Zimmer Biomet Holdings Inc (ZBH) 2008 Q1 法說會逐字稿

Good morning.

I am Paul Blair, Vice President of Investor Relations for Zimmer.

I would like to welcome you to the Zimmer first quarter 2008 earnings 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'll review our performance for the first quarter, present an update to our outlook for 2008, provide you with a report on some key initiatives, and conclude our discussion with a question and answer session.

Before we get started I'd 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 orthopaedics industry Managements beefs 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 www.Zimmer.Com under the section entitled Investor Relations.

A rebroadcast of this call will be available from approximately two hours following the conclusion of today's call through the end of the day on May 4, 2008 and can also be accessed from the Investor Relations section of the Zimmer website.

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

Thank you, Paul, and good morning, everyone.

Today I'd like to review the overall results for the quarter and address the progress we're making and further strategic priorities we previously outlined.

First, let's review our first quarter results.

Consolidated sales for the quarter of $1.059 billion, were up 11.5% over the prior year first quarter, 6.2% in constant currency and we delivered 6.1% growth in adjusted earnings per share.

We're pleased with our earnings performance and cash flow generation in the first quarter.

Our sales results when adjusted for a reduction in billing days in the United States and the negative impact of the previously announced actions at our Ohio based orthopaedic surgical products operation reflect performance in line with our expectations.

The continued weakening of the U.S.

dollar has favorably impacted our top line growth and as we have pointed out in the past our hedging program essentially neutralizes the impact to our bottom line.

During the quarter we generated operating cash flow of $243 million and we used $144 million to repurchase 1.88 million shares.

Jim will discuss these results and changes to our stock repurchase program in greater detail later in the call.

The market opportunity for our products continues to be strong across all three of our major geographic segments, and we continue to believe the market for our core reconstructive products is growing at mid single digits on a procedure basis with mixed benefit opportunities adding 1to 3% for new devices that address unmet clinical needs.

Our first quarter sales performance was well balanced and consistent with this view of the global orthopaedic market.

I'll now turn to our updated guidance for the full year 2008.

We previously explained that we developed our guidance taking into account our assessment of the market and the ongoing opportunities and risks that could cause and impact our performance.

Our outlook called for top line growth for the year of 10 to 11% net sales on a reported basis.

As we indicated in our fourth quarter call, sales will be driven by new product introductions and further market penetration by key products launched in 2007 and this year, as well as the positive effect of a weaker U.S.

dollar a broad.

Our guidance for top line growth remains in the 10 to 11% range on a reported basis.

The previously announced impact on OSP revenues is expected to be offset by the positive effect of a weaker dollar.

In addition, as the year began, we projected earnings per share between $4.20- and $4.25 based on those expectations.

We've maintained that guidance today, after taking into account the negative financial impact we'll experience as a result of lost sales, inventory losses, and remediation costs in our OSP business.

We have also now factored in the anticipated positive financial impact of a number of other planned actions that that Jim will describe in your detail which are expected to offer the negative impact of the OSP situation.

On our fourth quarter earnings call, Jim and I previewed a number of significant infrastructure initiatives that will position us to respond to the growing medical needs of an aging population.

Chief among these are the investments we're making to ensure that we maintain state-of-the-art quality systems and processes in all of our business operations globally.

Our ongoing committment to quality will be unyielding as we continuously improve our quality systems.

To that end, our infrastructure investment plans for 2008 are in part directed at opportunities to enhance quality systems across our entire manufacturing network and to ensure the quality systems and practices in all divisions meet or exceed our standards as well as those of agencies that regulate us.

As a result of this endeavor, in the first quarter we initiated a comprehensive remediation effort at our OSP division in Dover, Ohio, including voluntary product recalls of certain OSP products, voluntary and temporary suspension of manufacturing and sales of certain products, facilities equipment and procedural upgrades, enhanced quality training for OSP employees, and appointment of a new Divisional President.

While we're clearly disappointed by the OSP situation, we believe the actions we've taken demonstrate the seriousness with which we take quality systems matters and we're keeping the FDA informed of all of our actions.

Now, I'd like to focus on and provide details regarding the progress that we've made early in 2008 on the other key priorities that were highlighted on our fourth quarter call.

One of our priorities is to meet or exceed our stated goals for financial performance.

Our updated guidance demonstrates that we'll take necessary steps wherever possible and within the interest of our stockholders to offset the negative impacts of unplanned events to the best of our ability.

Another key priority for Zimmer is to make investments in manufacturing facilities, Operations, and very importantly our employees so that we're prepared to serve the healthcare market of the future, generating positive returns for years to come.

During the quarter, we took a significant step in assuring that our global manufacturing met work is ready to meet growing demand.

We announced and began to work on a new Zimmer facility in Shannon, Ireland, and are making additional investments across our global manufacturing network.

The Shannon project also reflects our intention to geographically diversify our manufacturing base.

These investments combined with our other operating infrastructure initiatives comprise an ambitious program to build our business globally.

Over the last seven months since entering into our resolution agreements with the U.S.

Government, we've considered carefully what it will take to shape the future growth of our industry.

As we shared during our fourth quarter earnings call, this process has led us to move beyond the requirements of our resolution agreements to create what we believe is a more sustainable model for growth based on practices that reduce potential or even perceived conflicts of interest involving physician collaborators.

Our most urgent priority is to continue to develop products that are best-in-class.

In terms of the benefit they deliver to patients, the difficult problems that they solve across the clinical continuum and their quality.

We need to fulfill this mission in ways that broadly inspire confidence and trust.

That's why we've chosen not to incrementalize these efforts.

We want to go through this transition once in a comprehensive manner across our global enterprise.

Last week, we publicly communicated the strategies we've established at this stage which create fundamental changes in product development, surgeon training, educational and charitable funding, and transparency.

Taken together, they create a new model to aggressively reduce potential or perceived conflicts of interest while preserves the best of the collaboration that drives innovation in our industry.

Finally, from I turn the call over to Jim, I want to note that in March, we were informed by the U.S.

Department of Justice anti-trust division that they have closed their investigation that was first announced in June of 2006.

We're very pleased that the DOJs anti-trust investigation is closed and that neither the Company nor any of our employees were charged in connection with the investigation.

Jim will now provide further details on 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.

Sales of $1.059 billion for the quarter represent an increase of 11.5% reported and 6.2% constant currency.

These results reflect an estimated loss of $6.5 million in OSP product sales as well as the effect of one less billing date in the U.S.

On a day rate basis and excluding the impact of the OSP matter these results are in line with our expectations for the quarter.

A weaker U.S.

dollar as compared with prior year added 5.3% or $50 million of revenue in the quarter.

As expected consolidated price was flat for the quarter, in the Americas pricing contributed 0.6 of a point to growth in quarter and in Europe, price was 0.5 negative.

Germany, Italy, Sweden, France and the UK reported low single digit reductions in average selling prices while other markets in Europe were flat or slightly positive.

Asia Pacific results include negative price of 0.9% driven by negative 2.8% in Japan, offset by flat to positive deposited prices in other Asia Pacific markets.

Turning to our revenue growth by major product category, worldwide reconstructive sales increased 11.8% reported, 6.3% constant currency with a billing date difference in the U.S.

accounting for nearly 1 point reduction in growth.

Knee sales improved 6.7% reflecting lower mix benefit associated with the next gen Gender Solutions Knee compared to prior year first quarter.

Knee pricing on a global basis was flat for the quarter.

Flex Knees accounted for 49% of our Knee units on a global basis slightly ahead of our last two quarters.

We're still early into the launch of our Gender Solutions Natural-Knee flex as well as next gen mobile bearing Knee.

Unit sales of these two systems accounted for less than 10% of our Knee units on a global basis in the quarter and represent an important opportunity going forward.

In addition our new Gender Solutions patella femoral joint system is now broadly available and we're also launching a modular Trabecular Metal Tibial Tray for our next gen knee system.

In other knee systems, Zimmer Uni, LCCK, and LCCK and RHK as well as our prolonged highly crosslink polyethylene grew in double digits.

Geographically in the first quarter our knee sales in constant currency increased 6.1% in the Americas, 5.9% in Europe and a particularly strong 12.3% in Asia Pacific.

We feel very good about our Knee product line as we look out through the rest of the year at the opportunities we have with recent new product launches.

Hip sales increased 3.5% in the quarter, reflecting a volume and mix increase of 4% offset by a decrease in average selling prices of 0.5%.

These results no longer include bone cement sales which, for reporting purposes have been reclassified as OSP and other product sales.

The purpose of this change is to provide you with greater transparency to underlying performance of our Hip portfolio.

These results reflect steady growth across our primary Hip portfolio including 4S primary stems and acetabular cups.

Our TM primary and ML Taper with connective technology experienced steady growth, offset in part by lower sales by VerSys fiber metal MidCoat, Beta six inch full coat and other cemented stems.

TM modular cup and Durom acetabular component sales reported solid growth as did Metasul large diameter heads with the Metasul brand realizing over 26% reported growth in sales in the quarter, on a relatively small base.

On a geographic basis and in constant currency, hip sales increased 3.3% in the Americas, 2.9% in Europe and 6% in Asia Pacific inclusive of negative price of 2.3%.

Extremity sales for the quarter in constant currency increased 27.3% on a challenging comp of 29.6% in the first quarter of 2007.

Extremity sales increased 30.9% in Americas, 19.3% in Europe and 11.5% in Asia Pacific.

Dental sales increased 9.1% for the quarter on a prior year comp of 20.6%.

Dental sales increased 5.1% in the Americas and 26.6% in Europe including the effect of the distributor acquisition In Italy which closed in the second quarter of 2007.

Dental sales decreased 7.3% in Asia Pacific on a base of less than $10 million and against a very challenging comp of 46% growth in the prior year first quarter.

Trauma sales were up over prior year period 5.6% constant currency.

This growth is in line with our expectations as we bring greater focus to the sales efforts supporting our Trauma product line and continue to face competitive pressures on our intermedullary nails and compression hip screws.

Trauma sales in the quarter increased 5% in the Americas, 8.4% in Asia Pacific and 4.7% in Europe.

Our 13.8% of a prior year first quarter Spine sales are at pace with market growth led by sales of Outerbody fusion products, Interbody Spacers and Dynesys.

Spine in the America was up 11.1%, Europe increased 27.7% and Asia Pacific was up 20% on a small base.

Finally, orthopaedic surgical products and other sales grew 0.8% constant currency in the quarter.

Patient care product sales declined 15.6% as a result of the OSB actions, while bone cement and accessory sales now reported in this category increased 23.4% over the first quarter 2007.

The OSP and other category was up 3.2% in the Americas, 0.5% in Asia Pacific and declined 9.1% in Europe compared with prior year period.

Now I'll focus on the rest of the income statement.

Our adjusted gross profit margin of 76% for the quarter reflects a reduction of approximately 50 basis points for inventory related charges associated with OSP.

R&D expense decreased 4.5% to $50 million for the quarter reflecting lower spending on consulting services.

Certain U.S.

knee and hip development, clinical and external research activities have been delayed as we work our way through operational compliance with the resolution agreements and our recently announced enhanced compliance and ethics initiatives.

We expect activities to resume in the second quarter

Selling, general and administrative expenses increased to $415.6 million, up 14.9% the prior year and include monitor fees and expenses and higher instrument costs in the quarter.

SG&A expenses were favorably impacted by a change in estimate related to share based compensation expense that resulted in a reduction of approximately 50 basis points in SG&A for the quarter.

Acquisition, Integration and other, amounted to $7.3 million in the quarter comprised principally of costs pertaining to 2007 acquisitions, adjusted operating profit in the quarter increased 2.8% to $339.2 million, and at 32% our adjusted operating profit to sales ratio decreased by 270 basis points from prior year as a result of the lower gross margin in planned in cases in SG&A costs.

Interest income for the quarter amounted to 1 million, adjusted net earnings increased 3.7% to $244.3 million, and adjusted diluted earnings per share rose 6.1% to $1.04 on $233.9 million average outstanding diluted shares.

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

And at $1.02, reported diluted earnings per share increased 4.1% on prior year first quarter reported EPS of $0.98.

A 28.1% adjusted for the quarter our effective tax rate is consistent with our expectations and below prior year due to resolution of certain tax positions.

During the quarter, we repurchased 1.883 million shares at a total purchase price of $144.3 million or an average price per share of $76.61.

As of March 31, 2008, we have remaining capacity to acquire up to 477 million of stock under the repurchase program authorized in December 2006.

As indicated in our release, our Board has authorized an additional 1.25 billion stock repurchase program which expires on December 31, 2009.

I'll further discuss this in my comments on guidance.

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

Operating cash flow for the quarter amounted to $242.7 million, an increase of 26% over prior year first quarter as a result of strong performance on working capital management and suspended royalty payments of $22 million.

Inventory days on hand finished the quarter at 268 days, a decrease of 19 days from prior year first quarter reflecting higher cost of goods in the quarter.

Our trade accounts receivable Day Sales Outstanding finished the quarter at 59 days consistent with prior year first quarter.

Depreciation and amortization expense for the quarter increased to $61.8 million.

Capital expenditures for the quarter totaled $110.9 million including $57.5 million for instruments and $53.5 million for property, plant and equipment with $24 million related to infrastructure initiatives.

Finally, free cash flow was $131.8 million for the quarter.

Now, I'd like to provide an update on guidance for 2008.

As reported in our press release on April 3, OSP related actions are expected to adversely impact 2008 OSP revenues by 70 million to $80 million.

These actions are expected to negatively impact 2008 adjusted earnings per share by $0.18 to $0.20 including $0.07 related to inventory charges, idle plant costs, and other nonrecurring expenses.

Approximately $0.03 of the full year effect is reflected in our first quarter results.

We expect this impact to be offset by reductions in planned operating expenses, share repurchases, and other actions.

With regard to share repurchases, as already mentioned, our Board has authorized an additional 1.25 billion of share repurchases which can be financed in whole or in part with third party debt.

We intend to draw up to $500 million on our credit facility and use the funds to repurchase shares.

This, together with repurchases on the ongoing program is expected to reduce estimated diluted weighted average shares for 2008 to 230 million from 234 million and add interest expense of approximately 10 million before tax.

Share repurchases and reductions in planned operating expenses are expected to offset the negative operating margin impact from OSP.

Other actions, which are likely to incorporate one-time gains, are expected to offset the non-recurring OSP charges.

Regarding an update then on full year guidance, we expect to deliver top line sales growth in 2008 at the original 10 to 11% range and adjusted earnings per share in the same range of $4.20 to $4.25 including the items noted.

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 and the effect of a weaker U.S.

dollar, we now anticipate 4 points of growth to come from foreign currency.

Therefore, with the OSP impact our sales guidance now assumes a constant currency growth rate of 6 to 7% for the year.

We anticipate a tax rate of around 28.5%, 0.4 above our first quarter rate for 2008 which includes the favorable resolution of certain tax positions.

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

Turning to cash flow, we anticipate capital expenditures in the range of 400 million to $500 million reflecting the capital components of many of of our 2008 infrastructure and operating initiatives.

David?

I'll turn the call back over to you.

Thank you, Jim.

We're excited about the opportunities that are ahead for Zimmer.

We believe that our products are the best on the market and we respect and appreciate the responsibilities that come with being a market leader.

The strategic initiatives we've discussed today will make Zimmer even stronger in the long run and better able to meet the demands of the future.

In the immediate term, we will continue to execute against our 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 third, develop and market exceptional products under compliance standards for collaboration that consistently earn the trust of our stakeholders.

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

Thank you very much.

(OPERATOR INSTRUCTIONS) Our first question today comes from Bob Hopkins with Lehman Brothers.

Thank you and good morning.

Good morning, Bob.

A couple of questions.

First, of the 2 point decrease in constant currency growth guidance that you're giving, is that entirely OSP related or is there also a reduction in your outlook for hip and knee constant currency growth from the course of the year?

That is the direct effect of the OSP impact.

So there's no change in your constant currency growth assumptions for the full year for hips and knees versus the guidance that you gave on your Q4 call?

No, that's correct.

We are seeing same market that we saw when we put our plant together for 2008 where we believe again the procedure rate is mid single digits and then there's still an opportunity for 1 to points on mix.

But if you look at your first quarter constant currency hip and knee results especially in hips, it fell off about 3 to 4 points sequentially from the Q4 kinds of levels.

Could you talk to why we saw that sort of decrease in the first quarter and what sort of headwinds you faced in the first quarter?

Well, I think the procedure growth that we reported out on the fourth quarter of last year was stronger than what was averaged in 2007, and our 2008 pull year guidance assumes again a mid single digit procedure rate with that mix opportunity, so there was a fall off in procedure growth but some of that could be reflected by virtue of the fact that we had an impact on billing days as well as the timing of Easter and some of the other companies reported on that.

What kind of impact you do you think, like was the selling days one day and what kind of impact do you think you saw from Easter?

If we put all of that together, Bob, on the Easter holiday, the timing of the academy, as well as the billing day, it's probably 1 point in our estimate.

Okay.

Couple other things quickly.

Do you expect the OSP products to be back on the market by year-end 2008?

Our plan would contemplate those products would come back on market.

Okay and then one other question I have and I'm just curious about the timing of things.

Obviously on the fourth quarter call, you guys gave very bullish report, a very bullish tone and yet when we look back at the timing of the FDA recall announcement as it relates to OSP, that was sort of in full swing as you were giving that guidance but it wasn't disclosed, and now we're hearing that it's an $0.18 to $0.20 headwind for the full year.

I'm just wondering why didn't you disclose it on the first, on that call on the fourth quarter especially now knowing that it's going to be such a major headwind for the full year?

Yes.

We had identified a particular recall problem and acted upon that promptly and obviously, the problem was much deeper than what we knew at the time of the call, so work was under way but the scope of that issue had not been defined as of the first quarter call, and so we've reported out on the magnitude of that issue as soon as it was defined, Bob.

Okay, and then finally for me, do you think any of the deceleration in growth in constant currency in the first quarter that you saw was related to any fall out from the changes you're making inside Zimmer as a result of the settlement with the DOJ?

In other words do you think you lost any share or lost any physicians or salespeople or having any turnover in distributors that might have impacted results in the first quarter?

Well, nothing of any significance.

I will tell you that I think there is going to be impact over time and there may have been some is in the first quarter because different people are going to come at these changes with different speeds but we really believe that we're making the right decisions for the long term and our guidance would reflect any impact that we would foresee in that regard.

Thank you, I'll get back in queue.

Thank you.

We'll take our next question from Joanne Wuensch with BMO Capital Markets.

Thank you very much.

When I take a look at absorbing 18 to 20% that's a huge number.

I understand the components of it but when you think about that amount of money, is it $0.05 from share repurchases, $0.05 from cost cutting?

Is there anyway to sort of figure out the magnitude of what you need to do to be able to absorb that?

Well, Joanne, this is Jim.

As we pointed out, the combination of the plan reductions in operating costs as well as what we've went through specifically on the call with the share repurchase program, so in the $500 million on the credit facility and using those funds to repurchase shares, it's a combination of those two things that sort of covers off the lost margin on that 70 million to $80 million of OSP sales impact, and other actions that we have contemplated that would offset the non-recurring charges, the non-recurring charges related to either inventory life losses, idle plant expenses and extraordinary outside service fees that we're incurring as we operate and manage our way through that issue.

Is there anything that you're cutting out that you wouldn't have otherwise?

I mean, if this hadn't come along would we be looking at a $0.20 beat in 2008?

Well, some of what you're seeing and you see it in our first quarter results is we get further down the road on our enhanced compliance and ethics initiatives is clearly some lower spending.

You saw that in the quarter in R&D, so some of what we have, reflected in the reductions and plant operating expenses are consistent with the what you're seeing in the first quarter and otherwise, in some respects, it's timing.

We came into the year planning to increase our spend in total at around $100 million and it does take time to ramp up that kind of increase in operating expenses.

We don't at this point see it having any effect on the ability to execute on those strategic infrastructure and operating initiatives but there is a bit of a timing issue in terms of the ramp up of those expenses.

Okay.

How much did the moving of the bone cement out of hips impact the hip growth number this quarter?

It's by about 1 point, and which is consistent as well with what we would have reported last year.

Did you see any pick up in hips because of the Striker product recall?

Not in our numbers, no.

Okay.

Thank you very much.

You're welcome.

We'll take our next question from Mark Mullikin with Piper Jaffray.

Hi, actually this is [John Crowther] covering for Mark.

Just a couple of quick questions here.

Sorry if this has already been covered but did you see any competitive impact of the DOJ settlement in this last quarter, either gaining share or affecting your overall growth in the quarter?

I don't think that there's mining that's discernible in that regard.

I think that the structure of that resolution is to ensure that there's a level playing field and I think that generally speaking effective in achieving that objective.

Okay, great.

And then just a quick question on, are you guys seeing increases in the costs of your components that may be affecting your bottom line at this point?

No.

We had some visibility coming into the year to the increase you may be referring to in cobalt chrome prices.

We use cobalt chrome in many of our devices but again, we had good visibility to that coming into the year and that was reflected in the guidance we provided on the margin.

Great.

And one just last quick question.

On the cash you currently have on the balance sheet, is any of that in like auction rate securities, something that maybe you wouldn't have access to at this point in time?

No, John, going back to sort of the middle of last year, we moved out of, we didn't have anything in auction rate securities per se but we took action to even move money out of money-market funds that might have had some exposure to those securities and what our $475 million is invested in short-term Treasury backed securities so we have no exposure to what's happening or what has happened with those auction rate securities markets.

Great.

All right, thank you very much.

Thank you.

We'll take our next question from Tao Levy with Deutsche Bank.

Good morning.

I was wondering if you could give us the dollar amount for the bone cement and the Hip business?

We've not, Tao, provided that kind of detail and as I said, it accounts for about 1 point of growth in the quarter and that's consistent with what it was contributing as you go back to last year, and, as we make this change obviously we'll go forward with the filing of our quarterly filing, that will be reflected in the prior year numbers as well.

You'll be able to do the math then when you see the quarterly filings.

Okay.

And also just to follow-up on Bob's question, he asked whether OSP would come back online in 2008 and I think you just said it would come back online and I didn't know if you meant in '08 or '09?

Yes, our plan is obviously as soon as we can be comfortable that we're operating with our quality standards in mind, to bring those protects back online.

Some of the products are still online at this point in time and we're very comfortable with those obviously.

If all goes well, we would expect before the year is out to bring the other products back online but we couldn't give you any absolute assurance of that.

And then just lastly, I just want to get a sense obviously we've seen other companies report and you mentioned the Easter effect to your billing days.

What's your sense as you've exited the quarter as you see a little bit of April and you look back?

Did that, has the business returned more to a clip that you would have -- that you were seeing sort of at the beginning of sort of in the January, February time frame?

I'm just trying to make sure that maybe are we going to see a bit of a bolus activity in the second quarter because of those issues?

We obviously are reporting on the first quarter and we don't have visibility as to what the overall market and the other companies are going to be reporting for the month of April at this stage.

But I'm just trying to figure out how do we get comfortable that, we're talking about Easter, fewer billing days is in fact, what's going on and it's not a major market slowdown that's not reflected in billing days, et cetera?

Well, as we said with respect to the first quarter, we still believe that it's a mid single digit procedure growth rate with an opportunity for 1 to 3% in mix, and that's the premise to our 2008 plan and continues to be our insight as to what the market is doing through the first quarter.

Great.

And then just lastly, the activity that's going on in Ireland, the new manufacturing facility, what's going to come out of there and when do we start to see that?

I assume it affects some of your gross margins.

When do we start to see that impact the business?

Sure.

What we're going to focus on initially in that facility is the femoral, knee femoral components.

Those are high margin devices and this is in a low tax jurisdiction so it makes sense for us to have those kind of components.

We also have a process, we have in place to pick up these modular manufacturing, cell manufacturing processes and get them set up fairly quickly in Ireland.

We have an aggressive timetable that has us producing products in the beginning of next year, and then selling that product into the European market initially in I would say the second half of 2009 before it really begins to have an impact on either gross margin or net margins.

Great.

Thank you very much.

Yes.

We'll take our next question from Mike Weinstein with JPMorgan.

Thank you.

Good morning.

Thanks for taking the questions.

I was wondering if you could just follow-up with a couple of the questions we've had so far, just to clarify, Dave, what your views are on the business.

Last year, you grew your recon business about 9% constant currency, it was I think closer to 10% in the fourth quarter and then here, you reported 6% growth in recon which obviously excludes the impact of what's going on in Dover.

You said maybe 1 point of that was attributable to your being from a comp standpoint fewer selling days and Easter being in March this year instead of April.

What do you think the other 3% is?

Versus fourth quarter or maybe 2% then versus '07?

Yes, primarily I think versus fourth quarter the difference is the procedure rate.

We saw an uptick I think that all the companies reported favorable results in the fourth quarter.

To reconcile this back to last year, you're getting into some timing issues with respect to new product launches, for instance, Mike, we are anniversarying out of a mix benefit on the gender line for next gen but we're also picking up opportunities in the second half of the year, we're going to be able to fully exploit the opportunity that we have with the mobile bearing knee.

We also are very optimistic about what we might be able to generate in the way of opportunities with respect to the Natural-Knee with the Gender Flex attributes included, and then the ML Taper with connective technology is a product that we're optimistic about.

So I think that it's product cycle oriented but we feel like we're in good shape to produce good results on knees and we also feel like as the year progresses and we enter next year we ought to be able to improve on our hip performance.

So you're guiding now to 6, 7% total Company constant currency growth but the OSP impact is about 200 basis points so I assume you're thinking that recon is going to be more like 8 to 9% this year versus -- for the year versus the 6% we saw in the first quarter?

It's certainly fair to assume, Mike, this is Jim, that it's going to be higher than the 6 to 7% that we guided to for the overall results.

So the assumption is that growth accelerates over the balance of the year.

Do you think it steps up in the second quarter or is there something that drives an actual acceleration?

Well, that's really -- as David pointed out that's product cycle related as we get deeper into the launch of these new products.

The mobile bearing, the Natural Flex, the connective, the gender hip offering with connective technology.

Okay, let me clarify a couple other items, Jim.

Yes.

You made a comment where you said that you changed the accounting for stock based comp expense and that reduced SG&A by 50 basis points for the quarter.

Did I hear that right and maybe you could just explain it.

Sure.

We didn't change the accounting.

We recorded a change in estimate.

We recorded a change in estimate to recognize the difference in actual versus assumed forfeiture rates that were being used to accrue for share compensation expense and that adjustment was made in the quarter.

And it has that impact on SG&A expense.

So for the year, will it reduce by 50 basis points or was it one-time?

No, it's more of a one-time.

It will reduce it modestly going forward but the effect you saw in the quarter was more of a one-time adjustment to just get caught up for those differences.

And then as you talk about the $0.18 to $0.20 impact from OSP and the $0.07 that you're calling non-recurring, you're saying you're going to offset that through some other actions, some other one-time gains.

Can you give us any visibility on what those one-time gains might be that would offset that?

Well, I will tell you, I won't give you any specifics but I will tell you coming into the year that we were looking at some opportunities that were really focused on improving returns on invested capital.

The more balance sheet focused initiatives that included financing, share repurchases with debt, we've obviously taken action on that and some of the other things that are included for example, are monetizing non-strategic assets and that's what would result in one-time gains and again, I don't want to get into any specifics but I will say that there's a high probability of those transactions occurring between now and the end of the year.

But basically the way you want us, you want us to take out that $0.07 and that's what you're saying is through cost cutting, share repurchase, you're going to offset $0.11 to $0.13 of what you will call recurring or operating, incremental operating or lost operating income because of OSP?

That's the right way to think about it.

Last question just to clarify, Dave, just the answer to Bob's question about the timing of the April 3, announcement on OSP because the recalls just from the FDA's database occurred in December and I think on January 30, so what was it that took place that made you say hey, we've got to come out and make this announcement now on April 3?

Was it that you closed the quarter and you said there was a real impact there and we've got to make sure the Street knows about it?

Let me walk through a little bit more with a little bit more detail, Mike, the events that occurred.

As you said we had a recall in December.

There were other recalls subsequent to that event and as we were rescoping those issues we got deeper and deeper and became more and more concerned with some of the fundamental quality systems there, ultimately leading to the decision tat we announced earlier this month.

Included in that time period was, as you know any time you make a recall there's likely to be an FDA inspection.

There was an inspection.

There were some observations.

We had a third party come in and essentially do a wall to wall review and as a consequence of that very in depth review we identified some specific actions that we want to take so that's a lot of work over the course of many weeks,

Subsequent to that first quarter call leading up to that announcement, the actions that we were taking both at the end of of March and into the beginning of April included notifying customers, explaining to employees what we were doing to ensure that the quality systems were at a level that was consistent with our standards and so we didn't want to have any type of a disclosure issue there as we were taking the right steps to protect the patients interest at all times.

We didn't want to have some misconstruction of that information in the financial markets and we thought the best way to solve that problem was to put the release out that we put out earlier in the month.

Thanks for the explanation.

Sure.

We'll take our next question from Michael Matson with Wachovia Capital.

Hi, thanks for taking my question.

I guess with regards to the slowdown that we've seen in procedures, I was just wondering, are you guys hearing anything at all about the possibility that the economy is affecting procedure volumes?

Obviously consumers are under some extreme stress here and I have the sense that co-pays may have increased over the past 5, 10 years.

Is there any increased economic sensitivity out there?

I don't detect that there is.

I think that there was some speculation at the end of last year that supported the bolus that we saw in procedure growth in the fourth quarter that some people may have been concerned about potentially and an economic downturn that accelerated there locking in a date for these elective procedures but in the core recon market I don't think we're seeing fundamental impact.

I suppose if there was a long term and a sustained economic downturn that could have an impact but we're not seeing of those signs in the core business.

The segment, though we still like the market a great deal that we have probably seen some consequences to an economic downturn is the dental market because it's so much more private pay oriented.

Okay, and then with regards to the compliance changes that you announced and I guess there's a possibility that you'd buyout some of the royalties and I was just wondering what the timing of that would be and whether or not that would have any kind of impact on your P&L.

Yes, Mike, this is Jim.

We anticipate those buyouts to occur on a rolling basis over a period of several quarters.

We do expect at this point at least that we will fund those buyouts out of free cash flow on a quarterly basis.

We are at this point a bit uncertain as to the exact outcome and timing and we can't provide anymore specific items and we will provide updated disclosure on any material developments in our periodic filings as appropriate but we are going to work -- actually, we are interested in moving forward expeditiously and gain, that's as much as I can provide in terms of of detail at this point.

Okay, and then can we interpret this large repurchase authorization and the fact that you're planning to take on about $500 million in debt to finance some of that as a sign that acquisitions particularly sizeable acquisitions may be less likely over the next 12 months or so?

I don't think that you should construe the share repurchase move as an indication of any of our intent or opportunity with respect to merger and acquisition activity.

Rather you really ought to just look at that as our capability on the balance sheet.

Okay.

And then on gross margin, can you quantify how much of an impact the hedging had for foreign currency?

Well, what I will say, Mike, is I would really go back to the guidance that we provided on the fourth quarter call coming into the year, that we had indicated there that the guidance of 76 to 77% gross margin for 2008 that the difference between '08 and '07 was principally due to these hedge losses that were going to be running through our results for 2008 and that gives you some sense and I guess the other thing that we pointed out is you look at the contribution we're getting on our top line from currency, we've said that that typically gets neutralized, our hedging program on the operating profit line so you can apply our operating profit ratio as a benchmark to that pick up that we're getting on the top line to get a sense of what's running through cost of goods on hedge losses.

All right that's all I've got.

Thanks a lot.

Thank you.

We'll go next to Matt Miksic with Morgan Stanley.

Good morning.

Thanks for taking the questions.

I think a lot of the stuff here has been chewed over pretty well but I've got a couple of follow-ups.

On the trends in the quarter, I guess it sounds like sort of summing it up, you had some year-over-year comparison that impacted your numbers and is 1% Easter selling days and did I hear that right that it was also about 1% OSP?

Or is that all together?

Well, the OSP number that we quoted was about -- was $6.5 million, Matt, for the quarter.

Yes.

Okay.

A little less than 1%.

Okay.

And I wanted to get a sense as we go into Q2, are there any similar year-over-year comps either positive or negative that we should be aware of as we think about modeling the second quarter?

No.

I would tell you there isn't anything of the nature that we saw in the first quarter.

So no getting back a selling day, no getting back Easter?

As we look, I guess Matt at the balance of the year, we do expect to pick up that billing day that we lost in the first quarter and as I -- I don't have it here in front of me and I don't know that that's in the second quarter but we do pick that up in the balance of the year.

Okay.

A question on the quality system remediation that you're working on for OSP.

If you could give us some sense of maybe what that is running or what that runs you in terms of operating expenses or whether that's -- and whether that's included in the $0.18 to $0.20 impact you talked about in the press release?

It is reflected in the $0.18 to $0.20 impact.

Okay.

But you don't want to give us any sense of what that is just because that will be something -- I guess the question also is did that roll off towards the end of the year?

Sure.

What we did -- we pointed out I guess in the $0.18 to $0.20 we have included $0.07 for what we -- for inventory charges, out of plant costs and other non-recurring costs and the other non-recurring cost includes significant outside service fees that we're incurring, that as we work our way through the issues at OSP, and we would expect those service fees to taper off of as we get toward the end of the year.

Okay.

A couple questions on sort of the monitoring and compliance and DOJ related issues.

Can you give us some sense, you've talked about what the quarterly expense rate was in helping us put together our '08 numbers related to the federal monitoring expenses.

Any sense of how you're tracking against that range which I guess was in the 8 million to $10 million range?

Yes, and as we had guided to $0.02 to $0.03 per quarter and indicated that we, in our guidance we're anticipating being at the high end of that range, the monitor fees are for the first quarter were within that range.

We expect they will continue to be within that range and we have and continue to reflect in our estimates for the year an expectation that we between monitor fees and other outside service fees on compliance that we would be at the high end of of that range.

Okay.

And then you also talked a little bit about the contracts holding up some of the R&D spend, the external consulting spend, and you're expecting that to resume in Q2.

If I understand that correctly, I'm assuming that means that you'll have your contract sort of restructured and approved to begin that work in Q2; is that right?

Yes, generally that's right, Matt.

I think that the one thing that you should month is that our annual needs assessment is approved so that we have the ability to conduct meetings.

Those meetings are getting scheduled, surgeon contracts are being sent out now to engage those surgeons for services that are contemplated by that annual needs assessment so those activities both on the training and education side as well as we hope on the development side will begin again here in this quarter.

I would expect that you're going to see a gradual ramp up in the second quarter and then by the time we get into the third quarter, we should be at a full clip.

Okay, and any sense you can give us as to how that might show up in your P&L if there is any charges or changes in accruals throughout the rest of the year that we should think about?

I mean you're not guiding to it now but just to give us an idea?

Well, I guess what I will say, Matt, this is Jim, is we pointed out in the past we continue to accrue for example, under our legacy royalty arrangements our royalty expenses on any of the terms under the terms of those legacy arrangements, and that's what we have at this point, in our guidance and our assumptions going forward for the balance of 2008.

Is that, as we pointed out before, as we go through this process of settling out agreements and there are any material changes to those expectations we'll have to provide that information at that time.

And most of the rest of what you see in the way of the surgeon payments falls in the R&D line, within the P&L.

Okay.

That's helpful.

Just wanted to talk a little bit about if you could run through just give us a quick status as to how things are progressing on some of the major product launches you have like knee, Natural-Knee, Gender Hip and the Mobile Bearing Knee.

Maybe just at a high level where are you with instruments and training, any of them moving faster or slower, any kind of update you have as to when during the year you'd expect those to start to pick up some momentum?

Yes, I would say we're sort of where we anticipated we would be.

We're still obviously early into the launch as we've pointed out.

We did not have the opportunity with the MBK for example, to buildout a lot of inventory in advance of getting approval so there's that one is maybe relative to where we are for example, with the Natural-Knee Flex, that one is pacing a little bit behind, in terms of getting the inventory and the instruments out into the field and on the Hip side, the ML taper with connective technology we're in good shape with, in terms of where we are relative to where we expected to be getting the instruments and the inventory deployed out into the field.

As far as training goes, obviously with not having conducted any surgical skills training in the first quarter, that may have had some modest effect on certainly our ability to bring on any new customer who are unfamiliar with those systems.

That's probably more of an issue with the connective than it is with the knee systems, I think a lot of the customers that we would target with those new knee systems are either very familiar with using a mobile bearing knee or very familiar with using the posterior referencing system that goes along with the Natural-Knee Gender Flex product.

Okay.

And then just one final question if I could on Spine.

It looks like this is another sort of midteens constant currency growth quarter taking some share, a modest amount of share in that market.

Could you highlight what's going on in Spine, what the drivers are, and if there's anything we can expect in the next three to six months to maybe affect the growth of that business?

Yes, David, Matt, I think that what you're seeing principally is outer body sales.

We had fully integrated the Ambios acquisition.

We have a good pedicle screw system for both thoracal lumbar and the cervical region now.

So we're seeing an uptick in sales there.

Obviously that affects the inner body sales as well.

So it's basic offerings with respect to fusion procedures and I think that our differentiating product continues to be Dynesys and we continue to work towards the expanded regulatory clearance for the non fusion application.

But in the meantime we market the product as an adjunct diffusion and that is a product that we continuously hear good things from clinicians.

Any timing or milestones we can look forward to on Dynesys data or anything like that?

I don't have anything specific for you at this point in time.

Well, thanks very much for taking the questions.

Thanks, Matt.

Our next question comes from Jason Wittes with Leerink Swann.

I just wanted some clarification on how you're going to make up the $0.18?

Specifically, it looks like you're holding back on some expenditures.

That would be an R&D initiative I would assume.

Does that mean that '09 some of the investments that you plan on making this year fall into next year?

How should we be thinking about that?

Not necessarily, Jason, that reductions in plant operating expenses are really probably focused in a couple of different areas.

One, you see the lower spend on consulting services in the first quarter.

That's now reflected in the full year.

The slower pace of spending on those services is now reflected in the updated guidance as well as maybe just some timing on those infrastructure and operating initiatives in terms of ramping up the spending associated with some of those initiatives.

That's more of a timing issue.

Well, timing in terms of it's still all going to occur this year, or some of it will now occur next year?

Some of it will spill over into next year.

And so in terms of R&D spend it was down this quarter.

I guess part of that was due to the monitor, but could you give us an indication of where you think the right -- what the right level is for R&D spend for your Company?

Well, we came into the year, guiding to between 5 and 6% of sales.

We would still expect the full year spend to be within that range.

Maybe a bit lower.

Then I think we had indicated.

You mean more towards 5%?

Likely to be in the middle of that range, so probably a little lower on -- relative to that guidance.

And, I guess, from a longer term perspective that's also about the right range you'd think about for R&D spend?

That's right.

Great.

Thanks.

Our next question comes from Kristen Stewart with Credit Suisse.

I just wanted to clarify on that R&D, did you say it's going to be on the low end of the 5 to 6% range?

Or a little bit lower down?

No, towards the low end of that range, Kristen.

What's really a change in terms of your (inaudible) investment here?

Because in January you talked a lot about needing to reinvest in the businesses and that R&D was something that you needed to increase and that's one of the reasons why you had expected it to increase over the levels that you saw in 2007.

What's really going on there?

And any comment on whether or not you're still comfortable with gross margins at 76 to 77?

And then your SG&A levels at 39 to 40 for the full year?

Sure.

Nothing has really changed with respect to the investment -- our plans to invest in the infrastructure and operating initiatives that we had outlined on the fourth quarter call.

I think if you go back you would see, a lot of that investment was, as we pointed out then, more focused on either manufacturing, selling and distribution infrastructure, IT infrastructure and -- in places that would show up in SG&A, not necessarily in R&D.

And as we just pointed out, given just where we are with the compliance with the resolution agreements and some of the delays that we experienced in the first quarter, we're now guiding to the lower end of that 5 to 6% range on R&D as opposed to being in the middle of that range which is what we had indicated on the fourth quarter call.

As for gross margin, we have the impact, as we pointed out, reflected in the first quarter results of inventory charges related to OSP.

That had the impact of reducing margin in the quarter, gross margin in the quarter by about 50 basis points.

We do still expect to be, for the year, within the range that we had guided to of 76 to 77%.

And SG&A for the full year?

And SG&A still within, we had guided to a range of 39 to 40%.

Still within that range, we had indicated, I guess, on the first quarter call, likely to be in the middle of that range.

That may be more towards the higher side of that range given some of the fees, the non-recurring fees we're incurring associated with that OSP issue.

It sounds like OSP was something that maybe took you a little bit by surprise.

Have you gone through and reviewed the quality systems at your other facilities?

Are you comfortable there?

Do you have any FDA warning letters that you perceive or any 483 observations?

I guess what level of comfort do you have that your quality systems elsewhere are what you might expect?

Yes, the manufacturing in our other facilities isn't affected by the OSP announcement and the quality of our products from those facilities isn't in question in our minds.

We have a very proactive effort to continuously improve our quality systems and those over the course of the last year or so have included in depth audits conducted by a third party and it's the same firm that we brought into OSP and are getting their help in scoping out any redesigns that are necessary as part of those remediation efforts.

So our implant facilities, our major facilities have been reviewed by that same firm and we're comfortable with our quality systems at those facilities.

Any 483s or warning letters?

We have no pending warning letters and we wouldn't, the 483s are going to be part of any inspection that takes place.

We wouldn't be reporting with that level of specificity but we would always have Cappas entered on our systems where we're correcting and preventing any root cause issues that are identified so that's part of an ongoing operation of a quality system.

And I think in your kind of earlier comments you had said that you did expect, although you didn't see it in this quarter, a longer term effect of the change in the consulting agreements.

Could you just kind of elaborate on those comments just in terms of what you do expect to see?

In what respect specifically, Kristen?

I think the question was -- or you were saying in terms of the consulting and the DOJ monitoring that you had expected to see a longer term impact over time and I was just wondering if you could elaborate on your comment?

I'm just not clear as to what context that comment was made.

You made earlier I guess when you were talking about the change in consulting arrangements, prompted by the DOJ settlement, and then you went on to say there is going to be an impact over time of the change of those consulting agreements and so I was just unclear as to what you were trying to say?

Okay.

Well, I do think that it's going to be a dynamic environment.

It certainly has been over the course of the last seven months or so, but I think that you're going to see medical device businesses in general revisiting these issues and it's one of the reasons that we're coming out with a strong move in this area to clarify how we're going to collaborate with surgeons.

We think that collaboration is extraordinarily important both to the development of the right products and then training surgeons on the safe and effective use of those products.

So we want to continue to collaborate but we want to structure those relationships in a way that inspires confidence and trust among all of the stakeholders that are going to be scrutinizing those collaborations on a go forward basis and so that can come in a number of different forms.

It could be how we fund those initiatives, for instance we want to take any of our charitable giving and general medical education support and put those funds in the hands of a third party so they can be disseminated in a manner that doesn't even give the appearance of impropriety and it's also going to come about in the form of revisiting both structure and compensation arrangements within those collaborative arrangements, whether it's training education or on the design surgeon side.

So what degree do you think there's going to be a longer term impact on R&D if you're unable to kind of work with doctors in the same manner that you have in the past?

Do you expect to have difficulties kind of on the innovation side on R&D productivity, do you expect there to be longer term mix implications from any of these changes in consulting agreements?

Our first priority is continue to put out best-in-class products and address unmet clinical needs.

What it may involve over time is a repositioning of that dollar spend so that if there are certain surgeon services that are important to those collaborative efforts and the development of the right products that people are scrutinizing heavily, you may bring those resources inside even in an extreme but I don't see that this is going to have any negative impact on our ability to put great products out and to train people properly on those products.

Last question.

The update on the Hip resurfacing, I apologize if I missed it.

Yes, we had as we pointed out in the past, Kristen, working down two paths, one is to submit a PMA with foreign data and the other is to complete a U.S.

ID.

We have recently experienced some delays on both fronts.

We would now sort of project the earliest that we would be on the market with the Hip resurfacing device in the U.S.

is 2011.

Given that position, our sales and marketing, our product development efforts are going to remain focused on addressing the other 90% of the hip market here in the near term.

Does that change your expectations for your underlying hip growth because I know last year you were talking about how that was going to be an impact.

How confident are you that you can sustain higher underlying growth rates in hips as we move out this year above kind of where you were in this recent quarter?

No.

It does not change our view.

We pointed out in our last call, we were tracking very carefully on an account basis -- very closely rather our performance on a unit basis and we continue to view our opportunity with respect to our primary hip portfolio in a way that sort of has us keeping pace with market growth.

So contrary to what you thought last year your expectations for Hip resurfacing are maybe less of an impact now relative to what you thought back in October?

I think that's fair and again that's consistent with what we pointed out on the last call as well.

Thanks very much.

You're welcome.

We'll take our next question from [Michael Youngling] with Merrill Lynch.

Great.

Thank you for taking my questions.

I have three.

The first one is in relation to hedging losses.

Can I just confirm from the last discussion in the Q4 call whether you still believe that the impact from hedging losses will go away in the second half of 2008 and also into 2009 or have you had to rehedge and therefore, that pain could be extended for a longer period of time?

Secondly, on SG&A, can I just confirm that the monitoring costs in the quarter were around $8 million?

And if you could also comment on perhaps the precise details by SG&A to sales has gone from $37.4 in the fourth quarter to $39.7 adjusted for your changes in compensation expenditures in light of the fact that we've seen a reduction in selling or entertainment expenses both at the meeting in Boston and the (inaudible) meeting in San Francisco?

And the third question I have is in dental, can you comment on whether the U.S.

market for dental implants has seen a sharp or more difficulties from the fourth quarter of last year to the first quarter of this year?

That would be great, thank you.

Michael, this is Jim.

I'll cover the first couple of questions that you had.

First of all on the hedging losses I pointed out in the past.

We layered these hedges in over time, and so on a month to month basis we're looking out from anywhere from 18 to 24 months and layering in new hedge contracts to cover off projected cash flow exposures that we have.

So we would not anticipate the hedge losses that are tapering off particularly not to the extent the dollar has continued to weaken in the second half of '08.

At some point the dollar stabilizes and you anniversary out of those hedge losses but it would not be in the second half of '08.

With respect to your question on SG&A, the monitor fees as we pointed out are within the range we guided to and you're not going to give a specific number but again, I would just point out that they are within the range that we guided to and if we look out over the balance of the year between monitor fees and other outside service fees we're incurring on the enhanced compliance and ethics initiatives we would expect to be at the high end of that $0.02 to $0.03 range that we guided to.

And then regarding the SG&A ratio for the quarter, that really is a function of all of the things that we discussed on the fourth quarter call coming into the year.

In terms of the infrastructure and operating initiatives that we had outlined that includes the monitor fees and expenses, that includes the increased costs associated with getting more instruments out into the field in the U.S.

market, that includes sort of an enhanced commission opportunity to bring more focus to our Trauma product line within our core market here in the U.S.

and also investments in salesforce infrastructure and our global businesses and dental in Trauma outside the U.S.

So those are some of the things again, that we had outlined on our fourth quarter call coming into the year that are contributing to that increase in the SG&A ratio.

I would say that with respect to your question on the dental market we have seen a continued slowing of the U.S.

market and that is a progression that has continued through last year and into this year.

Just a quick follow-up on the SG&A side.

Can I just confirm that the increase in the first quarter and ratio was the investment in capital equipment so the amortization or depreciation of sales samples, was that a key driver or was it more the other things that you've mentioned such as investment in monitoring costs and fees, et cetera?

Thank you.

It's a pretty significant contributor.

The increased depreciation on the instruments that are being put out in the field, but monitor fees and expenses are also contributing to that increase.

Great.

Thank you.

Thank you.

Okay.

We'll take our next question from Bruce Nudell with UBS.

Hello, Bruce.

Sir we're not hearing your question.

Please check your mute button.

Oh, good morning, I'm sorry.

The most interesting thing about the quarter reported so far was that the U.S.

hip market last year was double digits.

This year with everybody reporting, it seems to be about 4%, selling day aside maybe 5%.

Units have averaged about 3, 4% over the last six or seven years barring '07 perhaps.

Could you, do you have a feel for why the market was so robust last year as opposed to seeming a more traditional type of revenue growth this year?

Bruce, this is Jim.

I think that when you're looking at the market, there have been over the past couple of years I think there have been a number of companies that have been able to increase their penetration with their alternate bearing offerings, more specifically metal on metal that for us represents frankly, an opportunity going forward and that's contributed to a pretty significant mix benefit and as obviously those companies achieve higher levels of penetration with those devices at some point, they anniversary out of that mix opportunity and you see results falling sort of back in line with something closer to unit growth.

Thanks so much on that, and looking at the categories and after kind of adjusting for your r taking cement out of hips, were there any categories in U.S.

or O-U.S.

hips where you felt you may be lagging the market this quarter?

I would say we have seen a bit of competitive pressure in our revision, Hip lines there's some instrument issues we're fully aware and are addressing with some development efforts and I would tell you those sales were somewhat weak in the quarter.

But basically you think for all of the categories you're within a point of the market?

U.S.

or O-U.S.

hips and knees?

I think putting hip resurfacing aside on a unit basis, yes.

Okay, and the 70 million to $80 million hit to top line this year, we had called you and we were trying to figure it out the EPS impact, and we were kind of told that it was at the lower end of the margin scale of your product line, but just doing a quick calculation it looks like the incremental operating margins to explain 11 to 13% have to be quite high, well north of 40%.

Was there a disconnect or did we just mishear?

Well, it's all relative.

These are lower margin products relative to hips and knees, but still, healthy margins.

Okay, and then Dave, a more strategic question, I think that you guys have taken the lead on the compliance front, I think you'll probably set the standard for doctor-company relationships going forward.

But assuming everybody comes to the level that you're hoping to establish, and we look out, it could make for a more fluid market share environment so when you sit back and think about the strategic plan for the Company, given the dominant market share position you have in hips and knees, how much, just to kind of speak to the level of risk, how much share do you think is at risk, due to potentially a more fluid environment when you say how much should I invest in hips and knees versus spine and dental and trauma?

Yes, I think that our core business is one that we are very optimistic we can continue to expand our leadership with respect to and that's part of the reason we're making those adjustments and establishing an appropriate standard for these collaborative relationships on a go forward basis.

These product decisions need to be made in accordance with what's in the patients interests and the vast vast majority, hopefully all of the surgeons that we do business with are making decisions because they firmly believe that these products that we produce provide them with the best opportunity to do right by their patients and that's the basis upon which we want to compete.

It's the basis upon which we compete every day and we do that successfully and on a go forward basis we're going to continue to be very effective at developing great solutions to address unmet clinical needs and training the surgeons on the proper use of those products, so I don't see any risk component to that.

It's just going to come back to how effective we are at developing the right solutions and marketing and selling those products.

I guess just the final thought on that issue.

Could you, does the O-U.S.

experience with regards to surgeon loyalty where I don't believe there are nearly as many consultants et cetera, tell you anything about the degree to which share loyalty is driven by instrumentation and great service and products?

Yes.

It's instructive, but the U.S.

is instructive as well, Bruce.

I mean there are thousands and thousands of surgeons that select our products resulting in millions of our implants being used every year and we don't have any relationship with those surgeons beyond a pure customer relationship, so that's the basis upon which most of these surgeons have always made their decisions and we're the leader in that market, so we're really comfortable with our ability to compete in that world going forward.

Thanks so much.

You're welcome.

Our next question comes from Bill Plovanic with Canaccord Adams.

Great.

Thank you.

On the OSP business, how much of that do you expect to come back online if you're losing 70 million over the course of the year, what do we end up getting back at the end of the day considering you're discontinuing some of these products?

Well, it comes back in phases over the balance of the year, Bill, and we haven't obviously put an operating plan together for 2009, so there will be some challenges, obviously.

There are competitors that are getting into those accounts where we've lost that business, we're going to work hard to get it back but I honestly couldn't tell you at this point when it's all said and done how much of that business we're going to get back.

But just to clarify, Bill, we aren't discontinuing products.

Those remediation efforts are intended to bring our products back online, so there is no discontinuation plan.

Okay.

And then if I just did a little back of the napkin math here, some of your comments that U.S.

Hip business, 4% up in the first quarter, excluding the less days was in line with last year, if I kind of, it runs some of the numbers with the cement up 24% year-over-year, I'm just trying to -- it looks like the Hip number, what I'm trying to get at here is actually -- reporting number is about in line with expectations when you back out the cement as you push it to OSP.

Question is OSP, this is the first quarter you're reporting it -- or cement, this is the first quarter you're reporting cement in the OSP line; correct?

That's correct.

So in the U.S.

Hip business instead of growing 9% last year grew about 4 or 5% if you back the cement out; is that pretty fair when we see those numbers?

Yes.

Our first quarter growth in hips excluding bone cement in 2007 would have been 4.3%.

Bone cement was in the U.S.

somewhere around $65 millionish last year?

Am I backing into the numbers pretty--?

For the full year?

You're in the neighborhood.

Okay.

And then just secondly, what's the cost of the credit facility if you're taking down 500 million and buying back stock just so we can do the numbers how much do you think that's going to cost you and what are you getting on your cash balances these days?

Yes.

Well, we had indicated on the call that we on the 500 million, we are projecting about 10 million of interest costs pre-tax.

For the balance of the year.

And what are your cash balances earning you right now?

Somewhere in the order of 2to 2.5%.

All right, great.

That's all I had.

Thanks a lot.

Our next question comes from Philip Legendy with Thomas Weisel Partners.

Quick question on the Mobile Bearing Knees.

You mentioned Mobile Bearing and the Flex-Knee together were about 10%, what was Mobile Bearing just on a standalone basis as a percentage of sales?

That's a detail that we're not going to disclose.

How about, how much have -- have you disclosed how much of a premium you get on Mobile Bearing Knee?

No, we wouldn't provide that type of breakout.

The Mobile Bearing opportunity is significant.

What we have right now, cleared is a product that probably compete effectively in about half the U.S.

opportunity.

If you assume that that is about 15% of the overall knee market it's a bit over $300 million.

So take half that number and that's the opportunity.

I would tell you that at this point in time it's obviously an insignificant percentage but the product was just launched and as we've stated previously we expect our ability to seize that opportunity to ramp up over the course of the second half of the year.

Okay.

That's helpful.

And then I wanted to maybe follow-up a bit on Bruce's question earlier.

In terms of how you are -- you're taking a leadership position on the physician consultant issue.

How different do you think your position will end up being from higher competitors choose to act?

I wouldn't suspect that at the end of the day it will be significantly different but I can't project out for you, Phil, with any certainty as to what kind of a time lag there may be as applied to either this sector or the broader medical device industry.

But do you have a sense that -- you must be talking to physicians already.

Do you have a sense that your actions are more draconian, for lack of a better word?

Or is everybody on the same page here?

Well, I think that directionally there's a lot of consistency here and this is a unique circumstance in the sense of the leaders in this sector are all under similar terms because of the deferred and non-prosecution agreements that they entered into and there is a stated objective by the Department of Justice and the monitors that are working with them to ensure that there's a level playing field.

So I think within this sector people are directionally on the same page.

We're making these decisions in a very principled way.

We don't want to incrementalize this initiative.

We want to make sure that any adjustments that we make, we're making these adjustments once and we believe that that's going to serve the long-term interest of the Company and the surgeons who we work with and the patients that they serve.

So we're very confident that we're doing the right thing.

And as for the other companies we'll have to see what pace they come along.

Thanks very much.

You're welcome.

At this time there are no further questions.

I'd like to turn the conference back over to Mr.

Dvorak for any additional or closing comments.

Thanks.

And thank you everyone for joining us today and for your continued interest in Zimmer.

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

Have a great day.

This does conclude today's call.

You may now disconnect.