Zimmer Biomet Holdings Inc (ZBH) 2007 Q1 法說會逐字稿

Good morning.

My name is [LouAnn] and I'll be your conference operator today.

At this time I'd like to welcome everyone to the Zimmer first quarter 2007 financial results conference call.

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

These statements are not guarantees of future performance and involve risks, uncertainties and assumptions 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 been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) I'll now turn the call over to Mr.

Ray Elliott.

Sir, you may begin your conference.

Great.

Thank you, LouAnn.

Good morning, everyone.

Welcome to the Zimmer first quarter 2007 conference call.

We're pleased to be hosting this call to discuss a good earnings quarter, including our highest reported and constant currency revenue growth since the fourth quarter of 2005.

We indicated again in our year end report that we believe that mid 2006 was the bottom of the sales cycle and that remains our opinion today.

For good reason, our improving sales performance included double-digit growth in the Americas for the first time since the second quarter of 2005.

The Americas notably had a balanced 10% growth in both hips and knees.

Globally our 9% constant currency growth in reconstructive was led by Gender Solutions Knees, including more than 14,000 units implanted.

This was 20% higher than our increased target, 44% higher than our original aspirational goal of 10,000 units for the period and a sequential quarterly increase of 51%.

Asia-Pacific delivered a nice performance with a 6% constant currency growth when the negative 6.2% anticipated price decline and 4 less billing days in Zimmer's second largest market, Japan, are taken into consideration.

Europe delivered a solid 5% growth, despite being a billing day short in several major country markets.

Globally we sold a record $51 million in Trabecular Metal up 44% from prior year same period.

These are all very positive outcomes in total when combined with continued excellent Dental results, but somewhat stagnant Trauma and Spine growth.

The latter to be measurably improved by the addition of the Endius acquisition, our new Anterior Cervical Plate and some first half regulatory relief in Japan for our St 360 Pedicle System.

As noted in our press release, relative to the guidance previously provided, we overachieved our sales by $18 million.

On the surface, this appears to be good, but more importantly, the underlying constant currency overachievement was $16 million, with only $2 million attributable to foreign currency.

Margins continue to expand, taken to the first decimal point at 78.3% gross margin was in fact an all-time Zimmer record.

Adjusted operating expenses were managed well below sales allowing adjusted operating earnings to grow at a rate almost 40% faster than sales.

Despite the usual first quarter tax obligations, operating cash flow once again exceeded $200 million and represent a 90% plus conversion rate from net earnings.

We continue to repurchase stock with more than 2 million shares in the quarter.

Our repurchase program in total has now reached 14.2 million shares, or about 6% of the original outstanding fully diluted common at an average price of $68.59, or a nice 23% discount to the most recent average ZMH daily quotes.

Fully diluted reported and adjusted EPS in the quarter grew by 20% to prior year.

We were honored recently by Forbes magazine, along with competitor Stryker in their newest award, champions of the world.

I know what you're thinking.

Don't blame me.

I did not make up the reward's name.

Having said that, Forbes started with their global 2000, the largest 2,000 public companies in the world with a minimum requirement of $1 billion in sales and a $5 stock price.

Companies were then compared for long and short return on equity, sales growth, profit growth, return to shareholders and a variety of other financial metrics.

Thomson IBS, audit integrity, S&P's net advantage and value line all assisted in further weeding out companies with accounting, earnings quality, or corporate governance issues.

Amazingly from a starting list of 2,000 companies, 93% were eliminated and only 130 companies succeeded and survived, including 5 in healthcare.

Coventry, Humana, our friends at Stryker, Varian and Zimmer, our thanks to the folks at Forbes.

Lastly in the opening remarks for those of you who feel compelled to ask during the Q&A session, our CEO search remains both thorough and on schedule for completion in the first half of the year.

With those 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 and Worldwide Operations and Controller.

We'll begin today's detailed discussion with comments related to our first quarter 2007, including an update on operations followed by Q&A.

All comments and comparisons are on an adjusted basis.

Further all adjusted commentary excludes acquisition and integration expenses.

We'll focus most of our attention on constant currency revenues.

With the anniversary of its utilization complete, it is no longer necessary to refer to the inclusion of FAS 123R share-based payment for comparative purposes.

Thank goodness for small accounting policy blessings.

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

Consolidated sales for the quarter were $950 million reported, an increase of 10% to prior year and 8% constant currency.

And above the street expectations by about $16 million with favorable foreign exchange to most recent management guidance only contributing about $2 million.

More importantly, the reported growth rate reached double digits and constant currency rates continued to trend above the prior quarters.

For the first quarter growth rates in the Americas, for both total and reconstructive sales, were 100 basis points or better sequential improvements from the fourth quarter 2006.

Our company's global reported sales for the last four prior quarters on a per billing day basis were $13.9 million in the first quarter of 2006, $14.2 million in second quarter 2006, $12.9 million in the third quarter, and $14.8 million in the fourth quarter, and just under $15.5 million this quarter, an 11.2% day-rate increase to same quarter prior year.

Our three geographic segments, Americas, Europe and Asia-Pacific all performed well when Japan pricing and worldwide billing days variations are considered, growing at 10%, 5% and 6% constant currency respectively in the quarter.

We believe on a weighted basis for our combined Zimmer serve markets our 10% reported growth combined with 11% reconstructive growth will prove to be at or slightly above market for the quarter in both categories, but trailing the market for the quarter in Spine and Trauma.

As mentioned, our worldwide recon sales grew 11% reported and 9% constant currency with the Americas at 11% growth, better than what was expected, particularly in light of the introduction of Japan pricing adjustments.

For a little more granularity, we belive worldwide constant currency recon market with much of the market reporting grew this quarter at 9% or better.

Unlike much of 2006, we believe there is an uptick in recent elective surgical bookings domestically.

In our case specifically, the extension of key Zimmer surgeon waiting periods or lead times for hip and knee replacement generally a good sign commercially, gives us increased optimism, albeit anecdotally.

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

Our latest strategic plan review of the serve 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 of 8% to 10% ex currency.

In the U.S.

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

We noted with interest recent published reports of potentially negative surgery growth in the U.S.

hips and knees during 2006.

The referenced public release data though can be notoriously unreliable, particularly at the early stages.

It often includes only 5 or 6 states, forcing 90% extrapolations without data, definitely doesn't include private pay, a crucial omission, and does not consider all the future variables and current trajectories.

In theory with just 5 states and no private pay and all other factors ignored, you are mathematically looking at only 6% of all national results.

In any event in our case, the conclusion is simply directionally wrong.

While we do not disclose pure volume alone, primarily because we do not want pure mix data in the market, I can tell you that unit surgical volumes of hips and knees for Zimmer in the U.S.

during 2006 were positive versus 2005 and the same is true for first quarter 2007.

Zimmer's only 30% of the market and therefore real verification requires asking others the same question.

Either way, the answer is good for us.

If the rest of the market is negative, we are winning the battle in the operating room.

If the rest of the market is positive and the data completely wrong, then the orthopedic sector should be an overweighted part of everyone's portfolio, but I digress.

Back to sales growth, Zimmer hips in the quarter grew by 8% reported and 5% constant currency.

In a market growing at approximately 7%.

Our Americas constant currency hip growth improved once again to double-digit or from 9% last quarter to 10% this quarter.

But at 8.5% negative hip price adjustments in Japan, the global hip total declined to the aforementioned 5% constant currency growth.

Given the releases of Trabecular Metal stems, the TMS Tabular Revision System, The Epic 2 Stem, 510(k) approval for large diameter Metal-on-Metal, Advanced Polys and the advent over time of Gender Solutions hips, combined with MIS, we are very comfortable with our go-forward hip strategy, with or without near term resurfacing.

Zimmer knees supported by early results from Gender Solution surgeries grew at 11% reported and improved to 9% constant currency in a worldwide constant currency market growing this quarter at about 9% to 10%.

Our Americas segment, as mentioned, accelerated to double digit growth.

Global knee sales were clearly negatively affected by Japan pricing and billing days, where we are by far the knee market share leader combined with considerable unmet needs amongst the U.S.

female target population for broader availability of the Zimmer Gender Solutions brand.

In many U.S.

and most international occasions and with many, many surgeons we are still unable to supply.

We are producing at our current maximum of 180 Gender sets per month, with expansion plans being rapidly executed.

The real issues for us, how soon can we meet the growing target of real Gender need demand and how much will Gender drive worldwide knees over the existing base growth rate 7% to 8%.

At least in part, the answer continues to be self evident this quarter.

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

As a reminder again, 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 down classification progress.

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

Zimmer's 8.1% constant currency worldwide sales increase was up sequentially by 50 basis points and up 80 basis points from our 2006 first quarter's 7.3% growth.

The increase was composed of volume and mix growth of 8.3% and basically flat price at negative 0.2% inclusive of Japan.

Excluding Japan our global price was positive 0.3% for the quarter.

The 8.3% volume in mix growth is a big 150 basis points higher than the first quarter 2006 and a sequential increase of 110 basis points.

Worldwide price had a 60-basis point decline for Zimmer versus the prior quarter.

The Americas price remains firm at positive 1%.

We continue to expect Japan to be negative 3.5% price for Zimmer on a full calendar basis and we have consistently incorporated this thinking into our guidance.

In Europe, price remained consistent at negative 1% with Germany improving price to negative 3.5% after spending most of last year at nearly negative 4%.

During the quarter France remained slightly positive in price with still no broadbased introduction of GRGs to replace the tips program.

The UK pricing continues to improve substantially from 2006 third quarter at negative 6.9% to negative 1.6% in the fourth quarter 2006 to actually flat in the first quarter of 2007.

That's a significant positive trend in a relatively short space of time.

Actual UK units of surgery have also increased slightly and the average waiting time for a hip through the British national health system has decreased.

Offsetting the gains in the UK, Italy and Spain have declined in price a little, but in the case of Italy, the decline only represented the temporary imbalance of private versus public hospital surgeries in the first quarter.

European price in total for Zimmer in the quarter registered once again at negative 1.0%, almost exactly the same as the last several quarters, but each time with a slightly different country mix.

If the current trends continue with Japan and Europe at low to mid single digit price reductions, worldwide price for Zimmer in 2007 given our geographic weightings and known U.S.

contracts should be flat to slightly positive and stable.

I'll provide some detail geographic and product sales analyses in a few moments.

Adjusted earnings per share for the first quarter 2007 were $0.98 on 239.2 million average outstanding diluted shares and reported EPS were also $0.98.

For the quarter we delivered a reported and an adjusted diluted EPS increase of 20% over prior year.

These results are $0.05 better than the First Call consensus EPS estimate of $0.93.

During the quarter as previously mentioned we utilized our share repurchase program to buy back approximately 2.1 million common shares, as measured by settlements at an average price of $83.18 per share and utilized $173 million in cash for those transactions.

For the quarter we delivered a reported and adjusted diluted EPS increase as I mentioned of 20% over prior year.

These results $0.05 better than First Call and the share repurchase program had a favorable contribution to adjusted diluted EPS of just 16/100 or a little over 1/10 of $0.01 when you account for lost interest income and the average shares are added back and weighted in a manner consistent with our actual repurchase dates.

Therefore our adjusted EPS of $0.98 remains a fair representation of our period sales and operational performance.

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 was an all time record 78.3%, up another 50 basis points from the previous quarter's 77.8%.

Positive first quarter mix relative to the Americas and the recon category offset by Japanese price changes account for most of the improvement.

The remainder of the P&L analysis will continue on an adjusted basis.

For the first quarter SG&A expenses and total operating expenses totaled $362 million and $414 million and as a ratio to sales were comparatively very good at 38.1% and 43.6% respectively.

SG&A and operating expenses were both 80 basis points better than a strong first quarter 2006.

At 8% growth on a reported basis versus 10.4% growth in sales, SG&A was once again substantially below revenues, in this case at 240 basis points better.

Our R&D investment growth rate was essentially equal to sales growth, therefore the total operating expense growth of 8.3% matched up favorably to the 10.4% sales growth.

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.

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

During the first quarter, R&D spending totaled $52 million, a ratio to sales of 5.5%, but increasing by over $6 million in absolute terms from the fourth quarter 2006.

We continue to be a proficient and efficient innovator.

During 2006 and early 2007 we doubled our biological personnel and project-related investments while simultaneously signing several exclusive relationships.

Early in May we will celebrate the opening of our new 100,000 square foot $24 million addition to our Warsaw based west campus R&D facilities with 70 additional new science positions and 108 active development projects.

A week ago Saturday in Warsaw, Zimmer's latest job fair attracted 2,000 potential applicants with the line-up to apply nearly a quarter of a mile long, two hours before we opened, and in windy, subfreezing temperatures, no less.

Along with Gender Solutions performance in the quarter we are thrilled by our additional cartilage replacement clinical trial surgeries, patient enrollment additions and continuing, but early, positive results from the first patients in November.

Late this year we hope to release to the market DeNovo MT, 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.

During the quarter, Standard & Poor's increased our debt rating to A minus from BBB plus, nice, of course, thank you, Standard & Poor's, but not reflective of our desire to be a 30% or so debt to cap ultimately by adding correctly valued acquisitions that fit our strategic initiatives.

Adjusted operating profit in the quarter was very strong at $330 million, consistency matters.

This is the tenth consecutive reporting period that we have produced at or more than a quarter of a billion dollars in operating profit and this time as with last quarter we were way over.

Our operating profit to sales ratio at 35% delivered an increase of 110 basis points from first quarter 2006.

During the quarter we believe that we have once again one of the highest operating margins in major medical devices.

As we mentioned so many times, the Zimmer construct that we have today was modeled during the late '90s turn around to register approximately $0.40 to $0.50 of operating profit for each new sales dollar.

We have of course benefited from higher drop-through rates during the Centerpulse integration.

In the first quarter of 2007 we recorded $41.2 million more operating profit on $89.8 million more in sales, or just over the midpoint of our target range this quarter at $0.46 of operating profit on every new dollar of sales.

The $0.46 this quarter included an increase of over $4 million of DTC spending from prior year, compounded by over $4 million decline in pure price in Japan from prior year.

In other words, positive or negative period swings, in this quarter negative, simply has not disrupted the outcome of our 10-year-old profit model.

We continue to read occasional financial notes that are $0.40 to $0.50 may not be doable in the future.

These notes seem to completely ignore the remaining magnitude of our opportunities.

Mix, scalability, annual COGS improvements through automation and vertical integration and substantial G&A leverage to name but a few.

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

10 years of history remains on our side.

EBITDA dollars in the first quarter climbed to $383 million and continued to register at 40% or better as the ratio to sales this quarter at 40.3%.

Up 140 basis points from the prior year period.

Adjusted net earnings in the first quarter continued to perform well at over $235 million, up 15% to prior year, and for the second consecutive period at or above a 25% ratio to sales.

Our 2007 tax rate improved from first quarter 2006 by 50 basis points, to 28.5%, but was up slightly from the full year 2006 due to the mix of sales sourced from higher tax jurisdictions.

Of course the same jurisdictions such as the U.S.

may carry a 5% to 8% higher operating profit to sales ratio.

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

New products, including Gender Solutions Knees, Trabecular Metal, Metal-on-Metal all delivered and helped to create a double-digit sales performance for the first quarter of 2007.

Our Zimmer financial model continues to deliver earnings leverage that is well above our competitors in the medical device market.

We believe that the model works because we are, as our annual report notes, different by design.

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

Cash generation as always remains fundamental to our strategy.

We had another excellent operating cash flow quarter, registering $213 million.

Measured against net earnings, these results demonstrate more than a 90% to cash conversion ratio from net earnings.

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

In short, over those same three years, pretty much $1 out of every $3 of sales has turned into $1of operating cash flow.

Free cash flow in the quarter was also outstanding at $160 million, particularly when you include the assumption of an additional $34 million invested in instruments and $19 million to collectively complete our Warsaw R&D west campus and other expansions.

At the end of the quarter we had $326 million of cash and equivalents on hand.

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

And an additional $1 billion was authorized in December 2006 for execution through year end '08.

As we have communicated previously we expect the funding of acquisitions to be the primary use for free cash flow, but share repurchases clearly does provide yet another option to enhance shareholder value.

Shareholder equity has increased from zero at the spinout to over $5 billion today or said differently, almost $1 billion in new equity per year of public life, and this has been accomplished, despite the offsetting accumulation of almost $1 billion in treasury stock through the share repurchase program.

Our first quarter combined working capital statistics continue to perform well and consistent with the large number of new product launches under way.

We normally expect an increase in inventory days early in the year, but particularly with new product builds higher than ever and some potential competitive gain requirements, this time increasing inventory, but by only two days from prior year to 287.

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

In the first quarter globally at 59 days, although up two days we are still meeting our aspirations of 60 days or better worldwide.

We should point out that the two days relate more to the calculation than the collection.

In periods of rapid foreign exchange movement, accounts receivable days are reported as of a point in time, while sales are measured using the average rate for the quarter, thus somewhat artificial days inflation.

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

During the first quarter, worldwide reconstructive sales increased to a record $798 million, an 11% reported increase over prior year and 9% constant currency.

Knees grew 11% reported and 9% constant currency while hips grew 8% reported and 5% constant currency.

We expect the worldwide recon market to be up about 9% to 10% constant currency in the first quarter.

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 9% constant currency versus prior year to $408 million, or more than a $40 million absolute reported increase.

From a brand point of view our NexGen LPS-Flex continues its outstanding 4 year trend, with an 89% constant currency increase to prior year same period.

But obviously from the size of the gain, you can tell that it's now inclusive of LPS-Flex Gender.

LPS-Flex and CR-Flex femoral components alone are approaching $90 million of sales for the quarter, but Flex itself is still under 40% of total Zimmer knee femorals.

The premium received in the market for Flex and incrementally beyond Flex for Gender remains an exceptional mix opportunity.

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

Once again, more premium mix.

A legacy Centerpulse NX knee, well regarded in European mobile bearing circles delivered excellent growth of 19%.

Our new Zimmer Uni, the industry's first high flex single compartment knee increased unit sales by 18% to prior year.

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

Prolong, highly Crosslinked Poly Knee Articulating surfaces, have more than quadrupled last year's sales, thanks in part we believe to competitive advertising.

Prolong was released more than three years ago and is the only new generation knee polyarticulating surface without free radicals and therefore very limited oxidation risk.

All this talk about new competitive knee poly, has caused people to take a real look at the underlying science.

We are appreciative of the beneficial attention.

Our new MIS Stem Tibial Plates, the only product of its kind that can be assembled inside the patient quickly jumped from its recent launch to first quarter 2007 sales of over $6 million, up over prior year by 71% to become a $25 million annualized brand.

Trabecular Metal Tibial Trays have continued to take share.

TM Tibial Trays alone reached over $11 million in sales this quarter up nearly $1 million sequentially from prior quarter and our new TM knee augments quickly reached over $1 million in sales.

As mentioned earlier Trabecular Metal sales in total were up 44% for the quarter to reach over $51 million.

Progress in the Zimmer Gender Solutions knee for females is taking our breath away.

That is, by the way, verbatim, the same sentence we wrote for last quarter's conference call.

In the first quarter, 14,427 Gender Solutions knees were implanted, without several territories of the U.S.

and very little of Europe and Asia fully participating.

That's a 51% sequential increase versus fourth quarter.

If 10,000 units, our original aspiration would have been a rocket ship in new technology performance what exactly does 14,427 mean?

It's actually a rhetorical question.

Strangely enough for us it means we can't even fully supply our own surgeons.

We are performing full out, but with near term production expansion on the horizon, those numbers should increase.

Hopefully we can breathe again.

Here's just a few quarterly Zimmer Gender knee highlights to think about, we released almost 900 sets in the quarter alone, bringing our total to 2,420 sets.

Our average selling price in the Gender Solutions femur is still more than the standard high flex femur.

Our media outreach campaign since the beginning of the year translation costs us virtually nothing, has resulted in 38 million impressions including feature articles in Family Circle and Reader's Digest, along with TV programs on Fox News, ABC, CBS, NBC and, of course, the much required Wall Street Journal story.

All combined, the viewers and circulations are in the multimillions.

We have delivered only 20 modest Gender Solutions dinner meetings in March, but they attracted over 600 competitive surgeons, despite the fact they know we can't immediately supply them.

We have held over 40 meetings with senior hospital public relations and marketing personnel in our targeted metropolitan areas alone, with almost every group registering with zimmerresources.com, a firewall vehicle created by us for the local download of high quality ready to use advertising campaign materials.

During the quarter, television ads with the blue ladies ran in New York, Chicago, Philadelphia and San Francisco with 20 more metropolitan target areas to be added in the second quarter.

In New York alone, we are generating over 200 calls per week on average to our new Zimmer Gender Call Center.

Based upon our data tracking system, 85% of the callers ask us to help them find a Zimmer surgeon close by and 70% agree to a personal follow-up from us on their future action taken.

In the last three weeks of March alone, 63,000 visitors went to our new internet site, genderknee.com, with 7,000 of those visitors clicking through to our find-a-doctor section.

Visitors to genderknee.com from only January to March total almost 200,000 people.

Given the usual lag between television work and actual surgeries, we don't believe our first quarter sales of over 14,000 Gender knee implants include many of the patients derived from our major DTC campaigns.

However, our prior pilot markets are showing nearly a three-fold growth in unit volumes with Gender Solutions versus their most recent unit growth history.

Speaking of the blue ladies and the Gender knee, we have been notified that we have won the 2007 Golden Trumpet award, the most prestigious PR award for Chicago in the Midwest.

The National Public Relations Society of America, the PRSA, has notified us that Gender Solutions campaign is one of the three healthcare finalists for the 2007 Silver Anvil, the most prestigious national award in public relations and the National Direct to Consumer Association has notified us that the blue ladies in the art gallery is a finalist for the best medical device consumer advertising campaign.

One last thought on Zimmer Gender Solutions, if our Gender and female knee is truly just great marketing, an insult we could live with, by the way and it's all just a fad to be ignored, then why for the first time in history have all four of our major competitors put a famous or politically correct solitary female on the front covers of their annual reports?

Coincidence, you may say?

Could be.

But I think it's something far more insightful and devious.

Maybe the competition knows Gender is a winner and down deep they really just want to somehow find a small way to be a part of it all.

We actually think they will be a part of it all, but just not the part they wanted.

They can, however, take solace in the deep conviction that it's better to give than to receive.

And remember what was said this day, because give, they will.

Let's switch to hips.

On a worldwide basis in the first quarter, hip sales were $317 million, up 8% reported and 5% constant currency.

The rates are down less than 50 basis points each from prior quarter and more reflective of Japan and Germany relative hip pricing adjustments than anything else.

Porous stems and MIS surgery are at this stage receiving new life from TM stems, epic stems, Metal-on-Metal, along with our new anterior lateral, posterior lateral and anterior supine MIS techniques.

We're very encouraged with our hip brands.

Our enthusiasm is based on the potential breadth and impact of both MIS and Durom Hip Resurfacing, Trabecular Metal, Metal-on-Metal, Advanced Polys and ultimately Zimmer's Gender hip solutions, including the ML with connective technology and the patented VerSys Epic Composite Stem both for females.

This week we completed very successfully, our first Gender hip surgeries with patients using connective technology.

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

These stem families grew by nearly 33% bringing the combination this quarter to over $40 million in sales.

Early in its release the Trabecular Metal stem has already become a $25 million annual brand.

In Europe, the popular CLS Paterno increased by 18% in the quarter to attain $50 million annual brand status.

In Acetabular cups, Trabecular Metal modular and Durom continue to perform extremely well.

Trabecular Metal Cup sales increased to almost $17 million in the quarter, an increase on a large base of almost 20% from prior year.

The Durom Acetabular component alone doubled to over $10 million in quarterly sales with Metasul technology driving substantial Metal-on-Metal articulation growth.

As you know, we have received conditional approval from the FDA to proceed with our U.S.

resurfacing IDE, utilizing our Durom brand and importantly we hope to receive 510(k) approval for the Durom femoral component in the next few weeks.

Approval for the Durom Acetabular component was previously received.

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

Premium price longevity in Durasul highly crosslinked polyethylene liner units increased again above the hip market growth and when annualized deliver over $100 million per year in sales.

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

During the quarter bone cement sales increased by over 25% to prior year.

Our reasonable conclusion is that our hips category is sound.

Total Zimmer extremity sales grew well above market at 30% constant currency in the quarter after a 24% growth last quarter.

As with prior year our Trabecular Metal Shoulder -- excuse me, as with prior quarter our Trabecular Metal Shoulder Stems and reverse and inverse shoulders are leading our performance.

To complete our reconstructive discussions, Zimmer Dental had another very successful quarter with sales reaching $49 million, up 22% reported and 21% constant currency.

The dental business showed very positive performances in all three geographic segments with the Americas, Europe and Asia-Pacific up 19%, 12% and 46% in constant currency respectively.

Dental implants increased by 20% constant currency and prosthetics by 15%, while dental regenerative graft sales including our new biological graft, Puros, were especially strong and up 42%.

We will continue to move into biologics, computer assisted digital technology and of course value-added education, with our new dental Zimmer Institute in California.

On a worldwide basis in the first quarter, Trauma sales were a disappointment at 7% reported and 6% constant currency to reach $50 million.

Worldwide Trauma market in general appears to be at low to mid double digit growth and while we're making progress in the Americas with double-digit growth we will need to make more progress in Europe at 6% and Asia-Pacific at minus 4%.

In fairness, the latter due to substantial price reductions in Japan and not lost market share.

We have started to deliver some great new products with expanded field releases of our new locking universal plates, as well as the NCB, our plate and screw sales in the quarter increased by what we would expect is a market-leading 22%.

But nails were up only 2% and impacted extensively by price and competitive offerings.

As we convert to new products from old and deliver innovative solutions, results should improve.

Our Zimmer Spine Division sales was the same good news/bad news story again as last quarter with the same increase of 8% reported and 7% constant currency to $47 million.

The bad news is that cage sales were light at only a little over $5 million, they are now approaching only 10% of total Zimmer Spine sales and a temporary registration issue with our Pedicle screw system in Japan hurts us by over $1 million in sales per quarter.

Excluding spine ortho biologicals it is clear that the spine market is growing at about 11% to 12%.

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

Dynesys our dynamic stabilization system reported sales of over $15 million in the quarter and despite difficult comps was still up 20% constant currency over prior year.

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

market.

When combined with almost $5 million of Spinal Trabecular Metal, these two technologies delivered $20 million in sales during the period or almost 4 times the contribution of cages.

With the addition of the TiTLE, Atavi, and the (Peak) spacer product lines from the Endius acquisition and our new anterior cervical plate in combination with Trabecular Metal, Dynesys and anticipated biological acquisitions we should be able to create a globally competitive spine business with substantially improved sales growth from this point forward.

In orthopedic surgical and other products, sales increased slightly from prior year to $52 million on a constant currency basis.

Obviously the OrthoPAT comparison anniversaried out of our results at the end of February.

On a product line basis, wound management grew by a reported 13% and power tools and consumables up 22% both above market.

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

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

As mentioned previously, we sequentially increased R&D spending in the quarter by more than $6 million.

We have 108 active new product development projects, including 18 new projects just initiated.

We currently have 23 active hip projects, 19 in knees and 21 in trauma and have increased the number of spine new product development projects to 18 excluding Endius.

2007 will feature another 20 or so key new products, but with a little better rollout balance than we demonstrated in late 2006, primarily due to the level of early activity devoted to Gender Solutions.

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

That number easily exceeded our expectations for the first quarter of 2007.

We have averaged about 19% to sales per year for the prior 8 years.

New product sales for the first quarter of 2007 were a record $231 million, or 24.4% of sales.

Let's look briefly at the geographic segments.

First, in the Americas, Zimmer Americas had a very good quarter with some expanded ability to sell both Gender knees and excellent utilization of Metal-on-Metal sets.

Pure price was successful again at approximately 1% positive.

Americas revenue for the quarter was a record $568 million, the fifth consecutive time we have reached or exceeded the $0.5 billion mark and up 10% constant currency over prior year.

The Americas reconstructive sales growth in the quarter was up 11% constant currency, and delivered $465 million, a third consecutive quarterly sequential growth rate improvement.

We believe that this 11% growth is at or slightly above market.

In our Americas reconstructive category, knees had a 10% growth to a record $263 million annualizing for the first time individually as a $1 billion business and at an absolute sequential quarterly increase of $22 million.

NexGen LPS and CR-Flex, especially Gender, the new High Flex Uni, Trabecular Metal Tibial components and the new MIS Stem Modular Tibial all made substantial contributions to Americas knee performance.

Hips in the Americas also increased 10% to $156 million and once again at or above market with domestic hip growth figures likely at 9% to 10%.

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 very pleased with the Americas hip and knee sales growth balance, with both categories at double digit.

Our dental business in the Americas grew at 19% in the quarter to $28 million and a sequential growth rate increase of 3 full points.

The Americas total operating profit in the first quarter 2007 was a record $297 million, with an excellent operating profit to sales ratio of 52.3%.

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 appears to be a somewhat more difficult European medical device market.

In the first quarter, European revenues were $259 million, up 13% recorded and 5% constant currency.

As has been noted by others, several major European markets had one less billing day in the first quarter 2007 versus 2006 and as mentioned previously, price decline in Europe for the quarter remains stable at approximately negative 1%.

Reconstructive implants in Europe delivered sales of $234 million in the quarter, an increase of 4% constant currency, but up almost 10% sequentially from the fourth quarter on a per billing day basis.

European hips were negatively affected by German and Italian pricing changes and the anniversary effects of a few remaining surgeon desynergies but despite all these circumstances stayed much to our surprise in positive territory at 1% constant currency growth and notably about the same as the prior two quarters on a day-rate basis.

Knees grew a solid 7% constant currency up from the prior quarter by 1 full point of growth sequentially.

Positive gains in the quarter reflecting the continuing acceptance of both Durasul and Longevity Highly Crosslinked Polys.

The growing use of Durom and Trabecular Metal, as well as ongoing market share gains for the NexGen and Innex knee brands including the extremely limited, but nevertheless enthusiastic availability of Gender Solutions.

Our Europe dental business grew by 12% constant currency to almost $13 million in the quarter.

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

South Africa, Russia, the Middle East, eastern Europe, Portugal, Belgium, The Netherlands and Austria all grew constant currency sales for the quarter at high single digit to mid double digits.

But we were very pleased to report that they were joined this quarter by the UK, returning to prominence at 11% constant currency growth.

Germany, Italy, Switzerland and Spain all remained in positive sales growth territory.

For the quarter Europe delivered operating profits of $112 million and operating profit to sales ratio of 43.4%.

In Asia-Pacific, revenues in the first quarter were $124 million, an increase of 7% reported and 6% constant currency.

These are reasonable results considering Japan's negative 6.2% price in the quarter.

We believe that the Asia-Pacific reconstructive market is growing at 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 first quarter excluding price was approximately 6% and above market.

In the quarter our combined Asia-Pacific businesses delivered reconstructive growth at 7% constant currency to $99 million in sales.

We expect Trabecular Metal Tibial components and NexGen LPS-Flex and CR-Flex knee along with the strength of the Centerpulse Natural Knee will continue to (inaudible) Asia-Pacific's knee performance, this quarter up a solid 11% constant currency despite very limited access to Gender Solutions knees, with meaningful availability in fact only in Australia.

A new Japanese hip, some hope for Trabecular Metal regulatory approvals and MIS-driven expansion will help to further grow our hip performance which this quarter softened to minus 1% constant currency growth solely due to the Japan pricing changes.

While our dental business is small in Asia-Pacific, it did deliver another very strong 46% sales increase.

Virtually every country's specific constant currency growth rate was good with Korea at 19%, Hong Kong at 20%, India, Thailand and Malaysia were all above 40% growth, Australia and New Zealand rebounded to 12% growth and Taiwan to 11% growth.

The Zimmer Asia-Pacific businesses delivered $59 million in first quarter operating earnings and a 47.3% operating profit to sales ratio.

Well, that covers the key components of our business in something close, at least for me to record time.

It's not clear yet that this is my very last occasion as the leader of Zimmer's quarterly conference calls, but it is very clear that I am a slow learner.

I'm embarrassed to tell you it has taken me 24 consecutive quarterly tries to actually contain my comments to at or below one hour.

Miracles will never cease.

I've always felt that our first job, of course was to perform, i.e., run the company well, make money for shareholders and obvious enough responsibility.

We want it to be the best.

When it came to public communications we had in some ways even higher goals, not only to inform, or to raise the bar on the level of disclosure, but also to entertain, to take the activities of our business competition and with conference calls, investor meetings and interviews put a fire under what can be mundane, if not repetitive details.

We hope we have succeeded over the last six years.

Sam, what are your thoughts on the quarter?

Thanks, Ray.

I'll add some details to a few key areas.

In the interest of time, as we've done in past quarters, on this call we will not provide the first quarter breakdown of price, volume mix, foreign currency and constant currency contributions to both geographic and product sales growth, but instead, this information will be available on our website immediately following this call.

In the first quarter, the contribution of foreign currency to sales growth was positive 2.3%, or about $20 million.

This was within $2 million of the expected contribution from foreign currency that we included in our first quarter guidance that we communicated during our year end earnings call on January 30.

In our revised sales guidance, which I will be addressing shortly, we have assumed that the U.S.

dollar will hold at the average rates experienced in the first quarter of this year.

If the U.S.

dollar holds at this average rate, the contribution of foreign currency to sales growth for all of 2007 should be favorable by approximately $32 million, or 1%, with $7 million in the second quarter, $3 million in the third quarter, and $2 million in the fourth quarter.

The U.S.

dollar continues to be volatile and has weakened a bit more since March 31 of this year.

Because the level and the direction of this volatility of the U.S.

dollar is difficult to predict, we have not included the most recent movement of the dollar in our revised guidance.

As I mentioned during our year end earnings call, although the vast majority of the integration activities relating to Centerpulse and Implex acquisitions are behind us, a few items such as continued manufacturing insourcing and some minor warehouse consolidations in a few countries still remain and are targeted for completion in 2007.

Also as stated in previous calls, systems integrations and conversions should be completed throughout 2007 and 2008.

The only debt we have in the books is $100 million in Japanese debt because it carries a very low interest rate and then our continued strong operating and free cash flow, we have accumulated $328 million of cash on the balance sheet, subtracting out the $100 million of Japanese debt we have a positive net cash position of $228 million.

In the quarter we recorded $300,000 in minority interest expense related to one of our small European subsidiaries.

All references to our effective tax rate will be on a adjusted basis and the effective tax rate for the first quarter was 28.5%.

This is slightly above the full year 2006 ETR of 28.2%.

Principally due to the mix of taxable earnings.

The strength of our Gender knee sales and margins has been almost entirely in the U.S.

and as a result, the contribution of U.S.

pretax earnings as a percentage of our total pretax earnings is higher, putting some upward pressure on the ETR.

This is a high class problem to have in the short-term.

When we begin to penetrate international markets with our Gender products.

particularly those that we manufacture in Winterthur, Switzerland, we should see some relief.

And also as we increase both Puerto Rico and Winterthur production we should see the benefits in our tax rate.

I would also like to make a few comments on our January 1, 2007 adoption of FIN 48, accounting for uncertainty in income taxes.

This is the new accounting standard for the recognition of liabilities necessary for income tax exposures.

The adoption had no material P&L effect in the first quarter.

The adoption effect of FIN 48 is reflected through retained earnings and required certain balance sheet reclassifications, which are summarized as follows.

Retained earnings was decreased by $5 million.

Goodwill was decreased by $61 million to reflect the more likely than not standard applied in FIN 48, as compared to the more conservative standard used for the historical tax exposures for Centerpulse and other acquisitions.

FIN 48 also requires that the balance sheet disclosure for tax exposures be recorded gross instead of historical net presentation.

And as a result, some significant balance sheet reclassifications were recorded as of Q1 of this year, most notably the creation of a tax receivable to reflect the tax offsets associated with the gross liability for uncertain tax positions.

As I mentioned earlier, the ETR impact of FIN 48 is immaterial.

In summary, taking all things into consideration, as you develop your models for the balance of 2007, an effective tax rate of approximately 28.5% would be a reasonable assumption to make.

Capital expenditures for the quarter were $53 million, consisting of $34 million for additional instrument sets and $19 million for all other property, plant and equipment fixed asset additions.

Depreciation expense was $40 million.

And as a result, the Centerpulse and Implex acquisitions and the related $596 million of amortizable intangibles recorded at the time of those acquisitions, amortization expense in the first quarter was $14 million.

We repurchased 2,083,800 shares of Zimmer common stock during the first quarter at an average price of $83.18.

The shares repurchased in the first quarter had no meaningful effect on earnings per share in the quarter as Ray mentioned earlier.

Since inception, through the end of March of this year we have repurchased 14,229,629 shares at an average price of $68.59, which is 23% below our current stock price for a total cash outlay of $976 million.

This leaves us with the opportunity to spend the remaining $1.024 billion from the 2 previous board authorized share repurchase programs by the end of 2008.

Now let's look at guidance in our press release last night, we provided an update to our 2007 sales and adjusted earnings guidance.

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

As a result of our strong first quarter, we are increasing our 2007 full year sales guidance by $34 million to $3.885 billion and 11% over prior year.

10% of this growth is expected to come from the combination of price, volume mix, while only 1% is expected to come from foreign currency.

This compares quite favorably to the full year 2006 sales growth of 7% from a combination of price, volume and mix, and negative 0.3 of 1 point from foreign currency.

This $34 million increase incorporates our $18 million of overachievement from the first quarter and also increases Q2 by $5 million, the third quarter by $5 million and Q4 by $6 million.

As a reminder, our FX assumption is that the average rates experienced in the first quarter will remain in effect for the balance of the year, even though in the past few weeks, the U.S.

dollar continued to weaken, but remains volatile and subject to major swings up and down.

We are also increasing our full year 2007 adjusted earnings per share guidance by $0.07 to $4.02 or 17% over 2006.

This incorporates our $0.05 overachievement in the first quarter and as $0.03 of operational improvement in the last three quarters, partially offset by $0.01 dilution from the acquisition of Endius.

The second quarter therefore remains unchanged and we have increased earnings per share guidance by $0.01 each in each of the last two quarters of 2007.

So in summary, we are very pleased with the first quarter, as we continue to demonstrate our ability to generate excellent sales and earnings per share growth under a variety of different business conditions.

We exceeded First Call consensus sales by $16 million and adjusted earnings per share by $0.05.

In addition, the strength of our exciting new product continued to deliver on our top line and -- as well as our margins.

We sold 14,427 new Gender knees, exceeding our 12,000 unit aspirational target by over 2,400 surgeries.

This was also a 51% sequential quarter unit increase.

New product sales were approximately $231 million in the quarter and represent 24% of consolidated sales in the quarter.

Our dental business was up 22% reported over prior year, with Asia-Pac leading the way with 46% growth.

Continued strong margins coupled with sound asset management contributed strong operating cash flow of $213 million.

We're also recently upgraded, as Ray mentioned, by Standard & Poors to A minus, up from BBB-plus.

We are building cash on the balance sheet that can be used as a primary source of acquisition capital or to buy back shares and our ETR for the first quarter remained very competitive at 28.5%.

We repurchased over 2 million shares of Zimmer common stock during the quarter.

Our first quarter sales grew at 10.4% reported and continued a five-quarter trend of increasing quarterly sales growth rates.

Finally we raised our 2007 guidance for both sales and earnings, supported by the strength of our new products, launched through 2006 and 2007.

As a reminder, our second quarter 2007 earnings call will be held at 8:00 a.m.

Eastern Standard Time on Thursday, July 26, 2007.

Now we would be happy to take your questions.

So LouAnn, we'll turn the call back to you.

(OPERATOR INSTRUCTIONS) Your first question comes from Milton Hsu with Bear Stearns.

Hi, good morning.

Good morning.

Just two questions.

First, on the Gender Solutions rollout internationally, can you just talk about whether or not you expect to get the same degree of premium over NexGen as you're seeing in the U.S.

and also talk about the marketing and the advertising strategy and so far do you have reception, is that any different than I guess the enthusiastic reception you're getting in the U.S.?

Yeah, thanks for the question.

Let's break it down in pieces.

We have sent some limited ability to Europe.

Germany of course is a huge market for us and is just starting in March-April, but literally just starting.

A little bit in Asia, I mentioned Australia, and then a sprinkling to other countries.

Primarily where we've got key surgeons, the one exception is southern France, where one of the developers is University of Marseille and of course as a developer he had early access.

The premium question is, is a tough one because there's so many countries involved there.

My own gut feeling is we will get pretty much the fullest of premium on the Flex aspect of it that we weren't getting.

In other words people weren't using Flex.

I, I'm inclined in those countries to think for the most part we won't get incremental Gender premium above Flex, just because the different set of cost pressures, much more socialized environment, so on and so on.

However, by far the largest portion, of course, is the Flex premium, not-- the Gender premium is a complete surprise to us frankly and so largest portion is the Gender premium.

So that's still good news.

Then on the marketing and rollout programs, we're still extremely early.

We to do it by country marketing program because the ability to reach women and the ability to do so relative to medical devices publicly using TV or other vehicles varies a lot by country.

So obviously we have to taylor our marketing programs and that's what people have been doing.

They have the advantage of downloading huge portions, just as hospital marketing people do, of downloading the work that's been done here, but not all U.S.

ads are usable and sometimes the look of the people, the style of the ads, whatnot, do not necessarily suit those cultures, but, they have been at it for oh, several months, but the fact of the matter is we can barely supply what-- we can't supply what's here and we're trying to feed out a few products as best we can into the international market, so we have a long ways to go there.

Okay, and just a second question on volumes, I've always thought about decelerant, periods of decelerating volume perhaps followed by a backlog situation.

And if you can-- am I thinking about this correctly?

Because in cardio if patients don't come in for ICD's, they are likely to die and fall out of the potential patient, you know, pool, In ortho, they are less likely to die and definitely not getting any better.

Yeah, no, I think that's right.

I think that's right, Milton.

I think we're seeing-- I don't think it's Cliff effect.

In other words, you don't see big jumps up and down.

It's kind of a glacial effect because surgeons in operating rooms only have so much capacity and capability relative to orthopedics, unless they start building and adding on, which, by the way, they are now doing.

But we are seeing the, the pickup in the surgeries and we're seeing a pickup in registered lead times.

Keep in mind that the only thing we can measure with surgeons is booked surgeries, if in fact they have, told Mrs.

Smith, let's, let's keep you on some pain killers.

Let's manage this a little longer and extend this out three or four more months, in part because he can't do it then.

We wouldn't necessarily see that because it's not a registered surgery.

It is a surgery to come.

So I think we are seeing that, but, again, it tends to be a little more glacial than big change quarter per quarter.

Okay.

Thanks.

Okay.

Your next question comes from Matt Miksic with Morgan Stanley.

Hi, good morning.

Thanks for taking the question.

Good morning.

Hi, Matt.

Just I wanted to clarify something on knees.

It sounded like with the Gender that you're looking to catch up to U.S.

demand based on the instrument production you have by sort of second half of the year, third, fourth quarter.

When do you think you're actually get in line with that?

I, I think quarter 2, assuming we can really keep production rolling in the summer at a fairly high rate and obviously keep instrument set capability to the extent that we need them going.

So I think it's quarter 2 and maybe just into the, sort of September period.

So that gets us caught up.

That does not account for new demand that's going to be created in the meantime, because I mentioned on the call, I don't think hardly any of the 14,000 had much to do with the DTC we were doing because the lag times are longer than the ability to get the surgery done during that period, so I think we will see effects coming there.

That will put further pressure, on our production again and on our sets and then of course, internationally, where we've got the project, product, I should say registered and can get it into those countries, for example Japan you can't that quickly.

We've got to service those people as well because they are going to create demand.

So there is, that's why I said hopefully we can breathe again sometime soon.

I mean there's a lot of pressure us on right now, but I think by the end of the year, we should be fine.

You know, I'm looking to the point where we can start taking market share because we have a lot of interest from people we, you know, we basically can't supply right at this point.

I think their interests will continue strong, but we've got to try and capture that as quickly as possible and not lose it.

One quick one, are you willing to give us any sense of the premium over sort of the standard NexGen, either, either at high Flex or Gender or on a combined basis?

Is it 10%?

Is it 30 in can you put round numbers on-- I know you don't like to go there, but it would be helpful.

I am shocked in our years working together that you would expect an easy yes/no answer.

The answer is no.

I figured that would be a quick one.

When you talk about share gains, there's one question, I guess it's our understanding that periodically in various spots around the country, you get surgeons, you get sometimes sales reps willing to migrate over to Zimmer based on, the current strength of your product line or whatever else is going on with the competition.

Have you seen-- you talked about surgeon interest.

I'm just wondering whether you're also having more success than usual kind of drawing reps or interest from other competitors, you know, in more regions than usual.

Yeah, I don't-- I think the answer is yes, but I would qualify the success.

The yes answer I'm giving is to the interest.

There is-- there seems to be more interest-- I don't know.

I mean maybe other companies feel this, too, and it's a cross thing.

But I think in our case I can tell you there's no question there is a higher level of interest joining Zimmer right now.

I think part of that is not only just Gender, but the pipeline total where we're going, our story, whatnot, hopefully we tell that story well.

Secondly, there's a lot of disruption in the marketplace right now and I think that's causing some people to reevaluate where they want their long-term employment to be.

So I would say it's higher in fairness to answer you honestly.

Success is a different question because you have to have an ability to take those folks on and it has to mix with who is in your territory and the hospitals have to fit together and so on, so on.

So it sounds good, but it's a lot more complicated when you try and execute it.

But the honest answer to your question is yes.

Great.

Well, I'll hop out and let some other folks ask some questions.

Thanks.

Thanks, Matt.

Your next question comes from Bob Hopkins with Lehman Brothers.

Hi, and good morning.

Good morning, Bob.

Couple of quick ones.

First, on Gender-specific, do you guys have a sense as to what high Flex was as a percentage of knee units in women before Gender-specific?

I can tell you in time frames because it was growing on its own, so we got to be careful with the correlation between Gender and growth, although there's no-- Gender is accelerated, but we spent, we spent a lot of time in the 20% to 25% area and it kind of was starting to flatten out.

In other words, the growth rates, instead of growing a percent from 23% to 24%, it would grow to 23.25% or something.

So you could tell it was starting to plateau a bit.

We always thought it would get in around the 25% zone, flatten out.

It started to go up.

With the Gender promotion, but without Gender even being released, it actually went up to over 30 on its own.

And I can't quite figure that out on my own.

I don't know whether it was the anticipation of people getting used to doing Flex in anticipation of Gender or whether all this exposure to Flex and Gender actually caused some increase.

So it did go up from the Gender announcement time into the low, low 30s and then we are running now-- we bounce around 37, 38, 39, so it's had a substantial increase directly related to Gender obviously because all 14,427, we sold almost 25,000 implantations in two quarters and you know by definition every single one of those is Flex, so it really starts to move the percents around.

Great.

That's very helpful.

Then Ray, I was wondering if there might be a little more color on the CEO search.

You mentioned you're on track for mid year, but has a decision been made on this point?

Do you have your person and, if not, is there any risk to a slippage beyond that June 30 time frame?

Can't answer the first one.

That's a board disclosure issue and that would be problematic.

I don't think there is any risk that I'm aware of to the probability of this not being done properly in the first half.

The board is doing a very thorough job.

Governance committee is acting as the search team.

They have done extremely thorough work, really well documented thorough work and I would be very, very, very doubtful that it would slip.

Okay, and then last question is just quickly on dental, you mentioned it first in your list of potential focus areas for MNA.

Does that mean it's the top priority and then beyond that, could you just talk a little bit about the dental market, because you're clearly growing faster than most other companies in the space.

Do you have a sense as to where that share is coming from and just any thoughts there would be helpful.

Thanks.

No, actually every now and then I forget to do things alphabetically, so it has absolutely no meaningfulness.

I may have thought of dental first.

So I should do everything alphabetically, I suppose.

no, it doesn't mean it's the first target.

It doesn't mean we're actively looking for in that area.

I don't think we're outperforming-- I appreciate the compliment to our dental division, but I don't think we're necessarily dramatically outperforming.

I think that marketplace, if you look at the numbers for Nobel or Stromel.

That's a strong marketplace and we're right there, maybe a shade above in total.

We continue to look at opportunities to grow but as I've commented so many times, dental's tough because there aren't the, as many of the small regional acquisitions.

We've stated that we don't want to be in the supply business, that end of the world in a pure sense.

There's two very large companies that dominate the industry for the most part, and, you know, if you look at the PEs.

and you're realistic about it and you look at our policy relative to acquisitions and whatnot, it makes it a very tough conversation and there's very little you can do in the middle other than forward-integrate to dental distributors on a by country basis.

So we want to grow in it.

We're doing it by going out and finding outside technologies, bringing in computer assist stuff for the lab, bringing in biologicals, but that, that sort of big jump growth and moving from where we are up is, it's a goal, but it's very tough, as we've said many times, to execute that goal given the nature of the marketplace.

Great, thanks.

Appreciate the thoughts.

Okay.

Your next question comes from Jeff Johnson with Robert Baird.

Hey, guys, good morning.

Thanks for taking the call.

Yeah, good morning, Jeff.

Question for you on acquisitions, I know at the analyst meeting a couple months ago, you talked about maybe a couple to a few more small acquisitions over the balance of the year, potentially a little bit dilutive in those.

Still thinking we could see some of those?

Obviously I see the cyclone deal here, but assuming there could be maybe a couple more small deals?

I think that's right.

You know, you have to make sure you don't get indigestion with a relatively small staff doing integration work, but I think as long as their product lines are small companies, we can do that.

We would like to do and have a long list that we look at and work all the time.

We would like to do two or three more and as long as they are-- unless it's something really strategic and have to go to the market and explain some higher lever of dilution we tend to be in that penny, two penny, sort of area for deals.

We try to do it without any if we can, but it generally is in there.

The other thing we're really active in that we don't visibly show you, but we're very active in is licensing deals where our business development team is also negotiating licensing deals, single products, technologies, sort of equity investment deals that give us distribution in the future and those types of things.

So it's not always just pure visible acquisition work.

Great, and then second question on pricing and especially in regards to Japan, with the last three price cuts we've seen in April '06, January '07 now April '07, those were all kind of a phase-in of a bigger April '06 price cut, or what was supposed to be the bi-annual price cut in April '06.

Any word yet or any rumblings yet on whether there could be an April '08 price cut in Japan that just kind of restarts that bi-annual type process?

I haven't seen it.

Our government affairs people, in fact, there's a group of people over in Japan right now.

We haven't seen anything on that and we haven't seen any early indications.

I do know, Jeff, that orthopedics relative to, and not Zimmer.

I mean orthopedics in total.

Everybody that sells there.

Orthopedics in general is in much better shape, in fact very good shape relative to Japan government guidelines on the basket of countries they look at, and it's this 1.5 times the average price of the basket being utilized.

We're in good shape on that versus other sectors of medical devices.

So I'm-- my inclination is to think we may get a little bit of, you know, symbolic cup.

My belief is that we're probably on pretty good ground now.

Great.

As long as we can maintain those numbers and provided they maintain their policy.

All right.

That's all I got, guys.

Thanks.

Thanks, Jeff.

Your next question comes from Dhulsini de Zoysa with Cowen and Company.

Good morning.

Ray, I was wondering if you could just clarify, when you're talking about reaching surgeons, Zimmer surgeons with your Gender Solutions line, how concentrated, can you give us a sense of what percentage of your NexGen Flex users or Zimmer-specific surgeons have adopted GS already?

I can't.

Not because I don't want to.

I don't know that I have the statistics.

I can tell you that we tend to go to developers first and developers, I'm being very general now, tend be pretty big players and have high clinical practice.

We go out to contributors, next, people who have worked on the instruments, so on and so on and then we go to people --we generally go to people who have huge relationships or they have only used Zimmer for 25 years or they dominate a city or, whatever methodology we try to parse out, what we have available in what is the most, best political manner that we can in creating the least enemies within our environment.

So I don't know-- that's the way we do it.

It's almost the way we do everything and particularly things that are in high demand.

There is a difference here because we've got to make sure and it's a unique difference for us.

We've got make sure that there is adequate training and support of products in the cities and towns where we're doing the direct to consumer.

Obviously it would be idiotic to do a huge campaign and then not have instruments and supply, so that's a little different for us because it's city-based.

But in terms of the actual statistics, I'm not even sure I have access to that, but I certainly don't know what the answer is.

Is it better then to think about it in terms of geographic concentration in your initial cities?

I think so, although the developers are spread around a bit, most of them are U.S.

There are some spread around the world, so obviously you can focus on Philadelphia, Salt Lake City, Chicago, those cities from that aspect and then you can -- once you see it, it will become visible what the 23 cities are.

I'm only giving you the top four or five because I don't want to help the competition that are on the call too much and tell them every city that we're promoting.

The other way to do this is you'll be able to see reasonably soon where the other 20 cities are and what we're doing.

So you have got to believe that we're going to be doing volumes there and that we've got equipment and support things going on there.

Okay, great.

And then if you could, just-- I don't recall an update on some of your early stage R&D projects in motion preservation at AAOS, the nucleus hydro gel repair, for example, can you tell us if that's an ongoing project?

Yeah, absolutely ongoing.

I've tended to, in attempts to sort of cut down the length of the call a bit, too, I've attempted not to update things that are progressing naturally and there's not really anything to tell about them other than it's progressing, so those continue to be live projects.

They continue to progress properly.

We continue to grow and expand our biologicals group.

We've got a ton of things going on there, but I only do limited updates, again, because it's normal work that's going on, but all of those projects that we've publicly pronounced over the last year or two, there's nothing there that I'm aware of of any magnitude that's been dropped.

We dropped small projects and things all the time and replace them because we have limited resources that we have to shift on to things, but there's nothing, nothing big we've dropped and anything that's got what I think is reasonable news to it, I try to somehow get into the script, but don't assume that natural progress isn't taking place on the others, because it is.

Okay, great.

Thank you.

Okay.

Your next question comes from Mike Weinstein with JPMorgan.

Ray?

Good morning, Mike.

Good morning.

I made it in before the market opened.

That's good, good to see.

We should be applauded.

It's only 9:16 and we're halfway through questions.

That's a good sign.

You're making progress.

I just wanted to follow up a couple of items.

I may have missed it.

I apologize, Alcon's call is going on at the same time.

Ray, your thoughts, you talked early on about the dialogue over the last few weeks about what procedure might have been in '06.

Do you have a thought on what procedure-- was last year and maybe if we are seeing a pickup this year, what it might have been year to date?

I would be guessing obviously because I only see our own and I'm not going give out specific statistics, Mike.

I was responding to, analytical work that gets published to make sure there's a balanced viewpoint publicly at least from industry, in this case from Zimmer on kind of what's going on out there.

The problem is I have no idea on a global or on a macro sense what our competitor's doing in real surgical units of volume because I don't want what their mix numbers are, so I have no way of getting to their numbers and I don't want to disclose ours specifically because people can then deduct and deduce and get to mix.

Then I got mix numbers out in the market that I don't want to have to deal with all the time.

I guess it won't be me necessarily, but I don't want our company having deal with that all the time.

I would tell you we were positive in hips and knees on pure units of surgery, in '06 over '05 and again.

And that has accelerated.

I guess I can tell you that.

That's accelerated a point or two in the first quarter over what it used to be, and I am presuming the other companies had positive units of surgery, but I don't know that.

Okay Let me ask a different question.

In the fourth quarter, if my recollection is good, I think there was about a 50-basis point drag on gross margins because of currency, currency helps the top line, but weighs down the gross margin, did you give what that was in the first quarter?

We did not, no.

Can you give us a guess?

Do you know?

Sitting here, I would have to look at it.

We know what it is, but it's not a-- if you are thinking about the growth in the margin, the 78.3, you know, versus the 50-basis point growth versus prior sequential growth--

You still have some currency weight on that, I assume.

Well, yeah, you do, but as we reviewed our closing not too long ago, I can't recall off the top of my head, but I can tell you that the creation of the incremental 50 basis points was not artificially or otherwise created through hedge and other things that we had real mix geographic and product improvements that were the more important part of that.

Now, we always have hedge expression movements between quarters obviously.

I was looking at the other way, that try to figure out ex currency, where margin should play out at.

Yeah, because-- you're on the right point, I think, Mike, during times when the dollar is weakening because we settle our hedge contracts in cost of goods sold, it tends to put a drag on margins and I think we are asking what is the difference in the drag on Q1 versus Q4?

Yeah, I knew what your question was, but I was answering the flip side of it.

The primary reason-- technically what you said is correct.

I understood your question, but I was answering the flip side, saying the primary reason for the improvement was price and mix and therefore if the drag is more than the improvement must have been even more significant in geographic and product mix.

the flip side of the answer.

When the dollar is weaker and you're getting a currency benefit from the top line, your incremental operating margin percentage is going to be less, right?

And you guys were at 46% this quarter.

Assuming the dollar stays where it's at and currency, and that currency benefit would dissipate in the second half of the year, you guys should get greater margin expansion over, over the back half of the year is that a fair assumption?

I think, again, it depends on which way the dollar goes and as you know, we have not speculated on that.

And then your guidance for--

I was just going to say, let me guess, Mike's next question is on guidance relative to that.

I was going to ask your guidance for the balance here seems a little bit conservative based on what you guys have been able to deliver from a leverage standpoint.

Anything we should be aware of?

I don't think so.

I think our guidance in terms of the way we develop it is pretty consistent to past periods.

Going back to FX, though, as you know just from the numbers I quoted, the FX contribution for the balance of the year is somewhat consistent from one quarter to the next.

So I don't think there's going to be any measurable effect on gross profit margin simply because of the movement of foreign currency at the moment

Great.

Thank you, guys.

Your next question comes from Michael Matson from Wachovia.

Hi this is [Vincent Ricci] actually in for Michael, thanks for taking my question.

Yes.

Just a couple quick questions.

Will the Gender hips also be supported by a DCT campaign?

They will be, although we haven't constructed the strategy and theory behind it and I say they will be because the early thinking is that this is being successful.

If for some reason we don't like, you know, dollar return versus dollars spent, then we might change our strategy on that, but, you know, the thinking at this point is assuming it can generate incremental profits.

Sure, we're going do that.

We'll probably find some new ways of doing it and as I say, we just-- I just got the information yesterday.

In fact I handwrote it into the script.

We just got the results of the very first connective surgery yesterday with Dr.

Mark Heartspan in New Jersey so.

This is very new information so.

We're on our way to delivering that product and the people are working on the marketing campaigns and programs right now.

But the assumption is knees is working.

The campaign's successful.

Let's do something similar in hips.

That's the basic assumption right now.

Would you continue the DCT campaign for knees through 2008?

Don't know.

Haven't made that decision yet because we're not in the position yet to evaluate the real results of this one.

It's just theoretical.

Again, the 14,000 that we sold in the first quarter I would bet virtually none of that or very little, probably some of it is related to the most recent heavy campaign work because you would have had to get from seeing the commercial to seeing your GP to seeing an orthopedic surgeon to getting schedule to having surgery done in a creditably quick amount of time, almost impossible.

So until we get definitive feedback on the effectiveness of our DTC programs that we can numerically analyze, I don't think we'll make that decision and we do our budgets sort of September-October period and we will have definitive results by then.

So it allow us to budget one way or the other for '08.

Okay, and then just a quick question on spine.

How will these products fit into the spine portfolio?

Well, the India's fit in really well because the products that we're bringing in, the brands we're bringing in are types and designs of Pedicle Screw Systems as an example that we don't have today and most companies have multiple, most companies have multiple types of Pedicle screws.

We have gaps and holes in ours that we help fill.

We believe they are MIS Portal and they are MIS capabilities is not only unique and obviously we love MIS, but it allows us to take Dynesys and convert Dynesys to a posterior MIS entry surgery.

That is really fantastic and then on top of that we pick up some peak spacers and other items that the sales guys can put in the bag that we don't have today, that aren't necessarily unique but certainly with the people that buy from us will be able to do that as an add-on sale.

So it's a very, very nice deal for us and then although it's not Indias, just to do it quickly anyway, the cyclone anterior cervical is really neat because we have an excellent product because this is what's known as a windowed plate, in effect has a window in the center that allows to you do a more effective job with the graph.

Again, very unique product, something we don't have, fits right into the product line.

Was there a significant amount of overlap in the portfolios?

No.

In fact, I think zero basically.

Virtually zero anyway.

Great.

Thanks for taking my questions.

Okay

Your next question comes from Bruce Nudell with Sanford Bernstein.

Good morning, Ray.

Since this is your last one, sorry to see you go.

It's been a pleasure.

Not dead yet, Bruce.

Okay, good.

That's what they say about me, too.

Anyway, we, we, brought that point up about units on the Stryker call and, we've since corrected that data to reflect, the a pretty large shift to Medicare, managed care last year.

So it really loose in our latest analysis that it's around 3% unit growth among seniors.

You know, if young people grew at 8%, that comes out to about a, maybe 5% year, maybe a 4% year, kind of straddling the range that Stryker gives out on the call.

But the flip side of it is it implies that it's certainly below trend line, as Milton said, you could get a unit rebound this year, but also it means that the industry is very successful in taking ASP and I wonder if you can comment on that.

Then the next thing is that with regard to Medicare advantage, which pays a lot better, I think, than traditional Medicare, if you look at the trustee's projections over the next 10 years, looks like there's going to be a big shift away from traditional part A to Medicare advantage and if things stay the same that, should provide a degree of relief on the ASP front because the hospitals will be better reimbursed.

Any comments on that as well?

Thank you.

No, I think everything-- and I did write that little piece in my script from reading your note obviously, so just so you know, I read your stuff.

But, no, I think everything you said is correct.

I think that relief is correct.

Think we have to be conscious of, though, in shifting from Medicare to Medicare Advantage into private pay programs and so on, we need to be sensitive to the fact that it does pay more, but we need to continue to be smarter about explaining our economics and the benefits to that to the non-Medicare private pay folks.

So it looks good, but we have to do and continue to do a very good job.

On the ASP comment, most of the companies including us tell you what our, certainly our price component is, which reflects, the compound effect of all the ASPs, so I don't know that there's anything new to tell you there.

I really think the differential everybody was seeing was, I think you got the right number on basic growth around three or four.

That's what I've always said.

To that, though, on the trajectory going forward, you have got to add all the other things going on in our world, from osteoporosis and impacts on females to living longer, to higher activities, to obesity.

People do stories on them individually and say, well, this can't be that big a deal.

Obesity's only half a point or quarter of a point.

Problem is there's about 8 or 10 of those categories that are all going effect our numbers.

As to I still think we're going to be 7% volume.

I still think price is stable.

I do agree with you it's moving-- it will move more to private pay, if for no other reason that the people are getting younger and Medicare surgery if they wanted to.

And I think the caution I would put in, not a caution on the growth, it's a caution on the fact that we have to get smarter at selling our story to private pay and making sure they understand the return and the value on what we do.

Other than that, I agree with the correction you made and I agree with everything else you just said.

And just one final question, it looked like the incremental operating margin was 46% year-over-year, which is very impressive.

I mean is that, if we were modeling looking forward around 40% incremental operating margin going forward, is that, a safe bet or would you push the limit even higher?

No, I just, I just keep saying the same thing we've been saying for a long time and that's the $0.40 to $0.50.

I recognize prior to being public, and it's unfair unless you just trust me on what I'm saying, but I can tell you we've consistently delivered that for the best part of 8 or 9 years once we completed the turnaround in the first year and we've obviously publicly delivered it at much higher numbers but it's because of Centerpulse.

The $0.40 or $0.50 is good, as I pointed out in the call Bruce, and you're always going to have ups and downs, and things it's maybe it's a little unfair to pick out two or three 5 million-dollar items, but had we not done the DTC, this is kind of cheating, but had we not done the DTC and had Japan price not been there, we would have been at 56%.

You know, so with no big synergies or anything going on with Centerpulse.

So I think that $0.40 to $0.50 is reasonable.

Obviously we will guide to the conservative side of that, you know, because that's our best judgment.

Thanks so much.

One of the ways we get there, and we talked about all the levers we pull, but I think we view manufacturing differently than many of our competitors.

We're quite willing to invest probably a little more in CapEx so we stay on top of emerging changes and how, how metal is fabricated.

So we're, we're quite willing to invest in the face of what most would look at as normal cost pressures increased materials, increased wages.

We invest into that and invest heavily in M and E so we can take our costs down 2% a year.

That's one of many ways in which we continue to look at internally ways to get, deliver that 40% to 50% drop-through.

Thanks so much, Sam.

You're welcome.

Your next question comes from Jason Whittes with Leerink Swann.

Hi, thanks a lot for taking my question.

Good morning, Jason.

Good morning.

I just need a couple clarifications on Flex.

I guess my tally is from the Q&A that your percentage of high Flex is somewhere between 37% and 39% right now.

And I assume that's worldwide and I think, again, can we assume that the larger percentage of that comes from the U.S.

and a smaller percent overseas?

It, it is, but there's a lot of, there's a lot of countries where we don't even have it introduced and plus, it is, it is on the basis of NexGen because the natural side or the Centerpulse side does not come out.

So, I guess if you wanted to look at on every single femoral we produce, I haven't looked at it on that basis, but if you do, that number's going come down.

It's a lower percent than I just stated because I'm only doing it-- yeah, globally.

It would be lower than what I just stated because I'm not including every single item.

The natural knee, which has quite a strong following in Europe has no Gender availability to it now and I'm not using it in the calculation because it's not relevant.

So that number-- I don't know what it is-- I have to look that up.

I don't know what it is anymore on absolute total every femoral we produce and sell, but it's certainly going to be less than 38% or 39%.

But higher in the U.S.?

Higher than what now?

The 38, 39.

Again, that was a global number you gave, so the U.S.--

Almost everything we have is U.S., so it's almost-- virtually everything we've got, it's going to be a little higher, but virtually everything we've got is U.S.

at this point.

Okay.

Then a question on Gender knees, back of the envelope, I think you said you did a little bit over 14,000 Gender knees this quarter.

Yes.

I assume most of those are in the U.S.

I guess my back of the envelope number says that's somewhere about 25% of your unit volume this quarter in the U.S., again, making some assumptions here.

Is that in the right ball park?

Yeah, again, you got to use all those different kinds of knees that we sell in the U.S.

that came with Centerpulse and whatnot.

You have to include that in the calculation.

Then you get to that kind of number.

We view that, and I think that's in the ball park.

It sounds a little low maybe, but it's in the ball park.

May 28 is actually what I got.

I was going say it sounded a little bit low.

I look at that and say we were kind of in my opinion plateauing out a bit preGender announcement on high Flex.

You can only get to so many people with each,, opportunity and science story that you sell.

So I view Gender as reenergizing that and if I look at that in let's say the 28 is the right number, if I look at that on everything we sell in the U.S.

and then add in the opportunity in Europe and in Asia, it gives us a lot of runway on this if we can continue to market and sell the story well.

Okay.

I mean I guess I'm just wondering about what kind of premium you're getting for Gender because, you know, that's a pretty significant bump to have 28-- versus nothing a year ago, having 28% of your mix now to Gender at least in the U.S.

You got to be careful though, Jason, because you got different kinds of sales going on.

First of all the premium for Gender is very little above the premium for Flex.

I'm just fascinated we get anything at all.

It's-- remember, there's different kind of sales here.

There's all the people that were using Flex that have now gone to Gender.

You may or may not be getting anything from them.

There's the people that never use Flex at all and no matter what you sell them, you're definitely getting premium from them.

Then there's all the competitive surgeons that in theory 100% of the sale is upsell because you're not doing any business with them and we have hardly any of those.

So, you know, the impact from Gender depends upon which surgeon and what they were using before to the extent you're actually getting a benefit from it at this point in time.

Okay.

So basically the way to think about Gender is it's hopefully going to bring share and it's a little bit too early because right now you're only supplying your own surgeons, and limited number at that?

Oh, yeah, there may be the odd competitive surgeon for some reason that we've given stuff, to but by and large, we're taking zero market share with it now because we can't even supply our own people and as you know very well, the share move is pretty glacial, but, you know, based on another analyst note that was written, and it was pretty good assessment of the situation, you know, there's an opportunity there, you know, to take, you know, say 1 to 3, you know, 1 to 3 points of share.

The other thing you have to remember, too, is to the extent the hospital and the surgeon are marketing this, people that were, we've worked with for years, it may very well be that our surgeons are in fact taking share in the context of from others, as opposed to us just selling to a competitive surgeon.

Okay.

I guess I follow that.

One last question, what was the share base payment net of tax related to, to options expense ?

About $0.06.

Okay.

Thank you very much.

Okay.

Your next question comes from Brian Wong with First Albany Capital.

Thank you.

Good morning, and thanks for taking my question.

Good morning, Brian.

Two questions related to the end use acquisition.

I saw you closed it.

Any chance we could get some sort of idea of what you expect that to contribute to the top line?

I think we already did-- I think we already disclosed that in general at around $12 or $13 million.

We didn't put it in the press release, which we probably should have, but that press release, if you recall, was kind of a rush because we had the spine-- Spine National meeting the next day, so I think it's $12 or $13 million.

Okay, and then, you know, going back to the press release, I believe you said you thought it would be $0.02 dilutive.

Looking at your guidance, you're saying it's $0.01 dilutive for the rest of the year, is that fair to assume then that you had $0.01 of dilution this quarter, or have you adjusted your--

No, it's fair to assume we're $0.01 smarter than we were when we sent it out.

All right, great.

Fair enough.

It didn't effect our first quarter because we didn't close the deal until the first week or so in April.

Yeah, we just closed it, so there is no first quarter effect.

That's why it has to be 1 cent smarter for the remainder of the year because there is no effect on the first quarter.

Okay.

And then in terms of OrthoPAT, obviously you've lost that, is there any progress in replacing that?

Your OSG business?

We looked at three units on the outside.

We narrowed it down to one and decided that the magnitude of change you would have to make to it to make it acceptable to a U.S.

hospital, and its technological design and its outputs was more costly and more troublesome and less interesting to that, that company, because the amount of money they would have to put in to do it.

So we have-- fortunately we never dropped the internal project.

We've stayed with that idea, but the problem with that is it takes twice as long because there's no base unit to start with.

So we will at some point have a replacement.

We told people don't put anything in '07 and we will update you later in '07 as to whether you should think about anything in '08.

I don't think any of that's changed, Brian.

Okay.

And then with the GM improvement, obviously pretty strong, where do you think that could go within the next year to two years?

Brian, I can't believe you're asking me this on potentially my last call.

Had to get it in.

I have told you guys, I have told you guys that the minute it goes over 100, we're firing Leno.

And they should.

Okay.

Fair enough.

That's it.

Thanks.

There are no further questions at this time.

I'll now turn the call back to Mr.

Elliott for any closing remarks.

Thanks, LouAnn.

Most appreciative of everybody staying on, I thought we were actually going to finish one minute before the market's opened for the first time in history.

We didn't quite make it.

We feel like it was a good quarter.

Looks like the orthopedic market is doing well, or certainly doing better, and we appreciate all your interest in us and the write-ups and the questions and all that stuff.

And we'll be around for the rest of the day if you want to reconnect and do some follow-ups.

Thanks very much.

Thank you for participating in today's conference call.

You may now disconnect.