Zimmer Biomet Holdings Inc (ZBH) 2014 Q4 法說會逐字稿

Good morning.

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

Mr. Marshall, you may begin your call.

Thank you, Julie.

Good morning and welcome to Zimmer's fourth-quarter 2014 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.

Thank you, Bob.

Good morning, everyone, and welcome to our earnings call for the fourth quarter of 2014.

This morning, I'll review our fourth-quarter financial results, providing commentary on 2014, and highlights from our performance.

Jim will then provide additional financial details.

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

In the fourth quarter and throughout 2014, Zimmer delivered solid sales growth across several product categories, as well as in the Europe, Middle East, and Africa region, and the Asia-Pacific region.

Consolidated net sales for the quarter were $1.22 billion, an increase of 2.4%, and our earnings per share were $1.71, an increase of 3% over the prior-year period.

Full-year sales for 2014 were $4.67 billion, an increase of 2.4% over 2013, and our earnings per share were $6.06, an increase of 5.4%.

Turning to each of our geographic regions, in the fourth quarter, our Europe, Middle East, and Africa business increased sales by 6.9% over the prior year and our Asia-Pacific business delivered impressive 8.4% growth.

Our sales decreased by 1.6% in the Americas on challenging comparisons in the prior-year period, owed largely to the exceptional market growth rate experienced in US procedural volumes in 2013, attributable to factors related to the implementation of the Affordable Care Act.

Before reviewing the performances of each of our product categories, I'd like to first comment on market conditions.

We saw global musculoskeletal markets demonstrate stability in the fourth quarter, despite softened macroeconomic conditions in certain geographies, supporting our confidence for 2015 and beyond.

While increased procedural demand in the fourth quarter of 2013 resulted in challenging sales comparisons in the Americas, we believe that the steady performance of this market over the last two years signals a stable demand for musculoskeletal solutions, including premium technologies.

With respect to pricing, we experienced price pressure of negative 2.4%, both in the quarter and for the full year, consistent with our expectations.

Against this backdrop, Zimmer's market-leading knee business increased sales by 2.5% in the fourth quarter, an overall steady performance reflecting positive volume and mix of 5.6% and negative price of 3.1%.

The Europe, Middle East, and Africa region delivered 6.1% growth; the Asia-Pacific region increased sales by 6.2%; and Americas sales were flat against prior-year growth of 10.7%.

Throughout the fourth quarter, focused execution expanded the ongoing growth of our knee business in key overseas geographies, while supporting a stable domestic performance.

We continued to accelerate global sales for Persona, The Personalized Knee System, our flagship total knee, which has built on the clinical legacy of our proven next-gen knee replacement system, with design innovations to offer enhanced fit, feel, and function.

Persona was also designated, or designed in concert with our next-generation suite of intelligent surgical instrument systems, including Patient Specific Instruments, the iASSIST personalized guidance system, and the eLIBRA soft tissue balancing system.

Our fourth-quarter growth in knees was also supported by the ongoing commercial expansion of our early intervention and joint preservation solutions, including our Gel-One single-injection Hyaluronate treatment and the Zimmer Knee Creation Subchondroplasty joint preservation procedure.

Turning to hips, in the fourth quarter, we increased sales by 0.6%, reflecting positive volume and mix of 3.2% and negative price of 2.6%.

Sales increased by 3.7% in the Europe, Middle East, and Africa region; increased by 6.2% in the Asia-Pacific region; and decreased by 4% in the Americas.

As in previous quarters, our performance was led by growing sales for premium solutions, such as the Continuum acetabular system; BIOLOX delta heads; and product offerings leveraging Vivacit-E, our advanced vitamin E-infused bearing material.

In 2014, our hip business also made important progress with respect to innovations that we believe offer compelling value to the evolving healthcare market.

By way of example, in 2014, Vivacit-E hip liners completed more than 90 million cycles of laboratory wear testing without oxidation or strength reduction, making Vivacit-E the only hip replacement technology laboratory-tested to mimic the number of walking steps and long-term in vivo environment a patient will typically experience during their lifetime following hip replacement.

Results such as these have supported Vivacit-E's commercial growth, as well as its acceptance in the clinical and payer communities, reinforcing our confidence in this platform technology.

In November, our innovative Synovasure molecular diagnostic test became eligible for sale in several European countries.

Synovasure is the first test of its kind specifically designed for the diagnosis of periprosthetic joint infection and offers clinicians rapid and accurate results.

Looking forward, we'll focus on continuing to strengthen our global position in hips by leveraging innovative technologies such as these, which further enhance the value of our personalized solutions.

Our extremities business delivered 6.2% growth in the fourth quarter, highlighted by impressive double-digit performances overseas.

Our Europe, Middle East, and Africa business reported 19.4% growth over the prior-year period; the Asia-Pacific region delivered a 20.5% sales increase; and our Americas business grew by 1.4%.

Our outstanding results overseas were again driven by our highly successful shoulder replacement portfolio, led by the Trabecular Metal reverse shoulder.

The Nexel Total Elbow and Trabecular Metal Total Ankle also delivered promising growth in 2014 and we plan to continue building on those performances.

Turning to our trauma business, sales increased by 3.7% in the fourth quarter, with our Europe, Middle East, and Africa sales increasing by an impressive 11.7%; the Asia-Pacific region delivering 5.7% revenue growth; and our Americas segment reporting a sales decrease of 1.7%.

We continue to position a comprehensive range of trauma solutions, which were led in the fourth quarter by strong sales for the Zimmer Natural Nail family and NCB Periprosthetic Plating System.

The recently released Distal Radius Plating System also delivered promising early results.

In 2015 and beyond, we plan to focus our US execution for improved growth in trauma, while continuing to expand our footholds in key global markets.

Zimmer's spine business delivered impressive 9.1% growth in the fourth quarter, a performance which was accelerated by a cadence of innovative new product launches throughout 2014.

In the fourth quarter, the Virage OCT Spinal Fixation System and the Optio-C Anterior Cervical System continued to expand our customer base in the global spine market, while driving volume and mix growth.

We also achieved strong sales with our expanded biologics portfolio, including new additions to our line of Puros Demineralized Bone Matrix grafting products, as well as implant system leveraging Trabecular Metal technology.

Looking forward, we plan to continue launching innovative portfolio additions to further enhance the value we offer to spine surgeons and their patients.

Dental sales grew by 9.3% over the fourth quarter of last year.

Our legacy portfolio led steady sales in the Americas, while European sales were aided by our value-based offerings designed in the P-I Branemark philosophy.

Zimmer dental also continued to benefit from the stable performance of our market-leading regenerative portfolio, premium Trabecular Metal dental implants and custom milled Zfx CAD/CAM digital dentistry solutions.

Sales for Zimmer's surgical and other category decreased by 1.9% in the quarter.

We continued to face challenging domestic sales comparisons for this business, stemming from the outstanding capital sales growth of our Transposal fluid waste management system in 2013.

Nevertheless, we achieved steady revenue growth across several categories of our differentiated surgical portfolio in the quarter.

There were strong sales of our surgical blades and power tools, including standout performances in several key European markets.

The A.T.S.

family of automated tourniquet systems also continued to deliver promising growth.

As the impact of prior-year sales comparisons taper in early 2015, our global sales force will focus on driving a steadily improving top line in the year ahead.

Looking forward, we intend to sustain Zimmer's focus on growth in 2015, as we embark upon a new chapter of our Company's history by combining with Biomet.

This landmark transaction, which we continue to expect to close later this quarter, marks an unprecedented expansion of our global Organization.

Our combined Company, to be named Zimmer Biomet, will possess a more comprehensive and diversified musculoskeletal portfolio for our customers, including attractive cross-selling opportunities.

Moreover, this merger will significantly enhance our innovation pipeline, allowing us to more rapidly and cost effectively bring innovative new clinical solutions and integrated services to market.

There are also a number of compelling operational synergies that will support our ability to execute effectively on a combined basis.

Our joint planning teams have collaborated diligently over the last nine months to map out the seamless integration of our two organizations.

We look forward to closing this transaction so that we may begin to realize the significant promise of this historic merger.

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

Jim?

Thank you, David.

I will review our fourth-quarter performance in more detail and then provide additional information related to our first-quarter 2015 sales and earnings guidance for Zimmer on a standalone basis.

Our total revenues for the fourth quarter were $1.223 billion, a 2.4% constant currency increase compared to the fourth quarter of 2013.

Net currency impact for the quarter decreased revenues by 3.8%, or $47.5 million.

The negative currency impact for the quarter related to the recent strengthening of the US dollar against many international currencies, which I will address in more detail in my guidance comments.

Our adjusted gross profit margin was 74.4% for the quarter, an 80 basis point improvement over the fourth quarter of 2013.

During the fourth quarter, we anniversaried through charges related to the Medical Device Excise Tax.

Together with lower inventory obsolescence and gains from our currency hedges, these improvements were modestly offset by manufacturing variances and negative price.

The Company's R&D expense was flat when compared to the prior year.

Zimmer remains committed to producing a pipeline of new and innovative products that will meet the needs of stakeholders in the evolving healthcare environment and help drive growth in future operating periods.

Selling, general, and administrative expenses were $459 million in the fourth quarter, and at 37.5% of sales, were 90 basis points below the prior year.

SG&A as a percentage of sales was 39% for the full year, an improvement of 70 basis points.

In the quarter, and for the full year, Zimmer continued to achieve process and operational efficiencies, which have created opportunities to both invest in future growth, as well as expand margins for the benefit of stockholders.

In the quarter, the Company recorded pre-tax charges of $197.9 million, and special items pertaining to global restructuring, quality, and operational excellence initiatives, certain litigation, and recent acquisitions.

Adjusted fourth-quarter 2014 figures in the earnings release exclude the impact of these charges, which include $59.5 million related to quality and operational excellence initiatives in manufacturing, logistics and sales; a $70 million provision pertaining to a patent infringement suit; $12 million connected with certain other litigation matters; and $56.4 million in integration and other costs.

Adjusted operating profit in the quarter amounted to $404.6 million.

At 33.1%, our adjusted operating profit ratio was 170 basis points higher than the prior-year fourth quarter.

Net interest expense for the quarter amounted to $12.5 million, which was flat when compared to the prior-year quarter.

Adjusted net earnings were $295.6 million for the fourth quarter, an increase of 2.4% compared to the prior year.

Adjusted diluted earnings per share increased 3% to $1.71, on 172.4 million average outstanding diluted shares.

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

At $0.91, reported diluted earnings per share decreased 33% from the prior-year fourth-quarter reported EPS of $1.36.

Our adjusted effective tax rate for the quarter was 24.6%, lower than prior year, but in line with expectations when we consider the global mix of our earnings and profits.

Our reported effective tax rate for the quarter was 19.4%, as the majority of restructuring and other special items charges are incurred in higher tax jurisdictions.

The Company had approximately 169.7 million shares of common stock outstanding as of December 31, 2014, flat from 169.8 million as of December 31, 2013.

Operating cash flow for the quarter amounted to $354.2 million, an increase of 18% over $300.2 million in the fourth quarter of 2013.

The increase is driven primarily by improved collections of accounts receivable in certain European countries, and the collection of an insurance recovery pertaining to prior-period product liability claims.

Net inventories were $1.169 billion at the end of the fourth quarter, a decrease of $8.5 million from September 30, 2014.

Adjusted inventory days on hand finished the quarter at 337 days, an increase of 52 days as compared to the prior-year quarter.

As of the end of the fourth quarter, net receivables decreased to $912 million from $937 million in the fourth quarter of 2013, or 2.6% from the prior year.

Our adjusted trade accounts receivable days sales outstanding finished the quarter at 64 days, a decrease of one day when compared with the prior year.

Depreciation and amortization expense for the fourth quarter amounted to $92.6 million.

Free cash flow in the fourth quarter was $270.5 million, $20 million higher than the fourth quarter of 2013.

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

During the full year, the primary drivers for the increase in free cash flow include the insurance recovery referenced in my earlier comments; strong cash collections in our Europe, Middle East, and Africa operating segment; and lower litigation-related payments, offset in part by the ongoing investment in capacity-related projects, as well as payments relating to certain tax positions.

Capital expenditures for the quarter totaled $83.7 million, including $34.5 million for instruments and $49.2 million for property, plant, and equipment.

I'd like to turn now to our guidance.

I will provide first-quarter guidance for Zimmer on a standalone basis.

Additionally, I will provide an update on our expectations for accretion and adjusted cash earnings per share for the first full year following the expected closing of the Biomet transaction.

We will provide full-year 2015 guidance for the combined Company after that transaction has been concluded.

Moving on to our market assumptions for 2015, we believe that full-year knee and hip procedures will grow in the low- to mid-single-digits.

We expect global market conditions will remain relatively stable in 2015, when compared to the full year 2014.

In our earnings release this morning, we announced that the Company expects first-quarter 2015 revenues to increase between 1.5% and 2.5% on a constant currency and billing day basis, when compared to the first quarter 2014.

At this time, assuming currency rates remain where they have been during the first month of this quarter, we anticipate foreign currency translation will decrease our reported first-quarter revenues by an estimated 6%.

Additionally, due to a change in our interim quarter-end closing convention for certain international reporting units, which is described in our periodic filing, the first quarter will reflect up to five additional billing days for those units, which has the effect of adding an estimated 3% to our consolidated revenues for the quarter.

Therefore, on a constant currency basis, with the additional billing days, we expect first-quarter revenues to grow between 4.5% and 5.5%.

On a reported basis, taking into account the effect of foreign currency translation, our revenues are projected to be between 1.5% and 0.5% below the prior year.

I'd like to make just a few additional remarks regarding the significant currency headwind we are facing as a result of recent moves in currency rates in relation to the US dollar.

As we described in detail in our periodic filings, we manage currency risk with derivative financial instruments, which has the effect of reducing potential volatility in the dollar value of cash flows.

Over time, our hedging program, which has been in place since our spin-off in 2001, has been refined and enhanced to include cost averaging, extended durations, and emerging market currencies, and from a management perspective, has been effective in reducing short-term volatility in cash flows.

While our program is effective in reducing volatility in cash flow, anticipated gains on hedge contracts to be released to earnings over the course of 2015 will also offset in part the impact of recent currency moves on earnings.

As a consequence, management expects to maintain necessary ongoing strategic investments of product development and sales and marketing.

The anticipated reduction in volatility in the short term that would otherwise have impacted our expectations for 2015 will give us time to focus on other operating levers that will drive sustained, long-term growth in the top and bottom line.

Returning to our guidance, specific to the first quarter, we expect pricing to be between minus 2% and minus 3% when compared with the first quarter of 2014.

As you move down the income statement, assuming currency rates remain near recent levels, we expect our gross margin ratio to be between 73.5% and 74%.

This takes into account anticipated gains on foreign currency hedges, principally from the euro and Japanese yen.

We expect R&D expense for the quarter to be approximately 4% to 4.5% of sales.

SG&A is expected to be between 38.5% and 39% of sales for the quarter, as we continue to realize efficiencies from our global operational excellence initiatives that further leverage revenue growth.

Assuming variable rates remain near recent levels, we expect interest and other expense of around $14 million, similar to the net expense realized during each quarter of 2014.

We anticipate an adjusted effective tax rate to be between 26% and 26.5%, which is above our final full-year rate for 2014.

The increase is mainly attributable to the anticipated change in the mix of our global earnings and profits.

We would anticipate the diluted weighted average shares outstanding for the first quarter to be between 173 million and 173.5 million shares.

You will note that our share repurchase program remains on hold pending the Biomet merger.

In preparation for our pending merger with Biomet, we are moving to an adjusted cash earnings per share metric.

We will add back amortization to our existing adjusted EPS in the first quarter of 2015.

We expect amortization during this first quarter to be $24 million, or approximately $0.10 per share after tax.

Therefore, 2015 first-quarter adjusted diluted earnings per share are projected to be in a range of $1.58 to $1.60.

As indicated in our release, we expect to record pre-tax charges of approximately $107 million within the first quarter 2015 operating period pertaining to amortization, global restructuring, quality and operational excellence initiatives, interest and other expenses related to the Biomet transaction, and other recent acquisitions.

Therefore, to arrive at our anticipated reported GAAP earnings per share, you should subtract these charges, or approximately $0.46 per share on an after-tax basis.

I would now like to provide an update on the anticipated accretion and adjusted cash earnings per share in the first 12 months following the close of the Biomet merger.

First of all, we remain confident in our previously disclosed net operating earnings synergy target of $270 million by year three, with $135 million achieved within the first 12 months.

We would expect that the phasing of these targeted net synergies to favor the back half of the first 12 months due to a structured transition planning [that] avoiding [unnecessary] disruption.

In addition, after taking into account the effect of recent currency rate movements on the anticipated acquired earnings of Biomet, as well as the favorable impact of now lower expected interest rates on acquisition-related debt, we expect the accretion from the Biomet pending merger transaction to contribute $1.05 to $1.15 in the first full year following the close of the transaction.

The previous range was from $1.15 to $1.25.

We will provide more detailed guidance for the combined Company after the closing of the merger with Biomet.

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

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

Thanks, Jim.

Throughout 2014, Zimmer delivered on our commitment to drive growth through the focused commercial execution of a comprehensive and innovative portfolio of solutions for the evolving healthcare market.

Our broad-based approach to product design and business innovation has positioned Zimmer to act on a transformational opportunity to enhance our global scale by combining with Biomet.

By bringing together two highly complementary companies in the musculoskeletal space, we'll accelerate our shared vision of leading the industry by delivering exceptional value to healthcare providers, their patients, and to our stockholders.

Now I'd like to ask Julie to begin the Q&A portion of our call.

Thank you, sir.

(Operator Instructions)

Thank you.

The first question comes from Mike Weinstein.

Please go ahead.

Good morning, gentlemen.

Thank you for taking the questions.

I want to just try and dig into the FX commentary, Jim, just a little bit, the part where you talked about the net impact of FX were Biomet not hedged versus the reduced borrowing cost is very clear, I understand the $0.10 swing there, but the commentary on Zimmer pre-Biomet was a bit confusing.

Can you maybe just talk a bit about the impact of FX on Zimmer pre-Biomet in 2015 as we think about our models?

And then in the context of that answer, can you talk a little about the FX hedging program because I'm aware that you had these long [dated] hedges.

I just want to get a better sense of when they roll off and what impact that has not only on 2015 but on 2016?

Thanks.

Sure.

Maybe to frame it out a little more clearly, Mike, on a standalone basis for the full year, we'd be expecting for Zimmer somewhere in the range of, say, $6.20 to $6.30 in adjusted earnings per share.

That's using our prior metric.

You would add another $0.40 to that for the adjustment to get to the cash earnings measure.

And then if you add the $1.05 to $1.15 of accretion that we provided, assuming the transaction had closed at the beginning of the year, you'd be looking at, for the combined enterprise, at a range of $7.55 to $7.75.

As I indicated, that takes into account the headwind associated with currency, not only on the acquired earnings of Biomet, but also on Zimmer's standalone earnings.

Just be very specific about that headwind.

With respect to the acquired earnings of Biomet, it's about $0.30 of headwind, but that's going to be offset by about $0.20 of savings in interest on the acquisition-related debt.

With respect to Zimmer's standalone earnings, we estimate there's about $0.20 of headwind and that's net of hedge gains that will be released earnings in 2015.

Then as far as the hedging program goes, as I indicated in my comments, with the refinements we've made to that program over time, those hedges extend out as far as 24 months or more.

As we described in the past, the focus of that program is to hedge cash flows associated with inter-Company transactions, which serves as a proxy, but not necessarily a perfect proxy, for the operating earnings connected with our international operating units.

The other thing to understand is we're never fully hedged, so the $0.20 that I referenced with respect to the Zimmer standalone earnings, as I said, is net of hedge gains, and if not for the hedging program, would be frankly a multiple of that number.

Jim, that's incredibly helpful.

I really appreciate it.

Let me follow up there.

The Zimmer standalone, you said $6.20 to $6.30, and that's before -- that's on a GAAP basis, so cash would be $6.60 to $6.70 on a standalone.

And then the $1.05 to $1.15, that's first 12 months, and obviously the deal hasn't closed yet, do you want The Street to have that full $1.05 to $1.15, which guides you to the $7.55 to $7.75 in the 2015 modeling, assuming deal closing later this quarter rather than January 1?

That's an excellent point, Mike.

As I said, providing this -- that guidance that I provided assumes the closing as of the first of the year and that's obviously that's not the case.

For modeling purposes, people need to be careful of that, what they include in calendar year 2015, because just at you pointed out, the accretion guidance is for the first 12 months following the closing of the transaction.

Again, as I indicated in my remarks, the other thing you have to be thoughtful of is the fact that, that accretion is going to favor the back half of the first 12 months following the close of the transaction, just given the time that it takes to take the actions that are necessary to drive those synergies.

Okay.

Just to make sure put in context, the way to look at it is more prorated and obviously back-half loaded for that $1.15 to $1.25, so don't expect the -- sorry, the $1.05 to $1.15 -- don't expect the full $1.05 to $1.15 obviously to flow through in 2015, that may be the last three quarters of 2015 and the first quarter of 2016, right?

That's right.

Okay.

Perfect.

Thanks.

I'll drop and let others jump in.

Thank you.

The next question comes from David Lewis from Morgan Stanley.

Please go ahead.

Good morning, this is actually Jon Demchick in for David.

Hi, John.

Had a quick follow-up on some of the information you gave to Mike's question.

The main thing was really just trying to figure out what interest rate you guys are assuming that the new Biomet debt will be able to be financed at?

You could assume at this point, and obviously, we haven't gone to market yet, but we will certainly before the closing of the transaction, somewhere in the range of 3.5% to 3.75% on the acquisition debt.

Okay.

Very helpful.

For the real question, in December there was some news about the European Commission and needing to divest one Uni Knee, one elbow brand in Europe, and then one total knee brand across two specific European countries.

I was wondering if you could provide any additional detail to the size or location of these products, and if not, if you can discuss how these divestitures related to your expectations and what you think that means to you heading into FTC approvals in the US?

Sure, John.

As we stated previously, the discussions with the regulators are tracking quite consistently with the anti-trust analysis that we performed prior to entering into the merger agreement.

As you point out, last month, relative to the European Commission, we disclosed the proposed remedy package that includes the three pieces that you just referenced.

We continue to work with the European Commission to finalize the remaining details for a remedy package.

We also continue to make progress, as it relates to the US and Japan.

Although we're not in a position to provide any specifics on that, we would do so as appropriate moving forward.

And all of this work leads us to reiterating what we've said upfront, that we still continue to expect to be in a position to close the merger before the end of the first quarter here.

Thank you very much.

You're welcome.

Thank you.

The next question comes from Bob Hopkins from Bank of America.

Please go ahead.

Thanks.

Can you hear me okay?

We can, Bob.

Good morning.

Good morning.

Just a follow-up on Mike's question and your very helpful commentary about the $7.55 to $7.75, and as you just discussed there's a difference between closing at the beginning and the end of the quarter.

We calculate that the difference is roughly $0.25 to $0.30, so you'd subtract about $0.30 from that $7.55 to $7.75 range.

I just want to check with you if that is math that you agree with?

Yes, Bob, that added color we will obviously be able to provide after the transaction closes, in terms of what the expectations are, particularly with respect to the synergies, which, as we point out, we're still, as we indicated back in April, expecting $135 million in EBIT synergies if the first 12 months following the close, but again, those are going to be somewhat back-end loaded in the first 12 months.

What you're doing is not unreasonable, but again, just be mindful of the fact that, as I said, those synergies are going to be back-end loaded.

Right.

So we miss one quarter of the synergy level, so perhaps it's a little bit more than that $0.30.

Okay, just trying to [titrate] us to a good number for the combined entity for 2015 relative to the information that you're providing.

Two other really quick things.

One, Jim, can you just give -- as far as the Q1 guidance is concerned, that $1.58 to $1.60, what is the like-for-like number in the year-ago period?

And then I also wanted to get your views on the US hip number of minus 4% in the quarter, that's was the one particular weak spot and just wanted to see if you could highlight what you think went on there in a little bit more detail?

Sure.

The first-quarter adjusted EPS in the prior year was $1.50 and you would add roughly $0.10 to that to get to the cash earnings measure.

Year-to-year comparison, you're looking at a similar expectations for bottom-line adjusted cash EPS.

Keep in mind that, that includes about $0.05 of headwind related to currency.

There's another, say, couple of pennies of headwind related to the tax rate, which will be higher in 2015 relative to 2014.

I will say with respect to the tax rate, that there will be opportunities to reduce that over time, but it requires changes in sourcing that do take time.

And then finally, given the fact that we put our share repurchase program on hold, there's obviously no leverage in those bottom-line expectations associated with any share -- very little or no leverage associated with share repurchases.

Bob, as it relates to the US performance in the hip category, that is an area that we look to improve upon, moving forward, obviously.

Remember that, that's off of a difficult comparison.

We were in mid-single-digit growth in the US or thereabouts in 2013 fourth quarter, so a lot of that sluggishness is driven by the math off of the prior year comps.

That said, we're obviously pushing more focus naturally with the Persona launch on the knee side and we need to energize the sales force and create more focus on the hip side.

The product portfolio is very competitive, as evidenced by the stronger performance O-US within that category, so the opportunity is clearly there.

Great.

Thanks for the help.

You're welcome.

Thank you.

(Operator Instructions)

The next question comes from Matt Taylor from Barclays.

Please go ahead.

Hi.

Thanks for taking the question.

Can you hear me okay?

We can.

Good morning.

Good morning.

Thanks.

Great.

I just wanted to ask a question about your synergy targets.

You mentioned that you're confident in the $270 million number and gave the $135 for the first 12 months.

If there's one area that people may be concerned about it's commercial disruption so the question is really two part, but really around, A, what are you seeing on the commercial side and can you give us any update on your integration planning and how your expectations around commercial outcomes and revenue growth are evolving here as you move toward close?

And then, two, if we saw upside to the $270 million, where do you think that could come from?

Maybe I'll take the first part and Jim can respond to the second, Matt.

This has been a multiple month process for us and the tough news about that is, it's a long time to have one of these combinations pending.

The good news side of it is the capability to plan forward has been extraordinary and both teams on the Biomet and the Zimmer side have done a terrific job of engaging in those planning processes in a manner that puts us in an excellent position to move into the execution phase upon closing.

The commercial teams are no exception at all to that.

We have very detailed plans by territory.

We made some of the statements upfront because of the nature of the opportunity that we have for cross-selling and pulling the product offerings together, that we were going to retain every sales position, and we stand by that commitment.

I would tell you, if anything, as we get into the detailed planning and the cross-selling opportunities get fully characterized, those opportunities are every bit as big as what we initially thought.

Both the revenue dis-synergies that naturally are going to be part of the integration and the revenue synergy side, by virtue of the immediate cross-sell opportunities, are factored into our synergy number that we provided, so that $135 million after year one and $270 million by year three number is a net number, and obviously, we continue to be very comfortable that revenue synergy opportunities offsetting some or all of the revenue dis-synergies and then the straight expense synergy element to that, nets out to those numbers that we've been talking about.

The detailed plans exist, as well, in the same manner for the operational synergy elements of it.

Maybe Jim you could comment on other opportunities beyond.

I would tell you that there will be opportunities beyond the $270 million and we're getting good visibility to that through the planning processes that are underway.

They come in any number of areas, including, first of all, the cross-selling opportunities that we'll have.

They could very easily be more significant than we're planning for at this point.

It's a question of getting the sales channels trained, getting instrument investments in place, getting the surgeon training programs up and running that will support those opportunities.

There will be -- it may not be in the first three years, but we're putting longer-term plans in place, I would tell you, with respect to manufacturing.

There will be opportunity to drive some significant savings in manufacturing cost over time as we rationalize the manufacturing plant network and look to source product from the most optimal nodes within that network.

Then the other major source of opportunity will be just getting the right structure in place.

As you know, we've had experience in working through very disciplined spans and layers process in the past that was very instrumental, when we kick off or innovate and improve programs, in getting Zimmer on a standalone basis, on the right track, just in terms of having the right organization in place with the right spans and layers to drive speed at decision-making and efficiency.

So we're excited about the opportunities ahead.

Thanks a lot for the details.

Sure.

The next question comes from Larry Biegelsen from Wells Fargo.

Please go ahead.

Good morning.

Thanks for taking the question.

Just two questions from me.

First, we know you're focused on paying down debt as quickly as possible.

How should we think about the paydown in terms of years?

Related to that, how are you going to use the $3 billion of O-US cash you're gaining access to?

Could that have a favorable impact on accretion in the out years?

And I had one follow-up.

Larry, this is Jim.

First of all, the syndicated bank facility that we have in place has a term structure to it and requires that 10% of that be paid down in each of the first three years, 15% in the fourth year, and the balance in the fifth year.

That's $3 billion of the total acquisition financing, so we, at the very least, we'll be paying $300 million down in the first year and potentially more.

I would tell you, and we have talked about this publicly, that among other activities, we've been involved in, a planning process that would enable us to get access to the cash that's being generated offshore, believe there's an opportunity to get access to several billion dollars over the next, say, five or more years.

That will provide the opportunity to perhaps get a share repurchase program reinstated sooner than we otherwise might have been able to and will provide the Management team with an opportunity to potentially drive higher accretion.

I would tell you that, just in terms of how you may be thinking about long-term growth in adjusted EPS, the longer-term plans that the Management team is putting together for the combined Company would target, at the very least, growing bottom-line earnings in a range of, say, [10%].

Very helpful.

Then second from me, you gave underlying Zimmer EPS guidance for 2015 before the FX impact earlier.

Should we think about the Q1 sales guidance of 1.5% to 2.5% as representative of the full year 2015?

Is that what's implied in the EPS guidance you gave earlier in?

And I'll drop.

Thanks.

Again, that additional color will be provided after the close of the transaction, but it's fair to say that there's an expectation that the revenues for the combined entity on a pro-forma basis, you've got to take whatever remedies are required out of the base year, but on a pro-forma basis, the expectation would be we'll be able to grow sales in at least low single-digits.

Thanks for taking the questions.

Sure.

Thank you.

The next question comes from Bill Plovanic from Canaccord.

Please go ahead.

Great.

Thanks.

Good morning.

Thank you for taking my questions.

Really if I could, I'd just like to focus on Asia-Pac and Japan.

You put up a very solid quarter over there.

I'm curious how much of the Asia-Pac was driven by Japan?

And then obviously one of your competitors saw some challenges.

How sticky do you think that business will be?

Well, we've been performing well for a good number of quarters in the Asia-Pacific geographic segment and Japan is obviously our largest business within that segment.

But I would tell you, the growth is very broad-based.

We've done well in other important markets, including Australia.

We've done very well in important emerging markets, importantly, China, in that regard, which is a very big business for us over there and a very strategic business, as well.

So it is broad-based, and as a consequence of that geographic diversity within the region, we feel very comfortable that this is a segment that's going to continue to perform well for us.

So if what you're getting at is how much of that is driven by Japan, and is that one time, I would tell you that I don't feel like there's any element of that within Japan that isn't sustainable for us with the team that we have in place, and I don't feel like there's an element of Japan driving the region's performance that would cause the region's positive performance to not be sustainable either.

We're in a good place within that market and I feel just as strongly about Europe, Middle East, and Africa's performance.

And then, for Jim, just on the guidance, the $6.20 to $6.30, you mentioned you had a $0.20 FX headwind for Zimmer in 2015.

Does that $6.20 the to $6.30 include that headwind?

It does.

Yes, it does.

Okay.

Great.

Thanks.

Okay.

Thank you.

The next question comes from Joanne Wuensch from BMO Capital Markets.

Please go ahead.

Good morning and thank you for taking the question.

I want to circle back a little bit to what we may think about full-year revenue growth to look like on a constant currency basis.

Biomet management on their previous -- their last call briefly mentioned some early dis-synergies.

When I speak with investors, that topic comes up very frequently, recognizing that longer-term, there obviously are many synergies to be had?

Just in general, our expectations as we said from the beginning, Joanne, is that on a combined basis, to grow that market in the range that Jim provided a couple of questions ago is consistent with that.

Right now, it's the case for Zimmer on a standalone basis, where we're obviously performing very strong outside the US and there are categories where we're making the right kinds of improvements within the United States, other categories such as hips where we have more work to do.

So it could be the case that there are some puts and takes to our performance relative to market growth rates once we consummate the transaction and are performing on a combined basis.

But we would still expect the combined Company in the initial years to perform at market and we believe that we have opportunities with sales force specialization, the innovation pipeline, the cross-sell opportunities, as we progress through the early stages of the execution and the integration and get towards the back part of that three-year phased integration approach, to be able to accelerate to above market rate growth.

Maybe it causes me to want to just highlight one other point, which is there's a lot of focus about the product category mix and we feel strongly about the strength in the musculoskeletal diversification that comes with this combination.

If you look at the non-large joint segments, round numbers, it will step down as a percentage of the combined Company revenues from what Zimmer has on a standalone basis at 70%, to on a combined basis, about 60%, from large joints or hips and knees.

Then we're going to have excellent scale opportunities to be leveraged in other product categories, including some of the faster-growing areas, such as sports medicine, extremities, and trauma.

So that's a big opportunity, as well, to shift the mix by product category to faster-growing areas and that's going to help our top-line growth rate.

We're very optimistic about our ability to realize that potential.

Thank you.

That fits in perfectly with my second question, which is you really did great in spine and dental during the quarter.

Clearly new products are helping there, but I'm trying to understand, since it's such a change in the previous quarter trajectory, if there was stocking in there or if we just think of this as the start of a new product cycle for those segments?

Sure, Joanne.

It is a bit of a mix of what you describe as it pertains to dental, because some of that business is a bit lumpier with stocking distributor orders, but it also is driven by new product introductions.

We have a strong regenerative portfolio that we continue to build out and strengthen.

We are completing the Trabecular Metal dental implant offering and that's a premium technology that's going to help us continue to take share in that market, we believe.

We have the launching in earnest really of the value-based implant, which is a segment that we've had less presence in, and a very important segment, at that, within dental.

And then we continue to make good progress on our digital dentistry offerings.

So we have a lot of product launches and innovation that are hitting the right places within that market, so our progress there is bright and the future is bright.

When you look at the spine performance, we probably had 10 or 12 important product launches in 2014, so that's the culmination of several years of hard work by that team.

We're rounding out our portfolio.

We've got a lot of traction in that regard, and I would tell you the pipeline, in that respect, is very full as well, so it's a game changer for us in the sense of the distribution channel can focus exclusively on Zimmer products as opposed to repping other Company products as we round out that portfolio.

That's going to create momentum to sustain a nice top-line growth opportunity for us and continue to be able to reinvest and maintain that momentum going forward.

Again, we're really optimistic about our opportunities in that $9 billion market and we'll end up, post-closing, doubling the size of that business, combined with the Biomet spine business, too, so that's going to create more opportunity.

Thank you.

You're welcome.

Thank you.

The next question comes from Mike Matson from Needham & Company.

Please go ahead.

Thanks.

I just wanted to ask a question that's actually not related to the merger with Biomet.

Just based on some of the discussions I've had with people in the industry, channel checks, et cetera, it sounds like the Persona knee and just the newer knees in general are some seeing pushback from hospitals because it sounds like -- what I'm hearing is that both you guys and J&J have tried to get a little bit of a pricing premium and that's made it difficult to drive the penetration of those new knees.

So I'm just wondering, do you think things have changed for the industry in terms of new product launches to the point where it is much harder to drive those and command a little bit of a premium?

No doubt, over the last five, 10 years, the capability to realize benefit from mix has become more challenging.

That said, I would tell you that your market checks are not consistent with the experience that we've had with the Persona launch, either in the penetration of that product or ability to realize a premium for it and to hold that premium.

So we're being successful in pricing that, the way we think it should be priced.

There are variants of the Persona system.

This is a big system that includes cemented, non-cemented, and we're working towards other elements in this multi-phase launch of the Persona system.

But we're continuing to be optimistic and quite confident about our ability to execute and get premium prices for the elements of the technology that we think warrant it.

But I'd just like to challenge that a little, because looking at the growth rates in knees, there hasn't been much of a differential between the growth that you guys have been putting up in your knee business and J&J, as well.

In fact, in some cases, we've seen better growth in hips from those companies, despite having a newer product on the knee side?

Well, if you look at the performance that we were generating going back pre-Persona launch, there's several hundred basis points of transition over and we clearly have been growing at above market rates within knees for several quarters now since the launch really took hold, so that's a big business for us.

We have about one-quarter of the market in knees currently and so it takes a lot to move that needle, but Persona has moved that needle, so we're quite satisfied with the product itself and the execution on the commercial side.

Okay.

Thanks.

And then the growth rates have slowed for both you and Biomet, so I was wondering if you -- do you believe that there's been any disruption ahead of the deal.

It's been a long time coming and it's probably created some uncertainty among employees and salespeople?

Well, naturally, that's a long pendency period, but if you look at the Company's overall performance, Zimmer's, that is, you see a stable performance.

In markets where you're reliant upon an independent distributor network, that uncertainty could lead to a pause on certain actions, investment in particular, but I would tell you we've been tracking the attrition rates very carefully and have not seen a spike up in that.

We're entering the closing period for planning and moving towards consummating the deal and into the execution of the integration in a very good position to create momentum right out of the blocks.

All right.

Thank you.

You're welcome.

Julie, we have time for one additional question.

Thank you.

The last question comes from Glenn Novarro from RBC Capital Markets.

Please go ahead.

Hi.

Thanks for squeezing me in here.

Two broader questions on the overall US knee and hip market, and I apologize if you've already addressed this.

I've been jumping around conference calls this morning.

If I look at the US market in the fourth quarter, Biomet, J&J, Stryker, you guys all came in a little light.

I understand it's a tough comp, but I'm wondering if you have any other thoughts or commentary as to why maybe 4Q did come in a little light across the board, at least relative to Street expectations?

Is there any chance -- because 3Q came in better -- is there any chance maybe we pull forward some cases in 3Q?

So commentary there.

And then, in your prepared remarks, you said your outlook for knees and hips for 2015 was up, but can you -- is that US?

Is that worldwide?

Is that units?

And then any guidance on pricing for 2015?

Thanks.

The knee and hip markets on a global basis have performed in a pretty consistent manner over the last couple of years.

If you look at it, it's probably closer to 3% growth rate in 2013, and that was positively impacted most importantly by the uptick in the US hip and knee business or markets within the fourth quarter of 2013.

The growth rate for knees and hips on a global basis in 2014 looks like it is close to that same number, maybe 2.5% as opposed to 3%, but close to that same number and I think that you're just going to see stability around that kind of a number on a global basis.

The real difference maker in the quarter itself, the fourth quarter of 2014, that is, is in fact the US business where those markets looked like they were growing not just at low single-digits but upper single-digits in the prior-year comparison, that is, the fourth quarter of 2013.

For Zimmer's business, we grew hips mid-single-digits and we grew knees low double-digits in that quarter.

So if you just run through the math on that front, Glenn, it really does produce a market comp that is much of the explanation for why the market looks a little bit choppy maybe going from Q3 to Q4, but overall you want to focus on a two-year trend along the lines of what I was describing at the beginning of the reply.

Okay.

And then the guide or your assumptions for 2015, again, you gave it to us on the call.

I just wanted a little more clarification.

Knee and hip growth is going to be up according to your commentary.

Is that US?

Worldwide?

And what's the pricing assumption for 2015?

The overall musculoskeletal market is probably what we were intending to reference with something that approaches mid-single-digits, because you have some faster-growing subsets, right, within the musculoskeletal market.

The growth rate for knees and hips, I would estimate along the lines of what I was just describing, in the 3%-ish range.

Then as it relates to price, we guided for the first quarter in a very consistent manner with going into 2014, expecting minus 2% to minus 3%.

We ended the year at minus 2.4%.

We don't see that climate changing in any material way in the first quarter.

You could extrapolate that as a view as to what we would expect to see in 2015 at this point.

Okay.

Great.

Thank you.

You're welcome.

With that, 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 first-quarter conference call, which is scheduled for 8:00 AM on April 30.

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

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

You may now all disconnect.