Zimmer Biomet Holdings Inc (ZBH) 2012 Q1 法說會逐字稿

Good morning.

And welcome to Zimmer's first-quarter 2012 earnings conference call.

I'm here with our CEO, David Dvorak, and our CFO, Jim Crines.

Before we start I would like to remind you that our discussions during this call will include forward-looking statements.

Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties.

Please refer to our SEC filings for a detailed discussion of these risks and uncertainties.

Also the discussions during this call will include certain non-GAAP financial measures.

Reconciliations of these measures to the most directly comparable GAAP financial measures are included within the earnings release which is available on our website at www.investor.zimmer.com.

With that, I'll now turn the call over to David Dvorak.

David?

Thank you, Bob, good morning, everyone and welcome to our earnings call for the first quarter 2012.

This morning I'll review our first-quarter financial results providing commentary on the year’s progress to date, and highlights from our performance.

Jim will then provide additional financial details.

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

Zimmer delivered increased topline sales in the first quarter highlighted by solid sales execution in our Europe, Middle East, and Africa, and Asia-Pacific segments.

Zimmer’s first-quarter performance was in line with our expectations, setting the foundation for accelerated growth in the second half of 2012.

We continue to be confident in the promise of a robust new product pipeline across Zimmer's portfolio.

Progress in our transformation programs is enabling us to make the strategic investments necessary to fully exploit the opportunities presented by these new products, while at the same time meeting our financial commitments.

Consolidated net sales for the quarter were $1.14 billion, an increase of 2.7% and our earnings per share were $1.30, an increase of 9.2% over the prior-year period.

In the first quarter, all of our geographic segments delivered year-over-year sales growth.

Americas grew 0.8%, Europe, Middle East, and Africa experienced growth of 4.2%, and Asia-Pacific recorded sales growth of 6.5%.

Once again, we also recorded attractive growth in key emerging markets around the world.

Turning now to the results of our product categories, Knee sales for the first quarter increased year-over-year 2.4%, reflecting positive volume and mix of 4.9%, and negative price of 2.5%.

This performance was supported by improved sales growth globally, including an impressive 4.7% in Europe, Middle East, and Africa, and 6.9% in Asia-Pacific.

Importantly, we generated more than 400 basis points of sequential improvement in the growth of our Knee business in the United States relative to the fourth quarter of 2011.

Throughout 2012, Zimmer will begin introducing significant implant and instrument additions to the Knee portfolio.

For example in the first quarter we introduced patient-specific instruments for the Zimmer Unicompartmental High-Flex knee.

This innovative system as well as a number of other offerings to be introduced in the coming quarters, reinforces Zimmer's position in the exciting intelligent instrumentation segment.

These streamlined disposable instrumentation systems are clinically relevant, cost effective, and highly marketable.

We believe they represent the next generation of orthopedic technology surpassing current navigation and robotic systems.

And finally, building on the long-term market-leading success of our NexGen and Natural Knee systems, at the end of the first quarter we received FDA clearance for the first phase of our Next Generation Knee system.

We're extremely excited to introduce this new system to markets globally over the next several years.

As is typically the case with a technology of this magnitude, it will be available on a limited basis through most of 2012 in anticipation of a broad commercial launch thereafter.

Zimmer’s Hip business delivered sales growth of 2.5% in the quarter, reflecting positive volume and mix of 4.8%, and negative price of 2.3%.

These results were supported by the Europe, Middle East, and Africa region with sales growth of 3.2%, and Asia-Pacific region with 7.6% sales growth.

We continue to generate positive mix in our Hip business supported by strong sales of our innovative personalized product lines.

For example, the Continuum Acetabular Cup construct continues to grow at attractive rates and offers opportunities for competitive selling.

Expanding on our clinically successful bearing surface options in the Hip category, we also received clearance in Europe for VIVACIT-E, our new vitamin E Highly Crosslinked Polyethylene.

Zimmer’s Extremities business recorded sales growth of 4.8% in the quarter.

Our Trabecular Metal Shoulder products again generated attractive sales.

As we move through 2012, we're excited by the potential of upcoming new products across a range of anatomical sites in this business including the lower extremities.

Zimmer's Dental business recorded a sales decrease of 2.3% in the quarter, while we faced market softness outside the US, we anticipate improved performance in the second half of 2012 based on the expected impacts of a number of recently introduced innovative products in this business, including products in new segments for the company.

Notably, we introduced the Trabecular Metal Dental implant for the United States market at the end of the quarter, and we began to introduce the Zfx CAD/CAM digital dentistry system in some European markets.

Sales in our Trauma business increased 7.7% in the quarter, despite the impact of an unusually warm winter in the United States.

Our international segments again delivered impressive performances, with Europe, Middle East, and Africa reporting 17.5% sales growth and Asia-Pacific recording 14.4% sales growth.

We've established a robust portfolio in Zimmer's Trauma business including innovative offerings in all three major segments of the trauma market.

Plates and screws, intramedullary nailing systems, and external fixation.

We're particularly excited by the XtraFix external fixation system which is now broadly available in the United States.

Zimmer’s Spine reported a sales decrease of 6.0% in the quarter.

This market continues to face challenges related to the pricing pressure and payor approvals.

Zimmer managed to partially offset these challenges through increased sales of recently introduced products including the PathFinder NXT, percutaneous MIS pedicle screw system, the TM-S Trabecular Medical Cervical Interbody fusion device, and the inVIZia Anterior Cervical Plate system.

Zimmer’s Surgical and Other business category again delivered strong sales growth of 9.2% over the prior-year period.

These results were supported by increased sales of our bone cement, wound debridement, power equipment, and biologic products.

Zimmer’s Universal Power Equipment system as well as the STABLECUT line of blades are now more broadly available.

We anticipate these new platforms will contribute to further growth in this category beginning in the second half of this year.

In the first quarter our Biologics group introduced the Chondrofix Osteochondral Allograft, a product designed to address Osteochondral lesions in a single-stage procedure.

We continue to generate strong growth from our Biological Joint Preservation and Restoration offerings, which represent key components of our portfolio of personalized solutions across the continuum of care.

Turning now to the broader musculoskeletal market.

Overall procedure volumes in the quarter were stable relative to the fourth quarter of 2011, consistent with our projections coming into the year.

We're cautiously optimistic that this quarter's uptick in the United States Knee market represents the beginnings of an improved environment, but we're not assuming that this single data point is a trend just yet.

With respect to pricing, we experienced price pressure of negative 2.0% in the first quarter.

This reflects some slightly increased pressure on our Reconstructive and Spine product categories, in line with our expectations.

The biannual price decrease in Japan, which went into effect on April 1, was greater than we had anticipated coming into the year.

While this price change is not insignificant to our Japan business, it adds only modest headwind to our full-year pricing outlook.

We're fully confident in our ability to offset this pressure with positive revenue contributions from other sources.

Before I turn the call over to Jim, I'd like to reiterate several points regarding our strategic priorities.

The positive contribution of product innovation to our performance was reinforced by another quarter of at or above market sales growth in many of our geographic segments and product categories.

Zimmer’s pipeline of clinically relevant and differentiated technologies has never been more robust or more exciting, and new implant and instrumentation offerings continue to generate attractive sales.

The success of our R&D program is driven by increased investments as well as organizational changes we have made to better align these functions.

Complementing our R&D efforts we continue to pursue prudent, bolt-on external development opportunities within the musculoskeletal space.

As previously discussed, our M&A strategy targets opportunities that can deliver meaningful returns in a reasonable timeframe.

All these activities are made possible as a result of the savings generated from our transformation programs and our ongoing disciplined financial management.

We remain vigilant in executing our transformation journey, which will enable us to deliver financial leverage in 2012 and beyond.

I'll now ask Jim to provide further details on the first quarter and our guidance.

Jim?

Thanks, David.

I will review our first-quarter performance in more detail and then provide additional information related to our 2012 sales and earnings guidance.

Our total revenues for the first quarter were $1.141 billion, a 2.7% constant currency increase compared with the first quarter of 2011.

Net currency impact for the quarter decreased revenues by 0.4% or $4.7 million.

Unfavorable currency impact from our euro denominated revenues was partially offset by favorable currency impact from our Japanese yen and Australian dollar denominated revenues.

For the quarter our adjusted gross profit margin was 74.8%, the margin ratio declined 60 basis points compared to the first quarter of 2011, the decline in gross margin compared with prior year was a result of negative pricing and higher unit costs associated with lower volumes, which were partially offset by lower excess and obsolescence charges and royalties in the quarter.

The Company's R&D expense increased 7% on a reported basis when compared to the prior year.

Including higher spending on new platform development projects across all product franchises.

Including our next-generation Knee system that David referenced in his remarks.

We remain confident that steps taken to better align our R&D support functions with our product category leaders will continue to drive a faster pace of product innovation, which is a key feature of our growth strategy.

Selling, general, and administrative expenses were $463 million in the first quarter, which was an increase of 1.1% on a reported basis.

At 40.6% of sales, SG&A expenses were 50 basis points below prior year.

For the quarter, expense reductions from our transformation programs drove favorability as a percentage of sales, savings from those programs were partially offset by increased G&A expenses related to legal matters and recruiting and relocation of new personnel.

Special items in the quarter amounted to $34 million, these included project expenses and contract terminations associated with our global restructuring and transformation initiatives and certain dispute resolution related charges.

Also included are integration costs related to the Beijing Montagne, SoPlus, Synvasive, and ExtraOrtho acquisitions.

Adjusted operating profit in the quarter increased to $330 million representing a profit to sales ratio of 28.9%.

This ratio is 40 basis points lower than the prior-year first quarter, reflecting gross margin pressure and higher R&D costs, partially offset by lower SG&A expenses.

Net interest expense for the quarter totaled $14 million, compared to $11 million in the first quarter of 2011.

This increase resulted from the addition of $550 million of senior unsecured notes in the third quarter of 2011.

Adjusted net earnings were $231 million for the first quarter, an increase of 0.2% compared to the prior year.

Adjusted diluted earnings per share increased 9.2% to $1.30, on 178.5 million average outstanding diluted shares.

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

At $1.17 reported diluted earnings per share increased 8.3% from the prior-year first-quarter reported EPS of $1.08.

Our adjusted effective tax rate for the quarter was 26.9%, which is in line with our expectations and comparable with the first quarter of 2011.

During the quarter, we repurchased 2.3 million shares at a total purchase price of $142 million.

As of March 31, 2012, approximately $1.36 billion remain authorized under a $1.5 billion repurchase program, which expires at the end of 2014.

The Company had approximately 177 million shares of common stock outstanding as of March 31, 2012, down from 193 million as of March 31, 2011.

Operating cash flow for the quarter amounted to $207 million, an increase of 14% from $182 million in the first quarter of 2011.

The increase in operating cash flow compared to the prior year was primarily due to the timing of income tax payments, and year-to-year improvement in working capital.

Adjusted inventory days on hand finished the quarter at 293 days, a decrease of 20 days compared with the prior-year period.

Net receivables increased to $895 million from $876.3 million in 2011 or 2.1% over the prior-year period.

This resulted in a four-day increase in days sales outstanding, the increase in days sales outstanding is largely due to a more diversified geographic mix of sales as well as increases in certain southern European hospital accounts.

We continue to monitor the financial crisis in the Eurozone and the indirect credit exposure we have to those governments through their public hospitals.

We remain confident in our ability to continue to manage our working capital in an efficient and effective manner.

Depreciation and amortization expense for the first quarter amounted to $97 million, free cash flow in the first quarter was $159 million, $40 million higher than the first quarter of 2011.

We define free cash flow as operating cash flow less cash outflows for instruments, and property, plant, and equipment.

This change in free cash flow also was driven by working capital improvements as well as lower spending on instruments.

Capital expenditures for the quarter totaled $48 million including $29 million for instruments and $19 million for property, plant, and equipment.

Cash outlays associated with divesting activities during the quarter include $35 million for acquisitions, most notably this Synvasive transaction.

I'd like to turn now to our guidance for 2012.

In our earnings release this morning we announced that the Company is reaffirming its constant currency revenue and adjusted EPS guidance.

In addition, the Company is updating its full-year reported revenue and reported or GAAP EPS guidance.

We expect full year revenues to increase between 2% and 4% in constant currency when compared to 2011.

The Company now estimates that foreign currency translation will decrease revenues by approximately 1.5% to 2% for the full year 2012, resulting in reported revenue growth between 0% and 2.5%.

Previously the Company had estimated foreign currency translation would decrease revenues by approximately 1%.

In the second quarter, foreign currency translation is expected to decrease revenues by 2.5%.

As we indicated in our fourth-quarter conference call, we expect lower revenue growth in the first half compared to the second half.

This is due principally to the cadence of new product launches, but also to challenging prior-year comparables caused in part by a large Knee tender in our Europe, Middle East, Africa operating segment in the second quarter of 2011.

With the change in outlook for foreign currency due to relative strength in US dollar, we now anticipate hedge losses to moderate and the gross margin ratio for the year to be at or near the top end of our prior range of 74% to 75%.

Our guidance for R&D and SG&A expenses for the full year remains unchanged.

However, as we continue to fund strategic initiatives, our SG&A expense in the second quarter is expected to be at or near the high end of our full-year guidance range of 39.5% to 40.5%.

Full-year 2012 adjusted diluted earnings per share are projected to be in a range of $5.20 to $5.40.

To arrive at GAAP earnings per share you should subtract total charges for special items of $125 million pretax or approximately $0.50 per share.

This compares with prior guidance of $110 million pretax, or approximately $0.45 per share.

The increase in special items pertains to a certain contract dispute, and integration costs connected with the recently closed Synvasive technology acquisition.

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

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

Thanks, Jim.

Earlier this year, the breadth of our innovation pipeline was on display at the AAOS annual meeting where we featured exciting new products in almost every product category from implants to intelligent instruments and power equipment.

These offerings received a very strong customer response, which further reinforces our excitement about the ongoing positive impact of innovation.

Sustained growth through 2012 will be driven by a continued focus on our strategic priorities.

Progress in our business transformation programs and disciplined financial management enable us to continue to generate high levels of operating cash flow, which we’re directing toward investments in growth drivers.

Including our sales channel, product development, and infrastructure in emerging markets.

In summary, we remain on track to meet our sales, earnings, and cash flow expectations for 2012.

Accelerated growth in the second half of the year will be achieved through continued execution of our strategic initiatives and the contributions of new product offerings.

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

(Operator Instructions)

Dave, I know everybody's going to ask, you noted a step up in pricing pressure.

Could you give us a little color on where it arose and why it arose and your view now as to where net ASP is across price and mix could be held?

Sure.

We had a step up in price pressure, I guess as we look at our numbers, across modest step ups, Bruce, across each of the geographic segments.

And I would say that within the product categories, a bit Knees and a bit in Spine and those were the primary growth drivers.

I would tell you that I don't think that any of this is different than our expectations coming into the year.

It's more of the same as we've talked about on prior calls, we had some factors that were improving our price performance including overseas forward acquisitions of distributors in prior periods, so I would deem this to be more of the same environmentally just a modest step up in those two product categories, but I don't expect this to be the beginning of a more significant negative trend.

And so net ASPs, where do you think it could be?

Across price mix?

That just depends where we are in the process of innovation and product rollout, Bruce.

I think that at this point, probably at its peak you could wash it out.

I think that with big system launches and I would expect that we're going to have nice opportunity in coming periods and moving into next year to do that in the Knee product category.

We don't have the capability to do that right now.

We have a bit more of the capability to wash some of that negative price out in our Hip business with mix, but not fully wash it out.

And I guess just on my follow-up is, and this is more of a schematic question, how do you view the opportunity for custom implants and the minority of patients who have really odd anatomy and/or unique pathology?

And do you think that it can be a significant driver over the medium term for mix for the industry?

I believe that the personalized solutions is a theme that we've been very focused on.

You can see it with our product innovations across all of our product portfolios.

I do believe that better clinical solutions can be gained through these personalized solutions.

I believe that frankly, the patient expectations are going to continue to rise, and their belief that they're going to be able to get back to active lifestyles and restore the quality of life that they once knew is going to cause innovation to move in a direction to be responsive to that ask by the patients, and so I absolutely believe in the personalized solutions.

I wouldn't want that to be misconstrued with the customized term, because I think that there are some nuanced differences there.

But identifying the most relevant clinical characteristics of a patient and ensuring that we're able to help the surgeon have everything that they need to replicate the human anatomy that that individual started with is a big area of focus, and again you've seen it in many of our product categories, you're going to see it to an even greater extent going forward through our innovation pipeline.

And so, Dave, just to be specific, that might be inclusive of implants that are designed for individuals as opposed to customized cutting guides, at least over the midterm?

I believe it's going to be implants that meet the characteristics of that particular patient in any respect that is clinically relevant.

And the key is going to be to innovate in a way where one is able to bring that solution to the hospital systems and surgeons and ultimately patients in a cost-effective manner, because as you can imagine that creates a SKU challenge, but I think that if one innovates intelligently, you're going to be able to solve that challenge and provide a better outcome and in a very cost effective way.

Bob Hopkins, BofA Merrill Lynch.

So just to be clear on pricing, you guys came into the year guiding to recon pricing to be down roughly 200 basis points, I think you said.

Is that guidance still good for the year in your view?

Yes.

That guidance is in the right range, Bob.

It may pick up a couple of tenths, but that's primarily as a consequence of the Japan biannual price declines coming in a little bit higher than what we had modeled coming into the year.

So I think that that's the right range of the number still.

And what's in Japan -- could you quantify that, what is the pricing decline that you expected and what do you think it's going to be now in reality?

Yes.

I think the across the product categories, we were expecting something in the range of mid-single digits and I would say if you do the math, it comes in a couple points higher than that.

Okay.

So high-single digit declines?

Yes.

And just to complete that line of thought, and be clear, Bob, I think what that means to us is that couple of tenths increased price pressure on a consolidated basis.

So if you do the math, we were expecting that to contribute about 30 basis points of price headwind on a consolidated basis and it looks more like 50 at this point.

Okay.

Great.

So the only thing that's changed is Japan in other words in your pricing outlook

That's really true.

Okay.

And then just to be clear, everybody's been asking this because of the leap year, was it a clear comparison in terms of selling days year-over-year for you guys?

Or did you have an extra selling day and if so, how did that impact the numbers?

We didn't have an extra selling day.

You go back to the federal calendar, Bob.

And essentially you picked up a day in February, obviously, and then gave it back in the month of March.

So within a couple of tenths across the globe with respect to selling days, it was an even comparison year-over-year.

Okay.

Great.

And then just real quickly on operating margin, you guys came into the year expecting that you’d have roughly a 20 to 30 basis point increase year-over-year in 2012.

You’re starting up the year with a slight decrease.

Are you still comfortable that as your revenues ramp a little bit in the back half that you'll be able to drive 20 to 30 basis points in operating margin year-over-year?

Yes.

We are comfortable.

We believe that we're going to realize the promise of the new products that are being introduced, Bob, and step up on the top line.

So in the meantime we're driving the transformation initiatives, seeing good returns and right on pace with those programs, and that's helping fund some of the upfront money that it's going to take to fully exploit those product launches.

So both those dynamics are headed in the right direction and we just need to execute and realize the benefits of those new products on the top line.

Adam Feinstein, Barclays Capital.

It's actually Dan stepping in for Adam.

Wanted to ask a real quick question to start off with Knees, which came in a bit better than we were expecting.

Last quarter you talked about it reverting back to normalized growth.

And I guess this quarter you're talking about (inaudible) for some improvement.

Can you talk about what you're seeing in that market and as best as you can see are we reverting back to that normalized level of growth?

Sure.

I think, Dan, when we spoke about normalized level growth that was more with the longer-term view just to continuously reinforced in these discussions that these are procedure referrals these are not patients that go away or have another solution.

And so the demographic drivers clearly are going to produce a good number of patients that need these solutions in coming years and with the macroeconomic conditions being what they have, we just believe that there's been increased procedural deferment.

And so when we talk a lot talk about normalizing the market or normalized procedures, we are referring to the longer-term dynamic of as the economy stabilizes and ultimately at some point in the future begins to improve and we're creating more jobs on a global basis, those patients are going to come back into the fold.

And it just is a matter of when and what pace.

So one quarter -- and this is principally a comment that is directed towards the US Knee market performance, which as you recall is more heavily impacted by the economic downturn and the thought was because of the pain pathology it was a bit easier relative to Hips to defer those procedures.

So this uptick sequentially from Q4 to Q1 of this year in the market for US Knees is a positive sign.

But that said, it's one quarter.

Great.

Thanks.

That's helpful.

And just one quick follow-up, just looking at Europe, you guys are actually seeing it form up pretty well there.

We’re seeing you sticking to that mid-single digit growth level, other challenges of that market.

So as best as you guys can do, would you characterize the environment as kind of stable there or do you think it's more of a shared tick type of gain that really allows you to keep growth where it's at in that region?

Well, I think that that market pan-Europe is stable, but I will tell you within Europe, there's a lot going on.

There are big differences among countries due to the austerity measures.

There are even differences intracountry within the large joint categories.

We clearly have been performing well in our Europe, Middle East, and Africa segment.

And I don't know how the numbers could be construed in any manner over the last many quarters other than we're taking share because I believe that that’s a market on the recon side that is growing low-single digits.

As opposed to the numbers that we're posting that have been closer to mid-single digits.

So I think that you're going to continue to have a lot puts and takes within Europe.

Those are very different markets amalgamated into something that we talk about as EMEA.

But I also feel good about our capability to continue the momentum in that market, and outperform the market in order to produce the growth that we need to.

Mike Weinstein, JPMorgan.

David, could you just talk about the cadence of project transformation?

The $400 million in cost savings and how much of that benefit you think we'll see this year and next?

Sure.

I would tell you that it's pretty evenly spread, Mike, in the way of benefit.

We were probably at a benefit run rate coming out of last year, round numbers of about $50 million.

And this year, we would look to be at a run rate in excess of $100 million.

And so you can spread the remaining $250 million out over the course of the five-year program the way we've defined it.

In the front end of that five-year program, obviously we're using the benefits of it to reinvest in key areas.

We've expanded salesforces, we’ve built infrastructure in key emerging markets.

We've increased our investments in key areas of our product development to execute our strategies is there.

So we're able to fund all of that.

And as you can see in this quarter, improve -- yet still improved our SG&A ratio not as much as it would have improved had we let all the benefits of transformation initiatives flow through, but we're pacing that out in accordance with our strategic priorities and where we see opportunities to create significant value.

So that's the framework as to how we look at it.

And we also want to emphasize that our expectation is that we would fully absorb the med device tax through these programs as well so as a consequence of some of the needed strategic investments on the front end of that five-year program, and on the need to absorb the medical device tax should that come through in 2013, more of the savings are not revealed in the performance of the P&L on the front end of the program.

But as we work through those time periods, you'll see more drop through those programs and more significant improvement in the operations side, which will obviously lag but ultimately flow through the COGS line as well.

On that pricing question from earlier, do you have more of an apples-to-apples comparison on what 2011 pricing would've been down absent the distributor buy-ins?

I don't have a specific number, Mike.

I would tell you that I would range that to have been a few tenths on a consolidated basis.

A few tenths benefit in 2011?

That's right.

Okay.

As far as consolidated pricing.

And then last on the investment side and salesforce, I know you’re building out a specialized salesforce in Biologics.

Is there anywhere else where you're adding personnel at this point?

We have sort of hybrid models across a variety of product categories.

In some instances, they’re product specialists, in other instances, they’re direct reps.

I would tell you that over the last 12 to 18 months, Trauma has been an area of focus for us.

Matt Miksic, Piper Jaffray.

I realize it's early in the year here on the Ortho trends that we're seeing.

I caught your comments I apologize, we were all juggling a few calls, but I was wondering it seems like the way things work in Ortho often is you’re growing a little faster on one side, maybe on your Hip side, you're not growing as fast on the Knee side.

Always having to go through the same rep and the same operations basically.

Are you seeing any of that due to the strength in some of the Hip products that you mentioned?

And secondly, is that something that you would expect would balance out maybe in the back half of the year as you get Persona up and running or into next year?

Some color on that would be helpful and then I have a follow-up.

Okay, Matt.

The reality of this Q1 performance is we're pretty balanced as between Knees and Hips.

As you can see, it's mid-2% growth rates in each of those categories.

I would tell you that I think that the geographic segments have done a pretty good job of balancing that focus.

They've had over the last year a bit more in the way of new product opportunities on the Hip side.

I think that as we get deeper into this year, that's going to balance out and at least balance out if not even tip to the Knee side as we enter 2013.

So we're excited about the position that we're putting them into to compete on both Knees and Hips.

And just geographically I think that among the three segments that we operate under, we see the opportunity for more improvement in the Americas group than the OUS groups at this point in time.

And frankly, both Knees and Hips.

Okay.

All right.

And then I guess looking out, maybe do you have enough on the Hip side, to withstand the attention that the new Knee is going to bring to the to the Knee side?

Is it vitamin E Poly that you mentioned or what do you think are the opportunities there that take you to '13, maybe not to push you too far out?

Well, I think that it's a good question.

Because we're really excited about what's coming out of the Knee side.

And I do feel good about our ability to balance that, though, Matt.

We have leveraging the technologies Trabecular Metal, the best wear characteristics in Polyethylene with Longevity.

And now a next-generation Polyethylene with the VIVACIT-E.

And then you add to all of that the offerings that are in development, but have been previewed to some extent on the intelligent instrument front.

And I think you have a really exciting Hip package going forward.

Okay.

And then one if I could on the P&L.

And I apologize, David, because talking back and forth here a bit.

But you mentioned something about making some investments, strategic investments important to your execution on new products.

Could I ask you to maybe provide a little detail as to what went into some of the SG&A spend in the quarter?

I don't know where it was relative to consensus but maybe it was a touch more than we were expecting.

That would be helpful.

Sure.

I'll let Jim respond.

Hello, Matt.

We did see some slightly higher spending in SG&A in the quarter.

Nonetheless, we're holding to the guidance.

We've given to the full year of 39.5% to 40.5%.

So we're confident with the savings that we're driving out of the transformation programs that we're going to be able to drive that leverage in the back half of the year.

In fact, even in spite of the higher spending that we're projecting for the first half of the year, we're still seeing year-over-year improvement in SG&A.

And just to give you some idea, those higher expenses that we experienced in the first quarter added approximately 90 basis points to SG&A in the quarter when compared to the prior year.

And they included as we mentioned recruiting and relocation costs associated with some of the hiring that we're doing particularly around sales and marketing to support some of the efforts we'll have in place around these new platforms.

And we did as well incur some higher expenses in the quarter related to legal matters.

Which are described in great detail in our periodic filings.

Joanne Wuensch, BMO Capital Markets.

Two clarifications.

You said that some of the cost savings are expected to absorb the med tech tax in 2013.

Do you plan to totally absorb that?

Or somewhat?

We plan to totally absorbed that, Joanne.

Okay.

Because our calculations are for that $0.25, $0.26.

I get totally -- the second question, the new NexGen Knee, I hate to ask a stupid question, what's the name of that product?

The NexGen Knee system is unnamed at this point in time.

Okay.

And can you just walk us through the game plan for the launch, usually these launches take about 12 months until they’re fully up.

Is that a similar pace that you'll be going up for this product?

Thank you.

That's the right way to think about it, Joanne.

We move through phase launching that would start with developer release and then move into a limited release and then a broader limited release and then leading up to a more general release.

But with these systems even when you get to the point of a general release, you’re pacing out instruments, it would be ultimately many, many sets, thousands of sets of instruments.

And so this will be a global launch that we look forward to in the coming few years as opposed to just a 12-month time period.

And, Joanne, this is Jim, just coming back to the comment you made about the med device tax, at this point, the best that we can estimate is somewhere on the order of $50 million to $60 million pretax on 2013 and understand, fully understand that we need to drive that an incremental $50 million to $60 million of savings out of these programs to fully offset that tax in 2013.

Derrick Sung, Sanford C Bernstein.

I wanted to ask you about the increase in your receivables as a result of the southern European crisis that you called out.

This is something that we've been hearing from all of the companies.

We've been hearing that it's been taking upwards of a year in fact in some areas to collect, and I was just wondering if you could give us some details around what specifically are you seeing, is this coming from hospitals, is it coming from distributors?

Maybe just a little bit of color on how it's affecting your business and how close -- at what point does it have a material impact either on cash flows or at what point does it have a material impact on sales when you stop or pull back on selling into these accounts if they aren't paying in an appropriate time period?

Sure.

This is Jim.

As we indicated, in our prepared remarks, we saw a four-day increase in days sales outstanding in the quarter on a consolidated basis.

And that was driven by a combination of some of the growth we're seeing frankly out of emerging markets where we have some longer payment terms in place.

But also by an increase in receivables in certain southern European markets and in particular Italy and Spain, we are providing some detail in our periodic filings around the balance of our net receivables as it relates to Italy, Spain, Portugal, and Greece, but I would tell you Portugal and Greece are not really material relative to the larger receivable balances we have in Italy and Spain.

It's something that we're paying very close attention to.

It is the case at least with respect to Zimmer that we're seeing it in the public hospitals.

We continue and we will continue to supply product into the public hospitals.

But we're just not at this stage able to collect those receivables as quickly as we'd like to.

I would tell you a number of things that we understand we need to continue to pay close attention to to ensure that ultimately we do get paid for the products that are being supplied to those hospitals.

It's important to maintain really good documentation.

We have an opportunity in those markets to have government officials periodically certify what's owed.

And we work that process hard to ensure that when the funds are made available and we continue to believe they will be, in fact, we know that there's a program that was just recently announced in Spain that we believe will result in some significant payment flow in the second half of this year with respect to our public hospital receivables in Spain.

So again, we're paying close attention to it.

We're providing some detailed information in our periodic filings with respect to what the net receivable balances are in those countries and we'll continue to do that.

Great.

Thanks.

That's very helpful.

Just going back to your new Knee launch here, I was wondering if you could give us some details around what you're including in this first phase that got approved, what's the value proposition here?

What specific products are being included in this first rollout and then when do you expect the next phases to come in?

Sorry, we're just not willing to do that at this point in time.

It's a big project, it's a system that we're extraordinarily excited about, but we're going to work the process in methodical ways to serve the interests of the owners of the Company here and get this one right.

And we just don't want to get out ahead of it so I apologize, but I can't share more at this point in time.

And it's the same response with respect to Joanne, to go down the path of naming features and benefits just would be premature for us to do that.

Bill Plovanic, Canaccord Genuity.

My question just resolves around there's a couple times you referenced new products really driving growth, and I think somebody had asked a little bit about this but I was wondering, if you could elaborate on what you believe the most important projects are for you or products that will drive that growth as we enter the back half of this year.

Thanks.

Sure.

So the themes of these product launches are personalized solutions across the various categories, and a lot of technology development with respect to intelligent instruments to ensure that implantations are as accurate as they possibly can be, that lead to better wear characteristics, better fit, feel, and function for the patient.

And so we have a lot rolling out across the various categories within Knees, PSI for our Zimmer Uni, eLIBRA Dynamic Knee Balancing System, on the revision side, the TM cones and augments and then ultimately bigger things with the next-generation Knee system.

Hips, we've launched and we're ramping up CLS Brevius with Kinectiv technology.

The Maxera large diameter head ceramic on ceramic outside the United States.

And ultimately as this year progresses globally, VIVACIT-E Highly Crosslinked Polyethylene.

Extremities Anatomical Shoulder combined adapter is doing very well and helping us better.

We have other launches, but they’re fairly late in the year, so they are going to have less of an impact on 2012 but a significant impact on 2013.

Trauma we continue to expand our NCB Periprosthetic Plate line.

We've now fully rolled out the ExtraFix External Fixation systems, so those are big truck areas for us within Trauma.

Spine, we're doing very well with TMS, the Cervical Trabecular Metal Interbody, the inVIZia Anterior Cervical Plate, and we have more coming up in the way of launches with respect to build out of pedicle screw systems in the second half of the year.

Dental just now launching the TM Dental Implant, and beginning OUS with the Zfx CAD/CAM digital dentistry solutions package.

Within the surgical line, we look to do big things with the SoPlus power tool equipment line and then the Synvasive Blade Technology line.

And then finally we continue to ramp sales nicely under the Biologics area with DeNovo NT just launched Chondrofix, and would hope to get into a full release of the Gel-One product line.

So a lot going on.

Definitely.

Thank you.

Kristen Stewart, Deutsche Bank.

I just wanted to go back to pricing.

You had said it was down 2% across the total Company.

Would you be willing to break out pricing by different geographic regions.

Sure, Kristen.

It was minus 2.8% in America's, minus 1.0% in Europe, and minus 0.7% in Asia-Pacific.

And so the Q1 pricing, as compared to the fourth quarter, we're at minus 1.6%, and as we said it’s minus 2.0% this quarter.

Right.

And I don't have other numbers right in front of me for 4Q, but it looks like it was probably Americas that got a little bit worse.

Is that true sequentially?

It was a little bit in each of those categories.

Within 0.2 to 0.4 in each of those categories per segment.

I guess the message that you guys are trying to convey is that despite the tickup in this quarter, you guys are still comfortable generally with your guidance that you outlined back in December of negative 2% consolidated for the full year?

Yes.

And I think that you could see that bump up from negative 2% to negative 2.5%.

But more than anything else, that's driven by the price headwind that we're going to be facing in Japan which was a bit higher than what we had believed was going to be the case coming in the year.

None of that for us reads as a fundamental shift in price headwind.

And we're very confident we're going to be able to offset that in other respects.

We have a lot of opportunity to do so.

Okay.

And then, Jim, I just wanted to go through and better understand your commentary around gross margin.

I know you’ve said some of the hedges were going to moderate you expected gross profit margin to be at -- I just want to make sure I understand it at or near the top end now of the range, so maybe can you help us put into context the ever so slight increase in pricing pressure, what's driving your expectations now to be a little bit more on that higher end versus anywhere else within the range giving pricing?

Sure.

So we understand very well that in every point of decline in average selling prices, can put somewhere on the order of 20 to 25 basis points of pressure on gross margin.

We've talked, as David just did about where we are with pricing and what our expectations are for the full year.

And that certainly is something we've taken into account and any updated guidance we’ve provided on gross margin as you’ve said now our expectation now for gross margin to be at or near the high end of the 74% to 75% range we provided at the beginning of the year.

So those -- to the extent we've raised our expectation for the effective currency translation on our top line from 1% to now 1.5% to 2%, there is some significant moderation, and those hedge losses, we -- relative to what we were looking at the beginning of the year, they fully offset that slightly higher pressure we're getting on margin from pricing trends.

Okay.

So it's more just a reflection of the FX change versus any higher cost savings or mix benefit that you would expect?

With respect to 2012, that's correct.

Obviously getting beyond 2012, we be certainly looking for the manufacturing and quality excellence initiatives to begin delivering some cost savings, to offset some of that pressure, that negative price is putting on gross margin.

Okay.

Thank you.

Raj Denhoy, Jefferies.

What if I could ask a bit about volume and mix?

I think you gave the constituent or at least you gave aggregate numbers for each of those 4.8%, 4.9% I believe it was for Knees and Hips.

Could you parse those out and give us a sense of what volumes are doing right now?

We just -- we're not going to give you all the details on that at this point, but try to help with the following.

Right now, we're getting more mix in Hips, but it's not fully offsetting the negative price.

And we're getting some mix in certain geographic regions in Knees.

But not offsetting the price.

And so I do believe that with the coming product launches, we're going to be able to improve the mix offset in Hips and materially improve the mix offset in Knees.

I would tell you that we still firmly believe that clinically-relevant innovation can be received with price premiums.

You have to be more cognizant of the stakeholders and the conditions that they're operating in to try to achieve the cost objectives at the same time that you're providing better patient outcomes.

And so that means building out more empirical evidence to be able to have that discussion and land where you want to land in that discussion but the opportunity is clearly there.

So I think that right now we probably overall are on the low end in a consolidated basis of mix, helping the top-line growth and profitability of the business.

But I’m very, very confident that we're poised to improve that position in the coming quarters.

Okay.

And one of the things that's been postulated in terms of why we've seen a slight uptick perhaps in Knee growth this quarter was maybe we've seen a higher percentage of revisions pulling up the ASP per procedures, are you guys seeing that in your results?

We are.

The revision is a component of the positive mix opportunity, and that contributes.

But I would tell you that overall, I don't think that there is a lot of positive mix in the Knee market right now.

Okay.

Just because of the cycle of launches, I think that that's going to change fairly significantly in 2013.

Understood.

And then just lastly, it's been seven or eight quarters now that we've been running 1% or 2% growth in these markets.

And you guys remain confident as does most everybody in this industry that we'll see it tick up at some point.

But at some point do we concede that perhaps this market is going to grow in terms of volumes maybe in the very low-single digits, that that’s just maybe the new reality we're dealing with in orthopedics?

I don't believe so.

I just don't believe that the demographics bear that out.

The penetration rates for these solutions would have to decline and be sustained in a declined mode for that to become the case.

So I still believe that you're going to tick up in procedure growth rates as the economic conditions stabilize.

Okay.

Thank you.

David Lewis, Morgan Stanley.

David, there's been a lot of questions on price this morning.

And I guess the one thing we are hearing from you is you're extremely optimistic about the new product launches for the Company.

Really, two-part question.

First, it doesn't sound like we're seeing the mix-driven new-product benefit in 2012.

It sounds like in your last comment, 2013 may be the period where we see more significant mix.

So number one, do you expect to see mix impact price in a positive way as we head into 2013?

And the second kind of related question is what we are getting this year is a dramatic amount of hospitals telling us that they are hiring consultants and very interested in bundling in ACO-like programs?

Looking at the Americas pricing this quarter is ACO something we should be seriously considering as a change in the structural pricing environment?

Or as your way of thinking about it, is it simply more of the same?

Good questions.

I would tell you that with respect to mix, I do believe that we're going to have sequentially improve in that regard, I would tell you that every quarter that goes by this year we would expect to improve our mix position and that's going to be part of what drives top-line growth.

But probably more significantly in 2012, we are entering some new product categories, and so those are going to be significant growth drivers.

As we get into 2013 the mix opportunity is going to become more significant across our large categories.

So we're really optimistic about what we're going to be able to achieve with the right kind of innovation, which segues into the second part of your question.

I think that whether you're talking about a ACOs or bundling or frankly, [pods], a lot that discussion is premised upon gainsharing type principles and so I do believe that there's going to be a receptivity and engagement level for those models to move forward.

But the discussion fundamentally is going to come back to innovation and service, and that's where we need to be forward-looking and understand the environment that we're operating in and we're very cognizant of those dynamics, because I think at the end of the day it is more of the same, where you're having pricing discussions and fundamental value-exchange discussions with the cost of that value, the cost of delivery from the customer's perspective.

And if we innovate in a clinically relevant way improve out the benefits of those innovations and we're cognizant of the cost objectives that the customers are going to have and the value proposition from their perspective, I think we're going to win in any of those environments whether it's ACOs, bundling, or the kinds of pricing negotiations that we have currently.

Thanks, David and maybe just one quick one, on utilization focus, obviously is in focus for a lot of people.

In the quarter you mentioned Trauma was strong even though we had a relatively mild winter.

And obviously we have seen a correlation between weather and Trauma in the past.

There are some who believe that the weather season also contributed to an increase in utilization.

Is there any possibility in your mind that that could have enabled higher Knee growth in the quarter?

You’re saying that the mild weather might positively influence the large-joint procedures?

It hasn't historically but there's a view that utilization this quarter was impacted by a milder weather season.

Just based on the nature of the disease I would expect that not to impact your business but any thoughts on weather impacting Knee up turn?

I don't believe it.

I think that it can be the case with a very severe storm to where you might have a disrupted operating week because patients can't get in.

But I think that that stuff typically would even cleanup within a short period of time, months, quarter unless there just are repeated storms, so I don't think that there is too much to that theory.

I do think that weather does impact the market within the Trauma sector.

But I don't see it having a significant impact on the large joint side.

Great.

Well, thank you very much.

Larry Biegelsen, Wells Fargo.

Just two for me.

First, David, you said sales growth should accelerate in the second half of 2012.

And you talked about the European Knee tender in the second quarter of last year.

Is that the only reason why you might -- were you trying to indicate that you would expect a little bit slower sales growth in the second quarter?

And if so can you quantify the European Knee tender for us?

We're pointing that out really, so that people understand what we would anticipate in that category.

We think that we're on a good track but there's going to be a comparable bit of headwind coming out of the European segment in particular with Knees.

So it's going to be a progression with these new products.

We believe that you're going to see some significant improvement in some of the product categories sequentially from Q1 to Q2, but a bit of that is going to be offset by the prior-year comp on the Knee side.

Quantifying it, Jim.

Larry, without getting too deep into the weeds, if you were to go back and look at last year's second quarter you would have seen Knee sales in Europe were up 9% in the market that was flat to maybe up in single digits.

And while it didn't account for all of that growth, it was a significant contributor to that 9% growth.

That's helpful.

So hopefully that gives you some sense of what we're up against with respect --

That's helpful.

Yes.

Sorry to interrupt, Jim.

And lastly I'm relatively new to this call.

David, could we get your view on robotics, please.

Robotics, I will tell you that we are big believers in incorporating technologies, developing technologies to improve the precision with which these procedures are done.

And a lot of that comes obviously into preparing the site, the bone cuts, but as well a more sophisticated approach is the soft tissue balancing, precise location of implants, there is a lot to be done here and I think it's a very exciting area of innovation.

That said, that innovation needs to be fashioned in a way that recognizes the price pressure and the environmental factors that the customers are operating within.

And I just don't think that the right solution is going to be an ultraexpensive piece of capital equipment and expensive licensing fees to provide a service that arguably is -- they would argue is a value driver.

I believe that the right answer in that space is going to be technologies and solutions that are smaller, faster, and cheaper than the robotics solution at this point in time.

Now, that said, it's going to be all about how things evolve and what areas innovate more rapidly in a manner that's more responsive to the customer needs.

But the platforms that we are rolling out, that we have been working on for several years, I firmly believe are going to be more responsive to that segment for the market and the needs than the current robotic solutions.

Thank you very much.

So I'd like to thank everyone for joining the call today and for your continued interest and support for Zimmer.

We look forward to speaking to you on the second-quarter conference call at 8.00 AM on July 26, 2012.

With that I'll turn the call back to you, LaShay.

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

You may now disconnect.