Zimmer Biomet Holdings Inc (ZBH) 2007 Q2 法說會逐字稿

Good morning, my name is [Lou Ann], and I will be your conference operator today.

At this time I'd like to welcome everyone to the Zimmer Second Quarter 2007 Financial Results conference call.

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

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

(OPERATOR INSTRUCTIONS)

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

These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions 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, read the disclosure materials filed by Zimmer with the Securities and Exchange Commission.

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

This presentation also contains certain non-GAAP financial measures.

A reconciliation of such information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the 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.

Thank you.

I'll now turn the call over to Mr.

David Dvorak, President and Chief Executive Officer of Zimmer Holdings.

Sir, you may begin your conference.

Thank you, Lou Ann, and good morning, everyone.

Welcome to the Zimmer Second Quarter 2007 conference call.

Joining me on the call today are Jim Crines, who is our Executive Vice President of Finance and Chief Financial Officer, as well as Sean O'Hara, our Associate Director of Investor Relations and Strategic Planning.

We're pleased to be hosting this call to discuss a solid second quarter and first half of 2007 for Zimmer.

Jim, Sean and I would like to inaugurate a new Zimmer tradition today, the sub-90 minute conference call.

Although we do intend to maintain the same high level of disclosure and visibility that you're used to.

Today's call will include a report on operations in the quarter and a Q&A session.

All comments and comparisons are on an adjusted basis unless otherwise noted.

Further, all adjusted commentary excludes acquisition and integration expenses.

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

Consolidated sales for the quarter were $971 million reported, an increase of 10% to prior year, 8% constant currency.

Net earnings per share in the quarter were up 20% as reported at $0.97 .

Adjusted net earnings per share were $0.98 an 18% increase over the prior year, $0.01 ahead of our previous guidance and in line with First Call consensus.

Our gross profit margin was up 40 basis points over second quarter 2006 at 77.7%, and our operating profit margin showed continued strength at 33.7%, a 100 basis point improvement over the prior year.

Worldwide price continued to track flat compared to prior year and consistent with our expectations.

Operating cash flow in the quarter was very strong at $303 million.

Finally, we reaffirmed our full year sales and earnings guidance.

I'll briefly comment on our sales performance in the quarter both on a geographic segment and product category basis, and then I'll provide an update on our strategic initiatives and the management transition.

Then I'll turn it over to Jim for a more detailed review of the financials.

Before that, though, I want to emphasize that we once again delivered attractive earnings growth.

And going forward, we're optimistic about our opportunities to accelerate our top line growth in a number of areas.

I'll discuss how we plan to do this in the product category review.

In the second quarter, each of our geographic segments contributed positively to our performance with our strongest constant currency sales growth coming from the Americas and Asia-Pacific.

Americas revenue was up 9% to $568 million led by double digit growth in the Americas reconstructive category.

Europe continued its steady sales growth, up 12% reported and 5% constant currency at $267 million.

Growth in Europe was generated by solid mid to high single digit growth in the UK, Italy, and Germany.

Congratulations are in order to the Zimmer Asia-Pacific group for recording double digit constant currency growth in the quarter.

Asia-Pacific revenues in the second quarter were $135 million, driven by strong growth in Australia and supported by a high single digit volume mix growth in Japan.

Turning to our product categories, our worldwide reconstructive sales comprised of knees, hips, extremities, and dental, grew 11% reported and 9% constant currency.

First in Knees, we turned in 8% growth in the quarter with further penetration of the Gender Solutions Knee.

While Gender Solutions continues to be a success, we're not completely satisfied with our performance in Knees.

We believe there are opportunities that lie ahead that will strengthen our results.

I'd like to address three of these opportunities now.

First, with the Gender Solutions Knee, we focused on our internal supply chain towards filling instrument and inventory orders for existing Zimmer customers and principally in the United States.

We've had limited opportunity at this point to pursue competitive business in the U.S.

or to achieve higher mix penetration outside the U.S.

With additional planned instrument deployments in the third and fourth quarters, both in and outside the United States and the effect of our direct to patient advertising in the U.S.

market, we do expect to see improved growth in the second half.

The mix benefit we've experienced with the Gender Knee should also continue to build through the second half and into 2008.

We expect to launch Porous Gender Solutions Femoral components, which are currently unavailable in the first half of 2008, as well.

Second, we've seen some pressure on our Natural Knee business in the U.S.

due to the success of the Gender Solutions offering.

On a limited basis, we will begin to rollout the Gender Solutions natural knee Flex system in the fourth quarter, which will relieve the demand for a Gender offering in that important product line and position it for renewed growth.

Another opportunity for Zimmer in Knees is the anticipated approval and rollout of the NexGen Mobile Bearing knee in the fourth quarter of 2007.

We enjoy approximately 20% Mobile Bearing knee market share outside the U.S., and we look to bring our product to a U.S.

market that is now dominated by one vendor.

We're excited about these opportunities and look forward to executing on each.

One final remark on Gender.

As you may know the Gender Knee celebrated its 1 year anniversary in just this past May.

I'd like to thank the Zimmer employees, distributors, sales representatives, and collaborating surgeons who together have made this one of the largest and most successful product launches in Zimmer's history.

Turning to Hips.

Driven by key new products like the Metasul Metal-on-Metal large diameter heads, we grew 6% in the quarter.

We're excited to report the debut of the first Gender Solutions Hip.

The Gender Solutions M/L Taper with connective technology, as it successfully entered surgeon developer release this quarter and is expected to begin broader rollout late this year.

This unique technology will help surgeons address head center placement and leg length discrepancies interoperatively During the quarter, we also received FDA 5 10-K approval for our Durom [Hip] Resurfacing System and our Durom Full Resurfacing U.S.

IDE study commenced with surgeries in June.

Our path to resurfacing in the U.S.

remains on a parallel track pursuing both the IDE study and a PMA filing with foreign data.

Congratulations are also in order for our extremities and dental group -- product groups recording 33% and 19% constant currency growth, respectively led by key new products.

Zimmer's Spine grew 6% in constant currency.

Here we came into the quarter with some pretty significant product gaps in the spine business, and we exit the quarter in a much improved position working through the integration of an acquired product portfolio.

With the Endius acquisition, we picked up the Atavi system, a state of the art MIS technology, as well as Title II and Minute which are advanced in-line pedicle screw systems.

Currently, as you may know within the spine market, about 75% of the revenues are generated through fusion procedures, and most of those are treated with in-line pedicle screw systems.

We'll continue to fill in gaps through internal and external development efforts and look forward to the spine business accelerating its growth.

Finally, we wish to publicly welcome the Endius employees and customers into the Zimmer family.

Trauma sales did not meet our expectations.

As sales were essentially flat.

In Trauma, we're having success with our new plates and screws, but we're still underperforming on an overall basis.

As we continue to introduce new and innovative products and implement plans to enhance our sales focus in this area, Trauma results should improve going forward.

Finally, OSP and Other sales grew 8% constant currency.

Each quarter, Zimmer continues to drive sales growth through innovative new products and the second quarter was no exception.

We've had a long standing goal for new products defined as those released in the proceeding 36 months to consistently deliver 15 to 20% of Zimmer sales each year.

In the future, we may have to update that goal as we once again drove new product sales to a record $237 million or 24.5% of sales.

At this point, I'd like to comment on a few areas around our strategy and the management transition we completed in the second quarter.

Last year, Zimmer evolved the strategic direction that it served us well for many years to focus on a new mantra.

To enable, to innovate and to grow.

Our efforts, and ultimately our results will be driven by these three mandates as well as the strategic initiatives that support them.

We're challenging ourselves to change the landscape in the markets we serve with new technologies and services as we've demonstrated in the past with MIS procedures, Trabecular Metal Technology, and more recently with our Gender Solutions Knee.

These examples also demonstrate a very important Zimmer advantage, which is the ability to take a technique or a technology design or other initiative and leverage it across our various business lines and distribution channels.

Two initiatives within our innovate strategy, biologics and advance materials made significant progress in the second quarter.

Our first biologic product developed in conjunction with Isto Technologies, known as DeNovo NT, had its first surgery completed in April and began limited release this quarter.

This product uses natural tissue in a single surgery to address focal cartilage defects and will be well-positioned in the 250,000 procedure per year chondral defect marketplace.

We expect DeNovo NT will be available more broadly late this year.

Meanwhile, our flagship technology Trabecular Metal also continued to show why it remains the leading porous metal in orthopedics with 23% growth to $53 million in the second quarter.

Trabecular Metal continues to pay dividends across many of our current product lines and we're investigating how we might further expand its application.

In the second quarter, we also made an investment to forward integrate our dental business internationally.

This investment is consistent with our goal to continuously strengthen our distribution capabilities by adding key managerial and sales talent.

We also announced expansion plans for our Warsaw operations of 220,000 square feet that were aided by incentives of approximately $2 million from the Indiana State Government.

We're preparing for the growth of orthopedic procedures globally as baby boomers enter the prime age for joint replacement, while at the same time demanding lifestyles and obesity drive younger patients into our market.

A few comments on acquisitions overall.

As we've stated in the past, we continue to look for acquisitions primarily in the areas of spine, dental, and biologics.

Due to the targets in the marketplace, these potential acquisitions are most likely to fall in a range of $100 million to $400 million in deal value.

Although we're willing to look at attractive opportunities beyond that range, from time to time, it's unlikely that we would venture outside muscle skeletal health.

Regardless of the property or transaction value, we maintain strict discipline when evaluating overall strategic fit, financial impact, and returns, business practices, and a host of other criteria centered around creating value for Zimmer shareholders.

From the use of cash standpoint, our position has not changed.

Our primary targeted use of excess cash will be to fund acquisitions.

As a secondary priority, that is in the absence of external development funding needs, we'll continue to deploy excess cash to buy back stock opportunistically as a means to enhance shareholder value.

Finally, a brief update management transition.

Both Jim and I have been busy since assuming our new roles on May 1st.

We've been traveling extensively meeting with employees, distributors, and surgeon customers.

We also had a chance to attend several of the investor conferences during the quarter and met directly with a significant portion of our shareholder base.

As we execute our 100-day plans, it is evident how strong our business is, and how much opportunity still lies ahead of us.

We're actively pursuing opportunities to invest in and develop technologies and solutions that can help surgeons improve patient quality of life.

We're also committed to attracting and developing employees.

And we continue to run our business to enhance shareholder value.

I've enjoyed getting to meet more of you in the analyst community over the past 3 months.

I'm looking forward to future opportunities for us to interact and to be able to update you on progress with our enable, innovate and grow strategic initiatives.

With that, I'd like to turn the call over to Jim for further detail on the financials.

Thanks, David.

In my remarks, I'll review this quarters revenue performance by geographic segment and by product catagory and then discuss the income statement, balance sheet, and cash flow statement.

I'll also provide some commentary on investments made in the quarter and related impacts on our operating results.

Finally I'll close my remarks by discussing our financial guidance for the third and fourth quarters of 2007.

As David indicated, second quarter sales amounted to 970.6 million while diluted earnings per share were $0.98 adjusted and $0.97 reported.

These adjusted earnings per share represent an increase of 18% over the prior year.

And as anticipated, our earnings were affected in the quarter by the acquisition of the Endius Spine business and by other investments.

These growth-related investments on a combined basis added approximately 40 basis points to selling, general, and administrative expense and accounted for less than $0.01 of the dilution in earnings per share in the quarter.

I'll turn now to a brief review of our consolidated sales.

Geographic segments and product categories.

Sales of 970.6 million for the quarter represent an increase of 10.1% reported and 8% constant currency.

These results are slightly below the Company's guidance and First Call consensus estimates.

The shortfall's attributed to slower than anticipated growth in our Trauma, Spine, and Knee product segments.

As expected, the price was flat for the quarter.

America's revenues of 568.1 million reflect an increase of [9%] constant currency.

Europe revenues increased 5.1% constant currency and Asia-Pacific sales were up 9.7% constant currency for the quarter.

Although flat on a worldwide basis, price was nearly 1% positive in the Americas offset by a negative price of 1.1% in both Europe and Asia-Pacific.

In Europe, consistent with our first quarter, Germany and Italy reported negative price of [3.3] and 2.8% respectively while other markets in Europe were flat or slightly positive.

Asia-Pacific was also include negative price of 4.8% in Japan, offset by flat to positive prices in other Asia-Pacific markets.

Turning to our revenue growth by major product category, worldwide reconstructive sales increased 8.6% constant currency in a flat price environment.

Knee sales, fueled by the ongoing introduction and launch of our NexGen Gender Solutions Knee improved 8.4% constant currency.

Pricing added 0.2% while volume and mix contributed 8.2%.

The Gender story has taken hold, we have been challenged to keep up with demand for inventory and instrument consignments.

And we are moving ahead aggressively with manufacturing expansion plans to better position our supply chain going forward.

Flex Knees now make up over 40% of our Knee revenue on a global basis, having grown from approximately 28% prior to the launch of Gender.

We are placing additional sets out in the field to meet increasing demand for the Gender Knee and look forward to continued success with this unique design.

In Other Knee systems, [MX] sales, as well as our hinge knees including RHK [in the list] system grew in double digits.

These increases were offset by declining natural knee sales as we experience some temporary cannibalization and competitive losses before the limited release of our Gender Flex design for the natural knee scheduled for late this year.

Geographically, our Knee sales and constant currency increase 8.7% in the Americas, 4.6% in Europe, and a very strong 14.8% in Asia-Pacific.

Above market growth in our Asia-Pacific operating segment highlights the strength of our sales and distribution networks in this region and our ability to grow share with new products.

Gender sales in the quarter were modest in the Asia-Pacific region and we look forward to further increases in the region.

Hip sales increased 5.7% constant currency reflecting a sequential improvement of 50 basis points when compared with first quarter and a volume and mix increase of 6.7% offset by a decrease in average selling prices of 1%.

These results reflect solid growth across our Hip portfolio including [sementic] stems, porous primary stems and [total] cups.

Our TM primary, ML Taper, CLS Spotorno Taper and Epoch stems all experienced double digit growth offset in part by lower sales of our VerSys fiber metal midcoat, fiber metal taper, and Beaded 6 inch FullCoat stems.

(inaudible) and Durom Acetabular component sales reported strong growth, as did Metasul large diameter heads, with the Metasul brand realizing over 40% reported growth in sales in the quarter.

Bone cement and accessory sales increased nearly 16%, reported.

On a geographic basis, and in constant currency, Hip sales increased 7.6% in the Americas, 2.4% in Europe, and 6.7% in Asia-Pacific.

With the latter indicating a significant improvement over first quarter negative growth, as the April 1, 2006 Japan price reductions anniversaried out of our Asia-Pacific year-over-year comparisons.

Extremity sales for the quarter increased 34.7% reported on a challenging comp of 15% of prior year second quarter.

Our trabecular metal and anatomical reverse shoulder systems introduced in 2006 have performed exceptionally.

Supported by well-designed and executed surgeon training programs at Zimmer Institute facilities.

Dental sales continue to grow in high double digits at 21.7% reported for the quarter on a prior year comp of 16%.

Trauma sales grew at 1.3% constant currency reflecting lower sales of intramedullary nails and compression hip screws compared to prior year.

On a positive note, plate and screw sales grew at above market rates led by periarticular and universal locking plates and screws.

Spine sales had 6.7% reported over prior year, saw some further softening in the quarter with declining [cage] sales offset by the Endius TiTLE 2 in-line Pedicle Screw System and higher Dynesys sales, which increased by 10.3% reported in the quarter.

Lastly, on product sales, orthopedic surgical product and other sales grew 9% reported in the quarter.

Now, I'd like to focus on the rest of the income statement.

Our adjusted gross profit margin of 77.7% for the quarter reflects a 40 basis point improvement over the prior year and a sequential reduction of 60 basis points from the first quarter.

The improvement over prior year points toward favorable changes in product and geographic sales mix and reductions in unit manufacturing cost.

While the decline from first quarter is driven principally by foreign exchange.

The weaker U.S.

dollars compared with prior year added 2.1% or 18 million in revenue in the quarter, but also resulted in recognition of greater losses on foreign exchange contracts under our hedging program, which are reported in cost of products sold.

R&D expense increased 10% to 53.5 million for the quarter, indicating higher spending for new product development across all product segments as well as ongoing development efforts in biologics.

Selling, general, and administrative expenses totalled 374.3 million and improved by 50 basis points compared with prior year.

A sequential quarter increase of 50 basis points in SG&A reflects the favorable settlement of a legal claim in the first quarter as well as the inclusion of SG&A pertaining to recently acquired businesses.

As indicated, the Company closed on the previously announced Endius Business acquisition in April.

During the quarter, we also acquired our dental distributor in Italy and made other investments.

These acquisitions and other investments, which contributed modestly in the quarter to our top line added 4.1 million or 42 basis points to SG&A expense in the quarter.

Adjusted operating profit in the quarter increased 13.4% to 326.7 million, at 33.7% our adjusted operating [profit] of the sales ratio shows an improvement of 100 basis points from prior year.

As such, this quarter's adjusted operating results illustrate the ongoing execution of our evolutionary strategy to enable, innovate, and grow while maintaining a disciplined approach to operations.

We made strategic investments aimed at future growth, absorbed the effect of those investments in operating expenses, and delivered a higher operating profit to sales ratio compared to prior year.

Interest income for the quarter amounted to 1.3 million.

Adjusted net earnings increased 13.8% to 234.7 million and adjusted diluted earnings per share rose 18.1% to $0.98 on 239.2 million average outstanding diluted shares.

These adjusted earnings per share are inclusive of approximately $0.06 of share based compensation.

The $0.97 reported diluted earnings per share for the second quarter increased 19.8% on prior year reported EPS of $0.81.

Let's now turn to our tax rate at 28.4% adjusted.

The effective tax rate is in line with our expectations in the guidance provided on the first quarter call.

Our current tax position reflects the success of steps taken following the Centerpulse acquisition.

To build out manufacturing and distribution infrastructure and tax advantage locations like Switzerland and Puerto Rico.

Reduction of the effective tax rate with our current structure and geographic mix of revenues and profits will depend on our taking additional steps to further diversify our manufacturing footprint or our geographic sources of revenues and profits.

While we will always consider investments and strategies that have the potential to reduce our tax rate, we anticipate the effective tax rate for 2007 to be around 28.5%.

As indicated, second quarter weighted average diluted shares outstanding were 239.2 million.

During the quarter, we repurchased 1.520 million shares at a total purchase price of 131.8 million or an average price per share of $86.69.

Taking into account the interest income pulled down on the cash used to buyback stock and the timing of the repurchases, we estimate that repurchases made in the quarter had a negligible effect on earnings per share.

On a year-to-date basis we have repurchased 3.604 million shares at a total purchase price of 305.1 million.

As of June 30, 2007, we have remaining capacity to repurchase up to 892.2 million of stock under our board approved stock repurchase program.

For us, in the absence of significant demands in our cash, stock repurchases remain an effective and efficient use of available free cash flow.

Operating cash flow for the quarter amounted to 302.7 million, depreciation and amortization expense for the quarter increased to 56 million, including the effect of business combination transactions closed in and prior to the quarter.

Capital expenditures for the quarter totalled 90 million, including 38.4 million for instruments and [51.6] million for property, plant, and equipment.

During the quarter, we announced the latest installment in our long range facility expansion plans for Warsaw Manufacturing and Distribution together with tax relief provided by local and State Government.

With the tax incentives now in place, we are moving ahead with these facility plans, including the buildout of additional foundry capacity and now anticipate 2007 spending for property, plant, and equipment to be in a range of 210 to 220 million.

Instrument investments for 2007 are expected to be in a range of 140 to 150 million.

Free cash flow was 212.7 million for the quarter.

Investment cash flow this quarter includes 106.2 million combined for the acquisitions and other investments referred to in my earlier comments.

These investments are accounted for as business combination transactions with purchase price allocations that include technology, contract related and other intangible assets.

The intangible assets related to these acquisitions are valued at 50 million and will be amortized over weighted average useful lives of 4 to15 years or at a rate of approximately 5 million per year.

Inventory days on hand finished the quarter at 284 days, an improvement of 3 days from the end of the first quarter and an increase of 11 days from prior year, reflecting greater investment in field inventory consignments in support of our new products.

Our trade accounts receivable days sales outstanding finished the quarter at 58 days, one day better than prior quarter and prior year.

One final note on cash flow.

Our first quarter cash flow statement contained an error in presentation.

Approximately 20 million of cash proceeds and option exercises were reflected in cash flow from operating activities rather than cash flow from financing activities.

This misclassification in the first quarter has no effect on second quarter cash flows and has been corrected in the cash flow statement for the 6 months ended June 30.

I'll turn now to guidance.

Taking into account volume mix, price, and foreign currency trends from the first half.

We are anticipating second half sales to be in line with the guidance provided on April 25th.

That is sales of 910 million and 1.050 billion for the third and fouth quarters respectively.

While the April 25th guidance at the time anticipated full year growth and sales of 11% with 10% coming from volume mix and price and 1% from foreign currency, we're now expecting 9% from volume mix and price and 2% from foreign currency translation benefit.

Our earnings guidance also remains unchanged from April 25th with third and fourth quarter adjusted earnings per share anticipated at $0.91 and $1.16 respectively.

Together with our first half results, this brings full year sales and earnings per share guidance to 3.881 billion and $4.03 per share.

In closing, we executed on a number of strategic initiatives, invested in our future with R&D spending increasing in double digits, returned cash value to our investors through our share repurchase program and delivered outstanding earnings performance.

We'll now open it up for questions.

Lou Ann, I'll turn the call back over to you.

(OPERATOR INSTRUCTIONS) Your first question comes from Michael Matson with Wachovia.

Hi, thanks for taking my question.

I guess first of all, with regards to the Gender Knee, it sounds like in the past you've said that there's a pricing premium for that.

But given that your rate of growth there is kind of in line, our maybe slightly behind market growth, that would seem to imply some volume share losses in your Knee business.

Can you maybe explain that?

Yes, as a general matter, Mike, we're not seeing losses in our Knee business.

As Jim mentioned during his comments, we did see a little bit of pullback on the natural knee side.

But we're going to address that with the Gender Solution and a Flex Solution in that category on a go-forward basis.

We are extremely enthusiastic about what we're seeing on the Gender side as a general matter, though.

And more of what the second quarter reveals is just logistically trying to roll this product out and meet the demand within the field.

This is the NexGen system is the world's leading knee brand.

This is a yell man's task to get this product out.

Our group, in my view, is doing a good job on that and as we move into the second half of the year, we said consistently that we're going to see opportunities to take competitive business with that rollout.

You have to measure this initiative on our part as a one-year anniversary as of May, and you're comparing it against knee systems that have been out for a couple of three years among the different competitors.

So we have no lack of enthusiasm or optimism for what this system is going to be able to do for us on a go forward basis.

And there are a lot of other opportunities within our Knee franchise.

Okay.

And then the Spine and Trauma businesses seem to lag, their respective markets in the quarter.

I know that you just completed Endius acquisition.

But beyond that, what is it going to take to get these kind of back up to market levels of growth?

Yes, they did lag in their performance.

And they have over the last several quarters, frankly.

Two different answers on that question.

On the Spine side, we picked up a business, as we stated in the past, that had a lot of holes in the product offering and we're addressing those holes through both external and internal development efforts.

Endius gives us a jump start by suring up the hole that we had on the in-line pedicle fusion side, that offering is extremely competitive and we couple that with a nice technology platform on the MIS area with the Atavi system.

So we really like what we're seeing on the Endius side, the recent activity among our surgeon base has been very positive, obviously that's early stages, but I think even in the short-term we're expecting improved performance on that side.

With respect to Trauma as Jim mentioned, we have what we believe is a leading plate and screw offering in that area.

We're seeing some weakness in our nail offering.

We have some work underway to sure that up.

But even in the meantime, we think that we can enhance the performance of the Trauma business by doing some things to bring about greater sales focus.

Okay.

And then with respect to the Durom, you said you submitted a PMA, or will be submitting a PMA with European data.

What level of evidence is that data?

Is that something from a randomized controlled trial?

Or is it retrospective data?

Any insight you could give there would be helpful.

Yes, that data is very similar to the drop that Smith and [Matthew] took, and so, we'll be submitting that.

And of course, if all falls into place in that regard, that puts us out a couple of years towards the 2009 time period.

If we end up having to use data through the IDE and a full PMA with U.S., then we're probably a couple years further out on the resurfacing side.

All right.

That's all I've got.

Thanks a lot.

Thank you, Mike.

Your next question comes from Matt Miksic with Morgan Stanley.

Hi, good morning, thanks for taking the questions.

Good morning, Matt.

Wondering if this impact from the natural knee, is that something that was leading up to this quarter, as well?

Is that something the pressure you got from surgeons that prefer that knee system?

Sure, that's a system that has a very loyal following.

And I think any time that you make an adjustment as we did to the technology and addressing these anatomical differences between male and female knees and it's resonated in such a profound way with the surgeon base and the patient base out there, that just highlights that issue and lagging that offering in the natural knee side has impacted the business.

But we think that that's business that will pick back up with the launch of the flex and gender side of the natural knee offering.

And that's just to put -- you probably don't want to get too detailed about it.

But it looks like it's something like in the 20% -- 20 to 25% maybe of your total knees.

Is that sort of a good number to work with in terms of how big the natural knee could be in the U.S.?

We're not going to give you a specific number, but you're a bit high on that.

Okay.

Okay.

The other thing, did you give, Jim, a specific number on the impact to gross margins in terms of dollars or basis points of the FX hedges?

No, I didn't provide a specific and we're not going to get down to that level of detail, Matt.

But it does account for the change in margin, if you will, between the first and second quarters.

Got it.

And then just on the Hip side.

As we look at what's happened with, I think it happened a little bit last year with the NexGen Gender and now maybe happening a little bit with the Natural Gender.

Do you anticipate any kind of holding patients back or people waiting for a more complete rollout of the hip business?

Should we think about maybe a little pause before the full rollout in the second half here and into the first quarter of next year?

This is the gender hip I'm talking about.

I understand, and that's a dynamic that you do see with these offerings, especially if you have the market share that we do.

And I think that that is a reality.

It's very difficult to quantify that.

It's difficult for me to tell you how much of that (inaudible) we've experienced to date that's impacted our second quarter numbers and then to forecast out how much of that we'll see in our third quarter.

Our forecast, try to adjust for all of that.

But I can't break out for you those numbers.

I do think that when push out these innovative technologies, there is going to be some pacing.

But all of that should wash out.

And with a business like the one we have, you have these different systems coming online and so there ought to be some puts and takes in that regard and our overall performance should be able to compensate for that.

And then finally, I'll jump back in line here, but in the quarter it sounded like we talked about this, I think, last quarter and during the quarter, there was maybe an above average activity around distributors in the U.S.

moving around from other competitors, some disruption at some other competitive shops.

Is that signing those folks, talking to those folks, pursuing those opportunities throughout the quarter, was there any disruption in the quarter that you can attribute to that?

We didn't see any disruption.

There's activity, there's always activity in that regard.

I think that when there are transitions or integrations of large deals, there's displacements of sales reps, et cetera as well as surgeon opportunities.

So that's just part of the business, but I wouldn't attribute anything performance wise to any efforts in that regard.

I would, tell you, Matt, as well, investments that we're making in the sales force and the infrastructure, sales and distribution infrastructure here, here in the U.S.

and outside the U.S.

will contribute in the second half.

Great.

Well, that's good to know.

Thanks for taking the questions.

Thank you.

Your next question comes from with Tao Levy with Deutsche Bank.

Good morning.

Good morning.

I was wondering if maybe, just to understand properly what happened in the knee this quarter.

So essentially Gender Knees continue to do well and that was more than offset by losses in some of your other offerings?

Is that sort of the basic message?

Yes, gender continues to do extremely well.

And I think the thing for us to focus on is on a go forward basis, there's a lot more run way with gender.

To date, we have this offering, we don't have it on the porous side within NexGen.

That's coming.

We don't have either flex or gender on the natural knee side.

That's coming.

We have just now gotten to the point where we have adequate deployment of instruments and inventory to truly push this product into the U.S.

market let alone the international markets.

So there is an extraordinary amount of runway.

This a big knee system.

And as we said, we just passed the one-year anniversary.

So we're executing well on this, but the opportunity is at a rapid pace.

And so we think that this -- the gender offerings are going to take us out of this year and well into 2008 with upside.

Okay.

And then the guidance for the full year, you adjusted slightly the volume mix and foreign currency benefit.

Is that related to the second quarter performance?

Or is that kind of what you're seeing for the back half of the year?

For volume mix or a little bit lower than what you might have anticipated earlier in the year?

We are taking into account the performance in the second quarter.

It's that more than anything that's contributing to the update that we provided.

Got you.

And then just lastly on the gender hip.

Any early feedback from the surgeons who've tried it?

Is it good to go?

Does it need to go back to the R&D shop for some more tweaks?

And also, I know it's not -- probably a long answer, but any major topics on the science side that you can help us with on the hip side?

Thanks.

Sure.

The ML taper with connective technology is the first gender offering and the feedback that we've received is very positive.

We don't see postponements in moving towards a full launch.

That will ramp up as the second half continues.

And then going into the third -- I'm sorry the fourth quarter and even the first quarter of next year.

The feedback that we're getting is all around the flexibility interoperatively to compensate for the anatomical differences, and center the head and appropriate neck adjustments, so we really believe we're on to something.

This is a technology that we're going to find a lot of traction with.

Great.

Thanks.

Your next question comes from Mark Mullikin with Piper Jaffray

Good morning.

Good morning.

To delve into the knee side of the business a little bit more.

If you look at the Americas growth rate decelerating this quarter, can you give us an idea of how much of it you believe was the cannibalization issue verses the supply constraints that you have in the category?

Yes, I think that the deceleration is not material in amount from one quarter to the next.

We don't see any softening in the general market.

Our optimism about where gender is going to take us has not changed a bit.

And I think it's a matter of just getting enough of these instruments and the inventory out to take full advantage of it.

There are a lot of new knee systems on the market, as you know.

Our newest product is focused on a segment of our NexGen knee line.

As we add gender to -- as we're beginning to, to the natural knee system and other elements of our NexGen line, we will have the opportunity to get back business that we may have lost temporarily.

And also to go after competitive business, as David has pointed out.

Okay.

So at this point do you feel you have the adequate supply to both penetrate those competitive accounts in the U.S.

and push into international geographies in the third quarter?

The timing of these rollouts is something we're very careful to take into consideration in the guidance that we've provided.

Okay.

And then on the Mobile Bearing knee, is that something we should look to more for an '08 growth driver in the U.S.?

That's principally the case, yes.

It will rollout if we get approval in the fourth quarter.

But we're waiting the FDA to make a decision on that.

So I think that is the right way to think of it.

How would you calibrate the market opportunity?

Well, that's a significant market that is owned at this point by one competitor.

So we have 20% market share outside the U.S.

with this product and once that's cleared with a NexGen platform and flex opportunities and an MIS-friendly mobile bearing knee, we like our opportunities a great deal in that segment.

Okay.

And then you talked about the DeNovo NT biologic and the number of procedures.

What's the revenue opportunity for that product?

Yes, the revenue opportunity is modest this year.

But that is baked into our forecast numbers, as well.

Okay.

Very good, thank you.

Thank you.

Your next question comes from Bruce Nudell with UBS.

Good morning, thanks for taking my question.

One narrow question.

With regards to your OUS hip resurfacing experience, how many patients are in the hopper at this point in time?

And on a more strategic basis, it really looks like the worldwide hip and knee markets settling into a high single digit constant currency run rate.

Traditional spine instrumentation and trauma is in that same ballpark.

Should we be looking at Zimmer over the next 3 years or so, reliably producing high-single digit top line on the constant currency basis?

Or do you think there's a high likelihood that you could solidly get into the double digits?

Thank you.

Bruce, I don't have the number in front of me to address your first question.

We'll look into that.

With respect to the broader second question.

Again, but we're not going to provide guidance beyond 2007.

But we do think that we have a business that is in a market that would allow for double digit growth and we obviously are designing our business to achieve that level.

But you'll just have to await our '08 guidance to get anything that is more definitive for that time period.

I guess my only follow-up then is with regards to the hip and knee constant currency market on a worldwide basis, should we be just thinking of it as 7 to 9% reliable market and leave it at that and not ever think they could reliably exceed 10% growth.

I don't think you want to think of it that way.

We don't.

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

Thank you, good morning, guys.

Morning, Steve.

Can you just remind us about approximately what your mix of high flex was prior to the GSF launch.

Is it fair to say that the initial Zimmer accounts using GSF were already using that -- the premium-priced high flex?

Not in all cases.

To address your last question, but we were high 20% moving towards 40% in mix on that front.

Jim, do you want to elaborate?

Yes, it was at around 28% prior to the launch.

I think as you go back and you'll see I indicated in my remarks, it's now over 40.

Okay.

And so then on that second part, you're saying that in terms of the Zimmer accounts, you're seeing both those who were using the higher flex offerings as well as those who were using non-high flex and are now upshifting?

That's right.

Okay.

And then on trabecular metal, can you just update in what applications are you using trabecular metal today?

And you mentioned additional potentials.

What are some of those additional applications?

Yes, sure.

Wea re using this as a good example of why we like our business portfolio so much, as well, Steve.

We're using trabecular metal in the hip, knee, trauma, and spine lines as well as extremities.

And it's driving nice growth in all of those segments for us.

We're also looking at finding applications for trabecular metal in dental.

Okay.

And then lastly, it sounds obviously like you're taking more steps towards the hip resurfacing market.

I'm not sure if you mentioned this already, but what is your perspective in terms of ultimately, as a percent of the market, hip resurfacing can be in the U.S.?

Sure.

I think that the commentary that is out is generally correct as far as the percentage that could represent, some people get a little bit high, I think.

The number of something like 10% in coming years, and the key is define coming years as far as the uptake on that technology.

We think that there's going to be a place for it, but we also think that there's going to be a relationship and how steep that uptake curve is relative to the risk that there are so many femoral neck fractures that people back way off the reuse of resurfacing.

So 10% over years, but a lot of what that curve is going to look like is going to be dependent upon how aggressively the companies that are introducing this into the U.S.

market now train and bring surgeons online with that technology.

Because, if they do it at too rapid of a pace and it starts to be used with patients that aren't properly indicated, then you're more likely to have those types of problems and see fallback in the uptake.

Okay.

Great.

Thanks, guys.

Sure.

Your next question comes from Bob Hopkins with Lehman Brothers.

All right.

Thanks, and good morning.

Good morning, Bob.

Just a couple quick questions and then one big picture.

Some data points that you guys used to give in the past.

I'm sorry if I missed this, did you give the number of gender-specific knee implants in the quarter?

I think last quarter you said it was 14,427.

Did you give that specifically?

We didn't.

And it was a conscious decision not to, Bob.

We try to provide that specificity in the first two quarters of the rollout just to give people a sense as to the pace of the penetration with that product, as well as just the sheer magnitude of deploying the instruments and satisfying the needs out in the marketplace.

We're not going to do that out on a go forward basis, just because I don't think that that's going to be useful information for us to put in competitors' hands.

One other data point regarding gender specific that you gave was that, you had mentioned last quarter that 600 competitive surgeons had attended dinners.

And I was wondering if you guys could just talk a little bit about how that number has advanced?

And really, as we look to the fourth quarter in 2008, in orthopedics, as you guys know, rarely have we seen significant share shifts in this industry.

And I'm wondering if at this point do you guys really believe that this is something that you can get competitive surgeons to use aggressively?

We're not going to start talking about tactical marketing areas and provide you with specific information on the dinner side.

But we do believe that we can see -- share, how much is yet to be determined.

But we're just entering the phase where we're going to get greater visibility to that, Bob.

Frankly in this business it doesn't have to be multiple percents for it to make a difference.

And we do believe that we're going to get share and a lot of that basis is founded on the conversations and feedback we've received from surgeons out in the field.

Okay.

And then one other data point you gave us that, in terms of manufacturing capacity, I think you said last quarter you're at about 180 sets per month on gender specific.

Are you still capacity constrained there?

Where are we right now?

No, we've been indicating that we're at a point by the end of the second quarter where we feel the field consignments, the inventory, the instruments are where they need to be so that we have the opportunity now in the back half of the year to go after competitive business.

We have plans to put additional sets out into the field.

But again, those are putting our reps and our distributors in a position to go after competitive business.

Okay.

And then last little one is, last quarter you also gave a nice history of average daily sales rates per quarter.

Do you have that information for this quarter?

We're not going to share that information, Bob.

Okay.

And, you used to in the past, new policy going forward, I guess?

We don't mean -- I can understand where some of that detailed information helps you build out your models.

But in instances where we think sharing that information is going to allow people to anticipate our moves among the competition and design their own programs and market around our moves, I just don't think that that's constructive for us to share on these calls.

Okay.

And then the one big picture question I had, David, given this is sort of the first conference call with the new management team at Zimmer, I was wondering if you could comment on the sustainability of the Zimmer economic model, that we've talked so much about in the past, and dropping $0.40 to $0.50 of every incremental dollar down to the bottom line, especially in line with some of your comments, I think you mentioned the accelerating top line.

Can you accomplish your top line goals at the same level of investments in R&D and SG&A?

Or are we going to need to see that pick up going forward?

Just some comments there would be helpful.

Sure.

I think when we talked historically about the $0.40 to $0.50 drop through on each incremental dollar of revenue, that is really focused on organically driven growth.

And so the source of the revenue growth is going to be determinative of whether or not that $0.40 to $0.50 drop through is realistic.

And as you say, in some of these businesses where we have single digit market share.

If you look at spine, dental, and trauma, collectively there is about that $10 billion market, which is equal in size to hips and knees.

So we have a lot of room for growth there.

And in order to take advantage of the growth in those areas, we're going to have to invest more heavily.

And we're going to have to compromise the P&Ls of those divisions.

But I will tell you that I still believe that we're going to show a very attractive leverage on a consolidated basis.

Okay.

Thanks very much.

I'll get back in queue.

Appreciate it.

Thank you, Bob.

Your next question comes from Mike Weinstein with JPMorgan.

Thank you.

Let me just follow-up that last question there.

David, the response there is, on an organic basis, the 40 to 50% is still a fair assumption.

But given the fact that you'd like to do some M&A, that may compromise that over a period of time?

Is that the message?

What I'm saying is I think we'll still show very attractive leverage in our top line growth down to the bottom line in the divisional P&Ls whether it's M&A or just further internal development, Mike.

We're going to have to invest in those businesses to grow them.

But we'll incorporate any of that into our guidance.

Okay.

So the message then is that, you may need to invest in a heavier rate across some of these smaller businesses, spine, trauma, et cetera, in order to get to the size that you want in those businesses and therefore don't pencil in the 40 to 50%?

Don't pencil that in for every incremental revenue dollar is my point.

Okay.

Just wanted to clarify.

And let me just talk about, in the back half of the year.

You changed the components a little bit of your revenue guidance for the year.

You're still targeting 11%, but you said that the volume mix price component would be 9% instead of 10% previously and FX would go from 1 to 2%, which we understand.

It still does imply some acceleration in the back half of the year.

You will have, obviously, the contribution from India, so that will in itself help accelerate growth.

But organically, are you expecting acceleration in the back half?

And if you could just talk about what drives that?

Sure, we are expecting organic growth beyond the benefits of the Endius transaction and the other transactions that we've talked about.

But organic growth in the hip and knee business, obviously will have the biggest impact on that trajectory.

As we rollout further, the Gender Solutions just on the NexGen side, let alone the natural knee side, we expect to see nice uptick on that side of the business.

As well as, we talked about this consistently, we had a pretty significant marketing campaign that we described in a fair amount of detail on the DTP side.

The benefits of that are coming.

We like what we see there, we think that we've got an effective program.

And that's going to drive growth.

And finally on the hip side, we're focused a lot more on knees in this call.

But on the hip side, we are very enthusiastic about the initial feedback that we're getting on the ML taper with connective technology.

We think that's a good product for us.

And beyond that we're still seeing ramp-up from some of last years introductions.

As you'll recall, we had a real bolus of new product launches in the second half of last year.

And so those will continue to reap down in our benefit in the second half of this year.

So I guess my question then, following that up would be, how good is your visibility you feel like at this point on that acceleration?

Your comps in the first half of this year were pretty easy, a little bit more difficult in the back half.

Do you feel pretty comfortable at this point that that will materialize?

We do.

Okay.

And let me just follow-up the first back and forth we had on just the discussion of the 40 to 50% drop through on margins.

If I listened to what you were saying there, it does sound like verses maybe where Ray was at that you'd like to see an accelerated pace in investment in those areas.

Is that a subtle change that maybe I'm picking up, or am I trying to read too much into it?

Well, I think that what I'm saying is I want to see an acceleration in the growth of those businesses.

If we can do that with less investment, we would do it that way, obviously.

We're going to go through and develop very detailed business plans going into 2008 that will incorporate installments of these overall strategic initiative and is provide you with clarity as we give you '08 guidance.

But fundamentally, we're all about growing earnings and cash flow in this business.

And so, we're not going to be hung up on some nuanced margins within these divisions so long as we still can show nice leverage on a consolidated basis within that P&L and drive earnings and cash flow growth.

There's no change in the operating culture here, Mike.

Yes, I know.

We're in kind of financial discipline as we always have.

Yes, of course.

Kind of a realistic picture as to what it's going to take to grow out those other businesses.

Understood, I'm just trying to get the sense for what the feel is relative to the need to increase the investment in those businesses in order to stimulate that growth that you want.

Sure.

Thanks for taking the questions, guys.

Thank you.

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

Great, thanks so much.

Was wondering, David, you mentioned accelerating growth in the trauma business that you had some new products coming.

I'm assuming that's in terms of nail offering (inaudible).

I assume the sales focus can accelerate immediately in the second half.

What can we expect in terms of new products?

and when?

Our new product offerings this year within the trauma line are really focused on further enhancements in broadening our offering on the plate and screw side.

And then as you get into next year, it is, as you suggest, on the nail side.

And those offerings and introductions will be comprehensive on the nail side.

Okay.

And is that throughout the year or first half?

I'm trying to get a sense of when we can return to maybe some double digit growth.

It's throughout the year, Dhulsini.

Okay.

All right.

And then I was wondering, your comments about the flex knee reaching over 40% worldwide, can you give us a sense of what that penetration looks like U.S.

verses overseas?

And specifically I'm wondering if it's contributing to that very impressive growth in Japan that you post in the quarter?

I would tell you it's higher in the U.S.

than it is overseas.

I would also tell you that flex penetration in Japan is higher than any other market in the world, but it's been that way historically.

You may know that that flex product was originally designed with that market in mind.

And in terms of mix benefit, what we have in Japan is not contributing in the same way that the -- that we're getting that contribution in the U.S.

because of the reimbursement system there and how that operates.

Sure.

Okay.

And then could you just confirm in terms of GSK overseas, it's still front and very limited?

It is limited at this point.

It's concentrated on sort of initial launch in select markets within the European world and the same thing with Asia-Pacific.

Okay.

That's it for me.

Thanks so much.

Thank you.

Your next question comes from Ben Andrew with William Blair.

Good morning.

Just a brief question on pricing dynamics.

You talked about some of the declines in Japan as well as what's been going on in Europe.

Can you give us your thoughts for kind of the next year or so in the key markets on price?

We'll go back to just sort of our general perspective on price, Ben, to respond to your question.

We're obviously coming off a time period a few years ago where we're seeing something that was out of the cycle of the kind of 2 to 3% positive price and more towards 4 or even 5%.

We came off that at a fairly significant way over the course of the last couple of years.

And now we're seeing, on a global basis, a very flat pricing environments and some positive jurisdictions, including, for us, this past quarter within the U.S.

But then both globally and then within the European world, some offsets, Germany is a tougher pricing environment, obviously.

Everyone's aware of what's going on with Japan and Asia-Pacific, but then there are some other jurisdictions that offset that a bit.

For the balance of this year, we're still looking at flat pricing, I don't see that climate changing all that dramatically.

In a more macro sense, we've been telling people plus or minus 2%.

But I think that flattish pricing is what you can expect to see going forward.

Great.

Thanks.

Sure.

Your next question comes from Bill Plovanic with First Albany.

I'm sorry, with Canaccord Adams, good morning.

Good morning.

Just some points of clarification.

On the new product launches in the knee area, you have the -- is it three different products the porous GSK, the GSK natural, and then the GSK flex?

That's correct.

Okay.

That's number one.

Number two, I was wondering if you could quantify the contributions from the acquisitions both the Endius and the dental acquisition in Italy this quarter?

Insignificant.

Completely inconsequential in the scheme of our results.

Okay.

And then, just lastly in terms of the ML taper and the VerSys systems for next year, wondering if you could just give us one minute recap or what have you on the differences in those products?

Sure.

The ML taper with connective technology is the modular stem that allows the surgeon to interoperatively adjust for the anatomical differences in the female hip, and that includes adjustments that allow for the centering of the head, neck adjustments, as well as leg length.

Whereas the Epoch technology incorporated in the versus line is oriented towards addressing stress shielding and the [ausocorodic] bone that you typically will see with the female patient.

Great.

Thank you very much.

You're very welcome.

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

Thanks.

Good morning.

Good morning.

Just was wondering if you could talk a little bit about, if any, spinal disk program you have and where you are in that?

Yes.

We're not going to get into any detail about internal projects on the disk side.

We are interested in nucleus replacement and [annualess] repair on that side of things, as well as disks.

We said, I guess going back several years now, that we didn't think that the first generation lumbar disks were an area of interest for us, but we are interested at the cervical level in the artificial disks.

Okay.

And if we could just back track real quickly on your sales force.

Obviously, there's some additions and what not.

If you could tell us if there's any particular area you're concentrating on building out your sales force.

Is that trauma or is that spine or just more general across the board buildout?

Sure.

As a general matter, we're always looking to strengthen just like any other element of our business the sales force managerial talent.

Our current reconstructive sales force is the global leader in my view.

We have an extraordinary amount of talent and experience and the commitment of that group, I believe is unmatched.

If there are instances where we can find additional talent to even augment that system, we're interested in doing that.

I think you're going to see a lot more emphasis for us on ensuring that we bring proper focus to the sale of our trauma products, as well as continue to buildout the sales infrastructure on the spine side.

Okay.

And then lastly, I was wondering if you could comment on your progress with [bridge-it].

Is that anything to be interested in?

It is something to be interested in.

We're highly interested and so are the surgeons that we've interfaced with on that development project.

That is not one that is likely to have any kind of a revenue impact this year.

But as we get into 2008, it would more likely impact that year and we'll give you the updates as is appropriate.

Okay.

Great.

Thank you.

Sure.

Your next question comes from Robert Faulkner with Thomas Weisel Partners.

Thank you, good morning.

Morning, Robert.

Two questions for you, if you will.

One I'd like to come back where Bill was.

You said negligible contribution of acquisitions, even if it's exceedingly negligible.

Are we talking a million or two or three in that range of order, just ballpark?

What we're saying did not really have a measurable impact on our top line.

And otherwise, I provided some detail on probably more detail than most people would provide.

But detail on how it's impacting on our operating expenses within the quarter.

All right.

And secondly, with respect to the overall environment in the U.S.

in terms of interaction between Zimmer and the hospitals purchasing people, for example.

Could you characterize any change you've seen in their aggressiveness towards price or reduction in aggressiveness with respect to price over the last 6 months, 9 months, let's say?

No noticeable differences from our perspective.

If anything I think is compared to the prior year or the prior 18 month period that is prior to coming into this year.

We're probably seeing a little bit more focus on some of the other areas and them.

And so it's a slightly positive price environment within the U.S.

from our perspective.

Good.

I'll leave it there.

Thank you very much.

Okay.

You're welcome.

Your next question comes from Jason Wittes with Lerrink Swann.

Hi, thank you very much.

I'll start off by apologizing for another knee question.

But I wanted to ask about specifically pricing on gender specific.

I guess the understanding I've always had was that it's basically priced to the level of a high flex knee.

Is that the right assumption?

Or is there some more of a premium to be expected?

As a general matter, that's the right assumption.

There is a premium that we receive in instances above the flex level but it's less significant than the step from the traditional NexGen system to the flex system.

Okay.

And in terms of who actually is going to be using gender specific.

Is it right to assume both male and female patients are looking into this technology?

Or is it really focused towards women?

Well, it is really focused towards women, but there are instances where a particular male's anatomy could be quite similar to what we found with the anatomical reference points in the development of the Gender Knee.

And so there are surgeons that have used it already in male patients.

Okay.

And then you did, I think you did touch on acquisitions in your script.

I think you might even talked about it in the past.

I guess the assumption is that you will, if you do some kind of -- something equisitive it would be more in the -- it would stay within the realm of orthopedics.

Is that the right way to think about it?

And with that, can you enlighten us into like what areas are the most interesting, I guess looking at your product portfolio, I think spine is always of interest.

And I'd imagine even trauma?

Yes, as far as our acquisition strategy, that really has not changed, Jason.

We're focusing on deals primarily in the $100 million, some of these deals are even less than $100 million But 100 to $400 million value range.

And as far as the areas of particular focus for us, biologics, spine and dental are where we're more focused.

But we're looking at things more broadly than those three areas, they are confined, I would say, to general -- to muscular skeletal health.

Anything we do, you should expect to see to be within muscular skeletal health.

Okay.

And just, I guess, a clarification on the rollout you just described for hips, for gender hips.

You mentioned that's sort of a fourth quarter event.

Should we assume that's sort of a 6 to 8 month rollout?

Or is that something that's going to see a big bolus fourth quarter?

Just curious to know how we should be modeling for that.

Yes, I think any of these rollouts for the size business that we have are beyond the one quarter rollout.

But you'll start to see ML taper come out this year.

And, I mean, it sounds like it's roughly -- well probably 3 quarters before a rollout is sort of fully up to scale.

Is that a fair assumption for the size of your business?

I think that is fair depending upon the product line.

But that's the right way to think of it.

Okay.

Great.

Thanks a lot.

Sure.

Your next question comes from Jeff Johnson with Robert W.

Baird.

Hey, guys.

Good morning.

Thanks for taking the call, question.

Good morning, Jeff.

Just a couple points of clarifications, I guess, this late in the call I've got most of my questions answered.

But back to the distributor transitions or the chatter, I think a lot of us have been hearing in the channels recently.

Does that at all speak to just you guys being more aggressive against a competitor that's going through some transitions here?

Or does it at all, maybe indicate plateauing that you're seeing in some of your installed base of distributors and you need to look elsewhere here for some further growth here in the Americas?

No, you shouldn't characterize any of those efforts with respect to the two offered explanations that you have there, I don't think, Jeff.

We feel like we have a really attractive position within the marketplace.

I think surgeons, sales reps, and others see it that way, as well.

So conversations will take place predominantly because of a shared view as to where this world needs to head.

And a buy in that we're doing the right things.

Okay.

Great.

And then just last question on knees as far as the natural knee.

I'm just a little confused if the natural knee has been suffering from softness maybe here just given the GSK and that.

Is that natural knee users or surgeons who are transitioning to a competitive product in the interim here or are they going to GSK?

And if they're going to GSK, as you then bring out of a gender specific natural, how does that not just get reallocated within the knee portfolio and not necessarily drive growth?

That's correct.

If someone is historically a natural knee user and they move to the Gender -- the NexGen solution, then it's all within our world.

What we're seeing is in instances some pullback from the use, I think in anticipation of the flex, as well as some interim competitive losses that we believe will pick back up.

Okay.

So just to clarify that, that natural knee, again, kind of the softness there is more those surgeons not going to GSK, necessarily or the NexGen GSK, it's them pulling back their use of that product overall or going to a competitive product in the interim, and that is where you could come back and drive some growth?

That's correct.

Perfect.

Just wanted that clarification.

Thanks, guys.

Okay.

Your final question comes from Matt Miksic with Morgan Stanley.

Hey, thanks for taking the call.

I really don't want to beat a dead horse here around the $0.40 to $0.50 drop through question.

I know you talked around that a lot and you have over the past quarter.

But I just want to read back to you, I guess, the way that I'm interpreting your comments.

And let me know if this is on target.

$0.40 to $0.50 drop through is, has been, continues to be, sort of the long run target multi-period 4 to 6 quarter target that you look for.

And obviously that's a lot easier to hit that objective when you're not adding to businesses, but just kind of tuning them up and tightening them up with knees, for example, or with maybe a spine business that wasn't getting a lot of new investment.

But during a period where you're going to be adding businesses to spine, potentially adding making acquisitions and investing in those businesses for long run growth, that 40 or 50% drop through may, for some period of time, kind of abate and then return as you kind of kick those operations into sort of fully tuned shape.

Is that a good way to look at it?

I think that it's generally a fair characterization.

You said a lot there, Matt.

I just don't want to reiterate, from our perspective, what we're seeing is that within divisions, you're not going to see that type of growth if you're a 3% market shareholder within the spine world, and we want to grow and become a more significant player within that market, obviously we're going to have to invest at a heavier rate.

In the more mature businesses, that we have in the sense of market share, currently, such as our market share within hips and knees, that aspirational goal of $0.40 to $0.50 drop through is far more realistic in its current state.

Because that's our dominant business, with believe that we're going to be able to invest in these other businesses to accelerate the growth and yet on a consolidated basis show nice leverage in the P&L overall.

Got it.

And long run, pre [Ray and Sam], post Ray and Sam, this is a goal that sort of was in place, is in place, continues to be in place and hasn't fundamentally changed in terms of your organization?

That is an aspirational goal that applies, that's correct.

But we're going to make good business decision, notwithstanding our aspirational goal to make sure that we're fully taking advantage of the other market opportunities that we have.

Then, obviously, it'll all be all incorporated into the guidance going forward too, Matt.

Got it.

Thank you.

Okay.

Thank you.

And now I'd like to turn the call back to Mr.

David Dvorak for any closing remarks.

Thanks, Lou Ann.

Well in closing, we believe this was a solid quarter in which we again demonstrated our ability to deliver very attractive earnings growth.

We're very much looking forward to the opportunities ahead.

And we appreciate your continued support of Zimmer.

So we'll speak to you again on our third quarter conference call, which is scheduled for October 25th.

Thank you.

Thank you for participating in today's conference call.

You may now disconnect.