Zimmer Biomet Holdings Inc (ZBH) 2005 Q2 法說會逐字稿

Good morning.

My name is Judy and I will be your conference facilitator.

At this time I would like to welcome everyone to the Zimmer second quarter, 2005 financial results conference call.

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

After the speakers' remarks, there will be a question and answer period. [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 orthopedics industry, management's beliefs, and assumptions made by management.

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

For a list and description of these 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 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.

Now I would like to turn the conference over to Mr. Ray Elliot, Chairman, President and Chief Executive Officer of Zimmer Holdings, Inc.

Sir, you may begin.

Good.

Thank you , Judy.

Good morning, everyone.

Welcome to Zimmer's second quarter 2005 conference call.

We are pleased to be hosting this call to discuss a very good second quarter of the year.

We continue to make excellent progress against our plans.

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

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

If not, you can obtain a copy, as we mentioned at our website, www.zimmer.com.

We'll begin today's call with comments related to our second quarter, 2005, including an update on operations followed by Q&A.

All comments and comparisons are on an adjusted basis.

Further, all adjusted discussion excludes acquisition and integration expenses and inventory step-up.

As always, we wish to thank our new Zimmer team for their exceptional work and with a special congratulations this quarter to the Dental and Spine teams.

Both categories floated record sales in excess of $40 million, sales growth in excess of 20% constant currency, and we believe gained market share.

As our press release indicated, we take very seriously our commitment to deliver on our expectations.

So far we've kept our pledge and we plan to do so in the future.

Let's take a look at the fundamentals of our second quarter P&L and balance sheet performance.

Consolidated sales for the quarter were 847 million, an increase of 15% to prior year and about 5 million above the first call consensus expectations.

All three geographic segments -- Americas, Europe and Asia Pacific -- grew at 15% reported.

On a constant currency basis, sales to prior year improved by a solid 13%.

On a day rate basis, reported sales increased 14%; also very good.

In reconstructive products, reported sales grew 16% in the quarter and 14% constant currency.

Year-to-date reported total sales were 1.68 billion, a 13% increase from prior year and up 11% constant currency.

Year-to-date reconstructive products grew 14% reported and 12% constant currency.

We believe the global constant currency recon market is growing at roughly 13% XFX, composed of 11% volume and mix and 2% price.

Zimmer is growing about 1% faster than the market but with a little different composition: 13% volume and mix and 1% price.

We do see less hip revenue and more knee revenue, but we can find no underlying future hip surgery demand decline.

However, mix and price have negatively impacted hips more than knees, and while hip primary surgery demand appears normal, actual operating room block time continues the pattern of accelerated knee surgery bookings in the U.S., in part, perhaps, due to the younger patient mix driving much-needed positive margin results from non-Medicare private payers.

From our Zimmer perspective, in our first quarter call there appeared to be on the surface less hip revisions, but further research from the first and second quarters indicates more stems traditionally coded as primaries are being utilized in revision surgery and more Gamma-type nails for fractures.

As with most of the competition, the pattern of new product releases in hips appears to be more back-end loaded for the year.

We are pleased that Zimmer hips in the quarter increased by 10% reported versus last quarters 6% and by 9% on a day rate basis versus 8% on a day rate basis last quarter.

Interesting to note, with most major competitors having reported, we believe on either a reported, constant currency, or day rate basis, that we are growing hips slightly above the market globally but one to two points above the market in the Americas.

Zimmer America's bellwether reconstructive numbers grew by 17% in the quarter against a really tough 2004 comp of 20%, composed of 21% knees and 20% hips.

The Americas market for recon again seemed stable at 14 to 15%.

Let's return to looking at the quarter in total.

Zimmer's 15% sales increase globally was composed of volume and mix growth of 12%.

This number is very important.

Regardless of billing days, it's substantially higher than the 9% we saw for all of 2004, including the strong fourth quarter, or for that matter, the same 9% we saw in volume and mix for first quarter 2005.

It also suggests that in the quarter, Zimmer has grown fundamental volume and mix share despite the continued pressures of the Centerpulse integration.

In my earlier comments, and also an important point for Zimmer, underlying global reconstructive volume and mix grew more than 12% in the quarter versus 10% growth in first quarter.

Said differently, when we grew 14% in the second quarter of 2004 versus 2003, price and foreign exchange were 5% of the growth.

Today, in the second quarter of 2005, we drew 15% but only 3% is price and foreign exchange.

For Zimmer, the loss of two points of growth in price and foreign exchange in 2004 has been replaced with three points of growth in volume and mix in 2005.

We believe for the quarter our more than 12% global recon volume and mix growth is now one to two points faster than the market.

Our spine and dental operations delivering 22% and 28% growth respectively, are both well above market; but more on them in a few minutes.

Worldwide price improvement for Zimmer was 1% reported in the quarter and about the same as last quarter.

While the number is the same, it's clearly a more difficult market.

Having said that, our strength in volume and mix and margins make it far less a factor for Zimmer than perhaps people realize.

Our U.S. reconstructive market was positive 1% price, which we believe is far closer to the ongoing reality than the 3 to 5% quoted at times by others.

In fairness, the current 1% growth for Zimmer does reflect an earlier conscious decision to negotiate with key accounts, which we believe will serve us well in the future.

Positive 1% global now includes a mostly anniversaried and slightly positive Japan, Germany at negative 6%, and Taiwan also at negative 6%.

The U.K., Canada, France, Belgium, the Netherlands, Switzerland, and Italy all remain in positive territory.

If current trends continue with Japan, France and Germany at mid single-digit 2006 cuts and the U.S. slightly positive to flat, price for Zimmer, given our geographic weightings, would be flat at best, with some certainty.

Again, we are not 1 to 2% smart.

However, given the number of levers we have in the business, we expect this to have no effect on our ability to achieve any previously provided earnings guidance.

Volume and mix for us have easily replaced price and foreign exchange.

For Zimmer the operational formula for the business remains the same: scalibility, leverage, innovation and market share equals profitability.

So, as I'm certain your interested, with respect to H.C.

A., we have concluded officially our contractual arrangements, with June 1 as a logical starting point, the opportunity to chase several millions of dollars in new business with a less crowded field of competitors is always welcome, provided real compliance is delivered.

We believe our down-side risk is minimal and immaterial.

We are at the very early stages of monitoring initial success and forming our opinion.

The ultimate time frame to validate compliance is relatively short.

We want to give H.C.

A. a fair opportunity to prove that their hard work can provide a win-win.

We want them to do well, but they chose to make this their mantra and therefore they have to deliver.

We do not have any proof at this time that this construct will move material amounts of business.

Failure to do so must result in a return to higher prices and/or less services.

Importantly, we believe that we have a unique model that will sustain us.

Zimmer's low-cost manufacturer, low-cost distributor, and low-cost acquirer of new sales destinations thrived very well in multiple market environments, including higher volume, less price, higher compliance.

Our strategy to profit and win in any scenario remains intact.

Returning to our quarterly performance, our plan when we announced the Centerpulse deal was, as you know, to try and maintain -- or remain at approximately 10% sales growth for the first two years, despite sales to synergies, distributor realignments and a larger slower growth legacy Centerpulse Europe.

For 2004 and the beginnings of 2005, we are clearly overachieving that committed pace.

Our Americas business delivered another strong quarter -- growth in the quarter, at 15% with volume and mix up 13% in total and a stellar 21% growth in knees.

Year-to-date, the Americas business grew 14%.

Europe delivered substantial growth at 15% reported versus last quarter's 9%, but more importantly 11% constant currency versus last quarter's 4%, a solid display of traction and progress.

Year-to-date our Europe business increased by 13% reported and 7% constant currency.

Our Europe business remains vibrant in the face of considerable challenges.

We believe in the aggregate Zimmer Europe is now at least equal to but more likely slightly above combined competitive local currency market growth rates.

With price in all of Europe a little negative due to the impact of Germany, this would also suggest that raw European volume and mix delivered 11% growth in the quarter, a far cry from the negative volume and mix growth incurred by legacy Centerpulse in the late 1990's and early 2000's.

Our new Europe team is delivering.

In Asia Pacific, sales also grew by 15% reported but the 11% constant currency growth, as with Europe, was a significant milestone.

In fact, it's more than doubled the prior quarter's 5% constant currency growth.

Year-to-date, Asia Pacific sales were 12% reported and 8% constant currency.

Geographic mix was the story in the quarter.

Japan improved to 5% growth despite 3 to 4% negative impacts due to a key distributor change referred to in the prior quarter's remarks.

The balance of Asia Pacific sales were simply exceptional, at positive 35% reported and up 26% constant currency.

Led by greater China at plus-30% constant currency, Australia and New Zealand up almost 20% constant currency, and Korea and Southeast Asia up a staggering 39% local currency.

For Zimmer, our Asian businesses are not small markets and excluding Japan are now approaching almost $100 million in sales annually, making the constant currency growth there even more remarkable.

On a worldwide basis for the total Company, we expected to lag both competitive geographic segments and product categories for the first two years post the Centerpulse deal.

At 16% reported growth in recon and 14% constant currency for the quarter, we are at least holding our own if not back to taking a little share despite integration to synergies and primarily recon-oriented distributor changes.

With 20%-plus growths in both spine and dental, we are certainly not lagging these markets but rather, we believe, taking share.

At 17% reported reconstructive growth for the quarter in the Americas we are definitely taking share.

We anticipated losing some $50 million globally in sales to synergies by the end of 2004.

We are planning a reasonable run rate recovery of 50% of those lost sales from cross-training benefits, distribution changes, European MIS, and other strategies that should accrue to our favor, mostly beginning in late 2005 and extending through 2006 and 2007.

Based on recoveries to date, our current net losses from sales to synergies have improved to only negative 35 million.

Out of about only 1% of the combined company sales, these current losses are not much to split between six or seven hungry competitors.

For the record, we intend to recover it all.

I'll return to some detailed geographic and product and sales analyses in a few moments, but for all of us, the heart of the Centerpulse deal was devoted to early accretive and long-term sustainable earnings per share growth.

On that note, as with our underlying sales we continues to reap the benefits of our integration.

Adjusted diluted earnings per share for the second quarter 2005 were very strong at $0.80 adjusted on 249.9 million average outstanding diluted shares or an expansion of approximately two million shares from second quarter 2004.

For the quarter we delivered a diluted EPS increase of 38% over prior year and a $0.05 better than first call consensus EPS estimate of $0.75.

However our results were affected by the favorable resolution of certain legal and other matters which, when combined, added a little less than $0.02.

The story remains clear.

The acquisition of Centerpulse was accretive on an adjusted basis the very first day after closing.

This pattern of significant and rapid financial return from the deal, reflected by both EPS and cash flow, continues in 2005.

Year-to-date EPS are $1.55 or a 36% increase to prior year.

We are obviously very pleased with the Company's efforts to drive each line of the P&L, deliver on integration strategy targets, and of course create our trademark operating and free cash flow.

We will continue to emphasize our focus on profit margins and incremental earnings contribution from new sales.

As we mentioned last quarter, the once meaningful legacy Zimmer metrics combination of 75% gross, 30 operating, and 20 net margin results are currently but a memory.

Zimmer's gross profit margin in the quarter exceeded our own expectations again and broke an all-time record at 78%, up a whopping 290 basis points from the second quarter 2004, directly related to geographic mix, product mix, manufacturing management and continued vertical integration in the U.S., Switzerland and Puerto Rico.

As previously mentioned, the margin was somewhat enhanced by the positive adjustments from legal resolutions, but the net effect remains well over 77%.

More importantly, with the vast majority of some 30 to $35 million in favorable manufacturing synergies still in front of us for 2006 and 2007.

For Zimmer it again validates what we've been saying for a long time: our model can thrive in both a strong price or lesser price environment.

Looking at price from the gross profit perspective only, the 78% margin in the second quarter contained only .6% global positive price increase while the 75.1% margin in the second quarter of 2004 contained 2.1 positive price.

Said differently, the 290 basis point gain in gross margin was inclusive of a 150 basis point moderation in price contribution.

Our huge arsenal of G.P. and cost of goods sold is often missed.

On an annualized basis, Zimmer could potentially maintain 77% plus gross margins with no price help at all.

That's a profit outcome we could easily live with.

For your reference, our year-to-date gross profit margin is 77.6%.

In the quarter gross profit dollars grew by 19% on a 15% sales increase.

We believe that at 78% or our mid-77's year-to-date, our gross margin is easily once again at our near the top of the orthopedic industry and close to the best in major medical devices.

As a matter of reference, the highest recorded gross profit for the legacy Zimmer business prior to Centerpulse was 76.1 percent, more than 190 basis points below where we are today and those historical margins contain four points of price.

We believe strategically executed scale, share, and leverage not only works but will prove to be the optimum industry strategy.

SG&A expenses and total expenses for the quarter as a ratio of sales were very good at 38.8% and 43.9%, respectively.

At 38.8%, SG&A costs increased only 11% versus prior year despite a 15% sales increase.

The 38.8% SG&A ratio is a 150 basis point improvement over the 40.3% ratio recorded in the second quarter of 2004.

You will note that the 38.8% on a sequential basis only matched last quarter.

But this is misleading and is reflective of the series of one-time investment events, including extensive due diligence cost of an acquisition that we elected to not move forward with, the biannual second quarter EFORT [ph] conference in Europe and other items, adding in total more than 50 basis points.

G&A , although we don't disclose it separately, continued to come down nicely.

The actual increase in SG&A absolute dollars from second quarter 2004 was $31 million on a sales improvement of about 110 million, indicating not a variable but a fully loaded SG&A expense cost of only $0.28 to acquire each new sales dollar.

As we mentioned earlier with respect to new business opportunities, this makes market share growth of these fully loaded cost rates a very attractive proposition.

We believe that our focus on reconstructive is a strength in virtually any environment, significant diversity of products only tends to be a good argument when the category is being compared of similar long-term profit contribution potential.

That's why in general we like spine, dental and biologics diversity as opposed to capital or medical surgical goods.

Over a two-year period starting with fourth quarter 2003 at 40.9%, we have targeted to reduce SG&A by at least 200 basis points, with this quarter's performance reemphasizing completion of that goal.

Year-to-date SG&A and operating expenses are 38.8 and 43.9% respectively.

We expect that with the increase in total development projects to more than 170, and an expanding number of external technology relationships, our R&D ratio to sales, this quarter and year-to-date of 5.1%, will tick back up to the historical 5.5 to 6% range.

In the quarter, R&D represented a more traditional 14% increase in spending over prior year as some of the biological investments kick in.

Upcoming expanded investments in R&D will prove to be important as we continue the current pattern of delivering more than 500 or $600 million per year in new product sales.

Total operating expenses for the quarter at 372 million represented a real growth of 11% to prior year quarter versus a 15% sales growth.

Year-to-date operating expenses were 736 million or a 9% increase versus a prior year-to-date sales growth of 13%, and therefore consistent with the leveraged drop-through type model that we operate.

For reference in the second quarter, actual acquisition and integration cost dropped to only $10 million versus 17 million in the prior quarter and compared very favorably to the 24 million in the second quarter of 2004.

Year-to-date integration expenses were $27 million.

Operating profit in the quarter reached 288 million, an all-time record and the third consecutive reporting period that we have produced more than a quarter of a billion dollars in operating profit.

We are equally pleased to reach a record 34% adjusted operating profit ratio to sales in the second quarter, up sequentially some 60 basis points from the first quarter, but more importantly, up some 440 basis points from the 29.6% reported in the second quarter of 2004.

During the second quarter we recorded the highest operating margin in all of medical devices, barely edging out Boston Scientific's 33.8% performance.

As previously mentioned, the Zimmer construct we have today was modeled during the late 90's turn-around and well before Centerpulse was target approximately $0.50 of operating profit for each new sales dollars.

In the second quarter of 2005 we've delivered $69 million more of operating profit on $110 million more in sales, or $0.63 of operating profit on every new dollar of sales.

Zimmer has been a limited user of EBITDA due to its non-U.S.

GAAP designation.

However, with the Centerpulse and Implex acquisitions, it should be a beneficial data point for our shareholders in the near term.

EBITDA in the second quarter improved on an adjusted basis to 39.3% as a ratio to sales.

The same EBITDA in dollars is providing almost 80 times interest coverage.

Adjusted net earnings in the period were very strong at just under $200 million, the first time we've been that close to a 200 million net quarter.

We also produced a new all-time record in ratio to sales of 24%.

This represents a 90 basis point sequential improvement from the first quarter and a 400 basis point-plus improvement from the 19.5% recorded in the second quarter of 2004.

Our second quarter 2005 tax rate was reduced from prior-year quarter by 190 basis points to 29.8% and on a year-to-date basis is 30.1.

It's a good trend when you consider that we hope to reduce our sustainable tax rate to under 30%.

We are obviously pleased with the second quarter 2005 results and the progress of the Zimmer/Centerpulse/Implex integration.

The original 20 to 25% adjusted diluted EPS growth target for 2005 was increased with last night's guidance by $0.07, implying a $3.07 per share adjusted or a 27% growth for 2005.

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

Cash flow generation has always been our story.

It is perhaps even more important now as the primary source of rapid debt pay-down and we're appropriate acquisition capital.

We had a monster operating cash flow quarter.

Operating cash flow was beyond the favorable end of our expectations, registering $244 million.

Year-to-date operating cash flow is just under 400 million.

In the 21 months of combined operations with Centerpulse and 15 months or so with Implex, we have delivered almost $1.5 billion in cumulative operating cash flow.

Strong quarter and cumulative operating cash flows have been supported by record operating profits, well-managed working capital statistics, and effective [inaudible] of legacy Centerpulse's prior period net operating losses.

Free cash flow in the quarter was 172 million or a year-to-date at the halfway point is 263 million.

With $95 million of cash and equivalents on hand, we have a new net debt position of only 173 million.

That said, it is conceivable that Zimmer will once again be net debt free only two years from the date of our Centerpulse acquisition, early in the fourth quarter 2005 and some 15 to 16 months early.

Shareholder equity has increased from zero at the time of the spinout to 745 million at the time of Centerpulse acquisition to over $4.3 billion today.

And therefore net debt as a ratio to equity has been effectively reduced to less than 5%.

Our first quarter combined working capital statistics continue to perform within Zimmer's normal range for this time of the year and consistent with the number of projects underway.

Excluding the favorable effect -- the favorable 6.5 million resolution of legal and other matters previously referred to, our combined inventory days are 262, same as the first quarter.

We continue to believe with more than 170 projects and, in several cases, national roll-out strategies, somewhere between 245 to 265 days makes sense; particularly in a lower working capital carrying cost environment.

At 262, days we remain in our normal range.

Our receivables collection will continue to provide support for strong cash flow production.

In the second quarter we delivered global receivables at a very respective 61 days, a sequential improvement of one day from the first quarter and a material four-day improvement from prior-year same quarter.

With a tougher hostile environment and now a very large European business, the four-day improvement is notable.

Combined Americas receivables results were solid at 39 days as with the first quarter and the prior year same quarter, again a notable achievement for the reasons already cited.

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

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

For the first quarter, worldwide -- excuse me -- for the second quarter, worldwide reconstructive sales increased to 705 million reported, a 16% increase over prior year and 14% constant currency.

Globally, knees grew at a solid 20% reported versus prior year and up sequentially from last quarter's 19%.

Knees increased 18% constant currency in the quarter versus prior year and up sequentially in constant currency from last quarter's 17%.

Hips grew a much improved 10% reported to prior year, up sequentially from last quarter's 6%.

In constant currency hips grew 7 percent, up sequentially from last quarter's 3%.

For Zimmer, hip growth has improved by four points from last quarter and knees continue strong despite an almost endless string of historical 20% growth comps.

As discussed earlier, for us at least, current Japan, Germany, and to a much lesser extent, U.S. pricing affects hips more negatively than knees by a differential of some 2%.

We are pleased with our recon results versus both the total market and the three primary competitors who have already completed their public reports.

We expect the global recon market, ex-dental, to be up about 13% constant currency in the second quarter and therefore we are very pleased with our above-market results.

The combined Centerpulse/Zimmer effort remains cumulatively ahead of plan and ahead of schedule.

Year-to-date global recon growth for Zimmer is 14% reported and 12% constant currency.

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

First on products, in the knee category, again, on a worldwide basis from the quarter knee sales for Zimmer increased by 20% versus prior year to 354 million, an 18% constant currency.

Within our company with a great balance of power, 16 countries or regions, including the U.S., had local currency knee sales growth in the quarter of 20% or better.

For the quarter globally, all femorals increased by 20%; all articulating surfaces by 18%; all tibials grew by 20%; all patellas grew by 18%.

From a brand point of view, our next-gen LPS-Flex remains the right place to start.

The world's original high flex knee, first released in 2004, continues an almost three-year trend gain with explosive 87% increase to prior year in the quarter versus last quarter at 89%, the previous quarter at 74%, and an average growth of 65% for all of 2004.

It's no coincidence that the LPS-Flex is the knee of choice for our new MIS-Mini and trademarked MIS Quad-Sparing total knees.

Our rates of flex knee growth have actually accelerated during the period of multiple competitive new system releases.

The new Zimmer CR-Flex knee also continues to be a special story.

The CR-Flex femorals delivered sales of some 16 million in the second quarter this year, a 90% increase to prior year.

The patented Minus size femoral components in the CR-Flex system have been utilized in over a third of our surgeries as a unique soft tissue balancing process.

We believe that in cruciate retaining units, Zimmer is still growing some five percentage points faster than the market.

PF and CR combined, Zimmer high flex femoral components have an annualized sales trends now of over $175 million, despite still being only a little over 25% of our own total Zimmer knee femoral mix.

A few more highlights: Legacy Centerpulse's NX [ph] knee had double-digit growth again, primarily in Europe, and has become a $20 million brand.

The new Zimmer Uni, the industry's first high flex single compartment knee, with multiple surgical velocities, quickly registered almost $4 million in quarterly sales and up sequentially by more than 30% versus the first quarter.

Mobile bearing and trabecular metal versions will follow.

Annualized sales for all Zimmer Uni products continue to be well over $50 million.

The patented Zimmer RHK Rotating Hinge, combined with legacy Centerpulse's MOST system, had a $2 million sequential gain over the first quarter and a 40% increase to prior year.

Zimmer's Option LCCK Knee revision offering jumped by 29% in the quarter to almost $40 million in annualized sales.

Knee revision remains a great opportunity, representing historically only 5 to 6% of total Zimmer femoral units.

Trabecular Metal Monoblock Tibial Trays have continued to take share as surgeons recognize the value of the material and the reduced probability of micro motion-created tibias osteolysis, that could potential lead to revision.

Trabecular Metal Tibial Trays increased by another 26% in the quarter versus prior year and along with TM patellar implants and TM knee augments, delivered a Trabecular Metal annualized run rate in knees alone of over $50 million.

We have completed the expansion of our New Jersey based Zimmer trabecular metal technologies manufacturing capacity to 33 reactor units.

Once again, we expect to comfortably exceed our guidance of $100 million in total trabecular metal sales for 2005.

Our comfort is for good reason, with second quarter TM sales easily surpassing $28 million.

With Zimmer's LPS-Flex mobile bearing IDE complete, we expect to be on the market in 2007 or sooner if the FDA approves the amended petition. [Inaudible] initial special controls have been well-received and biomechanical test protocols will be submitted to the FDA.

Either way, we are planning to have the world's largest mobile bearing offering, including the UniFlex Mobile, the LPS-Flex Mobile, the CR-Flex Mobile, the NX Mobile, and the Natural Knee Mobile, all supported by advanced prolong highly crosslinked polys and ultimately the new Seema [ph], as well as trabecular metal and fast low-cost MIS navigation techniques.

There continues to be excellent progress in new data points in the Zimmer minimally invasive knee front, particularly in utilization and instrument deployment as well as a very full Quad-Sparing class, early success with our new MIS stem tibial component, and progress with electromagnetics.

I will update those activities later.

Let's switch to hips.

We continue to observe country-specific government pricing decisions; later in the year, new product cycles by both our competitors and ourselves; and a surgical planning reality that appears on the surface to be increasing knees at a corresponding rate to the decline in hips.

Zimmer hip sales improved substantially in the second quarter, with hip revision back to solid sequential growth.

For us, MIS hip stems are still definitely driving market share, and while foreign exchange, price, and mix can always be variables, we have not seen a decline in future underlying patient demand for primary total hip replacement.

On a worldwide basis, in the second quarter hip sales increased 10% to 294 million and 7% in constant currency.

The growth this quarter, as with some of our competitors, was for Zimmer measured against a very tough prior year same quarter comp of 15%.

We continue to be very encouraged with hips in our new combined company.

Our enthusiasm is based on the potential breadth and impact of both MIS and hip resurfacing, trabecular metal, advanced policies -- polys, I should say, and the economic value-added marketing potential for MIS per patient profit improvement.

Zimmer fiber metal tapers, along with the new ML taper, are the stems of choice for Zimmer's MIS Mini and two-incision hip surgery.

In the second quarter, these two stem families grew again by 28 percent, bringing the combination of fiber metal and MLs to over $28 million in the quarter.

Obviously, neither the hip stem market nor the porous stem market are growth at anywhere near 28%, but our MIS stems are.

As we have noted so many times in investor meetings or in press releases, for Zimmer, MIS brings in new business.

It did last year and it is this year.

Speaking of the impact of MIS, new instruments for legacy Centerpulse brands in Europe are already having an impact.

The CLS Spotorno Taper, with a longstanding $40 million per year sales base, mostly in Europe, had unit growth in the quarter of over 20% in a market growing at perhaps 4 or 5%.

That's with only the first wave of MIS instrumentation sets released.

We would suspect that our 20% unit growth in the CLS Spotorno will surprise some of our competitors.

The CLS Spotorno, you will also recall, was honored with the best cementless results in the Swedish hip registry.

The results were 100% survival, that is to say, zero revisions after ten years.

While some competitors are attempting to market knockoffs, we have some pretty interesting science that in this case suggests staying with the original is a better plan.

On that note, our counterattack marking plan is called, of course, The Originals.

Late in the second half we expect to launch the very first trabecular metal stem, and in the nearer term expand the offering of our highly successful MIS product, the ML, this time with popular HATCP coating.

Zimmer's porous hip stems alone have an approximate annualized run rate of some $400 million.

Zimmer combined primary and revision acetabular shells increased from prior year by 11%.

Legacy Centerpulse's new Allofit shell had a very strong showing, with 20% growth.

Trabecular metal cups and Duron hip resurfacing continue to thrill us and no less so this quarter.

Trabecular metal cup sales jumped to over $13 million in the quarter, an increase of over 50% from prior year.

The Duron cup and stem, including our fast-growing resurfacing product, available selectively ex-U.S., grew by more than 130% to almost $6 million in sales for the quarter and is quickly approaching on an annualized basis a new $25 million brand.

Speaking of metal-on-metal articulations, our new 32-millimeter medisol [ph] head has been approved in the U.S. and thus fills one of the larger head gaps in our offering.

Here's one of our favorites, of course, despite extremely tough comps for almost five years significant internal penetration, new competitors, U.S. ceramic and ceramic presence, and you name it; premium price, longevity, and Durasol highly cross-synched poly liners, increased the gain by another 18%.

Not only is the growth rate way above market, but the base of sales is very different to our competitors, our two highly cross-synched brands, when annualized, deliver about $105 million per year in sales.

After five years we are still generating more than 1,000 liner units per month in new business globally.

We believe that in the future, CIMA, spelled C-I-M-A, or Cold Irradiated Mechanically Annealed poly, exclusive to Zimmer, will potentially revolutionize the industry, just as Zimmer and Centerpulse did several years ago with Longevity and Durasol brands.

As you know, our ceramic and ceramic PMA has been accepted by the FDA as filable and we have received a list of compliance questions for our response, which we are completing.

We do not have any additional updates or better guidance than prior to year end 2005 indications, already provided.

We have been really pleased with our 2005 U.S. co-exclusive and 2006 forward U.S. exclusive on Palacos bone cement products, including antibiotics.

The agreement with Zimmer was reached in late 2004 with Heraeus Kulzer, GmbH.

We have mutually agreed to broaden our discussions with Kulzer to selected European and Asian countries and expect to conclude a contract soon.

For the record, in the U.S. we've already sold $1 million on limited availability and without our full U.S. distributor team engaged.

New products including Trabecular Metal Hip, new techniques like Zimmer Anterolateral, MIS for Europe, new polys, bigger metal-on-metal heads, and a new antibiotic bone cement should liven things up in hips.

As with prior quarters, there is much new activity in MIS Hip, and I will cover these stories later.

In upper extremity joints, legacy Zimmer Bigliani-Flatow and Legacy Centerpulse's anatomical shoulder continued to grow worldwide, both with solid 18% plus increases in the second quarter, despite an array of competitive new products.

Total shoulder sales are annualizing at some $50 million.

Total elbows were not far behind, with global sales growth in the quarter of 17%.

To complete reconstructive discussions, our dental business had a tremendous second quarter with record sales surpassing $40 million for the first time ever and up, we believe, a market-leading 28% reported and 26% constant currency.

In the quarter, prosthetic implants increased 29%, led by the tap screw vent, up 32%, and now exceeding $50 million a year in annualized sales.

Atlantis CAD/CAM rapid turnaround custom abutments doubled in the quarter; dental biological sales of collagen, graft, and membrane.

Membrane grew by more than 70% with Puros Block Allograft recently released, showing strong early acceptance.

While the rebranding to Zimmer is almost complete within the dental group, major marketing initiatives for unibody implants, soft tissue graft strategies, assessment of potential use of trabecular metal, and minimally invasive surgery supported by imageated [ph] reconstruction, are underway.

Exciting news on the medical education front.

Our global state-of-the-art Zimmer Dental Institute, designed as a university-type setting and curriculum is in the final phase of construction in Carlsbad, California.

Congratulations to our dental team for a great performance.

On a worldwide basis, in the second quarter trauma sales grew slightly better than last quarter at plus 2% to 44 million.

The trauma market has had mixed results, but even at low teens growth, we'll continue to lose share until we deliver new products for later in 2005.

With only limited field releases of our unique peri-locking plates, some other new products have been carrying the load.

The ITST nail delivered unit growth in the quarter of more than 30% again.

For reference, ITST-type nails continue to be reimbursed in the U.S. market at higher rates than compression hip screws.

However, our total offering of Zimmer brand IM, or intermedullary, nails was only slightly above flat.

Our large compression hip screw category improved substantially from last quarter's minus 11%, but still remained week at minus 7% growth.

Peri-articular plates continued strong globally at up 23%, despite some U.S. weakness.

Plates and screws combined were almost double-digit in growth and this is an improvement.

In general, trauma health is on the way.

Before year-end, the new IM nail instruments, the new titanium lateral starting-point femoral nail, the entire lineup of peri locking plates, the new MCB noncontact bridging femoral and humoral plate and screw system, and the new trabecular metal osteonecrosis rods and instruments will all be released.

If we can turn around trauma and grow it at the same rates as spine and dental, Zimmer would have in the three product categories combined more than half a billion dollars of non-hip and knee sales growing at 20% plus.

Our Zimmer spine division sales increased by 22% reported and 21% constant currency in the quarter to a record $41 million, and a second consecutive sequential increase of $3 million.

We are very excited with the significant sales improvement, the operating profit improvement, and most important, although not a major player yet, we believe that we took global spine market share in the quarter.

Cage sales again remained firm at 8 to 9 million, as with the prior two quarters, but now represent only about 20% of spine division sales versus 50 to 70% in recent years.

The big story though is, once again, Dynesys, our dynamic stabilization system.

Sales jumped almost $10 million in the quarter, up 2.5 times prior year and outselling cages by nearly 25%.

When combined with more than $2 million of spinal trabecular metal, these two new technologies delivered some $12 million in sales for a sequential increase of 20% percent from the first quarter.

When you combine NuGraft [ph] collagen with Dynesys's trabecular metal, it's clear to see that new products have dramatically overtaken cages in quarterly sales by a factor of almost 50%.

As we noted several times, the combination of trabecular metal, dynamic stabilization, and MIS with our new pipeline and a few small technology and biological acquisitions, we'll create a globally competitive spine business.

Dynamic stabilization and MIS for spine obviously continue to create significant interest in competitive new product plans.

Nevertheless, we would now hope to raise the bar and keep this above-market spine run rated growth alive for the whole year, not just the latter part.

Congratulations again to our spine division on an excellent quarter.

You are starting to look pretty turned around to us.

In our orthopedic surgical products division, sales improved versus last year with an 8% increase and 7% XFS for the quarter, to 55 million.

OrthoPAT, our peri-operative autotransfusion system, again led the way in accelerated sales by 28% versus last quarter's 22%.

Management remains strong at 16% growth, with the wound debridement segment particularly benefiting from Legacy Centerpulse cross-training in Europe.

Our [inaudible] arthroscopy business in Asia/Pacific bounced back to an above-market 16% growth.

Late this quarter we will release the new Zimmer Pain Pump, targeted for both MIS and general use.

Let's switch to a quick look at our new product developments and performance.

As I mentioned previously, we've redesigned the new combined Zimmer pipeline to more than 170 projects with in many cases over $1 million of development each and approximately 100 projects alone in the hip, knee, extremities portion of recon.

Of the balance, 30 are in trauma; 7 in computer-assisted surgery; 10 in OSP; 14 in spine; 9 in dental; and 6 in biologics.

Of these projects, 85% are on or close to planned dates and requirements, 10% are temporarily on hold or not started, and 5% are likely to be terminated.

Of these projects more than two-thirds involve new innovations, new platforms, and new technology.

During the first half of 2005 we launched 48 projects including 17 field evaluations, 11 limited releases and 24 phone releases.

The 48 projects in the first half of 2005 exceeds the 40 projects launched in all of 2004.

Worth noting, in the first half of 2005, Legacy Centerpulse development programs accounted for 14 of the 48 launches, a nice contribution.

Significant product launches in the second quarter include the first shipments of the much anticipated legacy Centerpulse MIS instruments, not only for the CLS and [inaudible] classic stems, but also for IGAP NK2, the Natural-Knee instruments.

Also worth noting amongst many are the HATSP [ph] coated ML taper system, leading our domestic MIS hip business, several more peri-locking plates, our new biological rotator cuff repair patch, and of course new NexGen MIS stem tibial component.

In addition to launching projects, we initiate new ones virtually every month.

During the second quarter 11 new projects were approved, including additional line extensions to the popular MIS ML taper and Mayo stems, LPS Flex Tivanium, a new Asian-focused elbow, more Duron hip resurfacing expansion, and new MIS spine and dental projects.

New products projects are expected to consistently deliver 15 to 20% of Zimmer sales each year from a rolling 36 month list of new products.

That is 500 to 600 million in sales organically each and every year.

We have never missed that target since it was instituted in 1998.

We have in fact averaged about 18% of sales cumulatively each year for those seven years.

New product sales for the second quarter 2005 totaled $171 million, matching our 20.2%of sales record and improved by over 200 basis points from full year 2004.

We consider our designers, developers and innovative new product delivery system a material inhouse competitive advantage.

We noted with interest a recent journalism piece, fabricated to explain the lack of innovation in the orthopedics industry, based on the theory that repeated use of predicates in the regulatory process must certainly equate to commodity-like new products.

We are not familiar with the other companies' statistics, but we would suggest that Zimmer, after more than 2,000 issued domestic patents and more than 3,000 MIS2 incision surgeries, the U.S. pattern office thinks orthopedic innovation is alive and well.

Let's look briefly at the geographic segments.

First in the Americas.

Zimmer America's had another strong showing.

Revenue for the quarter was just under the half a billion mark at 495 million, up 15% over prior year and sequentially up $15 million over a very strong first quarter.

As mentioned previously more than 13% of our growth in the Americas was driven by increases in unit volume, mix, and 1% growth derived from pure price.

The Americas reconstructive growth in the quarter was up 17% and delivered just under $400 million in sales.

This would imply that in the Americas during the quarter, Zimmer had 16% growth in pure reconstructive surgical procedure volume and mix.

It's clear that we are continuing to take profitable share in the operating room.

In our 17% Americas reconstructive growth, knees delivered excellent results again with a 21% increase to $226 million, despite the prior year same quarter comp of up 21%.

NexGen LPS and CR-Flex, the new high-flex uni, trabecular metal tibial components, prolonged articulating surfaces, NexGen LTCK revision knees, and RHK and Most brand hinges all made substantial contributions to the Americas knee performance.

Hips in the Americas increased 9% to $138 million, a very respectable $6 million sequential growth for the first quarter and we believe nicely above the domestic market's hip growth figures that now appear to be 6 or perhaps 7% growth.

We are also pleased with the Zimmer hip growth in the quarter given our prior year same quarter comp of plus 20% and some decline in U.S. operating room hip scheduling in favor of knees.

Hip performance in the Americas benefited from market share taking growth in primary porous stems, related to various MIS procedures, trabecular metal cups, and highly cross-linked poly, both Longevity and Durasol.

Our dental business in the Americas grew a very strong 24% in the quarter to $23 million, up sequentially $4 million and well above the market as we dramatically reduced short term back orders originally created by our California plant consolidation.

Based upon our results in the already released public report of our three major competitors, BioMed, J&J DePuy, and Striker, as well the remaining market players, we believe that the reported market growth in domestic reconstructive products for the quarter will remain at approximately 14 to 15% ex-dental.

Zimmer's combined Americas reconstructive growth of 17% would appear to be again outpacing domestic hip and knee market increases by at least 2%.

Our reconstructive growth has been broad-based.

In the quarter, 13 of 33 U.S. distributors grew hips at double the market rate or better, 27 of 33 distributors grew knees at market growth or better with 18 of 33 distributors growing knees at 20% or better.

Five of 33 distributors grew knees at a terrific 30% plus.

For your reference, our U.S. distributor network have slowly increased their field sales team from 965 at year-end 2004 to 1,003 as of June 30, 2005, or about a 4% increase.

These figures exclude office, service, delivery, and other nonsales staff.

Here's a statistic we are always proud of, the new combined Americas operating profit margin in second quarter 2005 came in at 52% and a record $259 million.

Let's take a look at Europe.

We are very pleased with the underlying growth and the traction being gained.

Zimmer Europe is clearly alive and well.

In the quarter, European revenues were $228 million, up 15% reported and up a very strong 11% constant currency versus last quarter's constant currency growth of only 4%.

Adjusted for favorable billing days, the second quarter represents a real constant currency day rate growth of about 10% versus only 6% in the first quarter: nice progress.

In the quarter, prices for Germany declined by 6% and this contributed significantly to our forecasted near term flat to minus 1% price for Europe, in total during 2005 and this quarter at minus 8/10ths of 1%.

While we do not expect it to improve neither do we expect it to materially affect our global business results.

We have for a long time anticipated and communicated German DRG [inaudible], as well as flat to slightly negative price in Europe.

There isn't any new news here to share with you.

The future is comprised of the new DRG in France, probably mid single-digit negative, improvements in Spain and a new German government this fall.

It's unclear, if anything, what this new government might do relative to orthopedics.

Reconstructive implants in Europe delivered sales of $206 million in the quarter, an increase of 15% reported and up a much improved 10% constant currency.

Hips were by far the most negatively affected by German pricing changes into disynergies, but responded well with 11% growth on a reported basis and 6% constant currency.

Knees improved by a market share taking 18% reported and 13% constant currency.

With the quarter's competitive constant currency reconstructive numbers for Europe estimated in the aggregate at high single digits, we are, after a great deal of hard work, back to taking a little European share.

Positive gains in the quarter reflect the continuing acceptance of both Durasol and Longevity, highly cross-linked polyethylenes, some early impact of minimally-invasive procedures and instrument deployments, the growing acceptance of Duron and trabecular metal, as well as ongoing market share gains for the NexGen knee brand and Zimmer dental products, the latter at a very strong 27% growth.

Many of Europe's country businesses performed well on a sales growth basis versus the competition.

The UK, South Africa, Belgium, the Netherlands, Austria, Sweden, Norway, Finland, Russia, France, Switzerland, Spain, the Middle East and export all grew sales for the quarter in double-digit constant currency.

Germany, despite the 6% price decline, remains solidly in mid single digits.

Italy is in perhaps the toughest competitive environment at all, but we are recovering from down two quarters ago to flat last quarter to single-digit growth this period.

As mentioned previously, we did complete the transaction for the remaining minority position in our largest independent Italian distributor, AliSystems [ph] and we expect to have future benefit from this decision.

For the quarter, Europe improved operating profits to 76 million.

Profits improved by 13% to prior year or 33% ratio to sales, with substantial one-time sales and marketing investments in the bi-annual EFORT conference, MIS instruments, and export markets.

This ratio still has the opportunity to expand even further, as marketing strategies and margin related synergies are implemented over the next year or two.

In Asia-Pacific, revenues in the second quarter were 124 million, an increase of 15% reported and 11% constant currency.

These results are excellent since they reflect six points of constant currency sales growth over prior quarter sequentially are inclusive of both the partial effects of the Japan price cuts and the effects of the previously mentioned change in a key Japanese distributor.

Asia Pacific had positive 1% price in the quarter versus minus 3% last quarter as the Japan reductions from 2004 have for the most part anniversaried.

We believe that the Asia-Pacific market is growing at high single digits in local currencies and as a result, net of the synergies from the distributor reorganization, we appear to be, as with Europe, back to taking a little share.

In the second quarter our combined Asia Pacific business was led by a dramatic improvement in reconstructive growth, up 17% to a record of more than 100 million in sales and almost double the growth rate of the prior quarter.

Constant currency recon growth was 12%.

We expect trabecular metal tibial components, the NexGen CR-Flex knee, and the strength of Centerpulse's Natural Knee to continue to improve Asia Pacific knee performance.

This quarter had a very strong 20% reported and 15% constant currency.

New Japanese natural hips and trabecular metal regulatory approvals and MIS driven expansion will help to escalate hip performance this quarter at a much improved 12% reported and 8% constant currency growth.

While our dental business is small in Asia-Pacific, it did deliver another exceptional 52% sales increase.

As we've commented earlier, the local currency growth rates were dynamite, with Korea at plus 36%, Southeast Asia plus 42%, and greater China delivering an excellent 30% plus.

This specific group of countries are now approaching 100 million in annual sales.

Australia and New Zealand also had banner quarters, with almost 20% constant currency growth.

Japan remained at solid mid single-digit growth, displaying their usual strong earnings drop-through from sales of Zimmer's Asia-Pacific businesses delivered $55 million in second quarter operating earnings or a 44% operating profit to sales ratio, up 260 basis points from the second quarter 2004.

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

Given the usual time constraints, I would like to narrow that down to only two topics: integration update and minimally invasive activities for the quarter, with a special emphasis on global surgeon solutions and our computer assisted technology effort.

You may have noted that we removed mix from the discussion this quarter.

The reason is simple.

It saves a little time and there just weren't any substantial underlying changes in percent other than the continued growth in trabecular metal.

Here's a brief update on integration.

Of the 3,522 scheduled milestones required to execute the entire Centerpulse integration, we have completed 2,594 versus our plan to date of 2,569, or slightly ahead of schedule.

Our target for year-end 2005 is 3,048 milestones completed or 87% of the total project requirements.

A little less than 500 positions, or approximately 8% of the combined original Zimmer Centerpulse headcount, have been eliminated, consistent with the synergy plan.

Of our remaining 900 or so milestones for 2005 and 2006, approximately 80% are related to manufacturing cost reductions and information technology enhancements.

Net sales to synergies have fluctuated between 40 to $45 million annualized incurred or future anticipated as of the end of 2004.

As we indicated earlier, we expect to regain about 50% of these sales losses through year end 2005 with the benefits accruing primarily to 2006.

We are currently on track at the halfway point.

We believe total annualized favorable cost synergies will exceed our latest indication of $100 million.

We have changed distribution models in 13 countries and completed those tasks.

We have completed the Warsaw and Puerto Rico plant and distribution expansions. [Inaudible] casting tests for [inaudible] have been completed.

Our new three-year global tax strategy has already contributed, as you can see, to a nicely improved ETR.

We have completed the redesign of both dental manufacture and the entire ops distribution and information technology system for the spinal business.

We continue to have approximately 60 full-time staff working on integration, down from the original 100, and with the primary execution responsibility shifting to the global manufacturing and ops group for late 2005 through completion at year end 2006.

Now let's turn to Minimally Invasive Solutions.

We are always excited about the progress and expansion in our six year old MIS program.

The Zimmer Institute remained very busy.

Just as we met our goal last year to train 1400 surgeons with the [inaudible] staff while the momentum is almost exactly doubled from last year's 580 surgeons trained by June.

During the second quarter we trained a record 692 surgeons, after 458 surgeons in the first quarter for a total of 1150 surgeons at 23 active Zimmer Institute locations including six wet lab contractors.

We have added Heidelberg in Germany and Clermont-Ferrand in France to last quarter's agreement with the Ohio orthopedic Center of Excellence in Columbus.

Europe and Asia have significantly expanded their Zimmer Institutes, consistent with our delivery of MIS techniques and instruments.

Of the 1150 surgeons trained to date, 591 are American and 559 are from outside the U.S.; almost 50/50.

MIS-2 incision surgeons trained, totaling 57, have been overtaken by 396 trained on the new Zimmer Anterolateral Hip, introduced at the AAOF.

However, we should note that MIS-2 incision remains constant at 8% of our [inaudible].

Different than hips, the easier NexGen Mini TKA completed 92 surgeons trained, but the more complex Zimmer Quad-Sparing technique, utilizing the new NexGen MIS stem tibial component, exploded to do 423 surgeons trained in the quarter with more than half coming to European and Asian Zimmer Institutes.

By the way, our unique MIS stem tibial, on the shelf for only a short time, has already billed over $1 million.

We have deployed cumulatively in 2004 and 2005 almost 5,000 instrument sets for Zimmer MIS knees, including 1265 Quad-Sparing sets.

Our course curriculum, both didactic and cadaveric, has expanded to some 20 courses including the following latest additions: MIS subvastus, using the Natural Knee;

Train the Trainer, on Duron hip resurfacing; our first MIS anterolateral courses, modified for Europe and delivered solely in French and Italian respectively; and lastly, an introduction to electro magnetic computer-assisted MIS knees at the Zimmer Institute MIS in Singapore.

We have continued to do very sophisticated surveys related to our Zimmer Institute Training Programs.

We have to date surveyed more than 200 surgeons that have completed major courses this year for a statistically significant 17% of total attendees.

More important they represent 23% of all Quad-Sparing, 2-incision, and anterolateral course completions.

Here is just a sampling of the results: percent adoption of the procedure, i.e. do they go back and use it at all?

Quad-Sparing at 65 percent, two incision at 30 percent, Anterolateral at 43%.

In those that do go back and use it, how often do they use it versus traditional or other techniques?

Quad-Sparing: QS 48%; traditional 25%; minis 27%.

Two incision, 28 percent; traditional, 22%; minis, 50%.

Anterolateral, 15 percent; traditional, 23%; two incision, 28%; mini, 34%.

On the anterolateral, statistically I'd point out it's way too soon to really tell.

The average time from training to utilization of surgery was exactly the same in all three techniques at 30 days, as was the highest rating benefit of the course, enhanced surgical skills.

If you run the numbers on a broad spectrum of Zimmer surgeons, you'll arrive at what we see here. 31% adopting Zimmer Quad-Sparing, 8% dedicated to incision hip users and an incredible interest in the Anterolateral.

But again, too early to the tell on sustained adoption and utilization rates.

We have obtained both the clinical and economic value-added data from Dr. Richard White at Presbyterian Hospital in Albuquerque, from his first 100 Zimmer MIS Anterolaterals in preparation for a market paper and a manuscript.

Rick was the president of the prestigious U.S.

Hip Society.

We continue to evaluate companies for acquisition and or surgeon groups to deliver consulting base Zimmer MIS economic value-added improvements to hospitals.

We hope to have both a partnership and the strategy operational by year-end.

To date this year more than 250 surgeons have been personally trained by surgeon to surgeon visits, and that's in addition to the more than 300 different medical education events Zimmer will host this year, with various renowned U.S. and international surgeons as faculty and speakers.

At one such event just completed, the biannual EFORT meeting in Lisbon, we offered 14 meet-the-expert sessions, three active workshops, and one special Zimmer event called minimally invasive and [inaudible] preserving techniques in hip and knee replacement.

With 540 attendees it was the most heavily attended event of the entire Congress and was focused solely on the Zimmer MIS solutions portfolio and [inaudible] hip resurfacing and artificial hips.

With our little remaining time, I thought I would give you a quick update on activities with Zimmer's computer assisted solutions and particularly as it relates to our progress on our unique electromagnetics for the knee.

EM for the Zimmer Quad-Sparing knee system has come a long way clinically since our first surgery in Houston just before the AAOS.

We have now completed 180 surgeries with approximately 75 in the U.S., 75 in Europe, and 30 in Asia Pacific.

Surgeries utilizing Zimmer EM Quad-Sparing were also completed at meetings entitled MIS meets CAOS.

That 's C-A-O-S, for computer-assisted orthopedic surgery, and with more than 20 countries represented.

The European Zimmer Computer Solutions team is executing on a 13 cities in 13 weeks 2005 summer tour, with EM Quad-Sparing surgeries in every city.

Here is some news I've been waiting for.

The low-cost portable iNav for the O.R., developed by Medtronic and Zimmer and loaded with electromagnetic NexGen quad-spring software.

We'll run on a limited released in U.S. later this month.

Training was initiated in June and the logistics, order processing, finance, and distribution plan is being put in place as we continue to work our way through the final technical improvements.

INav E. M. has also been already presented in multiple countries, including Germany, Austria, Italy, Switzerland, and the UK.

So there you have it.

The quarter's in the books for Zimmer.

Balance, 15, 15, 15, reported growth in the Americas, Europe and Asia Pacific respectively.

And with Europe showing strong traction at 11% constant currency growth.

We took global and domestic market share in traditional recon, dental, and spine, the latter two with growth rates in excess of 20%.

We doubled our new product project releases and doubled our surgeons trained in Zimmer Institutes versus prior year.

We delivered $0.80 EPS, up 38%, operating margins at a medical device leading 34% ratio and sales and net earnings of 24%, although helped a little bit by some favorable legal resolutions.

We raised our first quarter EPS guidance for the year by $0.07 and applied increases to prior year of 27% versus our previous indications of 20 to 25%.

Nearly a quarter of a billion dollars in operating cash flow contributed to the potential to become net debt free again early in the fourth quarter, only two years from the date of our Centerpulse acquisition.

Well, Sam, I don't know if this is [inaudible], but I thought it was a pretty darn good quarter.

What are your additional thoughts and color?

Thanks, Ray.

As you've already seen, we've delivered another very strong quarter exceeding both first call consensus expectations as well as our second quarter guidance for both sales and earnings per share.

Similar to the format of past earning calls, I will try to add detail to several key areas including breaking down sales a bit more, foreign currency, gross profit and operating expenses, interest expense and debt levels, acquisition and integration costs, our effective tax rate, EPS, CapEx, amortization and depreciation, and finally guidance.

For the first quarter of 2005, sales of $847 million represented an increase of 14.8% over prior year and 12.7% in constant currency.

This was equal to our guidance for the quarter and $5 million over first call consensus even though we had to overcome $7 million of reduced contribution from foreign currency in the quarter caused by the strengthening U.S. dollar.

As a result of the training that we have invested in our combined sales force worldwide, we are demonstrating our ability to win new business, some of which is winning back business in surgeons that we had initially lost during the early stages of integration.

As a result we are overachieving the goal that we set for ourselves, and that was to win back in 2005 50% of the business that we lost during the first 12 to 15 months following the acquisition.

Our expectation was to lose about $15 million in sales during the first year post-acquisition and to win back 50% of those losses in the second year, which is 2005.

I am pleased to say that the sales dissynergies which include both what we lost initially less what we have already earned back, are currently running at a forecasted annual rate of approximately $21 million.

With a full year of Centerpulse now included in our historic sales numbers, as I did last quarter I will highlight the sales growth contributed by price, volume mix, and foreign currency for each of our three geographic segments and -- similar in detail to what we did in our 10(K) for 2004 and for our first quarter 2005 10(Q).

On a consolidated basis, reported sales were up 14.8%.

Of that, six tenths of a point came from price, 12.2% from volume and mix together, foreign currency contributed 2.1%.

On a constant currency basis our total results were up 12.7%.

In the Americas reported sales were 14.5%.

Of that, 1.2% came from price, 12.9% from volume mix, and 4/10ths of one point from foreign currency.

Constant currency Americas was up 14.1%.

In Europe total sales up 15.3%.

Of that, negative 8/10ths of 1% came from price, 11.3% from volume mix, 4.8% from foreign currency.

On a constant currency basis Europe was up 10.5%.

Asia Pacific, total sales were up 15.3%.

Of that, 6/10ths of one point came from price, 10.5% came from volume mix, 4.2% from foreign currency.

On a constant currency basis, Asia Pacific was up 11.1%.

Looking at geographic sales growth by key product category, knees on a consolidated basis were up 20.1%; in the Americas knees were up 21.1%; in Europe, 17.6%; in Asia Pacific, 20.2%.

Hips consolidated grew by 9.9 percent.

In the Americas hips were up 8.7%;

Europe, 10.9%;

Asia Pacific, 11.5%.

Dental on a consolidated basis were up 27.8%.

In the Americas, dental was up 23.5%; in Europe, up 27.0%; in Asia Pacific, 52.7%.

Total recon, consolidated, up 16.0%; in the Americas total recon, up 16.5%; in Europe, up 14.6%; in Asia Pacific, up 16.8%.

In trauma on a consolidated basis, up 2.1%.

In the Americas, trauma was actually down 2.4%;

In Europe, up 12.8%; in Asia Pacific, up 6.5%.

Spine up in total 21.7%; in the Americas, spine was up 20.2%; in Europe, up 17.6%; in Asia Pacific, on a very small base, up 106%.

O. S. P. on a consolidated basis up 7.9%; in the Americas, O. S. P. was up 3.8% in Europe, 57.1%; in Asia Pacific, up 5.6%.

In the area of foreign currency throughout the second quarter, the U.S. dollar strengthened against most other currencies and as a result the expected contribution of sales growth during the last three quarters of 2005 that were incorporated into our guidance at the end of the first quarter began to change somewhat dramatically.

On June 15 we issued a press release quantifying the impact of foreign currency and quarterly sales growth for the balance of the year.

And we also quantified how much of that change since the sales guidance we gave during our first quarter earnings call on April 25.

Since then the U.S. dollar has strengthened even more.

Compared to our previous sales guidance on April 25, the expected contribution to sales growth has declined by $7 million for the second quarter, by $22 million for the third quarter, and by $24 million for the fourth quarter.

In total it has declined by $53 million for the year.

If the U.S. dollar holds from where it is for the balance of the year, the contribution of foreign currency to sales growth should be approximately zero in the third quarter of this year and a negative $16 million, or down 2% in the fourth quarter.

Therefore for the full year 2005, foreign currency should contribute approximately $16 million, or five tenths of 1% to Zimmer's overall sales growth, reflecting a favorable contribution of about $32 million in the first half, offset by a negative contribution of about $16 million in the back half of the year.

Also, if the U.S. dollar holds from where it is today throughout 2006, the contribution to sales growth in 2006 over 2005 should be negative and a reduction of approximately $15 million, or 1.5%.

Zimmer utilizes simple forward contracts to hedge the short term effects of foreign currency movement on intercompany sales transactions and as a result, the short term effect of foreign currency exchange rate movements on operating profit dollars is expected to be minimal.

We have hedge contracts in place for the next 12 months, covering about 85% of our expected intercompany sales transactions and an additional hedge contracts in place for the 12 months beyond that period, covering about 40% of our expected intercompany sales transactions.

Because we manage our foreign currency exposures utilizing a 24 month horizon, it gives us the ability to average in the effects of foreign currency and to incorporate those effects into our normal, annual operating plans.

We record the settlement of our foreign currency contracts in COGS.

And as a result when the U.S. dollar weakens those contracts tends to suppress gross and operating profit margins.

Conversely, as the U.S. dollar strengthens, is it has for the last several months, those settlements tend to enhance gross and operating profit margins even though the net effect on operating profit dollars is minimal.

Reported gross profit margin for the quarter was 77.7%, including $2.1 million pretax or $1.3 million net of tax of inventory step up expenses related primarily to the acquisition of Implex in the second quarter of 2004.

The balance of the acquisition related inventory step-up of $1 million pretax will be expensed to the P&L over the next two quarters.

Inventory step-up related to the Centerpulse acquisition was completed -- completely expensed by the fourth quarter of 2004.

Excluding the effect of inventory step-up expense, the adjusted gross profit margin for the second quarter was 78%, which represents an all-time record for Zimmer.

Included in the second quarter is approximately $6.5 million of additional gross profit reflected as a reduction of COGS related primarily to the favorable resolution of certain legal and other matters.

These items contributed approximately 8/10ths of 1% to gross and operating profit margins, and a little less than $0.02 per share in earnings per share in the quarter, and are not expected to appear again in future periods.

Reported operating expense for the first quarter was 45.1% of sales, second quarter 45.1% of sales, and included in the reported operating expense for the quarter were acquisition and integration expenses totaling $10 million pretax, $7.2 million net of tax or $0.03 per share in EPS.

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

Excluding the impact of the acquisition and integration expenses, adjusted operating expenses as a percentage of sales were 43.9%.

Reported operating profit margin was 32.6% for the quarter and excluding the impact of the inventory step-up in acquisition and integration expenses, adjusted operating profit margin was 34%, 60 basis points better than the first quarter, 440 basis points better than the second quarter of 2004, and again, an all-time record for Zimmer.

With our continued strong operating and free cash flow we reduced net debt -- that is total debt less cash -- by $179 million in the second quarter to 173 million.

Interest expense in the quarter was $4.2 million, compared to $7.2 million last quarter.

Since the acquisition of Centerpulse in October of 2003 and Implex in April of 2004, we have paid down over $1.2 billion of debt.

At the end of the first quarter we updated our expectations and indicated that we would be net debt free by the ends of 2005 absent any cash that may be required for acquisitions.

And given our current debt level and our exceptional cash flow in the second quarter coupled with our forecasted cash flow for the remainder of this year, we have become even more bullish and expect to be net debt free early in the fourth quarter.

Again, this forecast excludes any cash that may be required to fund any new acquisitions.

Since the acquisition of both Centerpulse and Implex, we have spent $286 million on acquisition and integration costs. $188 million of this cost have been expensed to the P&L, with $10 million being expensed in the second quarter of 2005 and 27 million being expensed in the first six months of this year.

In total we expect to expense $46 million during all of 2005 as the majority of the remaining integration activities are completed.

All references that I make to our effective tax rate will be on an adjusted basis.

The E. T. R. for the second quarter was 29.8% compared to 30.5%, for the first quarter and 31.5% for all of 2004.

This brings our year-to-date effective tax rate down to 30.1%, and that's 40 basis points favorable to our full year guidance of 30.5%.

We may have the opportunity to drive the effective tax rate down even lower than 30.1% by the end of the year; however, this is very dependent on at least three critical areas, including the first and improved mix of earnings from jurisdictions with lower tax rates; secondly, continued benefits from increasing production and profits generated in Puerto Rico; and thirdly, increasing Swiss production and distribution activity to take full advantage of our low Swiss tax rate.

The second quarter reported diluted EPS is $0.76 and includes $0.04 negative impact of inventory step-up expenses in acquisition and integration costs.

The second quarter adjusted diluted EPS is $0.80, exceeding our previous guidance and first call consensus estimates by $0.05.

As I mentioned during my discussion of gross profit, a little less than $0.02 of our performance was a result of items related primarily to the favorable resolution of certain legal and other matters that are not expected to appear again in future periods.

CapEx for the quarter were $72 million consisting of $48 million for instruments and $24 million for all other property, plant, and equipment fixed asset additions.

For the full year Capex are expected to be approximately 270 to $280 million, consisting of approximately $145 million for instruments, and a range of 125 to $135 million for all other fixed asset additions.

These additions are being driven by new products, insourcing, the closure of Austin, and continuous productivity improvements.

In the first six months of 2005 we have completed several critical growth initiatives including tripling our manufacturing capacity of trabecular metal products in an attempt to get out in front of rapidly increasing demand for this product doubling the size and footprint of our highly automated distribution center in Warsaw, Indiana; and doubling the size and capacity of our manufacturing facility in Ponce, Puerto Rico.

As a result of the Centerpulse and Implex acquisitions in a related $608 million of amortizable intangibles recorded amortization expense of $11.9 million and depreciation expense of $33.4 million, were reported in the quarter.

As mentioned during our first quarter earnings call, Zimmer will adopt FAS 123 R and will begin to expense stock options in the first quarter of 2006.

Using our historic methods of determining the effect of equity based compensation on EPS, the expected effect on 2005 that we will continue to disclose in our public filings, should be approximately $0.17 to $0.18 per share.

As we mentioned in our press release last night, we have updated our guidance to incorporate the results of the second quarter and the significant change in expected contribution from foreign currency since April.

As I mentioned during my discussion of foreign currency, since we communicated our guidance at the end of the first quarter the expected contribution to sales growth from foreign currency rate changes using current rates has decreased by $53 million as a result of the strengthening U.S. dollar against most foreign currencies.

Also, in the first six months of the year our constant currency sales growth rate was 11%.

We have modified our guidance for the full year to incorporate the same 11% constant currency growth rate in the last six months as well as the reduced expected benefit from foreign currency.

As a result, our new guidance for the year is approximately $3,325,000,000 of sales.

With this forecast, we have absorbed the $53 million reduction from foreign currency, increased our expectations of constant currency growth in the last half of the year and still remain in the range of our previous full year sales guidance.

Our expectations for the third quarter sales is approximately $777 million consisting of constant currency growth of about 11% and zero contribution from foreign currency.

Our expectation for fourth quarter sales is approximately $875 million, consisting of constant currency growth of about 11% and a negative contribution from foreign currency of approximately $16 million or negative 2%.

Another point worthy of noting is that the fourth quarter and the second half of 2005 each has one less billing date in prior year.

We are also increasing the diluted EPS guidance for the year by $0.07 to $2.93 reported and $3.07 adjusted, and that represents a 27% adjusted increase over prior year.

Diluted EPS guidance for the third quarter is approximately $0.63 reported and $0.66 adjusted, representing an 18% increase in adjusted EPS over prior year.

Diluted EPS share guidance for fourth quarter is approximately $0.83 reported and $0.86 adjusted, representing a 21% adjusted increase over prior year.

Growth rates in EPS for the third and fourth quarters of 2005 incorporate the significant sequential margin increase that occurred in the third and fourth quarters of 2004, compared to the first two quarters of last year, as well as expected ramp-up of R&D expenses in the second half of the year, especially in biologics.

Our EPS guidance also incorporates expected increases in legal and IT expenses as well as increases in MIS related D. T. C. expenses in the last half of this year compared to the first six months.

In summary, several factors contributed to our excellent second quarter financial results.

They include the underlying sales growth for recon, dental, and spine, we believe was greater than market growth.

Mix, together with continued improvements in manufacturing operations, continues to play an important role in delivering industry leading gross and operating profit margins while overcoming a softer pricing environment.

We continue to overachieve the timing of realized expense synergies associated with the integration of Centerpulse and Implex acquisitions into Zimmer.

We have also been able to overcome more of the negative effect of expected sales this synergies, faster than we had originally planned.

Careful expense management resulted in our continued ability to deliver strong operating margins while leveraging sales growth and strong margins coupled with sound asset management contributed to record operating cash flow.

We also completed three major capital expansions, paving the way for future sales growth, including our trabecular metal manufacturing capacity, Puerto Rico manufacturing capacity, and Warsaw distribution capacity.

As a reminder, our third quarter 2005 earnings call will be held at 8:00 a.m.

Eastern Standard Time on Thursday, October 27, 2005.

Now we will be happy to take your questions.

Judy, we will turn the call back to you.

Judy?

[OPERATOR INSTRUCTIONS] Your first question is from the line of Dhulsini DeZoysa with SG Cowen.

Thanks again for the exhaustive review.

I was hoping you could -- Ray, you mentioned accelerating R&D spending up to through your stated 5.5 to 6% goal of revenue, could you, I think you mentioned biologics, could you also talk about the track for dynamic stabilization in the U.S. and then -- just curious, picking up on, Sam, your comments towards the end about increased spending on IT and legal, I think the level of detail you provide is proof that you have pretty good information systems.

What else -- where else can you be spending on that?

I will do the first part.

The biologic programs I won't expand on.

There are six projects there.

And one of the issues has been getting the correct level of Ph.D. level staffing.

So it's not so much -- they are not technical issues, it's really hiring and timing issues and getting that team fulfilled, which is permanently in place in Austin.

The second part, though, of the comment, dynamic stabilization, we are looking now to move to what we would call Dynesys 2, internally, and we are looking for opportunities to not only expand the profile of that product, expand its utilization, but also look to incorporating, particularly, our knowledge of MIS into the procedure over time.

So there's a number of spinal projects, not just Dynesys, but certainly that will would be an important one.

Sam, do you want to --

Yes.

On the I.T. front, while we've made a lot of progress in IT, systems take -- do take a lot longer than many other activities to bring together.

We made a lot of progress but still we have about five or six countries, some of them smaller, yet to convert to SAP in Europe.

We do need to materially upgrade our IT systems in Japan.

We have taken several steps forward.

The final step will be to switch over to a new ERP system, more than likely SAP.

That will occur throughout the back part of this year and halfway into next year.

Finally dental, our dental business still needs to be brought up to the new ERP system which will happen, again, the last part of this year and the first part of next year.

It we will more than likely go on to the J. D. Edwards platform that we have in the U.S.

Okay.

If I could, just one follow up.

Given that it's still early into your H.C.A. -- new agreement, I won't push too hard, but when do you expect to have a sense of compliance?

I know we are only, what, 45 days in or so.

When do you have -- do you expect to have a better handle on compliance?

We monitor it on a weekly basis and take a very close look at all the hospitals and individual surgeons.

But I think, I think we will be a lot more active, I guess to use the fall or early fall as a general guideline.

There's a balance here of saying, is this construct going to work?

It's not worked in the past.

Conversely, H.C.A has done a lot of very hard work.

They've been kind enough to share that work with us and the work they've done with their hospitals to try to make this work and we want to make sure we are fair and give them reasonable time.

There's a balance here between what's smart for us and trying to be fair with them.

I would use sort of the early fall as my best guess at this point, I guess.

We will check back with you, then.

Thank you.

Your next question comes from the line of Katherine Martinelli with Merrill Lynch.

Good morning.

I just had a couple of questions.

First with respect to 2006 EPS growth targets, you had previously been looking for -- to target 25% or better.

But obviously the base this year has moved up considerably.

Any thoughts that you could share with us, if that's still a reasonable assumption?

It's exactly the same assumption Katherine, the -- we have been quicker, in fairness, at executing many of the '04-'05 milestones.

It's more about speed than the actual milestones themselves.

We have been faster than we thought we would be, probably by about four or five months overall.

However it's not a pull forward from 2006.

Because the things that drive 2006, just to give you a couple of examples to simplify it, the manufacturing synergies, the Austin plant isn't going to close and can't close until December 31. 30 to $35 million worth of synergies that are built into our guidance and thinking for that potential 25% growth in '06 can't be moved forward into '05 and hasn't been moved forward.

We haven't experienced one penny of that gain.

Puerto Rico conversion to a C.F.C. tax situation will dramatically reduce our taxes for Puerto Rican-based products.

It is not going to happen until '06.

We can't move it into '05.

There's no way to do that.

Just to give you an example of a couple of things.

Those guidances remain the same, although we have been quicker, admittedly, in '05 than we expected it to be.

In addition to the full-year effect of the activities that Ray mentioned, we also have some few activities that actually will occur in manufacturing, occur in 2006 and that will be a bit more increase in earnings that will take place in the back part of the year of 2006 as a result.

But in addition to all of that, we still drive independently of our integration activities, still drive a requirement on our manufacturing organizations to always take one to two points out of standard costs every year with other investments and other automation activities.

So, the both of those together should help continue to help to drive cost out of the system.

And then, if I can ask as a follow up then and perhaps I didn't totally understanded the comments, but I thought, Ray, you had some something about you could sustain a 77% gross margin without price.

Is that how you are looking at your sustainable gross margin level going forward?

Because I am trying to reconcile that, if you've seen the bulk of the year over year declines in SG&A and we are looking at R&D ramping up, where the leverage comes from going forward?

Are you -- should we be assuming that your use of cash is some type of acquisition where you get your interest leverage or -- just to help us understand what the moving parts are.

No, I think the point I was trying -- obviously we don't give gross profit line item guidance.

The point I was trying to make for comparison -- because there is so much talk about price and the impact of price I wasn't so much trying to give specificity to ongoing guidance in GP.

I was being very general in saying at 77 or better, we can sustain that without any price.

My commentary wasn't so much about trying to give guidance on GP which I wouldn't do.

It was more about trying to show people that if you look at the price component comparison over two years, or foreign exchange, and look at where we are today, our growth, our margins and so on, we are better off than we've ever been at dramatically less price and that is sustainable over time.

So simply making that price comparison as opposed to getting indications for the future.

And in terms of cash, any thoughts that you can share with us?

You did say you looked at a transaction, second quarter, that you opted not to go with.

Should we assume with you debt free that the probability of some type of an acquisition has stepped up?

Gee, that's a tough question.

The answer -- we are always looking at acquisitions and just to make a point, if you do really thorough due diligence, as we do, there's a price to pay for that and if the probability of the acquisition declines as it did this case, we elected not to go forward.

Obviously you have to take the hit on the P&L.

You can't put it on the balance sheet as if the deal was going through.

That's the P&L impact.

We continue to be very active, looking at opportunities that will enhance us strategically.

I wouldn't assume anything because we are very picky about our choices and about our price we are willing to pay.

So we will look at things and discard them just as quickly as we will buy them.

Great.

Thank you.

Your next question comes from the line of Milton Hsu with Bear Stearns.

Hi.

Good morning, guys.

Ray, a question on the HCA vendor standardization.

In most of our conversations with large U.S. hospitals they've been enable to make this type of agreement work because either the volume contingency was 80 to 85% over one quarter or so.

Can you just give us a sense -- I know you probably can't say -- talk about the specifics, but with H.C.A. and a lot of your other larger contracts, is this sort of the rough -- rough numbers we are looking at?

Well, I won't comment on the rough numbers.

I would tell you that the compliances have gotten higher than they were historically, when will people were measuring the effectiveness of these constructs.

Secondly I would tell you that the H.C.A. compliance is extremely high and agreed to by all parties and I'm not -- I'm assuming that DePuy and Striker have the same compliance goals.

I don't know that but I'm assuming that.

They are very tough compliances to the point where it makes it very hard for these to work.

Again, if it works I think it's great.

It's a great opportunity.

If it doesn't work we are back to a different situation.

I'm not concerned about it either way from Zimmer's perspective.

Okay.

And then you mentioned 1% pricing.

As one of the reasons -- it's probably because you've been proactive in landing these contracts, or structuring them.

That would suggest that are giving discounts already from those.

But since those are underway do you anticipate if these hospitals do -- or some of your customers do fall out of compliance, that pricing goes back up or are are not counting on that?

It could but we are not counting on it. that's not in our thinking.

I think the U.S. market is probably at about two points of price right now and I think we are at one, but I think we are at one on -- for the most part on purpose.

And it reflects the way we've decided to do things.

Also keep in mind the terms of many of these agreements are longer than they used to be and I think will pay us good dividends over time.

I'm not figuring on people not meeting compliance and putting it back up, though.

That's not in any of our plans, either internally or otherwise.

Okay.

Just one last question on Europe.

There's been evidence of growth stabilization or acceleration there.

Should we just be thinking about Zimmer growing a little bit faster than the high single-digit market right there?

Going forward?

I hope so.

It's one of the things people have commented on, sort of this third quarter, fourth quarter in the guidance.

And one of the things you have to think about is not only on the sales side, but we've changed as a company.

When Europe was either very small with Legacy Zimmer or flat, or essentially flat when we first acquired Centerpulse, the whole shutdown in August, the whole third quarter versus fourth quarter was a very different mix than we have today.

You have a very big gap between third and fourth, and downtime in August, where everything just shuts down and, of course, you have the flip flop of that in the fourth quarter where we are now going to be much stronger in October and November, than we've historically been.

And the effect on that is not only on sales, Milton, but also on -- you have a higher fixed cost base because of more salaries, less commission, that kind of thing, in Europe.

So again, you get this kind of downswing, more so than Zimmer has ever seen in the third but this upswing in the fourth.

And that's why we, you know, adjusted our guidance -- we actually matched The Street on the half, but we've adjusted the mix of it because the mix that was in first call simply wasn't going to happen even though overall it's the same story.

So you've got to figure on us being a stronger European business.

You have to figure on us being above market and you have to figure on that altering the relative mix of our third versus fourth quarter that we've seen in the past.

We should just build in more seasonality from now going forward?

Yes, I don't think there's any choice.

I mean I realize people sort of look at first reaction and go, gee, it's $0.66, what are these guys doing now in the third quarter, but it's also 86 in the fourth quarter and you just have to realize, if Europe is going to grow at 10 and 11% constant currency instead of zero to 3, Zimmer becomes a different company from a mix point of view, even though overall, obviously the guidance is still $1.52 for the half.

And I think in fairness we have 21 different analysts on first call who have expectations posted for Q3 and Q4.

And up until now we have not provided any guidance for expectations for Q3 or Q4.

So some of those models are a bit out in left field.

So we felt the need and an obligation to calibrate what our expectations are to give everybody a chance to modify the models.

Okay.

Thanks a lot.

Your next question comes from the line of Mike Weinstein with JP Morgan Securities.

Good morning.

It's Taylor here for Mike.

Good morning, Taylor.

Hey, Ray, you made some comments on the hip market at the very beginning of your remarks.

I wanted you -- if you could, to maybe repeat those or explain them just so we all understood what you were saying.

I've actually put the sheets away now because I'm writing questions down here but the comments -- are you referring to the hip mix?

Yes, with primaries, revision, fractures, stems --

Well, two things there that are interesting.

In the first quarter conference call we said Zimmer's hip revisions were down but we didn't really know about our competitors because we don't get that final look and they don't necessarily report out the same way.

So we did a lot of research to try and figure out what's going on with hip revisions and hips in general.

And in hip revisions what we uncovered is not so much that revisions were declining for Zimmer, but rather that more surgeons were using stems that we code primary, that we think of as primary stems, they were using them in revisions.

And that's not unusual but there's just more of it now.

Secondly, on the fracture side of things, there's more Gamma type nails being used in fracture correction.

So that was one set of comments.

The other set of comments related to try to understand what's going on in the underlying aspects of the hip market.

Is it really declining and magically -- you know, where have all these hip patients gone?

Are knees magically increasing?

Well, we all know the trend in surgery at a rate of two to one, hips to knees, has been going on for ten years in terms of growth rate being dramatically higher.

What is different I think is the actual bookings into the operating room.

The patients aren't disappearing but I believe that there are more knees being booked in favor of hips and much quicker turnaround in the operating room.

These are much younger patients.

They tend to be non-Medicare private pay and I think there is a skewing, at least temporarily, and it can't go on forever because obviously all of those patients need attention, but I think there is, as far as we can tell, perhaps a short term skewing of bookings.

So those are the two main things I was talking about.

I'm not sure if there was other parts to that.

No, that's good.

But a short term skewing in favor of knees is what you're --

Yes, in terms of the actual booking, now, the underlying growth rates for knees being dramatically higher than hips is not a recent phenomenon.

It's been going on in our records since 1992 or 93.

In fact I use a graph at most of our investor presentations to document that for people.

That's not dollars.

That's actual surgical units.

Okay.

Great.

And then just looking at your 11% constant currency growth in the back half of the year with two fewer selling days.

So, does that imply an actual day rate sales growth higher in the second half of the year than in the first half of the year?

It's one fewer selling days.

It's a day less in the fourth which is also a day less in the second half.

It may have sounded like it's two less days but it's only one less day.

It implies -- if you think of sort of 100 active surgical days in the half year and you are missing a day, it's kind of 1%, rough terms.

Okay.

Great.

Just one more question, I believe Mike as a follow up.

Your marginal profitability on incremental sales has been between 60 and 70% first half of the year.

That's with the effective synergies.

Is your long-term rate excluding synergies still around 50% targeted?

Or higher or lower than that?

We constructed -- it bounces around, obviously, to your point with synergies, in this case, this month it was -- or, this quarter, I should say -- it was 63 quoted but we had some benefit in there as noted on the adjustments.

So it was probably more like 55%.

We try to run the business to have a highly leveraged drop-through, earnings higher than sales and about a 50% gain on incremental sales.

We try to keep the SG&A values, in other words, the cost of investment in new sales between 25 and 30%.

We've been pretty good at doing that.

That allows us to run a leveraged operating earnings and net drop-through company with the opportunity to grow sales pretty attractively and new sales a at a relatively low cost.

That's the turnaround plan we put in place in '97, '98, and we continue to believe that's the right way to drive the business.

Additionally, even beyond the operating profit line, Taylor, we do have an expectation that we will be able to continue to drive our tax rate down over time.

We do see in the cards us dropping below 30%.

We hope one day in the not too distance future we will have the best tax rate in the industry well.

Hey, guys, it's Mike.

Hi, Mike.

Good morning.

Ray, let me just throw out a broader strategic question, following up a little bit on the M&A discussion earlier.

You've had this great success with Centerpulse in terms of the returns it's provided to the Company.

You are getting close to having paid down that debt, as was pointed out earlier.

But as we look at the orthopedic industry your opportunities for meaningful M&A are somewhat limited if you stick to some of the areas that you are in today including some of the higher growth areas such as spine and trauma.

You can obviously buy earlier stage stuff.

But not a lot that would have an impact in 2007, 2008.

Do you think about making acquisitions outside of what we call traditional orthopedics?

And by traditional orthopedics I define it as recon, trauma, spine, maybe biologics, too?

And is that a possibility as we think about Zimmer in a couple of years?

We think about a lot of things, Mike.

The question is whether we would do it.

We have always said that we want to stick to our knitting.

I've have not given strong consideration to anything outside of that because that's been our profile and I'm not sure, I'm not sure if you wander outside of orthopedics, I'm not sure what you get in the way of incremental benefit for premium paid.

That's the struggle, because there would be probably fairly good premiums unless you just got lucky on something.

So we tend to think more in terms of -- in the broad context of orthopedics, and maybe we use orthopedics as a broader term than you do.

Where can we get impact out through those future years.

But if -- to take the obvious example of something that's way outside: cardio.

I mean, we don't tend to think in those --

No, I'm not talking about something that far afield.

But when you're saying a broader definition of orthopedics, outside of what I just ran through, what would you be including as well?

Well, if I tell you, you'll promise not to tell anybody else?

You know, Ray.

I would never tell. [Laughter].

Thanks Mike.

Thanks.

Your next question comes from the line of Joanne Wuensch with Harris Nesbitt.

Hi, this is actually Jessica for Joanne.

Can you hear me okay?

Yes.

Good morning, Jessica.

Hi.

You had just mentioned that -- I think it was the HCA. contract was -- they're longer than they used to be.

Is that just for HCA or for all contracts in general, and how long are they lasting?

No, it was intended to be a general comment and if you look back at some of our contracts, one to two years, review after a year, some sort of amendment or renewal, what we tried to do and I think this is what Milton was referring to, what we've tried to do earlier, if you go back and run through the conference call scripts over the last year, year and a half, what we've tried to do is to get at this issue earlier, probably give a little bit up more early, get better carve-outs of some of the technical we want and have slightly longer if not considerably longer agreements, depending upon who the partner is.

I probably can't give you a generic answer but I think probably -- if one to two years was history, then three years is probably more like now.

So the average length has maybe doubled if you want to use real generic averages.

Great.

Thanks.

And last question, the nice uptick in dental/spine, you have a lot of new products, do you think that growth was mostly due to new products or was there anything on the sales force side that you were doing there to help that improvement?

I think the answer is different for the two.

The underlying product strength at dental, you know, I would say is not highly new product oriented.

It's much more execution, sales force expansion for sure.

A little bit from recovery of some back orders, although that wasn't a big factor and it was only in the U.S.

Spinal is definitely the opposite answer.

It is a huge input from new products versus the traditional products we inherited from Centerpulse.

Great.

And just to follow up from Dhulsini's question, the Dynesys in the U.S., where is that in terms of when it could come to market?

It's -- I'm not sure what your question is.

We sold $10 million in the quarter.

It's on the market.

I'm sorry, but -- is it O.U.S.?

No, it's both.

It's both O.U.S. and in the U.S.

It's both.

It's both.

It's fusion at this point.

I think what you may be indicating is -- we have a plan, obviously, regulatory plan to get it to nonfusion.

We are nowhere near that at this point.

But it's on the market and is growing very rapidly, both in the U.S. and outside of the U.S.

Thank you very much.

Your next question comes from the line of Bob Hopkins with Lehman Brothers.

Hi, good morning.

Two quick questions, one on the bottom line and one more on the top line.

First on the bottom line for Sam, I was wondering if you could give us a sense as to what amount of integration expense you expect for Q3 and just how long you expect to continue making these adjustments, going forward?

Then I have a top line one.

Yes, we have, I think I mentioned we have about $45 million of total integration expense planned for the year.

By the time we exit this year we should have very little left, a little bit left in manufacturing, maybe a little bit left in systems, but the big dollars will be clearly behind us.

And we've incurred 27 ---

Yes.

I haven't got the notes in front of me right now.

I think it's 27 million year-to-date, 10 in the quarter and 45 estimated for the year.

Okay.

18 million forecasted for the back part of the year.

Okay.

And then secondly, more on the top line, for Ray.

In terms of hospital contracting, following up on the previous questions, could you just go into a little more detail on how that works and what percentage of the book re-prices at the end of each year?

And just also, what kind of teeth are in those contracts, if a hospital gets into a new initiative to try to cut costs in various areas, do they have no chance of trying to renegotiate with you guys?

Do they have to wait until the end of the contract?

Or is that fluid?

I will answer the last part first.

I mean, we try not to have it be fluid, I suppose is the answer, but we sit down, like any relationship you have to listen to people that are doing that.

If we've contracted in good faith and the pricing is competitive and whatnot, we usually don't make excessive renegotiation.

We'll make single adjustments in things if there's a particular area that's out of whack.

We do it on an individual line item basis, so it's really tough to give you a broad general answer.

In terms of the contracting process itself, on the first part of your question, what would you like me to comment on, Bob?

Really, just what percentage of the book reprices at the end of each year versus throughout the year?

At the ends, oh, you mean specifically at the end as in a calendar comment?

Oh, oh, no, it's mix, it's all through the whole year.

I don't know the exact percent at the end of the year.

We do our price changes effective January 1 but I wouldn't know the answer to your question.

It's spread out all over the place through all through the year.

I would have to go do a calculation of the amount that's actually January 1.

Any rough estimate?

Is it more than half the book that , quote, unquote, reprices at the end of the year or is that the wrong way to think about it?

It's not necessarily right or wrong, it's just I don't know the answer.

I would have to specifically go to our corporate, our corporate group to ask them the question on that.

The other thing you have to remember too, if you heard the wording I used in HCA, is one of the issues we've got on price fluidity is we've also contracted for services and there are services we provide, certain instrumentation agreements and so on.

One of the things that you have to think about too, is if people want or negotiate less price.

It's not always just price that comes out of it, it can be a reduction in services that we are willing to provide and therefore increased -- or less operating expenses and less commissions to our distributors, if that was the specific negotiated agreement.

So it's not just pure price having a direct effect on operating earning, it's more complex than that.

Okay.

Thanks very much.

Your next question comes from the line of Steve Lichtman with Banc of America Securities.

Good morning, guys.

A couple of questions.

Ray, you talked about D.T.C. spending.

Can you talk a little bit about what other type of campaigns you've been doing so far?

I guess this is related more on the MIS front and what kind you expect to do, going forward?

Yes, I will give a general answer.

First of all, we haven't been doing that much lately, other than routine -- what I would call routine advertising.

What we are talking about is, first of all, these are not large national programs.

They are targeted city programs and integrated programs.

So it's a bit of TV, a bit of local newspaper, a bit of follow-up marketing with hospitals and surgeons and so on.

They are targeting MIS -- is certainly one area.

And then we are also going to target some very specific sub-segment demographic groups and I don't want to be more specific than that because the plans are being put together now and I don't think it's in the best interest to really let out what that is.

But they are targeted programs by city, by sub-segment, demographic group, and they are integrated programs.

Okay, great.

And then just lastly, just on the MIS opportunity overseas, I apologize if I missed this, but could you talk about the penetration in Europe of MIS versus the U.S. and sort of what the trends are overall in Europe?

I didn't do it this time because I took that mix section out because as I said there wasn't a lot of change there other than the increase in the metal, but I usually do quote those numbers.

The penetration rate in Europe is less than a third in rough big round numbers of what it is in the U.S. and we see it as a major opportunity.

Centerpulse had and does have as a brand exceptional products but those were not charged up with MIS instruments and so on.

And we just started the -- in fact we saw some impact, as you can tell with that C.LS stem, because it jumped 20% in units.

You are lucky if the hip stem unit growth in Europe is 5% or 6%.

We are seeing early impacts.

We think, along with computer assisted and electromagnetics, that there's absolutely no reason why Europe can't meet or even surpass U.S. penetrations.

But it's all opportunity at this point.

We are not anywhere near that right now.

Thank you, guys.

You're welcome, Steve.

Your next question comes from the line of Tao Levy with Deutsche Bank.

Good morning.

Thanks for taking my question.

Just two quick ones.

First on the gross margins, is there any way you can help us quantify -- you obviously gave us the FX impact, let's say, for the fourth quarter, what type of benefit that translates to on the gross margin side?

Probably the best way to answer that question, Tao, is that -- start with operating profit instead of gross profit.

As I mentioned, because of the way we hedge and the way we average in the effect of foreign currency movement over this 24 month horizon, movement up or down of the dollar tends to have very little effect in dollars on operating profit.

But because the contracts are settled in COGS, as I mentioned, the denominator of the equation goes down as the dollar begins to strengthen.

But the numerator, operating profit hasn't change at all, so it tends to shore up or boost operating profit margin.

And similarly, in gross profit that's even more enhanced because that's where the contracts are settled.

So it is a margin enhancer, although it doesn't change operating profit dollars very much.

So target same level of operating profit margins by increasing the gross margin.

Not margins, dollars.

Dollars.

Okay.

Also on the sales force, as you start to negotiate potentially lower prices where there's less of a price increase, how does that affect commissions paid out to the sales force and does that mean you have to pay a little bit more to the sales force?

No.

It doesn't necessarily affect them at all.

It depends on what services and what approach we are going to take in the given hospital institution.

For instance, a nationally negotiated contract where someone within it doesn't want to pay for nor do they like having a sales rep in the operating room, we consider that a substantial support service item we provide and a valuable input in the operating room.

We have to look at things in terms of commissions for services and work provided and we have to take a look at price and whether we are just changing price, which we may be, up or down, or are we actually altering the services.

Do you put in x-number of consignment sets so they are available all the time as instruments in the hospital because of the number of surgeries they do?

Or do you just bring those sets in with you for that specific?

Do you put computer assisted equipment in on a per surgery basis or on consignment?

So it's more than just commission, it's taking all the GP dollar traders, if you will, and taking a look at all the services and costs, including commissions, that you provide and try to figure out how to maximize earning.

It's not sort of a simple one-on-one answer there.

Great.

Thanks a lot.

Next question comes from the line of Glenn Reicin of Morgan Stanley.

It's Matt Miksic for Glenn.

Thanks for taking the question.

Just one housekeeping question on the tax rate.

Sounds like that was an improvement that you are going to sustain and potentially improve further?

Well, the way we are obligated to record taxes in the U.S.

GAAP is that at the end of any quarter the tax rate that is recorded on a year-to-date basis should be what you expect to be for the full year.

So because we are at 30.1% on a year-to-date basis at the end of the second quarter and we started out the first quarter 30.5. the second quarter ended up at 28.98 So at least going forward, unless something gets better, the rate that we are expecting for the full year is 30.1.

I did say, however, if we can continue to focus on the source of earnings and the increase in volume of earnings in our true big lower tax jurisdictions, which are the Swiss based rate as well as Puerto Rico, we may be able to drive that down even further from the 30.1 unit day rate that we are right now by the end of the year.

Okay.

Those you continue to use 30, 30.1 to model?

Is what you are saying?

Yes.

So -- right.

And then a question on mix, I mean volume and mix, very strong.

Just wondering what some of the bigger drivers of that are and what -- and if you can give us an update on where some of the key things like trabecular metal are, highly cross-linked poly, and et cetera?

I will do it in the growth pattern, I guess, Matt.

Trabecular metal, in various categories, was up anywhere from 20 to 50%. [Inaudible] our overall sales aren't growing at that rate and trabecular metal is extremely profitable to us.

Polys, highly cross-linked polys were up 18 percent, very clearly hips are not growing at 18%.

They are growing at something around half that.

Those are certainly two big factors.

High flexion, in the case of high flex knees, growing at 70 and 80% on big, big basis, that's very clearly creating improved profitability.

MIS is driving porous stems.

MIS stems grew at 28 percent, porous stems are growing 10, 12%, so that's, again, double where we have been.

And then just product mix in general, knees growing faster than hips.

Spine and dental growing at over 20.

So when you put all of those together you end up with some pretty attractive situations.

Our revision business is growing faster than the natural market.

All of those thing tend to have, if not higher GP percent, which in many cases they do, they definitely have higher GP dollars.

Specifically drilling in on trabecular metal, you mentioned the Monoblock knee.

In terms of tibial trays -- or I guess in terms of knees in general, we were at 8 or 9% of trabecular metal penetration, is that kind of still in that range or are we seeing a significant uptick from there?

We were at 5 or 6% and it's growing at 25 or 30% a quarter.

I'm not sure where the 8 or 9% came from.

Okay.

Well, we had eight or nine.

So, five or six and up.

Five or six in the second quarter.

Well, but it's growing at rates of 25 and 30 and 40 and 50%.

It's so very clearly it's growing at rates two and three and four time the rate of the company.

Therefore obviously your penetration is getting much higher.

Great.

If I could, just one follow up on Dynesys; what are you learning so far?

It seems like you got a significant up-take in the quarter.

What are -- how is that changing your view on penetration or on up-take or on the use of this product in the field?

Again I think it's -- we've stated from there beginning that we like the concept of getting at DDD earlier in the disease process with a less invasive process so I think it's reaffirming our belief that there are different ways to skin the cat, so to speak.

I think it reaffirms our belief we're, in some cases, able to get some pretty positive reimbursement for us.

That reaffirms our belief that there will be an economic position there.

It's allowing us to reinvest in what I guess we would call Dynesys 2, informally, to get at MIS and technical modifications.

So I think it's a reaffirmation of everything we already know.

Any -- no time lines on Dynesys 2?

Not that we are going to disclose at this point.

We are going into a strat [ph] planning session in the next little while for a solid week with all of our top people and that's when we do that kind of work.

So at some point we will give you some information on that, but I wouldn't be prepared to do it right now.

Great.

Thanks so much.

Your next question comes from the line of Michael Madsen With Wachovia.

Hi.

I have a question on the Palacos Bone Cement.

I think you said the sales so far were 100 million.

Is that correct?

I wish.

No, we've only had the product for a few weeks.

We had a very quick $1 million without having everybody trained, without having our full distributor sales force engaged, without having all the products we've got and we've not cannibalized -- this I didn't put in the script. but I could have, I guess.

Interestingly enough we have a long history with our own product and very modest growth.

We've had the same share for years.

We've been able to do that without any cannibalization of our older products.

So we are very thrilled with what are very early results.

Secondarily, as I did comment in the script, we are in some pretty good discussions with Kulzer about how to expand this on a global basis and if we can get that done in some of the targeted key countries in Europe and Asia we will be very pleased.

It's a great looking product.

Okay.

And I know it's still very early, but of that $1 million do you have any sort of feel for where these customers are coming from?

You said it's obviously not cannibalizing your own existing cement.

Is it coming from the current distributor of Palacos or is it coming from other competitors that sell cement?

My understanding is that it's spread across all of them.

I don't know that there's any significant -- I haven't looked at it in great detail but what I'm told anecdotally from our marketing people that are reviewing the reports is that we are getting pretty good traction across the three major competitors.

But it's small at this stage, too.

Okay.

And then one more question on your hip -- large diameter metal on metal head that you said you were going to be introducing in the U.S.

I think you said that was going to be a 32-millimeter [inaudible].

I know that some of your competitors have a larger breadth of sizes, kind of a full product range.

Are there plans to ultimately introduce that as well?

Yes, you're right on all counts.

We did not have much in the way of large heads.

The 32 is the first one approved on that.

We are planning to introduce all the large hip sizes.

So that's one gap filled out of about three gaps we need to fill.

So your assessment is correct.

Okay.

And what is the timing on the 32 and then the rest of the -- 32 is approved now and ready to go.

The other ones, I don't know the exact timing and I will look that up for you and we will get an answer out on that.

So I don't know the exact timing.

The 32 is approved so it's done.

It is ready to go.

We have inventory so it's ready to go.

That's all.

Thanks.

Your next question comes from the line of William Plovanic with First Albany Capital.

Great.

Thank you.

Good morning.

Good morning, Bill.

Just one quick question.

You talked about the contracting with HCA and other systems.

The discount up front, if they don't meet the volume requirements, will you actually -- do you actually reduce the prices up front or is it a back end loaded pay back to them or -- how does that work?

If they don't hit compliance could we actually see pricing kick back up and then maybe an extra check back to you or something?

No, no.

I mean, you could see -- it depends on the negotiations.

You could see possibly prices come back up.

The gamble we do is on the front end.

We are not going to get any checks back from them or anything like that.

We invest.

We take a look at the model and decide whether we can make a lot more money, assuming they hit compliance or something close to it, and then we invest the reduction in price up front.

I'm not speaking for everybody.

I don't know what DePuy and Striker do, you'll have to ask them, but in our case we are investing that money up front now to see if they can deliver.

If they don't deliver then we will sit down and renegotiate.

But that's our investment and our risk up front, not theirs.

That's what I've always said, although I consider it a sensible risk and with very little down side relative to the potential gain.

If they can't deliver and if they can't make it work, then we will sit back down with them and take a look at price and services and see how else they want to approach this.

That's the way we've done it.

Again, you are going to have to ask the other people what they are doing.

I don't know the exact details.

Have you ever given color on the range of the discounts provided in these types of contracts?

No, nor would I. Far too -- [inaudible] information.

Great.

Thank you.

Your next question comes from the line of Jason Wittes with Leerink Swann.

Thank you for taking the question.

I guess just a follow up to that, you are saying basically you decide on a contract, if there's not compliance you go back down and sit with the hospital.

I guess from that perspective, from what you said from your earlier comments, at least with the H.C.A. comment, in about six months you're going to probably -- if there's not compliance you would go back down and sit down with them again.

Is that a fair way of looking at it?

I don't think I said six months.

I think I said sooner than that, but, yes, that's the essence of it, that's correct.

Okay.

And also, we notice that goodwill has been trending down and I guess just wanted to know what the mechanics were, A., as to why it's been coming down and, secondly, how that flows through the P&L.

The reason it trends down is because of foreign currency translation.

Translation effects goodwill and really not much else.

Okay.

And finally, you mentioned quite a few products, opportunities that you guys had.

I don't know if you can give any kind of indication about what the mix component is to your growth right now and what you expect it to be going forward.

Because that would help to us better understand what all those products mean.

We don't, Jason, as you know.

But I would tell you that mix is virtually unchanged from what it's been over the last several years because the decline we've had in mix in summer is where we get over-penetrated have been offset by things like Trabecular metal growing at 30 and 40%.

So there's no meaningful change in mix at this stage.

What you are seeing is what I commented on at one point during my initial comments, and that is that we are essentially replacing foreign exchange decline and some price with increased volume and mix.

And in the case of the mix component, there's not a heck of a lot of change.

That's very helpful.

Thank you.

Your next question comes from the line of Mark Landy with Susquehanna Financial.

Hi, Mark.

Hey, good morning, folks.

How are you doing?

Just drilling down into the dental business, Ray, you know, you're growing that nicely, but what do you have to do to really get that up there?

You've got two large European competitors with pretty stock valuations.

You are obviously not going to go out to buy acquisition and grow because it's just too expensive, I think [inaudible] metrics.

Do you get more value by selling that business off, taking the money and reinvesting it into your core franchises?

Or -- how does one get that to kind of get bigger?

I'm still trying to get over your opening comment of drilling down into the dental business.

It's a good question because it's, as you know there's a couple of big horses out there.

There's not a lot in between.

It's kind of like the spine business in a way.

What we've found that's interesting, first of all there's a lot of geographic areas that we are not necessarily strong in.

We hit tremendous growth in some of the areas but there's many countries and areas that we are not necessarily anywhere near as well penetrated or positioned as we are in hips and knees and so on, and yet there is demand.

So that's one thing.

Secondly, much to my surprise there is a remarkable amount of interesting technology out there that may have some opportunities to change the business and we are looking at some of those now.

So I think you -- we've told people before, we have no intentions of selling the business.

We didn't at the time.

We still don't.

We like its growth potential, its diversity.

I think you can grow it dramatically.

You can't jump from fifth to first.

I agree with you, it's just, the gap is too wide.

But I think there's a lot of growth potential, both geographically and technologically and expanded sales force and so on and so on.

So at least for the foreseeable future, we can keep this moving.

At some point, I guess if you get from fifth to fourth or fourth to third you have to decide how far you want to go.

But we are not there yet.

Thanks.

Great quarter, guys.

At this time there are no further questions.

I will now turn the call back over to Mr. Elliot for any closing remarks.

No, that's fine, Judy, thank you for all the calls and thanks as usual to everybody for their patience.

We hope we've been thorough in our comments and answering questions and we look forward do seeing you next time.

Thanks again.

Good bye.

This concludes today's Zimmer second quarter 2005 financial results conference call.

You may now disconnect.