmer products already exceeded an annual run rate of $300 million.

Porous revision stems continue to be an area of focus for Zimmer, and our sales supported that with an increase of almost 22 percent.

These results include our Zimmer ZMR product line and the Centerpulse Revitan and Revisal brands.

Zimmer brand primary Acetabular shells accelerated significantly from prior year with growth of 25 percent, including our particularly strong showing from the Centerpulse Allofit shell, up 32 percent.

Trabecular Metal Cups have increased by 165 percent in the quarter, and will quickly become, including Trabecular metal revision cups, at current run rates, a new 30 million plus product line.

It is interesting to note the Trabecular metal product sales, excluding spine and sports med, are already at more than $70 million on an annualized basis.

Metasul, metal-on-metal liners, insets and heads grew to also exceed $30 million per year in sales on an annualized basis.

Despite extremely tough comps, significant internal penetration and U.S. ceramic and ceramic competition, premium priced longevity, Highly Crosslinked Polyethylene Shell Liners increased by 39 percent, an acceleration of 3 points from last quarter's 36 percent growth.

Since there's no little difference between our longevity dollar growth and unit growth, it's clear that our continued strong sales represent real surgical procedure penetration.

Our longevity product line, when combined with Durasul and other Zimmer ultimate-bearing surfaces, are annualizing for the first time at more than $100 million per year.

We believe competitive surgeon acceptance is growing.

Specifically, we have long since converted our own traditional Zimmer and Centerpulse surgeons on the total liner market clearly is not growing in units and mix any more than 20 percent or roughly half our growth rate.

Our national marketing campaign, titled (ph) Limit Wear Not Options that favorably reviews our Highly Crosslinked Poly capabilities versus ceramic-on-ceramic limitations, continues to have a great reception.

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

Based upon our own current analysis, we would expect that current prices for ceramic-on-ceramic to assume about 6 to 7 percent of the market.

Since our -- role must always involve servicing the maximum number of patients and surgeons profitably, we will continue to plan and negotiate for U.S. distribution and complete our ability to offer Highly Crosslinked Poly, metal-on-metal and ceramic-on-ceramic.

Given continued longevity of Durasul growth combined with Metasul, we are clearly not giving up any sales dollars on a macro basis to competitive alternate bearings.

In upper extremity joints, Zimmer's Bigliani/Flatow shoulder has continued to take marketshare worldwide, with 22 percent growth in the first quarter while the former Centerpulse anatomical system also showed very favorable growth at 18 percent.

Zimmer's marketshare-leading Coonrad/Morrey Total Elbow grew 30 percent in the quarter.

Our combined extremity sales now exceed 60 million on an annual basis.

On a worldwide combined basis in the first quarter, trauma sales grew 15 percent reported and 9 percent constant currency with the former Zimmer traum. business continuing its recovery with a 17 percent growth in the quarter.

Our review of scheduled new products, early surgeon response to the new ITST femoral nail and potential account conversion seem to indicate positive potential, provided that our ITST nail can overcome some formidable competitors.

It's clear that is happening.

The ITST nail went from almost no sales to an annualized 10 to 20 million product line and improved in the quarter by almost 500 percent growth.

For reference, ITST-type nails continue to be reimbursed in the U.S. at higher rates than compression hips screw, adding to their attractiveness.

Old Zimmer brand IM or Intramedullary Nails jumped by 32 percent in the quarter versus prior year.

The former Centerpulse's Sirus titanium lateral starting point femoral nail is a great addition to our lineup and should be well received in the U.S. with approval anticipated in the second half of this year.

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

Our Zimmer ZPS plates and screws continued their strong penetration against the trauma market leader with 30 percent growth in the quarter and our TransFx External Fixation System reached its first $1 million sales quarter with accelerated growth of 68 percent versus only 40 percent last quarter.

Our Zimmer spine division sales increased by 10 percent in the quarter to a more steady 34 million.

Cage sales in the U.S. were actually up 2 percent to prior year in the first quarter and appear to have stabilized, as anticipated, after several quarters of steep decline.

Sales of Thoracolumbar were strong with 15 -- up 15 percent in the U.S. in the quarter, led by our new ST 360 Thoracolumbar pedicle fixation system.

The new Trinica Select, our anterior low-profile cervical plate system, has helped drive U.S. cervical sales up by 33 percent in the quarter and the continued clinical trial of Dynesys, our Dynamic Stabilization System, provided a 25 percent increase.

We are very pleased to announce the FDA 510-K approval of Dynesys, but we have elected to complete the clinical trial with a current enrollment of 180 patients to be academically better prepared for an early 2005 launch.

We are also pleased to announce the approval of our TM 500 and VBR-II Trabecular Metal Spine Vertebral Body replacements.

Distributor locations are currently being provided with inventory.

All new Trabecular Metal Cages for Europe will be launched at Spine Week being held in Portugal in June.

In our Orthopedics Surgical Products division, sales increased an excellent 15 percent for the quarter to 52 million, led by OrthoPAT, our perioperative autotransfusion system designed specifically for orthopedics.

OrthoPAT sales increased by 41 percent in the quarter and continue to generate sales approaching 25 million annually.

Our Limbotech (ph) arthroscopy haul-power tool business in Japan continued to perform well with 24 percent growth in the quarter.

Our OSP division has now reached 200 million in sales on an annualized basis.

In our Dental division, sales remain strong with 26 percent growth supported by 32 percent growth in the standard and tapered SwissPlus Design Implants and 60 percent growth in dental biologicals.

In prosthetics, the Internal Hex, a product line staple, grew 45 percent in the quarter.

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, another half dozen or so under Phase I review.

To give you some reasonable appreciation to how prolific the new Zimmer has been and will be, in reconstructive and trauma alone, our combined new product development operations in Warsaw, Winterthur and Austin released for launch in the first quarter 2004, 16 new product projects, of which half could be considered major.

And the number increases to 25 if you add dental and spine to the mix.

This same group initiated 15 new projects in the first quarter.

Of the more than 40 new reconstructive product launches in 2003 by both companies combined, 14 were launched in the last quarter.

In our efforts to consolidate new development projects, our databases have now been combined, allowing us to return to a more detailed new product disclosure process for the next full quarter.

First in hips, the Hip Development group launched six new projects in the market in the first quarter, including the extended Apollo project stems, 13 new lighted instruments for our proprietary MIS hip G1 system and the Epsilon Highly Crosslinked constrained liners for Durasul.

Nine new proprietary hip projects were initiated in the first quarter, including a unique hip arthroscopy spacer system, the HA/TCP ML taper stem, the globalization of Metasul and the conversion and application of Durom Hip Resurfacing to both computer-assisted and MIS.

We continue to be very excited about Durom hip re-surfacing, with the first successful implantations in Portugal and Canada and in the corridor in Germany, the first successful MIS Durom with no muscle detachment.

In knees, we launched four new product systems including the CR version of the high-flex fixed with HA/TCP, a limited release of the new Fixed High Flex MIS Unicondular.

The Mobile Flex Uni, with and without Trabecular Metal Tibials, is anticipated for 2005.

We also released all the remaining options of Trabecular Metal Tibial System and the Medial Core Instruments for the MIS QS Quad-Sparing knee.

Importantly during the first quarter, we initiated development of the new advanced MIS knee project that we had previously referred to under Phase I review as Wave Three.

In extremities, we launched the new Bigliani/Flatow shoulder fracture instruments, anticipated new Trabecular metal glenoid before year-end along with an innovative total ankle project.

In trauma, we have expanded our TransFX line and have released our Sirus proximal humoral nailing system from Centerpulse.

We are very pleased with the early results of our Trabecular Metal AVM rod.

Avascular necrosis is a difficult disease with historically poor reconstructive results due to femoral head collapse.

The new Trabecular metal rod implanted in 80 patients with an excellent 87 percent success rate is dramatically above other current solution outcomes.

Sign (ph) development work continues on artificial disk and nucleus projects, T2 (ph) transformational spine and the transfer of Trabecular Metal Spine cages and related products to our Minneapolis-based development group.

Internal and external technology reviews are underway to initiate MIS approaches for the key Zimmer spine products.

In Dynesys, five new biomechanical and long-term stability studies have been initiated with respect to dynamic stabilization.

Relative to European data, indications from initial group of 45 Dynesys patients show that five individuals showed post surgical recovery under MRI with re-hydration of the formerly black disk, and intradiscal biopsies indicate that the material recovered now lacked the traditional properties of diseased disks.

In a dental area, work is underway for 2004 with respect to new tapered implant sizes, surgical tools and composite abottments (ph).

In our Zimmer orthobiologics development group, histo-knee cartilage has proceeded to three concurrent large animal studies, with one utilizing a periosteal autologous flap and reservable suturing.

The Centerpulse brand Denovo autologous cartilage graft team has expanded the chamber for production of large clinically relevant grafts and new surgical cases have been successfully completed with Denovo-C Contra-site transplants.

The new studies have been initiated for Contra-Fixed brands Unigraft, a repair study for our Matrix Plus brand scaffolds and the use of regen CMI, as a collagen-based scaffold as well as cell-sitting experience with human munisical (ph) contra-sites and stem cells.

Surgical technique processes are complete for the Permacol rotator cuff patch with preliminary results indicating zero inflammatory responses, a significant improvement over competitive products.

We have filed a 510-K for the use of Dicall (ph) brand as a bone void filler and animal studies will start this quarter for Centerpulse's ABC, autologous bone concentrate.

In total during the first quarter, Zimmer and Centerpulse combined new products represented 17.4 percent of sales and continue to meet our original stand-alone internal goal of 15 to 20 percent.

Let's look briefly at the geographic segments.

As with product segments, we will try to provide combined first-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 showing.

Revenue for the quarter was 423 million, up 17 percent over prior year and sequentially up 8 percent over fourth quarter 2003.

The composition of our growth retrospectively was as follows -- the old Zimmer stand-alone delivered 21 percent sales growth while the old Centerpulse delivered 5 percent.

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

I am also pleased to announce the multi-year contractual signing of Precision Orthopedics in Florida, historically Centerpulse's largest U.S. distributor, to be the exclusive distributor of Zimmer's full line of recon, trauma and orthopedic surgical products.

Twelve 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 and delivered 331 million in sales.

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 a very strong 24 percent and the old Centerpulse at 2 percent.

Included in our combined 19 percent Americas reconstructive growth, knees delivered excellent results with a 19 percent increase to prior year to 183 million.

Again as a matter of historical reference, the old Zimmer business grew knees at 25 percent in the quarter and the old Centerpulse at minus 3 percent, for the most part due to tightened indication for UniSpacer.

NexGen LPS Flex, Trabecular Metal Tibial Components, Centerpulse's Natural-Knee and NexGen LCCK Revision Knees all made substantial contributions to the Americas Knees performance.

Since there's less mix associated with knees, this would indicate a surgical procedure unit mix growth in the quarter from the new Zimmer knees portfolio in the Americas of over 15 percent.

Hips in the Americas increased 19 percent to 121 million with Zimmer porous stems at more than 60 (ph) percent of mix, surpassing cemented stems for the last trailing seven quarters.

Once again as a matter of historical reference, the old Zimmer hip portfolio grew in the Americas for the quarter at our best ever, 24 percent, and the old Zimmer Centerpulse business, up 3 percent.

Hip performance in the Americas, as previously mentioned, benefited from across the board solid growth in primary porous stems, revision, Trabecular Metal Cups, Highly Crosslinked Poly, both Longevity and Durasul, augmented by new product releases in both brands.

Our Dental business in the Americas grew a solid 19 percent in the quarter to 16 million, rounding out reconstructive.

Based upon our results in the already released public reports of our three major competitors, Biomet, J&J DePuy and Stryker, as well as the remaining market players, we believe the reported market growth in domestic reconstructive products for the quarter has remained firm to slightly up at approximately 16 to 17 percent.

The new combined Zimmer reconstructive, which we anticipated lagging the Americas market for a year or so, would appear to be to our surprise, outpacing the market growth rate by about 15 percent in our first two quarters together.

Our recon growth has been broad-based.

Of the new Zimmer distributor group, including the additions from Centerpulse, 15 of 30 distributors grew hips and knees in the quarter at 20 percent increases or greater and 8 of 30 grew at 30 percent or better.

Americas trauma product sales on a combined basis improved nicely in the quarter to 28 million or a growth of 11 percent versus last quarter's 9 percent growth.

We were positively impacted by our ZPS plates and screw offerings and also by a strong ITST femoral nail gain.

And our new spine business in the Americas finished the first quarter on a positive note, with 29 million in sales for the quarter and an increase of 12 percent, supported by the cage decline leveling off, Trinica surgical plate growth and the continued Dynesys trial.

In patient care, OrthoPAT, available only in the Americas, continued its rapid acceptance and was a primary contributor to our orthopedic surgical products, $36 million in sales in the quarter, and solid 10 percent growth over prior year.

On a contractual note, we have concluded a new three-year supply agreement with the Novation buying group for hips, knees and shoulders, and we expect to conclude the same for the Premiere buying group this summer.

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

The new combined Americas operating profit margin in the first quarter 2004 came in at 50.9 percent or 215 million in profit, a 17 million profit improvement from fourth quarter 2003.

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

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

Europe had a good first quarter 2004, considering the fact that the old Centerpulse business has been essentially flat in local currency sales for all of 2003 and is much larger than the traditional Zimmer Europe business.

In the quarter, combined European revenues increased to 215 million, up 8 percent sequentially from fourth quarter 2003, a 25 percent reported increase over prior year and a 6 percent constant currency growth.

From a historical perspective, the old Zimmer stand-alone business grew 38 percent reported and 22 percent constant currency, while the old Centerpulse business grew 18 percent reported and minus 1 percent constant currency.

Constant currency growth for the quarter in Europe for the combined business was derived from 6 percent volume mix and positive 1 percent price.

On the product front, reconstructive implants on a reported basis grew to almost 200 million in the quarter, a solid market-leading 25 percent growth led by hips at 26 percent and knees at 22 percent.

As a matter of historical reference, the old Zimmer reconstructive business grew at 38 percent reported and 22 percent local currency for the quarter and the old Centerpulse business grew recon at 19 percent reported and flat in local currency.

With competitive reconstructive numbers for Europe already reported for the quarter, it's clear that we are not significantly lagging the European reconstructive market at this time, although we expected to do so for two years or so given the complexity of the combination and sales to synergies.

It is true, of course, that the later the quarter impact of the dis-synergies somewhat understates their negative contribution to the quarter itself.

And we plan for and expect these dis-synergies to play a short-term larger role along with accelerated European distributor restructuring in the second quarter.

Positive gains in the quarter reflect the continuing acceptance of both Durasul and Longevity Highly Crosslinked Polyethylenes.

The increased impact of minimally invasive hips in Europe, multiple fourth quarter 2003 and first quarter 2004 new product releases from Winterthur and ongoing market share gains for the NexGen Knee brand.

To round out recon, about 30 percent of the dental division sales are contributed from Europe, and first-quarter reported sales increased by 38 percent.

Combined trauma this quarter with more than 1,000 ITST nails placed in Europe already, grew by 25 percent.

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

We look for the expansion of new products, such as Trabecular Metal Cages and the geographic expansion of Dynesys for modest improvements.

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

Portugal at 32 percent local currency growth, the UK at 27 percent local currency growth and Italy at 13 percent local currency growth are particularly noteworthy.

But 11 countries or regions delivered double-digit local currency growth, well above the European market.

While Europe will be a very difficult challenge for the near-term, this is an exciting ongoing sales story with tremendous future potential.

For the quarter, the combined Europe improved operating profits to $73 million and a solid operating profit to sales ratio of 34 percent, but obviously this ratio still has the opportunity to materially expand even further, as infrastructure and operating synergies are implemented over the next two years.

As previously mentioned, we plan to take the inventory buybacks and restructuring to go direct in several European countries during the second quarter, much earlier than planned.

This will negatively impact second-quarter sales on a onetime basis under U.S.

GAAP but will keep us on target for the half and really put us in excellent shape for late 2004, 2005 and 2006.

In Asia-Pacific, revenues for the new Zimmer in the first quarter were 104 million, indicating a combined increase of 19 percent and 5 percent constant currency.

As a matter of historical reference, the old Zimmer business grew a strong 22 percent reported and the old Centerpulse business started a little bit at only 7 percent growth, with negotiations under way with a key Japanese distributor.

AsiaPacific had flat prices in the first quarter as we anticipated.

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

We are pleased to announce, however, that while, as we informed you last quarter, Japan pricing was thought to be coming in at minus 4 percent to minus 6 percent for 2004 and 2005, our latest information as applied to Zimmer's mix should generate only a 3 percent decline.

This is a very manageable and positive outcome.

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

During the first quarter, our combined Asia-Pacific business was led by a reconstructive growth of 19 percent with hips and knees both performing well at 16 percent and 20 percent growth, respectively.

LPS Flex Knees, particularly with our conodium hardened femorals, Trabecular metal tibial components, the recently released NexGen CR-Flex Knee and the strength of the Centerpulse brand Natural-Knee for cruciate retaining procedures were all positive contributors.

Hip sales improved considerably at 16 percent growth with the addition of the Centerpulse brands and MIS-driven expansion.

You may recall that last year, we reported the old Zimmer stand-alone as flat in local currency for Asia-Pacific hip sales.

Trauma has shown dramatic improvement with a combined 19 percent increase in the quarter.

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

While our dental business is small in Asia-Pacific, it did deliver a 34 percent sales growth in the quarter.

Australia once again plus New Zealand and China all delivered a minimum of 15 percent constant currency growth for all Zimmer product segments combined in the first quarter.

Displaying excellent earnings drop-through from sales, the new Zimmer Asia-Pacific delivered with the combination of the two companies, 45 million in first-quarter earnings or a 42.7 percent operating profit to sales ratio.

Let's move from products and geographies to Hot Topics.

For this quarter again, I'd like to narrow that discussion down to only three topics, mix impact, minimally invasive activities and of course, lastly a Zimmer Centerpulse integration update.

Mix impacts, we continue to believe that mix does now and will for several years play an important role in our success.

Let's look at a few key areas.

Porous versus cemented primary stems.

The new combined Zimmer was 66 percent porous stems in the first quarter 2004 versus 65 percent in the fourth quarter 2003.

These numbers compare to the old Zimmer history of 42 percent in 2000, 45 percent in 2001, 57 percent in 2002 and 59 percent in 2003.

The old Centerpulse was 70 percent in the fourth quarter 2003 but we do not have a prior history.

At 56 percent, as the newly combined company, we still have at least 10 to 12 points of growth opportunities in stems alone.

Highly Crosslinked Poly, dollar penetration has increased in hip liners to 92 percent in the old Zimmer with Longevity, but we uncovered a remarkable opportunity in the Legacy Centerpulse product, with only 17 percent and 2 percent penetration in Europe and Asia, respectively.

This penetration compares to old Zimmer's penetration of 90 percent and 39 percent, respectively, in Europe and Asia.

Zimmer's fast growing Prolong, as previously mentioned, represents only 17 percent of total articulating surfaces, up from 14 percent in the prior quarter.

Trabecular Metal has increased to 5 percent of Zimmer stand-alone reconstructive sales in the first quarter of 2004 from 2.4 percent in 2002 and 3.2 percent in 2003.

The applications potential for this product line is almost unlimited.

Minimally Invasive Solutions, we are very pleased with the progress in our six-year-old MIS program.

During this section of the call, we will update you on several this different aspects of our MIS program, medical education and training, actual MIS hip U.S. procedure tracking, MIS knees, the second of two parts on MIS activity in Asia, and lastly, health technology reimbursement and coding status.

First in medical education and training, the Zimmer Institute continues to be incredibly busy with 276 surgeons, PAs and nurses trained on the MIS 2-Incision Hip and MIS Quad-Sparing QS Knee in the quarter at only nine internal or contracted Zimmer Institute locations, including Warsaw, Johns Hopkins, Vancouver, Tucson, St. Louis, Budapest and Estonia, Paris, Innsbrook, Austria and Perth, Australia.

Zimmer Institute that Johns Hopkins just completed a second successful MIS 2-Incision program for 12 surgeons.

If we can increase our Zimmer Institutes by two to four locations per quarter, we should be able to achieve our target of 1400 surgeons trained in 2004.

In March alone, we delivered seven U.S. 2-Incision Hip and Quad-Sparing Knee courses at four different locations with 15 new surgeons signing proctor agreements to help teach their colleagues.

Zimmer surgeon proctors work literally at the elbows of other surgeons in remote non-Institute locations as they begin the process of live to incision and Quad-Sparing surgeries.

We are grateful for their time and their assistance.

Surgeon-to-surgeon visits for the quarter totaled 143, debut (ph) primarily MIS surgery and representing a 40 percent increase to prior year, with 493 current outstanding requests at varying stages of scheduling.

In total, more than 40 different surgeons have received visiting surgeons to augment our MIS efforts in the U.S. alone.

Next U.S.

MIS Hip actual utilization and procedure tracking.

In last quarter of 2003, we tested our procedure tracking methodology for MIS Mini and 2-Incision hips for the U.S. only.

During the first quarter of 2004, we went live with the system in the U.S. and tested the new tracking methodology in both Europe and Asia-Pacific.

In the last quarter of 2003, 61 percent of Zimmer's surgeries used the Mini Hip technique in one form or another and 9 percent utilized the MIS 2-Incision.

In the first quarter of 2004, we have an additional 33 U.S. surgeons active in the procedures and 60 percent of Zimmer hip surgeries utilized a form of Mini while the MIS 2-Incision has increased from 9 percent to 13 percent.

As a point worth noting, based on Zimmer Medical Education protocols, the Mini is a mandatory prerequisite procedure required to be completed in training and clinical practice, along with a minimum surgical practice of 40 hips per year before moving to the more advanced MIS 2-Incision.

We are extremely pleased with the 13 percent share of our own U.S. business that the Zimmer MIS 2-Incision hip now represents and the marketshare potential it ultimately represents for the future.

As a matter of reference, our test work in Europe indicates a total of 187 surgeons trained and active from 10 different countries with a utilization rate on Zimmer surgeries of 17 percent on the Mini and 8 percent on the 2-Incision, respectively.

AsiaPacific in the very early stages, has 17 trained and active surgeons in five countries with 6 percent utilization in Minis and 2 percent for MIS 2-Incision.

We have tremendous procedure and market penetration potential in front of us, with a current position of 600 active MIS Hip surgeons globally.

With our major QS Quad-Sparing MIS total lead rollouts just beginning, we have not initiated a similar procedure tracking technology but we do have some early U.S. only estimates.

Let's take a look at MIS Knees.

Interest in the Zimmer MIS Mini Incision Knee has been high for several months, but the interest in the Zimmer QS Quad-Sparing exploded at the AAOS recently completed in San Francisco.

In the first quarter alone, 46 surgeons were trained on the Quad-Sparing Technique during five Zimmer Institute courses.

More than 60 MIS knee training programs with 7 to 10 surgeons per program will be delivered through multiple Zimmer Institute locations during 2004.

Our first European course for the Quad-Sparing will be in Paris this month, of course is to following the second quarter in Australia and Singapore.

For good or for bad, the advanced MIS training demand continues to temporarily outstrip our supply.

Incrementally, there's tremendous demand for the legacy Centerpulse distributors and sales reps to cross train on Zimmer as well as convert key Centerpulse hip and knee brands to MIS techniques.

During 2004, we will issue more than 300 MIS knee instrument sets per month with 100 sets per month solely focused on Quad-Sparing.

Popular Zimmer NexGen 4-in-1 and intermedullary devices are being modified for Zimmer's smaller incision techniques, with 100 sets targeted to roll out per month.

Such modifications provide surgeons with an easy on-ramp from open to Mini and ultimately to Quad-Sparing, in a controlled fashion supported by sophisticated instruments, medical education and infield proctor support.

Our current estimates, without the procedural tracking system, indicate that in the U.S., Zimmer knee procedures are 23 percent Mini Knees and 1 percent Quad-Sparing for the first quarter.

Our 300 patient multi-center IRB study continues to benefit from strong enrollment with the outcomes focused almost solely on post-op pain and measurable quality of life activity improvement indicators.

In our first opportunity to compare real data between MIS knees, one of our key competitors presented their results at a recent Knee Society session as follows -- 2 cm invasion of the VMO versus Zimmer's QS target of 0 cm; competitive patients discharged 18 percent faster than standard total knee arthoplasty versus Zimmer's 40 to 80 percent faster; competitive patients range of motion 90 degrees passive flexion three days after surgery versus Zimmer's 90 degrees active flexion immediate post-op on the operating room table.

Both the competitor and Zimmer positively demonstrated x-rays equal to the standard open procedure.

Next, the second of two parts on MIS activity in Asia.

Next quarter we will take a look at Europe.

In Australia, Quad-Sparing sets have been provided to major educational institutions, the first case is completed successfully and as noted earlier, our first major Quad-Sparing teaching course for Australia will be held in Melbourne later this month.

In China, we've completed our first ten 2-Incision Hip cases in Shanghai, and our first Chinese MIS Institute for Quad-Sparing is scheduled for the second quarter.

In Korea, doctors from the National Medical Insurance Foundation return from U.S. fellowship training and initiated both Zimmer Mini and Zimmer 2-Incision Hip techniques.

In Japan, thirty new Mini and two incision sets will be issued at the Japan Orthopedic Association annual meeting in May.

While percent of total surgeries utilizing MIS is low at this point in Japan, the ramp-up is significant, with 135 Mini and two incision cases alone in March.

Leading Japanese academic institutions, Kao University and Koba (ph) University, both performed Zimmer Quad-Sparing MIS Total Knee procedures last month.

Lastly under MIS health technology reimbursement and coding status, we have just received confirmation that the third major insurance company has agreed to reimburse surgeons at a higher rate for the Zimmer 2-Incision Hip procedure.

This time the premium payable to the surgeon is 25 percent.

We have captured additional data, not yet ready for publishing, from our MIS economic value added beta hospital sites.

After detailed cost and reimbursement analysis, hospitals with high volumes of Zimmer MIS 2-Incision cases are noting improved profitability due to the combination of both real and hospital cost savings and a better mix of patients due to insurers.

The results do not as yet include dramatic savings in external tertiary rehabilitation requirements.

We have also co-modeled the patient outcomes and costs for standard hip replacement with our beta institutions to be utilized as a comparator.

We hope to have a critical mass of publishable economic value-added MIS data during late 2004.

The U.S.'s major insurance brand has officially designated only the Zimmer 2-Incision Hip for its National Medical Policy panel review for determination of coverage.

This potentially is a huge step driven by their member's need for a cohesive opinion based upon demand from the beneficiaries, i.e. the patients.

Zimmer and Medtronic have both applied to the ICD 9 CM Coding Committee with respect to the Zimmer 2-Incision Image guidance following the FDA's recent approval of the guidance technique and instrumentation.

We will now turn our attention lastly to a brief first-quarter progress review of the Zimmer Centerpulse integration.

Once again, 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 know, more than 11 teams with some 100 full-time people have worked on the integration each day since October 2, 2003, managing and executing what is now more than 300 discrete projects and some 3100 individually-required milestones from our integration playbook.

Although we live in complex times, the vast majority of our people are getting on -- the work done and getting on with their lives.

We have proven as a company so far that we can simultaneously and successfully drive both day-to-day business and the integration of very demanding standards.

It's not our intention to go into graphic detail on the integration each quarter over the next year or so.

Instead, we really want to focus on key activities, problems and successes with hopefully useful and practical insights.

Let's once again set the stage for future 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.

The entire group analyzes, manages and executes three silos of activity -- number one, process, training templates, playbook control, meeting cadenance (ph), and sub-team tracking in its simplest form.

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

Secondly, financial, synergies, costs, return on investments and reconciliations to predetermining goals and with sophisticated tracking tools.

Thirdly, human resource issues, from compensation, benefits and severance in 80 countries, career plans in the new Zimmer, training and development and headcount baselines to constant morale pulse checks by country, by group, by month.

Here is a very short list of some of the activities initiated or completed in the first quarter 2004 alone.

The announcement of the entire management structure and appointments three levels down globally -- closure of the Zurich head office; the two-year plan and announced closure of the Austin facility; the restructure of Europe Spine; the centralization of a global biologics group with defined projects; an automated financial consolidation and conformity; a three-year global tax strategy for more than 80 legal entities; global insurance pooling; manufacturing sourcing and distribution network optimization for the years 2004 through 2008; benefits consolidation, including the issuance of a common U.S. benefits plan; global quality systems, common metrics and directives; global R&D project strategy by science category for four different locations; completion of the U.S. distributor integration and cross training; re-signage of buildings, websites, communication materials; a two-year castings and forgings in-source plan for manufacturing; and it goes on and on and on.

In fact, of the 3,112 months milestones planned through 2006, we have completed on-schedule and on-budget some 904.

We are slightly ahead of our cost synergies and net headcount reduction run rate, thus reinforcing the 80 million to 90 billion high end of our range and with new opportunities, continuing to ensure 2005 and 2006 EPS growth guidance previously provided.

We tracked sales dis-synergies by surgeon, by hospital, by country, by product, and have lost on an annualized basis, $34,875,000 to date or within 10 percent of the 35 to 38 million we expected to lose at this point, primarily composed of 10 million in the fourth quarter, 2003 and 25 to 28 million in the first quarter 2004.

We still believe and have planned the total sales dis-synergies related to the deal to be 50 million.

We expect another 15 to 20 million and of course with much of the impact in March, as expected, the visibility will be more evident in the second and third quarters.

However, we also expect to begin our recovery of the sales dis-synergies in the fourth quarter of 2004, one quarter ahead of our original plans.

Some key surgeons who left late in the third quarter 2003 and early in the first quarter 2004 have in fact already returned.

In the first quarter actual and the second quarter guidance, as well as our total-year guidance, sales and earnings are clearly far exceeding the internal models prepared at the time of the acquisition.

In some part, this is due to a healthy orthopedic climate but we believe the majority is in direct correlation to the quality, intensity and work ethic of our employees who are focused on delivering the goods.

Sam, I will turn it over to you for some additional thoughts.

The first quarter of the new year proved to be just as exciting as the fourth quarter last year with the integration of Centerpulse well underway and the new year off to an excellent start.

We are proud of what we have accomplished during the last six months since we completed the acquisition of Centerpulse and are very pleased to be able to report another terrific quarter for Zimmer.

Including Centerpulse in our financial results this year makes comparisons to last year rather difficult to understand.

And as a result, I will attempt to clarify both year-to-year as well as sequential quarter comparisons as well as I can.

Many factors contributed to our strong first quarter, including the underlying sales growth for both Zimmer and Centerpulse products was better than expected in all geographies, a weaker U.S. dollar resulted in more favorable foreign currency effects and the translation of international sales and earnings to U.S. dollars, continued over-achievement of the timing for realizing dis-synergies associated with the integration of Centerpulse into Zimmer, and finally delay in realizing expected sales dis-synergies.

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

In total, reported consolidated sales of $742 million for the first quarter grew by 90 percent over prior year and we are comparing these results against combined sales of $622 million for the first quarter of 2003, sales increased 19.3 percent.

Contributing to this growth were 2.7 percent pricing, 7.3 percent foreign exchange, and 9.3 percent volume and mix.

Within this 19.3 percent combined sales growth for the quarter, the Zimmer stand-alone product portfolio continued with strong growth that we had seen for all of last year finishing the quarter at 23.8 percent over prior year.

At the same time, the Centerpulse stand-alone product portfolio also grew at a faster rate than expected at 11.7 percent over prior year.

In the area of foreign currency, continued weakening of the U.S. dollar against most other currencies resulted in the first quarter contributing $45 million or 7.3 percent of our sales growth, higher sales growth from foreign currency than in any quarter in 2003.

By comparison, the effect on sales growth in the fourth quarter of last year was only 6.2 percent.

The Yen strengthened by 11 percent over the first quarter of last year while the Euro strengthened by 17 percent.

We have forward hedge contracts in place in 2004 for the Yen at an average exchange rate of 120 and for the euro at an average exchange rate of 104.

As a result of these contracts, the weekend U.S. dollar will have only a modest positive effect on the operating profit dollars and growth rates created by the former Zimmer stand-alone business for 2004 over 2003.

We also have forward contracts in place for less significant currencies for 2004, including the Australian dollar and the Canadian dollar.

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

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

If current foreign currency exchange rates remain unchanged for the balance of the year, foreign currency movement will contribute $29 million or 4.5 percent to our second-quarter sales growth and would also contribute $113 million or 4.4 percent to our full-year 2004 sales growth over 2003 combined sales.

Reported gross profit margin for the quarter was 70.4 percent.

U.S.

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

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

This step-up has been 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 profit will return to normal manufacturing margins.

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

In the first quarter, $31 million of the inventory step-up was expensed to cost of goods sold and had a negative impact on gross profit margin of 420 basis points.

This $31 million pretax expense, $20 million net of tax, equates to an EPS reduction of 8 cents in the first quarter.

Excluding the effect of inventory step-up expenses, the gross profit margin of the first quarter was 74.6 percent, which we believe is the highest in the industry, even with the lower margin contribution of Centerpulse.

The remaining $25.4 million of inventory step-up will be recorded through the P&L as non-cash expenses during the next two quarters.

As a reminder, Centerpulse recorded instrumentation expense in cost of goods sold.

In our consolidated results, we have permanently reclassified the Centerpulse instrumentation expense from cost of goods sold to SG&A expense.

Reported operating expenses for the first quarter were 49.7 percent of sales.

Included in reported operating expenses for the quarter were acquisition and integration expenses totaling $31 million pretax, $21 million net of tax or 8 cents per share of earnings.

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

Excluding the impact of the acquisition and integration expenses, the adjusted operating expenses as a percentage of sales were 45.5 percent.

This includes the permanent reclassification of Centerpulse instrumentation expense, as I mentioned earlier, from cost of goods sold to SG&A.

Reported operating profit margins were 20.7 percent and excluding the impact of both the inventory step-up of $31 million or 4.2 percent of sales and acquisition and integration expenses of another $31 million or of another 4.2 percent of sales, adjusted operating profit margins were 29.1 percent.

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

As a result of continued strong operating cash flows in the first quarter, we paid down an additional $150 million of debt in the quarter, and since the acquisition date, we have paid down almost $400 million of our initial acquisition debt.

Consequently, interest expense for the quarter was $9.8 million and will continue to decline as we generate cash and pay down debt rapidly over the balance of the year.

It remains our expectation that Centerpulse-related acquisition debt will be paid down fully by the end of 2006.

Total debt at the end of the quarter was $960 million, and we had cash on the balance sheet of $121 million.

Net debt, therefore, was 839 million.

Last Friday, we completed the $108 million acquisition of Implex, our Trabecular metal partner, and the $98 million initial cash portion of this transaction was funded in part from our cash on hand and also in part through the utilization of our revolving credit facility.

Since the acquisition, we have spent $209 (ph) million on integration and acquisition costs. $111 million of those costs have been expensed to the P&L with $31 million being expensed in Q1.

We expect to expense $96 million during the full year 2004, which is balancing the $128 million that we had previously forecasted for 2004.

With the benefit of having another quarter to refine our cost estimates for executing our synergy plans, we were able to scale back our expected cash outlays for several of the major execution categories.

Zimmer's effective tax rate was 33.3 percent on the adjusted earnings for first quarter 2004.

This rate was a little higher than expected in the first half of the year, due primarily to the mix of earnings originating in higher tax rate jurisdictions.

We are actively working on developing and implementing a more tax efficient model, which should begin to go into effect in the last half of the year.

As a result, we expect to be able to deliver a 31 to 32 percent effective tax rate for the full year 2004 with a higher rate in the first half of the year than the second half.

Reported earnings per share for the first quarter was 40 cents.

Excluding the Centerpulse Purchase Accounting acquisition-related entries, namely inventory step-up together with acquisition and integration expenses, first-quarter 2004 adjusted EPS was 56 cents.

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

Our combined days sales outstanding for the quarter was 64 days, two days higher than the end of the year.

This increase in DSO is in part due to the increase in sales in March versus December, as well as a higher mix of international receivables, whose customers are accustomed to paying slower than domestic customers.

Days inventory on hand were 228 days, excluding the effect of the inventory step-up, and this represents a four-day reduction from the 232 days reported at the end of the fourth quarter.

As new products are prepared to be launched throughout the course of 2004, we do expect days inventory on hand to increase to the 250 to 260-day levels at various points throughout the year.

Accounts Payable days to pay were 60 days, down three days from the end of the fourth quarter.

Operating cash flow was a healthy $194 million for the quarter.

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

Capital expenditures for the quarter were $51 million, consisting of $38 million for instruments and $13 million for all other PP&E fixed-asset additions.

Free cash flow, which is operating cash flow less capital expenditures, was $143 million for the quarter.

As a result of the acquisition and the related $500 million of amortizable intangibles reported at the transaction date, amortization expense for the first quarter was $8.6 million and depreciation expense was 33.1 million.

In our press release last night, we announced that we are increasing our previous sales and earnings guidance for the full year 2004.

We have incorporated several factors into our sales and earnings expectations for the balance of the year.

First, as I mentioned earlier, the effect of foreign currency on our first-quarter sales growth was the highest it has been during our two and a half years as a public company.

However, if foreign currency exchange rates remain at current levels, the 7.3 percent favorable impact of foreign currency exchange rate fluctuations that we experienced in the first quarter will lessen throughout the balance of this year due to the weakening U.S. dollar throughout all of 2003.

Next, as we near completion of our-non U.S. distributor integration plans, we have begun to see the $50 million of expected 2004 sales dis-synergies materialize late in the first quarter.

We expect to fully realize these dis-synergies in the last three quarters of this year.

Full-year sales are projected to be in the range of 2,925,000,000 to $2,950,000,000, an increase of 50 million to 75 million over previous guidance.

Reported diluted earnings per share are expected to be in the range of $1.80 to $1.84, reflecting estimated acquisition and integration expenses of $65 million and inventory step-up of $35 million, both net of tax.

Adjusted diluted earnings per share are projected to be in the range of $2.20 to $2.24 for the full year; that represents an increase of 13 to 14 cents over our previous guidance.

Second-quarter 2004 sales are expected to be in the range of 725 million to $730 million.

Due to the strength of the first quarter, the Company has decided to accelerate the restructuring of its distribution network in Europe, which will cause a sequential sales decline in the second quarter compared to the first quarter in the affected markets.

Additionally, the second quarter has one less billing day than the first quarter, and this one-day difference is worth $10 million of sales and has been incorporated into our updated forecast.

Also worth noting are the historical sequential quarter trends between the first and second quarters of every year and how they differ between Zimmer and Centerpulse in Europe.

Zimmer's more significant European markets have been the UK, Italy and Spain, all of which have historically experienced sequential quarter sales growth between the first and second quarters.

The more significant European markets for Centerpulse, on the other hand, have been Switzerland, Germany and France, where Zimmer had a more modest presence.

Those markets have experienced about a 5 percent sequential quarter sales decline in the first and second quarters during each of the last three years.

This factored together with the others that I mentioned are expected to affect our second-quarter sales results and have been factored into our sales guidance for the second quarter.

For those of you working on your quarterly Zimmer models for the balance of this year, our combined sales for the second and third quarters of 2003 were $648 million and $618 million, respectively.

Diluted earnings per share for the second quarter of 2004 are expected to be 40 to 42 cents on a reported basis and 53 to 55 cents adjusted to exclude inventory step-up expenses and acquisition and integration expenses of 12 million and $20 million, respectively, after tax.

As a result of the comprehensive assessment of integration and synergy opportunities completed by our operating committee and the full 100 full-time people on our integration team, we are confident that we will achieve sales at the high end of our expectations.

And therefore, we are also reaffirming our forecast of 2005 adjusted diluted earnings per share growth in the range of 20 to 25 percent with the potential to exceed 25 percent adjusted diluted earnings per share growth in 2006.

Our expectations of earnings per share growth in both 2005 and 2006 also incorporate our revised EPS estimate for the full year 2004 of $2.28 to $2.24.

We are investing heavily in cross training our combined sales force of over 2,000 sales representatives during the next six 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, as we mentioned in the previous call, on MIS activities in 2004 to $80 million this year, $50 million of which will be invested in MIS instrumentation.

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.

And now, we will be happy to take your questions.

Melissa, we will turn the call back to you.

(OPERATOR INSTRUCTIONS).

Dhulsini De Zoysa, Fulcrum Global Partners.

You always give us so much to chew on.

Ray, I'm going to just focus on a couple things you mentioned.

You briefly mentioned your ceramic project.

You also talked about your global biologics team.

I'm curious when we might start to hear something from that effort.

And then maybe if you could just spend a couple minutes on the two or three most promising things you see in the Implex final product.

Okay.

I will start with ceramics.

I'll just do them in the order I think that you said them.

The ceramics effort for us has not been ignored.

I think we sound like we downplay it a bit.

It is a good market and I think Stryker and Wright in particular, have done a good job.

But we do see it as a niche product.

It's a 6 to 7 percent market for us.

And that's probably why we sound like we have perhaps downplayed it a bit.

We have about four different avenues, if you will, to attack ceramic-on-ceramic through licensing agreements.

Everything but running a full five-year program, which we do not intend to do at this point.

And a good deal of the conclusion as to which way we go will be dependent upon the data which we have from both sides of our family from Europe on Trilogy, as well as Siricel and the acceptability of the data in various forms to the U.S. government.

So that is the primary effort.

There are a number of other ways, including negotiating cross-license agreements where we would give something up to someone else and someone would share ceramic with us in a variety of other mechanisms.

All four mechanisms are being very actively worked on.

But again, we just have not seen a huge amount of impact on us.

And I recognize that our two friends are doing well with it.

But we just haven't seen the impact on us as you can tell from the numbers.

But it's a good niche product and there's no doubt about that.

Global biologics, we have now organized into a business into a group; it has 16 full-time Ph.D.s, a significant budget, about 20 projects or so underway, some of which have been underway for about three years.

Most of those projects will not have any revenue impact for at least a couple of years, some longer than that.

There is nothing there that I'm aware of, other than things that we've already done deals with the outside such us on the rotator cuff, where that's ready to go and has been approved already.

Two or three most promising areas in the broad, general sense of our business, I want to make sure I'm answering your question.

From the Implex.

Oh from the Implex.

I'm sorry, I didn't hear the Implex at the end.

I think absolutely number one on the list has to be spinal.

We are just thrilled with a lot of the spinal opportunities.

There is a long list of projects already being shifted and moved.

As you can tell, there's already been some FDA approvals and product releases going on in Europe.

In the full coverage areas of spine, we are doing work on and have mechanical work done on a cage, but that would not be ready for some time.

Number two, I would probably suggest is the whole area of sports med. because of the ability to attach ligaments and practitioner material nominally to Trabecular metal but then insert that Trabecular metal into bone where you can get a really solid hold for re-attachment, just as a single example of sports med.

The third one is probably a smaller one but it's the one I mentioned, that's ABN, not because it means big revenues but ABN is such a devastating disease that we think it's an opportunity to really make great use of the material.

Great.

And then, if I may just one quick one for Sam.

Sam, you said something about lowering your effective tax rate by I think the three points over the next few years.

Is that included in your 20 to 25 percent and 25 percent or better EPS growth?

Yes, it is.

Okay great, thanks.

Bob Hopkins, Lehman Brothers.

A few quick questions.

I'm just wondering if you could clarify on ceramic-on-ceramic sort of a best case, worst-case time to U.S. market from what you know currently?

And then second question more from a 30,000 foot level, if we look at the history of Zimmer as a stand-alone company and see maximum operating margins and the 32.5 to 32.7 percent area, which are the best that I've seen among any of the pure-play orthopedic companies, now that you've Centerpulse a couple of quarters in, do you think you can get back to that kind of a level?

Or do you think you might be able to go a bit higher?

Those are my two questions.

Thanks.

Okay.

On the ceramics, a tough one to answer because it's obviously dependent so much on government interpretation of data and so on.

The time frame I guess if you want a big range is '05 and '06.

I am hopeful it's '05 and I'm hopeful it's in the first half of '05.

But I don't know that I can get any narrower than that, Bob, because again, it's so dependent upon data and on negotiations not only with the master supplier but perhaps with other players in the industry where we're trading things off.

So that's probably the best I can do.

I will make some early comments on your second question;

Sam can jump in if he wishes.

We do of course believe we can get back to that.

There's a lot of factors as we get deeper into the business.

The shear size and the leveragability that we saw in Zimmer, we think a lot of things that we hopefully have managed to -- learned to manage well over the years, we can incorporate in.

So I do believe very clearly that we can get back there.

I actually believe in this business, depending upon the competitive situations, price -- I mean, there's so many other factors, I actually believe over time that virtually any of these businesses that have a super high recon mix, it's tougher to do if you have other products.

But if you have a very high recon mix, and given the path we're headed into for the next five years, I actually believe that you can even do better than those numbers.

I think people at times may struggle to get to our '06 or start thinking beyond that as we do.

We try to do strat. plans out to '07, '08.

But you have to take a look at what that leveragability is, what the mix of business is, what we think our tax rate is going to be out there, where interest is going to be relative to additional acquisitions, so on and so on.

I think if you go through all that, we're obviously very comfortable that we can give and reaffirm our '05, '06 guidance based on a new starting base of 2.20 to 2.24.

Yes, another contributing factor to the operating margin improvement that we will ultimately experience is obviously in the full-year realization of the increased synergies that we targeted for 2004, 2005 and finally topping out in 2006.

So that will help leverage expenses down and leverage operating profit margins off as well.

One of the reasons, I think, too, Bob, just to make the last point -- I said in my note -- I cringe writing it because you don't ever want to down-play sales, but one of the things that we recognize is as we see the dis-synergies and our ability to recover from those at the end of the day, at a drop-through rate of 40 percent or whatever, for every $10 million you might lose there or might change there is $4 million.

Obviously, a GP dollar and earning (ph) dollar in sales is different than finding new synergies in the deal.

So we're pretty comfortable too that we can not only offset but in fact increase earnings based on what we've seen on the balance of synergies versus potential sales loss.

And as we begin to kick the spine business in as well, traditionally for the industry, it creates higher margins.

For us we also have the ability to in-source the spine product line which is currently outsourced.

So we have a lot of opportunity to build margins, both gross profit margins as well as operating profit margins through the manufacturing part of our synergy plan -- the in-sourcing -- and dental, dental is a good-growing business and also is a self-manufactured (ph) product (inaudible) that gives us the ability to drive cost down as well.

Great, thanks.

And just specifically on tax rate, is it possible some day out in the future you could get below 30 percent in your opinion?

It is.

Okay, great.

Thanks, so much.

Rick Wise, Bear Stearns.

Good morning, gentlemen.

I'm here with Milt (ph) of course.

A couple of questions, you talked about R&D moving up to 6 percent of sales as you increase investments.

But I think it's clear from your comments that you're aggressively investing.

There are a lot of new projects.

Where do you spend the extra money?

Oh, I think -- Rick, I mean I don't want to make it sound like we're not spending in recon, but I think a lot of our newest investments at least in the short term are going to be devoted to MIS, spine, biologicals, which of course don't have immediate payback.

And those areas tend to be a little more expensive per sort of dollar of sales too, in my opinion, primarily because the -- at least in the case of spine, the lifecycles of the products are a little shorter.

Spine to me is a little more like cardiovascular, where if we look at recon lifecycles of seven to ten years, I mean our belief is spine is anywhere from sort of two to five.

So I don't think we'll have trouble being in that 5.5 to 6 percent range over time for the reasons just stated.

And another sort of a big picture question that I'm sure you're asked all the time -- but you're going to be debt free in '06.

What's the right level of leverage for Zimmer on an ongoing basis, number one?

And number two, clearly you're going to be generating more cash, clearly you have leveragability.

It's hard to believe that you're not going to make strategic investments outside.

Can you help us think through those issues and just update us in your latest thinking, Ray?

Yes, I will make a couple of comments and then Sam can jump in.

We have always said since we did the spin-out that we sort of thought that we don't want to be A rated, we always sort of thought BBB.

And we've used numbers around 40 percent back in those days of debt equity was probably a nice place for us to be, because we felt we could grow the Company effectively at those kind of numbers for shareholders and ultimately provide better return.

It's clear in my mind that we will continue to invest both internally and externally in this case; in MIS, there is technology, obviously, outside of what we're doing.

We made it clear that we would -- although we would not be doing any big deals for a little while because of the complexity of absorbing Centerpulse, we would and are looking at, as we speak, bolt-on deals.

And we have always kind of used the 1 to 200 million.

And I don't want to be restricted to that.

But in an effort to give some guidance to people, sort of the value of those businesses, and we would be -- move forward on spinal bolt-ons and then any other technologies we thought appropriate.

The other thing you have to realize too is we get a tremendous amount of pressure, not so much short-term, but a tremendous amount of pressure on the dividend subject.

And we have always said that in the near term, you know, that we would not consider that because we thought there was things we could do and prove to our shareholders we are better in a short-term effort.

But very clearly as you get further out and debt gets knocked down and if you're not doing larger deals, you know that comes back into play as a valid input from our shareholders.

Yes, also from a credit-rating point of view, we are perfectly happy; in fact our target zone is to stay within a BBB family of investment grade credit.

It could be at the high-end or the low end, it doesn't much matter to us.

But we will always finance acquisitions as we said before to maintain that investment-grade portfolio.

And so at a BBB target, the range of debt to total cap is between low end of 20 to a high end of about 35 percent.

Right now, we are at the very low end of that range.

So we are comfortable with that sort of a debt leverage on the balance sheet.

Ray, this is Milman (ph), just have one question.

Could you just comment on whether or not you've been able to benefit from price increases on the Centerpulse hip implants?

Our sense is that they were priced a little bit lower than Zimmer's implants.

But have you guys adjusted that to better align it with Zimmer?

I'll have to get -- the problem is we vary in our comparison between the two parts of the family depending upon which part of the world you're in and which product line.

So I would argue with you that that's not necessarily true for instance if you go to Europe.

I think it's more so true in the U.S.

And what we're doing rather than just answer the hip one, although I would tend to agree with you.

But what we're doing is we're doing an overall profile by hospital, by surgeon, by product, of precisely where our pricing is positioned and what we do and don't have, competitively speaking, with each of those customers.

And then we are trying to come up with or have in many cases, come up with a plan by hospital, by surgeon that nominally (ph) goes after perhaps pieces of the business we're missing but takes a look at maximizing profit potential.

And we've actually ran pages and pages and pages of models, which generate for us probable earnings and price gains if we take certain actions by account.

So that's all in the playbook, if you will, for the integration.

Ben Andrews (ph), William Blair.

Can you talk a little bit more about the details of the acceleration of the restructuring efforts in Europe and specific what you're going to be doing.

And just give us a sense of how that's going to play out?

Yes, thanks, Ben.

I will preface it as Sam and I both did.

I don't know that we'd be doing it now, frankly, if we haven't had such a good start to the integration, both a fourth quarter and a first quarter we are really happy with.

It was really planned for late '04, early '05.

So just I preface it with that comment, because we've decided to move it forward, you know frankly because we are doing well, is the answer.

What it's composed of, about six countries where we are changing the distribution methodology, primarily to direct renegotiating arrangements with distributors or exercising our rights under those and reconstructing our folks there and the distribution methodology to be direct.

And what that entails, amongst other things, under U.S.

GAAP is that if we take inventory back, obviously, during that period as part of the negotiation since that distributor will no longer be in play, we record that as a return.

And that's the reduction on sales that we identified.

I think we will move forward as far as I know on all six countries -- I think we can get them actually all done or very close to all done in the second quarter.

We will keep you advised on that as the situation carries on.

I don't believe -- and Sam can correct me -- I don't believe there's anything outside of Europe, it's all Europe restructuring.

Sam, did you want to make any further comments?

No, I think that's pretty complete.

Can you quantify that potential inventory return at this point, or you may not know obviously until things sort of play out?

Strangely enough, these four components, the billing day difference, which you know at our size company gets to be a big deal now, the foreign exchange, the adjustment in the restructuring and everything else we're doing -- those components are all kind of around 10 million.

Certainly, the restructuring we think is around 10 million.

We know the lost billing day is around 10 million.

Sam has done the detailed work on the foreign exchange.

And we also know that we've got, as Sam correctly described, much to our surprise, a difference between second and first quarter at Centerpulse versus us because of the concentration of business in Switzerland, Germany and France that we never had before.

And we think that's around that area.

So if you sort of normalize, if you want to do -- we don't do this because it sounds like sort of excuse-giving.

But if you want to normalize the second quarter and put those components back in versus the forecast we've given, you get yourself to like 765 or 770 or something like that versus the guidance we've given of 720 to 730 because we've taken all of those components into consideration in the guidance we gave you.

And the 10 million, to be clear, especially with the restructuring, Europe is $10 million worth of sales reduction, and the associated reduction in gross profit as well.

And 10 million, in the overall scheme of things for the full year is rather inconsequential to us.

But it does affect the second quarter and, therefore, the sequential quarter comparisons of quarter one to quarter two.

Any chance some of this bleeds off into the third quarter, or you know further out into the forecast period?

It could but I'm doubtful, because we have those negotiations pretty well under control.

So I mean anything can always happen.

But I'm pretty doubtful of it.

Katherine Martinelli, Merrill Lynch.

One just clarification because, Ray, I think you made a comment about the synergies playing a larger role.

But if I am looking at the numbers you said about 10 million in the fourth quarter and something like 25 million in the first quarter.

So does that mean there's 10 to 15, just to be clear, of the final dis-synergies out of that 50 million that we will see in the second quarter?

Second and third, it's hard to tell at this point, Katherine, because we are getting down to situations where surgeons are borderline.

Some of the people you know -- they are thinking about whether they want to stay, whether they'll leave, it's tough for them.

There may be a rep situation and they are kind of borderline.

So we do believe it's all second and third.

I can't tell at this point what the proportion is going to be.

We do know we are starting to see some recovery of people and we do believe our recovery if you will, of the lost sales will begin about a quarter earlier, and that would be quarter four, obviously.

But I cannot give you a position on two versus three at this point.

And those are all annualized numbers, obviously.

They are annualized, of course.

And then the other comment about having just signed an agreement with Novation, expecting to do one with Premiere, is that new?

Because we have always thought that the GPO contracts never had much teeth in the recon market.

Are those new contracts?

Did you do pricing concessions in them?

Can you just give us a little more detail?

They are renewals.

They're becoming very important, I think or more important because I think in most cases, the companies are trying to get less players.

So we are pleased to be actively involved with them.

They do not -- I won't get into where we position pricing and how that works.

But I would tell you they are not price concession-oriented contracts, at least the Novation is not.

Premiere, we expect to complete in August.

So I cannot comment on that one at all.

But Novation is complete.

And I actually think to the extent that the so-called hunting licenses are being narrowed down to less companies, I think they have more teeth than they used to have.

But I don't think there's any fundamental differences beyond that.

Okay, that's helpful.

And then on the Dynesys, you have the 510-K approval.

I assume that is approval though not as a motion preservation but just as a fusion device?

Correct.

So you'll continue -- did you say you've enrolled 180 or is the total of 180?

And is that the data that you'll follow for two years and then submit to get an actual motion preservation claim?

We've enrolled 180.

We are renegotiating and I don't know where the number is going to end up in terms of the total, but it's going to be in excess of -- it's going to be certainly well in excess of 180.

And we've decided to do that -- you are correct in everything you said.

And we've decided to do that to get a broader base of -- academic base -- and also to really just complete the study.

The study was not complete at 180.

And I think we want to go back to the original protocol minus a few patients.

It also makes it, frankly, a lot more acceptable to the government.

So will you follow those patients for two years?

Yes.

Okay.

And then just lastly, it looks like the down classification petition for mobile bearings is going to finally go back on June 3.

Is that sufficient enough timing to get approval by the end of the year?

Or does that get you into first half of next year potentially with the mobile bearing?

I think it gets you into -- sorry I'm getting a little bounce-back.

I think it gets you into first quarter.

I think it's about a month late.

And I'm doing this from memory, Katherine, but I believe it had to get in by May to make year-end.

So I'm guessing that's a first-quarter conversation now.

You would file for both a Uni and a total mobile bearing?

Yes, as long as our Uni data is already.

We started out with -- we've got Flex, Fixed and Mobile and we started out with Flex Fixed on the new Uni.

So I'm not up-to-date on all our data on the secondary portion of that.

But if we've got all the data available, absolutely.

Okay great, thank you.

Robert Faulker, Prudential.

This is actually Mike Lee (ph) calling for Rob.

Quick question for you, where -- if you could just sort of go over the structural changes you're making to your European distributors and sort of connect the dots from the expected revenue to synergies and what you're doing structurally to that organization?

It's pretty straightforward go direct.

We are reconstructing all our warehouse locations over there with less of them, more automation, more inter-European Union movement of inventory goods.

The sales reps that we have of course are ours.

We may be taking over sales reps from distributors in some circumstances.

We are eliminating the distributor margins and their warehouses and going direct.

In order to do that, in many cases, we have both Zimmer, but especially Centerpulse, has contractual agreements with people that if we go direct, they may be sitting there with you know $400,000 worth of good inventory.

We take that back under U.S. GAAP; that's a credit against the sales line and against the margin line, and obviously affects our earnings as well.

There's nothing beyond that in it that I can describe.

It is pretty straightforward, going from distributor to direct model.

It also -- Mike, it also supports the European physical distribution rationalization plan that we have underway as part of the integration plan.

We have a number of distribution centers, physical distribution centers, spread throughout the countries of Europe.

And one of the many, many projects we have is to rationalize the number of centers and drive to fewer.

Driving to fewer at the same time we convert some of these European distributors to directs helps support that process.

All right.

And as a quick follow-up, you mentioned that you had approval for intervertebral products made of your Trabecular Metal technology.

What's the timeline like for rolling out those products to your spinal sales force in the US?

We are loading the distributors with inventory.

They've already been pre-trained, they already have market materials.

We are loading up the distributor warehouses as we speak.

And how would you sort of describe initial physician interest in the product?

Well, the physician interest has been very strong because many of the physicians have seen this outside of the country prior to this.

So the Trabecular Metal results in spinal have been -- had some interesting publishings prior to this and some interesting clinical studies.

So our interest at this point is very strong.

It will also be increased in Europe because we are introducing a number of Trabecular Metal products in spine area there, as well, I believe it's in June.

I'll jump back in line.

Thanks, a lot.

Joanne Wuensch, Harris & Nesbitt.

Given that you're going to be launching a number of new spine products, what does it take or what time period do you think it will take for you to get more in line with a 20 percent plus market growth rate?

I think not this year.

We're actually Joanne, -- we predicted as did Centerpulse, frankly, that they would be flat in '04.

And we agreed with that when we took the Company over because of the strength of the InFuse position on Medtronic cages and the impact on cages.

And cages being disproportionally high amount.

It's going to depend upon our ability to negotiate outside products and bring them in if we are going to accelerate that.

There is no way, given the time frame and the pipeline we have today even with Trabecular Metal, that we could get to 20 percent during 2004, on a run rate basis even.

I am hopeful we can get there in 2005, but we probably need some outside distributed lines to get there.

Okay.

Of the physicians that go through your MIS training program, how long does it take for them to start adopting the products in their daily practice?

And those that do not adopt, what are the reasons for sort of a fallout?

That's a good question.

It's really all over the place.

Some of them go back and go right away.

And some of them take as long as two to three months.

A lot of it has to do with, number one, they really look for ideal patients in the beginning, thin, active, motivated and so on.

That's one thing.

Secondly, they may be frightened of it.

You can only get so much, even out of great cadaver courses.

And when you leave here, you're alone.

And if we are short on proctors, which we often are, we have so much demand for this that we really like to get proctors get with people in their early cases.

And if for whatever reason, we are unable to do that due to demand, that also delays the process.

So we are really focused, as you might imagine, on getting more proctors.

But it's zero to two or three months.

And then fallout after that is usually difficulty in surgery.

It's very rarely to do with a patient outcome.

A patient outcome, you know, as we've seen over and over -- we have done 1300 MIS 2 Incisions now.

We understand all the complications.

We have seen a lot of the outcome of the patients.

It's more often than not because the surgeon feels uncomfortable with it, he can't get accustomed to the body position.

He struggled in the surgery or she did.

It's those kind of things that psychologically affect people.

It is a more difficult surgery, I mean there's no question about that.

And then my final question is given the quarter and the strength that you see in it, what keeps you guys up at night?

What worries you?

Gosh, keeping you happy.

I don't know -- I'm always -- I'm always focused on the integration now.

I still look at sales every morning at 7 AM every day of my life.

So I guess sales always keep me awake, even though this deal tends to be more of an earnings accretion deal.

Everybody in this industry worry about quality every night.

I don't think there's anything big right now.

I'm just focused on executing the integration and delivering the earnings.

And then trying to figure out how to accelerate activities for '07 and '08.

I am always trying to get out two years and let people run the day-to-day operations, you know, worry about tomorrow.

But I am not being coy.

I just can't think of anything big to answer you, frankly.

Maybe Sam worries about something.

What do you worry about?

I worry very little, Joanne.

But one of the things I spend my time on and one of the things that does concern me is, we have continued to have really strong results; and we do our best to provide guidance that we think is a pretty reasonable reflection of what we and the investment community should expect from the Company.

I concern myself with, every now and again, we will see an analyst get way out ahead of us due (ph) to sales or earnings per share.

And I find that concerning.

Beyond that, operationally, I think we run the business by the number as we have -- pay attention to everything, so I think we are pretty confident in our ability to deliver to our forecast.

Actually, it's a funny comment.

I was reading some of the early clips and people were saying well, you were not blowing the doors off anymore in hips and knees.

And I am looking at our first quarter going, I've never been so happy in my life.

So I -- I'm trying to think -- I think what happens is people get so accustomed to us at 22 in knees and 24 in hips and this and that, that they've forgotten that we took over a business that's much slower growth, that we are going to make a ton of money from, and that we predicted we would actually have 10 percent -- it's only a few months ago we said we will have 10 percent growth reported.

That would imply, depending upon what you want to use for exchange I guess, probably 6 percent growth you know constant currency, and lagging the market.

We are sitting here at double that, 19 and 12.

It's basically double the rate.

So I guess if I worry about something, I worry about the psychology of people remembering that this acquisition is a two-year deal to make a lot of money, not an immediate jump to 20 percent in sales.

So I guess if I worry about something, maybe it's investor psychology.

And I think that's what Sam was saying, as well.

Mike Weinstein, J.P. Morgan.

I always enjoy being at the two-hour mark during an earnings call.

We are trying to get better, Mike.

I know, I know you are trying.

I just want to ask two quick follow-ups.

The first, if we do see down-classification in mobile bearing, what do you think competition looks like over the next couple of years?

I assume -- if we assume there could be multiple players.

How does that play out?

And the second question is for Sam.

Centerpulse -- you weren't hedged on the Centerpulse cash flows but you have been hedged on the Zimmer base.

How should we think about the way currencies is hitting the Company's bottom-line right now?

And in particularly, if we just assume that there's no change in the dollar and we go out a few quarters and maybe some of that benefit dissipates.

So how large is it right now, just as we think about year-over-year numbers?

Okay, I will do the mobile bearing one.

Near as -- assuming we get down-classification -- of course this is an ongoing adventure for some time -- J&J DePuy, of course, in the U.S. control 100 percent of the market share.

So that's the starting point.

I think as near as we can tell, all the major companies and some of the smaller ones have mobile bearing offerings.

I'm guessing there would be somewhere between five and seven offerings on the market very quickly.

If you'd asked me this a year ago, I would have said it's going to be okay incremental sales for us.

But I didn't think -- and I don't think R&D people think that our original Zimmer offering that we had in Europe is an exceptional product.

I think it's an okay product.

However, with Centerpulse, with Innex and other parts, we now change our view dramatically in assuming that product fits the U.S. market well.

I think we would be challenging for a significant chunk of that mobile bearing.

But I do think there would be four, five, six other players on the market.

Obviously, it puts J&J DePuy in a real tough spot because not only is it 100 percent market share, but they have extremely attractive pricing on that product that exceeds the average total knee.

But I think that's where it would shake out.

We are obviously very hopeful it happens because it's almost assured to be guaranteed extra knee sales of some proportion.

We think mobile bearings on a global basis is 15 to 20 percent of the market.

So we are talking about a lot of dollars here.

Let me just before we get to the second question -- what do you think plays out on pricing, assuming these other products do come into the market.

And put yourself in J&J's shoes and you look out with that potential impact on your business over the next couple of years, what would you do?

Thanks.

I'm not going to plan J&J's strategy for them on the phone.

But I think from a dollar point of view, it depends how well, Mike, they have communicated the future (ph) benefits and sold the stories.

You know for the most part this is not a price kind of industry.

And when it has been tried, it's been unsuccessful anyway.

The companies that have tried it just ended up losing dollars, GP dollars.

I'm guessing they've done a good job of marketing the story and that for the most part, the price will stay strong.

If I was them, I guess I'd have another part in the pipeline.

You're not going to be able to hold share against four or five of us on a down-classified mobile bearing when we all have great products and sales forces.

I mean, J&J is a good company but there's no way they have any hope of holding share.

I think they have got to augment their knee line with some other strategies and I will leave it to them to figure that out.

In response to your second question, Mike, I will try to be sure that my answer doesn't take us over the two-hour mark.

Prior to the acquisition of Centerpulse, we had a pretty simple world.

We were making product in the U.S. that was the only manufacturing source for us, and shipping those products across border.

So those were very simple cash flow hedge contracts to put in place.

Now the world has become more complex because now we have an international manufacturer, a Swiss manufacturer.

Some of their product gets shipped into the U.S., and to that extent, it's a natural hedge against the products going the other way.

But a lot of their products go into other markets, other European markets and Asia markets.

And because, in those markets, no U.S. dollars are involved in those transactions, effectively trying to hedge a U.S. dollar cash flow -- ends up being virtually impossible.

We are looking at some other forms of hedging and that's a lot more complex than the simple cash flow hedges right now.

So for now, we're not hedged on the Centerpulse side of the business.

As we close Austin and re-balance the product load between the three remaining implant plans, which are Warsaw, Ponce and Winterthur, Winterthur will have more production and gives us a bit more of a chance to add those natural offsets.

Having said that, we still are faced with the problem of what -- how do we hedge, if we can effectively hedge in a cost-effective manner, the exposures that exist for products made in Winterthur that don't come into the U.S.

Probably the best way to think about it is the Centerpulse numbers were very public, and so you can probably get a pretty good sense of how much of the product was being shipped into other markets outside the U.S.

And you also were aware of their operating profit margins.

Probably the best way to quantify that is go back to the old Centerpulse model and work at it that way.

We don't quantify the up-and-down movement that comes with the unhedged portion of the business.

But unlike Zimmer, where the cash flow hedges did in fact, help protect earnings and international earnings for Zimmer, therefore, movements in currency, while they affected revenue, didn't have much of an effect on operating profit.

That is not the case in Centerpulse.

So absent anything different, as the dollar continues to strengthen, we will continue to benefit with incremental operating profit dollars on the Centerpulse side.

If the dollar begins to drift down, it will go the other way against us.

Hopefully by the time, we will have cracked a code on how to effectively hedge those exposures.

Final question, just with pending announcements on in-hospital DRG payment changes, do you have any insight into how you think they might play out?

Thanks.

I haven't got anything at this point, Mike.

We would share a range if I had it.

And I've heard a number of things, none of which seem to be very material, either psychologically or in reality.

But I don't have anything meaningful or hard news to share.

So I'd rather not guess.

William Plovanic, First Albany Capital.

Two questions, please.

First, your ceramic-on-ceramic strategy, does that potentially include an acquisition of a company?

And secondly, Sam, if you could give us an idea for gross margin expectations, '04, '05, '06 excluding onetime charges?

I have got to duck the first one, Bill, because we wouldn't talk publicly about acquisition targets, not when you've narrowed down to a product line.

So apologies, I've got to duck that one.

I will duck the second one too.

We don't give guidance at the gross profit-margin level.

But baked into our comments though, we do expect that we will continue to be able to improve gross profit margins as a result of all the things we talked about, continued drive towards mix, continued operating improvements that will come to us from the manufacturing portion of the integration plan, that will help bolster gross profit margins, in-sourcing spine products and a variety of other things.

So we do expect that they will increase, but we don't quantify those.

So at least forward -- from here forward, at least flat if not improving then?

From the 74.6 level you saw in the first quarter, flat or improving from that level is what you're saying?

Yes, we include (ph) anything directionally it's improving, which is why we are bullish on our outlook for 2005 and 2006, frankly.

Okay.

Actually if I could ask the question differently, Ray, first ceramic-on-ceramic, you mentioned you had four different avenues.

One of those was licensing.

What were the other three?

It's -- one is licensing, one is, is obviously, the full-blown five-year program.

And the other two are data utilizations with and without types of licensing that may allow you to get to the end game anyway.

A version of that would be a cross between two company deal, where we would for instance, give somebody the rights to use something that is Zimmer, that we own in both a patented and trademark form, and they would exchange that by giving us ceramic.

So there's kind of 3.5 to 4 combinations there, depending upon how you want to do it.

And then there's variations on those themes, too, all of which we're working on right now.

Again, I do not want to downplay at all the good job that Stryker and Wright have done.

It's just not as high up on our list as perhaps people might think because we're not seeing the impacts and the share is not coming from us.

So we have a lot of other things we are trying to do right now.

But again, it's a good niche product.

Absolutely would like to have it in our bag so that we could have a fuller offering.

But for us, it really does not go beyond that in priority.

Michael Lachman, ThinkEquity Partners.

Thanks, I think we are at the two-hour mark now, so I appreciate you taking the question.

Quickly on the MIS numbers, you went through a breakout, and it sounded like some pretty impressive numbers.

And I just want to make sure I understand them.

The 63 percent on the Mini side, is that the percentage of all U.S.

Zimmer hips that are performed being Mini?

And then the 13 percent to incision, is that 13 percent of all Zimmer hips?

Or is that 13 percent of MIS procedures, 13 percent among trained surgeons, what does that number mean?

Okay.

The 61 is -- Mini gets a stretched definition here.

And I think we may try and get a little more refined with you in the future.

But it's procedures being done that are not using a traditional length of incision so that it includes the folks that are reducing their incision size down to a lesser size, and therefore, that's why the number is quite high because a lot of surgeons are doing that.

I put the number in there for you, not that it's immediately relevant, but because Minis, for us, both by protocol and by experience, have proved to be an effective on-ramp to moving people to the 2-Incision and 2 procedures that, obviously, we feel give Zimmer a better chance to take share.

So that's the reason for putting it in.

But 13 percent is of hip procedures done for Zimmer, obviously, not the whole market -- Zimmer hip procedures done in the first quarter, total hips.

So it is not of MIS, it is not of trained surgeons.

It is of the total in the U.S. only.

Where does that number stack up relative to where you would have expected that number to be by this point say a year ago?

It's actually -- both numbers are actually higher than I would have thought.

If somebody had asked me, I would have said well, 40 or 50 percent of surgeons are absolutely clearly reducing incision size down below traditional large incisions.

And if you'd have asked me on MIS 2-Incision at this point, I would have had single digit.

I mean I'm not sure what my number would have been.

But I don't think I would've been at 13.

One more quick revisit to the European distribution strategy.

It sounds like we should be thinking of this dis-synergy number less in terms of lost sales due to lost customers, resulting from any sort of a sales force shake-out, and really more in terms of the mechanical taking back of inventory; is that correct?

Yes, I think that's a fair comment.

You know, because under U.S.

GAAP, we have to apply it to our sales, there's no choice in that.

We felt it was appropriate to inform you know, people of it.

That's number one.

Number two, we wouldn't be doing it at all now, frankly, if we had not done so well in the fourth and first quarters.

So for us, it's a chance to jump ahead of the game, get ahead of the game in those countries, run the business the way we want.

And frankly, we've done well enough that we can absorb it -- provided we explain it properly -- we can absorbent in the second quarter instead of waiting to the third or fourth or even early in 2005.

So you always take a bit of a communication chance when you do something like this.

But I'm willing to gladly take that risk because I want to secure a stronger end '04 and then all of '05 and '06.

It's just smart business to move it forward.

There's nothing too magical in it other than the way you just described it, other than the fact that as Sam pointed out, we are reconstructing our warehouse distribution philosophy in Europe and those locations to maximize the profitability and the inter-country flow of goods and doing that efficiently.

But other than that, it's just as you described it anyway.

Mike, I think you've characterized it well.

Unlike the loss of a surgeon, where you have a permanent sales loss, this is a onetime event.

It's a $10 million impact from Q1 to Q2.

But it happens once and it doesn't happen again.

Are you seeing any meaningful level of dis-synergy in the U.S.?

Yes.

A good chunk of the 34 that we believe is there annualized is in the U.S.

It is in heavy concentration, so Southern Texas, where we knew we would have a significant issue, and then bits and pieces elsewhere.

But we believe the U.S. is pretty well done.

In fact, the U.S. is where we've seen some surgeons already return.

We are not anticipating anything but recovery gains now in the U.S.

And as I pointed out, we surprisingly have about 20 significant sales reps interested in joining us.

We never, in all our models, assumed that people would want to join us at this point.

We thought it would be sort of mostly outflow that you naturally get in these occurrences.

So I think in the U.S., we are in very good shape.

I think in Europe, we have got another three to six months of activity to carry on with in terms of distributor and sales losses.

And then the rest is really spread around the world on a by-surgeon basis.

You get surgeons here and there.

But the concentration has been the U.S. and Europe.

One more quick thing, obviously, there is a lot more discussion on ceramic than metal-on-metal.

You guys now have a metal-on-metal product line.

Is there any sort of growth strategy focused on this?

At least one of your competitors has a pretty high penetration rate in that particular category.

Do you see this as a growth area?

Yes, we do actually.

I think it's been sort of down-played a bit by the presence of a lot of ceramic-on-ceramic marketing.

But we think metal-on-metal, we think all three areas are obviously good and clinically perform all.

We think metal-on-metal is very strong.

The history and Tribology in metal-on-metal that Centerpulse has in Winterthur, the development of Durom, which was an offshoot of Tribology and metal-on-metal knowledge and the ability to bring out that 32 head in Europe, to give you an example -- we haven't got it approved yet in the U.S. -- the 32 head with metal-on-metal to get it to a larger head size, has shown a 500 percent increase in sales in the first two months in Europe.

So we're very excited about metal-on-metal.

I think there's just been so much talk about ceramic-on-ceramic, primarily due to the direct-to-patient marketing, that I think metal-on-metal has kind of got pushed into second place a little bit.

And we don't see that from a technical point of view.

We don't think it's a second place product at all.

Great, thanks a lot.

Ted Huber, Wachovia Securities.

Sam, just my follow-up on currency.

Can you quantify the EPS impact of currency on the P&L in the quarter and your expectation for the year?

Now, we can, but we haven't done that.

As I mentioned to one of the -- to Mike earlier, we don't quantify that.

But there, clearly, on the Centerpulse side, is a P&L benefit.

On the Zimmer side, it's rather immaterial.

So you know the number but you just don't want to reveal it at this time?

Yes, we don't disclose that.

We don't go down to that level of detail, Ted, throughout the financial statements.

Okay.

Let me shift over to just Ray, MIS question.

Is your average take per procedure when you're doing the 2-Incision Hip larger than the other 87 percent of hips that are none 2-Incision, and so, therefore, is this a revenue driver?

And as well, with this image-guided reimbursement that you've applied for, is that a potential significant driver for Zimmer revenue as well?

The answer to your first question is yes but perhaps not the way you're asking it.

We don't charge more for the MIS procedure or the associated implants because the procedures have been designed on purpose to operate with fully and partially-coated porous stems and because we market heavily Trabecular metal shells, where possible, as an augment to that with -- and also Trilogy, we actually make a higher-priced sale although the margins don't differ that much.

But it's not because we are charging more.

It's because we construct and have constructed the technique and the outcomes themselves to be related to higher price products.

Sam, can you -- or Ray, can you quantify that at all, how much more the average take is per procedure?

It's the same difference there is between porous stems and cemented stems, which we don't disclose publicly on a line-item basis.

But it's easy information to get on average in the industry.

And then in terms of the image guided?

Image guided, yes, on the second part, image guided, if it becomes a fee for service, if it becomes a role-in, roll-out technique, which is one of the options, as opposed to planting the equipment in there at some price or even at no cost, if it becomes a fee for service role-in, roll-out kind of procedure, it does become a service revenue, that's number one.

Number two, the software, we actually sell.

So the software that the hospital needs to put in there, their stealth station or whatever it may be, that has Zimmer 2-Incision technique built into it, is a sellable, marketable revenue-creating product for us.

Obviously, we are in the very early stages.

So we do not have any material revenue.

But in the future, yes, that's true.

And can you quantify at all what kind of take per procedure that might represent?

Not at this point.

We are not there where we have set our strategies and -- on the full software.

So I don't want to do that at this stage.

At some point down the road, as we get data that's got some volume to it from the U.S., be happy to take you through how we view, ultimately, these procedures.

But right now, it's not meaningful.

Okay.

And last MIS question -- you mentioned I think it was three payers you're now reimbursing for surgeons in extra reimbursement for this procedure.

Yes.

Can you let us know what ratio do you think of U.S. reimbursement does give that up-charge at this point?

And is this a significant driver for this procedure, this reimbursement issue?

It's pretty small at this point because it's not so much the insurers are reimbursing; it's the individual surgeons have to go through that process of gaining it.

So it's pretty small at this point.

I don't have the actual numbers.

I know what the percent up charges are by insurer, but I don't know what the total impacts are.

Ultimately, what we want to get to, obviously, is a re-coding that identifies Zimmer's MIS because of our outcomes work, because of our economic value-added work as having a separate -- ultimately a separate CPT if you could do it, but certainly starting with ICD.

So that's our goal.

Right now, it's pretty small.

Okay, thanks.

I think we have, Melissa, one more or two more callers.

Just one more question, sir.

One more, okay.

Glenn Reicen, Morgan Stanley.

Wow, make it the last minute here.

Two just clarifications.

And we've been talking around this for awhile -- the issue of dis-synergy and the issue of the network changes in Europe are the same?

No, they're not at all the same.

The dis-synergies are surgeons and/or sales reps who've elected to leave the new company because they are headed off to a competitor, leaving the industry, they're unhappy, whatever.

They are the traditional dis-synergies associated with a large merger.

The change in the distributor network is something we had planned to do to go direct in several countries in Europe that we'd planned to do late '04, in fact, probably early '05.

We elected to move that forward and the effect it has on sales is incremental to the dis-synergy, is equal to, we think, around $10 million, will all occur in the second quarter, the best of our knowledge, is a onetime event associated with U.S.

GAAP requiring you to record the return of the goods against your sales and margin.

So they are two distinct events.

One is ongoing, if you don't recover it.

The other is a onetime effect of a structural change.

Okay, so that's what it sounded like.

So can you tell me then, you said if you did sort of a bottoms-up analysis, the second quarter looks more like 765 or 770.

What brought you down, how does that work?

You had 10 million from the extra day of sales.

You get 10 million from this, and then you had 10 million from dis-synergies.

Is that a good way of looking at it?

Yes, then you need to take a shot at, which Sam can help you on, on what we think the difference will be in foreign exchange, depending upon if current rates hold versus rates change.

So when we did it, kind of look at -- and I'm really hesitant to do this because it sounds like sort of, gee, if we weren't doing this, we'd look like that.

I don't really like doing that.

But we did it to see what our normalized base would look like.

And I haven't got it in front of me, but I think it's something like 765.

Okay.

And then the other question is, if I look at same-store hip growth, clearly, it's ahead of your expectations.

But in the first quarter, it did look like it moderated a little bit from the fourth quarter, from I think 16 percent growth down to the low teens.

A, why do you think that was?

And B, what are you anticipating as organic growth for hips and knees this year?

You know, X-out the FX -- X, obviously, the impact of acquisitions.

Are you talking about us or the market?

You.

Well, I don't know that we're breaking out in terms of hips and knees.

We've always -- we said initially that we saw recon market growing X FX in sort of the 10 to 12 and hips and knees are about the same in that.

And we initially thought, because our guidance to you was 10 percent growth reported and whatever you want to use for FX when we redid our original guidance, we thought we would actually lag the market because of taking on Centerpulse by two or three points.

That's simply not happening.

And in fact if anything, we are about a point or two ahead.

Whether we can keep that going depends upon the ultimate outcome of the synergies.

We are about double where -- and because we are so recon-driven, I think I can make the comment in general -- we are about double where we told you we would be and where we planned to be.

At 19 reported and 12 constant currency, we are sort of roughly double what we advised.

I don't see anything -- I don't know whether there was any slowdown in hips particularly.

I mean one quarter versus the next, I don't get too excited on it.

Frankly, you've got things in there like the AAOS where you had a lot of surgeons in San Francisco for a week and things like that.

I don't pay much attention to a movement of a point or so because I don't think it's that meaningful, not one quarter to the next.

Glenn, the guidance that we gave of 2,925,000,000 to 2,950,000 compares against last year's full year pro forma or combined revenue base of 2,133,000,000.

Right, right.

Okay, thank you, very much.

Melissa, I believe that was our last call?

Yes sir, that was our last question.

Do you have any closing remarks?

I would be afraid to have them at this time point after two hours.

So I'm not going to have any other than thank people.

Sorry, I know we are long and detailed.

But we are trying to provide the best information we can.

Appreciate your attention.

And we will talk to you soon.

Thanks.

Thank you for participating in today's Zimmer's first-quarter 2004 conference call.

All lines have been -- thank you.

You may now disconnect.