Zimmer Biomet Holdings Inc (ZBH) 2013 Q1 法說會逐字稿

Good morning.

I would now like to turn the call over to Bob Marshall, Vice President, Investor Relations and Treasurer.

Mr. Marshall, you may begin your call.

Thank you, and good morning, and welcome to Zimmer's first quarter 2013 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 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 of 2013.

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.

We achieved our financial commitments in the first quarter, delivering leveraged earnings per share growth.

During the quarter, we continued the introduction of significant new product offerings across the portfolio, which will accelerate topline growth for the balance of 2013.

Ongoing progress in our commercial and operational excellence initiatives continues to generate savings in line with our long-term goals, while enabling us to make the necessary investments in support of the new product launches.

Consolidated net sales for the quarter were $1.14 billion, an increase of 1%, and our earnings per share were $1.41, an increase of 8.5% over the prior-year period.

In the first quarter Americas sales grew by 0.1%, while Europe, Middle East, and Africa experienced growth of 1.8%, and Asia-Pacific achieved growth of 2.8% year-over-year.

We continue to deliver attractive growth in key emerging markets around the world.

It's important to note that the quarter included two fewer billing days in the United States, and in a number of other key markets, compared with the prior-year period.

On a like billing day basis relative to prior year, we estimate consolidated net sales growth for the quarter would have been 3.4%.

Turning now to the results of our product categories, knee sales for the first quarter were flat, reflecting positive volume and mix of 2.2% and negative price of 2.2%.

In the quarter, our Americas segment reported a sales decrease of 2.5%, while Europe, Middle East, and Africa sales increased by 3.2%, and the Asia-Pacific region delivered 4.1% growth compared with the prior year.

During the quarter, at the American Academy of Orthopedic Surgeons annual meeting, Zimmer officially introduced Persona, The Personalized Knee System.

Surgeon response at the meeting was outstanding, and clinical feedback from the first several thousand Persona surgeries has been excellent.

The Persona system redefines personalization, offering unprecedented options for patient specificity.

To create a more natural feel and normal function for patients postoperatively, personalized implants and precision instruments ensure a better fit intraoperatively, without the compromises inherent in competitive systems.

Persona, The Personalized Knee System, is the most comprehensive and highest fidelity system ever developed, featuring anatomically accurate implant components in finer increments.

The Persona system also leverages Zimmer's proven Trabecular Metal and Vivacit-E technologies, for exceptional performance.

We look forward to further penetration of this truly differentiated system, as we continue to deploy implant and instrument sets in all geographic regions.

Also at the AAOS meeting we launched iASSIST Knee, The Personalized Guidance System, which elicited great interest from the surgeon community.

iASSIST Knee represents the next step in intelligent instruments, offering significant benefits to patients, healthcare providers, and health systems.

This innovative technology comprises disposable digital components that provide accurate intraoperative feedback and alignment validation during joint replacement, supporting more streamlined and personalized procedures.

While Persona and iASSIST represent major breakthroughs in knee replacement, we also are broadening our offerings in early intervention and minimally invasive joint preservation technologies.

In the quarter, we began to record meaningful contributions from our Gel-One Hyaluronate product, which provides our sales force with opportunities to engage a broader range of healthcare customers in the United States.

As we build upon early success with each of these new technology offerings, we expect to deliver improved sales performance in our knee franchise globally.

Hip sales decreased 2.4% in the quarter, reflecting positive volume and mix of 0.5%, and negative price of 2.9%.

Sales decreased by 1.3% in the Americas, 2.4% in Europe, Middle East, and Africa, and 4.8% in Asia-Pacific, compared with prior year.

We've established a comprehensive portfolio of offerings in our hip business, supported by our proprietary Trabecular Metal technology and Vivacit-E advanced bearing material.

Expanding our portfolio further, we recently received 510(k) clearance in the United States for the Avenir stem, a product that has enjoyed success in our European markets, and that is compatible with the increasingly popular anterior supine approach.

Going forward, we expect to leverage these broad abroad offerings to improve performance in our hip business.

Zimmer's extremities business reported sales growth of 7.0% in the quarter.

Our Trabecular Metal shoulder products continued to generate attractive sales.

At the AAOS meeting, we introduced the Trabecular Metal Total Ankle replacement system, which supports a unique lateral surgical approach.

This new system is the first ankle replacement to bring contemporary advances realized in knee and hip replacement to total ankle arthroplasty, including advanced bearing materials in anatomically-matched shapes and sizes.

In the quarter we also gained regulatory clearance for Nexel, our next-generation elbow system, which promises to strengthen Zimmer's already significant leadership position in the elbow market.

Sales in our dental business decreased 1% in the quarter.

We continued to face market softness internationally, with some stabilization in implant volumes in the United States.

Zimmer dental is receiving broad interest in the Trabecular Metal dental implant, for which positive clinical results have recently been published.

Notably in the quarter, as part of our agreement with Zfx Digital Dentistry Solutions, Zimmer opened a milling center for custom-milled components in the United States.

Our trauma business continued to deliver impressive growth in the quarter, with sales increasing 10.7%, including 17.5% growth in Europe, Middle East, and Africa.

Once again, sales of our differentiated Zimmer Natural Nail products were strong in all regions.

We also recorded increased sales of plate and screws systems, including the NCB Periprosthetic Plate.

The consistently positive performance of our trauma business reflects the benefit of programs implemented over the past several years to expand our global sales channel, and to establish an increasingly comprehensive product portfolio.

Zimmer's spine reported a sales decrease of 10%, compared to the prior-year period.

In the United States we faced some disruption in the quarter, stemming from actions taken during the fourth quarter related to our PEEK Ardis Interbody Inserter.

We do expect to resolve these issues by the second half of this year.

Meanwhile, international results improved, including stable sales in Europe and growth of 19% in Asia-Pacific.

As we move through 2013, we anticipate recent product introductions will contribute to improved performance.

Zimmer's surgical and other business delivered sales growth of 16.8% in the quarter, including impressive performances in all three geographic segments.

These results were supported by increased sales of our tourniquet and skin grafting products.

Capitalizing on the acquisition of Dornoch Medical Systems we closed in late 2012, we recorded strong sales of our Transposal Fluid Waste Management System in the quarter.

I'll turn now to a couple of comments regarding the broader market and pricing.

Although the global musculoskeletal market continued to be influenced by general economic conditions in first quarter, growth rates remain in line with our expectations.

With respect to pricing, we experienced price pressure of negative 2.0% in the first quarter, and that's a stable trend from the prior year and consistent with our guidance.

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

Jim?

Thank you, David.

I will review our first quarter performance in more detail, and then provide additional information related to our 2013 sales and earnings guidance.

Our total revenues for the first quarter were $1.139 billion, a 1% constant currency increase compared to the first quarter of 2012.

As David noted, on a like billing day basis estimated sales growth would have been an increase of 3.4%.

Net currency impact for the quarter decreased revenues by 1.2% or $13 million.

The negative currency impact for the quarter related principally to our Japanese yen-denominated revenues, and it was partially offset by positive currency impact from our euro revenues.

Our adjusted gross profit margin was 74.5% for the quarter.

The margin ratio declined 30 basis points, compared to the first quarter of 2012.

In the quarter, foreign currency hedge losses and negative price offset cost savings from our operational excellence and transformation programs.

The Company's R&D expense decreased 10.2% on a reported basis, when compared to the prior year.

As noted in the prior quarter, the decrease in R&D expense continues to reflect a natural decline related to the completion of a number of large projects, as well as the efficiency benefits of transformation initiatives implemented in this function.

Selling, general & administrative expenses were $461 million in the first quarter, and at 40.5% of sales were 10 basis points below the prior year.

In the quarter, increased selling and marketing, and distribution costs associated with the commercialization of a number of new products, as well as direct sales integration in certain key markets, were offset by savings stemming from our transformation initiatives.

Special items amounted to $33.5 million in the quarter.

Included in special items are costs related to our global restructuring and transformation initiatives, certain litigation-related charges, and integration costs connected with recent acquisitions.

Adjusted operating profit in the quarter amounted to $333.9 million.

At 29.3%, our adjusted operating profit ratio was 40 basis points higher than the prior-year first quarter.

Net interest expense for the quarter amounted to $14.5 million, which was flat compared to the prior-year quarter.

Adjusted net earnings were $240.8 million for the first quarter, an increase of 4.1% compared to the prior year.

Adjusted diluted earnings per share increased 8.5% to $1.41, on 170.7 million average outstanding diluted shares.

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

At $1.28, reported diluted earnings per share increased 9.4% over the prior-year first quarter reported EPS of $1.17.

Our adjusted effective tax rate for the quarter was 24.8%, a decrease of 210 basis points compared to prior year.

This rate reflects the full recognition of the R&D tax credit related to 2012, which was reinstated in January 2013 with the enactment of the American Taxpayers Relief Act.

Our reported effective tax rate for the quarter was 23.1%.

During the quarter we repurchased 5.4 million shares at a total purchase price of $392 million, enabling us to return increased value to stockholders.

Approximately $623 million of authorization remains under our repurchase program that runs through December 31, 2014.

The Company had approximately 169 million shares of common stock outstanding as of March 31, 2013, down from 177 million as of March 31, 2012.

Operating cash flow for the quarter amounted to $180.5 million, a decrease of 13% from $207.4 million in the first quarter of 2012.

The decrease is driven by the ongoing build-out of pipeline inventory, in support of new product introductions.

Net inventories were $1.039 billion at the end of the first quarter, an increase of $44 million from prior year-end 2012.

Adjusted inventory days on hand finished the quarter at 311 days, an increase of 10 days compared to year-end 2012.

As of the end of first quarter, net receivables increased to $913 million from $895 million in the first quarter of 2012, or 2% over prior year.

Our adjusted trade accounts receivable day sales outstanding finished the quarter at 70 days, consistent with the prior year.

Depreciation and amortization put expense for the first quarter amounted to $85.1 million.

Free cash flow in the first quarter was $105 million, $54 million lower than the first quarter of 2012.

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 necessary investments in our product pipeline inventory, and planned deployment of instruments to support the full release of Persona and other new products.

Capital expenditures for the quarter totaled $75.4 million, including $57.5 million for instruments and $17.9 million for property, plant and equipment.

I'll turn now to our guidance for 2013.

In our earnings release this morning, we reiterated that the Company expects full-year 2013 revenues to increase between 2.5% and 4.5% constant currency when compared to 2012.

We now expect foreign currency translation to decrease our reported 2013 revenues by approximately 1.5% for the full year.

Therefore, on a reported basis our revenues are projected to be between 1% and 3% above 2012 results.

Previously, the Company had estimated foreign currency translation would decrease revenues by approximately 0.5%.

For the second quarter, we expect revenues to increase between 3.5% and 4.5% constant currency, and between 2% and 3% on a reported basis when compared to the prior year.

As a result of the change in outlook for foreign currency translation, we now anticipate higher hedge gains to be recognized in 2013.

Consequently, our gross margin ratio is expected to be between 75% and 75.5% for the full year.

Our guidance for R&D, SG&A and interest expense for the full year remains unchanged.

However, as we continue to support new product launches in the second quarter, our SG&A expense for the quarter is expected to be at or near the high end of our full-year guidance range.

Moving down the income statement, we now anticipate more significant tax benefits from our manufacturing network optimization efforts.

As a result, we expect the 2013 full-year effective tax rate to be around 26%.

Full-year 2013 adjusted diluted earnings per share guidance remains within a range of $5.65 to $5.85.

As previously indicated, 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.

Taking into account the higher SG&A costs anticipated in the near-term, and other factors, second quarter adjusted diluted earnings per share are expected to be in a range of $1.40 to $1.45.

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.

Coming into 2013, Zimmer advanced a number of clinically-differentiated new offerings through regulatory clearance, and the initial stages of commercialization.

Through the first quarter, we continued to receive a steady cadence of regulatory clearances for new products and technologies, demonstrating the ongoing productivity of our R&D programs.

In late March, the output of our innovation pipeline was on display at the AAOS annual meeting, with significant new offerings in all of our established product categories, and in many new and adjacent segments.

In our knee business, we now offer an unmatched portfolio of products across the continuum of care, from early intervention and joint preservation to the world most personalized knee replacement system, complemented by the advanced intelligent instrument offering.

To improve our sales effectiveness in support of these new product introductions, we continue to make progress in our commercial and operational transformation programs.

While we make the necessary investments to support our new product introductions, these programs also are generating savings that are in line with our long-term targets.

Finally, we continue to deploy capital in a disciplined fashion, returning value to our stockholders through an increased dividend and share repurchase program, and pursuing prudent external development within the musculoskeletal space.

We're confident that the foundational work completed in the first quarter positions Zimmer for accelerated topline growth for the balance of 2013, including material contributions from our broad pipeline of new products.

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

(Operator Instructions)

Matthew Taylor, Barclays.

Guys, it's actually Dan stepping in for Matt.

Just a quick question, I appreciate the comments you made on Persona, and how that really becomes a more meaningful contributor towards the back half of the year.

Can you discuss Gel-One, which you called out as a meaningful contributor this year, Power Tools, Vivacit-E, some of those other pipeline items?

Are those also expected to ramp through the year, or is it really mainly Persona where it's more of a back half contributor?

It's a good question.

We have exciting new offerings in all of our product categories, Dan, and I think it's fair to say that the general launch plans for each of them would have them ramping as the year progresses.

So if you look at knees, obviously Persona's the largest launch in the Company's history.

We're just beginning that general release, and the Academy was really the formal initiation of that launch program.

So that will ramp as the year progresses, but we do expect it to be impactful in 2013.

Within hips, our Vivacit-E products have been out for a couple quarters, and so the penetration rate continues to increase there, and that's going to be a significant help within our hip business.

The Avenir hip stem will just get going in the second quarter, and so that will be a second half event for sure.

And then you get into extremities, the Total Ankle replacement, and now the Nexel Total Elbow, that really will continue to sequentially progress through the year within the extremities business.

And you asked about Gel-One, Gel-One really was launched in earnest at the very end of last year, and we look to make good progress; are right on track if not a bit above our plan expectations coming into the year within the first quarter, and feel very good about the execution that we're running to within that opportunity category.

And the list goes on.

And the others, there's obviously very significant opportunity within the surgical business with some of the internal development projects that have been initiated and successfully completed over the last several years, as well as the external development projects, including the Transposal Fluid Waste Management System.

So you should expect to see sequential improvement, and I would tell you that I'm very confident you're going to start to see some of the early benefits of these launches in the second quarter.

Okay.

Very helpful, guys.

One quick follow-up on R&D, it's a little bit below where we were expecting, a little below that 5% range, I appreciate your comments on -- I know you guys completed a large number of projects.

The transformation initiatives are obviously helping there.

But as far as a normalized rate going forward, is 5% kind of a good rate, or I'm just kind of curious about where you see that longer-term and normalized, I guess?

I think that is a good rate.

It could dip in some periods a bit below that.

It could accelerate a bit above that.

We'll regulate it over time.

But as far as a midpoint expectation, Dan, I think that reinvestment at that level is an appropriate way to think about it.

Thanks very much, guys.

Bob Hopkins, Bank of America.

This is Robbie in for Bob.

Can you guys hear me okay?

We can.

My first question is just on Dornoch, and really just how much capacity does Dornoch have to pick up lost business from the Neptune recall?

For example, I think when you acquired Dornoch, they were doing about $10 million in revenue, but if the opportunity was there for them to do $30 million to $40 million, do they actually have the capacity to do that?

They do.

They do, and it's been a terrific effort, I will tell you, from the point of closing that transaction to ramping up production relative to the opportunity that we have before us.

And I want to give a shout out to the Dornoch team, and the broader integration effort that's taking place within the organization, because it's been heartening to see the amount of work that people have been willing to put in to fully exploit the opportunity that we have.

We believed that this was going to be a good fit, and plug a meaningful gap and address an opportunity that we had within our surgical portfolio, and it's exceeded our expectations to date.

But we look to do big things in that category this year.

Great.

Very helpful.

And I just wanted to get your thoughts on the pending AAOS statement on the clinical benefit of hyaluronic acid, when are you expecting that letter to come out?

And do you think there's any chance that they change their mind, or what the impact of that letter could actually be on Gel-One and the overall HA market?

We aren't overly concerned about the outcome of that.

The letter, as I recall, went out for comment, and I think the comments were due in the early part of March.

And there's speculation that the guidance document, whatever form it takes, may become available sometime perhaps next month.

But I will tell you that the productivity that we're seeing within the sales force on the Gel-One product -- if you think about it, the entire trend within the field, where payers are highly interested in early interventions and solutions that might represent either a deferment of a more significant procedure, or even addressing that patient's issues to a point where a procedure, a follow-on procedure could be avoided, there's a high, high level of interest, because it's a very cost-effective way to treat patients and care for them.

So I don't think that market's going to go away, and we've received terrific feedback on the users of Gel-One to date.

So I believe that we're very well-positioned, and I think irrespective of what comes out of the guidance document, we're going to continue to be able to address a significant clinical need with the Gel-One product.

Great.

Thanks so much.

David Lewis, Morgan Stanley.

It's Steve Beuchaw here for David.

A couple of housekeeping questions for Jim, first, number one, looking at the SG&A spend in the quarter, could you help us quantify or somehow dimension how much spend there was tied to the rather significant lineup of launches?

I'm not going to get into providing very specifically what we're spending, the exact dollar amounts on the promotion activities that occurred over the course of the quarter.

I would just point out that if you look back over the past several quarters, SG&A has been on a very positive trend in terms of having us bring the ratio down through the restructuring and transformation initiatives that we have underway.

Those programs are still progressing in line with our long-term plans.

We're hitting the targeted milestones that we have outlined with each of those programs.

But we are, as we pointed out, in the short term reinvesting some of those savings in support of these new product launches.

And as I also pointed out in my comments, that's going to continue on into the second quarter, impacting -- and it will impact on the ratio again in the second quarter.

But as we progress through the balance of the year, you can expect to see us get back on a positive trend in terms of continuing to bring that ratio down as a percent of sales relative to prior periods.

Thanks, Jim.

One more housekeeping item, did you happen to call out the impact of the med-tech tax in dollar or percentage terms on the P&L?

It's not yet reflected in the P&L.

As we pointed out in fourth quarter call the tax, as it gets reported and paid, it gets capitalized in our case in inventory, initially.

It will begin to show up in the P&L in the second half of the year, and we've estimated that we would expect to see somewhere on the order of $10 million to $15 million of charges working their way through cost of goods in each of the third and fourth quarters, as we work our way through the balance of the year.

It did impact on cash flow in the quarter.

It's included in the increase that I referenced in my comments, in inventory that we saw in the first quarter.

Got it.

Very helpful.

And then one for David.

Thinking about Europe specifically, you have a competitor that is expressing to investors they have quite a bit of conviction in their ability to execute in Europe on share gains and commercial execution.

Does your plan for the balance of the year anticipate that you continue to gain share?

Can you just speak to the dynamics there, and how you expect them to play out specifically in Europe?

Thanks.

Sure.

We do clearly expect to be continuing to take share in Europe, Steve.

This is a business that's performed extremely well for us for a good number of quarters now, and they continue to outperform the market.

I think as we saw in maybe the second half of last year, and it looks like continuing into 2013, some of the developed markets are tough markets to grow in, and yet our team has been capable and delivering results that are consistent with several hundred basis points of above- market performance, I believe, within the developed markets, and then executing very competently on the plans within the emerging markets.

And so we absolutely do believe that we're going to be able to continue, even if the market is a bit challenged, at least the subset of them that are considered to be developed.

Great.

Thanks.

Very helpful, guys.

Matt Miksic, Piper Jaffray.

One question, just on APAC and Europe, particularly in what looks like a slight difference there maybe in terms and hip and knee growth.

Could you talk maybe about anything that's happening there in particular, any other -- I know they're opposite sides of the planet, but anything that's happening in those regions?

Any changes maybe you're making there to help drive growth in those regions?

And I have one follow-up.

Sure.

I think that the general program is a consistent one with the last several quarters, Matt, and again I think that we are outperforming the market in those developed countries by several hundred basis points, we believe.

Obviously, within the quarter, we had a much stronger performance in knees than we did in hips, but we have some programs underway to address that.

We have a good set of new product introductions that are going to assist in our hip performance on a global basis, too, and I referenced a few of those in the prepared remarks.

So we're going to continue to leverage this team, and I believe we're going to continue to see terrific results.

I do think, Matt, that the hip market was a point or two slower than the knee market in Europe, at least in those developed countries, and so that explains part of the disparity of performance relative to our own results as well.

Okay.

That's very helpful.

And maybe on a similar line, appreciate the color on price mix for hips and knees, but also noticing a little bit of a difference there in your [back] -- mix is not usually a big part of the story in Europe, but the difference seems to be predominantly in mix.

Could you maybe talk a little bit about the relative difference in maybe trying -- what you're seeing in knees and more flattish mix in hips?

Yes.

I think that there's a bit of a difference at a given point in time, and I think if you look at where we're doing well and where we have opportunities for improvement within the hip franchise, some of the recent launches in the areas that are most supportive of revisions, and I think that some of the competitors have had opportunities to accelerate the growth of their revision business, probably in a way that they didn't initially plan for, but we've got a great pipeline.

We're going to be able to exploit what we currently have, and I'm excited about the things that are coming in the next handful of quarters, Matt, and I think that will improve both our opportunity for unit, and particularly in the premium side of the hip business with revisions, and that obviously translates into mix opportunities at the same time.

Terrific.

Thanks.

Larry Biegelsen, Wells Fargo.

It's actually Craig Bijou on for Larry.

Good morning.

Just a quick question on the EPS guidance.

It looks like there are a couple -- the gross margin improvement, tax rate improvement, so there's a couple -- with the gross margin improvement, tax rate improvement -- so there's a couple benefits that you're going to have for 2013, for the full year, and I just wanted to see what -- if there were any takes, in terms of possibly raising the guidance -- or, sorry, negative impacts?

Sure.

Craig, the most significant negative impact would be the devaluation of the Japanese yen, which we've seen decline in value over the past six months by about -- somewhere in the neighborhood of 20% to 30%.

We have a large business in Japan, it represents about 8% of our total consolidated revenues.

So while we are hedged, and that's what's leading us to lift the guidance for the gross margin ratio for the year, in absolute terms we do lose some gross margin out of that business.

We're able to offset that to some degree with hedges, but to the extent we are not fully hedged, there is some loss there.

So we've taken that into account, obviously, together with the lower effective tax rate, again the change in outlook with respect to the hedge gains, in reiterating the guidance that we provided for the full year.

So all of that's sort of factored into the guidance that we've provided.

Okay.

And then one follow-up on Persona.

I guess, what can you share about the metrics you're tracking, in terms of what you deem to be successful adoption?

So is it something like surgeon conversion, and would you ever share that with us?

Sure.

That's one of the key metrics.

And no, we're not likely to share it with you, Craig (laughter).

But we are rolling that -- look, this is a very large multi-general -- multi-generational launch, and it is formally initiated, so it includes a lot of instrument sets going out.

And you can see that reflected even in our cash flow statement, with the instrument spend within the quarter and the investments that we're making there.

So it's the biggest, fastest launch.

But you'll recall that last year we were slow-walking this one, to be absolutely sure that we had everything right, and I think that the methodical approach that we took in 2012 set us up very well for executing the plan that we have for 2013.

So metrics will include, obviously, as a threshold matter, getting the instrument sets out and deployed, the allocation of those sets globally to opportunities that are consistent with our strategic priorities as it relates to the launch.

And one of the areas that you mentioned, that's obviously very important to us, is to get those instrument sets into the hands of competitive surgeons, and pick up competitive units by virtue of the deployment of those instruments.

And so that is an area among several where there's a lot of intense target qualification, and literally day-to-day and hour-to-hour attention being given to that element to the Persona launch.

And what I would tell you is the interest level is very high, including among competitive surgeons, and the feedback that we've received to date on the clinical outcomes from these cases has been nothing short of outstanding.

So I'm very optimistic that this is going to be a successful launch, and set us up not only to have good quarters as 2013 progresses, but good years ahead within our primary knee franchise.

Okay.

Thanks, guys.

Mike Weinstein, JPMorgan.

It's Kim in for Mike this morning.

First question on -- is on Gel-One.

So you made some comments earlier in the call on Gel-One progressing ahead of expectations for you guys here in the quarter.

Can you talk about why that is, what's been going better with the launch, and maybe some of the progress that you're making with formulary status?

Sure.

We're making progress with the specialty Pharma side, and establishing the appropriate hub relationships, and I think that we have a good plan, and we continue to execute on all the infrastructure that needs to be established to fully exploit the opportunity.

But in addition to that, I would tell you that I think that the reason that we're so confident that we're going to be able to do at or better than plan -- and this is our plan as opposed to some of the speculation that the analysts have put out as to what 2013 might look like in this category -- but we're so optimistic about our performance because, fundamentally, I think that the engagement level and the oversight of the sales of the product is high and excellent, respectively.

We're doing all the right things, gaining a lot of momentum and engagement with the sales force.

We knew that in the first phase of the launch, it was going to be all about leveraging our existing relationships, and that starts with us ensuring that our sales force, those that possess those relationships are engaged and making it a priority to ask for this business, and to become more familiar with the sale, which is a little bit different sale than what they have grown up doing on the implant side.

So all the indications are very positive, and it's one of a handful of top, top priority products for us this year, because obviously it's a big opportunity for topline acceleration, as it's a new product category, and so there is no revenue cannibalization, and fortunately, we're in a position where we have several others that fit that same definition.

Okay.

Great.

A follow-up, maybe for Jim, on the second quarter guidance, so I think the guide looks like it's come in maybe a hair below the street on the top line, and obviously some of that is currency, but certainly below on the bottom line.

Can you just remind us, is there any delta in selling days in the second quarter?

And maybe it would be helpful, the gross margin might be the swing factor there, how should we think about the gross margin sequentially from 1Q to 2Q?

Sure.

So, first of all, on the billing days, as we said coming into the year, I think everybody understands we had two fewer billing days in the quarter.

We get back those two days, one each, in each of the third -- or second and third quarters.

I think what I would focus on, I guess, with respect to the second quarter, is the -- just the stage of where we are at with the -- all of the new product launches.

David's talked about the fact that there are new launches occurring across nearly all of our product franchises, and all of those launches require some level of support in terms of promotion activities, training activities, whether it's sales force training or surgeon training.

So we're clearly going to be fully invested in supporting those launches, to take full advantage of the opportunities we feel we have to accelerate our topline growth.

And then the other thing I would point out, it's probably helpful to go back and look at the SG&A ratios that we report out on a quarterly basis.

I think if you do that, you would see that we typically gain much more leverage in the back half of the year, typically in the fourth quarter, just as a consequence of the seasonality of our revenues, and the way -- and the opportunities that we have to leverage our fixed costs in the fourth quarter relative to the earlier quarters in the year.

And I don't know that that's really fully appreciated in analyst models as I look at them, but it's really no more than that, that leads us to the guidance that we provided for the second quarter.

Okay.

Great.

Thank you.

Derrick Sung, Sanford Bernstein.

First, a quick clarification on Gel-One.

You mentioned Gel-One in -- at the same time you were talking about knee sales, and I wanted to clarify, are Gel-One sales now being logged in your knee sales category, or are they still in the other?

And if you could break out how significant the contribution to that category from Gel-One was?

Derek, as a matter of fact, this is Jim, if you look at the sales table in the release, you'd see a footnote at the bottom of the table that does indicate that certain product sales have been reclassified from surgical and other categories to knees.

And now this is in recognition of the fact that we have a growing portfolio of early intervention devices that are generally used in treating pain or osteoarthritis of the knee joint, including Gel-One, DeNovo, but as well the DeNovo NT Natural Tissue Graft, and our Chondrofix Osteochondral Allograft.

Recognize that these products are all sold through our global reconstructive sales channels, and are expected to become an increasingly important subcategory within our knee franchise, especially in the way in which they can be co-marketed with our partial knee replacement devices, like the patellofemoral joint and the Zimmer Uni Knee.

We have -- to help you with your sales modern -- models, rather, we will be posting a schedule on the Investor page of our Zimmer.com website showing the adjusted product category sales by quarter for the prioryear.

Those adjustments, in response to your last question, by quarter are small, as aggregate sales of the products were less than 1% of our consolidated sales in 2012, but again we anticipate significant growth in this subcategory of early intervention devices going forward.

Okay.

Thanks.

That's helpful.

Then just a quick follow-up on Dornoch, could you give us a sense for the contribution that Dornoch made to your other category this year as well -- or this quarter as well?

It was relatively significant within the surgical line, but I would tell you, probably round numbers, something in the range of half the growth, when you take that overall growth rate.

Great.

That's very helpful.

Turning to Persona, so one of the consistent messages that we've gotten back from AAOS, as we surveyed surgeons on their feedback to Persona, there's generally strong enthusiasm.

Many surgeons were very interested in using the product, but we did hear quite a few of them say that they weren't sure if their hospital would be willing to pay a premium price for that product.

So I was wondering if you could maybe give us some color on how you're approaching those discussions with the hospitals, how you're approaching that pushback, and maybe what you're seeing there?

That would be helpful.

Sure, and what you're describing is not a different dynamic than any other product category or launch that takes place within the industry, and I think we're all pretty familiar with the pricing environment that we're operating in, and I think across the various competitors, you get pretty consistent messaging as to what that pricing environment looks like, but I will tell you that one of the reasons that we're so enthusiastic about the opportunity that we have with Persona is that we do believe that we've hit the mark with respect to innovation, in a way that is going to resonate with various stakeholders that are going to be involved in the decision process.

So we've spoken a lot about why we believe that this is going to prove to be a more personalized solution, and improve the fit, feel and function from the patient's perspective.

Your question specifically as to how you sell-through the surgeons and the hospital administrators, and other decision-makers in that process, includes the fact that we've developed instrumentation, and intelligent instrumentation, that we believe can not only deliver a terrific result for the patient, but can make economic sense to the hospital administrators, the kitting of the instruments, and enhance the opportunity to make the procedure go very smoothly, less instrument sets, shorter OR times and improved turns, lower central sterilization costs with the instrument configuration, preoperative planning systems that will enhance the productivity of the OR's and the quality of the outcomes, as well.

And then the advanced technologies, obviously the patient's going to care a lot about a premium technology like Vivacit-E, with 90% wear reduction tests that we're going to be rolling out and publishing.

But the surgeons and the hospital administrators are going to be able to focus and find a lot of value from elements of this system that include the fact that it's going to be the first fully cementless construct featuring Trabecular Metal technology on the femur, tibia and patella.

And you can do some math around that in the OR, for set time for cement, and how much that adds to the procedure.

Again on the patient side, that's increased tourniquet time, et cetera.

So we just feel like this has been a huge effort, but we've been able to pull together innovations not only on the implants but the instruments, the configuration of those instruments, preoperative planning systems, intraoperative technologies that include eLIBRA, iASSIST, PSI, and when you integrate all of those elements together there's a value proposition for patients, surgeons, hospital administrators alike.

All right.

Thank you very much.

That's clear.

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking my question, and for that explanation on Persona as it relates to price.

I do have a question in extremities.

I listened to you talk about a Total Ankle as new as well as a new elbow; can you please remind us of where you are on the shoulder business?

Yes.

We do well in the shoulder business.

Again, we've had tens of quarters of double-digit growth with our Trabecular Metal product offering on the shoulder side.

So we continue to innovate in that area, but we have a significant share position at this point in time.

And frankly, Joanne, at this point, with early launches in the ankle, and relative market size in elbows, even though we have significant leadership position in elbows, our extremity business to date is all shoulders, effectively.

Okay.

And then on the sales force side, can you give us an idea how you're adjusting those headcount numbers as you enter all of these new product launches?

Yes.

We obviously are expanding the sales force in a manner that's consistent with the focused products, and so in some instances that means more feet on the street as general sales reps.

In other instances, it means enhancing the general reps' capabilities with field specialists, and so it's a combination of the two, and I would tell you that it's probably a combination of those two on a global basis.

But most significant emphasis placed on more feet on the street within the United States market, because there are -- more of those product opportunities reside, at least initially, here.

Okay.

Terrific.

Thank you very much.

Dave Turkaly, JMP Securities.

Just to push it a little bit on the Persona metrics, but given your size in the knee market today, and all the new products you have from instrumentation and kitting, and the features you spoke about; three quarters left in the year, would it be fair to say that you expect to lead the knee market in the Americas before this year is out, i.e.

take share?

We're going to have you present to our sales force at our national sales meeting, Dave (laughter).

No, that is our goal.

Look, we're the global leader in knees, and we've been at it for a good number of years with respect to these various innovation efforts that have matured into the Persona system, as well as all of the related and complementary surgical instruments and intelligent instrument offerings.

And so when you pull that together, you take the continuum of care with early interventions, the patellofemoral joint, the Zimmer ZUK on the Uni side with excellent clinical results, and leveraging off of our terrific legacy of NexGen N-K II systems, and advancing into the next generation of solutions with the Persona offering, if we can't get this one right, shame on us, but we will.

I appreciate that.

I'll tell my agent to expect a call.

And just as a quick follow-up on Gel-One, obviously non-ortho guys use these products.

I wonder if you have any evidence that -- where you stand today that some of your core non -- just your hip and knee franchise guys have utilized the product, or if that share is a little stickier to get into the non-ortho docs?

Thanks.

Yes, I think that our initial push date is within the ortho space, because that's where we have the relationships.

Now, we have phased plans as to how we're going to get after bigger and bigger pieces of this market, but the instant offense for us is clearly on the ortho side.

And then with the establishment of the specialty Pharma relationships, the pull-through scripts that flow, but again, fundamentally we're leveraging our relationships with the orthopedic surgeons.

Thank you.

Richard Newitter, Leerink Swann.

Just two quick ones.

First on extremities, I appreciate that most of your extremities right now is focused on the upper segments within the body, but maybe -- some of your competitors are seeing very strong growth in foot and ankle.

I understand that your Total Ankle product is going to probably catapult you more significantly into that arena.

Do you have any other internal or external plans for some of the kind of other non-Total Ankle replacement portions of that market that seem to be growing?

And where do you think you are on the -- or how quickly do you think that Total Ankle replacement can begin to have foot and ankle impact?

Good questions.

It is a space, Richard, that we're very interested in taking more advantage of.

Obviously a fast-growing space, you referenced the Trabecular Metal Total Ankle Replacement System, and that really is our entree into that space.

But just to answer your general question, yes, we do have both internal and are interested in external development opportunities to expand our offering, and make sure that we're working our way promptly towards a comprehensive offering in that anatomical space.

Okay.

That's helpful.

Thank you.

And then maybe a quick one on spine, can you -- you said you had a bunch of new products anticipated.

I wasn't sure if that commentary was directed for Asia-Pacific specifically, or the US as well, globally?

Can you comment on what some of those new product areas might be?

And then, secondly, on spine, it looks like your pricing actually improved a little bit sequentially.

Any changes in the reimbursement landscape or price negotiation conversations?

Sure.

They did improve, as you can see, sequentially, and it was fundamentally an anniversarying out of some of the more significant price-downs that we experienced in prior periods.

And so in our case, a bit of stabilization on price, and certainly want to work towards optimizing the chance that we make that a trend.

But we're a small player within that space, so it's tough for me to give you much value by the way of extrapolating our experience into a broader market environment.

It certainly doesn't feel to us as though it's getting worse relative to what it was, and I do think it's an early sign of stabilization within our business on the price front.

With respect to product development, we are very focused on innovating within the core fusion space, and so the products that we have developed and begun to launch are focused in that area.

We're doing very well with the Trabecular Metal interbodies.

Obviously, some of what you saw in the US business that I think would have made progress otherwise in the quarter, based on headwind, because of the PEEK Inserter, that we had to -- field action with respect to, but as I said, we're well on our way to getting a 510(k) trial and getting that inserter, and a consequence the interbody back into our bag.

And moving forward with that, I believe that will happen before the year is out, on the clearance side.

But in the meantime we're executing better OUS, and I think that the spine team has done a good job of developing cost-effective solutions for some of those OUS markets in the core pedicle screw side, those products are getting launched.

I think that we're going to see productivity from those launches.

And then back in the US, we've launched a couple of products that are important relative to the space, one of which is maybe a bit more niche, but an important one, and a nice innovation.

And then are just beginning to launch what I think will become meaningful within the year, and that's the Apex System, that is more geared towards deformity and complex spine cases, and that's a subset of the market that is not insignificant, that historically we didn't have much of an offering to be able to compete effectively within.

And so I'm quite confident that we're going to see sequential improvement within our spine business, as this year progresses.

Great.

And if I could, just one last one, on my first question on the foot and ankle space, can you maybe tell me, what areas of that market do you think are most important as you look to broaden out your scale?

Is it on the distribution side, or is there a specific product area that you'd like to have?

Well, I think for us it starts with the products.

Obviously, you're familiar with the space, and so the call point becomes a bit different, but none of the distribution channel issues are paramount until you've got the products to sell, so I believe that the TM Ankle is going to be a difference maker.

I think we're going to be able to further leverage TM into that space.

And then obviously we have much of the capabilities necessary to do anything by the way of plating solutions, and innovate within that space, because it's very transferable from our other businesses, including our trauma business.

So we like it, we're going to grow it, we'll compete very effectively within that space going forward.

And as we have with other business segments, we're going to be hopefully smart and methodical about the pace of investment in various areas, and try to avoid the progress being serial across product development and distribution channel expansion, but you have to have the products before the sales force can become a productive investment for you, so I would put it in that order.

Thank you very much.

Jeff Johnson, Robert Baird.

David, just wanted to start with you on Gel-One, and I think we're all trying to feel out here, you know, can this be a $35 million, $70 million, $100 million product line this year?

But as I think about the fact that you touch about 25% of the ortho -- of the knee guys out there in the US, would it allow you -- the formularies you're getting on some of the commercial payer formularies, some of the work you're doing in the specialty Pharma, getting on those panels, would it be possible for you to touch, or for one-third to maybe one-half of your knee surgeons to have access to Gel-One this year?

Yes, I just -- this is the first full year of the launch, Jeff, and I have no doubt that this is going to become a significant product category.

First of all, it's a great product, and the clinical results and the feedback that we're receiving is extremely positive.

So there's some infrastructure to continue to build out on the sales side, and some of which you were just referencing.

We are doing exactly what we should be doing in that regard.

I think that expectations for this product -- I would tell you that I look at it and say, if you do the math on the subset of the market that we're going to have immediate access to, again, focusing on leveraging our orthopedic surgeon relationships, this can be tens of millions of dollars in 2013, but I think you start working your way up towards something like $50 million, and that's just -- that's a big number to come out of the blocks, and if you look at any of the competitors within the space, and the pace of penetration in the first full year, that would be, I believe, far in excess.

Now, we're going to keep pushing the opportunity, but just to manage your expectations a bit, I'd frame it out to you that way.

Okay.

That's helpful.

We've been saying $30 million to $35 million, so I think it sounds like that fits kind of with where your expectations might be, anyway.

Yes.

Jim, just one last question then for you, and obviously your big competitor that reported last night has a slightly different hedging strategy than you do, but they pointed to the low-end of their guidance range, just given some of the end-movements and what have you.

Did you make any comments at all about the range of your guidance, given some of the foreign currency headwinds you'll be dealing with this year?

No, very comfortable with the guidance, you know, we provided coming into the year, and so we've taken into account the effects of the yen devaluation, in terms of what that will have on our business for the full year.

We've -- as I said earlier on the call, going to have some opportunities to offset -- to the extent we're not fully hedged, the hedge has certainly helped us recover some of the lost top line and the impact that has on margin, but to the extent we're not fully hedged we have other opportunities.

I mentioned the fact that we're going to have -- are now expecting to have a lower effective tax rate for the full year, to offset the impact of the yen devaluation.

So very comfortable with the range we provided coming into the year, and obviously reiterated that in the release and on the call here this morning.

All right.

Great.

Thanks, guys.

Marley, we have time for one more question.

Bill Plovanic, Canaccord.

Last but not least, hopefully.

Just two questions, really, one -- and they're both SG&A-related.

Just to understand, as you talked about leverage through the year, I would take it that's predicated on a revenue increase and not a spending decrease?

And then the second question is, as you look at the program you're going through, in terms of cost reduction, is there a tipping point or a big step up at any point, because you've eliminated some prior SKUs, or what have you, that helps drive some further benefits to the operating line?

Well, let me just start out by reiterating what we said coming into the year about the restructuring and transformation initiatives, in terms of how they're going to impact on the current year.

We expect to generate full-year savings out of the actions that are going to be taken this year of about $80 million.

$30 million to $40 million of that will be realized within the year, more of that perhaps in the second half of the year, as we work our way through the year and those actions are taken.

So it is the case that there are cost reductions that are occurring, as we work our way through the balance of the year.

And that, together with the leverage we're going to be able to gain from an accelerated topline, are what will drive leverage we're looking to achieve for the full year in SG&A.

So it's a combination really of realizing that $30 million to $40 million of savings that we talked about coming into the year, in terms of how that's paced out over the course of the year, together with the leverage, as I said, from an accelerated topline, as we get into the balance of 2013.

So that, again, gets us to that 39.5% to 40% expectation that we have for the full year, Bill.

Okay.

But -- so just for clarity, though, excluding the savings from the previous programs, it's kind of like this bump up in distribution investments, what have you, it is predicated on that revenue ramp, excluding those savings, to get to the leverage we're talking about?

Yes.

I will say -- there's no doubt that the revenue ramp is going to provide a meaningful -- lead to a meaningful opportunity to drive leverage in SG&A in the back half of the year.

All right.

That's all I had.

Thanks for taking my questions.

Thanks, Bill.

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 our second quarter conference call, which is scheduled for 8 AM on July 25.

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

Thank you very much, and thank you again for participating in today's conference call.

You may now disconnect.