Zimmer Biomet Holdings Inc (ZBH) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the fourth-quarter and full-year 2006 financial results conference call.

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

These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions 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 periods 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.

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

After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

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

Sir, you may begin your conference.

Great, thank you.

Good morning, everyone, and welcome to Zimmer fourth-quarter 2006 conference call.

We are pleased to be hosting this call to discuss a strong earnings quarter with revenue growth that was both sequentially and year-over-year just what the doctor ordered.

We indicated in our midyear report that we believed the second quarter was the bottom of the sales cycle, and that remains our opinion today for good reason.

The hockey stick effect created by second-half new product rollouts for Zimmer made the year potentially challenging.

However, with $229 million of new product sales in the fourth quarter, versus an average of $200 million in each of the first three quarters, the year in the end was secured.

We anticipated that these same new products, some foreign exchange benefits, and somewhat easier comps would create a better opportunity for Zimmer to deliver double-digit sales growth; and in fact, collectively, they did.

Sales in the Americas had almost a full 3 point sequential quarterly growth rate increase, led by recon at 10%.

Expanded margins including all-time records for adjusted operating and net profits excluding share based compensation, along with focused metrics and strong cash flow, highlighted the period.

During the quarter, we repurchased almost 2.2 million shares of Zimmer common stock and invested $168 million in doing so.

During the full year, we invested almost $800 million to repurchase over 12 million shares or about 5% of our outstanding shares at an average price each of $66.07, a nice 16% discount to current price.

Zimmer's new Gender Solutions Knee has been to date the rocket ship we hoped for; in fact, better than we could have ever realistically expected, with 9,584 GSFs implanted during the quarter.

That is more than 2,000 surgeries ahead of our forecast.

We will talk more about the GSF later.

During the prior quarter, we successfully completed on schedule after three years more than 3,000 milestones associated with the integration of Centerpulse.

Similarly, we will derive in annual synergies benefit an annuity, if you will, of more than $100 million for a very long time.

However, we should not forget the Implex acquisition that followed shortly thereafter in early 2004.

During the fourth quarter, we built a record $48 million in what became Trabecular Metal, up 47% constant currency from the prior-year same quarter.

And for the full-year 2006, we had TM sales of $168 million, up 42% constant currency.

Here is the key Implex M&A metric.

Our forecast to comfortably sell over $200 million in 2007 would imply that our total purchase price was a 1-times multiple of our annual sales, in this case after only three years of ownership.

Next, with Gender Solutions, Trabecular Metal, MIS and Metal-on-Metal alone is alive and well in Zimmer.

Our adjusted EPS in the quarter excluding share-based compensation grew by 26% over prior year, over 3 times the constant currency sales growth, and for the year grew 18%, again 3 times the sales growth.

Despite what certainly felt like a tough year at various points in time, with the combination of a $53 stock price in August and the enormous task of trying to roll out 12 major new products being the undeniable low point, it was in fact a really good year again for us.

And perhaps more importantly, a solid ramp into 2007.

By year-end, we had fought our way back to beat the S&P 500 index in share price appreciation.

Forbes named us to the Platinum 400 team, denoting the best managed big companies in America.

Perhaps the most statistically interesting, BusinessWeek found only six companies in the S&P 500 with market caps over $1 billion that delivered five-year compound average growth rates of 25% or more in three categories -- sales, earnings per share, and return on equity or efficient capital deployment.

Zimmer was one of the six.

For those of you that are better interested in portfolio managers' party trivia, Aeropostale, Chesapeake Energy, Coach, Cognizant Technology, and Headwaters were the other five.

We try to focus in our Company as a priority on the individual productivity.

In a recent analysis of leverage per full-time Zimmer employee, we generated during 2006, $507,000 in sales per employee and $170,000 in operating profit per employee.

While sales structure may alter competitive comparisons, operating profit for the most part is pretty much operating (technical difficulty).

Individual contributions in operating profit per Zimmer employee are nearly double the prior-year per employee productivity average of J&J, DePuy, Stryker, Biomet, and Smith & Nephew on a combined basis.

With our opening remarks complete, joining me on the call today are Sam Leno, our Executive Vice President of Finance and Corporate Services and Chief Financial Officer, and Jim Crines, our Senior Vice President of Finance in Worldwide Operations and Controller.

We will begin today's detailed discussion with comments related to our fourth-quarter and full-year 2006, including an update on operations followed by a Q&A discussion.

All comments and comparisons are on an adjusted basis.

Further, all adjusted discussion excludes the acquisition and integration expenses.

We will focus most of our attention on constant currency revenues.

In light of the inclusion of FAS 123(R) share-based payment and our corresponding decision not to restate 2005, we will try to provide as much apples-to-apples comparison to prior year -- i.e., excluding share-based compensation -- as is reasonably possible.

Let's take a look at the fundamentals of the fourth-quarter and full-year P&L and balance sheet performance.

Consolidated sales for the quarter were $934 million reported, an increase of 10% to prior year, 8% constant currency, and above the Street expectations by about $9 million, with favorable foreign exchange contributing about $7 million over our forecast.

More importantly, the reported growth rate reached double digits and constant currently rates were above the prior quarters.

The fourth-quarter growth rates for the Americas, both total and reconstructive, were almost 3 full points above both the first half and the third quarter, respectively.

Our total Company reported sales growth rates for the first three quarters of 2006 on a per billing day basis were 2% in the first quarter, 6% in the second quarter, 8% in the third quarter, and 12% in the fourth quarter.

Our day rate sales growth rates for all four quarters of 2006 in constant currency were equally strong at 5%, 6%, 8%, and 9%, respectively.

Better still, with a little help from our favorable foreign exchange swings, our reported day rate growth rates globally in reconstructive on the same 2006 quarterly basis were 2% in the first quarter, 6% in the second quarter, 9% in the third quarter, and 13% in the fourth quarter.

In fairness, we had been about one quarter behind all year in our sales growth forecast, achieving in the third quarter our expectation for the second, and expecting to achieve in the fourth quarter our third-quarter goals.

But the fourth quarter's $934 million should take away any question marks about the year.

As we anticipated, the third quarter was better than the second, and the fourth quarter was better than the third.

The relative improvement is apparent.

Last year the fourth quarter represented an 11% sequential improvement over Zimmer's third-quarter sales; while this year the fourth quarter was a 14% sequential quarterly improvement in sales, with the hurricanes and billing day differences essentially washing each other out.

Internationally, we did have some recovery from country-specific political issues in the UK, Germany, Spain, and most notably a turnaround-type quarter from Australia and New Zealand.

But we believe that female Gender Solutions patients in our Americas business, combined with Trabecular Metal, Metal-on-Metal articulations, and robust extremities and dental sales accounted for most of our double-digit sales performance.

We're still unable to supply Zimmer sets for all the Metal-on-Metal or Gender Solutions demand at this point, despite the fact that our instrument and implant set deployment in the period substantially exceeded the targeted goals.

Our dental business continues its stellar performance as a consistent market overachiever in each geographic segment, with 24% constant currency sales growth in the quarter globally.

During the quarter, our three geographic segment -- Americas, Europe, and Asia-Pacific -- all performed well and grew 9%, 6%, and 6% constant currency, respectively.

We believe on a weighted basis for our combined Zimmer served markets, our 10% reported growth and 8% constant currency will prove to be at or slightly above market growth for the quarter in both total sales and reconstructive; but trailing the market for the quarter in spine and in trauma.

For the full year, our geographic segments, the Americas, Europe and Asia-Pacific, grew at 7%, 6%, and 7% constant currency, respectively, while total sales for the year increased by 6.4% reported to a little under $3.5 billion.

As mentioned, worldwide recon sales grew 11%, 11.1% reported, and 8.4% constant currency with the Americas at 10% growth, about what was expected or hoped-for.

For a little more granularity we believe the worldwide constant currency recon market, with about 75% of the market already reporting, grew this quarter at 7.5% to 8%.

Unlike the last two quarters, we believe there is an uptick in both recent elective surgical bookings domestically and, in our specific case, extension of key Zimmer surgeon waiting periods for hip and knee replacement, generally a good sign commercially.

In any event, once again we can find no significant underlying future surgery demand decline or demographic trend differences.

Our latest strategic plan and review of our served worldwide reconstructive market for the foreseeable future remains unchanged at 7% volume; 1% to 3% mix, depending upon the individual manufacturer's new product pipeline; and 0% to 1% worldwide price, for an average future market growth rate of 8% to 10% ex-currency.

In the U.S. market, surgeon capacity, operating room block time availability, and hospital profitability resource allocations relative to other disciplines may continue to be periodic issues but are unlikely to create any significant or sustained negative trends.

Zimmer hips in the quarter grew by 9% reported and 6% constant currency in a market growing at approximately 6%.

Our Americas constant currency hip growth improved to 9%.

Given the releases of Trabecular Metal Stem, the TMS Trabecular Revision System, and Epoch II system, 510(k) approval for Large Diameter Metal-on-Metal, advanced polys, and the advent over time of Gender Solutions hips combined MIS, we are very comfortable with our go-forward hip strategy.

Zimmer knees, supported by early results from Gender Solutions surgeries, grew at 11% reported and 8% constant currency; and our worldwide constant currency market growing this quarter at about 8%.

Our Americas segment accelerated by 3 full points sequentially in a single quarter.

Knee sales were (inaudible) still negatively affected by Japan pricing, where we are by far the knee market share leader, and considerable future anticipation amongst the target U.S. female population for broader availability of the Zimmer Gender Solutions brand.

In many locations and with many, many surgeons we are still unable to supply.

The real issue for us -- how much will gender drive worldwide knee sales over the existing base growth rate of 7% to 8% -- has been at least in part answered this quarter.

We believe the pent-up demand and sustainable interest through media exposure, combined with Zimmer science and anatomy research being better understood, will drive measurable market share taking growth in 2007 and 2008.

In addition to gender news during December, we submitted our premarket approval to the FDA for our LPS and LPS-Flex Mobile Bearing Knee for the U.S. market.

In the normal course of things, we could expect approval late this year with or without additional downclassification progress.

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

Zimmer's 8% constant currency worldwide sales increase was composed of volume and mix growth of 7.2% and positive price of 0.4%.

For reference, worldwide price had a 10 basis point improvement for Zimmer versus the prior quarter and a 50 basis point improvement since the end of the first half of 2006.

Zimmer's worldwide price for the total year, including Japan, was positive 0.3%.

In fact, if you look at the last eight consecutive prior quarters or two full years, from the beginning of 2005 worldwide price ex-Japan for Zimmer was positive 1.4%, 0.5%, 0.4%, 0.1%, 0.5%, 0.4%, 0.8% last quarter, and positive 0.8% again this quarter.

In short, price bottomed out at positive 0.1% in the fourth quarter of 2005, and there has been only price percent improvement for since then based upon Zimmer's specific mix of countries.

In the same two years that price increases have moderated, Zimmer has reported an increase in adjusted gross profit, excluding share based compensation, of 80 basis points.

Our bellwether Americas geographic segment was price positive again this quarter at 1.6% and finished the year in total at the same positive 1.6%.

As mentioned at various times previously, the current 1.6% price improvement for Zimmer Americas does in part reflect the conscious decision to negotiate longer and better arrangements with key U.S. hospital groups, including four remaining years with HCA, and contracts with other groups that have clauses containing automatic extension options.

The 2006 price improvement is in fact more then a 30% rate improvement from the positive 1.2% price gained domestically during all of 2005.

We believe that that will serve us well not only now, but in the foreseeable future.

The positive 0.4% price globally in quarter continues to be mostly about Japan, currently at -5.3% as anticipated.

It is important to keep in mind that the next installment of the scheduled Japan price reduction was January 1, 2007, and not April 1.

We expect Zimmer price in Japan during 2007 to be -3.5% on a calendar P&L basis.

Without Japan, our Asia-Pacific segment was slightly positive in price as expected.

In Europe, Germany improved price to -3.6% from most of this year at negative 5%.

During the quarter, Iberia, Spain, and Portugal combined register positive price for Zimmer, as did France, Belgium, Austria, South Africa, Eastern Europe, the Middle East, Denmark, Finland, and Switzerland.

The UK continues to be a somewhat understressed market but has improved substantially from last quarter's -6.9% price to only -1.6% this quarter.

Actual units of UK surgery have increased only slightly, though; and the average waiting time for a hip through the British National Health System has increased to 40 weeks, 10 weeks longer than any other surgical specialty.

European price in total for Zimmer in the quarter was -1.0%, an improvement from last quarter's -1.6%.

If the current 2006 trends continue with Japan, the UK, and Germany at low to mid single digit price reductions, worldwide price for Zimmer in 2007, given our geographic weightings, will be slightly positive and stable, inclusive of the long-anticipated but yet to be executed change in France's [TIPS] program.

While these are obviously complex calculations given the variables, we do have internal price information technology to support our theory down to the SKU level.

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

But the key to most deals is sustainable, accretive earnings per share growth.

We continue to reap the benefits of not only our Centerpulse integration work but several years of intense focus on margins and mix management, combined with prudent expense control.

We have done so without the sacrifice of any key future personnel additions, technology, or research investments.

We have in fact more than 70 new approved R&D positions alone available globally for 2007.

Adjusted diluted earnings per share, inclusive of share-based payment for the fourth-quarter 2006, were $1.02 on 241 million average outstanding diluted shares.

Reported EPS for the fourth quarter were also $1.02; while adjusted EPS, excluding share-based compensation, were $1.08.

During the quarter, as previously mentioned, we utilized our share buyback program to purchase approximately 2.2 million common shares, as measured by settlements, at an average price of $76.49 per share and utilized $168 million in cash for those transactions.

For the quarter we delivered an adjusted diluted EPS increase of 26% over prior year on an apples-to-apples basis, excluding share-based payment, and over 3 times the rate of constant currency sales growth.

These results are $0.03 better than the First Call consensus EPS estimate of $0.99.

Share buyback in the quarter created a favorable contribution to adjusted diluted EPS of 8/1000ths or less than 1/10 of 1 penny when you account for the lost interest income and the average shares are added back but weighted in a manner consistent with our actual repurchase dates.

Therefore, our adjusted EPS performance, ex the buyback only, of $1.02 remains representative of our period operations.

The pattern of significant financial return from our acquisitions reflected by both EPS and cash flow, combined with our own distinct earnings drop-through model continues.

Zimmer's gross profit margin in the quarter on an adjusted basis and excluding the share-based payment was a near record 78.1% and up another 10 basis points from the previous quarter.

Positive fourth-quarter mix relative to the Americas and the recon category, offset by the negative effects of settling our hedge contracts and cost of goods sold, accounted for much of the change, the latter being a full half a point.

For the year, adjusted gross margin excluding share-based payment was 78%, an improvement of 30 basis points from full-year 2005.

With 30 to $35 million in remaining favorable Centerpulse integration synergies, as well as a long list of mix, cost reduction, and tax opportunities still in front of us for 2007 and 2008, we are confident in both the potential consistency and expandability of our gross operating and net margins.

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

The remainder of the P&L analysis will be solely on an adjusted basis, excluding share-based payment effects, in order to provide a more realistic apples-to-apples comparison prior year, essentially without the repetitive clarification language.

For the quarter, SG&A expenses and total operating expenses as a ratio to sales were records, at 35.5% and 40.1%, respectively.

At 35.5% SG&A costs improved sequentially by 330 basis points and were 150 basis points better than a strong fourth quarter of 2005.

For the full-year 2006, SG&A and operating expense ratios were 37.2% and 42.3%, respectively, and were both more than 100 basis point improvements from 2005.

We continue to take specific expense actions to enhance our leading position as the low-cost manufacturer and the low-cost distributor, while increasing long-term infrastructure investments.

Over nearly a three-year time frame, starting with the acquisition of Centerpulse and the fourth-quarter 2003 at 40.9%, we have publicly targeted to reduce SG&A by at least 200 basis points, with this quarter's performance continuing to exceed that trend, with a three-year improvement of over 500 basis points.

We expect that with the expanding number of external and internal biological relationships, our R&D ratio to sales would operate between 5 and 6%.

During the fourth quarter, R&D totaled $43 million, a current ratio to sales of 4.6%, but influenced substantially by the strong sales denominator in the quarter.

The same R&D spending on prior-quarter sales would have delivered a 5.3% ratio.

We continue to be a proficient and efficient innovator.

Most important, for the full year R&D expenses were $180 million or 5.1% of sales.

During 2006 we doubled our biological personnel and project-related investments, signed exclusive relationships, and even more recently completed the $24 million addition to our new Warsaw-based R&D center.

We have announced initial staffing of three new emerging technologies devoted solely to orthopedic applications for woven materials, sensor technology, and drug-device combinations.

After more than six years of direct involvement, we are pleased to announce that during November, Indianapolis's Dr. Jack Farr completed the first successful DeNovo ET cartilage replacement surgery.

DeNovo ET is the ISTO-Zimmer partnership project previously known as Neocartilage.

Along with Gender Solutions results in the quarter, nothing could be more thrilling for us than our first true cartilage replacement surgery.

Late this year we hope to release to the market DeNovo NT, a natural minimally-manipulated tissue.

In addition to biologicals, we continue to focus our business development acquisition activities on dental, spine, and hospital productivity consulting targets, for the most part in the $100 million to $400 million range each.

We are dedicated to pay the right price for companies with valid intellectual property and legally compliant business practices being in place.

Total operating expenses for the quarter at $375 million represent an increase of 4.2% to prior year compared to a 10.1% sales increase.

Our record low 40.1% total operating expense ratio to sales was a 410 basis point sequential improvement from the third quarter, a 230 basis point improvement over the same quarter prior year, and came very close to breaking the 40% ratio barrier.

Total operating expenses for the year were $1.48 billion, up 3.1% to prior year, a 42.3% ratio to sales, and a 140 basis point improvement versus full-year 2005.

For your reference, in the first quarter 2006 actual acquisition integration costs were a credit of $3.4 million and for the year were only $6 million, due primarily to the gain on the sale of the legacy Centerpulse Austin facility and the final resolution of legal issues inherited with the acquisition.

Adjusted operating profit in the quarter reached a record $355 million.

Consistency matters, and this is the ninth consecutive reporting period that we have produced at or more than $0.25 billion in operating profit; and this time we were way over.

The single-quarter record $355 million in operating profit broke our previous record by almost $50 million.

Our operating profit to sales ratio at 38% in the quarter was also a record, and up over 230 basis points from a very strong fourth-quarter 2005.

During the quarter, we have delivered perhaps the highest operating margin in major medical devices, consistent with the continued margin expansion that has totaled over 500 basis points on each key margin line since we became a public company.

For the full year we generated just under $1.25 billion of operating profit and a full-year 36% ratio of operating profit to sales.

As previously mentioned, the Zimmer construct that we have today was modeled during the late 1990s turnaround to register approximately $0.40 to $0.50 of operating profit for each new sales dollar.

In the fourth quarter of 2006, we recorded approximately $52 million more operating profit on approximately $85 million more in sales, certainly over the top of our target range this quarter, at approximately $0.60 of operating profit on every new sales dollar.

For the year, we increased operating profit by approximately $130 million and sales by approximately $209 million for a drop-through rate of $0.62 on each new sales dollar. $0.62 is not sustainable; but $0.40 to $0.50 should be.

We continue to read occasional financial notes that our $0.40 to $0.50 is not doable in the future.

These notes seem to completely ignore remaining magnitude of synergies, mix, scalability, and annual COGS improvements through automation and vertical integration, and substantial G&A leverage to name but a few.

Interest gains or stock buybacks, tax rate reduction through favorable manufacturing jurisdictions and acquisitions will of course add below the line.

History is on our side, not to mention the facts.

In early 2002, five years ago, one analyst -- who is gone but not forgotten -- rated us as neutral and a $30 price target with little if any upside share price potential due to -- and I emphasize -- the very low likelihood of margin expansion in the future.

That was $50 and 500 basis points ago.

Good call.

EBITDA dollars in the fourth quarter passed the $400 million mark for the first time and continue to register at 40% or better as a ratio to sales, this quarter at 43.6%, up 200 basis points from the same quarter prior year.

Adjusted net earnings in the period continued extremely strong at nearly $260 million, our first time ever with net income over $0.25 billion, up 21% to prior year, up 250 basis points from the same quarter prior year, and creating and industry-leading and all-time Zimmer record of 28% net margin ratio to sales.

Our 2006 tax rate improved from fourth-quarter 2005 by 180 basis points to 27.1%; and therefore our full-year ETR at 28.2% is 140 basis points better than the 29.6% recorded in full-year 2005.

With some favorable benefits in the fourth quarter, we believe a more normalized tax rate would have been a little over 28%.

However, permanent reductions to tax rate should count for performance.

The effect of the fourth-quarter tax change from the norm, combined with the net value of the share buyback, is well under $0.02.

Therefore the right answer for our purely operational EPS in the fourth quarter is somewhere between $1 and $1.01.

We believe that we can continue to make substantial progress while simultaneously raising the performance bar on each line of our P&L.

While sales acceleration can be fairly measured against easier prior-year comps, foreign exchange contributions, and a comparative first-half lack of new products, the fourth-quarter sales growth rate least no doubt that the much-publicized fear of the hockey stick phenomena for Zimmer proved to be wrong.

New products including Gender Solutions Knees, Trabecular Metal, and Metal-on-Metal, all delivered and created a double-digit ramp into 2007.

Our Zimmer financial model continued to deliver operating earnings leverage that was above market and above the Street with or without the benefits of tax rate improvements or share buybacks.

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

Cash generation remains fundamental to our strategy.

Every company has their argument about what is important.

Ours is simple.

We like cash.

We had another excellent operating cash flow quarter at or above our $0.25 billion per quarter expectations, registering $247 million.

Measured against net earnings these results demonstrate almost a 100% to cash conversion ratio from net earnings.

In slightly over three years of combined operations with Centerpulse, we have delivered some $3 billion in cumulative operating cash flow.

Over three years, pretty much $1 out of every $3 of sales has turned into $1 of operating cash flow.

Free cash flow in the quarter was also outstanding at $156 million, particularly when you include the assumption of an additional $33 million invested in instruments during the quarter, and $58 million to collectively complete our Warsaw R&D, the West campus and Puerto Rico facility, and equipment expansions.

At the end of the quarter, we have $266 million of cash and equivalents on hand.

Here are some numbers for full-year 2006 worth noting.

We have generated for the first time ever over $1 billion in operating cash flow at 1.04 billion, and over $770 million in free cash flow.

During the fourth quarter of 2005, our Board of Directors authorized a $1 billion common stock repurchase program through year-end 2007.

As noted by our press release earlier, an additional $1 billion was authorized in December 2006 for execution through year-end 2008.

Since the inception of our buyback programs, we have utilized $803 million in cash for settlements and commissions, to purchase a little over 12.1 million shares at an average price of $66.08 per share.

As we have communicated previously, we expect the funding of acquisitions to be the primary use of our free cash flow.

But the share buybacks provide yet another option to enhance shareholder value.

Shareholder equity has increased from zero at the time of the spinout to a little under $5 billion today; or almost exactly $1 billion of new equity per year of public life, despite the offsetting accumulation of $803 million in treasury stock through the share buyback program.

Our fourth-quarter combined working capital statistics continue to perform very well, and consistent with both the large number of second-half new product launches underway as well as accelerated fourth-quarter sales.

We indicated during the third-quarter call that our combined inventory days were 310, reflecting at the time nearly $20 million of new inventory build for the TM Stem, the Epoch Stem, Metal-on-Metal, two new shoulders, and of course the Gender Solutions Knee.

We forecasted a 20- to 25-day drop in inventory days for year-end 2006, but actually accomplished a 33-day drop to a much more normal 277 day base and a six-day improvement from year-end 2005.

Our trade receivables collections provide support for our strong cash flow production.

In the fourth quarter we delivered excellent worldwide trade receivables at 55 days, an improvement of four days from prior quarter and well within our aspirations of 60 days or better.

The Americas maintained its prior-quarter performance at 39 days.

We continue to operate our payable days at 68, 13 days in excess of our trade receivable days and nicely above our three-year payables average of 62 days.

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

During the fourth quarter, worldwide reconstructive sales increased to a record $780 million, an 11% reported increase over prior year and 8% constant currency growth.

Knees grew at 11% reported and 8% constant currency, while hips grew 9% reported and 6% constant currency.

We expect the worldwide recon market to be up about 7.5% to 8% constant currency in the fourth quarter.

As we indicated earlier, Zimmer should therefore be at or just slightly over the market's growth.

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

First, products.

In the knee category, on a worldwide basis in the quarter knee sales for Zimmer increased by 8.3% constant currency versus prior year to $389 million or almost a $40 million absolute increase.

Knees for the year grew constant currency by 7% to sales of $1.46 billion.

From a brand point of view our NexGen LPS-Flex continues its strong three-year trend with a 67% constant currency increase to prior year in the quarter; but it's now inclusive of LPS-Flex Gender.

LPS-Flex and CR-Flex femoral component sales alone are approaching $75 million in the quarter, but are still only a little over one-third of our Zimmer knee femorals.

The premium we receive in the market for Flex, and incrementally now for Gender, remains an exceptional mix opportunity.

During December we also released our new LPS-Flex Tivanium brand designed primarily for patients with clinically significant nickel sensitivity, a notable issue, particularly in Europe.

And once again, more premium mix.

The legacy Centerpulse Innex Knee, well-regarded in European mobile bearing circles, delivered excellent unit growth at 12%.

Our new Zimmer Uni, the industry's first high-flex single compartment knee, increased sales by 27% to prior year.

Offsets to these strong knee performances are reflected in several Centerpulse specialty knees and old Zimmer brands that we continue to aggressively phase down.

Our new MIS stem tibial plates, the only product of its kind that can be assembled inside the patient, quickly jumped from its early launch to fourth-quarter sales of over $6 million, up sequentially by almost 20% and up 80% from prior year.

Prolong, highly cross-linked poly knee-articulating surfaces, have almost doubled last year's sales to over $13 million in the quarter.

Prolong was released more than three years ago as the only new-generation knee poly articulating surface without free radicals and therefore with very limited oxidation risk.

And the only surface with the FDA approved label -- resistant to delamination.

The more notable art surface failure in knees tends to be delamination, not debris.

All this talk about new competitive knee poly has caused people to take a real look at underlying science, and that will continue to accrue to our benefit.

No other products, including the new competitive releases, can make these combined claims.

Our new series of collaterals entitled Facts Versus Fiction do a nice job of separating the truth about the real radicals in the industry from the free radicals in the poly.

Trabecular Metal tibial trays continue to take share.

TM tibial trays alone reached $11 million in sales this quarter, up nearly $1 million sequentially from prior quarter.

Along with our new TM knee augments, that quickly reached $1 million in sales.

As mentioned earlier, Trabecular Metal sales were up 47% in total for the quarter to reach almost $50 million.

Progress on the Zimmer Gender Solutions Knee for females is taking our breath away. (inaudible) certainly the knee women are talking about has left me personally speechless; and as you know that is no simple task.

In the fourth quarter 9,584 GSFs were implanted without several territories of the U.S. and virtually none of Europe and Asia fully participating.

The early feedback on its fit and function, combined with our first retrospective look at 42,000 other knees, shows great promise.

The beginnings of several new white papers and peer-reviewed articles suggest that our Zimmer Gender products will be nothing short of hot.

We do not measure our deeds by a few selectively-placed phone interviews to a small group of surgeons.

We measure our success by almost 10,000 women implanted in the first real quarter of activity.

Here's a few Gender data points for your consideration.

First, our goal was to place to date 1,220 sets, to keep up with forecasted surgical activity.

We placed 1,497 sets, or 20% above our target, but still have considerable excess demand versus capacity.

As a result we have increased our forecasted production and deployment to over 4,000 sets for 2007, of which 3,000 sets will be in the Americas.

We have an option to expand that build target by 20% more to 5,000 sets.

Our Gender Solutions communications campaign with the Zimmer Blue Ladies has also benefited from over 900 media placements and over 200 million Gender Solutions media impression since June, including multiple viewings on ABC's Good Morning America, USA Today, the FOX news channel, Prevention Magazine, and CBS's Up-to-the-Minute to name just a few.

Most of these placements were free.

For its annual review the December issue of Health Magazine, with a primarily female circulation of 1.3 million, named Zimmer's Gender Solutions Knee one of the biggest breakthroughs in all of women's health.

Our new campaign website, www.genderknee.com, debuted last fall and delivered more then 70,000 visitor hits in the fourth quarter alone.

Gender Solutions manuscripts that publish the clinical work of designing surgeons Doctors Booth and Bertin, along with Dr. Mahfouz's bone morphology research on gender, will be submitted to the JOA, the Journal of Orthopedics, early this year.

More than a dozen Zimmer Gender papers have been designed or started, including an economics white paper and a robot-based joint study with Massachusetts General Hospital.

Our live surgery via satellite with Salt Lake City's Dr. Kim Bertin performing the Gender Solutions implantation set a Zimmer ORLive series record, with 1,900 individuals tuned in, in real-time.

Our legacy Centerpulse brand, the Natural-Knee II Gender Flex, should be ready for third-quarter 2007 to complement the current NexGen LPS-Flex and CR-Flex offerings.

We have completed our Gender Knee direct-to-consumer test market work in October through December of 2006, utilizing Birmingham, Alabama;

Lincoln, Nebraska;

Harrisburg, Pennsylvania; and Toledo and Dayton, Ohio, as the sites.

The results were both outstanding and self-evident.

The combined performance included a 31% compound growth rate in average sales per month driven directly by Gender in markets that are otherwise growing at about 10%.

In the same five test markets the percent of Gender Flex implants to standard knees increased to 40% before Christmas.

During the first five months of 2007 our Zimmer Blue Ladies will launch a $5.5 million media campaign in a total of 23 cities including five major U.S. metropolitan markets.

We also perhaps forgot to note to you and our other listeners that while our multi-stem female Gender hip offering is well underway for early viewing at the AAOS, our bone morphology research and data development with Dr. Mahfouz regarding female gender knee tibia and patella is even further along.

Now, surely you other guys didn't think that the battle was going to end with just femorals; but never you mind.

We all know that, when you were designing your knees with women in mind several years ago, you certainly must have been thinking about combined femoral, tibial, and patella redesigns for females.

You were thinking about all components back then, weren't you?

With 9,584 Gender Solutions Knees implanted in the fourth quarter versus our goal of 7,500, we will on this conference call publicly increase our aspirations to over 12,000 new GSF surgeries completed in the first quarter of 2007, a sequential increase quarter-over-quarter of 25% and well over the original first-quarter goal of 10,000 units.

Let's switch to hips.

On a worldwide basis in the fourth quarter, hip sales were $319 million, up 9% reported and 6% constant currency.

For the year, hips grew by 5% constant currency to $1.19 billion in sales.

Porous stems and MIS surgery are at this stage receiving new life from TM Stems, Epoch Stems, and Metal-on-Metal, along with our new anterolateral, posterolateral, and anterior supine MIS techniques.

We are very encouraged with our hip brands in the new combined Company.

Our enthusiasm is based on the potential breadth and impact of both MIS and Durom hip resurfacing, our patented composite technology Trabecular Metal, Metal-on-Metal, advanced polys, and the continued flow of economic data and upcoming new stems for Zimmer's Gender Hip Solutions and MIS.

Zimmer fiber, metal, and ML tapers, along with the new TM and Epoch products, are the stems of choice for our MIS hip surgery.

These stem families grew by over 27%, bringing the combination this quarter to almost $39 million in sales.

For the year they grew by 20% to almost $140 million.

In the quarter, (indiscernible) release the Trabecular Metal Stem has already become a $25 million annual brand.

In Europe, the famous CLS Spotorno increased by 13% in the quarter to become a $50 million annual stem brand.

In acetabular cups, Trabecular Metal and Durom continued to perform extremely well.

Trabecular Metal Cup sales increased to over $16 million in the quarter, an increase of 22% from prior year.

The Durom and Metasul stems, cups, liners, and heads, including our LDH or our Large Diameter Heads, increased sales in the quarter by 50% versus prior year to over $21 million.

As you know, we've received conditional approval from the FDA to proceed with our U.S. resurfacing IDE utilizing our Durom brand.

Ceramic-on-ceramic gains in the market continue to be relatively small and are clearly on the decline in favor of either large head metal-on-metal or highly crosslinked polys.

Premium-priced Longevity and Durasul highly crosslinked polyethylene liner units increased again, well above the hip market, and when annualized deliver over $100 million per year in sales.

In the future Cold Irradiated, Mechanically Annealed, Vitamin E, or other advanced poly technologies exclusive to us may well be the true second-generation offerings.

We have also been very pleased with our performance on Palacos and other bone cement products.

During the quarter bone cement sales increased by well over 50% to prior year.

New products including Gender Solutions hips, the Trabecular Metal hip, the Epoch composite stem, TMS [atabular] revision, new MIS hips and new MIS techniques like the Zimmer anterolateral, posterolateral, and anterior supine, Durom, bigger Metal-on-Metal heads, and a new antibiotic bone cement are expected to make significant growth contributions to Zimmer's worldwide hip platform.

In extremity products the new inverse and reverse shoulders along with Trabecular Metal stems contributed to our shoulder growth worldwide, up an excellent 32% constant currency for the fourth quarter.

Total Zimmer extremity sales grew well above market at 24% constant currency in the quarter.

For the year, extremity sales grew by 17% constant currency to $77 million.

To complete our reconstructive discussion, Zimmer dental had another very successful quarter with sales reaching $50 million in a single quarter for the first time, at $50.3 million, up 27% reported and 24% constant currency.

In the case of constant currency growth rate, a full 5 point sequential quarterly improvement.

The dental business showed very strong performances in all three geographic segments, with the Americas, Europe, and Asia-Pacific up 16%, 35,% and 44% in constant currency, respectively.

Dental implants increased by 24% constant currency; and prosthetics by 30%; while dental regenerative graft sales, including our new biological graft Puros, were equally strong, up almost 25% in growth.

We will continue to move into biologics, computer-assisted digital technology, and of course value-added education.

For the year we grew dental business by 20% constant currency to $179 million.

On a worldwide basis in the fourth quarter, trauma sales grew 11% reported and 9% constant currency to reach $50 million of sales in a single quarter, also for the first time.

The worldwide trauma market in general appears to be at low to mid double-digit growth.

While we are making progress, we will need to make more progress.

However, we have only begun to deliver some great new products.

Americas' trauma growth was solid at 9% and well above the prior three-quarter average of 7%.

For the year, trauma sales increased by 9% constant currency to $195 million.

With the (technical difficulty) field releases of our new locking and universal plates as well as [MCB], our plate and screw sales in the quarter increased by 15% constant currency, with IM nails up by 24%.

But we were held back again by the continuing decline of compression screws.

As we convert to new products [from old], innovative solutions, and make our trauma division fully operational, results should improve.

Our Zimmer spine division's sales was a good news/not so good new story, with an increase of 8% reported and 7% constant currency to $46 million versus an 11% increase for the year.

The not so good news is that cage sales were light for the first time in several quarters at only a little over $6 million.

They are now only 14% of total Zimmer spine sales.

A temporary registration issue with our pedicle screw system in Japan will hurt us until April.

Excluding spine orthobiologicals, it is clear that the spine market is growing at about 11% or 12%.

The good news relates to our future with Dynesys and Trabecular Metal.

Dynesys, our Dynamic Stabilization System, recorded sales of almost $15 million in the quarter, up $2 million dollars sequentially; and despite a major difficult comp anniversary was still up 17% constant currency over prior year.

Dynesys continues to grow as a $60 million annual brand after only a year or so in the U.S. market.

When combined with almost $5 million of spinal Trabecular Metal, these two technologies delivered almost $20 million in sales in the period, more than triple the contribution of cages.

As we have noted several times, the combination of Trabecular Metal, Dynamic Stabilization, and MIS, along with additional pedicle screw technology and biological acquisitions, could create a global echo globally competitive spine business.

In orthopedic surgical and other products, sales increased slightly from prior quarter; but declined versus last year by 2% to $57 million on a constant currency basis.

Obviously OrthoPAT, declining by over $5 million to prior year, took its toll as we phase out this distribution agreement.

We expect this decline to affect sales growth negatively by at least $5 million in the first quarter of 2007 through the contract expiration anniversary at the end of February.

As previously announced, Zimmer and Brasseler USA have entered into a five-year U.S. distribution deal for large and small bone powered surgical instruments and disposables, including a Zimmer-branded blade.

Our first five major U.S. distributors received product training during the fourth quarter and have initiated their 2007 rollout plans.

Let's switch to a quick look at our new product development activities.

Nearly two-thirds of our R&D investment spending related to innovative products and platforms with a real bent towards improved patient quality of life and economic value-added.

We try to accomplish those goals with the most proficient use of our investment dollars.

We are not trying to particularly have the most R&D spending, but rather the best new products.

At the end of the fourth quarter we are managing approximately 100 active new product development projects, including 16 new projects just initiated.

We currently have 28 active hip projects; 18 in knees; and 21 in trauma.

We launched 12 major new products in the second half and a grand total of more than 20 total new products for the period, with the most significant of course being Gender Specific Knees.

We can now state with experience -- 20 new product introductions or 12 major product introductions in the single half, most of which required instrumentation, is too complicated. 2007 will feature another 20 or so key new products; but with a little better rollout balance.

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

That number easily exceeded our expectations in 2006 at $828 million.

We have never missed the 15% to 20% target since it was instituted in 1998.

We have in fact averaged about 19% to sales cumulatively per year for the prior eight years.

New product sales for the fourth-quarter 2006 were just over $229 million, both an absolute record in dollars and also a record 25% of sales.

Let's look briefly at the geographic segments.

First in the Americas.

Zimmer Americas had a strong quarter with some expanded ability to sell both Gender knees and excellent utilization of Metal-on-Metal sets.

Pure pressure was successful again at positive 1.6%.

Americas revenue for the quarter was $538 million, the fourth consecutive time we have reached or exceeded the $0.5 billion mark and up 9% over prior year.

For the year Americas' sales increased 7% to cross the $2 billion mark at $2.08 billion.

The Americas' reconstructive growth in the quarter was up 10% and delivered $434 million, a second consecutive quarterly sequential growth rate improvement of 2 full points or more.

We believe that this 10% growth is at or slightly above market.

As we have stated earlier, we are better off than expected relative to recon market growth rates.

J&J, BioMet, and Stryker are only collectively growing combined hips and knees domestically at 10% in the quarter, inclusive of new system rollouts and upgrades.

In our Americas reconstructive category, knees had 9% growth to $241 million; absolute sequential growth of $16 million; and a sequential growth rate improvement of 3 full points.

NexGen LPS and CR-Flex including Gender, the new High-Flex Uni, Trabecular Metal tibial components, and the new MIS stemmed modular tibial all made substantial contributions to the Americas' knee performance.

Hips in the Americas increased 9% to $150 million and above market, with domestic hip growth figures likely at about 8%.

We are reasonably satisfied with the Zimmer hip growth in the quarter, given the new stems, our bone cement growth trajectory, Trabecular Metal Acetabular Revision System, and the full launch of Large Head Metal-on-Metal.

We are in fact well positioned.

Our dental business in the Americas grew at 16% in the quarter to $28 million.

The Americas' total operating profit in the fourth quarter 2006 was a record $286 million and a record operating profit to sales ratio by 10 basis points at 53.3%.

Let's take a look at Europe.

We continue to be pleased with the underlying constant currency sales traction and operating profit ratios being delivered in what appeared to be more difficult 2006 European medical device market.

In the fourth quarter European revenues were also a record at $267 million, up 6% constant currency and the first time over $0.25 billion.

For the year, Europe sales increased by 6% constant currency to $931 million.

As previously mentioned, price decline in Europe for the quarter improved to -1% from -1.6% in the prior quarter.

We still expect to see a new DRG-like tariff system in France, still probably mid single digit negative.

Reconstructive implants in Europe delivered sales of $241 million in the quarter, an increase of 6% constant currency.

European hips were negatively affected by German and UK pricing changes and a few remaining surgeon dissynergies.

But despite all these circumstances stayed, much to our surprise, in positive territory at 3% constant currency growth, and 1% better growth rate than prior quarter.

Knees grew a solid, slightly above market, 6% constant currency.

Positive gains in the quarter reflect continuing acceptance of the Durasul and Longevity highly crosslinked polys, the impact of Minimally Invasive instrument deployments, the growing use of Durom and Trabecular Metal, as well as ongoing market share gains for the NexGen and Innex knee brands, including the very limited but enthusiastic introduction of Gender Solutions.

Our Europe dental business grew by 35% constant currency to almost $15 million in the quarter.

Many of Europe's country businesses performed well in sales growth versus the competition.

South Africa, Sweden, Russia, the Middle East, Eastern Europe, and Belgium all grew constant currency sales for the quarter at high single digit to mid double digits.

But we are very pleased to report that they were joined this quarter by the large Italian, Spanish, and Netherlands divisions.

Germany, France, Switzerland, Austria, and now the UK all remained in positive sales growth territory.

For the quarter Europe delivered record operating profits of $120 million, beating the previous record of $120 million by 20%.

And an operating profit to sales ratio also a record for Europe at almost 45%, a 500 basis point-plus increase over fourth-quarter 2005 and far from the 25% ratio to sales during our first full quarter combined with Centerpulse.

In Asia-Pacific revenues in the fourth quarter were $129 million, an increase of 6% constant currency.

For the year, Asia-Pacific grew sales by 7% constant currency to $488 million.

These are reasonable results, considering Japan's -5.3% price in the quarter.

We believe the Asia-Pacific reconstructive market is growing mid single digit rates in local currencies; and as a result we appear to be on market.

Japan's constant currency growth rate in the fourth quarter excluding price was approximately 8% and above market.

In the fourth quarter, our combined Asia-Pacific businesses delivered reconstructive growth at 8% constant currency to $105 million in sales.

We expect Trabecular Metal tibial components, the NexGen LPS-Flex and CR-Flex Knee, along with the strength of the Centerpulse Natural Knee will continue to improve Asia-Pacific knee performance, this quarter up a solid 10% constant currency despite absolutely no Gender Solutions Knees available at this point.

A new Japanese [DCMJ] hip, some hoped-for Trabecular Metal regulatory approvals, and MIS-driven expansion will help to further growth in our hip performance, which this quarter was softer at 3% constant currency growth.

While our dental business is small in Asia-Pacific, it did deliver another very strong 44% sales increase.

Several country-specific constant currency growth rates were good, with Korea and India both at 20% or better, and Australia and New Zealand rebounding to double-digit growth.

The Zimmer Asia-Pacific businesses delivered $63 million in fourth-quarter operating earnings and a record-tying 48.4% operating profit to sales ratio, up 100 basis points in the fourth-quarter 2005.

Well, that covers the key components of our business in not quite record time.

Sam, I know you'll have your usual elaborations.

But let me deliver two other brief thoughts.

First, what to look for from Zimmer at the 2007 San Diego AAOS meeting; and secondly and even more briefly, one last time on the facts of retirement.

Our focus at the AAOS in San Diego will be consistent with our new strategic initiatives -- to Enable, to Innovate, and to Grow.

Each of these initiatives has three crucial tactics supporting them, from education, health economics, and new audiences under Enable; to biologics, advanced materials, and smart tools for Innovate; and finally women's health, spine and dental expansion, and infrastructure investments for the Growth initiative.

Look for several areas of focus at AAOS that align directly with our new initiatives, the hope of biologicals, our smart tool BRIGIT, paired with our cost-effective disposable ICE Cube instruments for navigation, even more innovative use of Trabecular Metal, the marketing of health economics, new products for the promise of MIS, advanced curriculum for the world's 25 Zimmer Institutes, and of course Gender Solutions, with more science, more papers, more speakers.

Real demonstrations against the competition's designs, and of course some Gender hip philosophies including an early look at both our new [Pori-Lock] and connective technology.

Lastly, on November 20 I announced that I would retire as Zimmer's President and CEO with a target date of no later than June 30, 2007, provided that my successor is in place.

As per the announcement, I intend to continue as Chairman for least one year, through November of this year, perhaps longer.

I thank you sincerely for your long list of interesting questions, related mostly to -- what could I possibly be thinking of?

Here's a few final thoughts of what I wasn't thinking of.

At least I know what motivates our employees -- the following day several of them in the Warsaw head office tried to abscond with my nice parking spot close to the main door.

Oh, how soon they forget.

Some of you have suggested that I am retiring because I am lonely for the lost companionship of Stryker's John Brown, BioMet's Dane Miller, and J&J's Bill McComb.

I can assure you that I have a notoriously low need for affiliation.

Besides at least one of these dear departed looks poised for the Midwest version of rising from the dead.

While in the case of the latter I wrote a congratulatory note to him at Liz Claiborne containing the sincere hope that he learns more about women's dresses than he ever knew about women's knees.

Here is an old favorite that is least better in theory -- I am leaving to spend more time with my family.

There is no doubt that achieving work-life balance in orthopedics is a noble and much sought-after goal.

It has practically become a proverb in departure announcements.

But let's be practical.

Why wreck a good thing?

As it stands today. my kids all resolutely believe that I have had the privilege of being their mother's boyfriend for the last quarter of a century, based on my audacious and late arrival home most mights, if at all, and my lack of presence on some, but not all, weekends.

No; family can't be the correct answer.

How about the more sinister interpretations?

Well, my health is good; and as you can tell from the length of this call my endurance remains intact, even if yours is not.

How about the old investigation intrigue angle?

Sorry to disappoint you, but the only contact I have had personally with the U.S. government is with my neighbor and friend, a Republican congressman who was gainfully employed in Washington until January 1.

Oh well, at least I will have someone to talk to.

How about either orthopedics or Zimmer are soon to be a struggling, depressed medical device segment?

Then you must be the only one who thinks so.

Both the industry and Zimmer have multi-year vision of growth.

And with hardly a P/E ratio under the mid-20s, apparently everyone else agrees.

Besides the millions of patients with no other viable long-term solution for osteoarthritis would be going -- where?

Nor am I leaving because of the incessant abuse of TheStreet.com's Melissa Davis.

This one at least had some potential.

Ordinarily I don't pick fights with people who buy ink by the barrel; but she is only depressed because her town in Oklahoma is smaller and less exciting than my town in Indiana, population 1,100.

Why should I have to personally suffer the slings and arrows of her discontent?

Melissa, I hereby request for Cramer to transfer you to the Big Apple.

But who is kidding who?

Even with the time that retirement may eventually afford me, there are not enough hours in the day to be your editor.

In the end, that leaves us with the only other possible answer outside of these interesting, albeit misguided, rumors.

We are stuck with the truth.

It has been a great 10 years with a lifetime of memories.

I bleed Zimmer Blue;

I always will.

But if you stay to finish everything, the chances are you'll never leave.

And for all the fresh blood and new ideas the Company would miss, that would be the saddest thing of all.

Sam, what are your thoughts on the quarter?

Thanks, Ray.

I will add some details to a few key areas.

Our 10-K will only address full-year results; and so in the interest of time on this call we will not provide a breakdown for the fourth quarter of price, volume, mix, foreign currency, and constant currency contributions to both geographic and product sales growth.

Instead, this information will be made available on our website immediately following this call.

In the fourth quarter, the contribution of foreign currency to sales growth was positive 2.4% or $21 million.

If the U.S. dollar holds at current levels for the balance of 2007, the contribution of foreign currency to sales growth should be favorable by about 8/10 of a point or $29 million for the full year.

This level of contribution from foreign currency is already incorporated into our latest sales guidance.

Effective January 1, 2006, we adopted SFAS 123(R), share-based payment, using the modified prospective method.

In accordance with this adoption method, we did not adjust our historical financial statements to reflect the impact share-based payment.

The adoption of this new accounting standard reduced earnings per share in the fourth quarter by $0.06.

In order to understand comparisons to prior year, I will identify the dollar impact of this new accounting standard on each line of the adjusted P&L.

The impact on cost of goods sold and gross profit, $3 million; on R&D, $2 million;

SG&A, $15 million; operating profit, $20 million reduction.

The tax effect of that was $6 million.

The net income effect was a reduction of $14 million.

Our acquisition and integration line this quarter was $3 million of income.

This is a result of recognizing favorable adjustments from settling two legal matters inherited with the acquisition of Centerpulse, offset by various small intangible asset impairments of Centerpulse brands, as well as a variety of residual integration activities.

Since the acquisitions of Centerpulse and Implex, we have spent $322 million on acquisition and integration costs. $223 million of those costs were expensed to the P&L.

Although the vast majority of the integration activities are behind us, a few items such as continued manufacturing in-sourcing and some warehouse consolidations in a few select countries still remain and should be completed in 2007, with some systems integrations targeted for completion in 2008.

The only debt we have on the books is $100 million in Japanese debt because it carries very low interest rates.

With our continued strong operating and free cash flow, we have accumulated $268 million of cash on the balance sheet.

Subtracting out the $100 million of Japanese debt, we have a positive net cash position of $168 million.

Interest income in the quarter was $1.5 million compared to $800,000 of interest expense in the fourth quarter of last year.

In the quarter, we recorded $100,000 in minority interest expense related to one of our small European subsidiaries.

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

The ETR for the fourth quarter was 27%, which includes better-than-expected contributions from our Puerto Rico operations for the year, as well as some miscellaneous items.

The effective tax rate for the full-year 2006 was 28.2%, which is 140 basis points below full-year 2005.

We began to see some of the structural benefits that we expected to realize in 2007 show up in our fourth-quarter 2006 results.

As a result, we would expect to see some modest improvements in the 2007 effective tax rate from the 28.2% reported for the full-year 2006.

Capital expenditures for the quarter were $91 million, consisting of $33 million for additional instrument sets and $58 million for all other property, plant, and equipment fixed asset additions, as we completed several major facility projects late in the year.

Our full-year capital expenditures were $268 million, consisting of $126 million in instruments and $142 million in all other property, plant, and equipment fixed asset additions.

For 2007, instruments should be the same or slightly higher than 2006.

Given some additional facility capacity expansions that we expect, traditional property, plant, and equipment should be about $25 million higher in 2007 versus 2006.

Depreciation expense was $39 million.

As a result of the Centerpulse and Implex acquisitions and the related $596 million of amortizable intangibles recorded at the time of those acquisitions, amortization expense in the fourth quarter was $13 million.

On December 12, 2006, we announced that our Board had approved a new share repurchase program authorizing us to repurchase up to $1 billion of Zimmer common stock through December 31, 2008.

This is in addition to a similar program approved at the end of 2005.

In the fourth quarter, we repurchased 2,194,329 common shares at an average price of $76.49.

Since its inception through December 31, 2006, we have repurchased 12,145,829 common shares at an average price of $66.08, which is 16% below our current stock price, for a total cash outlay of $803 million.

Turning to guidance, in our press release last night we provided an update to our 2007 sales and earnings guidance.

We increased both our sales and adjusted earnings per share guidance for 2007.

Our revised full-year 2007 sales are expected to be approximately $3.851 billion, representing an increase of 10.2% over 2006.

This is $40 million over current First Call consensus and $20 million increase from the middle of our previous range of $3.820 billion to $3.840 billion, which we provided in our December 13 guidance press release.

Since we issued that press release, the U.S. dollar on average has strengthened, reducing expected full-year 2007 sales growth by about $25 million.

Therefore our new guidance is a $45 million increase over the implied constant currency growth that we have previously communicated.

Also in our release last night we provided sales guidance for each quarter of 2007 and increased our previous first-quarter sales guidance to $932 million from a range of 928 to $930 million.

We also increased our adjusted diluted earnings per share guidance for full-year 2007 by $0.05 to $3.95, up from our previous range of $3.89 to $3.91, representing an increase of approximately 15% over full-year 2006.

We also provided adjusted earnings per share guidance for each quarter of 2007, again increasing our previous first-quarter adjusted earnings per share guidance to $0.93 from the previous range of $0.91 to $0.92.

In summary, during the fourth quarter we continued to demonstrate our ability to generate excellent earnings per share growth under a variety of different business conditions.

We exceeded First Call consensus sales by $9 million and adjusted earnings per share by $0.03.

In addition, the strength of our exciting new products began to show up in our sales line.

We sold, as Ray mentioned, 9,584 new Gender Knees, exceeding our 7,500 target for the fourth quarter by over 2,000 surgeries.

New product sales were approximately $229 million in the quarter and represent a record 25% of consolidated sales in the quarter.

This is 4 points higher than the 21% recorded for the full-year 2005.

New product sales were $828 million for the full-year 2006.

Our dental business was up 27% over prior year reported and up 24% in constant currency.

Continued strong margins coupled with sound asset management contributed strong operating cash flow of $247 million in the quarter and $1.041 billion for the year, which was 25% more than our reported net income.

We are building cash on the balance sheet that can be used as a primary source of acquisition capital or to buy back shares.

Our ETR for the full year 2006 was a record 28.2%.

We purchased over 2 million shares of Zimmer common stock during the quarter and over 12 million shares for the year at an average price that is approximately 16% favorable to our current share price.

Our third-quarter sales grew at a faster rate than our second quarter; and our fourth-quarter sales as expected grew at a faster rate than the third quarter.

Finally, we raised our 2007 guidance for both sales and earnings, supported by the strength of our new products launched throughout 2006, as well as those we have on target to be launched throughout 2007.

Now we would be happy to take your questions.

(OPERATOR INSTRUCTIONS) Milton Hsu with Bear Stearns.

We continue to hear still a lot of good, great things about Trabecular Metal, even from competitive surgeons.

Given the gross margins on this product line, can you just talk about the share gains perhaps coming from Trabecular Metal?

And then just the revision market and where you expect that to be growing, going forward?

We do take share, and you know this, and we tell people all the time, it is tough to take share in this business because it is sticky.

But TM is one of the things that does allow us to take share.

We tend to take share with competitive surgeons who at least initially are focused on revision.

Because the results of TM in revision, where you have very complicated, difficult, sometimes disastrous situations to resolve, is very visible and effective.

It does have margins.

We don't disclose individual margins; but the margins on Trabecular Metal tend to be extremely positive.

We focus a lot of our efforts at this point in time on revision, other than the basic cup which generates -- although we are finding -- we have, I think, 12 or 13 projects that are related to Trabecular Metal right now.

So it's ability to expand way beyond revision, as you can tell, into spine.

We are looking at dental processing.

So it is going to continue to grow and contribute substantially to mix as well as increased margins.

Then just revision procedures going forward over the next, perhaps, three years?

They are growing at a rate that is considerably faster than primary.

I don't think any of the companies see that changing.

Just the sheer volume of surgeries that have been done, the activity expectations of people, unfortunately the weight of people, you know you're going to continue to see the revision business growing more rapidly.

In some cases, as much as double the growth rate, but that may be a little high at this point.

You are going to continue to see that very profitable, because although the GP margins don't tend to be higher in revision particularly, the GP dollars, because of the bill out rates, are considerably higher.

Okay.

Just one last question on the guidance.

It sounds like a lot of the newer products are sort of out there in full swing there.

But the fourth-quarter sales growth of 12%, does that just reflect the typical seasonality of the fourth quarter?

Or is it something else?

No, it is just the timing of when we think.

If you think back to Gender Knee as an example, and we were not sure how big a start we would get in the fourth quarter, if at all; it has turned out that we had a good start.

You'll see Gender Hips, and some of the other products that you'll see at the AAOS, will start to weigh in around that time period.

I think what it reflects is we hope for obviously a successful start with some of those, as we have had with these.

So it is not just seasonality.

It is a real layering out.

The only thing we're doing differently is we are not having as many big ones all come out in the fourth quarter.

Because this year we killed ourself doing that, and we don't want to do it again.

Okay, thanks.

Bruce Nudell with Sanford Bernstein.

Listen, I have kind of a, just a conceptual question, and a specific question.

With regards to kind of an SG&A level that is kind of sustainable longer-term in the industry of orthopedics, you know, hips and knees, where do you think that might be?

Also, just generically -- and I don't think I ever really understood this.

Why have the orthopedic companies in the U.S. kind of gone to a distributor network?

My second question or third is really, of the gender-specific knees that you cited in the quarter, how many were in the United States?

Thank you.

Okay, on your SG&A, I don't know if you are asking about ours or about the industry.

I have no idea what the industry's sustainable SG&A is.

I don't even look at it.

I look at us compared to individual other companies.

We wouldn't give line item analysis, but I did -- I read your report, Bruce.

The theory of us not being able to produce more than $0.30 or $0.40 of drop-through shouldn't be based on the theory that there is some sort of sustained or peaked-out level for us of SG&A.

Because that simply is not the case.

The history of the industry over many years flip-flops back and forth between distributors and direct and hybrid versions.

I don't think there is any magical answer to that.

If we look at a couple of our competitors that are direct, at least one is a hybrid.

A couple of others including us, we use 100% distribution, 100% direct commission.

That is our model.

But I would caution you on that, in terms of what that means, because the average distributor with us has been with us for 20 years.

Our distributors are not allowed to sell any other products other than Zimmer.

Our average sales rep, out of over 1,000 of them, has been around for more than 13 years.

So, yes, it is distribution by legal definition.

Are they highly experienced Zimmer-dedicated people?

Absolutely.

Then lastly on Gender, I don't think we're at a stage where I want to have line item breakouts, because then you will expect updates.

Relative to geographic sales on Gender at this point, I think when we get Gender released, maybe over another three or four quarters, to where it's got a little fuller application of it, we can certainly do that for you.

But I can tell you the vast, vast majority was in the U.S.

In fact we don't even have all the U.S. covered.

Very little in Europe and Asia, and very little at this point with competitive surgeons.

Although we have a lot of interest, we simply can't supply them with instruments at this point.

So Ray, just a follow-up on that.

The ICD companies could kind of -- when the industry matures a little bit more, probably could get down to SG&As of 32%, 33% of that portion of the business.

Is it possible that an efficiently run ortho company like yours could get down over time to 36% or so?

I think it is possible, but you've got to put some qualifiers on it.

If we stay with the distribution system we have today, and we expect the distributors to deliver the activities they do for us today, they're going to expect to be well paid for that.

Average distributors out there in the world are somewhere between 17% and 22% in total; and then they pay the reps, obviously.

So you could -- if you add then on all your marketing, and instruments, and your G&A, which we keep a throat hold on around here, sure, you can get to those kind of numbers.

No doubt about it.

Thanks, Ray.

Matt Miksic with Morgan Stanley.

I had a question on the knee growth in the U.S.

Obviously, Gender looked good.

But it looked to me like it was -- you're still sort of approaching or maybe just at market growth for constant currency knees in the U.S.

Am I getting that wrong?

No, I think we are just a little over, by our estimate, so far -- and there's still some companies to report -- but we are just a shade over market.

So I think what you have to do, first of all, Gender you're getting the upgrade; you're not getting the new people yet.

Because we are obviously dealing with Zimmer surgeons first.

So you are getting an upgrade.

In some cases you may be getting only a small premium, because they may already be using Flex.

So you are not getting the Flex.

In some cases you're getting a Flex premium.

What we're pleased about is where we have come from in terms of 3 points of growth, much of which we contributed to the activities around Gender.

So it is not so much where we are today; it is the trajectory we are on, when you consider the fact that we have barely rolled this product out.

Of course we have other things coming.

It is not the only -- as you as you can tell from the list of stuff there -- it is not the only knee product.

So no, I think you've got your numbers just about right on.

I'm more interested in where we are headed than where we are at, and the progress we have made sequentially.

When do you think you shift to a point where you're able to take -- go from share, servicing your clients, your surgeons, to share gain?

Well, probably -- and this is speculative on my part, because it is really dependent upon instrument production and whatnot.

But if we can get the -- as I mentioned we have got about 1,500 sets out there at year-end.

We wanted to have 1,220 and we still can't service the marketplace.

I would expect towards midyear, and we have the option, with some prenotification, of increasing those sets to about 5,000 as I mentioned; some of which need to go to Asia and Europe.

We just introduced Gender in Australia as an example, so.

I am speculating but I would think around midyear.

Question on spine.

A little below market there.

I am wondering what gets that -- you pointed out cages, but what gets that business moving?

Is there an acquisition at some point that maybe is part of that strategy?

Yes, we don't have enough -- we have I think cleaned up the pipeline there.

We have got some very nice products under way.

We put Trabecular Metal in.

But I don't think there's enough just internal pipeline over the next year or two to drive that up to 15% sales growth, or pick whatever number you like.

Secondly, the cages -- the cages were about 62% business when we bought it. it is now 14%.

So cages really can't hurt us too much anymore.

But they are very profitable.

You don't get them back.

It's primarily because Medtronic I think does a great job of marketing INFUSE in the cage; and of course if you don't have it it's a tougher sales game.

So I think for us, pedicle screw and MIS type acquisitions that will drive sales up immediately, and then the fulfillment of our own pipeline over two years will get it there.

We're confident we're going to get it there, but you're not going to get it there with just Dynesys and Trabecular Metal when cages are declining.

The math just works against you most of the time.

So if we can keep it around double digits until we get a deal or two done, I'm not frankly unhappy with that.

Any -- is that a deal we see this year or is that -- we just don't know when it happens?

Well, we're constantly talking to people, but I mean we're not cheap.

I don't want to make it sound like that.

But you know, we do deals based on valuation with verifiable IP and the kind of business practices we want in place.

We are struggling with getting all three of those to be in the right combination.

Not that there's not lots of targets out there.

There are.

So, yes, I would like to have a deal or two done this year, but I said that last year, too.

So I'm not going to -- at this point it would sound like false promises.

Just one last question here if I can on your retirement, not that we are trying to hurry you out the door by any stretch.

But what is the next thing that we might see on that front and when?

Probably somebody in my parking spot that is not my car.

No, I'd say it is a normal search.

Obviously Spencer Stuart knew about this way in advance of you and was able to do research.

They're actively talking with people and carrying on what you would call a normal search at this point.

I don't have any information to suggest it won't be in the first half, but I don't know.

It is -- again, it's a bit of an unusual fit because of the location we are in.

It is not as easy.

And yet it is a fabulous job, so it's kind of tough to predict.

Okay.

Well, thanks very much.

Dhulsini de Zoysa with Cowen and Company.

Ray, did you consider that maybe you are just fed up with taking our questions?

No, I love your questions.

I live for this.

With that, I have got sort of a philosophical question for Sam.

Sam, I often hear the question -- now, isn't Zimmer at or quickly approaching peak margins?

Do you believe in the concept of peak margins in your business?

If so, where is your ceiling?

I think there is always a peak at some point in time; but I think we are far from it as a result of all of the things that we keep on talking about, that we really do do.

Invest for the most part heavily in manufacturing, automation.

So we routinely and religiously build into our operating plans to drive 2% out of standard cost every year.

Sometimes we're able to drive even more than that out.

Plus the leverage points we have throughout all of SG&A.

We think leverage is with us for a long time.

It looks like at least in the coming 12 to 18 months SG&A is probably the line we should be looking for, for the bulk of the move.

It that about right?

I wouldn't say that.

I think there is always potential in all the lines of the P&L, gross profit included, as we have seen in the past.

Now as part of our guidance we don't separate out where the growth and improved margin is going to come from.

But we do expect we will continue to improve margins and continue to drop down $0.40 to $0.50 of operating profit from every incremental sales dollar.

But I would not limit it to SG&A.

Okay.

Then Ray, I'm sorry if I missed it.

Did you already comment on what you're expecting for Medicare reimbursement this year?

I didn't comment on it.

I'm not expecting any unusual changes, other than in the slight positive.

One of the things we have to keep an eye on, of course, is where some of the other issues, the weighting issues and the modifications come into play.

We think the way it is set up now, that most of those changes that are likely to be done, either under a test format or under a real change, are unlikely to be negatives to orthopedics.

It may affect some other specialists.

But there are unlikely to be real negatives to orthopedics.

So no real departure from (multiple speakers)?

No;

I don't see anything that's going to be a meaningful departure, even there will be some talk about changes in the weightings and how they target it.

I don't think those changes will be meaningful in the near term; and many of them require legislative voting after a period of tests.

So even if there are changes, I think they are going to be out some period of time.

Great.

We will look forward to seeing you in San Diego.

Thanks.

William Plovanic with First Albany Capital.

Just one quick question.

In terms of the Gender Flex Knee that you mentioned you will be start rolling out in third quarter, is that a full roll early in the quarter?

Or should we expect that kind of later in the year and more of a contributor in '08?

That is all I have.

Thanks.

Did you mean knee or did you mean hip?

I thought you had a Gender Flex Knee you talked about.

Gender Flex Knee has already been released.

The one I mentioned, when Milt asked me about the sales increase in the fourth quarter next year and early into '08, was actually hip technology.

The other things I was talking about is -- and kidding our friends out there -- is Gender is not going to end with femorals.

That we have some interesting work we're doing on tibials and patellas.

So that may have caused things to mix up.

Thirdly, it could have been the Natural Knee, which is the Centerpulse brand, which is coming out in the third quarter.

That is a big chunk of knee sales that we are converting to Natural Knee to Gender Flex.

So I'm not sure which of those three, but I answered all three of them for you.

So I am not sure which one you're referring to.

Thanks, Ray.

Bob Hopkins with Lehman Brothers.

Ray, in the press release, I think you made a quote talking about '07, and the initiatives in '07, and the product focus in '07 as being more evolutionary than revolutionary.

I was wondering if you could just elaborate on that a little bit.

Then the second question I have is I think I heard you say in your prepared remarks this morning, as it relates to gender specific, that you expect measurable market share taking growth.

Which I think is a little more of an aggressive statement than you have made in the past in terms of gender specific as a device that can actually lure competing surgeons.

So I was wondering what data points you have at this point to suggest that that is possible, if I heard you correctly.

Yes, let me go to the first one.

The reason I said evolutionary not revolutionary is we have -- when we started the turnaround for Bristol-Myers in '97 we put a plan together that we presented to them that was Educate, Innovate, and Grow.

It became Educate, Innovate, and Integrate when we bought Centerpulse.

So if you look at what we have today, which is Enable, which is kind of like Educate, but it's getting to new audiences and teaching in different ways;

Innovate has not changed at all; and we are back to Grow because, obviously, we have completed the integration.

So the reference I had in the quote was these aren't big moves from where we were, but the underlying tactics we are using -- women's health, smart tools, reaching out and teaching and talking to new audiences -- the underlying tactics are different; but the overall strengths and mandates really aren't that different.

So that was the comment on that.

Bob, I don't have underlying data.

You know, my experience in this business tells me there's few things that move sticky orthopedic business.

Every company has their own, one of those or two of those or whatever it may be.

In our case, I really believe it has been MIS, which I think you will see new things come on.

I think it has been Trabecular Metal.

And I think it will be Gender.

So those three things I attach to us.

The patterns we are seeing in level of interest, the patterns we are seeing in talking with surgeons, the requests we have from competitive surgeons -- not to try one or two, but to try -- seriously lead me to believe that it may have that kind of a potential.

Therefore that is what I commented on.

But because we have not done virtually any competitive surgeries at this point, I can't sit here and say we have converted the following millions of dollars X to Gender.

I'm not in a position to do that, and I don't have the data to do it anyway.

Ray, any update on your plans when you release the CEO position?

Because it is obvious from our experience over the last couple of years and our experience on this conference call that you love the fight as much as you love to win?

So I'm just curious if you have got any formalized plans beyond Zimmer at this point.

No.

I haven't talked to anybody or done anything for the simple reason I'm as busy now as I have always been, and I will be for quite a long time.

So I don't have the ability to really do anything.

I have had some nice calls from people, but I'm not doing anything with it.

The CEO search, just to follow up on Matt's question, no real update there?

We haven't narrowed it down to a couple of candidates?

It is still at the early phases, is that the right way to characterize it?

It's in the normal process of reaching them, talking to people.

It is not at a point that can go beyond that, because they have to do a thorough job of that.

So I don't think -- there is nothing.

Not that I am keeping anything from you; there is nothing really to tell you.

Okay, great.

Thanks for the time.

Steven Lichtman with Banc of America Securities.

Just, Ray, on new products, when do you expect to begin the Durom resurfacing IDE?

You also mentioned a new cartilage product that will be introduced by year-end this year.

Can you expand a little bit on that?

Sure.

The resurfacing IDE begins in the first quarter.

We have done the protocol training on the key surgeons and institutions.

We will do the -- all things -- assuming nothing goes wrong, we will do the first surgeries in this quarter.

Then it will follow hopefully the normal course from that point after.

I missed the second part, Steven because I was writing a note down.

Sorry, can you just give me the second piece here?

Yes, sure.

I think you mentioned a new cartilage product that would actually be released by the end of this year.

What is that product exactly?

Yes, I must missed the word, sorry.

Cartilage.

That is what we call DeNovo NT.

ET is engineered tissue; that is what used to be Neocartilage.

That is the first surgery we just did in November.

NT, DeNovo NT -- as in Norman -- stands for natural tissue.

That is a minimally manipulated tissue that we have been working on for some time, and can be used for filling in divots and various issues relative to cartilage in the knee and so on.

That product, assuming everything stays on schedule, will be third to fourth quarter of this year.

Got it, thanks.

Then any update on an OrthoPAT replacement?

No, we're doing work internally on some ideas we have.

We are down to only one outside vendor.

We were at three, I think the last time I gave an update, if I am not mistaken.

We have eliminated two of those because we don't think they can get there.

So, no; we are down to one outside, one inside.

And none of that is going to be in the real short term anyway.

Okay.

Then lastly, Sam, you mentioned on the tax rate -- you said I think modest improvement in 2007.

Can you characterize that a little bit more?

Are we talking 50 basis points, a little more, a little less in terms of goals for '07?

I think I am just going to leave that modest; because we had been talking as you know, for the last several years, and we overachieved in each of those years, to improve by 50 basis points or more.

But because we had such significant results, lowering our tax rate to 28.2% in 2006, we have modified our wording.

Not to be cute, but just to send the right signal.

So it is modest.

Okay, all right.

Thanks, guys.

Robert Faulkner with Thomas Weisel Partners.

I wonder if you could just comment on hip growth and to what extent there was bone cement that contributed to hip growth.

Bone cement?

I haven't got the dollars in front of me, Rob.

But bone cement is in our hip category, has always been in our hip area.

We had our own bone cement for many, many years.

We still sell it in several countries in the world.

What is different is we have added Palacos, which has given us some uplift there.

I don't have the percent offhand, but I think you were high in your notes I read quickly this morning.

You had too high a number.

You were too low on hips and too high on bone cement.

So I will have to go back and double-check.

I didn't have time this morning to double-check it and get you a real number.

But you were too big on cement.

Okay, that is why I am asking.

Good.

Thanks.

Mike Weinstein with JPMorgan.

Just a couple clarification items.

First, in fourth quarter, do you think that the global recon market accelerated constant currency?

Yes.

So versus third quarter, your math is saying that the market was actually a little bit faster?

Yes, believe it has, as long as we are using constant currency dollars.

Because as you know, Mike, we tend to measure these markets on a competitive basis in dollars.

With Stryker's performance, with putting out their new system, being higher, particularly on the knee side.

But obviously that influences recon.

And our performance ticking up; and a couple people we haven't seen yet, I don't know how it couldn't be an uptick.

Plus my other sense is, talking to surgeons, that the actual surgeries are up a bit.

Their waiting times are a little bit longer, which I put some reasonable stock in.

So I think it has.

But I think we have got two, three other players here we should make sure we listen to as well.

Okay, on a constant currency basis, we're getting flat to slightly down; but we can compare numbers later.

Yes.

Second question, just to clarify, you made your comments on the tax line relative to '07.

Could you comment on the R&D line?

Given that R&D expenditures were flat to slightly down this quarter, what type of R&D growth we should expect?

Yes, I saw that in a couple notes.

Then I get -- I'm nice enough that a couple people copy me on their calls that they put out to investors, so I get to listen to that as well.

It is sort of [all] on the R&D to me, because we are completing everything and doing everything we want to be doing.

I think with Gender really captured in a tighter time frame, about a year and a bit as opposed to two years, I think maybe people are sort of seeing the dollars.

Because we haven't cut back on our R&D spending.

There is sort of this mentality out there that if you are only spending 5%, how can you grow your margins or grow 30%?

Or, isn't the guy who is spending more going to have more sales?

I mean, we produced $828 million on a 5.1% spend rate.

I think the other thing -- and I don't see the drop-through it's producing.

The analysis we do that produces that, I don't see that compared to other companies.

So I don't -- they may be not getting the payback from it.

But one thing that is clear, we grew 12% in the first half as we focused on Gender and several things, getting ready for the big second-half launch.

Then you have got a higher denominator, higher than planned or forecasted denominator, I should say, in the fourth quarter.

So I think that there is nothing special about it.

I think people are just looking at a set of numbers on that basis.

I don't -- I am very comfortable as long as we do some acquisitions to go with it, with the 5% to 6%.

We have very efficient innovation output, and it's proven by the numbers. $828 million and 25% of the sales, you got to be doing something right with that 5%.

I'm sorry, do you think you will grow R&D in line with sales growth in '07, or slower than sales growth?

No, faster.

So R&D will grow above 10% in '07?

As of guidances now, yes.

Okay, just trying to clarify there.

Then in gross margins, which you noted were down this quarter, which is unusual for Zimmer, do we get gross margin expansion in 2007?

I don't know what you mean by down this quarter.

Are you doing it on apples-to-orange basis?

If you do it on the basis of excluding share-based, they're up 10 basis points sequential.

Then, Mike, you have to add in -- although we don't give you those numbers -- we settle hedge agreements there; and that is about half a point because of where the U.S. dollar has been moving around.

So (multiple speakers).

Sorry.

FX was a 50 basis point weight on gross margins, you are saying?

It was about 50 basis points this quarter, so if you look at a fair comparison to prior year, our margins were at 78.6%, 78.7%; and we are happy with that.

Those are good margins.

Okay, and obviously, the dollar benefit wanes on the top line and, of course, margin should look a little bit better as we move through the course of the year?

Fair assumption?

Fair assumption.

And this last item, this is just making sure I heard you correctly, I think this was Sam.

You said that the Centerpulse integration costs were actually a credit this quarter; was that right?

Yes, that's correct.

And how does that get accounted for?

It gets accounted for in the acquisition and integration lines.

We separate it so it doesn't confuse the results from operations.

But what it basically consists of, we have a couple legal matters we inherited with the Centerpulse acquisition that we are able to favorably dispose of.

Plus offsetting that, we had as I mentioned some impairments of a few of the smaller Centerpulse brands -- those are non-cash items -- as well as the more traditional ongoing miscellaneous integration activities for the quarter.

Great, thank you, guys.

There are no further questions at this time.

I will now turn the call back to Mr. Elliott for any closing remarks.

No, that's great.

We actually did make close to record time, which is an improvement of our usual two hours.

Thanks, everybody, for tuning in and appreciate the good questions and the good wishes.

Take care.

This concludes today's conference call.

You may now disconnect.