Zimmer Biomet Holdings Inc (ZBH) 2007 Q4 法說會逐字稿

I'm Sean O'Hara, the Associate Director of Investor Relations and Strategic Planning.

I would like to welcome you to the Zimmer fourth quarter and full year results conference call.

Joining me today to host this call are David Dvorak, President and Chief Executive Officer; and Jim Crines, Executive Vice President, Finance, and Chief Financial Officer.

This morning we will review our performance for the quarter, present our outlook for 2008, and conclude our discussion with a question and answer session.

Before we get started I would like to point out that 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 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 Zimmer.com under the section entitled investor relations.

At this time I would like to introduce David Dvorak, President and Chief Executive Officer of Zimmer.

Thank you, Sean, and good morning, everyone.

Today I'd like to briefly review the results of the quarter.

We're pleased about these overall results, especially the strength of sales across geographic segments.

I'll spend a few minutes giving you our outlook for both Zimmer and the industry in 2008.

Also, I'll outline some important programs we plan to institute in infrastructure, operations, and elsewhere which we believe will prepare the Company for an even more exciting future.

First, lets's review our fourth quarter results.

Consolidated sales for the quarter of $1.073 billion were up 15% over the prior year, 10% in constant currency and we delivered 16% growth in adjusted earnings per share.

Our sales results reflect improvement in nearly every product category and all geographic segments and also include the effect of recent acquisitions supporting our spine and dental businesses.

Based on the already reported results of other market participants it would appear that market growth accelerated in the fourth quarter and we're particularly pleased to see how our supply chain and our sales and distribution networks around the world were able to respond to this growth in procedures.

The fourth quarter's strong finish capped off an eventful year for Zimmer.

With respect to our financial results for the full year we grew sales 12% over the prior year, 9% in constant currency and grew adjusted earnings per share 18%.

During the year we made progress on some of our key strategic priorities by expanding our gender solutions product offering and adding products from Endius and ORTHOsoft to our portfolio.

We also continued our strong record of cash flow generation and used over $576 million to repurchase 7.2 million shares in 2007.

Jim will discuss these results in greater detail later in the call.

Turning to our 2008 outlook.

We developed our 2008 guidance taking into account our assessment of the market and the opportunities and risks that could impact our performance.

I'll now take you through our expectations for our sales and earnings.

First, looking at the market for our core reconstructive product categories and geographies, we enter 2008 with positive momentum and underlying market demand for orthopedic devices.

When all Company reports are in for 2007, we expect the results will indicate that the global reconstructive market grew in the range of 8 to 10%.

We continue to believe this reflects mid single digit growth and procedures with the balance due to mix and flat to modest price improvements.

We anticipate similar market dynamics in 2008 and slightly higher market growth rates for spine, trauma, dental, and extremities consistent with recent trends.

Our outlook calls for top line growth for the year of 10 to 11% net sales on a reported basis and adjusted earnings per share of $4.20 to $4.25.

Sales will be driven by new product introductions and further market penetration by key products launched in 2007, as well as the positive effect of a weaker U.S.

dollar abroad.

We attribute approximately 2 points of sales growth in our range to the impact of foreign currency exchange rates.

Several important elements of our product portfolio will impact top line results in 2008.

In our two largest product categories, knees and hips, we see the introduction of certain new products as key drivers for the performance this year.

We're experiencing a nice stream of new products in knees this year.

We anticipate that the further extension of our gender solutions brand and performance of our mobile bearing knee will provide the stimulus to meet or exceed market growth within our knee franchise.

In hips, we're working to address a range of mix opportunities.

Our new ML taper with connective technology products should enhance our competitive position in 2008 and beyond.

Although we don't believe we're experiencing unit share losses because of these factors, we expect to continue to track behind the market on a dollar basis until these mix opportunities are fully addressed.

Rounding out our reconstructive group, we expect both dental and extremities to continue their strong performance and we anticipate growing at or above market-rates in 2008.

We expect spine will benefit in 2008 as it did in the fourth quarter from the complete Integration of Endius products and we'll continue to look for fill in acquisitions that can enhance our spine portfolio.

Finally, in trauma, we still have some work to do to capitalize on the opportunities in that market.

We do expect that our renewed focus on the sales effort will help to improve our performance as we continue to work on addressing key product gaps going into 2009.

As we continue to drive the top line in 2008, we also plan to implement a number of significant infrastructure and operating initiatives that will position us to respond to the growing medical needs of an aging population.

Recent studies indicate that the baby boomer generation will contribute to a 40% increase in arthritis over the next two decades.

We believe that investing today in the infrastructure needed to serve the healthcare market of the future will generate attractive returns in the years to come.

For example, moving beyond this year to 2009, we expect to return to at least low double digit growth in adjusted earnings per share.

Jim will provide further details on the impact of these initiatives on 2008 earnings and modeling inputs during this call.

I'd now like to turn to what I've determined will continue to be a priority of the highest level for the Company.

With the passage of four months since signing the deferred prosecution and corporate integrity agreements the continued enhancement of our corporate compliance program is progressing.

We're focused on meeting our obligations under the operational provisions of these resolution agreements and we've embraced the opportunity to make a broader committment to the ongoing improvement of compliance and business practices that will position us for greater growth.

The terms of the resolution agreements built upon the foundation and incorporated key features of our enhanced compliance program which we began developing in 2004 and implemented in 2005.

The work we've undertaken to address the additional requirements of these resolution agreements has revealed an exceptional opportunity to provide a benchmark of compliance transparency and patient centrism for the industry.

We'll focus initially on three key priorities as we begin to execute a strategy that moves beyond the requirements of the resolution agreements and positions Zimmer to lead in this important area.

First we're reviewing existing consulting agreements to ensure that they're consistent with the fair market value principles which are our cornerstone of our 2005 corporate compliance program.

Second, we'll continue to move beyond the hip and knee business with an even more robust enterprise wide program.

And third, we'll enhance our efforts to consistently align all business units throughout the world behind best practices and new standards.

As with any situation in which someone steps forward to initiate change, we anticipate that we may face certain challenges.

Nevertheless, we'll carry forward with these initiatives because we believe it's the right thing to do for our Company and the industry as a whole, in all cases, we commit to fair treatment of our collaborators and we'll endeavor to work with stakeholders who embrace these enhanced compliance initiatives.

Fundamentally, we believe these changes will allow us to continue to deliver industry leading products backed by business practices that inspire confidence and trust.

As a market leader it makes sense to us that our leadership position should extend to include innovation in the area of compliance.

Finally, the new initiatives will make it possible for us to focus entirely on what we do best, bringing to market products that enhance patients lives.

At this point, Jim will provide some further details on the the quarter and our 2008 guidance.

Jim?

Thanks, David.

I will review our performance in the quarter in more detail and then provide some additional information related to our guidance and infrastructure and operating initiatives.

Sales of $1.73 billion, for the quarter represent an increase of 15% reported and 10.2% constant currency.

These results reflect a sequential 240 basis point increase in constant currency growth and were broad based.

Growth in the quarter was stronger than anticipated reflecting increased underlying procedure demand in the quarter, which was most evident for us in U.S.

and Europe knee sales.

The weaker U.S.

dollar as compared with prior year added 4.8% or $44.9 million in revenue in the quarter, approximately $11 million ahead of our previous estimates.

Our hedging program resulted in the recognition of greater losses on foreign exchange contracts, which are reported in cost of products sold.

The impact on gross margin for the counter reported for the greater part of the decline in the margin compared to both prior year and prior quarter.

As expected, consolidated price was flat for the quarter.

In the Americas pricing contributed 1 point to growth in the quarter.

In Europe, price was 1 point negative.

Germany, the UK, and Italy reported negative price of 4.1, 1.7, and 0.7% respectively while other markets in Europe were flat or slightly positive.

Asia Pacific results include negative price of 1.8%, driven by negative 4.7% in Japan offset by flat deposited prices in other Asia Pacific markets.

Turning to our revenue growth by major product category, worldwide reconstructive sales increased 15.3% reported, 10.2%, constant currency, up 150 basis points from the third quarter.

Knee sales led by the ongoing introduction and launch of our next gen Gender Solutions Knee improved 10.2%.

Pricing on a global basis was flat for the quarter.

Flex knees accounted for 47% of our knee units on a global basis, consistent with third quarter.

Achieving these results in a quarter when Flex penetration remained at prior quarter levels is a sign that increased investment and field inventory and instrument deployments across our entire knee portfolio is already having a positive impact.

In other knee systems, Zimmer Uni, LCC, as well as our Prolong highly crosslink Polyethylene grew in double digits.

We launched the gender solutions Natural-Knee Flex in the quarter and that has curbed some of the competitive pressure on that product line.

Geographically, in the fourth quarter, our knee sales in constant currency increased 9.6% in the Americas, 10.3% in Europe, and a very strong 13.3% in Asia Pacific.

Hip sales increased 6.7% in the quarter reflecting a volume and mix increase of 7.7% offset by a decrease in average selling prices of 1%.

Growth in bone cement sales for the fourth quarter accounted for approximately 100 basis points of the volume mix increase for hips.

These results reflect steady growth across our primary hip portfolio, including for porous primary stems, total cups, and bone cement.

Our TM Primary, ML Taper and Epoch stems all experienced double digit growth offset in part by lower sales of our VerSys fiber metal MidCoat, beaded 6 inch full coat, and other cemented stems.

TM modular cup and Durom acetabular component sales reported strong growth as did Metasul large diameter heads with the Metasul brand realizing over 37% reported growth in sales in the quarter on a relatively small base.

Bone cement sales increased 47% in the quarter.

On a geographic basis and in constant currency, Hip sales increased 9.2% in the Americas with bone cement accounting for 2.5 points of that growth.

4.7% in Europe and 3.9% in Asia Pacific inclusive of negative price of 3.3%.

Extremity sales for the quarter in constant currency increased 30.1% on a challenging comp of 23.7% in the fourth quarter of 2007.

Extremity sales increased 34.7% in the Americas, 19.1% in Europe, and 21.6% in Asia Pacific.

Dental sales continued to grow in double digits at 24.2% for the quarter on a prior year comp of 24.3%.

Dental sales increased 7.2% in the Americas and 63.5% in Europe, including the effect of the distributer acquisition in Italy, which closed in the second quarter.

Dental sales increased 11.9% in Asia Pacific.

Trauma sales in the quarter were up over the prior year period 6.2% constant currency.

This growth is up sequentially as we bring greater focus to the sales effort supporting our trauma product line.

We expect this growth to still lag the market due mainly to slower sales of intramedullary nails and compression hip screws.

Trauma sales in the quarter increased 4.3% in the Americas, 8.9% in Asia Pacific and 9.2% in Europe.

At 17.8% over prior year fourth quarter, Spine sales saw a nice sequential improvement from the third quarter lifted by sales of [Thorocallum] bar outer body fusion products, inner body spaces and [Denesis].

Spine in the Americas was up 15.1%, Europe increased 27.6% and Asia Pacific was up 45.6% on a small base.

Finally, orthopedic surgical products and other sales grew 6.6% in the quarter up 3.9% in the Americas, 11.4% in Europe and 10.8% in Asia Pacific over the prior year period.

Now, let me focus on the rest of the income statement.

Our adjusted gross profit margin of 76.4% for the quarter reflects 140 basis point decrease from prior year and a sequential decline of 150 basis points from the third quarter.

The decrease in margin is mainly attributable to the impact of foreign currency hedges and geographic sales mix.

R&D expense increased 12% to $51 million for the quarter, indicating higher spending for new product development across all product segments.

Selling, general, and administrative expenses increased to $401 million, up 16% to prior year and include monitor fees and expenses and higher instrument costs in the quarter.

SG&A expenses were also impacted by dilution from the ORTHOsoft acquisition which closed in November.

Acquisition integration and other amounted to $15.7 million in the quarter, comprised principally of cost pertaining to 2007 acquisitions and including an IP R&D charge and contract termination liabilities related to the ORTHOsoft transaction.

Adjusted operating profit in the quarter increased 9.8% to $367.9 million, a 34.3%, our adjusted operating profit to sales ratio decreased by 160 basis points from prior year as a result of the lower gross margin and higher SG&A cost.

Interest income for the quarter amounted to $1.1 million, adjusted net earnings increased 12.5% to $276.1 million and adjusted diluted earnings per share rose 15.7% to $1.18.

On $234.8 million average outstanding diluted shares.

These adjusted earnings per share are inclusive of approximately $0.05 of share based compensation.

At $1.12, reported diluted earnings per share increased 9.8% on prior year reported EPS of $1.02.

Let's now turn to our tax rate.

At 25.1% adjusted for the quarter and 27.5% for the year the effective tax rate improved relative to our expectations.

Principally as a result of higher earnings and profits from our non-U.S.

operations.

As indicated, fourth quarter weighted average diluted shares outstanding were $234.8 million.

During the quarter, we repurchased 1.624 million shares at a total purchase price of $116 million or an average price per share of $71.23.

During 2007, we repurchased 7.2 million shares at a total purchase price of $576.2 million.

As of December 31, 2007, we have remaining capacity to repurchase up to 621 million of stock under our repurchase program.

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

Operating cash flow for the quarter amounted to $408.3 million.

Depreciation and amortization expense for the quarter increased to $62.4 million.

Capital expenditures for the quarter totaled $107.2 million including $32.3 million for instruments and $74.9 million for property, plant, and equipment, with $19 million related to infrastructure initiatives.

Free cash flow was $301.1 million for the quarter.

Operating and free cash flow includes approximately $23 million related to delayed payments under various contractual arrangements with healthcare professionals or institutions.

Finally, inventory days on hand finished the quarter at 258 days, a decrease of 19 days from prior year reflecting higher cost of goods and strong underlying demand in the quarter.

Our trade Accounts Receivable Day Sales Outstanding finished the quarter at 52 days an 8 day improvement to prior quarter and 3 days better than prior year.

Now, I would like to expand upon our guidance for this year and comment on our philosophy in this regard.

Guidance reflects our outlook for the year based on a thorough evaluation of detailed business unit and corporate operating plans.

We are changing our approach by only issuing full year guidance.

We want to guide the Street as we run the business which is with the longer term perspective and accountability for annual performance.

For 2008, we will provide some more detailed guidance with regard to our spending plans and also share with you our thinking on margins and expense ratios.

This should give you more information than you have had in the past to help with your models.

We hope for now this will strike the right balance between your need for detail and our desire to stay focused on our longer term goals and objectives.

As David mentioned, after reviewing market dynamics and our relative opportunities and risk we expect to deliver 10 to 11% top line sales growth in 2008 and adjusted earnings per share in a range of $4.20 to $4.25.

As always, our guidance and assumptions exclude the effect of potential future acquisitions or other unforeseen material business events.

Taking a closer look at sales expectations, we anticipate approximately 200 basis points of growth to come from foreign currency and as we have pointed out in the past, our hedging program essentially neutralizes the impact of FX to our bottom line.

Therefore, our sales guidance assumes a constant currency growth rate of 8 to 9% for the year.

This is a step down when compared to the fourth quarter as we will be up against some tougher comps and continuing challenges in hips in particular.

Our earnings guidance for 2008 reflects the expected cost for a number of ongoing infrastructure and operating initiatives referenced in our press release.

As David indicated these initiatives are needed to serve the healthcare market of the future.

Our earnings guidance also includes dilution related to the ORTHOsoft Acquisition and incremental monitor fees and related compliance expenses.

Working down through the P&L, we anticipate our consolidated gross margin to be in a range of 76 to 77%, most likely in the middle of that range consistent with our fourth quarter results.

Compared with the full year 2007, this is a sequential step down due to two principle factors.

In 2008, we are facing increased manufacturing cost due to higher material and quality costs and with foreign currency bolstering the top line, we anticipate further losses under our foreign currency hedging program.

We are also in the process of finalizing plans to accommodate at least 100,000 square feet of additional international manufacturing capacity and consolidating distribution in Europe.

The rationale for expanding now is to diversify our manufacturing network and reduce risk, take advantage of possible lower tax jurisdictions, and prepare our supply chain for increased future unit volumes globally.

At the same time, our product portfolio has grown in size and complexity and for example, contains an increased number of PMA class 3 devices.

Due to these circumstances, we are also upgrading our quality systems infrastructure to ensure Zimmer product quality is never compromised.

Moving along to R&D, you should expect R&D expenditures consistent with 2007 between 5 and 6% of revenue and here as well most likely in the middle of that range.

Now, as we get to SG&A, I'll outline the impact of monitor fees and related compliance expenses as well as the infrastructure and operating initiatives.

To start, as disclosed previously, we anticipate $0.02 to $0.03 per quarter in SG&A expenses related to external monitoring.

We also will be implementing the compliance related initiatives that David described and have planned in some additional expenses for these efforts.

We will be absorbing on a full year basis $0.03 of dilution related to the ORTHOsoft acquisition as previously disclosed.

We are making necessary investments to our global IT systems.

Since our spinoff in 2001, we have run our businesses on multiple IT platforms.

In 2007, we kicked off a global initiative to buildout a single global IT platform on SAP.

As we enter 2008 we plan to implement SAP in our Asia Pacific operating segment, also, we are upgrading our field based U.S.

inventory and instrument tracking systems on the same SAP platform.

This should allow us to drive further efficiencies and operations and improve salesforce effectiveness.

Our guidance includes implementation as well as ongoing infrastructure cost related to this project.

As we have mentioned throughout 2007, we intend to position our field based sales and distribution networks to more effectively respond to changes in daily surgery demand patterns as well as new business opportunities.

This necessitates an increase in instrument deployments and the amortization of these investments as reflected in SG&A.

Finally, to capitalize on growth opportunities with our smaller business units we are investing in 2008 in salesforce, instrumentation, and other selling expenses related to our spine, dental, and trauma business units.

All together, with monitor fees and related compliance expenses as well as the cost for the various infrastructure and operating initiatives, we expect SG&A for 2008 to fall within a range of 39 to 40% of sales and likely to be in the middle of that range.

Below operating profit, we anticipate a tax rate of around 28.5% above our final rate for 2007 due to a higher mix of earnings and profits from higher tax jurisdictions in 2008.

As we mention on our third quarter call, in the absence of any changes to sourcing, we would anticipate upward pressure in our consolidated tax rate over time.

Our planned manufacturing expansion outside the U.S.

should provide us with the opportunity to counter this upward pressure and maintain and possibly even lower our effective tax rate after we get the increased international capacity online.

We anticipate weighted average shares outstanding for 2008 to be approximately 234 million shares.

To arrive at our GAAP earnings per share you should assume subtracting acquisition, integration, and other costs of approximately $27 million or an estimated $0.08 per share.

Turning to cash flow.

We anticipate capital expenditures in the range of 470 million to $500 million reflecting capital components of many of our 2008 infrastructure and operating initiatives already detailed.

Instrument capital in 2008 will be in a range of 155 million to $170 million, traditional PP&E is expected to be in the range of 315 million to $330 million, including $100 million for infrastructure and our international manufacturing expansion, estimated depreciation and amortization expense for the year is in a range of 260 million to $280 million.

As we have indicated in the past, we expect to continue to apply available free cash flow towards stock repurchases.

We continue to monitor our cash flow against other strategic priorities and if we are unable to find opportunities that meet strategic and other criteria, we will consider either increasing or accelerating our repurchase activity.

David?

I'll turn the call back over to you.

Thank you, Jim.

This is an exciting time at Zimmer.

We believe that 2008 will be an extremely productive year as we strive to execute three major priorities.

First, meet or exceed our stated goals for financial performance.

Second, implement the infrastructure and operational initiatives that will prepare Zimmer to participate in the future growth of the market in a significant way.

And finally, develop and market exceptional products under compliance standards for collaboration that consistently earn the trust of our stakeholders.

We pursue these priorities with a committment to ensure that healthcare professionals will choose our products based on their committment to provide the best patient care.

That's the basis upon which we want to compete and the surest path forward to maximizing shareholder value.

And with that, I'd like to now open the call to your questions.

(OPERATOR INSTRUCTIONS) Your first question will be from the line of Raj Denhoy of Bear Stearns.

Good morning, guys.

Hello, Raj.

I wonder if I could ask briefly, you mention halfway through your comments about a return to low double digit earnings growth in 2009.

I was curious if maybe you could just give us some more detail around that, what expenses particularly in '08 are leverageable and really what product initiatives might start to pay off in better top line growth come 2009?

Yes.

We don't intend to go into detailed guidance with respect to 2009 at this point, Raj, but we want to give you an indication that because of the earnings per share projection in our 2008 guidance that it would be our intention to see improved leverage in the P&L in the go forward year so we want to just cast that in terms of at least low double digit growth and earnings per share in 2009.

I think the one area one would anticipate is obviously after the first quarter of 2009, the monitoring expenses would taper off and that will improve margins.

Yes, Raj, this is Jim.

There are as well some additionally some one-time costs associated with some of the infrastructure initiatives that we will incur in 2008 that will not carry over to 2009.

We, I think as we've indicated feel very good about our knee portfolio and are looking to address some of the mix opportunities on the hip side as well going into 2009.

All that together, we believe will put us in good position to return to, as David indicated at least low double digit earnings growth.

Okay, and then just one follow-up.

One of the questions though it has arisen over the last several months about the longer term profitability of the Company and whether you guys are planning I guess to fundamentally alter the longstanding goal of this $0.40 to $0.50 of every $1 topping through profitability.

It sounds if I'm reading into what you're saying that perhaps returning to that outlook in '09 and beyond is really in the cards?

Well, we again believe that we're going to be able to restore the leverage in the P&L on a go forward basis and to the extent that we can provide you with definition to that 2009 we believe will return to at least low double digit earnings per share growth.

Okay, very good, thank you.

Thank you.

Your next question will be from Ben Andrew of William Blair.

Just wanted to follow-up on a couple of those things.

You made a comment about investing to serve the healthcare markets of the future.

Can you go into a little bit more detail of what you mean specifically by that, if you can, please?

Yes, Ben, this is Jim.

A couple of the infrastructure investments in particular, that clearly the manufacturing expansion we have planned outside the U.S.

is a step towards getting the Company ready for what we anticipate will be a step up in unit demand within this market.

As we march towards the point where baby boomers hit that age of -- the average age of a total joint replacement patient which in our history has been around 67 or 68 years old, those baby boomers today are just this year turning 63.

The upgrade to, as we go through that upgrading our quality systems infrastructure, investing in the IT platform, that's something that we're going to be able to leverage in a number of different ways driving out some efficiencies in administrative functions, as well as potentially driving out some efficiencies in the management of the inventory and the instruments which I think as you know is a key to servicing procedure demand within these hospitals on a daily basis.

Okay, and what sort of assumptions are you making about global price or as much detail as you can give there as we look into '09 and longer term on that same trajectory.

Yes, this is Jim again, Ben.

At this point, we see no change from what we've been experiencing over the past couple of years, which again is some modest price reductions outside the U.S., offset by modest price increases inside the U.S., and I guess when people ask about price, they're often asking as well about mix opportunities.

We believe those mix opportunities are still there to the extent that we or any of our competitors for that matter bring new and unique devices to the market, particularly those that offer improved patient outcomes.

Okay, and then just two other questions.

When you talk about increasing manufacturing outside the U.S.

and tax advantaged areas are you talking Switzerland, or are you looking Asia to get a little cost down?

Or can you be more specific?

Well, we're not ready to announce yet a location.

I think in the near future, we will be.

I would tell you that most likely it will be in Europe, not Asia Pacific.

Finally, what is your view of the long term cost savings opportunity with SAP as you get it fully implemented and when would that be kicking in?

That -- it will be a couple of years before we really have the opportunity to leverage that investment.

It takes as you can imagine with this kind of initiative a couple of years before we are able to get through all of the operating segments.

As I indicated we're going to begin with Asia Pacific in 2008.

We'll move on to North America and then Europe following that, so we are a couple years out before we'll begin to really be able to leverage the investment.

It's one of the ways in which we pointed out earlier, we're going to look to drive efficiencies through the P&L and return to leveraged growth and earnings per share.

Beyond that, then it's kind of hard to give specifics at this point.

I would also say, Ben, that it's obviously a key piece of our infrastructure that will allow us to do future Integrations more efficiently and effectively so that's an important part of our strategy on a go forward basis as well.

Okay, thank you.

Thank you.

Your next question will be from Michael Jungling of Merrill Lynch.

Yes, good morning, I have three questions, please.

Firstly on SG&A, did your Q4 2007 number benefit from reducing consultancy agreements with doctors?

Secondly, on ethics contracts, using current spot rates what is the actual headwind to gross margins from foreign exchange contract losses?

And then thirdly on the share buyback, can you comment why you did not raise your share buyback program given the current trough valuations?

I don't fully understand that given the excess capital that you currently have, thank you.

Sure, Michael, thanks for the questions.

To respond to your first question, the answer is no, the SG&A expenses were not reduced in any way by consulting payments.

Any payments would have been accrued even if the payments weren't made at that point in time so there is no impact on our SG&A expenses in that area.

And then Michael, this is Jim.

I'll address the other two questions that you had.

First of all on currency, I guess when we've guided people to think about this by first looking at the lift, we would expect to get on the top line with respect to 2008.

We've indicated that it accounts for 200 basis points of the 10 to 11% growth that we have forecasted and then to the extent that we've indicated that gets neutralized on our operating profit line through the hedging program, you could basically apply, do the math and apply your operating profit ratio to that lift and you get a sense of what the headwind is going into 2008 and again that is something that we have taken into account in the guidance we provided on gross margin.

On share repurchases, I wouldn't get too focused on a single quarter's activity.

As you are hearing on this call, the Company has under way some major infrastructure investments.

Some of the cash that we'll report out we have on the balance sheet as of December 31, is not resident here in the U.S.

So we don't necessarily have access to all of that cash to go out and repurchase shares.

We did, as it turns out in 2007 invest over $500 million or returned over $500 million of cash to our shareholders through that share repurchase program.

So again, I wouldn't get too focused on a single quarter.

And I have just two quick very follow-up questions.

The gross margin for 2009, will that be impacted by foreign exchange losses based on your current FX hedging program?

And secondly, if I look at SG&A divided by sales, it does appear if you exclude monitoring charges to be one of the lowest that we've seen so many many years.

Can you explain why the SG&A came in so low?

Thank you.

Sure.

So with regard to 2009 currency, we do hedge out 18 to 24 months so there will be some carryover to 2009, but certainly not as significant.

Assuming exchange rates don't change from where they are today, the losses that are running through the P&L in 2008 would be more significant than we would expect to see in 2009.

And then on SG&A, I think what you're seeing there is more the the impact of seasonality within our business.

Our fourth quarter does very typically tend to be the lowest, we tend to experience the lowest SG&A ratio as the lowest SG&A as a percent of sales relative to other quarters within the year, particularly relative to the third quarter.

So I really don't think you're seeing anything else other than that.

If you include the monitoring charge of that sale of I'm guessing 6 million, 7 million, 8 million or so in the fourth quarter on a like-for-like basis your Q4 SG&A to sales is meaningfully lower to Q4 of 2006.

That really was the question.

Yes, I would tell you, Michael, that this may be something we'll just need to follow-up on after the call.

We see, you take out the -- as you pointed out the 6 million to 7 million of monitor fees and expenses and I think what you would see is SG&A tracking in line with the top line growth.

Great, thank you.

Thank you.

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

Hi, thank you, and congratulations on the good results.

Hello, Bob.

First question, just be, would you guys be willing to quantify the extraordinary spending on a pre-tax basis that's going on in 2008 when you include the monitoring expense and the compliance initiative and the IT systems and all that that's running through the P&L, is there any way you'd be willing to give us that number?

I think you can get there, Bob, if you follow the guidance that we provided on the expense ratios, and you can do the math, and I think what you'll get to is somewhere in the order of about $100 million of incremental spending including monitor fees and related compliance expenses.

Okay.

And as we've indicated some of those will carry over into 2009 and a good portion of them we would expect to go away in 2009.

Okay, so in terms of thinking about what flows through to 2009, the monitoring expense we know but away from the monitoring expense, what percentage carries over into '09?

Yes, it's a little hard to say at this point, but probably safest to assume that roughly in the order of half of that.

Okay, and then one other question on the consulting arrangements and the doctor spend.

Would it be a fair assumption as we model longer term for your Company that those expenses relative to what we saw publicly announced a couple months ago would come down meaningfully as we think about maybe '08 and '09 and 2010?

Or do you expect that same kind of numbers that the we saw publicly announced would be maintained?

I would think that you could anticipate that there would be adjustments, business needs would dictate those adjustments to a large part, Bob, but we may also find ways of supporting medical education, for instance, in a manner that puts those dollars into the hands of a neutral third party just so there's no appearance at all of an impropriety.

So I wouldn't discount all those dollars down.

Our needs will dictate them but they may take a bit of a different form as we go forward.

Okay, and then one other for me is it's clear when we've seen J&J and Stryker and Biomed, and now you guys report that there's been an apparent uptick in the orthopedic markets in hips and knees.

Is there one or two things that you could point to -- that you can attribute the strength to or is this just surprising you guys as well?

Well, I think that it was broad based in our case.

We saw an uptick in procedures not only across the various product lines but also across our various geographic segments, so that's really the response.

It is a broad based acceleration.

But is there one or two reasons why you think or just seeing an acceleration and happy to see it?

Well, an acceleration and procedure growth.

Okay, so procedure growth.

Yes.

And I would tell you, Bob, in our case although again, we have seen it in what our competitors have reported, that we're seeing within our own business to some degree the effect of having put out more instruments and more inventory into the field and that's putting our sales and distribution networks in a position to service, the increase in demand that we're seeing across the market and to go after new business opportunities as well.

Okay, and then finally just to be clear on the philosophy around guidance, I think you were pretty clear on this but these are not aspirational goals, these are things that you expect to meet or exceed; is that correct?

That is correct.

Okay, thanks very much, guys.

You're welcome.

Thank you, Bob.

Your next question will be from the line of Matt Miksic with Morgan Stanley.

Good morning.

Good morning, Matt.

Thanks for taking the questions.

One point of clarification on guidance is this $0.08 that's the difference between your 4.20, 4.25 adjusted and 4.12 to 4.17 I guess ex the $0.08.

That $0.08 includes -- what's exactly in there and what's not in there?

Yes.

What's in there are the integration costs associated with the acquisitions we completed in 2007 and costs associated with the centralization of our European distribution.

Okay.

We have multiple distribution centers in Europe that we're moving towards a central hub, building out a new facility and with that, we'll incur some restructuring costs to either relocate people or for those people that choose not to relocate to pay severance to those employees.

Okay, monitoring expenses are in the -- are in that other number, , they aren't in that

That's correct.

And then another just clarification on guidance.

I know you're moving away from quarterly guidance, but just to help us maybe put together the pace of the year and the first quarter, if -- one way to look at this, if we were looking back on the first quarter based on what you know now, what kinds of things should we be mindful of as we put together our numbers, nuances in the quarter like differences of selling days, price cuts, year-over-year comps, new launches that might affect Q1?

Yes, I think, Matt, similar to what you've seen in prior years out of this business, the same issues around seasonality obviously with elective procedures slowing down in the Summer months.

I would tell you the spending on the infrastructure and operating initiatives as it turns out in the aggregate was likely to play out evenly over the course of the the year.

There's some of those that will hit hard in the beginning of the year and then others that will be more active I guess in the back half of the year.

So in the aggregate, we would expect that's going to take place somewhat evenly over the course of the year.

On the pricing front, Japan price reductions, April 1, as they typically are, so really no difference relative to prior year seasonal patterns.

Okay, so no new cuts as of January 1, no unusual comps in any of your business lines that we should be thinking about for Q1?

I guess the only other thing I would point out is to the extent we're seeing the effects of acquisitions on our top line in the spine and dental businesses, at some point in the back half of the year next year, we'll be up against some tougher comps there.

That's helpful.

One question just on the regulatory front.

One of your competitors has been hit by a couple of warning letters from the FDA over the last year or so and I was just wondering if you can give us any sense of maybe where you are in the cycle of inspections and over the past 12 months, where you stand with the FDA?

We obviously have a variety of different facilities, as you know, Matt, and so as inspections are taking place on a rolling basis, Jim mentioned that we have initiatives under way to enhance further our quality systems, that's a significant priority for us as one would imagine and we're going to continue to improve those systems as we go forward.

So it's an ongoing committment in our area but one that we treat as a major premise to running our business.

Okay, and then just finally on, again to the question of strength in the fourth quarter.

You saw a broad based strength I think across all your businesses, but hips in particular I think across the market have been stronger than expected.

This is something you guys are often unwilling to talk about is off label usage.

As we get more resurfacing products out into the market, many of these products are proved overseas in that sort of well characterized clinical data and results and safety profiles and so on.

Is it possible that as these other products rollout from Stryker and Smith and Nephew that we see just a broader off label use across other manufacturers that have approved O-U.S.

products?

That is not part of our business strategy whatsoever, Matt.

We respect the clearances that we have and treat that the matter in a very careful fashion, so we don't anticipate that we're going to be participating in the resurfacing market until we have a product that's properly cleared.

And Matt, this is Jim.

I would tell you that we don't think we're seeing that at all.

In fact, I think I believe our reimbursement challenges with respect to anyone who would choose to use a product off label and that is frankly keeping that under tight control, across the market.

I would tell you that in fact as we examine our hip results relative to our competitors and particularly those reporting out higher dollar growth, one of the things that's contributing to our performance relative to their performance is the fact that our large diameter head metal and metal offering has not reached a level of penetration that is at all near what the those other companies have achieved with their alternate bearing offerings.

Okay, and then just one last question, just in the past couple of quarters, I think it's fair to say that it sounds and looks like you've learned some lessons in terms of forecasting and providing guidance and perhaps managing the business as well.

I just wanted to ask if there's anything that you see yourself doing differently over the next, as you talk about your quarter and your guidance today or going forward, based on what you've learned say in the last nine months?

Well, Matt, we obviously went through an extremely methodical process to put our 2008 plan together.

We described that process broadly to people that we've met with and really all of that hard work puts us in a great position and provides us with nice momentum coming out of the fourth quarter, so we're anxious to execute on these plans and optimistic that the we're going to have a good year in 2008.

And Matt this is Jim.

I would just say as I've said before that we really appreciate all the feedback we get from you folks and hopefully you see that we are doing everything we can to respond to that.

Great.

Well, thanks.

I'll jump out.

Thank you.

Your next question will be from the line of Kristen Stewart with Credit Suisse.

Hi, good morning.

Good morning.

I was just wondering if we could just kind of take a step back to in October you guys had reduced your guidance and one of the things that you had cited was a reduction of 33 to 38 I think it was in constant currency growth.

What happened I guess relative to your expectations in the month of November and December which I would imagine December is generally a pretty slow month, to really drive the increase in your top line growth?

Was it just currency and if it was just currency, are you fully hedged to where it's not dropping through, I think you'd mentioned SG&A impact obviously but does any at all fall through o the bottom line?

Okay, well, I'll pass the currency question back over to Jim but let me just respond to the front end of your question, Kristen.

I think that what we saw was broad based procedure growth that the drove across our various geographies as well as our business units and candidly, I think that we also did a better job of exploiting those opportunities.

We had better synchronization of our distribution, our manufacturing to take advantage of that and I think that there were less missed opportunities on our part in the fourth quarter than there may have been in the second and third quarter.

Yes, and on the currency front, Kristen, this is Jim, that really contributed a fraction to the over achievement as we indicated in our prepared comments, it was 11 million of the over achievement on the top line.

And can you give us a sense just in terms of where currency has been impacting you in the previous three quarters?

I know it wasn't obviously as much of a hit but just where that was on the gross margin line?

Yes, again, I don't have it in front of me, you'd have to go back over the year and look at what currency has contributed to the top line in total.

I think in total, if you look back over the year you'll come something -- come somewhere to the order of $100 million benefit to the top line and as I indicated, you can get a sense of what's going on with hedge losses when you consider that we've disclosed that the hedging program effectively neutralizes that top line benefit by the time you get down to the operating profit line.

So you can do the math and get a sense of how that's playing out in the margin.

Wouldn't some of your SG&A and R&D also be impacted obviously by higher foreign exchange rates because those expenses will also be a little higher?

Yes.

And then the last question just going back to the acquisition and integration and other expenses that you broke out which is about $0.08.

What's your general philosophy on kind of how you would exclude this into I guess outside of the adjusted numbers?

What type of expenses are these specifically?

And to what degree will they continue going forward?

Yes, we would look to put into that line any unusual expenses that are sort of one-time in nature, and we've done that, we've done it consistently, and then we would also look to provide very transparent disclosure.

You'll see in our periodic filings as to what's included in that line and we'll continue to report on that basis.

And then the added distribution I guess the investments there, will those be similar to what you did in previous quarters with the purchases of distributorship or is it something different?

There we're talking about our own distribution centers, our own logistics operations in Europe, not talking about, not referencing acquisitions of any third party distributors.

Aren't those included in the acquisition integration and other or are those within the SG&A line?

Well, I'm just, again, this is just referencing what the we were talking about on the call with respect to centralization of our distribution operations in Europe, in 2008 that that is, as I said that is an effort that involves our own internal logistics operations in Europe.

Maybe I'll follow-up online.

Thank you.

Sure.

Thank you.

Your next question will be from Joanne Wuensch of BMO Capital Market.

Thank you very much.

A couple of questions.

The first, have you seen any changes in your business practices with the physicians, now that the DOJ settled in behind you?

Our business practices are obviously geared towards being completely in compliance with the terms of those resolution agreements and I would not describe the business practices as having changed in any material sense.

I sort of need to ask the question a different way then I'm sorry, which is that do you feel like -- there's been some speculation that now this settlement is behind Zimmer that the doctors would not be as sticky to using Zimmer products?

Could you sort of comment on that?

I think that as a general matter, all these healthcare professionals are making decisions with respect to products and the best interest of their patients and we feel very comfortable with the quality of our products and believe that that is going to be the basis for competition on a go forward basis and we're going to be well served in that marketplace.

Okay, in your guidance, do you have share repurchases planned?

We do.

As you look at the average share number that we provided, you'd probably be able to figure out that what we've assumed in is a bit more modest than what we experienced in 2007 but as I indicated in our prepared comments, to the extent that we don't have other needs for the cash over the course of the year, what we have assumed into our guidance may prove to be a bit conservative.

Okay and this question has been sort of asked a couple of different ways but I want to really get my arms around it which is that in the second quarter, the Company met expectations and then guided lower and in the third quarter they met expectations and guided lower and now in the fourth quarter you beat expectations and guided in line with the Street.

If you had to say what happened between the last conference call and this conference call, could you just put a couple of items that the may give you some increased confidence in the way of the financial guidance is being provided?

Thank you.

Sure, as David explains, we've had the opportunity to go through a very detailed review of our business unit and corporate operating plans, we're very pleased frankly with the performance in the fourth quarter relative to our earlier expectations.

We see our supply chain and our sales and distribution networks responding to the increase that we're seeing in demand across the quarter.

That together with the process that we went through gives us the confidence that we have going into 2008 that we will meet or exceed the financial targets that we've set for ourselves.

Okay, thanks.

Sure.

Your next went will be from Mike Weinstein with JPMorgan.

I think a loot of the questions have already been asked, but I do want to circle back on some of the questions that were being raised and the theme that Joanne was pushing you guys on.

Are you surprised by the performance in the fourth quarter?

I mean, the market obviously is healthy.

You're not necessarily growing above market in either hips nor knees but you're pretty close in line with the market in knees and maybe slightly below in hips.

Are you surprised though by your performance because certainly the tones you guys gave on the third quarter call was much more cautious and then your tone since then with investors at meetings and so forth was cautious.j So am I right in assuming you're a bit surprised or how should we characterize your own response to the the quarter?

Well, I think that we were surprised by the extent of the procedure growth and that's obviously a positive surprise.

I think that as I said earlier, Mike, that a lot of things have come into synch.

We were able to take full advantage of that uptick and procedure growth and we were able to do that across a variety of different business units that were coming in below our expectations in the prior two quarters, and so things came together in a more significant way and I think that we also saw an earlier payback to some of the investments that the we made in the distribution channel that Jim has mentioned including inventory and instrument deployments.

And when you say pick up in procedure growth, are you talking about hips and knees or are you talking across your business?

Do you think that there was a fourth quarter pick up in volumes?

Well, primarily in reconstructive procedures.

That's because it's three quarters of our business, it dictates so much to us, but I'm referencing really the reconstructive business when I say that.

You seem to be suggesting that you've got enough of a read on the market to say that you think the market actually picked up in the quarter, is that -- rather than just the Zimmer's own business picked up in the quarter.

Is that right?

If it's true, Mike, I think that it's our perspective from our running our own operations as well as what's been reported publicly.

That being based on the other numbers that have come through so far?

That's right.

It corroborates our view from our own perspective.

Jim, just one financial clean up question.

Is the drop in the tax rate in the quarter maybe helping understand better what was the one-time benefit there and then you had been suggesting that the tax rate would move up in 2008, but you're pretty much -- you're actually guiding to below what we had and you're pretty much guiding to a flat year-over-year.

Can you just maybe walk us through both of those?

Sure.

What led us to the tax rate down to where we landed at 27.5 % for the year was really the strength of our earnings and profits out of our non-U.S.

operations and particularly -- that happened to be particularly strong in the back half of the year and why it wasn't factored in earlier in the year, that and the fact that frankly, we go through a more detailed robust process at the end of the year that gives us a more precise indication of what our legal entity earnings and profits are on a consolidated basis and make the adjustment as we did at the end of the year.

That's why there was a catch up for the year?

That's right.

That's sort of the story on 2007 and with respect to 2008, at 28.5%, again, above where we landed in 2007 and we're forecasting that, given the fact that some of the newer products that we've launched that will drive the mix of earnings and profits are getting sourced out of our U.S.

facilities and that, as we indicated, that does tend to put some upward pressure on the tax rate.

Last couple quick questions here.

How much of your cash is in the U.S.

right now?

It's roughly about a third of what we have reported on the balance sheet as of December 31, '07.

Okay and philosophically, Jim, the thoughts on taking -- on either using -- working that down or taking on debt to do an increased share repurchase, the Company is still against that?

Well, I don't know, Mike, that we've ever said we're against that.

That's something that the we would consider, it's not, clearly not something that we have reflected in the guidance that we have provided for 2008.

Okay, great.

Thank you, guys.

Take care.

See you, Mike.

Your next question will be from Mark Mullikin of Piper Jaffray.

Just a couple questions on the competitive environment here.

With one of your competitors having some very well known issues at this point with quality and manufacturing issues, are you seeing anything in the field indicating that you might be gaining some share on the large joint side of the business?

Nothing of significance in that respect.

And then on some of the smaller components, extremities, dental and spine, within the extremities business, you've put up a string of really strong quarters here.

Are there any specific products or geographic expansion?

What's driving that?

Yes, Mark, I think, this is Jim, some of what's driving that is it's certainly benefiting our reports and to some extent with the new products that we've introduced is even driving an increase in usage across the surgeon community.

I think these new inverse/reverse shoulder systems as I understand it are a bit less challenging with respect to surgical technique so they're getting greater usage, if you will, across the surgeon community and that's driven up market, driven the market higher with respect to the total procedures that are being done, and again, we've launched a couple of new products into that category that have incorporated in doing so our Trabecular Metal technology and that's really helped to drive the kind of performance you're seeing out of our extremities line.

So is it that this is a product group that Zimmer has that some of the competitors don't because we've seen some pretty weak numbers out of some of the other shoulder companies.

Is it basically that you're gaining share because you have that product line?

Well, I think that that product is gaining share and it's expanding the market as Jim said because it, in a sense is addressing an unmet clinical need prior to the launch of that product, so we would expect to continue to do well in that segment.

Okay, and then within spine, we're seeing a nice rebound in growth and you mentioned finishing the Endius acquisition.

Are there any specific products that are driving that growth?

Have you now anniversaried some of the interbody fusion cage challenges at this point?

That is the truth, on the spine side we have anniversaried out some of the losses that we're experiencing on the cage side and we're just reaching the traction point of adding the Thoracolumbar product that we picked up through the Endius acquisition as well as the MIS offering with Atavi that is opening doors for us and we're creating some opportunities in that area, as well as ongoing expansion of our Denus' product family.

And how much did acquisitions contribute to the quarter and how much are you factoring into '08 guidance?

We haven't provided that detail, Mark, and I'm not going to provide it here on this call.

Clearly, it did contribute in the spine and dental numbers, with the dental sales in Europe increasing 65% in the quarter, but in the aggregate, it's modest.

It's very modest, and in particular, within spine you would see that in our U.S.

numbers and obviously on the dental side it was a European distributor, so you'll see an uptick in the numbers that Jim walked you through earlier in the call.

And then the ORTHOsoft acquisition, where does that fit into the revenue build?

Yes, it would be in the what the we refer to as orthopedic surgical products and other sales, it's very modest revenues that come with that, the strategy there is really focused on having that technology available for, across actually our entire reconstructive portfolio.

And then just one last one, on the gross margin line, you're guiding that to being a bit down in this quarter.

It was down quite a bit sequentially.

Can you just maybe break out what are the pressures on the gross margin line?

Is it that the FX issue?

Is it the reinvestments?

Exactly what's pressuring it?

Yes, well, the most significant issue is the FX issue.

That's what contributed to the sequential decline in the fourth quarter and that carries over into 2008.

There are a couple of other things as well that we've mentioned, higher material costs being one, specifically on cobalt chrome, that we're seeing a significant increase in the price of that material and then there's two other things would be the investments we're making in quality systems infrastructure that does impact to some degree on cost of goods and that's it.

Well, I'm sorry, there's one other thing, start up costs, on the international manufacturing expansion, will also run through cost of goods in 2008.

Okay, very good.

Nice quarter, thanks a lot.

Thank you.

Thanks, Mark.

Your next question will be from Tao Levy of Deutsche Bank.

Thanks, good morning.

Good morning, Tao.

Maybe on the dental business, is there any, can you give us a sense of how much that distributor added, not necessarily in dollars but you grew there 60%, was it maybe half of that growth?

It's a small based business, so insignificant in the scheme of things.

I think that the breakout of the different geographies that Jim walked through earlier in the call provide you with good guidance in that area, Tao.

And any thoughts on how we should view sort of the dental business in 2008 just given all the macro environment issues?

Well, we're still optimistic about that segment.

It's a business that we've invested in since the time we consummated the Centerpulse transaction in 2003 with good success performance-wise and we will continue to do so.

It is one of the areas in the infrastructure expansions -- of the infrastructure expansions that Jim described earlier and principally in the sales and marketing side.

But overall, in terms of end-user trends consumer trends, you feel comfortable that that's still maybe a good growth business this year?

Yes, we're bullish on it in part because it's such an under penetrated market at this point in time relative to the potential patients that could benefit from those procedures.

Okay, and on the hip side, last quarter you'd mentioned that you've been nervous on how your hip business was going to perform.

Not so much by hip resurfacing taking over but by surgeons getting exposed to competitor products, et cetera.

Now that you've gone through some of that experience maybe over the last few months, have you seen that take place?

Have you seen folks who are trained in the Birmingham go away from Zimmer products?

Well, I think that as we stated earlier in the call as well, we don't believe that we're losing unit share.

We think that we're missing some mix opportunities there and the metal on metal under penetration within the United States that Jim referenced is an example of that, so I think that we're quite comfortable that we're retaining the unit share on that side but we want to shore up our ability to take full advantage of those mix opportunities and so some of the benefits of the product offering on the paper product with connective technology this year will start to kick in but then we have some other programs in the pipeline that we think will help us even in advance of ultimately having a resurfacing product off of the U.S.

marketplace.

All right, and you mentioned you talked about investing in compliance and systems.

Do you currently have any issues with the FDA, any warning letters, that usually takes a few months for those to be posted, that they may have been issued or 483'd?

We don't have any warning letters at this point.

Got you.

And just lastly, on the shares outstanding that you're expecting for next year, doesn't look like you're assuming much of a repurchase.

Any sense of where that interest income line should shake out then, given -- assuming limited share repurchases that you're guiding to?

We've given a lot of detailed guidance and the one thing we didn't--..

I appreciate that.

So I'm going to leave it to you to figure out what it needs to be to get within that 4.20 to 4.25.

But that is factored in into--?

Sure, sure.

Okay, great.

Thanks a lot.

Great quarter.

Okay, thank you.

Your next question will be from Steven Lichtman of Banc of America Securities.

Thank you, good morning.

Good morning, Steven.

You guys, I don't think you mentioned the Gender Hip.

Maybe I missed it but is that still a planned launch in 2008 ?

It is.

We have been talking about two different product launches in that the category, the ML Taper with connective technology which is the one that is beginning to ramp up now.

In the back half for the year, we would go to potentially a limited release and then extend beyond that with respect to the EPOCH stem that also fits into the gender category.

And then in terms of the Gender Knee, I mean, any change in the tone out there?

On the last quarter call, you had mentioned that you need to kind of, in a sense go back to the drawing board in terms of the message out there, DTC, et cetera, what's the general tone out there on the Gender Knee?

We have refocused our salesforce and I think that we saw some of the benefits of having done so and we had a productive fourth quarter in that area.

So we continue to be very optimistic about the performance of our gender offerings on a go forward basis.

Okay, you talked, David, during your prepared comments about expanding the corporate compliance program and you said as you initiate change, we anticipate may face some challenges.

Can you expound on that?

What types of things should we be looking for?

What potential challenges were you referring to?

Sure.

Well, I think that any time where you're dealing with a dynamic circumstance, different parties that are involved in those changes come at them at different speeds, principally in our case, I think that we are committing significant resources to ensure that we're in absolute compliance with the resolution agreements and so that includes our senior management team and myself on that list, so that is part of what we're referring to is we're very focused on that but it's a key priority and we're absolutely confident that we're going to work through this transition period and be able to generate first rate products in a manner that brings about trust and confidence and all of the stakeholders involved in that the process so we're very optimistic that the we're doing the right things and it's going to serve the Company well in the long term.

And in terms of the gross margin looking forward, maybe qualitatively if we look past '08 can we think about gross margin getting back to the levels that we've seen previously or some of the issues that you mentioned in terms of costs, infrastructure issues that perhaps will last a little bit longer than 2008?

Understanding there's certain one-timers with FX, how should we think about gross margin a little bit longer term?

Sure.

Well, Steve, there's so many factors that impact our margin, including price, product mix, geographic mix.

There are clearly some things you could forecast out that would lead you to believe that the we would see some improvement in gross margin, not the least of which is sort of anniversarying out of the hedge loss this year that we've been experiencing.

And then leveraging some of these investments that we're making.

So one of the things that has contributed to even in the face of very modest price increases and improvement in gross margin over time is our ability to leverage unit growth, and we are making investments as we said that will put us in a position to leverage unit growth in time.

Whether or not we see that in a significant way in '09 as I sit here today, I can't really project that.

And then one quick thing on the fourth quarter, nothing unusual in terms of selling days in the quarter, the fourth quarter?

No.

Okay, and then actually that's it for me.

Thanks a lot.

Thanks, Steve.

Thank you.

Your next question will be from Doug Schenkel of Cowen & Co.

Good morning and thanks for taking my questions.

Hello, Doug.

Just a couple quick clean up questions.

I think you talked about integration of Endius' distribution last quarter being a bit of a drag on spine.

Are we past this dynamic at this point or where do we stand on that integration?

Yes, we are past that dynamic.

That was an acquisition, Doug, that was really geared towards picking up some products that represented holes in our offering prior to the Endius acquisition, Atavi, and the Title Systems in particular, and there were distributors that came along with that, that as you can imagine it was a small Company with an independent distributor network and so there's going to be displacement.

I think we've also picked up some good people through that the, but that the process is complete at this stage so what you saw in the fourth quarter should be representative of the benefits that we see in the go forward time period.

Great, thanks for that.

We've talked a lot about GSK today already but I was wondering if it was possible to provide any metrics in terms of whether or not that would demonstrate whether or not you're becoming more or not becoming more successful and actually using the product as a way to capture additional surgeons?

Well, the metric that we have provided in the past and continue to provide is Flex, high flex penetration and within that primary knee portfolio, as we reported, we saw that the sort of level out in the fourth quarter at 47% consistent with where we had seen it in the third quarter.

Now, we also saw a fairly significant uptick in procedure volumes in the fourth quarter and when we look at growth of that product line relative to some of our other product lines, that was really one of the products that led that growth and particularly when you look at, if you focus on the growth rate in knee sales in the fourth quarter in Europe relative to the third quarter, we're moving ahead with putting more instruments, more inventory out into the field in Europe and it is definitely contributing to the uptick in growth we saw in knees.

It also contributed as Jim mentioned reversing some negative trends that we had previously been seeing in the Natural-Knee product line.

Right, okay, that's very helpful and just one last follow-up on the investment you talked about in instrumentation and the salesforce.

Is it fair to assume that these investments will result in some sort of multi-year acceleration that would begin in sales and I guess spine, trauma, and dental as soon as 2009 or does it usually take a bit longer to actually get a return on that investment?

Well, with instruments, you actually get to see and as we did in the fourth quarter, you get to see a pretty immediate return.

If there's unmet surgery demand, those things will be put to use pretty quickly and I think we did see some of that in the fourth quarter.

So as we move ahead we would expect to see a pretty, maybe immediate return on the placement of more instruments and inventory into the field.

There are other investments that we're making around systems that will help us more efficiently manage those assets in the field but I think it will be a little longer before we are able to leverage those investments.

Okay, great.

Thanks a lot and congrats on a great quarter.

Thank you.

Thanks, Doug.

Your next question will be from Bill Plovanic of Canaccord Adams.

Great, thank you, just a few questions, clarification questions for me here.

First of all just in terms of the double digit earnings growth '09 off of '08, is that off of the 4.20 to 4.25 guidance?

That's correct.

And then a point of clarification, and to jump on I think Bob asked the question of $100 million in incremental spend for '08.

If I actually take that $100 million at your current tax rate that's about a $0.30.

Am I in the ballpark in thinking about what the GAAP earnings would be?

$0.30?

Well, I wouldn't use -- the $100 million is not something we reference in reconciling between GAAP and non-GAAP earnings.

Okay, what the is that number in terms of that we should reference for non-GAAP and GAAP earnings?

Yes, the 27 million or $0.08 in 2008 is what the we have forecasted for acquisition, integration, and other costs.

That includes monitoring and everything?

No, it does not.

The $100 million is embedded within the 4.20 to 4.25.

It's embedded in the adjusted earnings per share.

Okay, all right that's all I had, thank you.

Okay, thank you.

Your next question will be from Michael Matson of Wachovia Capital Markets.

Thanks for taking my question.

I haven't heard a lot of questions about your acquisition strategy so I thought I would revisit that.

I just wanted to see looking out at 2008 if you're still targeting the sort of 100 million $400 million range that you've talked about in the past?

You shouldn't start that as a reference point, I think going forward, Michael.

I think with respect to our merger and acquisition strategy, we again think that we have a great portfolio of businesses and one of the reasons that we like the mix of businesses that we have now is many of the acquisitions that we do such as in ORTHOsoft, we feel we can leverage that to the advantage of all those different business units.

So that's going to be beneficial to hips, knees, to spine, and we'll take it to other business units over time as well.

Our priorities going forward will continue to be in a category of fill-in acquisitions, for spine, dental, we like that space as we've talked about on this call, and we would like to expand critical mass within the dental marketplace and of course, biologics we believe that these solutions will be the wave of the future and so we continue to be interested in exploring opportunities there.

It's not limited to those three categories but those are principal categories that organize our proactive efforts at this point in time.

Our criteria really hasn't changed from our past discussions, strategic fit is of the utmost importance to us.

We have an organization that I think has done enough, especially through the Centerpulse integration to understand how much work these transactions take and so we want to make sure that through all of those efforts in spending the capital that we're going to get a good return for our shareholders and so we're very financially disciplined in the approach that we take to these acquisitions.

All right, and then with regards to the monitoring and the enhanced compliance practices, the changes that the you're making in your hip and knee business, you said you're also doing that in the spine and trauma and dental and other businesses.

Is that because this settlement requires you to do that or is that something you're just taking upon yourselves to go ahead and do?

And -- because it sounds like some of your competitors may or may not be doing that.

Just wondering where your thoughts are?

It's really the latter, Michael.

The resolution agreements don't compel us to take those steps, but we're embracing this process.

We want to ensure that we are developing the very best practices in this area and obviously as we make principle decisions around how these collaborative relationships are structured and organized, those principles are going to be equally applicable across our various business lines and across our various geographic segments.

So it's our initiative in that respect.

Okay, and then you mentioned in the prior question that the Flex penetration in the U.S.

was -- or sorry, globally it was 47% I assume.

Can you give us what the break down is between the U.S.

and international markets?

I will tell you that it's lowest in Europe, it's pretty high already in Asia Pacific because that goes back to the development and launch of our very first high flex knees.

They were designed initially for the Japanese markets so our levels of penetration are higher in Asia Pacific than -- much higher in Asia Pacific than they are in Europe, and they're higher in the U.S.

than they are in Europe, and I'll leave it at that.

Okay, but there's-- you still think that there's room to drive increased penetration in the U.S?

I think there's room in the U.S.

and I think there's even more room in Europe.

Okay.

That's all I've got.

Thanks a lot.

Okay, thank you, Michael.

Your next question will be from Bruce Nudell with UBS.

Good morning, thank you.

Could you guys provide a little more granularity with regards to your market expectations for units in U.S.

hips, U.S.

knees, O-U.S.

hips and O-U.S.

knees?

Just what kind of range you might see for hips and knees in those geographies?

Yes, well, Bruce, we talk about the market in global terms and unit growth being at around mid single digits.

We have not really broken it down by geography.

It's probably a bit higher in the U.S.

than it is in Europe, but again, on a global basis, we see the market continuing to grow in mid single digits and then we would have mixed to modest price improvements accounting for the balance of growth to get to a market that we see growing in 8 to 10% and understanding as well that at least with respect to the U.S., we do see hip resurfacing accelerating growth in the U.S.

hip market.

So if I were to just kind of, as for planning purposes say like U.S.

hips around 5% units, O-U.S.

knees around 7% or 6% units, would that be in the kind of ballpark that you guys are thinking about?

I would say it's in the ballpark, yes.

Okay, and then just a follow-up with regards to the consultancies.

When we spoke to the consultants as you I think alluded to on your call today, some of the payments have kind of been held up due to monitoring review.

Would it be safe to say that the accrued expenses for U.S.

consultancies one way or another were around 120 million, $130 million for the year in the U.S?

Well, I'll tell you what the you can do is you saw the posting, the website posting that was made, the initial posting that put our total payments at around $85 million and then as I indicated on the call, we had fourth quarter payments of $23 million that had been delayed, and that math doesn't quite get you to your number, Bruce.

Okay, so the full year was closer to a little -- 110 or so?

And again we're talking specifically about U.S.

hip and knee payment.

Correct.

All right, thanks so much.

Sure.

Thanks, Bruce.

Your next question will be from Jeff Johnson of Robert W.

Baird.

Good morning, guys.

All my questions have really been asked at this point.

The only follow-up I guess I'd have is just at the upcoming AAOS meeting anything we should be looking for there?

It appears you guys might not be having an Analyst meeting at this point, is that correct and maybe what was the rationale in not holding one this year?

Yes, that is correct.

We're excited about the AAOS and would love to have you come through the booth and we can show you some exciting things.

As far as the Analyst meeting goes just because of scheduling we thought that it was the best thing to do was to maintain our circuit on this conference and to make ourselves available to all of you as best we can both in person and by phone, so we didn't see the necessity of adding that meeting.

Fair enough, David.

I guess one more question on that.

Any change in tone at the AAOS meeting or do you plan on changing anything at all how you reach out to surgeons there, dialing things back maybe a little bit from where they've been in the past, or pretty much status quo go forward?

Well, we're excited about what the we have to demonstrate in the way of the efficacy of our products.

Obviously, our ongoing service efforts are compelling to these surgeons in making their decisions and the other healthcare professionals.

I think that everything you're going to see at the booth is going to be indicative of the tone that we're establishing and continuing to collaborate with the surgeons but making sure that our practices are perfectly compliant so stand by.

Fair enough, thanks, guys.

Okay, thank you.

Your last question will be from David Toung of Ardus Research.

Yes, thank you.

Hello?

Yes, thank you for taking the call.

David, are you still there?

Okay, we seem to have lost him.

Yes, maybe we lost the caller.

Yes, sir, he's disconnected.

Anyone else in the queue?

Not at this time.

I'll now turn the call back to David Dvorak for any closing remarks.

Thanks, and thank you everyone, for joining us today and for your patience continuing on through this call.

We very much appreciate your interest in Zimmer and we're excited about 2008.

We look forward to speaking to you again on our first quarter conference call which will be held Thursday, April 24, at 8:00 a.m.

Have a great day.

This concludes today's conference.

Thank you for participating.

You may now disconnect.