Zimmer Biomet Holdings Inc (ZBH) 2005 Q3 法說會逐字稿

Good morning.

I would like to welcome everyone to the Zimmer third 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 risk, uncertainties and assumptions, including but not limited to our ability to successfully integrate Centerpulse AG and Implex Corporation that could cause actual outcomes and results to differ materially from those in the forward-looking statements.

For a list and description of the risks and uncertainties, see the disclosure materials filed by Zimmer with the Securities and Exchange Commission.

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

This presentation also contains certain non-GAAP financial measures.

A Reconciliation of such information to the most directly comparable GAAP financial measures, along with the other financial and statistical information for the period to be presented on this conference call, was included in the press release announcing our earnings, which may be accessed from the Zimmer website at www.Zimmer.com, under the section entitled "investor relations."

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

Thank you, Liegh.

Good morning, everyone and welcome to Zimmer third quarter 2005 conference call.

I'm pleased to be hosting this call to discuss a good earnings quarter, though with a little more difficult Recon sales environment and double-digit growth in trauma, spine and dental -- the latter two approaching 20% increases.

Strong gross margins, cash flow and ratios were consistent with prior quarters and the business model we operate.

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.

We're going to shorten today's call remarks to approximately one hour at your request, and we'll begin today's call with a few thoughts on the market, comments related to our third quarter 2005, including an update on operations, and followed by a Q&A discussion.

All comments and comparisons are on an adjusted basis; further, all adjusted discussions exclude acquisition integration expenses and inventory step up.

As always, I wish to thank our Zimmer team for their continued hard work and with a special congratulations again this quarter to the dental and spine teams.

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

Zimmer in the quarter was the only major orthopedic company to meet or exceed original First Call EPS expectations.

Let's change our usual format, though, and talk about our Zimmer-served market for a few minutes, specifically Recon and for the most part, U.S. Recon.

It's a tougher climate; some of the issues will pass, while others will be with us for a little while.

Here's a few highlights as we see them.

We believe units of elective surgery were somewhat softer this summer, but mix and price remain consistent with prior quarters.

But more on that later. 12 Zimmer countries or regions had one less billing day in the quarter, and 13 countries including the U.S. and virtually all of Europe will have at least one billing date less in the fourth quarter.

That's a 1.5 to 2% of decreased growth.

During the catastrophic events of Katrina and Rita, we lost more than $6 million of sales in the final few days of August and the month of September.

Zimmer marketshares in the affected areas averaged more than 50%.

With the storms we lost 2 points of U.S. knee and hip growth, and one point of total global growth.

Katrina and Rita are expected to trim 10 to $11 million from fourth quarter results.

We obviously wish it wasn't so for the people that live there, but nevertheless, to our marketshares the revenue impact for us is what it is.

We are losing an estimated $10 million or more per quarter related to hard bearings, ceramic-on-ceramic and large-head metal-on-metal but that should be solvable with fourth quarter, 2005 and first quarter, 2006 anticipated FDA approvals.

DePuy has done a nice job on their most recent DQC programs relative to knees, and particularly as it relates to new patient surgery motivation.

However, we have seen little impact from the two new competitive knee systems.

On the important and much talked about subject of price, a positive 1% globally this quarter, and positive 1% in the U.S., we haven't seen much change at Zimmer now for three quarters in a row.

We continue to believe price will be globally negative in 2006, as little as minus 1% to as much as minus 2%, but with the latter assuming Japan at minus 8, Germany at minus 5, and a new tariff program in France very late next year.

We continue to believe that U.S. price will be minus 0.5% to minus 1%.

We continue to model our business and our planned investment spending internally, on the theoretical global price range of plus 2% to 0, to minus 2%, although as we complete the 2006 budget process, we are really concentrating our modeling attention on the zero to minus 2.

The 2006 full year guidance provided to you last night, is our best effort and was based upon minus 1.2% globally.

In other words, for us, it's already built in.

More recently in general, the market reactions, rumor mills and interpretations of events and reports seem overblown.

Here's our favorite five orthopedic fact-versus-fiction myths.

Myth number one -- Ortho stocks are a bad place to be, and a bad opportunity.

Utter nonsense.

Ortho stocks are at or approaching 5 to 10-year lows in valuation; there is no cure for osteoarthritis, there's none planned in the pipelines of drug or biotech companies -- so much for the next 7 to 10 years.

One or more of the arthritis pain relievers allegedly have potential serious problems.

Talk to the patients -- Total joints dramatically alter peoples lives every day, and it remains hands down the single most successful elective surgery in the world.

Myth number two -- it's the early '90s all over again; also nonsense.

The early '90s was a relative orthopedic wasteland for innovative technology, was rife with managed care and proposed Clinton administration health care reform, and there's no demand matching today.

Gainsharing is getting skeptical discussion but no traction.

There was virtually no patient education, Internet or DTC marketing back then.

The opportunity for MIS with reduced invasiveness and quicker rehab was not an alternative to fear, and earlier technology was not potentially accelerating multiple revisions.

The rate and level of obesity in this country has increased dramatically in the last 10 years, and body mass index has a direct correlation to osteoarthritis onset and incidence.

In the painful early '90s, the orthopedic sector traded at roughly 18 times forward earnings, or 1 multiple unit higher than Zimmer is trading at today.

Go figure!

In orthopedics, we live for this decade and the next one.

Myth number three -- the magic of diversification.

We like hips, knees, shoulders, elbows, ankles, dental, trauma and spine.

We like support product related to the orthopedic procedures, including biologicals.

We liked Recon yesterday, we like it today, and we like it for tomorrow.

Our margins are 10 to 25% better than the best-known diversified companies.

Our operating profits in many cases 50% higher as a ratio to sales, and we paid off $1.5 billion of debt from our own free cash flow in less than two years.

We are the low-cost producer and the low-cost distributor.

We would like to have more trauma, dental, and spine and biologicals, sure.

But those hundreds of thousands of people who need or will get hips and knees aren't going away.

We remain enamored and enthusiastic about Recon as the core investment.

Myth number 4 -- sour grapes about our Zimmer contract price renewals, and when did you say you saw price as an issue?

All nonsense, too.

We have been politely accused of sour grapes over our contract price renewals and renegotiations that, prior to HCA, we have precipitated over the last 18 months and informed you of on various occasions.

A simple check of the conference call transcript would suggest that we sought longer terms, with more technology carve outs, in exchange for better hospital pricing on routine primaries.

But pricing overall, in every single case, was positive.

As for "when did you say you saw price as an issue?", this is reminiscent of minimally invasive surgery.

We have already had to listen to revision historians of the industry say they invented MIS total replacement in orthopedics.

That was bad enough.

Now, we have to listen to people actually competing to say that they told you a year ago about a much tougher U.S. price environment.

A year ago, they weren't even talking about it a month ago, and some of them still say 2006 price is positive 3 to 5%.

We say, check the record.

Zimmer margins are consistently strong through active daily management, and our expenses have been adjusted accordingly and out in front of the current environment, not lagging it.

We believe we will continue to succeed and deliver the results we have committed to, all without harming the future.

More difficult Recon sales quarters?

You bet.

Traditional $0.50 drop-through on each sales dollar, and our Zimmer earnings at least double the sales growth rate, you bet.

And the 2006 guidance reflects that.

My last myth is myth number 5 -- the hospital chain outside consultant story.

This is one of my personal favorites.

Here's their pitch -- two-thirds of hospitals are losing money on incremental Medicare hips and knees; hospital profits have suffered the most.

Ortho companies have raised prices 113% in the last 10 years, and orthopedic reps make more money per surgery than surgeons.

All nonsense.

At Zimmer, we have the exact average CMS pricier code information for every hospital in the United States -- that is to say, the exact reimbursement rates provided and received by them.

They range from the routine $10,000, to many, many hospitals at 12,000 or better and several in the 15,000 to 20,000 range.

Less-efficient hospitals with high concentrations of revisions, Medicare and/or academic requirements can clearly be hurting with a basic $10,000 reimbursement, if it's combined with lots of new technology utilization.

One of our recently retired Texas distributors just had a Zimmer knee put in at a hospital group that constantly pleads serious profit decline due to orthopedics.

We billed $5700 for all the implant components and materials.

They billed our retired friend $31,000 for the implants alone, and nearly $55,000 for the surgery in total, and that didn't even include the surgeon and anesthesiologist charges.

Hospital profits haven't suffered the most in the last five years, but in fairness, neither have we as an industry.

It is the orthopedic surgeon that works harder and harder for less and less.

The surgeon friend of mine in Southern California earned $1200 per surgery in the early '70s.

He earns that same $1200 today, 30 years later.

Orthopedic reps don't earn more than surgeons, and day in and day out on thousands of routine primaries, earn half or less what the surgeon does, and they work hard and under a lot of pressure for it.

Withdrawal from Medicare surgery or cash-only on private day, along with approved up-charges on unique skills such as MIS, have helped augment dramatic declines in surgeon income, but certainly not for everyone.

As we talk to you today, key representatives of the surgeon community are presenting briefs to the government panels in an attempt to avoid additional income reductions.

The industry has not raised prices 113% in 10 years, as consultants often say, and even some analysts are now using figures of almost 50% over the last five years.

We probably have raised list prices that amount.

While implant list prices may make for splashy headlines, they are mostly irrelevant.

Unfortunately, you don't get to keep list price.

Let's talk about fact.

The average stick rate, or real price increase gain per year by Zimmer over the last 12 years, averages approximately 2.8% per year.

That's compared to a CPI increase of 2.3% for the same 12 years.

Hospital consultant presentation -- 113%.

Zimmer reality, a half a point over CPI per year for more than a decade.

We hope this small and at times intentionally caustic diversion into fact versus fiction was helpful.

We will thin down our remaining details to account for the time already used.

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

Consolidated sales for the quarter were 763 million, an increase of 9% to prior year, and about $14 million below our expectations of which roughly 50% was storm-related, as previously mentioned.

Our three geographic segments -- America's, Europe and Asia Pacific -- grew at 10, 6, and 8%, as reported.

On a constant-currency basis, sales to prior year approved by 9%, substantially the same as reported and potentially ex- the hurricanes, we grew at 10%, a number that we're not completely unhappy with at all in the last quarter of our first two years of the Centerpulse integration.

On that same basis, as a total company we lost 1% of growth versus the first half of of 2005, but Europe at 7% maintained their constant-currency growth.

Reconstructive reported sales grew 9% in the quarter and 9% constant-currency.

Year-to-date reported total sales were 2.44 billion, up the same 10% constant-currency.

Year-to-date Reconstructive products were 11% constant-currency.

This quarter we believe the global constant-currency Recon market, based on those already reporting, grew at roughly 11% -- composed of 9 to 10% volume and mix, and 1% price.

We do see less hip revenue and more knee revenue, but we can find no significant underlying future hip surgery decline any different from the trends over several prior years.

Once again, mix and price have negatively impacted hips more than knees.

Less hip fractures and revision, with more younger folks, especially women, receiving knees, appears to be a continuing story.

Zimmer hips in the quarter increased by 4% constant currency versus our first half results of 5%, and against a market we believe is growing at 7%.

Zimmer knees grew at 12% constant currency versus 17% in the first half, and against a market we believe is growing at 14%.

Zimmer America's Reconstructive numbers grew by 10% in the quarter against a very tough 2004 comp of 20%, composed of 21% knees and 17% hips.

On our sales base, a 20% comp is meaningful.

Without the storms, Zimmer likely would have achieved 12% Americas Recon growth in a market that, this quarter, appears to go to have grown at that same rate -- 12%.

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

Zimmer 9% sales increase globally was composed of volume and mix of 8%, not dissimilar from 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 the first quarter of 2005.

When we grew 13% in the third quarter of 2004, price and foreign exchange were 5% of the growth and therefore volume and mix was 8%.

Today, in the third quarter of 2005, we grew 9%, but only 1% is price and foreign exchange.

For Zimmer, our year-over-year volume and mix is exactly the same, despite the price and foreign exchange declines and the catastrophic weather events.

We believe for the quarter our 8% global Recon volume mix is only marginally less than market.

Our spine and dental operations both delivered 19% growth respectively, both at above market and with trauma returning to double-digit growth is very positive.

But more on them in a few minutes.

Worldwide price improvement for Zimmer was 1% recorded in the quarter and about the same as the last 2 quarters.

In fact, if you look at price for Zimmer in the last three quarters of 2004, it was plus 2, plus 2, plus 2.

If you look at price in the first three quarters of 2005, it's plus 1, plus 1, plus 1.

While the numbers are the same, it's clearly a somewhat more difficult price market, regardless of the bizarre rush to now say "I said it first."

Once again, it's already in the guidance for us.

Our strength in volume, mix and margins combined with the variable model in which we operate the Company, makes it far less of an earnings factor for Zimmer than some people seem to realize.

Our US Reconstructive market was positive 1% price again, which we believe is not below the market but rather reflects current market practice.

Believe what you will; we delivered strong earnings in tough price markets.

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

Positive 1% globally for us also now includes a fully anniversaried Japan, while Germany improved for the quarter from negative 6% to negative 5%, and Iberia -- or Spain and Portugal combined -- registered negative 2%.

Positive price in Europe was gained in the UK, Belgium, Netherlands, France and Switzerland.

Given the relative size of Germany for Zimmer, Europe price in total for Zimmer is negative 0.7%.

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

If the annual change in Japan is negative 8%, we are more likely to reach negative 1 to 1.5% globally.

As previously mentioned, this latter worst-case scenario has already been accounted for in our guidance at minus 1.2%.

We are not 1% smart, and these are fairly complex calculations given their variables.

But we expect price as described to have no effect on Zimmer's ability to achieve our guidance as we have currently provided it to you.

Specifically with respect to HCA, we continue to believe our annualized downside risk is minimal and immaterial.

We have been monitoring initial contract performance now for 4 months.

Our ultimate time-frame to validate compliance was relatively short, and we have concluded additional discussions with HCA on a go-forward position until year-end.

While we want to give and have given HCA a fair opportunity to prove that their hard work can provide a win-win, we also have a serious intention to receive the optimum fair value for our products and services.

Returning to our quarterly performance, our plan when we announced the Centerpulse deal was, as you know, to try to remain at 9 to 10% sales growth for each quarter of the first 2 years -- post integration, and despite sales to synergies, distributor realignments and a larger, slower-growth, legacy Centerpulse Europe.

For 2004 and 2005 year-to-date, we have done so.

I will provide some detailed geographic and product sales analysis in a few moments.

But the key to the Centerpulse deal was early accretive and long-term sustainable earnings for share growth -- per-share growth.

We continue to reap the benefits of not only our integration work but focused margin and mix management, combined with prudent and preemptive expense control.

Adjusted diluted earnings per share for the third quarter 2005 were very strong at $0.70 adjusted, on 250.2 million average outstanding diluted shares.

For the quarter we delivered a diluted EPS increase of 25% over prior year, and about $0.03 better than the First Call consensus estimate of $0.67.

The pattern of significant financial return from the deal, reflected by both EPS and cash flow, combined with our own high-earnings drop-through remodel continues in 2005.

Year-to-date adjusted EPS are $2.24 or a 32% increase to prior year.

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

Zimmer's gross profit margin in the quarter was once again 72. -- 77.2%, up 40 basis points from the third quarter 2004, directly related to -- amongst others -- mix, manufacturing controls, and vertical integration in the U.S., Switzerland and Puerto Rico.

As mentioned on the July conference call, the second quarter margin was somewhat enhanced by positive adjustments from legal resolutions, with the net effect for the second quarter being about 77.2% and basically matching this quarter and the 77.3% in the first quarter of 2005.

The vast majority of some 30 to 35 million in favorable manufacturing integration synergies are 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 stronger or weaker price environment.

Looking at the gross profit from a price impact perspective only, the 77.2% margin in the third quarter of 2005 contained only 0.5% global positive price increase for a margin, net of price, of 77.1%, while the 76.8% margin in the third quarter of 2004 contained 2.1% positive price, for a margin, net of price, of 76.3.

On a net of price basis, we've increased our gross margin 80 basis points over the last year.

Said differently, the 80 basis point improvement in gross profit was achieved in spite of a 160 basis point moderation in price contribution.

We are the only major orthopedic company increasing margins materially on a year-over-year basis in a tougher price climate.

In the quarter, gross profit dollars grew by 10% on a 9% sales increase.

We believe that at 77.2%, our gross margin is easily once again at or near the top of both the orthopedic industry and major medical devices.

SG&A expenses and total operating expenses for the quarter as a ratio to sales, were very good at 38.8% and 44.6% respectively.

At 38.8%, SG&A costs increased only 3% versus prior year despite a 9% sales increase and a lighter seasonal sales denominator.

The 38.8% SG&A ratio is a 210 basis point improvement over 40.9% ratio recorded in the third quarter 2004, and is consistent with the first and second quarters of 2005.

Although we don't disclose it separately, G&A expenses were at a record low.

The actual increase in SG&A absolute dollars from the third quarter 2004 was a little under $10 million, on a sales improvement of about 62 million, indicating a fully-loaded SG&A expense cost of only $0.16 to acquire each new sales dollar.

With the expectation of somewhat less price and some short-term product gaps, we took specific expense actions while increasing R&D back to its original 6% of sales simultaneously.

Over a two-year time-frame starting with fourth quarter, 2003, at 40.9%, we had 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 44.1% respectively.

We expect that with the increase in total development projects, and the expanding number of external and internal biological relationships, our R&D ratio to sales would tick backup.

In the recent per months we signed an exclusive relationship with Revivicor Inc. for tissue-replacement materials, and increased our equity position in ISTO Technologies Inc. related to cartilage development.

During the third quarter, R&D totaled $44 million and almost $130 million year-to-date, for an average quarterly spending increase over prior year of about $4 million, as several of the internal biological investments did in fact start to kick in.

Total operating expenses in the quarter at 340 million represent a real increase of only 4% to prior year quarter, versus a 9% sales growth.

Year-to-date operating expenses were 1.08 billion or an 8% increase versus prior year -- versus year-to-date sales growth of 12%, and therefore consistent with our highly-leveraged drop-through type model.

For reference, in the third quarter actual acquisition integration costs dropped only $8 million, versus $10 million in the prior quarter, and compared very favorably to the $12 million in the third quarter of 2004.

Year-to-date 2005 integration expenses were $35 million.

Operating profit in the quarter reached $249 million, in the third consecutive reporting period that we have produced at or more than $0.25 billion in operating profit.

We were equally pleased to reach a very strong 33% adjusted operating profit to sales ratio in the third quarter, up some 260 basis points from the 30% recorded in the third quarter of 2004.

During the quarter we've once again recorded one of the highest operating margins in all of medical devices.

In truth, we were actually second to Alcon's 34%.

As previously mentioned, the Zimmer construct that we have today was modeled during the late 90's turnaround and well before Centerpulse, to register approximate $0.50 of operating profit for each new sales dollar.

In the third quarter of 2005, we delivered $39 million more operating profit on $62 million more in sales or $0.63 of operating profit on every new sales dollar and consistent with the same $0.63 delivered in the prior quarter.

EBITDA in the third quarter improved on an adjusted basis to 38.6% as a ratio to sales, up almost 200 basis points from the same quarter in 2004.

Adjusted net earnings in the quarter continued very strong at 174 million, with an industry-leading 23% net ratio to sales and up nearly 300 basis points from the same quarter prior year.

Our third quarter 2005 tax rate improved from the prior year quarter by 150 basis points to 29.4, and for the first time below 30% on an annual ETR basis at 29.9%.

We are pleased with these third quarter P&L 2005 results, despite the challenging events.

Perhaps more difficult third and fourth quarters are not; we intend to deliver First Call's $3.07 adjusted EPS or 27% growth for 2005, and have memorialized that intent by reaffirming the $3.07 adjusted EPS in last night's press release.

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

Cash flow generation remains our story; we had another monster operating cash flow quarter.

Operating cash flow was above the favorable end of expectations, registering $232 million.

Year-to-date operating cash flow was nearly $630 million.

In only 2 years of combined operations with Centerpulse and a year and a half or so with Implex, we have delivered almost $1.75 billion in cumulative operating cash flow.

Free cash flow in the quarter was 169 million and year-to-date is 433 million.

With $104 million of cash and equivalents on hand and only $86 million in debt, we have paid off Centerpulse and Implex a few days before the second anniversary of the Centerpulse deal and 18 months have schedule.

We are officially net-debt free.

Shareholders equity has increased from 0 at the time of the spin out to over $4.5 billion today.

Our third quarter combined working capital statistics continue to perform well for this time of the year and consistent with the number of project underway.

Combined inventory days are 303, up 41 days from the second quarter but consistent with the 35 to 40 day increase we see each year from the second to third quarter.

For your reference, in 2004 the increase was 36 days.

Slightly higher day differential this year between the second quarter and third quarter was driven by correct decisions to close the Austin plant earlier than originally planned; therefore, additional buffer inventory -- and additional metals raw materials at favorable prices.

We expect inventory days to decline some 30 days in the fourth quarter, as they have for the last few years and should potentially bring us back into the 270's.

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

In the third quarter we delivered global receivable days a very respectable 64 days, up one day from the 63 days in prior year's same quarter, and within our normal range.

Combined America's receivable results were solid at 39 days, as with both the first and second quarters and the prior year's same quarter.

Again, a notable achievement with a more pressured U.S. hospital environment.

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

For the third quarter, worldwide Reconstructive sales increased to 624 million reported, a 9% increase over prior year, and 9% constant-currency.

Knees grew at 12% reported and 12% constant-currency.

Hips grew 4% reported to prior year and 4% constant-currency.

As discussed earlier for Zimmer, Japan, Germany and to a much lesser extent, U.S. pricing affects hips more negatively than knees by a current differential of some 1%.

We expect the global Recon market, ex-dental, to be up about 11% constant-currency in the third quarter.

We are staying around the 9 to 10% growth we expected at the beginning of the integration, but we've been spoiled.

While we would like to be a point or two higher, the combined Centerpulse/Zimmer effort remains cumulatively ahead of our expectations.

Year-to-date global Recon growth for Zimmer is 13% reported and 11% constant currency.

Let's take a look at each global product category and geographic segment more closely -- first in products -- in knees.

Again on a worldwide basis in the quarter knee sales for Zimmer increased by 12% reported versus prior year, to 314 million and 12% constant currency.

From a brand point of view, our NexGen LPS-Flex, the world's original high-flex knee, first released in 2004, continues an almost three-year trend again with a very strong 62% increase to prior year.

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

As mentioned previously, we've seen almost no impact from the near competitive knee systems on the market.

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

The CR-Flex femoral sales of some $16 million in the third quarter, a 69% increase to prior year.

LPS-Flex and CR-Flex components are still only a little over 25% of our own Zimmer knee femoral mix.

The new Zimmer Uni, the industry's first high-flex single-compartment knee registered almost 4 million in quarterly sales.

Zimmer's LCCK knee revision offering jumped 17% in the quarter.

This is a good sign.

Knee revision remains an important future opportunity, representing historically only 5 to 6% of total Zimmer femoral units.

Trabecular Metal Monoblock Tibial Trays have continued to take share.

Trabecular Metal Monoblock Tibial Tray units increased by almost 20% again this quarter.

We expect to comfortably exceed our guidance of $100 million in total Trabecular Metal sales for 2005.

There continues to be excellent progress on new data points on the Zimmer minimally invasive knee front, particularly the early success of our new MIS stem tibial component, progress with electromagnetics, and a new study out on the first 50 consecutive Zimmer-completed outpatient Total knees.

I will update those activities later.

Let's switch to hips.

Zimmer hip sales were somewhat weaker in the third quarter, and with hip revisions notably softer.

For us, MIS hip stems are still definitely driving market share.

On a worldwide basis in the third quarter, hip sales increased 4% to 260 million and 4% in constant currency.

The growth this quarter was for Zimmer measured against a global prior year comp of 14%.

Weakness has accelerated in cemented stems and revision, as they were down an average of 5%, while porous stems conversely of almost double-digit unit growth.

We continue to be very encouraged with our targeted hip brands in the new, combined company.

Our enthusiasm is based on the potential breadth and impact of both MIS and Hip Resurfacing, Trabecular Metal, advanced polys, and the economic value-added marketing potential for MIS.

Zimmer fibre metal tapers long with new ML taper are the stems of choice for Zimmer's MIS Mini and 2-Incision hip surgery.

In the third quarter, these two stem families grew by 23%, bringing the combination of fibre metal and MLs to over $100 million on an annualized basis.

Obviously neither the hip stem market nor the porous stem market are growing at anywhere near 23%.

Now, we recognize there is always some cannibalization of other stems, but MIS brings in business.

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

The CLS Spotorno taper with a long-standing $40 million per year sales base, mostly in Europe, had unit growth for the second quarter in a row of over 20% and a market growing at perhaps 4 or 5%.

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

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

Apparently, at 20% growth, lots of our customers agree with us.

The legacy Centerpulse Alloclassic and CLS brands reached almost $20 million in quarterly sales.

At the end of the year and throughout 2006, we expect to launch two new platform technology stems.

A very first Trabecular Metal stem, and the Versys EPOCH Composite Fullcoat, a great addition for MIS and the only successful composite stem on the market.

In acetabular shelves, legacy Centerpulse's new Allofit shell out a very strong (technical difficulty) 18% growth.

Trabecular Metal Cups and Durom Hip Resurfacing continued to thrill us.

Trabecular Metal Cup sales increased to over 12 million in the quarter, an increase of over 37% from prior year.

The Duron Cup and Stem, including our fast-growing resurfacing product available selectively ex-U.S., grew by more than 90% to almost 5 million in sales for the quarter.

Speaking of metal-on-metal articulations, our new 32mm Metasul head has been approved in the U.S. and thus fills one of the larger head gaps in our offering.

But realistically, we need the remaining sizes to 50 mm over the next three to five months in order to be fully competitive and recover lost sales.

Here's one of our favorites, of course -- premium priced longevity and Durasul Highly Crosslinked Polyethylene liners units increased by yet another 11%.

Not only is the growth rate above-market, but the the base of sales is very different to our competitors.

Our two highly crosslinked brands when annualized total over $100 million per year in sales.

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 the Longevity and Durasul brands.

During the quarter we signed the exclusive long-term CIMA deal with our Boston-based partners, Harvard, MGH, MIT, and Cambridge Polymers, augmented by an exclusive license for an outstanding new vitamin E technology with Professor Lederer in Germany.

In the meantime, despite all the hoopla from two new competitive poly products, we are just not seeing them.

As you know, our ceramic-on-ceramic PMA has been excepted by the FDA as fileable, and we have received a list of compliance questions for our response, which we have completed and refiled.

We do not have any additional updates or better guidance than anticipated clearance prior to year-end, 2005.

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

We've recently announced exclusive distribution rights for the rest of the world, and an agent agreement for Europe.

Please note, though, the agent agreement in Europe is very good for earnings, but will do nothing for reported sales, as Kulzer will remain the seller of record.

During the quarter, bone cement and accessory sales reached almost $10 million in sales, or a 37% increase to prior year, far exceeding anything we've done previously.

New products including the Trabecular Metal hip, new techniques like the Zimmer Anterolateral MIS for Europe, new polys, bigger metal-on-metal heads and the new antibiotic bone cement should improve hips sales.

As with prior quarters, there's much new activity on MIS hip, including a factual update on more than 2500 MIS II incision surgeries from over 250 surgeons that provides real data on the technique as opposed to the usual uninformed bashing.

We will have a press release out in a week or two.

In upper extremity joints, legacy Zimmer's Bigliani/Flatow and legacy Centerpulse's Anatomical Shoulder continue to world worldwide with a solid 13% increase in third quarter, despite an array of competitive new products.

Total shoulder sales are annualizing at some $50 million.

Importantly, two weeks ago we completed and filed our 510k application for the world's first Trabecular Metal Reverse Shoulder.

To complete our Reconstructive discussions, Zimmer Dental had a very successful third quarter, with sales surpassing 35 million and up a solid 19% in the quarter.

Dental implants increased 17%, while Atlantis rapid turnaround custom abutments continued to double again.

Dental biologicals sales of collagen graft grew by almost 65%.

Exciting news on the medical education front -- our global state-of-the-art Zimmer Dental Institute, designed as a university-type setting, is almost complete in Carlsbad, California -- a definite competitive advantage over Internet implants sellers.

Congratulations to our dental team again for another strong performance.

On a worldwide basis in the third quarter, trauma sales grew in double digits to 44 million.

The trauma market has had mixed results but we are clearly moving back into positive territory as we deliver new products.

With expanded field releases of our new locking plates, periarticular sales in the quarter jumped by 32% and our new ZPS plate and screws by 27%.

Only compression screws remained weak, and that's mostly in Japan.

New NCB, or noncontact bridging plates, jumped 600% with major releases, and external fixation improved by over 20%.

ITST nails are still growing at 15% despite our relatively flat nail performance overall.

Trabecular Metal ON rods were quickly up over 100% again this quarter.

Our Zimmer spine division sales increased by 19% reported and 19% constant-currency in the quarter, to 38 million.

We are pleased with this continued sales improvement.

Excluding biologicals, we believe that we took some marketshare again for the second quarter in a row.

Cage sales remained firm for the fourth consecutive quarter at 8 to 9 million in sales.

They 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 to 11 million in the quarter, up 1 million sequentially, despite the summer period, and was three times prior-year sales, outselling cages by nearly 40%.

When combined with more than $2 million of new spinal Trabecular Metal, these two new technologies delivered some $13 million in sales.

As we've noted several times, the combination of Trabecular Metal, dynamic stabilization and MIS with our new pipeline, and a few small technology and biological acquisitions, should create a globally-competitive spine business.

Dynamic stabilization 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 double digit run-rate growth rate going.

Congratulations to our spine division on another strong quarter.

In orthopedic surgical product division, sales improved versus last year by only 2%, to 56 million.

OrthoPAT increased by only 15%, versus a history of 25 to 30%.

We expect to see this gradual decline to affect sales growth negatively by 2 million in the fourth quarter, 2005 and buying 3 to 4 million in the first quarter of 2006.

Both assumptions are already implied in the guidance provided.

During the quarter, we released the new Zimmer pain pump targeted for both MIS and general use, as well as a cement mixer system, dedicated to the Palacos product.

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

During the first half of 2005, we launched 48 projects.

During the third quarter, we launched an additional 28 projects, including three developer clinical studies, 11 limited releases, and 14 full releases.

Of the 28 projects launched, 13 were in trauma.

Hip product launches in the third quarter include the first shipments of the Trabecular Metal acetabular revision line, the MIS anterior supine instrumentation, and a major clinical projects for Durom resurfacing hybrids.

In knees, we delivered a full release of Trabecular Metal femoral cones and a series of new MIS instruments.

In the extremities, we launched a new CCR patch to full release and a limited release on the anatomical inverse and reverse shoulder in Europe.

Clearly, the big launch news, though, was in trauma, where we moved seven new peri locking plates to the market, the Sirus global nail to full release, along with the Trabecular Metal osteonecrosis rod and new Supra Condylar Femoral Nailing to developer release.

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

That 5 to $600 million of 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, per year, for those seven years.

New product sales for the third quarter, 2005 totaled $172 million and a record 22.5% of sales.

Let's look briefly at geographic segments, first in the Americas.

Zimmer Americas had a tougher quarter.

Holding the line on price was successful but the hurricanes and short-term hard bearing product gaps along with some regional DTC pressure on knees, made for a more challenging environment.

Revenue for the quarter was 473 million, up 10% over prior year. 9% of our Americas growth was driven by increases in unit volume and mix, and 1% growth was derived from price.

The Americas Reconstructive growth in the quarter was up 10% and delivered 376 million in sales.

This would imply that, in the Americas during the quarter, Zimmer had 9% growth in pure Reconstructive surgical procedure volume and mix, versus a market that had 10% volume and mix.

In other words, eliminate the storms and we are pretty close to even money in the operating room.

In our 10% Americas Reconstructive growth, knees delivered good results again with a 12% increase to 212 million, despite the prior year's same quarter comp of 21%.

As mentioned, NexGen LPS- CR-Flex the new high-flex Uni, Trabecular Metal tibial components and NexGen LCCK revision all made substantial contributions to the Americas knee performance.

Hips in the Americas increased 6% to 130 million, and we believe equal to a domestic market hip growth figure that now appears to be likely 6% or perhaps at best 7%.

Given the challenges, we are not that displeased with the Zimmer hip growth in the quarter, especially considering the prior years same quarter comp of 17%, and some decline in U.S. operating room hip scheduling in favor of knees.

Hip performance in the Americas benefited from marketshare taking growth in primary porous stems, related to various MIS procedures, Trabecular Metal cups and highly crosslinked poly.

Our dental business in the Americas grew a solid 18% in the quarter to 22 million, and we believe at or above the market.

Based on our results and already release public reports of our three major competitors, as well as the remaining market players, we believe that the market growth in domestic Reconstructive products for the quarter will be approximately 11%, ex- dental.

Zimmer's combined Americas Reconstructive growth of 10% will appear to be slightly below the domestic hip and knee market as reported.

Here's a statistic we are always product -- the new combined Americas operating profit margin in the third quarter of 2005 came in at $251 million, or a record 53.1%, up 210 basis points from the same quarter prior year.

That's a 15% operating profit increase on a 10% sales growth.

Let's take a look at Europe.

We are pleased with the underlying constant-currency growth, and the traction being gained.

In the quarter, European revenues were $178 million, up 6% reported, but up 7% constant-currency, matching the first half's constant-currency growth of 7%.

Adjusted for unfavorable billing days, the third quarter represents a real constant currency dayrate growth of about 8%, versus that same 8% dayrate growth in the first half.

As mentioned previously, price in the quarter for Germany declined by 5%, and this contributed significantly to our flat to minus 1% in price for Europe during 2005.

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

We can expect a new DRG-like tariff system in France, probably mid-single digit negative, very late in 2006, some price improvements in Iberia, and the new German government with a limited mandate but continued domestic economic problems.

Reconstructive implants in Europe delivered sales of $159 million in the quarter, an increase of 6% reported.

Hips were negatively affected by German and Iberian pricing changes, some aggressive competitor knock-offs and surgeon dissynergies, but despite the circumstances responded well by staying in positive territory.

Knees were essentially with the market at 12% reported and 12% constant-currency.

With the core's competitive constant currency Reconstructive numbers for Europe estimated in the aggregate at high single digits, in units of surgery, we are after a great deal of hard work back to at least market.

Positive gains in the quarter reflect a continued acceptance of both Durasul and Longevity highly crosslinked poly, some early impact of minimally invasive instrument deployments, the growing acceptance of Durom and Trabecular Metal as well as ongoing marketshare gains for the NexGen knee brand and Zimmer Dental products -- the latter at a solid 16% growth.

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

The UK, South Africa, Sweden, Norway, Finland, France, Spain, the Middle East and export, all grew sales for the quarter in double digits, constant-currency.

Italy and Germany, despite the price declines and tough competition, remained solidly in positive growth.

For the quarter, Europe delivered operating profits of $60 million.

Profits improved by 14% to prior year, on a 6% sales growth.

In Asia-Pacific, revenues in the third quarter were $112 million, an increase of 8% reported, 6% constant-currency.

These results are inclusive of the effects of a previously mange mentioned change in a key distributor -- Japanese distributor that will not anniversary out until next April.

Asia-Pacific had positive 1% price the quarter, with the Japan reductions from 2004 fully absorbed.

We believe that the Asia-Pacific market is growing at high single digits in local currencies, and as a result net of dissynergies and the distributor reorganization, we appear to be at market.

In the third quarter, our combined Asia-Pacific business was led by a solid Reconstructive growth, up 10% to almost 90 million in sales.

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

This quarter had a solid 11% growth.

A new Japanese Natural-Hip, some hoped-for Trabecular Metal regulatory approvals, and MIS-driven expansion, will help to escalate good performance, this quarter at 7%.

While our dental business is small in Asia, it did deliver other strong 23% sales increase.

The constant-currency country growth rates were good, with Australia and New Zealand at 11%, and Greater China delivered again an excellent 26%.

Japan remains in single-digit growth again.

Displaying their usual strong earnings drop-through from sales, Zimmer Asia-Pacific businesses delivered $48 million in third-quarter operating profit, a 44% operating profit to sales ratio, and up over 300 basis points from the third quarter 2004.

Let's move from products and geographies to hot topics -- given the extra time constraints, I'd like to narrow that discussion down to briefly updating you on minimally invasive activities.

We are pleased as always with the continued progress and expansion in our six-year-old MIS program.

The Zimmer Institute remained very busy during the third quarter.

We trained 479 surgeons; that's after 1150 surgeons in the first half, for a total of over 1600 surgeons trained year-to-date.

We're proud to announce the addition of four new Zimmer Institutes, including Khon Kaen in Thailand, True Orthopedic in Minneapolis, Kassel (ph) in Germany and lastly the prestigious Stanford University Medical School in Palo Alto, California under the leadership of world renowned clinician, researcher and Chief of Orthopedics, Dr. Bill Malone.

We welcome all four institutions.

Year-to-date, we have trained more than 500 surgeons each, on the Zimmer MIS Anterolateral and the Zimmer MIS Quad-Sparing.

Data from almost 300 post-MIS training surveys suggests that 63% will utilize our Quad-Sparing, and 30% the MIS 2-Incision.

The new Anterolateral ranked almost 4 on a scale of 5 for best benefit to surgical practice.

Speaking of our new MIS Anterolateral we had almost 700 people at 300-plus web sites view our first live surgery.

Since then, the Web-cast has been rerun by medical and Zimmer staff more than 1000 times by 1400 registered viewers.

In addition to the Zimmer Institutes, over 300 surgeons have been educated year-to-date on a surgeon-to-surgeon visitation basis in the U.S. alone.

An electromagnetic computer-assisted MIS surgery, or EM we have now successfully completed over 250 EM Quad-Sparing cases globally.

With 20 iNav portable systems in the field, the first successful commercial utilization was completed in Miamisburg, Ohio during August.

Speaking of knees, we have now issued almost 1300 Quad-Sparing sets globally and we estimate that 8% of our total knees are now performed using our Zimmer Quad-Sparing methodology.

That quadruples the rate in the first half of the year.

In total for MIS knees, we have issued over 4000 instrument sets since inception.

We have just deployed over 500 instrument sets for our patented MIS stem tibial plate, for assembly inside the patient.

Although only fully released in June, we tallied $2.5 million in incremental sales during its very first quarter.

Multiple surgeons at Rush Medical College in Chicago presented their experience with the first 50 consecutive, fully-outpatient Total knees, utilizing the Zimmer Quad-Sparing Technique. 48 patients, or 96%, did not spend even 24 hours in-hospital, but rather went home safely and happily the same day.

There's no idle speculation here; the article was peer-reviewed and published in the October JBJS.

Switching to hips, our MIS Anterolateral first 100 patients preliminary data will be ready for year-end, and we'll look at not only clinical results but also economic benefits.

The MIS 2-Incision, despite incessant bashing, has increased utilization from 7.9% cumulative globally to 9.5%, primarily due to gains in Asia and in Europe.

The next week or two, we will issue -- via press release -- the results of our first 2500 2-Incision hips, including all complications from all original learning curves, an unprecedented approach.

The data has been compiled by more than 250 different surgeons, with overall publication rates comparable to traditional techniques.

Patient testimonials on this life changing surgery should really help personalize the data, and help others to avoid their fear and take action.

In addition, as we expected, many surgeon practice volumes of increased dramatically with the ability to offer this technique.

Zimmer consulting surgeons, such as Dr. Sonny Bal at Columbia, that produced the early learning curve complication white papers at last year's AAOS, have of course gone on to use the technique broadly and with great success.

Well, we've done our best to bow to the pressure and keep this portion of the conference call shorter.

We have provided 2006 sales growth directionally at 8 to 9%.

But that prudently assumes 1% lost revenue from foreign currency, 1% lost revenue from global price, and 1% lost revenue from the OrthoPAT distribution agreement.

Despite all the rhetoric about 2005 and 2006 guidance we have reaffirmed our commitment to strong, highly-leveraged earnings for both years.

In the course of cleaning up the basement, I found a team message from one of my old hockey coaches that said, winners make commitments; losers make promises -- a good lesson that has not been forgotten.

Sam, what are your thoughts?

Thanks, Ray.

In keeping with Ray's earlier comment, I've also abbreviated my comments to stay within the one hour that we've targeted for our opening remarks.

Similar to the format of past earnings calls, I will add some detail to several key areas, including foreign currency, gross profit, interest expense and debt levels, acquisition and integration costs, our effective tax rate, capital expenditures, amortization and depreciation, and finally guidance.

Ray has already extensively discussed our sales results, and in our third quarter 10-Q -- which will be filed on November 7th or 8th -- we will include a detailed breakdown of the price, volume, mix, and foreign exchange growth factors for each of our three primary regions and each of our key product categories.

So, in the interests of time, I will not address those details here.

In the third quarter, the contribution of foreign currency to sales growth was minimal.

In the U.S., if the U.S. dollar holds from current levels for the balance of the year, the contribution of foreign currency to sales growth should be negative $21 million or 2.6% in the fourth quarter.

Therefore, for the full year of 2005, foreign currency should contribute approximate $13 million or only 4/10 of 1% to Zimmer's overall sales growth, reflecting a favorable conservation of about $31 million in the first half, offset by a negative contribution of $18 million in the back after the year.

Also, if the U.S. dollar holds from rates that we are incorporating in our 2006 budgets, the contribution to sales growth in 2006 over 2005 should be negative, and a reduction of approximate $34 million or 1% of sales for next year.

Reported gross profit margin for the quarter was 77.1%, including $500,000 pretax, or $300,000 net of tax, of inventory step up expenses, related primarily to acquisition of Implex in the second quarter of 2004.

The balance of the acquisition-related inventory step up of $500,000 pretax will be expensed to the P&L in the fourth quarter.

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

There will be no inventory step up expenses related to these two acquisitions in 2006.

Excluding the effect of inventory-step up expense, the adjusted gross profit margin for the third quarter was 77.2%, which is consistent with the adjusted gross profit margins that we reported in the first and second quarters of this year.

With our contained continued strong operating and cash flows, we reduced net debt -- that is total debt less cash -- by 191 million in the third quarter, and our cash now exceeds total debt, making us net debt free in less than 24 months since the acquisition of Centerpulse, and 18 months since the acquisition of Implex.

Interest expense in the quarter was $2.1 million compared to $4.2 million last quarter.

Since the acquisition of Centerpulse in October of 2003, and Implex in April of 2004, we've paid down over $1.5 billion of debt.

Since the acquisition of Centerpulse and Implex, we have spent $294 million on acquisition and integration costs, $195 million of those costs have been expensed to the P&L with 7.7 million being expensed in the third quarter of 2005, and 35 million being expensed in the first nine months of this year.

In total, we expected to expense $47 million during all of 2005.

By the end of this year, the vast majority of remaining integration activities will have been completed.

However, a few items still remain to be completed throughout 2006.

Some of those items include additional IP systems conversions, primarily in Europe and Asia Pacific, the residual costs of decommissioning Austin and disposing of this asset, and a few miscellaneous items.

These items should result in about 10 to $15 million of integration expense in 2006, and there should be no additional integration costs beyond 2006 for the Centerpulse and Implex integrations.

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

The ETR for the third quarter was 29.4% compared to 29.8% for the second quarter, and 31.5% for all of 2004.

This brings our year-to-date effective tax rate down to 29.9%, and this is 16 basis points favorable to our full year guidance of 30.5%.

We may have the opportunity to drive the ETR down lower in each of the next few years; however, this is very dependent on at least three critical areas, including an improved mix of earnings from jurisdictions with lower tax rates, the continued benefits from increasing production and profits generated in Puerto Rico, while at the same time moving on January 1st from the 936 selection environment to a CFC structure, increasing Swiss production and distribution activity to take full advantage of our low Swiss tax rate.

Capital expenditures for the quarter were $62 million, consisting of $39 million for instruments and $23 million for all other property, plant and equipment fixed asset additions.

For the full year, capital expenditures are expected to be approximately 250 to $260 million, consisting of approximately $150 million for instruments, and a range of 100 to $110 million for all other fixed asset additions.

These additions are being driven by new products, insourcing, the closure of Austin, information systems, continuous productivity improvements, and some facility-related expenditures.

Depreciation expense was $33.3 million, and as a result of the Centerpulse and Implex acquisitions, a related $608 million of amortizable intangibles recorded, amortization expense in the quarter was $12.3 million.

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

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

Turning to guidance, as we mentioned in our press release last night, we have updated our guidance for the balance of 2005 to incorporate the results of the third quarter, and we are also providing guidance for the first time for the full year, 2006.

First, I will address the fourth quarter of 2005.

We are updating our Q4, 2005 sales guidance to incorporate the negative contribution of approximate 10 to $11 million from reduced surgical procedures due to hurricanes Katrina and Rita.

As Ray indicated, these hurricanes affected several key markets where we enjoy, on average, over 50% market share.

We have also included the $21 million of negative foreign currency for the fourth quarter, as well as one less billing day compared to the fourth quarter of 2004.

Similar to the guidance that we provided at the end of the second quarter, we have incorporated increased spending in biologics, legal, and IT into our guidance.

Incorporating these issues, fourth quarter 2005 sales are expected to be in a range of 845 million to $850 million, approximately 6% growth over prior year.

This results in full 2005 sales expectations of 3,283,000,000 to $3,288,000,000 representing approximately 10% growth over prior year for the full year.

We are also reaffirming our full year EPS guidance of $2.93 reported and $3.07 adjusted, that we communicated at the end of our second quarter.

Now what's look at 2006.

Sales for 2006 are expected to increase in a range of 8 to 9% over 2005.

And this assumes a 1% reduction due to foreign currency, a 1% reduction due to the loss of the Company's OrthoPAT blood management system distribution agreement, and a 1% reduction in global pricing.

Once we have successfully repressed our OrthoPAT sales with another product, we will notify investors with our expected release dates, as well as sales estimates for 2006.

Earnings per share for the full year 2006 are expected to be in a range of $3.51 to $3.61 reported, and $3.58 to $3.65 adjusted, representing an adjusted growth over 2005 of 17 to 19%.

We've also built into our plans for 2006 a significant DTC campaign which should begin to roll out early in the new year.

Earnings guidance excludes the effect of adopting new accounting standards and share compensation.

We will be wrapping up our internal planning process over the next few weeks, so we have not yet finalized the quarterly phasing of sales and earnings, and as a result we will provide quarterly guidance for 2006 when we report our year-end results on January 31st.

Sales and earnings growth in the first half of 2005 was stronger than the second half, with a decelerating contribution to quarterly sales growth from foreign currency that we saw throughout this year, together with our planned pricing contribution of negative 1% in 2006, and the elimination of OrthoPAT sales for next year, we do expect growth rates in sales and earnings per share for 2006 will be stronger in the second half than in the first half.

In summary, even though we have a more difficult Recon sales environment, with which was in part storm-related, we again demonstrated our ability to generate excellent earnings per share growth under a variety of different business conditions, including a somewhat flatter pricing environment, by exceeding First Call consensus by $0.03.

In addition, we are now net debt free and will be accumulating cash to fund future acquisitions.

We announced our new biologics distribution agreement with Revivicor, and in recent months we increased our equity investment in Isto for cartilage repair.

Sales growth in both dental and spine continue strong at 19%.

Trauma has returned to double-digit growth for the first time in five quarters.

Continued strong margins coupled with sound asset management contributed to very healthy operating and free cash flow.

As we mentioned earlier, we will be closing the Austin manufacturing facility by the end of November, one month ahead of schedule.

And finally, our effective tax rate for the year is below 30% for the first time in Zimmer's history.

As Ray commented, we believe our commitments to operating excellence and highly-leveraged profit contributions remain intact.

Our fourth quarter 2005 earnings call will be held at 8AM Eastern Standard Time on Tuesday, January 31st, 2006.

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

Lee, we will turn the call back to you.

Thank you. (OPERATOR INSTRUCTIONS) Dhulsini de Zoysa, S.G. Cowen.

Thank you and good morning.

Ray, we do recognize and appreciate your candor over the past few months.

You gave us a little teaser about the HCA contract.

I understand that there's sensitivity and a limit to what you can say, but you have in the past indicated that by the fall or so, you would have a better idea of how compliance is running.

So I'm curious when you would be willing to share a little bit more color, if not today.

And then I have a couple of follow-ups.

Okay, I think Lee, in her generosity, gave everybody three questions;

I'm not sure I agree with that.

I think it's one question, but I will let you have a follow-up on that one.

HCA -- we have had some go-forward discussions, as I mentioned.

We're not seeing dramatic improvements in the compliance, although they've put tremendous effort in.

I hope they get their program and their plans run through about December 1.

I'm not going to share anything regarding the discussions we just had with them, because I don't have their blessing to do so.

And, I'm not going to do that without their blessing.

But we have had good go-forward discussions with them, and there is no change from my perspective in compliance improvement, but again they want to drive their program forward through December 1, and that's really the limit that I can give you.

Okay, and if I have to know this down to one more, then (Multiple Speakers)

One more follow-up.

Right.

In your upcoming publication on the 2500 cases of the 2-Incision, are you also going to include any kind of cost benefit analysis, or economic analysis?

We are updating that; we have done it with Harvard and MGH and we now have a group at San Francisco merging all that data together, but it won't cover all 2500 because we didn't have access through HIPAA and through our agreements to really do economic work on all 2500.

I wish we had it but we've got it on, I think, about 1000 or 1200.

We will update that; we will update -- give the early look at the MIS Anterolateral, and we will have a study coming out that believe is going to be published in December, on the MIS economic benefits of the Quad-Sparing, so I'm switching here to knees.

So we will have economic benefits on three looks at it, two through publishing and one through early results, on two different hips and of course the Quad-Sparing knee, by year-end.

Okay, thanks for your usual thorough review.

Milton Hsu, Bear Stearns & Company

Good morning, guys.

Ray, you guys did a great job managing through one large acquisition and some recent volatility in the Recon market.

But over the longer-term, if sales growth or the Recon market remains at a 10 or 11% rate, what's the normalized maybe EPS growth for Zimmer over the long-term?

Milton, are you asking for long-term guidance on EPS again, or is it my imagination?

No, just -- (multiple speakers) big picture take (multiple speakers)

Yes, big picture/long-term guidance!

You know, I will repeat what I've said.

I mean, our goal on the topline is to always get to at least 1 to 2 points better that market growth.

We're not there this quarter, but as you heard there's some interesting surrounding factors on that.

We are happy with where we are.

On the bottom line, we use the terminology "highly-leveraged", we run the model that way.

We like to get to where earnings growth is double sales growth.

I mean, that's where we want to be.

We have lots of capacity;

I keep saying to people because I think people get over-focused on Centerpulse because it has delivered well, but we have the capacity to model the structure and we've done it since 1998 or 99, even though didn't see it all the time -- to deliver those kind earnings on the bottom line.

So we are not nearly as fussed about this whole thing as perhaps the market is.

And obviously that doesn't include things like additional acquisitions, which we obviously intend that to do, being net debt free -- as long as we can find the right ones at the right price.

It doesn't include things like share buybacks, which probably are a decent discussion also, although before somebody asks the question, I will tell you while it will be a topic for us, we do not borrow money and to do share buybacks.

So we need to keep that in concentration.

It is excess capital oriented only, if in fact we go that way.

So, you know, we've consistently done this -- the same management team, over and over for years now.

I just don't see anything different in it, and that's -- without giving you long-term guidance, that's the best I can do.

Okay, and a follow-up just on the topline.

As providers look toward more evidence-based medicine, you know just from a mix shift perspective, is it as easy to drive as just introducing more hard bearing services, or do you see anything else that will be as significant as the conversion to highly crosslinked poly and Press-Fit stems over the next three years or so?

I think obviously we are biased, but I look at things like CIMA, which really is the next generation;

I obviously look at Trabecular Metal, which continues -- I mean, we've got data now going back now over 10 years on many, many areas of Trabecular Metal, so it's not -- while it appears to be new, our database on that is tremendous in terms of its performance.

Moving into different implant designs and different efforts in MIS, all create -- as a byproduct -- create mix improvement value, given the nature of the design of the products.

We just announced today, two new technology platform products -- a Trabecular Metal stem, and an active composite stem, which doesn't exist anywhere else in the world -- those to technology platforms.

So I think there's a long list.

I think, though, I will repeat what I've said so many times now, that I agree with you to this extent -- I think mix will have to be continuously combined with good science data, which I believe we have on those things that I've talked about or will release, and economic benefit to show that the incremental value for the patient/surgeon hospital is worth paying.

But, we've got lots of-- obviously with a pipeline the size of ours, there's lots of mix in it.

Katherine Martinelli, Merrill Lynch & Company Incorporated.

Thank you, and good morning.

One question in terms of the Direct-to- Consumer impact from J&J -- and they've indicated they're going to continue their DTC initiatives, which seem to be fairly successful, at least as evidenced by their numbers in the quarter.

Ray, as their success made you rethink the likelihood of doing something on the DTC front?

No, not at all.

Actually, the plans we had were well before that.

I think we have to be careful there, and I give them credit -- I think they did do a nice job, and I do honestly try to give the other guys credit when they do good things.

But the problem is, I don't know what the net gain is.

If they are spending 20 or $30 million on DTC, you've got to sell about 3500, perhaps 4000 new joint replacements in 6 or 8 or 12 targeted markets.

I'm not sure there's the payback on it.

I never have believed it, frankly, having spent some time in my life in consumer medical world.

So, what we are targeting is a DTC program; we had it being prepared prior to anything they were doing -- at least our awareness of it.

And it is based upon giving effective return, because we obviously have to show our public results down through the entire P&L and therefore we have to do things that create market share gain profitably.

So it doesn't change anything;

I think they've done a nice job and I think they gained some share from it, and we've given them appropriate credit for that.

Then, you mentioned that in Europe, rather, one of the issues had been more aggressive moves by some of your competitors.

Can you just expand on that little bit, in terms of how you respond to it?

Is that more of a price issue there?

No, it's not.

It can be price, because knock-offs tend to have kind of that sound to it, and a little bit of that is true.

We've not sort of dramatically sacrificed price relative to the fight on knock-offs.

We have developed some science reporting and some papers, and prepared those papers, that have a pretty strong argument on why you ought to stay with the original.

But they've done a little bit of early damage to us, probably because they got their knock-offs' story faster than we got the response in the paper, I suppose.

So, you know, it had some effect on us.

I'm not concerned over the long haul;

I think they've done the little bit of damage they're going to do.

And we will go address them more effectively now.

Tao Levy, Deutsche Bank.

Good morning.

Just a couple quick questions -- you guys, I look at your guidance for the fourth quarter, revenue growth of around 6%, and then you look at next year and obviously accelerates from that 6%.

Can you point us to a couple of the areas that you think will allow for increased sequential growth, especially given the sort of the headwind that you'll be facing on the pricing side, on the FX, etc.?

Well, keeping in mind we've priced price, or guided price OrthoPAT and foreign exchange already into next year, so what's driving it is clearly new products and new market opportunities in specific geographies.

You know, anniversary -- in some ways you anniversary some of the negative things, such as the distributor change in Japan and some of the distributor stuff in Europe.

So as you phase your way to the year, a combination of those things give you an updraft.

We've not included, obviously, any acquisitions in there, we've not included in the new distribution agreements; we've not included a replacement for OrthoPAT.

So there's still opportunity, obviously, there.

But we didn't want to be way on the high side; we wanted to try and put out guidance that we thought was rational and then as we make improvements in that or things go our way hopefully or we do new things, we will inform people of that.

But I'm not concerned at all about the directional guidance.

I think it's solid.

So a lot of it is sort of unit-driven, demand-driven?

Oh, absolutely.

We're not seeing -- you know, one of the things I think people are perhaps believe they are seeing, although the surgery I think in the summer were a little softer and a variety of reasons for that, some of which we've talked about -- we're not just seeing underlying and I don't think we will see underlying unit surgery demand on a go-forward basis.

There's just no underlying medical or other reasons for that.

So I'm expecting to see surgery solid, with the battleground being on other areas.

But the underlying -- that's why we talk so much in our conference calls and presentations about underlying volume and mix growth for Zimmer, because that's ultimately where the action is going to be.

We've already priced in the negative price, as we do great detail, with it.

And just a follow-up.

On the hip resurfacing, your strategy in bringing that into the U.S., given Smith & Nephews ability to use European data.

Do you have any clinical trial data that you could use to support an FDA approval?

Well, we have significant trial data based on Europe, obviously, because Centerpulse had the Durom product active, and we also have it active and are doing studies in Canada as well.

We will put the femoral and acetabular sides independently through the FDA, and expect to have those completed in the first and second quarters, respectively.

But as you know, that doesn't give you hip resurfacing; that gives you the two component sides of the body, in theory.

The only way I know of, unless there's a damn classification, the only way I know of is to begin the main study which is starting, but that would put it some years out for us on a normal basis.

Mike Weinstein, JPMorgan.

Good morning.

Forgive me if I missed this, but could you just talk about the ability for Palacos to offset the -- is it this one versus the other -- offsetting the loss of OrthoPAT?

Offsetting the loss of OrthoPAT?

That you're getting Palacos, and that will be (multiple speakers)

Well, yes, it's a net positive like any new product, but it's not anywhere near the sales, Mike, because the offsetting numbers in the U.S. would not be the same and Europe is an agent agreement which as I mentioned in the conference call is nice on earnings, but Kulzer will be the seller of record in Europe.

And the rest of the world offsetting it, I don't know, because I don't think the sales would be enough to offset it.

But it helps, but as do other things.

Okay, but we think of Palacos as being an incremental 10, $15 million versus the loss of OrthoPAT which is 30, 35 -- is that fair?

That would be line-item guidance, which we don't do.

That's fair.

And then your response to the question that Milton was asking, or Milton was trying to get you to talk little bit about, long-term growth rates -- the commentary you made, where you said that the goal of the company is to deliver earnings growth at double the rate of revenue growth -- there's a perception out there today, which you and I talked about, that given how successful the Company has been on expanding operating margins over the last several years, that there isn't that much room left on the income statement to continue margin gains.

Could you just comment on that idea, and maybe bring back some of your comments from earlier about the incremental sales dollar and how profitable an incremental dollar is to the Company?

Yes, I'd be happy to -- to the extent I can.

We do want to grow 1 to 2 points faster, and we do want to aspirationally have very high leveraged earnings, and I reference that, as you pointed out correctly, at a couple times the sales growth.

I'm not sure -- you know, we can't give enough detail without giving too much information, to give people maybe all the comfort they need.

I would have thought the same management team that's done for seven years and did it long before Centerpulse, did it in a turnaround with Bristol and has proved that every quarter, quarter-after-quarter, at at least $0.50 drop through -- we've been running $0.60 to $0.80 with Centerpulse -- I would have thought the new product pipeline, manufacturing automation, low-cost producer, low-cost distributor, the dedicated and exclusive mix components we have, 12.5% Swiss tax rate along with 3% CFC that we haven't fully utilized in Puerto Rico -- it's just coming up in the new year -- acquisitions for further leverage, I can go down a list of 20 items -- I'm not sure why people underestimate that when we've never missed an earnings guidance quarterly, and never missed any of those numbers.

New products at 18 to 20% a year that are dropping through higher margins than any historic products.

We've been doing this since 1998, although I understand it was not public; it was buried at least up until the last 4 years.

So, you know, it's a tough one to answer.

I mean, a certain amount of what you do is, you bet on management and you bet on history, I guess.

But the components I listed, which I could sub-categorize down into about 15 comments each, certainly would support that theory.

And Ray, how should we think about acquisitions, it's something, obviously, that we can't put into our models ahead of knowing what you're going to do and what the exact deals are.

But how should we think about acquisitions as the ability to potentially supplement organic growth?

If everybody else could just go on mute and I can just tell you, that's what I always tell you, Michael, you know that.

Acquisitions are targeted at spine, trauma, dental, biologicals; there's opportunities there.

We try not to and don't do bad-value deals.

We intend to make the primary use of our excess capital acquisition-oriented.

We certainly intend to make acquisitions.

I mean, I'm not -- without getting beyond target categories, it's tough to tell you more.

Most people that I've talked with know we have no desire to be A-rated.

We like BBB, we like debt-to-total-cap to be somewhere in that 30% range as opposed to zero.

We don't need to be at 30 overnight, before everybody jumps on that one.

You know, these are all things we've said before, and obviously we're looking at businesses right now, as we do all the time.

(Multiple Speakers) Just to clear up (Multiple Speakers) what you're going to buy, which you are obviously not going to comment on.

This is a second follow up, Mike.

I know; this is the last one, but not mentioning what you're going to buy because obviously you couldn't say today.

As much as how you think about acquisitions in terms of what you would like to achieve as it relates to the Company's returns and growth profile.

Does that make sense?

Well, it does, but individual deals are different.

Some -- I mean, biologicals may not have revenue because that's not the nature.

Obviously, the other ones would have revenues right off the bat.

Return is return over what time period.

I would suggest to you, it's the same rules we always have; we don't do highly-dilutive deals, and we do deals that will contribute to 1 to 2 points of growth faster than the market in the targeted area, and contribute to the kind of drop-through.

If we don't think we can turn them or buy undervalued assets or they have future potential, then we wouldn't do it.

The other thing is, is we've said, I know, boringly, over and over and over, we are cash flow people.

We work and run the business positively, in a positive sense to strong cash flow, and we're not going to do any deals that inhibit that, other than perhaps some long-term biologicals stuff of a smaller size.

Michael Matson, Wachovia.

I've kind of been bouncing back and forth through some other calls, so I apologize (multiple speakers) if you've already talked about this.

But what are you seeing in terms of hospital efforts to control implant costs?

Obviously, there's pushback on pure pricing and so forth, but are you seeing hospitals implementing any sort of plans to try to control the mix components -- plans such as patient matching and things like that?

No, we're not really -- you know, you see the few hospitals, sure, but that has always been there.

I think there's a big difference between an administrator trying to seek a surgeon out to get some help, or pushback on price.

It doesn't always work.

We've been pretty successful, as you can tell, at defending a good part of that.

I think when you start to get into telling surgeons about the patient clinical decision selection, at least the surgeons that are late 30's/40-years-old or older, certainly the ones in their mid-40s and up, which constitute a lot of the volume -- certainly were here for the early '90s and remember this whole story having played itself out before, and I doubt that they would ever let the world go back to that format.

So, we are not seeing -- we see a little bit of it now and then, but it has tended to be more recent times, more about price discussion, and I think we have done a good job under the circumstances, of spotting that way in advance, remodeling our business to adjust for it, renegotiating deals and positioning ourselves where we are.

So, I don't -- I mean, I would tell you if I saw a lot more of it, but I just don't see it.

All right, that's helpful; thanks.

And then in terms of your trauma products, two questions there.

First on the ON rod product, any sort of early feedback there?

Are surgeons really excited about that, moving it out for their avascular necrosis treatment?

And then, the peri locking plates that you guys have introduced, is there more to come of those or are those completely rolled out now?

On the ON rod, of course the present growths are huge because you're doubling up, doubling up, doubling up.

The product just went to full release, because at the time we got that kind of surprise 510k approval, very clearly we didn't have all the inventories built because we weren't expecting the approval.

We're getting very positive responses and early responses from some of the larger users, about the effectiveness of this product.

Because it doesn't really change their technique all that much, and that's usually the bigger problem.

Because you're still coring it out, in order to place in the rod, so that sort of original coring technique remains somewhat intact.

So we're getting very, very good responses.

But it's very early because frankly we didn't have the inventory.

The question on the plates, on the locking plates is, we rolled seven out; we have -- I don't know what the correct total number is, but I would suggest that that is probably less than half of what will be rolled out over the next six or seven months, on a full release basis.

So, I would have to go check the absolute correct numbers.

But I think that's about right.

Glenn Reicin, Morgan Stanley.

It's Matt Miksic for Glenn.

So, looking at -- thanks for taking the question -- on pricing, Ray, you mentioned that gainsharing doesn't sound like it's that much of an issue, or in a lot of ways the pressure here is not really new.

So looking at what's happened, I guess even it's 2% to 1% last year to this year, it's hard to kind of understand what's changed or what will continue to change.

I guess the question is, are you concerned at all that this discussion about negative pricing becomes kind of, you know, in and of itself kind of drives pricing lower?

As everyone kind of follows the everyone else, competitively?

Do you have any concerns about that, or what prevents us from going there?

No, I don't think so.

We fight the fight every day, as do our competitors, I'm sure.

I don't think -- you know, I think at some point you have to pick a spot and communicate that to your shareholders into your guidance.

And we've done so.

And I've said so many times, I mean we're not 1% smart; this is highly complex, complex calculation work on thousands of accounts, 100 countries, multiple deals at multiple times, changes in contract periods at different times of the year and so on.

So you know, I think what we try to do is get it so that it's rational guidance relevant to the situation.

More importantly, adjust our model here and adjust how we run the business to account for that and still deliver the earnings.

I don't think it motivates anybody, one direction or the other, because these are based on thousands of interactions.

It's Glenn.

Can I interrupt for a second and just ask in a different way?

When we talked to Stryker after the quarter, they had mentioned that they obviously lost some accounts and they, in hindsight, felt that they gave away some pricing that they didn't have to give away, especially like on Trident and on bone cement, and that they were going to make a better effort to hold back on price concessions, in the fourth quarter and beyond.

Are there any efforts that you are making in order to maintain some pricing discipline in the United States, special efforts that you're making to maintain pricing discipline in the United States for the fourth quarter and next year, so this all is not self-fulfilling as Matt had sort of tried to avoid saying?

But that is the fear out there.

Yes, it's not self-fulfilling.

I mean, we have strict controls that we control here at Corporate.

We have a distributor system that has rules.

Those rules require levels of approval and sometimes reaching even to me, or to Sam.

Those rules have been in place for some time; we review every price and every account on a master report, every discount of every price is reviewed by Sam and I -- a very detailed report that comes out every week or two.

There's nothing here in terms of self-fulfilling destiny.

We're working in a market that I believe we have correctly called and anticipated, in our guidance, and I don't think there's anything beyond that.

As you go outside the U.S., as you all know in many cases it's country-legislated, so that's a different phenomenon, obviously, that we have to deal with.

But I think directionally we understand what's going on in all those countries, and have weighted Zimmer accordingly to next year's plan and figured it out.

You know, could I be out by a bit?

Sure, but I think for guidance and purposes of running the business, we're doing it the right way.

Matt, did you have any other follow-ups?

Yes, actually I did.

Just on the same issue, in the past you've talked about the ability to carve out certain products, as you put together these contracts on price.

And I was wondering if that's still the case and what those opportunities are, in your product -- in your bag.

It is still the case, and remember what we've done.

Take HCA out of this conversation for the moment; we've already renegotiated and extended the terms, and done all that, in every major, big-time agreement that we've got.

And not one of those agreements comes up for renewal in 2006.

So we've already gone through.

And that represents, you know, as we report in our Ks and Qs, about 45% of our U.S. business.

Not that everybody uses a contract, but that's the correct amount.

Those carve-out items have certainly tended to be not only products we have today but products we anticipate having, so the obvious things are Trabecular Metal, the obvious things are MIS, they are new products that are unique to us.

Highly crosslinked poly, but in this case, branded to us.

So I mean, there's a long list of carve-outs.

We try to get as many as we can, but I can tell you that carve-outs have historically been 5, 6, 7, 8, 9%.

We've tried to get up in double digits; we have a couple of agreements where, thanks to the negotiations with those folks, that we've been able to get as much as I think 18% carve-outs is the highest unit carve out we have of SKUs and product listings.

So, it continues to be the right thing to do, because it gives the hospital the opportunity to perhaps have a little better pricing on what I would call slam dunk hip and knee primaries, and allows us and the surgeons, and frankly patients, to benefit from technologies that will remain highly profitable to us.

Great, well thanks very much for taking the questions.

Pat Pace, UBS

Good morning.

Just -- in your data set on the MIS 2-Incision hip replacements, you mentioned anecdotally some reports of increases in procedure growth.

Can you just give us a little more flavor on I guess what the surgeons said in terms of increases in volume there?

Yes, the increases -- the cumulative global rate went up, as I mentioned.

That was based on a slight decline in the U.S., and increased utilization in Asia and in Europe.

I don't have individual surgeon feedback on those.

I can tell you, part of that, Pat, is the fact that we have accelerated training in those locations and in the U.S. it's offset by kind of the uninformed bashing, so you scare some people away.

I don't have the feedback surveys we do; we've done about 300 of them now on 1600 surgeons trained, and we know the retention rate for MIS 2-Incision is somewhat higher probably then we would have expected.

But the ability of people to state with it over a long period of time is very tough, because it's pretty stressful and it's pretty complicated.

So there's a bunch of trade-offs.

But I don't have individual survey stuff in front of me here that I could quote to you.

Just follow up, if I could, on Dental.

I may have missed this, but just on the overall market, your growth is obviously fairly impressive.

But is the market growing faster than maybe mid-teens, or are you guys just taking share?

Well, I think the market -- the market we've said is growing on and off between 15 to 20%.

But we try to extract implants out because in Dental, very much like Spine were you've got biologicals, we try to take a look at fundamental implants versus biologicals, versus other things that are going on.

So if you look at our implant total only, and ignore everything else in our dental business, it's up 17% and I would suggest that's market or a shade above.

The 65% growth in biologicals, and massive growth in things like rapid turnaround abutments are far above market, and that swings the whole number up to 19.

But if you want to take a look at an underlying fundamental number of 17 on implants, that's probably -- pure implants -- a shade above market.

Raj Denhoy, Piper Jaffray.

I was wondering if I could just ask a little bit about this incremental profitability -- the contribution margin you guys continue to put up, which is very impressive.

I'm curious sort of what the mechanisms of that truly are.

In a sense, are you at this point still leveraging a lot of the fixed assets you acquired through the Centerpulse acquisition?

And at some point, do you have to then make incremental investments which make that -- the contribution margin from that point forward slightly lower?

And I guess it sort of plays into the idea of what the long-term, true earnings growth is, once you get through potentially all of what you got from Centerpulse.

Well, I think it's back to what I was saying with Mike, when he asked his question appropriately -- I mean, the numbers right now, if you look at that drop-through rate are about $0.63 per dollar, they have fluctuated well above 50 since we've owned Centerpulse.

They were always at $0.50 or better, back through from the time we completed the turnaround.

So if you consider that a baseline, to that if you think of it on an EPS basis, to that we are adding all the time -- that you don't obviously see -- is insourcing.

For instance, we don't have a single spine product made inside Zimmer; it's all outsourced.

If you insource that in and then by the way put it in Puerto Rico for a 3% tax rate, there's an example -- we've done none of that.

We are insourcing today, we continue to automate -- people that come in see the plant tours.

If they don't come too often, they see fairly dramatic changes in automation, vertical integration.

We shift goods to Switzerland and Puerto Rico while appropriately bringing new technologies into Warsaw; we are closing Austin.

So there's so many things, the mix of our products, the technology of the product and what we get for it, versus the product we are cannibalizing.

You know, it goes on and on; it's really the long list of things.

And those things happen all the time, even though you don't see them, as we are phasing our way through the completion of Centerpulse.

So they were there before Centerpulse, and they will be there long after.

And if you take it down through the tax line, so that you get yourself to EPS, we've shown an ability with or without Centerpulse -- again, I know you haven't seen all this, but over seven years -- to continue to derive that kind of change.

Then if you can bring in acquisitions, in combination with what I just said, that are perhaps underperforming assets or undervalued assets, or turnaround, or an opportunity that has significant synergies, very clearly you can keep that rhythm going at a rate much higher than $0.50.

Did you have -- Sam?

Yes, if you look also, Raj, at SG&A, one of the benefits we have, of what we believe is a low-cost distribution position -- and if you've been through our distribution center, you've seen how that works -- we invest into technology.

We invest in areas that will help us keep our labor costs down and constantly improve the flow-through of our distribution center, and that helps keep our SG&A costs down.

We are also very stingy on adding headcount in non-sales areas, like in G&A and in places like that.

So it's a combination of a variety of issues, not just the benefit we got from the Centerpulse acquisition, but just fundamentally, managing our expenses at a very detailed level.

Would it be safe to say you guys should maintain these levels for at least the foreseeable future?

Oh, I think we can do it for several years, again as long as you continue doing things we're talking about, and you've probably got to sprinkle in some acquisitions.

If you look at what we did, to be prudent on our expenses -- just reacting to this environment right now -- I mean, one of the questions nobody has asked, which I thought they might was, did you guys do anything in your expenses that affect the future, or is this a one-time expense thing in strong earnings this quarter?

The fact of the matter is, the two areas you can mess up if you do imprudent cutting is sales and research.

We increased sales, because we've added salespeople, this in the quarter and we also had to augment support for our people in the weather-affected areas, and make sure they were covered financially.

And we've increased R&D.

So we have a lot of flexibility, as Sam was pointing out, in SG&A, I was just covering all the other areas.

But I didn't even touch on SG&A.

So as far as our concern, we have a defined model.

We have operated this model for a long, long time and frankly operated in careers prior to Zimmer, so I mean we are comfortable with what we're doing.

I think it's just a matter of some people publicly get comfortable with it and others still don't.

So I think we just try and communicate as best we can.

Just one other question as well -- on your guidance for the next year, I think you mentioned -- and maybe you didn't mention explicitly.

But it sounds like what you've put up is largely a sort of worst-case scenario.

You know, when you look at the various possibilities, when you sort of handicap where this truly might come out next year, where would you put this scenario sort of in that list?

I mean, do you think this is greater than a 50% chance this is really what we are going to see next year?

Or have you largely given us what you think is going to be the worst-case?

I would put it on the list as the only one you're getting! (LAUGHTER)

The worst-case wording you heard in the transcript was, I've tried to put in the downside risk on price, only.

I didn't comment any further on guidance, but it's tough to put guidance out last night and then redo it today.

So, you've certainly got the guidance you're going to get anyway, for a little while, until we continue to re-evaluate.

Bob Hopkins, Lehman Brothers.

Thank you, and good morning.

Just two quick questions.

First, for Sam, I'm sure we could figure out this math ourselves, but if you have it, it would be helpful.

Could you give us the U.S. hip and knee growth rates, excluding the impact of the storms?

Well, I can do it.

Knees is 14 -- gee, I've got the script away from me now -- knees is 14, and hips should be, I think, 9.

You said excluding storms, right?

Excluding the hurricanes.

8 -- I'm sorry, I said 9.

That's wrong. 8 and 14.

Okay, thank you.

And then just one other question.

On the second-quarter call, if I'm reading the transcript right, Ray, you reiterated some level of confidence of 25% growth for 2006.

Yes.

Relative to the new guidance that we're seeing today, is that all price?

Yes, it's pretty much -- you know the trouble is, we started to do a lot of pricing analysis in May, June, July.

August, we started to see the Japan government doing some interesting things in terms of their research, because of contacts we have there, and so on and so on.

And I've, obviously, communicated this before.

Think of it in these kind of terms -- and I'll have to do this roughly in my head.

But think of it in these kind of terms.

If you go back to the older, older times -- a few months ago, several months ago -- and you think of U.S. 1 to 3, Japan at its biannual 2 to 4, and Germany being essentially flat after already taking 5% this year and not repeating that -- if you ran that through Zimmer, you would end up with about $70 million worth of incremental, pretax profit.

Now, you've got to take -- I've got to think this through -- you've got to take sales distribution, royalties and things away from that.

So it probably drops about 80% through to the bottom line on price.

That's 56 million.

Tax it at 30% roughly, and you can about 40 to $0.42.

If you add $0.40 to $0.42 onto 307, that gets you about 23 to 25% EPS growth.

So -- you know, I mean, I think what we're trying to do is get great at -- obviously, what we're trying to do is get great earnings for people and great cash flow out of a lesser-price environment.

I mean, it's crystal-clear what we're doing.

But I think if you run those -- I'm doing that in my head;

I would have to sit and do it probably -- but I think we'll get to those kinds of numbers.

Thanks, that's very helpful, guys.

Joanne Wuensch, Harris Nesbitt.

It sounds like there are two outstanding issues from at least the investors that were speaking to -- of overhanging concern.

The first is possible legislation regarding gainsharing, and the second one is the timing of the knowledge behind the cuts, or the potential cuts in Japan.

Could you just walk us through what those milestones could be over the next several months?

I can; thanks, Joanne -- or think I can -- I will tell you what I know about it.

On the gain-sharing side, you probably read as much about it as I do every day.

I get a little more insight, because we have a full-time Zimmer employees that live on Pennsylvania Avenue, that work for us there.

My own view is that -- and it's primarily driven by Rep. Nancy Johnson of Connecticut -- there's some aggressive discussion around it, but as I look at the responses from people like Lewis Morris, who is the Chief Counsel with the OIG -- as I look at the responses that I'm able to access inside the AAOS because of relationships there, as I look at comments from Pete Stark and other people, I think it's going to have a rough time getting through.

And I think if it does, it's going to be so limited and so restricted and so much a one year program that I just don't see where it's going to have a big impact on us.

And I've said all the way along -- not that you won't see a couple and it may be headline news -- I mean, you may very well.

But the fact that -- this being a game-changer, so to speak, in our industry, I don't get it, I don't see it and I don't think people will let it go the way.

And even if it does, it would be short-lived, relative to its impact beyond the first year.

On Japan, I really was hoping to have more.

It's a gap you identified and it's a gap that I feel is a gap in our presentation here today.

I would have liked to have had more -- I don't.

There's a lot of work being done right now by the industry.

Steve McMillan with Stryker just presented on this subject, representing INVEMED (ph) as did some other people.

There's a lot of effort in behind the scenes with the Japanese government.

I think it's going to be late in the year, early new year, unfortunately.

But unless we get a trend from them or some indication back that's different than now, they are playing it closer to the vest than usual.

And I'm just -- I'm not where I'd like to be on information, but that's where we are right now.

So, leading off of some of the questions that have already been asked, do you therefore think that this is your worst-case scenario in Japan?

Well, I plugged in 8% for us, but that's in the 1.2% negative that we used in the guidance that you have, last night.

Now, keep in mind, that 8% is effective April 1 of 06.

Entered in our budgets and in the government.

And I've assumed at this point it's not annual for any particular reason, it's just 8% and it starts April 1.

That's what we've budgeted.

I don't know of anything worse than that.

It could obviously be a little better.

But that's our best -- as I said in the conference call script -- what you got right now at 8 in Japan and minus 1.2% globally -- for Zimmer, based on our weightings of our business -- is our best shot at what reality is and it's our best shot at fulfilling what we've been telling you for some time, in terms of giving the actual numbers.

Ben Andrew, William Blair.

Ray, just briefly, do you see any potential for higher DRG payouts -- or payments -- for alternate-bearing products over time?

Because that obviously is the problem here, in terms of the mix.

Yes, for alternate -- you mean specifically hard-bearing?

You know, Trabecular Metal is an alternate material, but it's not an alternate bearing -- do you mean alternate bearing?

I just mean better technology, that is allowing for longer-lasting, better implants (multiple speakers) other industries have been very good about getting higher reimbursements for those sort of things.

Yes, I do actually, although you wouldn't know it from lately.

That's why I was defining your question, because I think if we go to the broader question, you know I do -- Stryker was unable to get an additional technology approval on ceramic-on-ceramic, because a lot of the government's arguments tend to be -- you haven't got sufficient incremental data beyond what's there today for incremental performance, even though we all know ceramic-on-ceramic is a good product.

If you go to technologies beyond that, I think we see in the ophthalmic area, we see in the cardiovascular area, we've got a group of surgeons and folks that work for us doing a real detailed analysis now on the latest ophthalmic approval, which has some very interesting opportunities in it for -- not just for Zimmer, for the industry.

So I honestly believe that the orthopedic industry will get more active in this area, both as all of us together and then individually, where it makes sense, and ophthalmic cardiovascular and these other people have done a better job of just going after it.

I don't think we've done the job.

It's not like we are being turned down all the time.

That's a multiyear process, regardless, right?

No, not necessarily.

A lot of these approvals, if you've got the right data and the right story, I think you can move them through more rapidly.

I think we simply haven't done sufficient homework and driven that aspect of government application the way some other sectors of devices have.

So I don't think it is -- I think it's a year after year after year process.

But don't think it's multiyear to get the first approvals.

And then finally, on the DTC spending side, can you talk about the format and what the thrust of those will be?

Historically, you've done MIS in print.

Do you intend to go TV and start spending some more serious amounts of money on that?

I'm going to make the assumption not everybody listening on the phone is in-love with Zimmer and some of them may compete with us.

So I think I'm going to duck that question.

That's too much information.

William Plovanic, First Albany Corporation.

Thank you.

Good morning.

Two quick questions.

First, in regards to HCA, in the original contract is it's automatic clawback to the pricing prior to the negotiation, or is that something that has to be renegotiated down the line?

I will only answer for Zimmer, and we've said before, I believe that it's not in the context of documented language; it is understood, and has been understood between the parties that we will talk and talk on a regular basis.

And we have done so.

So in terms of Stryker/DePuy, you'd have to ask them that question.

I don't know.

And then for Sam, with the closure of the Austin facility, when would you expect to see the benefit to the gross margin start to roll through?

Well, we've been in the process of closing the Austin facility now for a year, so as we've already begun to start making inventory that once was made in Austin in other plants, we should see that begin to take place early in the new year.

But it won't take place all at one time, because the transfer doesn't take place all at one time.

It will take place starting about the first of the year, in the first quarter.

And we will see that continue to accumulate on the P&L over the course of 2006 and a little bit into 2007.

Steven Lichtman, Banc of America Securities.

Thank you, good morning, guys.

Ray, just on the hip side, what are the key products you see over the next several quarters accelerating that business, and particularly what is the timing in the U.S. for CIMA?

That timing is not determined yet, Steve, because we are doing -- that's a technology that we're doing the ramp up and understanding the multiple manufacturing.

You won't be seeing -- CIMA is not a new product for 06.

I don't want to mislead you.

That's going to be out after that.

To answer your original question on hips, two new technology platforms, trabecular stem and EPOCH Fullcoat composite stem, acetabular -- Trabecular Metal acetabular, product lineup, both sides of the femoral and acetabular side, we hope with approvals that we expect to get on the Durom side of things.

There's a few, I mean there's a lot -- there's a lot more obviously, but that's a few of them.

Okay.

And Sam, in the EPS guidance for next year, what tax rate are you factoring in at this point?

Well, what we've said in the past is, given the success that we have had in our tax rate including this year, we still think that given the three factors I mentioned, if they continue to move in favorable directions, that's more profits from Puerto Rico and that's more profits out of the Winterthur facility and good earnings flow-through from sales in lower-tax jurisdictions.

All those have to happen.

We still think that there's potentially some room for improvement in the tax rate, in the out years.

You are building in a decline in that EPS guidance?

Yes, some.

Bruce Nudell, Sanford Bernstein.

Thanks, guys.

Looking forward into the U.S. market, factoring in both price and mix, where do you see ASP progression in the U.S. hips and knees over the next several years?

And the follow-up question is, Ray, in your initial five-point bulletin, you basically talked about hospital profitability for Medicare cases; you know, you've got 4 days of hospital stay, plus you've got 5 to $6000 of implant costs and a major surgery, and the DRG pays 10 and with co-pay maybe 11, and are those really profitable cases for the average hospital?

Thanks a lot.

Okay.

On the ASP, I want to make sure I understand you properly.

I think what you're asking me is, is if you take volume, price mix -- if you put everything into it (Multiple Speakers)

No, if you just take mix and price, what's that going to look like?

Mix and price?

Well, price, we've already said at least for next year we don't give guidance.

Beyond that, we put a point off of price, and we don't see any change in the mix component tree.

And to several earlier questions, I think there will be mix improvement out over the next few years, but I don't separately break mix out and we've already given you price.

In terms of the hospital units, what I said is what we've analytically proven and believe it was in the script already, that if you have an institution that is inefficiently operated, either on its own or for peripheral reasons, if they are getting just basic $10,000 reimbursement, if they are operating an academic environment or high mix of Medicare institutions, they are going to suffer declining profitability on an incremental basis.

Part of the problem that you get is -- and I could do it here if I wanted, because I can allocate costs differently.

Part of the problem you get is, people want me to do allocation analysis or bringing consultants to do so, to make a point with industry.

You know, they apply the application of the business and incremental patients differently.

You know, you are not adding operating rooms, hotels are fixed-cost, high fixed-cost-based bricks and mortar institutions with variable labor.

So if you do the analysis on an incremental basis, unless they are really poorly run, have huge academic responsibilities; they only get 10,000, and they're putting in Flex knees and hard-bearings in everybody, sure, they might be losing money.

But a lot of the analysis is to serve the purpose of renegotiating with industry.

It's pretty easy to take apart and frankly I've done so with several consultants.

So I will stand by what I said.

Thank you.

This concludes our question-and-answer session for today.

Mr. Ray Elliott, are there any closing remarks?

No, there aren't.

Thanks for the support, Liegh, and thanks, folks.

I hope people notice, since they were probably laughing that Sam finished precisely on one hour, when we completed our work together.

So, we just ended up taking three times as many questions.

So we are still at two hours and eight minutes.

But we are trying, believe me!

Thanks, folks.

Ladies and gentlemen, this does conclude today's conference.

Thank you for participating.

You may now disconnect.