Zimmer Biomet Holdings Inc (ZBH) 2012 Q4 法說會逐字稿

Good morning, I would like to turn the call over to Bob Marshall, Vice President, Investors Relations and Treasurer.

Mr. Marshall, you may begin your call.

Thank you, Regina.

Good morning and welcome to Zimmer's fourth-quarter 2012 earnings conference call.

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

Before we start, I'd 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 investor.zimmer.com.

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

David?

Thank you, Bob.

Good morning, everyone, we're glad you've joined us on the call today.

This morning, I'll review our fourth quarter and full year 2012 financial results providing commentary on Zimmer's performance.

Jim will then provide additional financial details as well as our 2013 guidance.

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

Throughout 2012, Zimmer successfully executed on our value creation agenda, including innovation and growth initiatives, global transformation programs, and capital allocation strategies.

For the fourth quarter and full year, Zimmer delivered on our financial commitments generating double digit growth in adjusted earnings per share and significant operating margin improvements.

We also achieved key regulatory and commercialization milestones for a number of innovative products and technologies, both in our core franchises and in new adjacent musculoskeletal markets.

Consolidated net sales for the fourth quarter with $1.18 billion, an increase of 2.1%, and our earnings per share were $1.51, an increase of 11% over the prior year period.

Full year 2012 sales were $4.47 billion, an increase of 2.3%.

And, our full year earnings per share were $5.30, an increase of 10.4% over the prior year.

Compared to the fourth quarter of 2011, Americas' sales grew 3.6% while Europe, Middle East, and Africa recorded a sales decline of 0.7%, and Asia-Pacific delivered growth of 1.8%.

In the United States, our commercial excellence efforts are focused on raising the performance of certain sales territories to the level of the many others that are continuing to perform well.

We're making progress in this arena, contributing to an improved performance in the fourth quarter of nearly 400 basis points.

We will build upon these programs and this progress in 2013 through our ongoing commercial excellence efforts and new product launches.

Notwithstanding the impact of two fewer billing days on fourth-quarter results, our Europe, Middle East, and Africa segment recorded a noteworthy performance for the full year.

Elsewhere, we continue to benefit from our global footprint with strong performances in the quarter and throughout 2012 in many of our targeted emerging markets.

Turning now to the results of our product categories, knee sales for the fourth quarter increased year-over-year 0.9% reflecting positive volume and mix of 3.0% and negative price of 2.1%.

In the quarter, our Americas segment reported an increase of 0.4%, while Europe, Middle East, and Africa sales were flat, and the Asia-Pacific region delivered 4.0% growth compared with the prior year.

A number of exciting milestones were achieved in the quarter for our knee business.

Most significantly, we began to expand the release of our new knee offering, Persona, the personalized knee system.

Building on the clinical legacy of our NexGen and natural knee systems, Persona provides surgeons with unprecedented options to personalize each patient's treatment.

The fundamental design principle behind this differentiated system is to achieve the forgotten knee by improving fit, feel, and function for a more natural feeling knee.

The system also incorporates major advances in instrumentation and surgical kitting, supporting more streamlined procedures and providing a number of efficiency benefits to hospitals.

Launching a system of this magnitude will involve multiple stages over the next several years.

However, we're confident that Persona will begin to contribute to improved performance globally in knees throughout 2013 as more instrument sets are deployed.

Also in the quarter, iASSIST knee, the personalized guidance system received FDA clearance.

iASSIST is a leading component of our intelligent instruments portfolio and we're very enthusiastic about the potential of this platform technology.

iASSIST delivers on the promise of accurate implant positioning and alignment validation without the complexity associated with costly competitive navigation and robotic systems.

Finally, late in the quarter, we received FDA clearance for the Zimmer Unicompartmental Knee System with our new Vivacit-E Vitamin E advanced bearing technology, extending the application of this proprietary material into the growing partial knee market.

Hip sales in the fourth quarter decreased 1.2% reflecting positive volume and mix of 1.8% and negative price of 3.0%.

These results included 1.8% growth in the Americas, a 5.2% sales decline in Europe, Middle East, and Africa, and a 0.3% decline in Asia-Pacific compared with prior year.

Zimmer's hip business remains focused on our proprietary technology platforms, including Trabecular Metal technology and Vivacit-E Vitamin E advanced bearing material.

Products incorporating these premium price technologies, including the Continuum Cup, delivered encouraging sales in the quarter.

We also recorded growth for ceramic products, including the Maxera Cup, Zimmer's large head ceramic on ceramic option, for younger and more active patients, which is currently available in the European markets.

In the fourth quarter extremity sales improved 7.5%.

We continue to generate strong sales of our Trabecular Metal Reverse Shoulder System, Trabecular Metal Humeral Stem, and our recently introduced Sidus Stem-Free Shoulder System.

Our extremities pipeline is focused on new anatomical sites and segments for the company.

In particular, we've been receiving positive clinical feedback from the developer release of our Trabecular Metal Total Ankle replacement system.

This exciting new system supports an innovative lateral surgical approach and provides us with an entry into the lower extremities market.

Our dental business recorded a sales decrease of 2.3% in the fourth quarter.

In a number of international markets we experienced slower growth consistent with challenging market conditions.

However, Trabecular Metal Dental Implants continued to gain traction globally in the quarter.

Late in 2012, we also completed the licensing of our US billing center for Zfx Digital Dentistry Solutions.

Moving into 2013, we look forward to the benefits of this center supporting our expanded CAD/CAM offerings.

Trauma sales in the fourth quarter were up 9.7% over the prior year period, with all three geographic segments again contributing above market sales growth.

These results were supported by strong sales of our anatomically designed Zimmer Natural Nail family and the NCB Periprosthetic Plating System.

We also are benefiting from increased penetration of our XtraFix External Fixation System, which now offers MRI compatibility.

In the fourth quarter, Zimmer's spine business reported a sales decrease of 4.7%.

To increase the competitiveness of this business, we're pursuing a strategic focus on innovation in core fusion technologies.

Reflecting this focus, we continued to grow sales of recently introduced core fusion products in the quarter, including the Trabecular Metal Ardis Interbody in the TMF systems.

Zimmer's surgical and other business category delivered impressive 18.9% sales growth over the prior year period.

This business continued to gain share in the quarter, notably in bone cement and tourniquets.

Sales of Zimmer surgical power equipment and the recently acquired transposal waste fluid management system also are beginning to contribute to growth.

Finally, we continue to make progress building out our early intervention portfolio of products.

These products extend our reach into joint preservation earlier in the continuum of care for arthritis and specifically knee arthritis.

In the fourth quarter, we began the broader introduction of our Gel-One hyaluronic acid injection product to promising early feedback.

Turning now from our product category results, I'd like to provide some additional thoughts on Zimmer's strategic growth initiatives.

In 2012, Zimmer once again delivered against our financial commitments, but perhaps our most significant accomplishments related to product and technology innovation.

Throughout the year, and especially in the fourth quarter, we advanced a number of clinically differentiated new offerings through regulatory clearance and the initial stages of commercialization.

While the achievement of many of these innovation milestones has yet to contribute materially to our results, we're confident that our new products and technologies will drive accelerated top line growth in 2013.

These offerings represent the culmination of significant R&D investments and are indicative of our continuing cycle of innovation.

A number of these products address new anatomical sites for the company, or are in adjacent segments in which we had not previously competed, generating incremental revenues.

Our innovation pipeline remains focused on improving clinical outcomes through greater personalization to match the needs of each unique patient, as well as increased efficiency and reproducibility through intelligent instrumentation and pre-operative planning tools.

We believe our pipeline offers a significant value proposition for all stake holders, including surgeons, their patients, and health care systems.

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

Jim?

As David discussed our total revenues for the fourth quarter were $1.181 billion, a 2.1% constant currency increase compared to the fourth quarter of 2011.

Net currency impact for the quarter was negative, decreasing revenues by an additional 1%, or $11 million.

The negative currency impact for the quarter related principally to our Euro and Japanese yen denominated revenues and was partially offset by positive currency impact from our Canadian and Australian dollar revenues.

Continuing the trend of the last several quarters, and in-line with our expectations, Zimmer experienced pricing pressure of negative 1.9% in the quarter.

In the United States, large joint reconstructive pricing improved by roughly 50 basis points in the fourth quarter, but this improvement was offset by incremental pressure in certain key European markets as we anticipated.

Our adjusted gross profit margin was 74.9% for the quarter.

The margin ratio improved 70 basis points compared to the fourth quarter of 2011.

The primary drivers of this improvement were lower manufacturing costs and reduced losses on foreign currency hedge contracts, partially offset by lower average selling prices.

In the quarter, we continued to benefit from progress in our strategic sourcing and manufacturing optimization transformation programs, specifically, we are implementing leaner and more standardized processes in manufacturing, which are driving greater efficiency and lower unit costs.

R&D expense decreased 14.8% on a reported basis when compared to the prior year.

The step-down in R&D expense for the quarter reflects a natural decline related to the completion of certain large projects as well as the benefit of changes we have made in this function to increase efficiencies.

Selling, general, and administrative expenses were $461 million in the fourth quarter.

And, at 39% of sales, were 60 basis points below prior year.

Changes stemming from our transformation initiatives drove improvement in SG&A allowing us to absorb the costs associated with the commercialization of a range of new products, including promotion and medical education costs.

Special items amounted to $54.3 million in the quarter.

We increased our provision for certain claims by $15 million in the fourth quarter.

We also recorded a non-cash charge for goodwill impairment of $96 million, net of tax, related to our US spine reporting unit.

The change in outlook for the US spine market, together with ongoing company specific challenges, contributed to the decrease in the implied fair value of our US spine business.

Adjusted operating profit in the quarter amounted to $368.1 million, at 31.2% our adjusted operating profit to sales ratio was 220 basis points higher than the prior year fourth quarter, primarily driven by lower operating expenses.

Our fourth quarter and full year operating profit margins of 31.2% and 29.5% respectively, demonstrate great progress in the execution in our value creation agenda.

Net interest expense for the quarter amounted to $14 million compared to $12.7 million in the prior year quarter.

Adjusted net earnings were $263.5 million for the fourth quarter, an increase of 7.6% compared to the prior year.

Adjusted diluted earnings per share increased 11% to $1.51 on 174.1 million average outstanding diluted shares.

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

At $0.88, reported diluted earnings per share increased 1% over the prior year fourth quarter reported EPS of $0.87.

Our adjusted effective tax rate for the quarter was 25.7% and our full year 2012 adjusted tax rate was 26.2%.

This is slightly above prior year and, of course, excludes the extension of the R&D and other tax credits which were enacted by congress in January.

These credits as they pertain to the 2012 calendar year amount to approximately $4 million and will be reflected in our first quarter 2013 results.

Our reported effective tax rate for the quarter was 18.3% and our full year reported tax rate was 24%.

The rates for the quarter and the full year reflect the net benefits income taxes of $34 million, which is excluded from our non-GAAP adjusted earnings measure.

The benefit pertains a legal entity restructuring of certain international operations.

During the quarter, we repurchased 2.1 million shares at a total purchase price of $140 million.

For the full year 2012, we re-utilized our purchase program to reclaim 4.3% of the Company's issued and outstanding common stock, enabling us to return increased value to stockholders.

Approximately $1 billion of authorization remains under our repurchase program that runs through December 31, 2014.

The company had approximately 172 million shares of common stock outstanding as of December 31, 2012, down from 178 million as of December 31, 2011.

Operating cash flow for the quarter amounted to $368 million, a decrease of 6.4% from $393 million in the fourth quarter of 2011.

This reflects a higher level of inventory investments in the current year quarter ahead of an anticipated ramp-up in revenue from a number of new products in 2013.

Net inventories were $995 million at the end of the fourth quarter, an increase of $65 million from the fourth quarter of the prior year.

Adjusted inventory days on hand finished the quarter at 301 days, an increase of 24 days compared to the fourth quarter of 2011, reflecting the ongoing commercialization of a number of new product systems including Persona, the personalized knee system, the Trabecular Metal total ankle, the second generation XtraFix External Fixation System, Zimmer surgical power equipment, and Gel-One Hyaluronic Acid.

As of yearend 2012, net receivables increased to $885 million from $839 million in 2011, 5% over prior year.

Our adjusted trade accounts receivable days sales outstanding finished the quarter at 64 days, flat to the fourth quarter of 2011.

Depreciation and amortization expense for the fourth quarter amounted to $90.3 million.

Free cash flow in the fourth quarter was $281 million, $40 million lower than the fourth quarter of 2011.

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

The decrease in free cash flow reflects the increased investments in inventory and instruments necessary to support the full release of Persona and the other new products referenced in my comments on inventory.

Capital expenditures for the quarter totaled $87.5 million, including $44.2 million for instruments and $43.3 million for property, plants and equipment.

Cash outlays associated with investing activities during the quarter include $20 million for acquisitions.

Now, I'd like to turn to our guidance for 2013.

In the earnings released this morning we announced that the Company expects full year revenues to increase between 2.5% to 4.5% in constant currency when compared to 2012.

At this time, assuming currency rates remain at year end 2012 levels, we anticipate foreign currency translation will decrease over reported 2013 revenues by an estimated 0.5%.

Therefore, on a reported basis, our revenues are projected to be between 2% and 4% above 2012 results.

Among our forward-looking assumption for 2013, we believe that full year knee and hip markets will grow in the low single digits.

We expect global market conditions will remain relatively stable in 2013.

We will have two fewer billing days in the first quarter of 2013 in key markets, including our largest market, the US.

We also anticipate more modest contribution from new products in the first quarter relative to the balance of the year.

Consequently, our revenues for the first quarter are expected to be flat to slightly positive on a constant currency basis and slightly negative to flat on a reported basis when compared to the first quarter of the prior year.

The two fewer billing days in the first quarter in the US will be recovered in the second and third quarters with one higher billing day in each compared to the relevant prior year quarter.

With regard to pricing for 2013, we assume stable but declining price as we anniversary out of Japanese price adjustments in the second quarter and anticipate moderately weaker pricing in Europe.

In the aggregate, this leads us to expect pricing for 2013 to be at or near minus 2% compared with 2012.

Moving down the income statement, assuming currency rates remain near recent levels, we expect our gross margin ratio to be between 74.5% and 75.5% for the full year.

This takes into account lower anticipated losses on foreign currency hedges, as well as the impact of the medical device excise tax which will be recorded as a cost of sale.

As previously reported, we have determined that the excise tax is an inventoriable cost.

As such, we expect very little impact on gross profit margins in the first half of the year, although there will be a negative impact on cash flows.

Beginning with the third quarter, we anticipate the tax alone will result in approximately $10 million to $15 million of charges in cost of sales on a quarterly basis.

We expect R&D expense for the year to average approximately 5% of sales.

Although we are cycling out of several major development projects, our pipeline remains robust.

Changes we have made to increase the productivity and process efficiency of our R&D function enable us to more effectively focus investments in this area while still supporting the vitality of our pipe line.

SG&A is expected to be between 39.5% and 40% of sales for the year as we realize operational efficiencies from our global transformation initiatives and further leverage revenue growth.

Assuming variable rates remain near recent levels, we expect interest and other expense of around $60 million in 2013.

We anticipate a 2013 full year adjusted effective tax rate between 26.5% and 27%, which is higher than our final rate for 2012.

This projected increase is primarily due to a larger proportion of our earnings and profits anticipated from higher tax jurisdictions in 2013.

We anticipate the diluted weighted average shares outstanding for 2013 to be approximately 170 million shares.

Therefore, 2013 full year adjusted diluted earnings per share projected to be in the range of $5.65 to $5.85.

Taking into account the impact of two fewer billing days and other factors, first quarter adjusted diluted earnings per share projected to be in a range of $1.38 to $1.42.

As indicated in our release, we expect to record pretax charges of $120 million to $130 million within the 2013 operating period related to transformation initiatives.

The programs to be completed in 2013 are expected to generate annualized pretax savings of $80 million, including $30 million to $40 million to be realized in 2013.

We continue to make meaningful progress in our business transformation efforts, which include strategic sourcing, streamlined logistics, shared services, and the implementation of leaner manufacturing operations.

And, we remain on track to deliver our aspirational goal of $400 million in savings by 2016.

Returning to 2013 guidance, we also expect to incur an additional $5 million to $15 million for certain acquisition and integration costs connected with the acquisition of third-party distributors and the recently completed acquisitions of Exopro, Dornoch, and Zfx.

Therefore, to arrive at our anticipated reported GAAP earnings per share, you should subtract total charges for special items of $135 million pretax, or approximately $0.60 per share.

Turning to cash flow, we anticipate total capital expenditures for the year to be in a range of $240 million to $280 million.

Instrument capital is expected to be in a range of $125 million to $145 million.

Traditional PP&E is expected to be in a range of $115 million to $135 million reflecting the cash outlays necessary to drive new product development and commercialization activity.

Our guidance assumes that we will continue to return cash to our stockholders through our share repurchase and dividend programs.

Free cash flow in excess of these capital allocation programs is assumed to be held in cash and cash equivalents or other investments.

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.

Thanks, Jim.

Zimmer is well positioned to deliver high single to double digit earnings growth in 2013 through continued expansion in both established and emerging markets and through the savings delivered by our operational and commercial transformation programs.

We look forward to the broader introduction of an unprecedented pipeline of new products and systems in our core franchises and in a number of adjacent product categories, delivering new opportunities for expanded top line growth.

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

(Operator Instructions) Derrick Sung, Sanford Bernstein.

Hi, good morning, thanks for taking my question.

I just wanted to start with guidance here.

You've talked about previously EPS growth in the 8% to 12% range is something sustainable, a sustainable target for you.

Your guidance for next year I think gets us to a 6.5% to 10% range.

Can you just talk about where -- the difference between that aspirational goal and what you're setting for it next year?

And, how you see that increasing to your aspirational goal?

Sure.

We have also said, Derrick, all along, that 2013 did not provide the same kind of opportunity for operating leverage as other years since, as you very well know, we are in a position in 2013 to have to absorb the medical device excise tax.

We've done that.

And, I would reflect -- I would focus on the fact that the mid-point of that range is certainly well within the aspirational targets that we've discussed.

And, I'd also reflect on the fact that when you look at our guidance, particularly when you look at the detailed guidance that I provided on the various operating expense line in terms of what's implied in operating profit growth, we are still driving leverage in 2013.

As a result of the progress that we're making on the transformational agenda and behind the anticipated growth we look to achieve with the launch of all these new products that David mentioned.

Okay, thanks, that's helpful.

In turning to the hip and knee market, it looks like you did see a bit of an acceleration in your Americas knee sales, consistent with what we've seen from some of the other companies that have reported.

In the US, or in the Americas, your hip sales stayed flat whereas I think we saw a bit of an acceleration in some of the other larger competitors.

I was wondering if you could comment first kind of broadly on how you're seeing the market dynamics in hips and knees unfold this quarter?

In particular, there's been some questions around are we seeing a bit of a pull forward in procedures in Q4 as a result of some of the concerns around fiscal cliff, et cetera, by patients?

And then, in particular, could you then comment on your own performance relative to your competitors and the lack of acceleration that you're seeing in hips and maybe talk about what's driving the improvement in your knee sales?

Thanks.

Sure.

I think when it comes to the overall market we did see a bit of a pickup sequentially from Q3 to Q4.

But, the pick up was more in the United States and offset by some O-US markets that actually stepped down, notably, some of the European markets.

So, I would deem it, Derrick, to be a stable market for large joints.

If you look across the quarters of 2012, you have a range of maybe 150 basis points from the highest growth rate quarter to the slowest growth rate quarter.

And, the average for the year looks to me to be dead on with what we saw in Q4.

That is, around 2% growth.

I think our own performance, we talked about the improvement that we want to drive with in the US market, we're seeing improvement.

I think that we had a nice pickup sequentially from Q3 to Q4.

But, more work to do in that regard.

And, I think that the programs that we're executing, along with these new product launches, are going to put us in a really nice place as 2013 progresses.

And, are you seeing any evidence of a pull forward in procedures, at least in the US in Q4 kind of based on increased seasonality at all?

I don't think that there's anything that is noticeable in that regard, or noteworthy in that regard.

I think that we always see seasonality.

You're going to have puts and takes across the globe.

And, for us, we look at that.

And, again, in the United States saw a bit of a pickup.

In the European markets, a bit of a slow down as we got to the back half of the year, certainly into the fourth quarter within the European market.

So, I think it washes out and you end up with a market that's stable.

Okay, great.

Thank you, very much.

You're welcome.

Bob Hopkins, Bank of America.

Thanks, and good morning.

Can you hear me okay?

We can, Bob, good morning.

Great, good morning.

I'm sure there will be a lot of questions about hips and knees, but I want to focus on the surgical and other line, because obviously this quarter you saw a pickup in your growth rate of roughly 2 times what you've been growing in the last couple quarters.

And, I wanted to make sure, for my first question, that I had a good understanding of what drove that acceleration in that line item this quarter.

Was that truly the first signs of positive feedback on your power tool launch?

Or were there other more one-time items in there?

Well, there was a bit of a benefit from the acquisition of Dornoch's Transposal Waste Fluid Management System, but the growth is much, much broader than that.

We did a nice job on the legacy products, Bob, within the surgical portfolio and just are beginning to see some of the benefits of power tools and the new product categories.

It's a good area for us to focus on, because we've been talking a lot about the new products, both through internal and external development.

And, the surgical line is an area where we've shored up our legacy products with internal innovation efforts.

But, we've also added through external development and that allows us to now penetrate markets that we didn't previously participate in.

So, I think that's going to be a big theme for us in 2013.

As we add products into categories and markets in which -- and these are adjacencies -- so these aren't out of our core wheelhouse here.

These are within the markets that we serve and the relationships that we possess.

As we add those new product categories, those are going to be top line growth accelerators.

And, that's exactly what you saw in Q4 within our surgical line.

So then, just to follow up on that.

As it relates to that line item for 2013, some of these new products have been on the market for six months now or so.

And, you're saying we probably won't see much of a pickup in Q1.

I guess I'm wondering why we wouldn't start to see that?

And then implicit in your guidance for revenues, what sort of contribution are you assuming from say, hyaluronic acid and power tools?

I think it would probably be a safe assumption from my perspective that you could grab at least 5% of those markets in 2013.

And, I was wondering if you -- is that what you're assuming?

Or just any further color on that would be helpful?

Those are -- it is the case that we're moving into full release of many of these products, Bob, and they're going to come at different paces, right?

There are going to be instances like Gel-One where I have absolute confidence that in a reasonable time period we're going to pickup nice market share with that product.

All the initial feedback has been very, very positive.

And, we have to get all the distribution channel elements set up.

So, that includes the specialty pharma wholesale side, we've got the buy and bill side, and we're pushing hard on that.

But, it's going to be a ramp-up because it is a new product category.

When it comes to the implant systems, as you know you're deploying instrument sets.

That takes time.

The surgeon train and education takes time, and it will ramp up sequentially.

I think that the biggest thing that you have to recognize in Q1 is two less billing days in our largest market.

That's several hundred basis points.

So, we're going to make progress in executing these launches.

I think that you'll start to see that progress much more in Q2 and thereafter in 2013.

Do you assume that line item grows 15% to 20% this year?

Within surgical?

Within the surgical and other, yes.

Surgical and other, we expect to see double digit growth within that line.

Okay, great.

I'll get back in cue.

Thanks.

Matt Taylor, Barclays.

Great thanks for taking the question.

Just wanted to ask one on knees and maybe just help us gauge the ramp of the Persona launch this year?

And also, just a broader question on hips, you know, what can you do there to improve some of your hip performance?

How big of a contributor do you expect some of these new cups to be in 2013?

Sure, I think on the knee front, the Persona, the personalized knee system is going to be the company's largest launch ever.

And, we put a lot of effort into the development of this system.

It's a multi-generational product development effort.

It will be rolled out in phases, literally over multiple operating periods.

And so, 2013 is just the beginning, but within 2013, we expect the system to make a meaningful difference in our knee performance.

And so, we feel terrific about where we're headed within total knee arthroplasty, which is our largest franchise.

I would tell you that we feel very good about our pre-TKA offerings and our revision offerings as well, the latter leveraging Trabecular Metal, the former leveraging terrific clinical results with our Unicompartmental system.

And, now adding Vitamin E as a bearing surface that is a superior technology, puts us in a great, great place.

So, there's going to be more to talk about with Persona in the coming quarters as we roll out the elements of that system.

It's a very comprehensive system that, as I said, includes the implant designs that offer terrific fidelity and personalization options for the surgeon.

We believe that it will be unmatched in the marketplace.

And, we're also augmenting that with advanced technologies through our intelligent instrumentation offering that will include iASSIST.

So, we're expecting big things from our knee franchise and are very confident that we're going to be able to deliver.

On the hip side, we have a very solid line already.

We have some great innovations.

And, again, Vitamin E is something worth talking about there, intelligent instrument innovations on the way within that franchise, and shoring up our revision line as well.

So, I think that hips is going to be a good contributor for us as well.

We're probably a little bit phased behind where we are in knees on the innovations with the new things coming out.

But, with the Continuum Cup and our existing lineup of cups and stems and various bearing surfaces, we feel like we're in a great position to compete effectively in hips currently.

And, I just wanted to ask one on China, because there's been some deals in the space.

You had one that you did a couple years ago and haven't talked much about it.

So, was curious in terms of how much of a contributor to performance China has been for you?

And, how you expect that to grow over time?

Yes, China's performed very well.

I think that it's one of the key markets that we're focused on within the emerging market set.

We, some time ago as you mentioned, did a relatively small acquisition there.

But, I think an intelligent acquisition for us to penetrate beyond the premium market segment there, premium -- into a little bit more of a value mid-market segment.

That acquisition has gone well for us, that was the Beijing Montagne acquisition.

It brought us some products, it brought us local capabilities on research and development and manufacturing, as well as a distribution channel that was set up focused on that market.

All of those key emerging markets continue to grow double digits plus for us, and we expect to see that kind of continued progress in China and elsewhere.

Great.

Thanks, a lot.

You're welcome.

Bruce Nudell, Credit Suisse.

Good morning, thanks for taking my question.

Dave, when we calculated the hip and knee -- major joint market for the year, we came up with 2.5%.

And, this quarter, your non-major joint businesses I think were growing around 7%.

So, if you grow at market in major joints next year, assuming constancy, and show continued momentum in the other businesses that you have, you should be kind of at the higher end of the revenue guidance range.

And so, could you just elaborate on your thinking of what's going to influence where you wind up in that range?

And any assumptions you may have about maybe continued under-performance in major joints as offset by strength in the non-major joint businesses?

And, is the mid-point of the range what we should be thinking about?

In direct answer to your question, I think that the last question that you posed, Bruce, is -- the answer to that is yes, I think that is the right place to start the year.

And, the comments that you started with I think are the locker room comments that will go up in front of our sales force because it really is, it's a sales execution game for us at this point in time.

And, it's a matter of not whether, but how fast we'll be able to ramp up and exploit the opportunities of these terrific new products that are getting launched across the globe and across all the categories.

We've never been in a better position.

The pace of that, whether it's one quarter or another quarter where you start to find some traction, you can never predict with absolute certainty.

You can run into some extra training needs or resource shifts to be able to fully exploit those opportunities.

And so, of course, you're going to come into this year providing a range.

But, I'm really excited about where we're headed.

We'll withstand the couple billing day loss of Q1, make good progress in the initial stages of these launches.

And, I think that thereafter, you're going to start to see progress on the large joint side.

And, as well, we have some great opportunities in some of the other product categories as you referred to them.

So, just to put a finer point on it, you wouldn't be shocked at 3.5% to 4% as opposed to 2.5% to 3%?

So, we shouldn't be ruling out maybe a little better than mid-point?

I'm not going to rule it out, Bruce, but we provide with you a broad guidance here sitting on a cold winter day in January because it's the first month of the year.

So, look, we're going to run the business and our expectations, obviously, are all that and more.

But, we want to make sure that we're expense-focused on the management side and we're doing the right things to manage expectations with all of you.

Fair enough.

And, I'm just going to try to hold you to the promise you made last quarter, I think.

Could you just give us a little color on how you scale the Gel-One opportunity, which does look like a very interesting product?

Yes, this is -- it is a product that we're going to do well with.

Again, very confident to that.

We're just getting rolling.

Obviously, if a company had an HA product in that space and had the full channel built out, the penetration rate that you're going to get to in the early quarters is going to be a bit higher.

Some of that infrastructure and distribution channel needs to get built out and we're in the process of doing it.

I think we're making great progress on it.

So, again, this is something where whether it's one quarter or two quarters or three quarters, we know we have a great opportunity.

We're going to be methodical in our approach to it.

Be smart about ensuring that we're doing it the right way for the long-term.

But, we've got some people that are very enthusiastic about it and we're going to get after it.

I don't really want to get into breaking out one product category, Bruce, and providing specific millions of dollars guidance on that.

But, it's embedded within our 2.5% to 4.5% constant currency growth rate guidance for the full year.

Thanks so much.

You're welcome.

Larry Biegelsen, Wells Fargo.

Good morning, thanks for taking the question.

Good morning.

I wanted to start with the gross margin and ask a question on Persona.

So, Jim, help us out here.

The medical device tax is about a 70 basis point hit.

It looks like you're expecting an improvement in the underlying gross margin year-over-year, if I'm doing the math correctly.

First, am I doing the math correctly?

And, if so, what's driving the improvement in gross margin in 2013?

Sure, so again, we anticipate our gross margin ratio will be between 74.5% and 75.5% for the year.

I think that lines up very close to where we landed for the full year 2012.

And, among -- ahead of things that are going to be impacting on margin in 2013, we expect that positive trend in hedge gains and losses to continue throughout 2013.

We also anticipate lower unit costs from a combination of higher volumes associated with new products with the Persona launch being the key driver, as well as efficiencies we gain and expect to continue to gain from improvements in our manufacturing processes.

Just to give you some idea of the changes in hedge contract; gains and losses alone using year-end exchange rates account for about a 50 to 60 basis point improvement in 2013 when compared to 2012.

And as you pointed out, offsetting the favorability in hedge gains and losses and the reductions in unit costs, will be the anticipated 2% decline in average selling prices.

And, in the second half of the year, the $10 million to $15 million per quarter charge in cost of sales for the medical device excise tax.

Thank you, very much.

Then on Persona, what can we expect at AOS this year?

And, can you give us a little bit of color on the O-US launch timing?

And, just lastly, do you think Persona is mainly going to be a mixed benefit for you guys?

Or do you think that the advantages of the system will be enough to take market share, which has obviously been very, very sticky in the hip and knee market?

Thanks.

Good questions.

We will be in a position to provide you with more exposure to the Persona system at the academy, so hope you're able to make it.

The launch of the system is a global launch, but I would tell you that as is consistent with most of these launches within the industry, we're focused moreso on the United States initially and then key O-US markets.

So, the big opportunities in year one are going to be more US-oriented.

And, I see it as being a system that provides us with opportunities beyond mix even out of the gate.

As you said, those are harder because of the stickiness of the market share.

But, the benefits of this system are profound enough to where we believe we're going to have competitive opportunities even in year one.

Thanks, guys.

You're welcome.

Joanne Wuensch, BMO Capital Markets.

Thank you, very much, for taking the question.

Can we touch a little bit upon your US sales force?

It looks like your Americas revenue growth is accelerating, actually, quite nicely.

Is there any reflection in sales effort or realignment of that effort?

Yes, Joanne, and we mentioned this in the prior or quarter or two calls, we've made adjustments.

But, that's the case, that's an ongoing management matter.

And, we're always looking to add talented people to the organization, whether it's at the rep management or senior leadership levels.

We've done so over the course of 2012, we'll continue to do so in 2013.

I think that we were specific in past quarters about some underperforming territories within the United States.

We've made some changes there, starting to see the early signs of those benefits.

And so, the Q4 performance and the uptick, I think it was a bit -- just a bit under 400 basis points, is part of the benefit of the actions that we've taken and the effort that we've made to shore up our execution on the commercial side within the United States.

But, we would expect to continue to make progress in that regard.

And those efforts, combined with the new product launches, ought to put us in a very nice position as 2013 progresses.

And then, the companion to that is what helps turn your O-US sales around?

Thank you.

Again, I would focus, Joanne, on the fact that we had two fewer billing days in Europe in the fourth quarter.

So, if you look at Europe for the full year, I would tell you that we had an outstanding year in what is admittedly a tough market.

We -- if look at our Asia-Pacific results for the year and feel that we had a good year relative to the market.

As you know, as we get into 2013, at least with respect to Asia-Pacific, we'll anniversary out of the Japan price cuts beginning in the second quarter.

So, that should provide a bit of a tailwind with respect to that region.

And, we expect to continue to see positive results out of Europe relative to market.

So, the market may be affected by economic conditions there, but we would expect to continue to see good performance out of our team.

Mike Weinstein of JP Morgan.

Thanks, just a couple clarification items.

Jim, could you just give us the contributions from acquisitions in the quarter?

On the top line, Mike?

Yes, on the top line.

I don't have a specific percentage.

It clearly -- there was -- it contributed to the growth, particularly in that surgical and other products category that David mentioned, the waste management disposal devices contributing in a meaningful way in the quarter.

How much did Dornoch contribute in the quarter, just a sense, for that line?

It would have been low single digits in millions, Mike.

So, the contribution of the top line growth of any of those acquisitions is negligible.

They're all a bunch of $2 million to $3 million is what we've got.

Yes, that's right.

Very small businesses that we acquired.

So, and the math for the 2.5% to 4.5% for 2013, do you know what it is for -- within that?

Again, these are businesses that when they were acquired had, perhaps, somewhere in the order of $10 million in revenue, for example in the case of Dornoch.

It's going to have, obviously, more than that in 2013.

But, it's -- at the margins, certainly going to be building that up over time.

But, not $10s of millions in a single operating period from where they (multiple speakers) --

Understood.

When you did your planning for '13, are you essentially assuming that a recon market, that is identical to 2012?

How are you modeling it?

Yes, that is our assumption, Mike, is that it's stable relative to what we saw in 2012.

Okay.

And, does your performance relative to it improve?

And you get the contribution from some of the other categories that you're just getting into, right?

Both, that's right.

And, our performance relative to that market will improve sequentially as the year progresses.

Last thing, the distributor buy-ins, how do we think about the impact of that on the business?

There's both a plus and minus from that.

Just give us a sense of where you are with that and the impact on the business fourth quarter and rolling into '13?

Not a significant contribution in that regard either.

Those are strategic acquisitions primarily in the O-US markets, Mike, where we have an interest in having a presence and making further investments.

And so, it's a structural adjustment consistent with what we want to do in those particular markets.

But, we don't have enough going on in that category at this point in time to spend much time talking about it.

It just isn't significant.

Okay, perfect.

That covers everything.

Thanks, guys.

Thanks, Mike.

David Lewis, Morgan Stanley.

Good morning.

Good morning.

Just maybe a quick one for Jim and then for David as well.

Jim, just looking at the EBIT margin for the third quarter, you had a nice sequential uptick.

And, I think, 31% is the strongest EBIT you've had in over four years.

So, it does look like the restructuring program is having a benefit.

As I think about '13, it seems like we're getting into the back half of the restructuring program, or maybe it's the break point over that five-year plan.

It seems like you would start seeing more material benefit from restructuring in '13, but that's not necessarily implicit in the guidance you provided for '13.

Give us a sense of where you are in the restructuring plan?

And, is there -- are there more material offsets to the restructuring in '13 that we're not thinking about?

Or you think the margin outlook for '13 reflects some conservatism?

First of all, as you said, the work we've completed to date validates our beginning assumption that we can create a lot of value through these programs.

You know to focus the organization on achieving what we're referring to as operational excellence.

We're pretty far along as you pointed out and we're on track to achieve the aspirational goal of $400 million of cost savings by 2016.

More specifically, I can tell you on a run rate basis on the savings from 2011 and 2012, and the 2012 initiatives are added to the anticipated 2013 savings, we expect a total run rate coming out at the end of the year of $210 million to $220 million.

So, I will say with respect to how it's impacting on EBIT margins in 2013, first of all obviously, we have to use those savings to absorb the medical device excise tax.

But, we're also using those savings to accelerate certain technology and product development programs, to cover short term dilution from these recently completed acquisitions, and to support the continuing build out of our emerging market businesses, and to fund expansion of our global sales channels.

As you know, we're getting into, with some of these acquisitions, adjacent markets.

David talked about the -- some of the investments we're making in the sales channel support the launch of the Hyaluronic, the Gel-One Hyaluronic Acid product.

So, to the extent you might have expected more EBIT margin expansion, if you're not seeing it it's because some of those savings are getting reinvested.

Okay, that's very clear.

And, David, just thinking about your recon franchise and Persona, I think you've talked about a couple things you're trying to achieve in recon.

The first of which is obviously improving clinical value.

And, I think you've also mentioned your desire to reduce complexity.

I'm trying to think about Persona with some of our early diligence.

I think we understand there's definitely more customization and there's some excitement about that.

But, how do you think about the complexity argument and how does sales manage that in terms of total cost of ownership at the hospital system just given, perhaps, better but more complicated instrumentation and actually increasing inventory versus reducing inventory?

How is the balance of clinical value versus complexity work with Persona as you begin the launch?

This is consistent with what we've been talking about is the scope of innovation that's going to allow one to be most successful in the marketplace that we're serving in the future is going to have to broaden.

So, we need to innovate, not only with respect to the implant design and the capabilities that that provides the surgeons to provide a personalized solution to a patient, but pre-operative planning, intraoperative technologies.

So, the Persona system is much, much more comprehensive than a traditional implant approach.

And, this will be coming out in waves.

But, we'll begin to have a more specific discussion within 2013 about that to get after the questions that you posed.

Okay.

Thank you, very much.

You're welcome.

Matt Miksic, Piper Jaffray.

Thanks.

So, a couple follow-ups on -- one on the changes that you're making in the US in terms of distribution.

Could you maybe provide a little bit of color as to what the impact, if anything, there was in the quarter from that?

US knee is obviously a little better than we were looking for

but, I'm wondering what's the net impact of some of those distribution changes in the US?

And then, how we should think about that heading into '13?

And then, I had, just have a couple of follow-ups here.

I think that the net impact was positive.

But, we're not going to get into granularity by territory, Matt, as to try to measure that in dollars, and I don't know how anyone would do that either.

You're talking about a large sales force and the connectivity and engagement of that large sales force.

And, obviously, if we're all aligned and we're providing the best products to that sales force to allow them to compete effectively in the marketplace, they're going to be more inspired, more effective.

And, I think that that's what we're beginning to see and we expect to see a lot more of it in 2013.

No worries.

Maybe early in '12 you were thinking -- you were talking about, maybe inconsistency is too strong of a word, but areas of US where you felt really good about performance and then areas where you felt they were lagging.

Would you say Q4 was more consistent or we're not there yet?

No, it was, I mean, we're on the right track.

You're always going to have in a ranking system, you're always going to have people that are performing better than others.

And, look to move those mid-tier people or lower-tier people up or do something more radical if necessary to get them on the right track.

So, it was progress in Q4 and we expect to see more of it in 2013.

But this isn't a discrete three-month effort, this is just ongoing management of the business, Matt.

Okay.

And, on spine, you mentioned in your prepared remarks a focus on core fusion technology to get that going.

Can you talk a little bit about what that means?

Are you talking about strategic adds to that business?

Are you talking about redesigning your main lines there?

Help us understand a little bit about what that means.

Yes, I think that part of where we had been in that franchise, as you're already familiar with, we emphasized in the past some of the non-fusion technologies.

And, we had picked up through bigger acquisitions, including way back when the Centerpulse acquisition, the non-fusion system of Dynesys, with the uncertainty as to how to get those products approved through the FDA at this point in time.

And, we've turned back to where the vast majority of that market resides and that's core fusion.

So, outer bodies, inner bodies, low profile solutions within that space are much of what we're doing.

You shouldn't expect us to do anything in the way of a large acquisition within that space.

Rather, I think that with the fragmentation of that marketplace and the technologies that have been developed and what's happened within that marketplace over the last several operating periods, we think we would be in a good position to very economically pick up some product lines or some licensing deals that would augment our internal development.

And then, finally, for Jim, on the -- question on the P&L and related to the rollout of Persona.

As we think about rolling out a system of this magnitude, granted, it's going to happen over a couple or a few years, but invariably, there's an awful lot of new fixed capital assets in the form of instruments that's going out into the field, early on.

Those are going to be underutilized relative to your core NexGen line, for example?

Is that something we've already started to see the impact on, here in Q4?

And, maybe can you talk about where in the P&L that extra depreciation drops and how that figures into 2013 guidance?

Sure, so that is the case, Matt, although I would tell you with this system, the approach is fundamentally different from what it's been in the past.

We have a more streamlined way of kitting for surgeries, for cases, and you'll able to get a sense of that at the academy meeting.

We'll have an opportunity to demonstrate that a bit more clearly.

Nonetheless, if you look at the cash flow statement for the fourth quarter you would see that there was a fairly significant investment in instruments.

Those are the instruments that are going to be getting deployed over the next couple of quarters in support of the launch of Persona and some of the other new products as well.

That depreciation, when it begins to hit, will hit SG&A expense.

But, as it's hitting SG&A expense the savings that we're driving out the transformation initiatives are going to be hitting as well.

And, that is all reflected in the guidance we provided.

And the -- as you get, I guess, as utilization starts to pick up, not that we're -- we just got into '13 here so we're not really talking about '14 yet.

But, is it that -- I would imagine that's a source of leverage back half '14 as volumes and utilization in turn starts to ramp up.

Is that fair?

Well, we've said in response -- I've said in response to that question in the past that in this business, with our margins and particularly with the opportunity that we have to drive more significant leverage on those fixed costs.

And, the instrument depreciation is a good example of that.

We know that if we can -- to the extent we can get that large joint reconstructive business growing up around mid-single digits, the opportunity to drive leverage in EBIT is somewhere in the order of 40 to 50 basis points.

So, you're absolutely right.

As we move into future periods with this particular system, we are going to have that opportunity.

Great.

Thank you.

You're welcome.

(Operator Instructions) Jason Wittes, Brean Capital.

Hi, thanks for taking the question.

I wanted to ask about iASSIST You previewed this last year at AAOS and it got a lot of attention, certainly from divesters but also from doctors.

I was just wondering a couple things about it.

Number one, I know it's basically a tool, so are you actually charging for it?

And, what range, what kind of premium would be attached to it?

And secondly, do you -- do you see this as actually something that could move market share for you?

Yes.

The answer is to the last question, is yes, we do.

We think that these smaller, faster, cheaper intelligent instruments that enhance the reproducibility of these procedures and enhance placement alignment, which is exactly what iASSIST is focused upon, are going to be difference-makers.

And, I think that over time these technologies are going to become, not only accepted and penetrate the market in a meaningful way, but I think they're going to become the standard of care.

I don't think that ultra expensive up front capital equipment oriented systems are going to become the standard of care because of the environment that we're operating in.

We've been working for several years now on what you're seeing with the launch of the iASSIST system and applying that technology.

In the knee procedure context, we do expect to get an incremental charge out of that system.

These are disposable pods that are used for each procedure.

And, I think that, as far as the pricing goes, you can think about that in a similar way that you think about our PSI technology.

Okay.

And, in terms of the rollout, I think it's actually started rolling out last -- in the fourth quarter.

How long should we anticipate before you can fully roll it out to the entire -- to your entire customer base?

Yes, this is one where, as you said, it did begin its formal rollout last quarter.

We received FDA clearance.

It was one of many clearances that came through in the fourth quarter across our various franchises.

So, we're excited to be at this stage.

It will be featured at the academy.

There obviously is going to be a more intensive surgeon train and education effort built around the rollout of iASSIST.

So, you'll see it throughout 2013 and thereafter.

I guess just last thing on iASSIST, in terms of clinical data backing the claims, what are you out there telling the fields about?

Typically, with these types of systems we have all of the internal validations and labs, a bench testing the scientific data to support why this leads to the right placement and reproducibility and ideal alignment.

And so, that case can be made out presently.

The long-term clinical benefits, obviously, will be a multi-year task, but we have the right study set up to build that data base out over time.

Okay, and just one quick clarification on the Persona knee rollout.

I know it's a multi-stage rollout, but I assume the first stage, from what you're implying, should be completed by the first half of this year, of 2013?

Is that the right way to think about it?

I think that the first stage being the core primary system will be rolled out in, as I said, primarily the US market, the key OUS markets as well.

This is going to be every month rolling with various additions, augmenting the core system.

And so, we're talking about every month of 2013 and a handful of, literally, years thereafter that are part of this broader plan for us.

Okay, great.

I'll jump back in queue.

Thank you, very much.

David Roman, Goldman Sachs.

Good morning, everyone, and thank you for taking the question.

Jim, I was hoping to come back to something you answered in response to one of the previous questions regarding the 8% to 12% earnings growth goal.

I know you talked about the medical device tax in 2013 presenting a headwind to operating leverage, but you only have that for half the year.

And, obviously, for 2014 you'd have it for the full year.

So, is there something else on a longer term basis that could help offset that where you would have a tougher comp for the next couple of years?

Or is 8% to 12% more an underlying number ex the device tax?

David, first of all, I would focus on the mid-point of the guidance, and what's implied in terms of operating leverage for 2013, which we do expect to achieve in 2013, even in the face of having to offset the medical device excise tax.

I would also just echo comments I made earlier in connection with where we are with respect to the restructuring and transformation programs, which, together with our growth initiatives and our capital allocation strategies, is what gets us to feel very comfortable, very confident in our ability to deliver earnings per share growth in that 8% to 12% range over the long-term.

As I pointed out earlier, we're in very good shape with respect to the progress we're making on those programs.

We expect to end the year at a run rate of, as I said, somewhere between $210 million and $220 million in operating expense savings.

Those savings we'll be able to use in direct response to your question about 2014 when we have to absorb another $20 million to $30 million of the medical device excise tax.

I pointed out earlier that in the short term it is the case that some of those savings are getting reinvested.

So, a number of different areas where they're getting reinvested in the business.

But, as we get into future periods, as we get past some of the investments we're making in the short term in support of these, a number of significant new product launches, we'll have the opportunity to drive the kind of earnings -- or the operating leverage that we need to deliver on that 8% to 12%.

So, if we think just conceptually about the growth rate, top line and bottom line, it sounds like what you're saying is you're going to invest to drive new product growth and expand into faster growth geographic regions.

So, we'll see an improvement in the top line as reflected in your guidance.

Gross margins, and it's -- there are a number of moving parts there as the device tax, et cetera, you have some cost efficiencies that can help offset things like pricing.

But, where there's still a lot of room is on the discretionary expense side, particularly SG&A, to drive a meaningful amount of operating leverage.

Is that a fair way to think about it conceptually?

I think that's very fair.

Okay, that's helpful.

Thank you.

You're welcome.

Rajeev Jashnani, UBS.

Hi, good morning.

Good morning.

I may have misheard this incorrect, or misheard this, but did you mention that pricing was plus 50 bps in US recon?

No, we said 50 basis points of improvement sequentially from Q3 to Q4.

Okay, then that clarifies that.

Okay.

Question just on the new product cycle and potential mix gains associated with that.

Some of your competitors are obviously launching new systems this year as well.

Maybe you could help put in perspective what a mix benefit might be as you roll out a new product cycle?

Generally, whether it's on the order of 200 basis points.

Presumably while you're striving for share gains, I would think it's -- your competitors are obviously trying to do the same thing, which may make it a bit tougher there.

Yes, I think that there are mix benefit opportunities for us as we roll these systems out.

If you focus on knees, for example, there are premium technologies that will be built into the Persona system.

This will be, again, a very, very broad-based system.

I think that for several operating periods to come, it's going to provide us with mix benefit.

The range of that, again, as we've said in the past, we think that on the high end, you probably are in a position to offset negative price in the current environment that we're operating in.

That's a fair amount of mix, obviously.

If you don't have the launch of material new system in the large joint side it's probably difficult to offset through mix the down price on the pure price side.

But, we ought to be in a good position to help ourselves on that front as this system launches more fully in 2013.

If I can, one follow-up on the fourth quarter, just on hips and knees, was there -- Zimmer was a few hundred basis points below the competitors, some of the competitors at least in major joints.

What's your perspective on that?

I know the new systems are going to be helping, but there was a pretty meaningful gap there.

Any other perspective you can provide on that would be helpful.

Thanks.

I think the GAAP there, obviously, Europe slowed down.

We have a big hip business in Europe.

That's a business that performed very well for us throughout the year but that was a slow market in Q4.

And so, we're going to take a big chunk of that with our market share there.

The knee opportunity on a global basis is going to change materially in 2013 with the launch of Persona system.

So, we're going to focus on execution.

I don't think it's several hundred basis points gap, but there is a gap and we're going to close that gap in 2013 and get on top.

Okay.

Thanks, guys.

Regina, we have time for one additional question.

Rick Wise, Stifel Nicolaus.

Good morning, and thanks for taking the question.

Just a couple of quick follow ups really.

Have you characterized at all the pricing premium for Persona?

Clearly, new technology would seem to deserve and generate a bit better price.

And, I'll ask just a second follow-up now.

Maybe, David, it would be great time to reflect on your latest thoughts on capital deployment, particularly in the acquisition side.

Should we expect the recent activities to continue?

And, maybe, just your updated thoughts on your priorities as to adjacency's or new markets or products?

Thanks, so much.

Sure, Rick, we do see opportunities on the premium price side.

With the Persona rollout, our experience to date has been positive and we would look to continue to drive mix benefit as we were just discussing in response to the last question.

Rick, don't want to quantify that at this point in time.

And, obviously, this is a broad system and so the mix opportunities are going to be different depending upon what configuration and what market we're deploying instruments and selling the Persona system at this stage.

On the capital redeployment, I think that we've been very disciplined about the deals we've done.

We're going to see a lot of value creation from these bolt-on transactions, particularly ones that have taken us into new markets.

Just because there's no cannibalization from the revenues when we pick up those product categories, or bolt-on acquisitions, and so they're going to be top line accelerators for us, leveraging the existing distribution channels, leveraging our existing relationships.

And, we think that that's a great value creation model.

We're starting to see it in a couple of the product categories already.

The XFix system that we picked up is one of the difference makers within our trauma portfolio, power tools, blades, the waste fluid management system is going to be a difference-maker for us on the surgical side.

And, we'll look to do that even in a large joint side where we can pick up the right kinds of technology.

So, I think that you should expect to see more of the same from us.

Again, to the extent that our aggressive and disciplined hurdle rates were met, would we be interested in doing larger transactions relative to the ones that we've been doing for the last several years?

Sure.

But, we're going to be disciplined about it to make sure the capital we deploy into such a transaction is going to be value creating for our shareholders.

Thank you, so much.

You're welcome.

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

We look forward to speaking to you on our first quarter conference call at 8.00 AM on April 25, 2013.

I'll turn the call back to you, Regina.

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

You may now disconnect.