Zimmer Biomet Holdings Inc (ZBH) 2010 Q4 法說會逐字稿

Mr.

Blair, you may begin your call.

Good morning.

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

I'd like to welcome you to the Zimmer fourth 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 of Finance and Chief Financial Officer.

This morning we will review our performance for the fourth quarter, provide you with an update on certain key matters, present an update on our outlook for 2011, 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'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 orthopedics industry, management's beliefs and assumptions made by management.

These statements are not guarantees of future performance and involves 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 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 February 10, 2011 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 fourth quarter financial results and provide comments on several highlights from the quarter and the full year 2010.

Jim will then provide additional financial detail as well as our 2011 guidance.

Except as otherwise noted, I'll state all sales in constant currency terms and I'll discuss all earnings results on an adjusted basis.

In the fourth quarter, we improved top line sales and delivered a strong bottom line performance with solid earnings and cash flow.

Successful execution of product launches throughout the year helped us finish out 2010 with sequential improvement in nearly all of our businesses.

In fact, the only business that did not produce sequential sales growth improvement was Zimmer surgical, which generated solid growth of 8%.

Our results in the quarter and full year reflect continued progress in the execution of our strategic agenda, as we drive growth and revenues, earnings and cash flow through performance improvement initiatives.

Moving into 2011, we're well positioned to further advance this agenda, strengthen our leadership position in joint reconstruction and increase share in our emerging businesses and geographic markets.

Net sales for the quarter were $1.13 billion, an increase of 3.0%, and our earnings per share were $1.27, an increase of 13.4% over the prior year period.

Full year 2010 (sic - see press release) sales were $4.2 billion, an increase of 2.3%, and our full year 2010 earnings per share were $4.33, an increase of 9.9% over the prior year.

For the fourth quarter, we experienced balanced year-over-year sales growth in all of our geographic segments.

Americas grew 3.1%, Europe, Middle East and Africa grew 2.7%, and Asia-Pacific again led our segments with sales growth of 3.2%.

We delivered improved sequential performance in our knee business, with knee sales for the fourth quarter increasing year-over-year 0.3%, reflecting positive volume and mix of 2.3%, and negative price of 2.0%.

Recognizing that we have more work to do, we believe that our knee business is positioned for further improvement based on ongoing instrumentation launches and future product development.

Patient specific instruments and posterior referencing instruments for our Legacy Systems, which remain the most widely utilized and clinically successful knees in the world, should enhance our ability to win in the marketplace.

Hip sales increased 3.6% in the fourth quarter, reflecting positive volume and mix of 5.6% and negative price of 2.0%.

The encouraging performance of our hip business was supported by strong sales in the Americas which delivered 6.3% growth.

Of particular note was the performance of our Continuum Acetabular Cup System which enjoyed substantial sales growth in the quarter.

This innovative system enables surgeons to choose between bearing surfaces to match patient's lifestyle demands.

The positive impact of product launches in many of our businesses in 2010 demonstrates how strategic innovation combined with solid sales execution leads to enhanced growth as evidenced by the performance of our hip business.

Extremity products posted healthy results for the quarter with sales growth of 10.4%.

Once again, the quarter's results were supported by sales of the Trabecular Metal Reverse Shoulder System and the Trabecular Metal Glenoid.

The performance of these products is another example of the differentiating impact of our proprietary Trabecular Metal Technology which we are utilizing broadly across our entire portfolio.

Our dental business outpaced the sector once again, delivering impressive double-digit growth of 13.1% in the fourth quarter.

This represents solid organic growth of 5.6%, as well as the impact of our amended RTI Sourcing relationship which will anniversary out later this year.

The management team at our dental business has done a great job in driving our performance in a market that experienced procedure pressure resulting from global economic conditions.

Trauma sales in the quarter were up 8.6% over the prior year period, with all three of our geographic segments contributing to this growth.

The performance of our trauma business once again demonstrates the positive impact of successful product introductions.

Throughout 2010, we continued to roll out new components of our Zimmer Natural Nail family, including the Cephalomedullary Nail as well as Antegrade and Retrograde Femoral Nails.

Our Zimmer Natural Nail products experienced significant sales growth in the quarter, and are proving to be real door openers for our global sales teams.

The fourth quarter also saw increased penetration of the NCB Periprosthetic Plating System, the only comprehensive solution in the market to address complex femoral fractures that can occur around a knee or a hip implant.

Zimmer spine reported a sales decrease of 3.9% in the quarter.

The spine business continues to face challenges related to reimbursement and pricing, particularly in the United States.

However, this remains an attractive market with significant long-term potential globally.

During the fourth quarter, our spine business outside of the Americas generated 11.3% sales growth.

We're confident that a newly established management team is well equipped to return our spine business to positive performance, supported by a strong lineup of new products to be introduced in 2011, including our Percutaneous MIS Pedicle Screw System, PathFinder NXT.

In the fourth quarter, our Zimmer Surgical and other category generated 6.7% growth.

The Zimmer Surgical business continues to perform well with growth led by our Bone Cement, Wound Debridement and Tourniquet products.

In December we also announced the acquisition of the SoPlus product line of surgical power equipment.

This strategic acquisition broadens Zimmer's portfolio of surgical power tools with large and small bone systems and consumables and will strengthen the Company's position in this more than $1 billion market.

Turning now from our product category results, I'd like to discuss several broad market factors.

While we continued to face some pressure in the fourth quarter, pricing improved relative to the third quarter and remains stable.

For the full year 2010, we experienced a pricing decrease of 1%, which is at the low end of our expectation coming into 2010.

There are a number of factors affecting pricing.

Of particular relevance is compression, where historic pricing differentials within certain markets, such as the US, narrow.

As we manage through this dynamic, we do not currently anticipate accelerated pricing erosion.

We would rather expect the pricing trend to remain relatively stable.

Moreover, we believe our markets will continue to reward innovation with higher reimbursements and premium pricing.

By way of example, Zimmer has secured premium reimbursement for the Trabecular Metal Modular Cup product in the Japanese market, based on the robust, long-term, clinical and mechanical data supporting this technology.

In addition, our Americas hip results for the fourth quarter reflect a significant increase in mix related to new products, which contributed to the sequential increase and sales growth of 360 basis points.

In recent quarters, a number of our businesses have faced pressure from reduced procedural volumes as a result of global economic conditions.

In the fourth quarter, we saw some stabilization of procedure volumes and expect further recovery as the global economy strengthens.

However, recent headwinds do not diminish the extraordinary long-term potential of our industry.

It's well-known that demographic trends will expand the patient base seeking the treatments we provide in developed markets.

It is also important to recognize that our solutions help take cost out of these healthcare systems through reduced long-term disease management.

Consequently, we're well positioned to respond to the needs of all stakeholders, from government and private payers, to surgeons and their patients, which will ultimately lead to sustained long-term growth.

Additionally, a number of emerging markets will also significantly increase the potential patient base.

Our fourth quarter acquisition of Beijing Montagne Medical Device Company in China establishes a broader leadership position for Zimmer in this key market.

In summary, Zimmer's performance in the quarter and in 2010 was characterized by successful commercial execution of product introductions across our portfolio.

Key products introduced in 2010 reflect the overall direction of our innovation pipeline.

We're developing products that address the breadth of the musculoskeletal continuum of care and that are designed to enable surgeons to customize treatments to the unique needs of their patients.

Our results including improved operating margins and strong cash flow are a reflection of continued financial discipline.

These are key features of our strategic agenda, under which rigorous management of our operations and support functions provides the opportunity for investment in strategic growth drivers and leverage in the P&L.

As Jim will discuss, we expect to further increase our investment in research and development in 2011, while maintaining industry-leading profit margins.

I'll now turn the call over to Jim who will provide further details on the quarter and our guidance.

Jim?

Thanks, David.

I will review our fourth quarter financial performance in more detail and then provide additional information related to our 2011 full year sales and earnings guidance.

As David mentioned, our total revenues for the quarter were $1.135 billion, a 3% constant currency increase compared to the fourth quarter of last year.

Net currency impact for the quarter was slightly negative, decreasing revenues by an additional 0.5%, or $5.6 million.

The unfavorable currency impact from our euro denominated sales in the quarter was partially offset by a favorable currency impact from our Japanese yen and Australian dollar denominated revenues.

Our adjusted gross profit margin was 75.8% for the quarter.

The margin ratio improved 30 basis points compared to fourth quarter 2009.

Manufacturing efficiencies and lower excess and obsolescence charges, offset by hedge losses in the quarter, account for the improvement in gross margin compared to prior year.

R&D expense increased 10% on a reported basis when compared to the prior year.

And in spite of the double-digit increase in spending, R&D expense remained at the low end of our targeted range of 5% to 6%.

We expect R&D expense to continue to grow in line with our strategy to direct more investment into new product development activities and clinical programs.

Selling, general and administrative expenses were $461 million in the fourth quarter, and at 40.6% of sales were 100 basis points below prior year.

Reduced spending on third party fees and expenses and general and administrative functions enabled us to hold total SG&A expense for the fourth quarter flat to prior year, in spite of volume related increases in selling and distribution costs.

Special items which were formerly referred to as acquisition, integration, realignment and other, amounted to $16 million in the quarter.

These expenses include integration costs from our recently completed acquisitions of Beijing Montagne and Sodem Diffusion and similar costs stemming from distributor acquisitions in our Europe, Middle East and Africa segment.

As indicated in our release we recorded a goodwill impairment charge of $204 million in the fourth quarter, related to our US spine reporting unit.

The impairment is a non-cash charge and is not deductible for tax purposes.

So the charge amounts to $1.03 per diluted share on an after-tax basis.

Goodwill is tested for impairment on an annual basis and whenever events or changes in circumstances suggest that the full carrying value of the reporting unit may not be recoverable.

In accordance with accounting policies as described in our periodic SEC filings,we performed the annual test for impairment in the fourth quarter.

Due to a change in the long-term outlook for the spine market in the US, as well as decreased projected revenues related to the Dynesys Dynamic Stabilization System and competitive challenges, the estimated discounted future cash flows for our US spine reporting unit were negatively impacted, causing the fair value of the net assets of the reporting units to be lower than the carrying value.

We calculated the fair value of goodwill and determined that the goodwill assigned to US spine was impaired.

Adjusted operating profit in the quarter increased to $343 million, a 30.2% -- our adjusted operating profit to sales ratio is 100 basis points higher than the prior year fourth quarter and reflects the benefits of operational improvements in manufacturing, and certain of our back office functions.

Net interest expense for the quarter amounted to $13.4 million, compared to $8.7 million in the prior year quarter.

The change is primarily due to the $1 billion senior unsecured notes offering we completed in November of 2009.

Adjusted net earnings were $251 million for the fourth quarter, an increase of 6.1% compared to the prior year.

Adjusted diluted earnings per share increased 13.4% to $1.27 on 197.4 million average outstanding diluted shares.

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

At $0.18, reported diluted earnings per share which include the charges reflected in the goodwill impairment and special items decreased 76% from prior year fourth quarter reported EPS of $0.74.

Our adjusted effective tax rate for the quarter was 23.9%.

And our full year 2010 adjusted tax rate was 25.8%.

The lower tax rate reflects a number of factors including more favorable mix of earnings and profits, the effective tax law changes enacted in the fourth quarter that extended the US R&D tax credit, tax benefits from the first full year of production out of our Shannon, Ireland facility, and the effective resolution of certain international tax contingencies.

During the quarter, we repurchased 2 million shares at a total purchase price of $101 million.

As of December 31, 2010, approximately $1.2 billion remained authorized under $1.5 billion repurchase program, which expires at the end of 2013.

The Company had approximately 196 million shares of common stock outstanding as of December 31, 2010, down from 204 million as of December 31, 2009.

Operating cash flow for the quarter amounted to $341 million, down 13% from $386 million in the fourth quarter of 2009.

Net inventories were $935 million at the end of the fourth quarter, an increase of $22 million over the fourth quarter of prior year.

Adjusted inventory days on hand finished the quarter at 307 days, an increase of 5 days compared to the fourth quarter of 2009.

As of year end 2010, net receivables increased to $776 million, from $751 million in 2009, or 3% over prior year.

Our adjusted trade accounts receivable days sales outstanding finished the quarter at 58 days, an increase of two days over the fourth quarter of 2009.

Depreciation and amortization expense for the fourth quarter amounted to $91 million.

Free cash flow in the fourth quarter was $243 million, $93 million lower than the fourth quarter of 2009.

We define free cash flow as operating cash flow less cash outflows for instruments and property, plants and equipments.

The change in free cash flow compared with the prior year fourth quarter resulted from increased investments in inventory and instruments in support of ongoing new product launches.

Capital expenditures for the quarter totaled $98 million, including $59 million for instruments and $39 million for property, plants and equipments.

Cash outlays associated with investing activities during the quarter include $92 million for acquisitions and licenses, including Beijing Montagne, Sodem Diffusion and amended license and distribution agreement with RTI and certain international distributor acquisitions.

I'd like to turn now to our guidance for 2011.

In our earnings release this morning we announced that the Company expects full year revenues to increase between 2% and 4% in constant currency, when compared to 2010.

At this time, assuming currency rates remain near recent levels, we anticipate foreign currency translation will increase our reported 2011 revenues by an estimated 1%.

Therefore, on a reported basis, our revenues are projected to be between 3% and 5% above 2010 results.

Among our market assumptions for 2011, we believe that full year knee and hip procedures will grow in the low single digits.

We expect market growth to be lower in the first half than the second half of 2011 due to more challenging comps.

Our market growth assumption anticipates modest global economic growth and relatively stable employment.

However, a significant improvement in employment levels especially in the US and a related step-up in enrollment in private health plans would lead us to take a more bullish view toward market growth.

With regard to pricing for 2011, we assume that price compression within our reconstructive business will continue and pricing trends for the Company will remain at a level consistent with 2010.

Or between minus 1% and minus 2%.

Moving down the income statement, assuming currency rates remain near recent levels we expect our gross margin ratio to be approximately 75%.

This takes into account anticipated losses on foreign currency hedges, resulting from relative weakness in the US dollar.

As well as some downward pressure on manufacturing volumes as we anniversary out of large pipeline inventory builds that occurred in 2010.

As indicated in my earlier remarks, we target R&D expense to average between 5% and 6% of sales.

And as we direct more investment toward product development and clinical programs in 2011, R&D should begin trending toward the higher end of the range.

SG&A is expected to be between 40% and 41% of sales for the year as we realize operational efficiencies from the global restructuring and transformation initiatives, and further leverage revenue growth.

We expect to incur lower interest expense in 2011 as we recently concluded an interest rate swap for $250 million of our 10 year fixed-rate debt to variable rate.

Assuming variable rates remain near recent levels we expect interest and other expense of around $50 million in 2011.

We anticipate 2011 full year tax rate of approximately 27%.

120 basis points above our final rate for 2010.

This projected increase is primarily due to a larger proportion of our earnings and profits anticipated from higher tax jurisdictions as well as the resolution of certain tax contingencies which we recognized in 2010 that will not repeat in 2011.

We anticipate the diluted weighted average shares outstanding for 2011 to be between 192 million and 193 million shares.

Therefore, 2011 full year adjusted diluted earnings per share are projected to be in a range of $4.60 to $4.80.

As indicated in our release, we expect to record pretax charges of $75 million to $80 million within the 2011 operating period related to restructuring and transformation initiatives.

We also expect to incur an additional $15 million to $20 million for certain acquisition and integration costs, connected with the acquisition of third party distributors and the recently completed acquisitions of Beijing Montagne Medical Device Company and Sodem Diffusion, SA.

Therefore to arrive at our anticipated reported GAAP earnings per share you should subtract total charges for special items of $90 million to $100 million pretax or approximately $0.33 to $0.37 per share.

Turning to cash flow, we anticipate total capital expenditures for the year to be in a range of $250 million to $270 million.

Instrument capital is expected to be in a range of $140 million to $150 million.

Traditional PP&E is expected to be in a range of $110 million to $120 million.

Reflecting the cash outlays necessary to drive new product development activities as well as the replacement of older machinery and equipment in the normal course of operations.

Our guidance assumes that we will utilize $500 million of cash flow for share repurchases during the year.

Free cash flow in excess of this $500 million is assumed to be held in cash and cash equivalents.

Estimated depreciation and amortization expense for the year is in a range of $370 million to $380 million.

Finally, please note that our guidance does not include any impact from potential acquisitions or other unforeseen events.

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

Thank you, Jim.

Zimmer's performance in 2010 was generally in line with our expectations, notwithstanding a challenging economy.

Throughout the year, we made progress on a number of key initiatives that will enable us to more effectively drive sustained growth in sales, earnings and cash flow.

However, we won't be satisfied until we make greater headway toward our long-term strategic goals.

Namely, expanding Zimmer's leadership in our reconstructive businesses, while achieving increased market share in each of the emerging businesses and geographic markets.

These goals will be realized through continued financial discipline in managing the bottom line and improved performance in product development and commercial execution.

Through continued focus on these fundamental strategic priorities, we expect to realize our aspirations for future growth, sustained at or above market growth rates in all of our businesses.

And now I'd like to ask Christie to begin the Q&A portion of our call.

(Operator Instructions).

Bob Hopkins, Bank of America-Merrill Lynch.

Can you hear me okay?

We can, Bob, good morning.

Great.

So, two questions.

One for you, David and then one for Jim.

First, David, just want to make sure I had the math right.

On your assumptions for hip, knee market growth for 2011.

Is netting out all the different moving parts that you just talked about, are you suggesting you think the hip and knee market will be roughly sort of a 0% to 1% to 2% grower in 2011?

Is that right?

In that range, Bob.

I mean, we're thinking that it's lower single digits, and then if the economy comes back stronger it could rise above that.

But at this point in time, I think that that's the best assumption to build into models.

Okay.

And then also, David, is it safe to assume that you think 2011 is a year where we're going to see a pickup in M&A activity on the part of Zimmer?

And then for Jim, could you break down those $0.44 of special items that are included -- or excluded from the -- or sorry, should say a part of the adjusted guidance, so just break down those $0.44 for us in terms of their moving parts?That would be great, thanks.

We are active, obviously on external development front.

And we'll continue to be active throughout 2011.

We're focused on the musculoskeletal space and so the types of deals that you saw at the end of the year are ones that you should expect in the future.

And if we can find deals that make good strategic sense and can structure and price those, you can see some things that are larger than those small deals that we did at the end of the year.

But, those are just ongoing efforts and we'll take a disciplined approach and create value where we see the opportunities to do so.

So Bob, on the restructuring and transformation initiatives.

First of all, the $75 million to $80 million of charges we have projected related to those initiatives will include employee termination benefits, contract termination fees, facility closing costs and potential impairment charges for assets taken out of [servicesty].

The benefits from these programs, as we indicated in the release, are estimated at $100 million on an annualized basis, with $40 million to $50 million to be realized in 2010.

I would tell you that we expect the benefits to be somewhat evenly distributed between cost of goods and selling, general and administrative expenses.

The programs, so you understand, will affect all of our businesses and all of our geographic segments.

Just to give you some flavor for what we're doing.

Among the initiatives is a de-layering of the Organization which is designed to reduce management layers, bring our commercial and functional leaders a step or two closer to their customers, enhance communication throughout the Organization and achieve tighter alignment on strategic priorities.

With this program, we expect our operational execution to improve as managers with greater spans of control are in a better position to leverage the Company's resources.

Other initiatives include a consolidation of sourcing activities across all categories of spend, and with the recent recruitment of new talent to the Organization with expertise in the area of sourcing, and based on some pilot work completed in 2010, we believe we can drive significant savings by centralizing our global sourcing activities.

So, hopefully that gives you some idea of what we have in mind.

I'll let others jump in, but is there a number of staff reductions that you're willing to provide?

Not a -- I would tell you this.

We're farthest along with the de-layering initiative.

That is something we expect to be completed in the first quarter.

So, we'll be able to provide more specific information as the programs are implemented.

Great.

Adam Feinstein, Barclays Capital.

Yes, thank you.

Good morning, Adam.

So, everything looked very good here.

Just a couple of questions, in the start.

For your outlook, can you talk about the margin outlook in a little bit more detail, so just trying to understand how you're thinking about margins for next year and then I have a quick follow-up question?

Sure.

So Adam, first of all, on gross margin our guidance for gross margin for 2011 reflects some headwind from anticipated hedge losses, as well as some pressure on volumes as we anniversary out of the large pipeline inventory builds that occurred in 2010.

We're also experiencing slower procedure growth, relative to historical norms, and finally we are engaged in ongoing efforts to drive our field-based operations toward greater efficiency in the management of our working capital.

And in that respect, we do expect to suffer some temporary inefficiencies in manufacturing as we burn off excess inventory in the field.

As far as getting further down into the P&L, our guidance implies a modest amount of leverage at the operating profit line in spite of some temporary headwinds on gross margin.

In 2011 we are planning to invest some, but not all, of the savings from the restructuring and transformation initiatives into product development and clinical programs.

And the increased investments in R&D are certainly going to help us strengthen our leadership position in our core reconstructive business, increased share in emerging businesses and markets and put us in a position to, as David talked about, deliver sustained growth in revenue, earnings and cash flow.

Beyond 2011, assuming we grow revenues at or above market, opportunity for leverage will be enhanced.

We expect to anniversary out of the gross margin headwinds and realize the full annualized benefits from the restructuring and transformation initiatives and then finally for 2011, keep in mind that we have also guided lower interest expense and a reduction of over 4% in the projected average share count compared with 2010.

Okay.

Great.

And then just a quick follow-up question here.

So, just saw a pretty nice bounce back relative to the third quarter, and I know you talked about the procedure volumes, but just curious, Q3 just seemed to be pretty weak and then once again seeing the bounce back here.

Were you guys surprised by just the magnitude of improvement on a -- relative to the third quarter in terms of the revenue growth and, just curious, any more color in terms of -- do you think the market growth picked up as well?

I think that we were doing all the right things throughout the year, Adam, and I think the slowdown that we saw from the first half of the year into the third quarter procedure rate-wise was a difficult environment to get as much traction as we wanted to get in launching the new products.

You could see another quarter passed and a little bit more of a stabilized market environment, we saw nice traction in the launching of those new products and a lot of productivity coming from those launches.

And so that's really what drove our performance improvement at that point in time.

I don't know that it was as much driven by a pick back up in procedure rates.

I think more stabilization of those procedure rates and productivity of those new introductions.

Okay.

Great.

You're welcome.

Mike Weinstein, JPMorgan.

Thanks.

Can you hear me okay?

We can, Mike.

Good morning.

Good morning.

So, let me just clarify.

How do you view your market growth -- put it this way, how do you view your 2011 guidance relative to underlying market growth in your end markets?

Do -- are you modeling it as if you're growing in line with your end markets?

Above?

Below?

How should we think about that?

At or a bit above, Mike, is I think the right way to think about it.

We clearly anticipate that in some of these categories where we've had successful new product launches that began in 2010 in earnest, that we're going to be able to take market share.

So, we would expect to take market share in categories like hips and trauma.

We obviously have a bit more work to do to get to market in knees, but we think we're well positioned with the new product introductions in the area of instrumentation to close that gap and perform well in that category as well, as the year progresses.

Okay.

And let me ask just a couple follow-ups to some of the earlier questions.

One, on the share repurchase, the $500 million for 2011, why is that the right amount?

Why not more?

You certainly could do more.

You could obviously do less, as well.

But why is $500 million the right number for 2011 relative to how you are thinking about the year?

And then second, why is it, given your market commentary and what we're seeing in some of the various orthopedic end markets, why is the best use of cash or a good use of cash to make acquisitions at this time?

So, to answer the first question, Mike, we can always do more and whether or not we do more will depend in part on our ability to access that cash.

We generate a lot of cash as you know outside the US.

And assert that in some cases, that that cash, our intent is to reinvest that cash in the business outside the US and have no intent to have that repatriated to the US, which is what we would have to do to deploy it towards share repurchases.

So, that certainly is something we take into account in arriving at we think -- at what we believe is a very appropriate and still reasonably aggressive share repurchase program at the $500 million level.

David, you want to just comment on acquisitions and why do you want to buy into some of these end markets right now given the challenges you're facing?

Yes.

Again, these markets, the procedure rates are clearly suppressed right now with the macroeconomic conditions, Mike.

But none of that is going to change the medium- and long-term prospects for these markets.

You go through the demographic analysis and we believe that the strength of the baby boomer population is still out there.

There aren't alternative solutions for advanced stage osteoarthritis.

So, across the musculoskeletal care space you're seeing that our ability to drive reasonably decent earnings growth numbers off of a suppressed procedure rate, and that rate is only going to get better as the economy stabilizes and improves over time.

So, the prospects within this industry are excellent going forward and this is the world that we live in and we like the space and think that we can provide better solutions for patients and take market share in the process and create a lot of value for our stockholders as well.

Okay.

Let me just make sure I can clarify that.

Then I'll let some others jump in.

So, if I could summarize this, you think that as we go forward, and I'm talking beyond just 2011, that volumes improve in orthopedic end markets but that pricing and or mix don't get worse or that they don't necessarily offset that improvement work you're expecting in volumes?

Absolutely.

We still think that there's a lot of room for innovation.

We're seeing that in our hip business right now, getting good returns in the mix category, offsetting any price pressure that exists.

We don't see that price pressure growing.

We think that that's going to be manageable going forward and so long as we're innovating in the right way, we think that we're going to be performing very well in a space that is going to be accelerating as the economy improves.

Great.

Thanks, Mike.

Bruce Nudell, UBS.

Congratulations, gentlemen.

Just returning to that.

So, we had talked about a quarter ago and you had basically -- Dave, held the view that net ASPs can be held at neutral.

Just, do you think -- and the market, the picture of the market today, is distorted by the negative mix suffered by J&J and Biomet, especially in hips.

So, if -- beyond that, where would you project net ASPs over the next, let's say, 5 years might be?

Bruce, I do think that you're going to see ASPs stabilize.

If you talk about pure price, I think that you're going to see those prices stabilize if the company is doing the right thing to manage through this transition period.

And I think that we are doing the right things in that regard.

I think that the broader price definition to include mix is going to be all about innovation and innovating in a highly relevant way.

Which is why you see us pushing more and more resources towards our spend in the research and development area as well as the clinical support for those developments and those innovations.

And I think if we execute our plans well, we're going to be in a nice position and environment where ultimately you're going to see procedure rates pick back up.

You're going to see pricing moderate and stabilize, and then the mix opportunities are going to be there and we're going to be back to a more normalized state for this industry.

So, but I guess to push the issue, do you think there will be net positive ASPs or neutral ASPs?

What's -- for modeling purposes, internally how do you guys think about it?

I think that where we're in a position to roll out a new product, we still think that we can offset price and then some with mix.

Okay.

So, slight positive in aggregate?

That's right.

Okay.

So long as you're innovating with the right cadence, that's right, Bruce.

Right.

And so -- and is it still correct to think about -- could you describe the volume trends around the world, like, as the economy stabilizes, where do you see the developed markets in terms of volume growth and where do you see -- over a 5 year period?

And where do you see the rest of the world, the developing world, in terms of volume growth?

I think that within the developed markets, you need to look at those procedure rates as going from low single-digits to more mid single-digits as the economy stabilize globally.

The procedure rate growth within the developing or emerging markets is going to be way in excess of that because the penetration rates are so much lower at this point in time.

So, there's significant opportunities and it's one of the reasons that you see us making investments in those markets and really emphasizing our emerging markets strategic plan and executing that plan.

And just one follow-up.

How should we think about the ASPs in developing markets?

I mean, if a hip or a knee in the United States is $6,000, where's a hip or a knee in China?

The hip and knee, you really need to stratify those markets.

In the high-end of the market, they're very competitive prices and so new technologies and cutting edge technologies can be introduced in those markets very successfully.

If you get into the middle portion of those markets, which in instances are some of the fastest growing subsets of the markets, then those price points are going to be lower and the service that's provided with the products and the technologies are going to have to be introduced in a way where you can hit that price point and maintain your margins, but we think that that's doable.

At the end of the day, the EBIT margins can be preserved so long as you have the right go-to-market strategies within that space.

Congratulations.

Thanks, Bruce.

(Operator Instructions)David Lewis, Morgan Stanley.

Thanks it's Steve [Bushaw] in for David.

Hello, Steve.

I wanted to ask a bit of a follow-up effectively to the line of questions that Bruce is going down regarding pricing.

Not so much over the longer term, but for 2011.

I'm wondering what are the data points that you're looking at that give you this very high level of confidence in the stability of the pricing environment?

What do you think are the key indicators?

Are these tenders?

Is it something about the dynamics of healthcare systems?

Can you give us a sense for what it is you're looking at?

Sure.

And understand that we measure changes at an SKU level, and report that out publicly and we have done that historically, unlike some of our peers who sometimes combine discussions around price with mix.

And in the US market and in certain cases this is also true outside the US, pricing decisions are generally made at a local level, subject to guidelines and review by a corporate contract management group.

And when we look at contract prices for our implants across all of our hospital accounts in the US, as an example, we know there is and there has historically been some variability, just given the fact that these pricing decisions, again, are being made at a local level.

Now, we're not going to answer questions as to just how much variability exists since the metric is something that's constantly changing and it's very dynamic, particularly in this environment.

But just to give you an idea, we have looked at prices for a number of our hip and knee devices over the last two years.

In some cases, and this is illustrative, so keep that in mind, looking back to 2008,we had somewhere in the order of, say, 20% of our accounts at price points above a median price point and we roll those analyses forward to 2010.

So, generally, more than half of those accounts have been -- have migrated to a lower price point on the curve.

So, we know that's something that will continue through 2011 but as our price curves -- our curves are narrowing to the point where this is something that we can see abating as we get beyond 2011.

That's very helpful.

One of the other drivers of your confidence in the 2011 outlook is your expectation for performance above the market, just to generalize.

I wonder if you might be able to get a little bit more granular on that point, specifically, the impact of metal on metal hips and the scrutiny that we've seen there now for the better part of the year?

And to what extent do you see metal on metal as a driver -- the pressure on metal on metal, that is, as a driver of market share shift, both in hips and for your orthopedic recon business more broadly?

How much of a factor would you suggest that was in the quarter and in your outlook for 2011?

Thanks.

Sure.

Clearly, it's an opportunity for our Company, and one of the big reasons that it's an opportunity for our Company is we didn't have a large share of that market to begin with so we just don't face the headwind that others might face in that regard.

But more importantly, we feel like we have a great portfolio to address the needs of these patients.

We have one of the best performing cross link polyethylene products and longevity within that category.

And you couple that with the new launches of Continuum Trabecular Metal technology and some very innovative and advanced stems, including the Fitmore Stem and M/L Taper with connective technology, and those are all the reasons that we're driving market share gain within our hip portfolio.

And we think that the circumstances within the environment with respect to metal on metal are just going to expand those opportunities for us going forwards.

So, we like our position within the hip space.

And just to clarify, that's unit share, correct?

That's right.

That's right.

Unit share and, as we talked about, mix opportunity as well.

Great.

You're welcome.

Kristin Stewart, Deutsche Bank.

Hello, morning, it's Rob filling in for Kristen.

Good morning.

Could you guys comment on the difference in pricing in the quarter, maybe across Americas, Europe and Japan and Asia?

Sure.

As far as just the -- what goes into the 1% decline in pricing overall, Rob?

Yes.

Yes, the breakout is minus 1.2% in the Americas, which is a step down from 1.6% in Q3.

In Europe, plus 0.6% in price, which is a step up from flat pricing in Q3.

And then in Asia-Pacific, minus 3.4%, which is an increase from minus 2.9% in Q3.

So again, we went from minus 1.4% globally to minus 1.0% in Q4.

Okay.

Great.

And then regarding the pricing guidance, I know you guys commented on pricing being down 1% to 2% and being stable.

Given that Japan pricing cuts will anniversary, that should kind of help out the year-over-year comparisons.

What are you assuming for the American and the European markets?

Can you comment on that?

We're not going to provide that breakout just because there's a lot that goes into that, so we think that that's the right range to build in for modeling purposes.

But you're right, within Asia-Pacific anniversarying out of that significant price cut after Q1 is going to be helpful.

Thanks, guys.

You're welcome.

Charlie Chon, Stifel Nicolaus.

Yes.

Good morning.

You spoke to the stabilizing of procedural patterns throughout the quarter, so it seems as if we saw typical year end seasonality as you concluded 2010.

But, as we move into the first quarter, what can we expect there?

Could you give us a little guidance on how to think about what the year-over-year growth trends could to look like, especially since we do run up against another healthy growth comp -- comparison?

You're right about that.

I just don't know that we saw as much of a spike in the fourth quarter as we had in some of the prior years.

That increased procedure rate that has been driven, the theory behind it is that the expanded deductibles at the personal level have increased procedures in fourth quarter.

While we continue to hear of that in the anecdotal fashion, the numbers in the aggregate just don't really bear that out in Q4.

I think that Q4 can be looked at as a little bit more of a normal state for where we are in the economic recovery broadly.

And moving into the first quarter, I would expect those procedure rates to look relatively similar.

You're right in the sense of the first half of the year where there are tougher comps and so I think everyone expects the growth rates to pick up in the second half of the year as we work through those comps.

Because some of the things that impacted the downturn towards the end of the first half of last year start to anniversary out including COBRA in the United States and the effects that that extension of the program had on the marketplace.

So, I do think that one should anticipate an accelerating market performance in the second half of the year versus the first half of the year.

You know, just to follow up on this, there were some opportunities to take advantage of disruptions for some of your competitors.

Just out of curiosity, how much of an impact was that -- positive impact was that for Zimmer?

And our channel checks speak to how there may have been some incremental procedure mix shift towards revision surgeries.

Just out of curiosity, is it possible that Zimmer's hip performance could be attributed to that phenomenon in any way?

I don't think that that was a material driver, Charlie.

I do think that those circumstances have a bunch of collateral opportunities attached to them for our business going forward, but I don't think that that was the primary driver for our performance in hips in Q4.

Okay.

My second question is just moving on to R&D, especially as we move to the upper end of the historic 5% to 6% of sales for 2011.

Does that in any way imply a faster product cadence here going forward or is this more just investing in white space opportunities to generate mix and regain share over the intermediate to longer term?

It's a mix of investments, but we clearly are investing in a way where we expect a more robust pipeline to show its face as we move forward and the cadence ought to improve relative to where it's been over the last few years.

Obviously, we had some really important launches in 2010 but I think what you should expect from the Company going forward is just a consistent cadence of highly relevant innovations to come out of the pipeline and be difference makers within the marketplace going forward.

Great.

You're welcome.

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking the question.

Did you quantify what the savings would be associated with some of the reorganization efforts that you will be implementing throughout 2011?

We have.

So we indicated it, Joanne, in the release, we're expecting to generate $100 million in savings on an annualized basis, and in 2011, just given the timing of these initiatives, expect that we'll realize $40 million to $50 million of those benefits in 2011, and that is reflected in our guidance.

And your trauma number was much better than we were expecting in this quarter.

Is there anything particular going on?

Is that new products or a market share shift?

Well, it's both, Joanne.

I mean, we've been working at this for quite some time and have sort of hit a point now where enough of the Zimmer Natural Nails are launched, coupled with very competitive plate and screw offerings that we have developed over the last several years, and some unique technologies in the periprosthetic plate category as well, all of that combined is leading to a lot of traction in the marketplace.

So, these are innovative products that are making a difference in the field and one of the things that's most heartening about that trauma performance is it was truly a global effort.

We saw nice growth come out of all three of our geographic segments but the principal door opener there are the new products, again, the Natural Nail and the NCB Periprosthetic Plate System.

My last question has to do with your personalized knee.

Could you give us a little bit of color on how that launch is doing?You're one of the few manufacturers that has the right FDA labeling for that.

Sure, Joanne.

We're doing well with the launch.

We continue to ramp up and every month we grow stronger and stronger in that category, getting good clinical results and so this is a space that we think is going to continue to expand and become increasingly important in the future.

And we're in a nice position with the technology that's launched, and as you point out, properly cleared.

Thank you.

You're welcome.

Rick Wise of Leerink Swann.

Hello, guys, this is Rich in for Rick.

Hello, Rich.

Just wanted to ask a question on Asia-Pacific region in your hips and knees.

I know that you have the reimbursement for Trabecular Metal in Japan.

Hoping you could just provide some color around how significant that could be in 2011 in terms of incremental sales for that region?

And also, if you could talk about your Beijing ortho manufacturing acquisition, what kind of contribution should we expect this year from that, and how big can that get going forward?

Okay.

The approval that you reference in Japan is a really important step because it validates the clinical import of Trabecular Metal technology.

So we've been awarded a significant premium price position with the launch of Trabecular Metal.

In this case it's the Trabecular Metal Modular Cup System, so it will improve our hip performance within that market.

It's going to create opportunities for us not only to improve mix, but to take market share.

Now, of course, you know how these launches work.

This is a product that is just now beginning to launch and so it will take time for us to train sales representatives, to train surgeons and as the year progresses we expect that to support our performance.

Turning to your question on Montagne, this is an acquisition that in current terms is around a $10 million business.

How big can that be in the future?

It's going to be a big, big market for us.

It's a market that is currently about a $1 billion market that's going to double in the next three years by virtue of this acquisition.

We now have a leadership position in large joint reconstruction within that market.

But that market has a long ways to go and grow.

Over the course of the next 5, 10 years, it's going to become a very significant part of Zimmer's business and so we're really happy to have the Montagne employee group join the Zimmer family and looking for big things out of that market going forward.

Great.

And then just one more question on spine.

You talked about eventually getting that to positive growth territory.

Just can you update your time frame for when you think that can happen?

Could it potentially happen as we exit the year?

That's the 2011 goal of ours.

There isn't any reason we shouldn't put that business on a track to get back in the positive space and market growth levels within this fiscal year.

So that's reasonable, Rich.

Thanks a lot.

You're welcome.

Derrick Sung, Sanford Bernstein.

Hello.

Thanks for taking my questions.

Hello, Derrick.

Just wanted to first clarify your view on how you performed relative to the market this quarter.

So, with DePuy and Biomet posting weak sales and you and Stryker posting very strong sales, am I correct in that what you're saying is that, essentially the market from a revenue basis was stable this quarter versus Q3?

And your out performance was essentially revenue share gains versus the market?

Is that a fair characterization?

Yes, I think that the right way to think of that in a big picture context is if the market improved, it improved in tens of basis points, and our performance improvement, as you can see, was in the range of a few hundred basis points.

Okay.

In the large category, you can look at 10, 30 basis point improvement in market numbers, dependent upon how you want to adjust the competitors that have already reported out results for billing days, et cetera, and we had a 300 basis point or so improvement in some of those big categories.

Okay, that's helpful.

And how much of that revenue share gain is actually true procedure share versus the metal on metal guys seeing a mix shift down and you seeing a mix shift up from your Continuum Cup and new product launch?

It's a mix of both.

I mean, we're getting healthy mix out of the new product launches.

But I think we're also seeing procedure growth.

Okay.

Great.

And the follow-up question on your knee business.

This is a business that looks, almost over the last three years you've sort of been consistently struggling, growing below the market.

When we look at the business on the surface it doesn't look like there's any big product gaps that you're missing versus your competitors.

You're out there with your patient specific knees, et cetera.

Can you just give some more color as to what's really the challenges that you're facing here?Is it a product gap issue that you can point to that you've been missing a couple key products for the last couple years?

Is it an execution issue?

Help us understand what's been going on there.

You've mentioned that new products turn it around but is that really the issue that you're facing?

We had some competitors over the last 3 to 5 years have introduced new knee systems and with those systems they provided updated instrumentation sets as well, and so to the extent that there was any gap, that was the gap and that was a gap that we addressed last year and those Posterior Referencing Instruments are rolling out now.

They have been for the last half of the year or so.

So we're starting to see some traction with those and beyond that, it is an execution game for us.

But we're in a good position.

We have a very comprehensive product portfolio.

We have the best knee system in the world in NexGen, as evidenced by the registry data on revision rates.

So, we're in a good position to get back to market growth and we're going to bring the right level of focus on the commercial side to ensure that that happens in 2011.

And just quickly on that, why is it that you would have an execution problem on the knee side versus the hip side where it's essentially the same sales force, et cetera?

Well, we -- you bring focus and priorities within those forces and those are both big categories.

We have brought a lot of focus to getting the knee business that was off-market growth for a number of years and it looks like it resolved that issue and so you should expect the same thing to come from us on the execution improvement side in knees going forward, Derrick.

Thank you very much.

You're welcome.

Raj Denhoy, Jefferies & Company.

Hello, good morning, guys.

Hello, Raj.

Wonder if I could ask a little about the spine business again.

You guys wrote off a lot of the Abbott Spine deal if not all of it.

Dynesys continues to struggle there.

You announced a restructuring of the management side of that.

I'm curious as you look out over the next couple years what your broad strategies are there?

Do you think you need to get larger in spine to be relevant?

Did you need some differentiated products in that?

Just generally, how you think about that business over the next couple of years.

Yes, let me just first address correcting out that the write-off was not the Abbott Spine acquisition.

That business continues to grow well for us.

Combination of things led to us taking that impairment charge.

But, more importantly going forward, we do think that we have the right leadership team in place.

We've got a product cadence and pipeline that we're excited about for 2011 that we think is going to improve our position.

This is a business that we're growing successfully OUS.

So, we know we have the capability with the existing product portfolio.

Some of the more unique technologies that we have within that portfolio benefit us outside the US because of the regulatory barriers within the United States currently.

And the most profound example of that is the Dynesys system with what's happened the last couple of years on the regulatory process within the United States.

We think we have the right pieces coming into place.

A core product offering that's very competitive.

A pipeline that is going to improve our position in that regard.

A leadership team that's coming together and going to be a strong group, I think, that will drive future improvement to our performance.

Beyond that, we do want to expand our critical mass in this space so as we get those pieces together performing in an acceptable way.

We'll be looking at opportunities to expand our footprint on spine and pick up more technologies and expand our distribution footprints as well on a global basis.

Okay.

Great.

And then just one last clarification just on the pricing commentary.

You focus primarily on this notion of compression between the upper end of your pricing band and then the lower end.

That upper band moving down.

I'm curious about your confidence though that that lower band doesn't deteriorate, that as hospitals and payers get more aggressive on that front that they start pushing on that end.

What gives you, again, that confidence that that lower band is stable at this point?

Well, fundamentally that's not something that we're seeing and we think that the innovations are a big part of the answer to that.

We're going to continue to improve the solutions that we provide and comprehensive solutions just beyond features and benefits of the products.

And our strategy is to position us to where we don't see any downward pressure on that side of the pricing curve, and we're confident that we're going to be able to execute our plans in a way where that doesn't come to fruition.

Fair enough.

Thank you.

Okay.

Thank you.

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

We look forward to speaking to you on our first quarter conference call at 8am on April 28, 2011.

I'll now turn the call back to you, Christie.

Thank you again for participating in today's conference call.

You may now disconnect.