Zimmer Biomet Holdings Inc (ZBH) 2010 Q1 法說會逐字稿

And sir, you may begin.

Good morning.

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

I would like to welcome you to the Zimmer first quarter 2010 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 will review our performance for the first quarter, provide you with an update on certain key matters, present an update on our outlook for 2010, and conclude our discussion with a question-and-answer session.

We understand that this is a very busy reporting day, and we'll do our best to keep today's call close to an hour in length.

Therefore, we ask that participants pose one question with one follow-up, to allow as many callers as possible the opportunity to take part in today's call.

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 www.zimmer.com, under the section entitled Investor Relations.

In addition, we routinely post important information for investors on our website in the Investor Relations section.

We intend to use this website as a means of disclosing material, non-public information, and for complying with our disclosure obligations under Regulation FD.

Accordingly, investors should monitor the Investor Relations section of our website, in addition to following our press releases, SEC filings, public conference calls, presentations, and webcasts.

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 6, 2010, 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.

We're glad you've joined us on the call today.

This morning, I'll review our first quarter 2010 results and provide comments on highlights from the quarter.

Jim will then provide additional financial details.

Net sales for the quarter were $1.1 billion, an increase of 3.4% on a constant currency basis, and our earnings per share were $1.02, on an adjusted basis.

Our sales performance reflects incremental constant currency growth, over the fourth quarter of 2009, of 90 basis points.

Sales results improved, when compared with the fourth quarter, in the Americas and Asia-Pacific, but remained under pressure in Europe, Middle East, and Africa segment, in large part due to the challenging economic environment in that region.

For the quarter, we once again reported year-over-year sales growth in all three of our geographic reporting segments.

America showed 2.8% constant currency growth, while Europe, Middle East, and Africa grew slower, as we anticipated, at 1.1%.

Asia-Pacific again led our geographic segments, with a solid 10.8% constant currency growth.

Knee sales for the quarter improved year-over-year 7.4% on a reported basis and 3.8% constant currency, reflecting positive volume and mix of 5%, less negative price of 1.2%.

Sales of partial knee devices, including the Zimmer Uni Knee and the Gender Solutions patella femoral joint, contributed to knee growth for the quarter.

Also showing growth for the quarter were later stage devices, like the NexGen Legacy constrained condylar knee and the rotating hinge knee.

We're confident that initiatives already underway will accelerate the growth of our primary knee systems and will drive further improvement in the performance of our knee franchise this year.

At AAOS, we debuted an expansion of our patient-specific instrument portfolio by adding our Natural Knee brands to the recently cleared NexGen brand.

Our patient-specific instruments are a proprietary tool set customized to the individual patient's anatomy, and are designed to streamline total knee replacement procedures by ensuring the successful implementation of the surgeon's preoperative plan.

We're pleased with the early clinical feedback on these instruments, and expect to further leverage our industry-leading knee systems with the continued rollout of patient-specific instruments, as well as other innovative instruments that we expect to launch mid-year.

Hip sales for the quarter improved year-over-year 5.4% on a reported basis and 1% constant currency, reflecting positive volume and mix of 2.1%, less negative price of 1.1%.

Sales of revision hip products, such as the Zimmer Modular Revision hip and the Trabecular Metal revision shell and augment cups, were strong in the quarter when compared to prior year, as were sales of Bi-Lux delta heads.

With 140 basis points of incremental growth over the fourth quarter, we see positive signs in our hip business.

The global launches of our Continuum system and MMC Acetabular products are underway.

But, as we've described before, we don't expect to see a meaningful impact from these new product introductions until the second half of this year, after implants and instruments are more widely deployed.

We are, however, on track with our expectations for the staged rollout of these products, and the initial clinical feedback has been quite positive.

The Continuum system further reinforces Zimmer's commitment to providing surgeons with the most comprehensive flexible and integrated array of metal, ceramic and polyethylene solutions, to meet the diverse and unique needs of their total hip replacement patients.

In combination with our comprehensive stem portfolio, including our Fitmore hip stem and our M/L Taper with connective technology,the Continuum system offers surgeons tremendous flexibility and confidence to personalize the implant solution.

Extremity products posted healthy results for the quarter, with sales growth of 13.9% constant currency.

Our Trabecular Metal technology has played a key role in the success of this product line, as the TM Reverse Shoulder and TM Glenoid continue their outstanding growth trends.

Following a year of weaker demand caused by the global recession, our dental sales increased 6.2% constant currency for the quarter.

Sales of our implants, restorative components, and regenerative products all grew in the quarter.

The Asia-Pacific region reported the largest increase in dental sales, at 23.9% for the quarter, with distributors in the region restocking as demand begins to recover from the depressed levels of the prior year.

Trauma sales in the quarter were up over the prior year period 2.7% constant currency.

Sales of noncontact bridging plates, cable products, intramedullary nails, and locking plates and screws contributed to growth in the quarter.

The comprehensive rollout of our Natural Nail system remains key to driving improved performance in trauma.

The rollout continued during the quarter with a limited release of a Cephalomedullary nail.

The reception of the CM Nail system has been extremely positive with surgeons, who have commented on its ease of use, due to the anatomical nail design, proprietary fixed angle locking screw technology and intuitive instrumentation.

Zimmer Spine reported a sales decrease of 9.1% constant currency in the quarter.

Our spinal business continues to experience challenges, related in part to the Dynesys Dynamic Stabilization system.

But we remain committed to the product category.

We expect incremental growth opportunities for Dynesys in regions outside the United States.

Overall, signs of improvement in our spine business are reflected in the growth reported by our international units and in the positive worldwide growth recorded for acquired spine products, including the PathFinder MIS Platform, the Ardis Interbody System, the Universal Clamp, and the Sequoia Pedicle Screw System.

For the quarter, spine sales increased 15% in Europe, and 7.7% in Asia-Pacific, although our base there is relatively small compared to our America's business.

Europe and Asia-Pacific growth is coming from stabilization of our distribution channel, resulting from our 2009 integration efforts.

In the first quarter, our orthopedic surgical products franchise experienced 18.3% constant currency growth.

Sales of wound debridement devices were up over 65% in the quarter, as our global sales channel continue to make progress on recovering market share in the category.

Bone cement and powered instruments also reported strong numbers in the quarter compared to prior year.

I want to make particular note of the excellent performances for the quarter by our dental and OSP businesses and by our Asia-Pacific team.

Each has faced considerable challenges for nearly two years, and I'd like to thank these teams for the work that they have done to turn their performance around.

There are a couple of other topics I'll touch on briefly.

Regarding pricing, consolidated average selling prices in the first quarter were down 0.7% compared to the prior year period.

We experienced negative pricing of 1.1% in the Americas, positive pricing in our Europe, Middle East and Africa region of 0.2%, and negative pricing in the Asia-Pacific region of 0.4%.

Now, please keep in mind that bi-annual pricing adjustments in Japan did not go into effect until April 1.

The consolidated pricing for the first quarter was consistent with our expectations, and we continue to anticipate moderate price erosion of minus 1% to minus 2% for the year.

Volume trends across our geographic regions were largely in line with our expectations for the quarter.

Volumes throughout our Europe, Middle East and Africa region continue to be suppressed, but appear stable as contemplated in our guidance.

In the Americas and Asia-Pacific regions, demand appears to be returning to pre-recession levels.

Finally, with respect to guidance, as we said in our earnings release this morning, we are reaffirming our outlook for 2010.

Jim will now provide further details on the quarter and our guidance.

Jim?

Thanks, David.

I will review our performance in the quarter in more detail and then provide additional information related to our 2010 guidance.

Our total revenues for the quarter, as David mentioned, were $1.063 billion, a 3.4% constant currency improvement, compared to the first quarter of last year.

Dollar strength in the quarter resulted in a tail wind from foreign currency translation, which increased revenues by 3.7% or $36 million in the quarter.

Our adjusted gross profit margin at 74.9% for the quarter was in line with our expectations and 230 basis points below the prior year.

As expected, higher unit costs of products sold and foreign currency hedge losses, as compared with prior period hedge gains, account for the majority of the change.

As we continue to build and deploy pipeline inventory of our recently cleared Acetabular cup products and our new line of intramedullary nails, as well as experience steady growth in our core reconstructive business, we improve utilization across our manufacturing network.

As a result, and also taking into account the change in our outlook for foreign currency translation, we are now expecting our gross margin ratio to be between 75% and 76% for the full year.

Moving down the income statement, R&D expense, as a percentage of sales, was at 4.8% and, at $51 million for the quarter, is 1.8% favorable on a total dollar basis when compared to the prior year.

Our R&D spend in the prior year was higher, due to the extensive development activities underway at that time, related to the Continuum and MMC cup products, as well as the Zimmer Natural Nail.

We are expecting R&D expense to increase through the balance of the year, as new development programs accelerate.

Selling, General and Administrative expenses increased to $447 million in the first quarter, but at 42% of sales, SG&A expenses are 70 basis points below prior year first quarter.

Medical training and education expenses increased in the quarter as compared to the prior year.

Spending and related to certain operational excellence and growth initiatives also contributed to higher expenses in the quarter.

As a consequence of accelerating these programs, SG&A, as a percentage of sales, is now anticipated to be between 41% and 42% for the full year.

Continuing down the income statement, acquisition integration, realignment, and other amounted to $2.6 million in the quarter, and includes costs principally related to prior period acquisitions.

Adjusted operating profit in the quarter increased to $298 million, at 28%.

Our adjusted operating profit to sales ratio is 130 basis points below prior year first quarter, largely due to higher production costs.

Net interest expense for the quarter amounted to $14.6 million, compared to $3.7 million in the prior year quarter, mainly due to the $1 billion senior unsecured notes offering we completed in November of 2009.

Adjusted net earnings were $207.4 million for the quarter, a decrease of 1.2% compared to the prior year.

Adjusted diluted earnings per share increased 7.4% to $1.02 on 204.2 million average outstanding diluted shares.

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

At $1.01 reported diluted earnings per share, which include the items reflected in acquisition integration, realignment and other, increased 11% over the prior year first quarter reported EPS of $0.91.

Our effective tax rate for the first quarter was 26.8%, in line with our expectations.

During the quarter we repurchased 1.5 million shares at a total purchase price of $94 million.

As of March 31, 2010, approximately $118 million remained authorized, under a $1.25 billion repurchase program which expires at the end of 2010.

The company had approximately 203 million shares of common stock outstanding as of March 31, 2010, down from 204 million as of December 2009.

Operating cash flow for the quarter amounted to $260 million, up 41%, from $185 million from the first quarter of 2009.

In the prior year quarter, we resolved outstanding payments to healthcare professionals and institutions, resulting in substantial cash out flows.

The strong results for the quarter also reflect the benefit of our continued efforts to streamline inventory investments.

Overall, the operating cash flow for the first quarter is representative of our expectations for continued strength in cash flow.

A $209 million in the first quarter free cash flow, defined as operating cash flow, less cash outflows for instruments and property, plant, and equipment, is in line with our expectations at this point in the year.

Adjusted inventory days on hand finished the quarter at 302 days, a decrease of 71 days compared to the first quarter of 2009, as a result of field and central warehouse-based inventory reductions achieved in the second half of 2009.

Our adjusted Trade Accounts Receivable days sales outstanding finished the quarter at 60 days, a decrease of one day from the first quarter of 2009.

Depreciation and amortization expense for the first quarter, amounted to $84.9 million.

Capital expenditures for the quarter totaled $50.9 million, including $39.3 million for instruments and $11.6 million for property, plant, and equipment.

We expect capital expenditures to be higher in each of the subsequent quarters for the remainder of the year, as we replace machinery and equipment in the normal course, and invest in instruments to support our new product launches.

Cash outlays associated with investing activities during the quarter include $2.9 million for certain international distributor acquisitions.

I'd like to turn now to our guidance for 2010.

In our earnings release this morning, we reaffirmed our full year constant currency sales and adjusted earnings per share guidance.

Full year revenues are expected to increase between 3% and 5% on a constant currency basis.

Assuming foreign currency exchange rates remain near recent levels, the Company estimates that foreign currency translation will increase revenues by 0.5% by the full year 2010, resulting in expected revenue growth on a reported basis between 3.5% and 5.5%.

2010 full year adjusted diluted earnings per share are projected to be in a range of $4.15 to $4.35.

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

Thanks, Jim.

In the first quarter, we made progress that will enable us to accelerate our growth.

Our improving performance and incremental manufacturing through-put are allowing us to increase investments in several strategic initiatives.

We're also encouraged by improvements in working capital management, which helped generate strong cash flows during the quarter.

In addition, our new product launches are progressing and we're continuing to deploy instruments and implants and the medical education associated with the new systems.

As mentioned earlier, the clinical feedback we've received, both in the early launches, domestically and in jurisdictions outside the US, where they've been in use for a number of months, gives us further optimism that these products are providing surgeons with excellent solutions for their patients.

More broadly, our organization has a sense of excitement coming off the AAOS meeting, and we're driving our strategic plan and moving forward with confidence.

And now, I'd like to ask Celeste to being the q-and-a portion of our call.

(Operator Instructions)

Your first question comes from the line of Raj Denhoy with Jefferies.

Hi.

Good morning, guys.

Good morning, Raj.

Wonder if I could ask a little about the hip and knee business.

It's still broadly lagging the other competitors that have reported so far.

I'm curious if you could give some thoughts around what's happening there.

I know you still have some product launches to come later this year.

But by our tally, you should have anniversaried the share losses, particularly on the hip side from about a year or so ago.

Why is that business still stubbornly lagging the market?

We are -- we're looking to make material improvements in the performance of those two franchises, Raj.

And a lot of this does relate to those product launches that you mentioned.

On the hip side, the Acetabular cups are going to give us great opportunities to pair those up with, what we believe to be, industry-leading technology on the stem side.

And we're already seeing early indications that that hypothesis is going to prove very much true.

Those sets do take time to get out.

And as we've said, it's really a second half of the year productivity story for us, on the deployments.

In the jurisdictions overseas where the cups have been launched and are probably, say, that early period, six months into the process, we're already seeing improvements in the performance in those markets.

So the up-take has been attractive.

I am absolutely confident that we're going to see the same experience in the US markets.

On the knee side, it's much the same story.

We mentioned PSI, we're getting good uptick in that already.

I will tell you that I think it's going to be a growth driver for us, principally in the US marketplace, but there are other instruments that we'll be launching mid-year that were going to put us in a much more competitive advantage for instruments to be responsive to what the surgeons are looking for.

They're looking for simpler instruments that take time out of the OR, lead to reproducible results or more ergonomically designed.

And we have a great solution that we'll be launching mid-year in that category.

We're very optimistic about the prospects for improving both of those key franchise performances within the year.

So you think maybe by third, fourth quarter, you'll be back to market growth rates, whatever those may be at that point.

But you think you'll be back to the market?

Yes, I would expect this year that we would he be back to market growth rates in both those franchises, and we're going to be working towards an expectation of delivering above market growth rates in hips.

Okay, and then just for my second question, I just wanted to ask you a bit.

You made a comment towards the end of your prepared remarks about how improvements in manufacturing profitabilities allowing you to increase investments in other areas of the businesses.

I may not have gotten that correct, but something to that effect.

I'm curious, just broadly speaking, how that plays out in terms of your business.

One of the real opportunities here is that your margin structure is still significantly lower than where it's been.

I'm curious to know, as you move through the year and as manufacturing productivity starts to improve, how you balance, allowing some more of that to potentially fall to the bottom line, to potentially increasing investments again in some of the other areas of the businesses, how you really manage that dynamic going forward.

Yes.

There are -- Raj, this is Jim.

There are a couple questions there I'll come to answer.

We mentioned, as you indicated, that we are accelerating investments in certain operational excellence and growth initiatives.

Without going into too much detail, those investments are generally in the area of sales and marketing support for new products and included, just by -- just to give one example, of sales planning and scheduling tools that can be used to optimize field inventory and instrument deployments as we get into these major new product launches.

The other thing I would tell you is that, just given where we are with these new product launches in this operating period, the focus of those investments is naturally going to be on sales and marketing.

I think we -- you can expect, coming out of this operating period, we'd like to be investing more money in research and development to accelerate new product development programs.

As we look forward into future operating periods, we would look to fund any increases in our R&D spending with savings from SG&A.

So I guess, broadly speaking, you guys reiterated your guidance on the bottom line this year.

It sounds like you're seeing better productivity improvements, but you're spending those, to put it bluntly.

In this operating period, given the opportunities that David talked about, with respect to the new product launches, we are investing in going after those opportunities.

Again, that's in the context of this current operating period.

Okay, great.

Thanks a lot.

You're welcome.

Your next question comes from the line of David Roman with Goldman Sachs.

Good morning, everybody.

Thanks for taking the question.

Just -- Jim, in your prepared remarks, you referenced it, I think you took gross margin guidance from about 75% now to 75% or 76%.

I think the two factors you cited were better product mix and also foreign currency.

Can you maybe break down for us what the drivers are of the 100 basis point increase in guidance?

How much of that is mix, how much of that is FX?

Sure.

So again, with the buildout of the pipeline for our new Acetabluar cup products, as well as our new line of intramedullary nails, we're seeing increased through-put across the manufacturing network.

We expect that to continue through the first half of the year.

So we're now putting lower cost inventory to the shelf, and anticipate that inventory's going to turn in the second half of the year.

So in part, you know, that's what leads us to a higher expectation for the gross margin ratio for the second half.

Now I should point out that production volumes are expected to peak in the first half of 2010,with these pipeline inventory builds, and then taper off perhaps in the second half of the year.

There is about a six-month lag in recognition of those efficiencies -- across the network.

Now, how much of it tapers off will depend, in part, on the success we have with penetration and those new products as well as procedure growth rates across our core markets.

And that accounts for about half of the improvements, David, that's reflected in the updated guidance that we provided.

The other half is related to the change in outlook that we have for foreign currency.

Okay.

If you use the rates that were in effect at the time that we gave our guidance at the beginning of the year, we clearly had a different outlook with respect to hedge -- the hedge losses we were projecting at the time, relative to the gains that we had experienced last year.

Okay.

And then on the guidance of 415 to 435, you kept the same.

Can you give us some sense of what the drivers are, at either end of that, the 435 number, how much is dependent on Continuum and MMC gaining traction, versus an improvement in the overall market than at the 415 level?

Does that assume no u- take from mix and a continued slow recovery in the end-user market?

Those are the principle drivers.

That's right, David.

Really, it's top line-driven and those are the biggest product categories that we have.

The one other one that I'd add into that, in addition to the instruments on the knee side and the cups on the hip side, would be the nail launch within trauma.

Okay.

And then lastly, David, you talked about the spine business, trying to more aggressively go after the US piece of it.

Can you talk us through some of the investments that you're making, and what type of catalysts or data points we should look for over the next six to 12 months to give some more clarity on the status of that business?

In the short-term, we have good opportunities to grow above market rates, OUS.

We have a good product portfolio.

It's actually broader, because it includes some of the non-fusion solutions that we have within that bag at this point in time.

And then, what we're looking to do is correct out that performance so that we're exiting this year back at market overall, and that's going to, obviously require some pretty significant improvement in our US performance.

That's going to come in the form of new product launches.

We're excited about some of the things that we have going on.

Especially in the MIS category, there, and just better sales execution as well.

So I think that what you want to look for, and hold us accountable to, is a continued performance,improvement trend through the year, exiting the year at about market growth rates, and then a good cadence of new product launches thereafter that are going to sustain that growth as we build the business out.

Okay.

Thank you very much

Thank you, David.

Your next question comes from the line of Bruce Nudell with UBS.

Thank you.

This is actually Mike Duncan for Bruce.

What product gaps do you feel like you have in these that would kind of explain, I guess, the slightly below market growth rate you have there?

I think that the instruments are the only gap of any significance at all at this point in time in our portfolio.

We have the leading knee systems, as far as clinical performance, globally, as evidenced by the registry data that is continuously published.

In both NexGen, Natural Knee, and then on the European front, principally in central Europe, the Innex knee system.

So we have great primary offerings, we have good pre-TKA, as well as revision opportunities as well.

Those aspects of our franchise are growing at attractive rates.

It's really the primary side and it's instrument-driven.

That's something that , as I said, we're going to be correcting out in the short-term

Okay, great.

Could you talk about the trajectory of the US trauma market now?

Historically it's been low double-digits.

Do you think it's still that going forward, or lower?

I think that that's the same range, currently.

Yes.

You know, plus or minus a couple percent of where it's been.

So we haven't seen any significant change.

But again, you have to look at our participation in that market with 5% market share.

So we have a little bit more of a limited perspective on that particular market.

Great.

Thanks so much.

You're welcome.

Your next question comes from the line of Bob Hopkins with Bank of America.

Hi.

Thanks.

Can you hear me okay?

We can, Bob.

Good morning.

Great.

Good morning.

Jim, I wanted to start with the comments around SG&A for 2010.

I'm just curious.

Should we be thinking of this 41% to 42% kind of range as the new structural norm going forward?

Or, do you continue to anticipate that over time the structural norm is more back where it used to be, in that 38% to 39% level?

Yes.

I would not characterize the 41% and 42% as the structural norm.

A I indicated, we see some significant opportunities with respect to these new product launches.

And they are very significant.

These are large system, that are getting launched, both on the hip side and in trauma as well, this year, that require us to make some investments in sales and marketing to support those product launches.

So,the 41% to 42% is not at all representative of the opportunity we believe we have to bring down that total spend overt time.

And I would tell you that in part, some of what we're spending money on this year is directed at putting systems in place, at re-engineering business processes that will ultimately drive savings in SG&A.

And you know, the savings, combined with the opportunity we'll have to leverage fixed components of our SG&A expense, as our top line grows, will work in combination to get us back to, without putting a specific target to it, maybe perhaps an aspirational target at this point, to get us back to that level that you referenced.

Okay.

And then, following up for David.

I was just curious, the Zimmer docs, your primary customers, is that a stable customer base at this point?

And, you talked a little bit bout the hip launch and some of the confidence there in getting back to market growth and even above market growth.

But I'm just wondering,in light of the metal on metal controversy, has that confidence in that hip rollout been compromised in any way, given what you're seeing from your surgeon base, or given what you're seeing in metal on metal trends following the AAOS meeting?

Bob, the surgeon base is largely stabilized.

I mean, there obviously isn't any magic to turning a calendar month or even a calendar year on those things.

So it isn't going to ever be a circumstance where all of that's over and passed.

There are going to be elements of that to continue on, but I will tell you, they're immaterial to the overall performance of the business.

And frankly,I'd characterize them as being much more in the norm of the bump and grind of, you're going to win some business and you're going to lose some business over time.

I don't think that that's a driving issue for our performance at this stage.

As far as the hip launch goes, I don't see anything that's happening with metal-on-metal, as at all inhibiting our ability to execute on the opportunity that we have with these new cup systems.

We were always quite low, relative to the market, in our share of that metal-on-metal side of things.

Down around 5%, relative to a market that was probably 25% to 30%, as measured by dollars, and maybe 20% to 25 % as measured by units.

Some of the competitors had 50%, or maybe even north of 50%, in mix.

So while there is likely to be some settling of the composition of the overall mix of metal within the hip cup offerings for the market, we have nothing but upside on that.

And we don't believe that that segment's going to go away within the market.

So this is all a great opportunity for us, and the versatility of those cup systems makes that a nonissue as well, because of the various [inaudible] surfaces that are offered globally.

Great.

Thanks very much.

You're welcome.

Your next question comes from the line of Mike Weinstein with JP Morgan.

Thanks.

Good morning.

Two questions.

First, on the knee side, and then on the hip side.

On the knee side, the rollout of the patient-specific instruments, where are you in that rollout?

And how do we think about the spend in order for that to happen?

The rollout of the PSI, this is one that was cleared, Mike, just in late November of last year.

So, we're just getting to the point where you can start to see a bit of traction, right?

And this is one where there's likely to be a little bit of a lag, because you have to get those MRI centers qualified, surgeons trained very specifically, and then the patients have to get into the queue as well, even after that.

So there's going to be a lag between the efforts that go into that and productivity of those efforts in realizing sales, and even enhancing primary need sale, which that system will certainly do.

And, that's going to be just beginning in the second quarter.

Obviously didn't see anything in the way of significant impact in the first quarter.

But, just to reiterate, more of a second half of the year driver for growth.

And then on the hip side.

The Continuum launch seemed to -- has hit a speed bump early on.

It looks like you got some feedback that you're having some difficulty implanting the cup, and then I saw that you had recalled the adapter liner, which is part of the implementation process.

So, maybe you can just spend a minute on that, and then give us a little bit of feedback on what you've gotten.

So that's why we do limited releases on these big systems.

You get the feedback and listen carefully to that feedback, and then make whatever adjustments are necessary to optimize the performance of those instruments, and that's exactly what the team did.

So they got on that issue very early.

It's completely insignificant to the success of the ultimate launching of that product, Mike, in our view.

And I wouldn't describe it as a speed bump whatsoever.

It's normal course correction and we jumped on it very early in the process, and we're going to have a lot of success with that Continuum system.

And, sorry, are you out there with a new adapter now?

Yes.

That's right.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Thank you.

Good morning, everyone.

Good morning.

A couple questions here.

Maybe just with Europe, maybe talk a little about that.

Obviously it's been more challenging in Europe.

We all spend more time looking at the US market.

So just curious if you can give us some more color for what's going there.

Do you think in the back half of the year we'll start to see positive growth there as the comps get easier?

Just curious to get your thoughts in terms of what's going on there.

In Europe, Europe continues to be flat overall on those -- in the primary developed markets, at this point in time.

You know, you see numbers around plus or minus a couple of percent or so in each of those markets, but when you weight them out, it looks like a very flat market for the large joints right now.

There obviously are good growth opportunities still in those developing markets in Europe, but they're not large enough to offset the flat nature of the large five within Europe.

And so, as we described in our prepared remarks, we see stability in that.

I don't think that it's getting worse.

I think that it's stable, and so at some point, clearly, those markets are going to improve.

But it really, you know, involves a fair amount of speculation as to when that's going to occur, because you're looking for a more fundamental recovery of some of those economies, and freeing up some of those dollars that are controlled by those centralized health care systems.

Those patients that are deferring receiving the implants right now can get in and get the benefits of those solutions.

And I still would project out the way we did in our guidance call earlier this year, as far as Europe goes, and it's going to be flat to slightly positive.

Okay.

Great.

And just a quick follow-up question here.

More of a bigger picture question.

So, clearly things have picked up in the ortho business.

You guys have done a good job in terms of the last couple years, You had some head winds you were dealing with.

Things have turned.

Business is stable and growing again.

I guess the question is, what's the next step, if you will?

Is now the time where we'll see more mergers taking place?

Do you think we'll see more consolidation?

You guys did the Abbott Spine deal a while back.

But, just curious, as you look forward, what's the next big step outside of just the regular new product launches?

You know, I think that the primary focus for us right now is to ensure that our organic growth rate is very much on track.

And so that, that is all about the new product launches, and the sales and marketing execution around those.

But beyond that, we're constantly looking at business development opportunities for, and exploring inorganic growth, and we think that there are good opportunities.

I think that you'll see more activity in that area as the economy stabilizes, and people feel like they have greater clarity as to what those opportunities look like.

So, we're active in that area.

It's the first priority as far as redeploying cash, and we'll continue to be quite disciplined in how we go about that.

But I do think that you'll see activity levels across the industry pick up.

I'm not sure that those take the form of large consolidations.

You know, there are only a couple of potential opportunities of significance in that regard, so I won't speculate as to what others might be thinking about doing in that context.

But I do think that, generally speaking, this'll be a healthier year for external development across the industry.

Okay.

Thank you very much.

You're welcome

Your next question comes from the line of Rick Wise with Leerink Swann.

Hi, guys.

Thanks for taking the questions.

This is actually Rich in for Rick.

A couple quick questions.

On the patient-specific knees, could you maybe describe for me, I know you are a little bit later than some of your competitors to the market, so you really haven't even seen most of the impacts in that you have on your business.

But is this something that's applicable, potentially, to all knee procedures?

And across all of your platforms eventually?

And where do you see this as, in terms of penetration, across the industry and within your own product platform?

I think that the application of these broader technologies, of advanced instruments, will certainly impact across all franchises.

I think that this particular solution has some leverageability in other franchises, but I think that it will be augmented by other technologies that create more efficient reproducible procedures, that give the surgeons even more confidence.

So, it's an area of import.

I think that it's an area we intend to improve and lead the industry in improving.

As far as penetration rates, that is just going to depend upon the clinical success that people have with these procedures and importantly, whether or not they solve some other challenges.

There's going to be a cost challenge, there's going to be a reimbursement challenge, and an income challenge on the surgeon's part.

And so, all of those instrument advancements are going to have to be crafted in a way where they resolve multiple issues and create value in multiple contexts.

That really will dictate what level of penetration.

I think it's going to be significant in the intermediate term and the long-term.

Great.

Thanks.

And then, just on your extremities business.

This is several quarters in a row you guys have posted very strong growth rates.

The market seems to be growing well there.

And I believe that you're mostly in the upper extremities arena.

Just wondering if you guys have any plans to expand into the lower extremities, foot and ankle, and where you guys were on that front?

Thanks a lot.

We define the sweet spot for our business as being the musculoskeletal state.

So that clearly is within that space.

There obviously are good reasons for us to want to expand into those types of markets.

We have distribution channels to leverage, we have internal product development skill sets to leverage, we have manufacturing capabilities to leverage, and so we think we can create a lot of value.

And anything that is within that musculoskeletal space that we currently aren't participating is of interest to us.

Your next question comes from the line of David Lewis with Morgan Stanley.

Hello, guys.

This is Bill Carlisle in for David Lewis today.

Thanks for taking the questions.

I know you commented on it a little bit already, but if you could maybe give a little bit more color on strengths and weaknesses in geographies outside the US, particularly how that may change across knees, hips and spine.

Again, to start at the high level, we look at Asia-Pacific and deem the procedure rates there to have returned, for the most part, to pre-recession levels.

And when you turn to Europe, the five markets that we referenced, you know, clearly haven't done that yet.

They've stabilized, but we haven't seen the improvement in those markets.

And we have pretty significant market shares within those jurisdictions.

So we feel like we have a fair amount of visibility.

Outside of those five developed markets, we are seeing good growth in Europe.

And so there are opportunities there.

And surely the emerging markets, when you define those as a dozen or 15 across the globe, we're seeing nice growth in all of those markets and those areas of emphasis for us, as well.

Okay, great.

And, following up on that, are there any significant differences you're seeing, especially in the emerging markets, across hips, knees or spine?

We are seeing higher growth rates in what we define as emerging markets.

We track our performance across the total of about 13 markets, including the brick countries, and we are seeing double-digit growth across those markets.

On what represents still a relatively small portion of our total revenue base.

Okay.

Thanks a lot.

And then, I know you've already touched on this a little bit already, but I'm curious to know if your current operating structure will allow your the flexibility to deliver on your view you can return to market growth rates.

Asked in another way, is there any chance you'd need to reinvest additional capital higher levels throughout the balance of the year to achieve that goal?

That's all contemplated by our guidance.

Those plans are well-developed and we're executing to those plans.

And to the extent that there would be accelerated spending that would largely be driven by an expanded -- still expanded viewpoint as to what the opportunity looks like.

So I think that you can assume that that is all baked into our guidance.

All right.

Thanks a lot.

You're welcome.

Your next question comes from the line of Kristin Stewart with Credit Suisse.

Hi.

It's actually Katherine for Kristin.

I just have a couple of questions on mix.

Can you tell us whether the US net mix price was negative or positive for hips and knees this quarter?

Yes.

When we look at that in the aggregate, for the quarter, a very slight positive.

For both hips and knees in the US?

Again, just looking at it in the aggregate for both hips and knees.

That's right.

Okay, so worldwide?

And also, so what are you assuming in your guidance in terms of mix contribution?

Yes, well we said coming into the year that our expectation with respect to pure price, first of all, would be that we would see something in the order of minus one to minus two percent across all of our product franchises.

And that positive mix that would offset that.

So for the year, you know, our expectation is that it -- that it'll be neutral.

And that hasn't changed.

Okay.

And then quickly, can you break out the US dental growth?

We --

Just trying to see if there's any improvement sequentially.

It's low single-digits, positive.

Okay.

And then lastly on Japan pricing, are you still estimating at about a 4% to 5% impact?

That's exactly right.

For us, that will be the impact.

Okay, great.

Thank you.

You're welcome

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Good morning, and thanks for taking the question.

OSP product line very, did very well this quarter.

I know it's a small portion of your business, but can we anticipate a nice recovery over the next several quarters?

Is this reflective of new products, or just simply a sales force getting it together over easier comps?

The relaunching of the products that were taken off the market is a big growth driver.

So we're executing well, I will tell you, on that front, 60% plus growth in some of those categories.

But it isn't just that aspect of the OSP business that is performing well.

We're doing quite well in bone cement and accessories, we're doing well with our tourniquet line.

So, it's pretty broad based.

The next step for us there, Joanne, is to make sure we that have a good product development cadence coming out, so that we sustain that growth.

But right now, it's really driven by good execution of bone cement, of tourniquets, and then the relaunching of those products that were off the market previously.

For clarification purposes, forgive me, your hedge losses, they go through -- they go through COGS?

They go through and impact your gross margins?

They do.

Okay.

Thank you.

Just a final question in the area of spine.

I understand Dynesys is a problem in the United States.

But is this a matter of getting more feet on the street and more products in the bag, or is there something else that would be necessary to get this area moving in a positive direction?

Well if -- we have a full portfolio at this point in time.

But obviously you know, it's always a matter of getting more products in the bag and more feet on the street.

We have what we deem to be a platform business there, and we need to execute better with what we have.

But it needs to grow and we're going have to continue to invest to be a player with any critical mass within that state.

I will tell you, right now, I think that it's new product development, and sales and marketing execution that gets us back on track, but then we're going to be continuously investing in that business to expand the growth, once we get it back at a market growth rate.

Thank you very much.

You're welcome.

Your next question comes from the line of Derrick Sung with Sanford Bernstein.

Hi.

Good morning.

You mentioned in your comments that you saw the US volume demand also is returning to pre-recession levels.

I was wondering if you could put some color around that, by maybe running through each of the businesses, and giving us a sense for where they are in terms of volumes, respective to pre-recession levels.

Derrick, if we look back at 2007, 2008 growth rates for , we're really principally focused on the hips and knees.

We saw those categories, those product franchises across the market growing in high single-digits.

And we look at at least what we understand with respect to you know, the first quarter at this stage, with the companies that have reported publically.

We see growth rates that are back at that level, with knees obviously being higher than hips.

We're seeing a return, you know, again, how we would characterize it, to high single-digit growth for hips and knees, in the US

Okay.

And in terms of, and you had, I think, previously talked about that deferred procedures, and anecdotes about deferred procedures, that you've been hearing from surgeons early through 2009, during the recession.

Can you comment on what you're hearing now about that from your customer base?

Well, I'm sorry, Derrick we had always indicated an expectation that the impact of those patients eventually working their way back into the system would be somewhat modest and would occur in a linear fashion over time.

That is, we believe, still the case anecdotally.

In pockets you do hear that certain surgeons, particularly those that are perhaps, do less volume, typically, are getting a bit busier and so it is the case that those patients may be coming back.

But in the aggregates, we don't see that adding significant points of growth in those hip and knee markets within the US .

Okay.

So is it fair to say that your view of the markets is that they're kind of where they are today, they're kind of, they're back where they were before, and so you wouldn't expect any further acceleration from kind of what you're seeing today?

Based on your knowledge of the markets?

Yes.

I'd say that's fair with respect to the Americas and the Asia-Pacific markets.

We would, you know, expect to still see a recovery at some point in Europe, Middle East, Africa markets, which are still a bit depressed.

Okay, thank you.

And on your knees, specifically in the US, sequential growth rates ticked down by a few points versus the fourth quarter, this quarter.

Is there any reasons for that, that you can point to?

We're in the middle executing a fair amount of work, right now to get things set up for these product launches, but I don't think there's anything that should be interpreted in the way of a trend there or a significant issue of any sort.

Okay.

And then lastly, in trauma, one of your competitors had mentioned bad weather, both in the US and in Europe, being positive for overall trauma volumes this quarter.

It doesn't look like we saw that in your numbers.

Is there any reason for that, that you can think of?

You know, again, I can't point to anything.

But again, we have 5% market share, and so a larger competitor may have a better basis to be able to characterize those types of dynamics.

Okay, great.

Thank you very much.

You're very welcome

Your next question from the line of Matt Miksic with Piper Jaffray.

Mr.

Miksic, your line is open.

Hi.

This is Matt.

Hello, Matt.

Thanks for taking the questions.

You bet.

A follow-up on some of the new product launches that you have going.

I wanted to get a sense -- you talked about, I think other manufacturers have talked about mix, obviously price, tougher in this environment.

As you roll out these new products, we know that orthopedic launches have always taken a good amount of time to pick up speed, as folks adopt these.

You get the instruments out in the field, you need to, and so on.

Is that a dynamic that you feel in this market, either because of the DOJ or because of hospital pressure or something, s extending further?

Are docs a little bit more conservative now than they were a couple of years ago, about picking up new products and adopting new parts you're rolling out?

I don't believe so, Matt.

As you've said, it's been a dynamic for some period of time in these rollouts.

There's a lot to mobilize in the way of effort and you know, obviously a large goal is on the manufacturing and operations side to even get these instrument sets and implant sets, manufactured and deployed, and then the surgeon training that goes along with that is significant.

Obviously the sales force training, even in advance of that, is significant.

That's really what we're seeing here.

But I wouldn't tell you that this feels different than other large launches from the past.

That kind of six- to 18-month time frame to seed the market and start to see some productivity and find traction is still what this one feels like to us, at this point in time.

You get early feedback, on these products, but as we've said, the early feedback in all jurisdictions, whether it's early stage of the launch or later stage, in terms of months for the OUS launches with these products has been very positive for us.

Okay.

And then,, so six to 18 months still the window for getting those kind of up to a full head of steam, or something we would see in the numbers.

I think that's fair.

And then, one follow-up on the dental market.

I may have missed any comments you made specific to how things are going there, but any color you can provide on what you're seeing in the market.

How much of the growth that you're seeing is sort of an improvement in the market, or do you think you're gaining share, notable products, any kind of color would be great.

Great.

You know, I just will tell you that on the general environment, I would characterize it more as stabilizing a bit, as opposed to restoration of pre-recession growth rates.

It obviously isn't at that level at this point in time.

Stability looks attractive, relatively speaking, to where that market's been over the last couple of years, since the recession took effect.

And I think that's more the driver, Beyond that, you know, one quarter, a trend does not make.

I think that we have a good management team out there and you know, they're stabilizing their business and executing well and you know, that's a business and a market that we're very interested in growing.

So, we're going to be in a good position when there is a more full recovery.

And that will come, but it hasn't come yet, Matt.

All right.

Well, thanks for taking our questions.

You're very welcome.

Celeste, in the interest of time, let's take one more question, please

Your final question comes from the line of Matt Dodds with Citibank.

Hello?

Hello.

Yes, hi.

This is (inaudible) calling in for Matt.

Hi there.

Hi.

So I was just wondering, you gave consolidated pricing.

I was wondering if you could break it out to hips, knees and spine?

Sure.

So hips, pricing for the quarter was down just over a point.

Knees as well.

Pricing was down just over a point, in the quarter.

And spine pricing was flat, for the quarter.

Okay.

And then, at AOS there was some negative data that was published on the NexGen knee.

I was wondering if you could comment on what the feedback was amongst your surgeons regarding that data.

It's a knee system that we're very comfortable with.

I will tell you that we've had great success with that system.

We re-reviewed investigative data and, since the launching of that system, the revision rates have been very low.

So, we don't have concerns at this point, as to the performance of the product, the design of that product.

And we'll continue to monitor it, as we do with our other products.

But I'll tell you that within the quarter, as measured by the sales performance within that product line, it didn't produce any issues for us, it grew at an attractive rate.

Okay, that's all I had.

Thanks, guys.

Great.

Thank you.

Well, thanks again everyone for joining us today, and for your continued interest in Zimmer.

We look forward to speaking to you in our second quarter conference call at eight am.

on July 22, 2010.

At this point, I'll turn the call back to you, Celeste.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.