Zimmer Biomet Holdings Inc (ZBH) 2015 Q1 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 first-quarter 2015 earnings conference call.

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

As a reminder, our Earnings Release and related financial information is available on our Investor Relations website at investor.

Zimmer.com.

A replay of this call will also be made available on our website.

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 the 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 in the financial materials we have posted to our website.

Additionally, all sales variances will be stated on a constant currency day rate growth basis.

The results in the Company's Earnings Release this morning reflect constant currency growth rates.

Including the extra billing days in the first quarter of 2015 that resulted from the change in our interim quarter-end closing convention for the majority of our international reporting units.

From March 25 to March 31, as referenced on our previous earnings call.

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

David?

Thank you, Bob, and good morning, everyone.

Before I review our first quarter financial results, I'd like to take a few moments to share our vision for the future of Zimmer Biomet.

I'll then discuss our first quarter performance, and Jim will provide further financial details.

As Bob has just noted, I'll state all sales variances on a constant currency day rate basis, and all earnings results on an adjusted basis.

During the first quarter, we were pleased to announce that the European Commission and the Japan Fair Trade Commission granted clearance of Zimmer's planned combination with Biomet.

We now expect to close the transaction during the month of May, as we work towards clearance from the US Federal Trade Commission.

As we've communicated previously, the rationale behind this merger has always been about enhanced scale and the opportunity to accelerate the pace of innovation across our musculoskeletal portfolio.

We believe that in the wake of this historic combination, we'll be well positioned to capitalize on future growth opportunities.

Zimmer Biomet's comprehensive and diversified portfolio of musculoskeletal conditions will offer more scalable and predictable revenues, as well as immediate cross-selling opportunities.

Our enhanced scale and broadened product portfolio will also enable us to enter exciting new product categories, such as sports medicine, as well as continuing to expand our participation in key emerging markets around the globe.

There are also a number of financial and operational synergies connected with this transaction that are highly consistent with Zimmer's long-standing value creation framework.

Moreover, we're confident in the organization's ability to execute effectively on a combined basis following the closure of the deal.

Creating and returning value to our stockholders over the long term.

Against the backdrop of these transformational changes, we'll remain a Company fueled by innovation and driven by a passion to restore mobility, alleviate pain, and improve quality of life for patients around the world.

Our combined research and development teams will leverage our enhanced resources to efficiently and cost effectively bring the new generation of musculoskeletal technologies and broad clinical solutions to market.

Turning now to our performance.

In the first quarter, Zimmer continued to produce steady sales growth in several geographies and product categories while meeting our financial commitments and delivering expanded operating margin leverage.

Consolidated net sales for the first quarter were $1.13 billion, an increase of 1.7% and our earnings-per-share were $1.58, a decrease of 1.3% from the prior-year period.

Our sales increased by 1.3% in the Americas, by 2.1% in Europe, Middle East and Africa region and our Asia-Pacific business delivered 2.6% growth over the prior-year period.

In the first quarter, we saw global musculoskeletal markets continue to demonstrate stability, consistent with trends in the previous two years.

Zimmer experienced a price decline of 2.2% in the quarter, which was consistent with our expectations coming into the year.

Turning to our product categories.

First-quarter sales for our leading knee business increased by a solid 3.9%, reflecting positive volume and mix of 6.7%, and negative price of 2.8%.

Our Americas segment reported a sales increase of 4.3%, while the Asia-Pacific region delivered 4.1% growth and our Europe, Middle East and Africa business grew by 2.8% over the prior-year period.

The quarter was marked by steady gains for Persona, the personalized knee system, which we continue to successfully position in concert with our advanced intelligent instrument offerings, including iASSIST, the personalized guidance system; Patient Specific Instruments; and the eLIBRA soft tissue balancing system.

We'll continue to broaden and differentiate our knee portfolio including our growing line of early intervention solutions along with the continuum of care, such as our Gel-One cross-link hyaluronate treatment and our expanded Zimmer Knee Creation Subchondroplasty offering.

It is also important to note that this year marks the 20th anniversary of our leading NexGen knee replacement system.

With more than 5 million implantations completed to date, patients around the world continue to benefit from the safe, joint flexion and restored natural kinematics that the NexGen system offers.

Just as NexGen marked a major step forward for total knee replacement two decades ago, we intend to continue setting the pace for innovation in the years ahead.

Turning to Zimmer's hip business.

Sales decreased by 0.6% in the quarter, reflecting positive volume and mix of 2.1%, and negative price of 2.7%.

These results include a sales increase of 1.3% in Asia-Pacific, a 1.4% increase in Europe, Middle East and Africa and a 3.2% decrease in the Americas.

As we focus our US execution in the quarters ahead, we expect that premium constructs will continue to drive penetration and deliver improved growth.

These offerings include the continuum acetabular system, which leverages platform Zimmer technologies, such as Trabecular Metal material and our Vivacit-E vitamin E infused bearing material which recently completed 100 million cycles of wear testing, and continues to demonstrate ultra low wear properties.

And notably, since receiving regulatory clearance in several European markets last November, the Synovasure diagnostic test for periprosthetic joint infection has already delivered promising early sales results.

In extremities, Zimmer recorded growth of 3.1% in the first quarter.

Our sales for this business continue to be driven by the performance of our Trabecular Metal reverse shoulder, which now features our platform Vivacit-E advanced bearing material.

We also continued our growth into anatomical adjacencies with premium solutions.

The Trabecular Metal Total Ankle system continues to perform well, and the Nexel Total Elbow is attracting a growing number of surgeons seeking the clinical advantages of Vivacit-E.

Zimmer dental sales decreased by 5.7% in the first quarter.

A stable performance in the US was offset by challenging sales comparisons in the Asia-Pacific region, owing to stocking patterns of our distributor network in Japan and accelerated growth of the China market in the prior-year period.

However, we continued to gain traction with our value based offerings designed in the PI Branemark philosophy in key European markets.

Looking forward, we'll continue to focus our execution behind building sales of our market-leading dental regenerative portfolio as well as our premium Trabecular Metal dental implants.

Zimmer trauma grew sales by 3.4% in the first quarter.

We continued to achieve steady sales results from our differentiated trauma portfolio including sales of the Zimmer Natural Nail family, and the Zimmer NCB periprosthetic locking plate system.

Trauma is a particularly exciting opportunity concerning our pending combination with Biomet, as we seek to leverage our enhanced resources to accelerate the development of proprietary innovations that are clinically and economically relevant to the global trauma market.

Zimmer spine delivered solid 5.4% growth over the prior-year period.

Building on the successful commercialization of a dozen new solutions in 2014, including the Virage OCT Spinal Fixation System, Optio-C Anterior Cervical System, and our expanded line of Puros Demineralized Bone Matrix grafting solutions.

These innovative new offerings are driving growth, and enhancing the diversification and competitiveness of our spine portfolio.

As we execute on our broadened portfolio, we'll continue to advance proven strategies and sustain our focus on promising market adjacencies, such as minimally invasive surgeries.

Zimmer's surgical and other sales were flat in the first quarter and included a solid performance by our surgical power tools in the Asia-Pacific region, and bone cement products in certain European markets.

We also achieved steady growth in our wound debridement solutions, particularly in the United States.

As we move forward and away from challenging sales comparisons from the prior operating periods, we'll continue to grow our presence in the operating room suite through the expansion of these and other clinically relevant solutions, that meet the needs of our surgical customers.

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

Jim?

Thank you, David.

This morning I will review our first-quarter performance in more detail, and then provide additional information related to our standalone earnings guidance as well as anticipated accretion and synergies connected with the pending merger with Biomet.

Total revenues for the first quarter were $1.13 billion, an increase of 1.7% on a constant currency day rate basis, when compared to the first quarter of 2014.

Net currency impact for the quarter decreased revenues by 6.8% or $80 million.

Our adjusted gross profit margin was 75.8% for the quarter, favorable to prior year by 90 basis points after adjusting for non cash amortization expense.

Foreign currency hedge gains, together with favorable mix of products and geographic revenues, and cost savings from our operational excellence initiatives were offset in part by higher excess and obsolescence charges, and the impact of negative price.

The Company's R&D expense increased 2.2% or $1 million on a reported basis to 4.3% of net sales when compared to the prior year.

Selling, general and administrative expenses were $425 million in the first quarter and at 37.5% of sales, were 80 basis points below the prior-year quarter after adjusting for non-cash amortization expense.

The Company continues to make strides in driving efficiencies throughout its operating units, in administrative, as well as commercial functions.

In the quarter, the Company reported pretax charges of $87 million in special items, and $3.9 million in cost of products sold pertaining to global, restructuring, quality and operational excellence initiatives, and recent acquisition.

The Company also reported $20.4 million in non-cash amortization charges during the quarter.

Adjusted first quarter 2015 figures in the Earnings Release exclude the impact of these charges.

Adjusted operating profit in the quarter amounted to $386.2 million.

At 34%, our adjusted operating profit to sales ratio was 150 basis points higher than the prior-year first quarter after adjusting for non-cash amortization expense.

This marks the seventh consecutive quarter of year-over-year operating margin improvement reflecting the ongoing progress we've made with our operational excellence programs as well as the positive impact of hedge gains and mix benefits associated with a number of newer product introductions across our broad portfolio of musculoskeletal solutions.

Adjusted net interest expense for the quarter amounted to $12 million, which was flat when compared to the prior-year quarter, this excludes $28 million of acquisition-related finance charges.

Adjusted net earnings were $272.8 million for the first quarter, a decrease of 0.6% compared to the prior year.

Adjusted diluted earnings-per-share decreased 1.3% to $1.58 on 172.9 million average outstanding diluted shares.

Our adjusted effective tax rate for the quarter was 26.6%, and was 200 basis points higher when compared to prior year due principally to the impact of foreign currency translation on foreign source earning, as well as the exclusion of non-cash expenses in adjusted earnings.

Our reported effective tax rate in the quarter was 23.7%.

At $1.02, reported diluted earnings-per-share decreased 20.9% from the prior-year first-quarter reported EPS of $1.29.

Operating cash flow for the quarter amounted to $92 million, a decrease of 52% from $188.8 million in the first quarter of 2014.

The decrease was driven primarily by the settlement of a pre issuance hedge associated with our recently completed senior notes offering.

Net inventories were $1.2 billion at the end of the first quarter, an increase of $48 million from December 31, 2014.

As I have noted on previous calls, the increase is due primarily to the support of ongoing global commercialization of new product offerings, as well as the effects of placing more inventory into distributor hospital consignments.

Adjusted inventory days on hand finished the quarter at 389 days as compared to 334 days at the prior-year quarter end.

As of the end of the first quarter, net receivables increased to $869.8 million from $939.1 million in the first quarter of 2014, or 7% lower than in the prior year.

Our adjusted trade accounts receivable days sales outstanding finished the quarter at 64 days, 1 day improved when compared with prior year.

Depreciation and amortization expense for the quarter amounted to $89 million.

Free cash flow in the first quarter was a net outflow of $5.3 million, $113.3 million lower than the first quarter of 2014.

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 was driven by lower operating cash flows, as I've just noted, as well as our continuous investment in support of the ongoing launch of new products through increased instrument deployments as we expand commercialization of newer products globally.

Capital expenditures for the quarter totaled $96.8 million, including $62.4 million for instruments, and $34.4 million for property, plant and equipment.

I would now like to make a few remarks regarding guidance.

As indicated in our release, we anticipate closing the pending Biomet transaction in the month of May.

Upon closing, we will provide additional details regarding our expected full-year performance, inclusive of Zimmer standalone and in combination with Biomet for the balance of the year.

As such, I will provide a few updates to the numbers I've previously communicated.

Before turning to the financial guidance, specifically, I want to reiterate the Company's perspective on the market and general pricing dynamics.

We continue to view the global knee and hip markets to be growing in low single digits for the full year.

Market growth drivers including the aging of the global population, positive outcomes associated with joint replacements, and other musculoskeletal procedures and increasing utilization in emerging markets result in consistent trends in procedure demand in our view.

We also continue to forecast a relatively stable global pricing environment with expectations of price for Zimmer to be down between 2% and 3% as compared to the prior year.

Turning back to guidance.

As indicated in our release, we now project full-year 2015 adjusted diluted earnings-per-share for Zimmer on a standalone basis to be in a range of $6.30 to $6.40.

We expect foreign currency translation will decrease our reported revenues for the full year by 6.5% to 7%.

Because our hedging program only partially offsets the impact of currency moves on earnings, our updated guidance reflects the further strengthening of the US dollar against other currencies since our last earnings call.

Lower anticipated earnings and profits from our international units has the further effect of changing the anticipated mix of those earnings and profits in favor of higher tax domestic operating units.

We therefore now anticipate the adjusted effective tax rate for Zimmer on a standalone basis to be approximately 27% for the full year.

A similar rate is expected for the combined enterprise post closing.

This compares with previous guidance of 26% to 26.5%.

Turning to synergies and accretion associated with the pending Biomet merger.

As indicated in our release, we now expect accretion of $0.95 to $1.05.

And adjusted diluted earnings-per-share in the first 12 months following the close of the transaction.

This change is related to increased foreign exchange headwind associated with the acquired revenue of Biomet.

Additionally, assuming a transaction close in May, we would anticipate approximately one-third of the accretion to by realized in calendar year 2015.

After expense and integration planning, which has been ongoing since the announcement of the pending merger with Biomet.

We now expect net annual operating synergies to reach $350 million by year three post close.

This compares with prior guidance of $270 million.

With this in mind, and assuming the pending merger transaction is closed no later than the end of May, we would expect revenues to grow organically between 1.5% and 2.5% over pro forma 2014 revenues, or between $6.17 billion and $6.2 billion.

This revenue number includes our expectations for divestiture remedies.

We anticipate the diluted weighted average shares outstanding for 2015 to be between 193.5 million and 194 million shares, including the shares issued to consummate the Biomet transaction.

Together with the anticipated synergies, we would expect calendar year 2015 adjusted diluted earnings-per-share to be in a range of $6.60 to $6.80.

For 2016 modeling purposes, there are certain timing issues to consider.

Only a modest amount of the $135 million in year-one post-close synergies are reflected in the calendar year 2015 earnings guidance.

That is due to the lag in capturing projected cost synergies in contrast to the immediate negative effect of the anticipated remedies, those remedies generally take the form of product line divestitures, which will result in an immediate loss of revenue and associated operating earnings.

As we indicated in our last call, synergies realization will be more heavily weighted to the back half of the first 12 months post closing, and accelerate into subsequent operating periods.

As a result of this anticipated phasing as well as the announced increase of projected synergies, we expect the growth rate in adjusted diluted earnings-per-share beyond calendar year 2015 to also accelerate.

As an example, 2016 adjusted diluted earnings-per-share should grow at a mid-teens or higher rate compared to 2015 guidance of $6.60 to $6.80.

Lastly for 2016, you should be using a fully diluted weighted average share count of approximately 209 million.

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

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

Thanks, Jim.

Zimmer made good progress in the first quarter of 2015, which would not have been possible without the dedication of our team members around the globe.

In addition to achieving steady global revenues and driving ongoing commercial releases, we've been fully committed to integration planning in anticipation of our pending combination with Biomet.

Our new Company will be forged in the principles and best practices that have made both Zimmer and Biomet leaders in the musculoskeletal healthcare.

On that basis, we look forward to continuing to serve the global healthcare community with innovative solutions and compelling value.

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

Thank you.

(Operator Instructions)

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

Please go ahead.

Great.

Thank you.

Can you hear me okay?

We can, Bob.

Good morning.

Great.

Good morning.

So the first question I wanted to ask is just on the actual Biomet deal.

It seems like the FTC is taking longer than you initially thought.

I was wondering if you could give a sense as to why?

And is the reason that they want to wait until the remedies are actually executed?

There are different requirements in different jurisdictions.

It is the case that, for instance, in Japan, you can come to an agreement as to what the divestiture needs to look like, and then subsequent to the closing of the primary transaction execute on that.

Whereas, it's a more concurrent requirement with the closing in jurisdictions like Europe and the United States.

But to back up a little bit on the status, Bob, in general, we're very pleased to have received the clearances from both the European Commission and Japan FTC.

As you noted, we're focused on the US FTC.

But I would add that we're encouraged by the substantial progress we're making to complete the final steps there as well.

And it is our expectation that we're going to get the transaction closed in May.

Maybe just add a little bit more color to that.

In the scheme of the overall transaction, this category is coming up very consistent with what we anticipated in our diligence work pre-execution of the deal.

And I think we're going to land in a very good place, and it just took a little bit longer than we thought.

But the main reason, just to be clear, for it taking a little bit longer than you thought is the process around remedies?

Is that a fair statement?

That's correct.

Okay.

And then as a follow-up, on the guidance, two quick things.

One, just doing some quick math here, it looks like what you're comfortable with for calendar 2016 is something below $8 a share.

So one, is that correct?

And also, Jim, could you just highlight the different buckets of what's changed in the guidance since you last communicated to us at the end of the Q4 call?

In terms of either specifics on FX or synergy or financing costs.

You talked about tax rate.

Just wondering what changed, and if my math is right that you're comfortable for now a little bit below $8 for 2016.

So I guess first of all, yes, we're comfortable with something below $8 for 2016.

Obviously based on a mid-teens or higher growth rate expectation.

Understanding, Bob, that there's a lot of work to do between now and 2016 in developing operating plans, which is what we would typically be doing before providing more detailed guidance, which will come eventually.

And then with respect to what has changed is really two things, I guess.

Well, maybe three.

The timing shows a realization of the synergies.

Obviously the phasing of the actions that have to occur to capture those synergies doesn't happen until obviously we close the transaction.

So to the extent that there's been a slight delay in our expectations with respect to when the transaction would close, the opportunity we have to capture those synergies just gets deferred.

Secondly, the headwind associated with foreign currency translation is really the most significant change.

And that's reflected both in the update that we provided on a standalone guidance, as well as the $0.10 take-down and the accretion expectations for the first 12 months post closing.

The one other change you mentioned as well is the fact that we're anticipating relative to our original modeling, a somewhat higher effective tax rate.

And that really is a result of both the effect of foreign currency translations is having on the foreign earnings, both Zimmer and Biomet.

As well as the fact that the interest costs associated with the deal financing is significantly below what we had originally anticipated.

So if you go back to the original deal model, we would have had a more significant tax shelter in the US associated with the deal financing.

And those -- that really covers the three things that I said that are impacting on the change in the outlook.

Sorry, just one more, and I'll let others jump in here.

Could you give us -- what was the FX hit on the combined Company in Q4 versus the FX hit now?

Because the guidance before included some other things.

Like you said, for Biomet was $0.30, offset by $0.20 of savings from interest, and then Zimmer was $0.20 net of hedging.

Can you just give us a sense as to how much currency is a headwind now versus the beginning of the year?

Sure.

On a standalone basis, it's another $0.05 or so a quarter, obviously, with the take-down of $0.20.

And that's a combination of the FX as well, as the pressure we're seeing with respect to the effective tax rate.

And on Biomet, it's a little more than the $0.10 take-down.

Because there is an offset in the form of some interest savings, relative to what our expectations were prior to launching the senior notes.

Great.

Thank you.

Thank you.

The next question comes from Matt Taylor from Barclays.

Please go ahead.

Hello.

Thanks for taking the question.

I just wanted to ask I guess about the closing here.

You're saying May now instead of April.

Can you just talk about the last steps for the closing in the US?

And what does your guidance imply when you're talking about the lower growth for the year in terms of US divestiture?

Can you talk what that looks like versus Europe or Japan?

There really isn't too much more to add, Matt, to the status of the clearances.

It's US focused at this point in time, and we do anticipate receiving FTC clearance in the United States and being able to bring the transaction to close in the month of May.

Matt, with respect to the divestitures, when we quote the 1.5% to 2.5% constant currency growth the expectation for the top line.

That's over pro forma 2014 revenues.

So that's really an apples and apples comparison.

We stripped out the anticipated divested revenues out of 2014.

And then where the divested revenues has an impact is obviously on the accretion expectations.

And nothing's changed with respect to the impact that those divested or product line divestitures are going to have in relation to accretion.

What has changed, as I said, is the foreign currency headwind that we've now factored into the updated guidance on accretion.

Maybe just taking a step back.

If you think about the guidance that you've provided all along for the transaction, conceptually I guess number one.

Are you seeing any disruption with the combination around the corner?

And do you still expect that you can grow in line with the market, and faster than the market after the merger closes?

We absolutely do, Matt.

If we characterized the progression from the point of close, integration and beyond, this guidance is consistent with that.

In line with market in the initial stages, accelerating above market as we get deeper into executing these plans.

So no changes whatsoever have come out of our integration plan.

I would tell you that in the intermediate to longer term, I think that the opportunity is even greater to create value by virtue of this combination.

And that should be reflected in the intermediate to long term on the top line.

Great.

Thank you very much.

You're welcome.

Thank you.

The next question comes from Mike Weinstein from JPMorgan.

Please go ahead.

Hello.

Good morning, guys.

Just want to start with the quarter.

Jim, can you just outline for us the impact of difference in selling days?

I think outside the US you had a couple more days this quarter than you had a year ago.

Yes, that's right, Mike.

So that accounts for about 2.5 points of growth on the top line.

And that's why all the growth rates that were quoted in our scripted comments have been adjusted to strip out the effect of the extra billing days.

So if you have an opportunity to go back through the transcript, you'll get the day rate growth, both consolidated and by product category.

Okay.

That's very helpful.

Thanks, Jim.

So let me just circle back now on the 2016 the implied guidance.

So Bob asked a question, are you basically endorsing something below $8?

But maybe just to be a little bit clear of that, because the mid-teens or better growth can imply anything from $7.50 all the way up to $8.

Do you want to be any tighter relative to that band, just so street expectations are appropriately reset?

Well, at this stage, again, to the extent we haven't done the bottom-up operating unit plans for 2016.

The range, it's right to think about a wider range.

Perhaps to put a finer point to it, something in the order of 15% to 20%.

So I think you get beyond that, the range gets to be a bit too wide.

Yes, understood.

Let me ask last question maybe.

The commentary you made about pro forma revenue growth, and I think what you said was 1.5%, 2% revenue growth, correct me if I'm wrong, pro forma, once the deal is closed.

That you said was included the impact of divestitures.

So is that -- are you saying that the divestitures weigh it down to 1.5% to 2%, or that's adjusted for the divestitures?

Adjusted.

So the hedge is 1.5% to 2.5%, and we've taken out the -- what we anticipate will be the divested revenues out of the base.

That basically would imply pro forma growth pretty consistent with what the Company is doing right now?

That's correct.

And understand, with the deal now anticipated to close in May, I mentioned that there's a lag in capturing cost synergies.

There's also a lag in capturing the cross-selling opportunities.

Those will ramp up over time.

And that's reflected in that top line expectation for calendar year 2015.

Okay.

One last question, I'll sneak into.

Are you at a point where you can give us a little bit more in terms of what you're doing with the sales organization to maybe tie up some of the better reps and distributors post close?

We have very well developed plans, but wouldn't want to start articulating anything specific in advance of the closing and the execution of those plans, Mike.

I think in that area, though, it's probably worth noting that our stability within the sales force is quite good on a global basis.

We're not seeing accelerated attrition rates, and I think we're going to enter the period to execute this plan in a very good position.

Great.

Thank you, guys.

Appreciate it.

You're welcome.

Thank you.

The next question comes from Glenn Navarro from RBC Capital Markets.

Please go ahead.

Hello.

Good morning, guys.

One of the things you did this morning is you raised your net annual sales synergy guidance from $270 million to $350 million.

And in that guidance, there is an assumption for sales dissynergies near term, plus cost savings.

So can you walk us through what's changed?

Are the dissynergies a little bit greater and the cost savings a little bit greater, serving as an offset?

Just a little bit more clarity there.

Glenn, I think that we haven't provided a breakout, you're right, to reference that synergy number as a net number.

But just to give you a directional response, it is more related to opportunity on the expense synergy side than any change in assumption on revenue dissynergy.

Okay.

And what are you seeing from a cost savings point of view today that gives you more confidence that it would come in greater?

Well, we obviously had the ability over the last many months to get access to a lot more information and bring teams together and do a lot more detailed planning.

And it's really with that information and the process that we've been executing to on the development of these plans that clarify the opportunity.

And we feel very, very confident in the opportunity, the plans that have been developed, and our capability to execute and realize those savings.

One quick on the end market.

Your hip number relative to our expectations came in a little bit light, but so did some of the competition as well.

I know from year to year, some years knees do better than hips and so forth.

Do you have a feel for why maybe hips have come in a little bit lighter to start off the year?

As a follow-up, do you have a view on robotics?

Coming out of AAOS, you heard on more on robotics.

You heard Smith & Nephew and J&J doing some partnering.

Just your view on robotics going forward as well.

I think the worldwide hip market does look like it stepped down a built from what it came in at for the entire year 2014.

I wouldn't over-read that one quarter data point, however.

It felt to us as though more of that was driven in the United States.

We had a little bit of a stepdown market growth rate wise as well noted in Asia-Pacific.

But I don't see any major trend that's driving that that would be indicative of what one should anticipate for the balance of the year.

And would still gravitate more towards an expectation that 2015 is going to look a lot like 2014 and 2013 overall.

With respect to robotics, again, we very much believe in innovating in a way that improves the quality of care and outcomes.

And at the same time, does so in an economically responsible and responsive way to the various stakeholders within the system.

For several years now, we've been developing technologies that we believe are smaller, cheaper, faster to bring about better clinical solutions and reproducible solutions in a cost efficient way.

And continue to believe that those platform technologies, including our iASSIST and Patient Specific Instruments and soft tissue balancing systems, preoperative planning systems.

And then as I had mentioned, these inter-operative technologies are going to be able to serve customers and patients very well in that regard.

So we think that the need is there.

Our solution and strategy within that space is a bit different approach.

And we're very confident that we're on a great track to deliver value to those stakeholders.

We don't think that going backwards in procedure time, for example, or changing the work flow in a fundamental way is going to lead to better patient outcomes.

And, in fact, those patient outcomes could be set in reverse relative to current capabilities.

And that's one area that one's going to have to be mindful of.

But it's an exciting area for innovation in general, and we like our platform technologies and the strategies that we have in place and we're executing to.

Thank you.

You're welcome.

Thank you.

The next question comes from Richard Newitter from Leerink Partners.

Please go ahead.

Thanks for taking the question.

I just was wondering just going back to the timing of the deal.

I know that you feel confident in the deal closing in May.

But I'm just curious, how should we or how could you help us get comfortable that the deal close in May is in fact the right time?

When previously it was April, and then before that you were very confident that it was 1Q 2015.

Just maybe help us get a better feeling that May is in fact probably the last potential pushout, or is that even a fair conclusion to draw?

We are confident in closing in the month of May.

And I guess the fact base that I would emphasize with you is that we have regulatory filings across the globe as it relates.

And you're trying to estimate the specific timing for close with a lot of variables in that equation originally.

We're now down to the point where we have one jurisdiction.

And you should assume that we're pretty knowledgeable about what is outstanding within that jurisdiction.

And what our path forward, the optionality to address any issues that are open within the United States.

And so it's a shorter list.

We're very knowledgeable and well-positioned to address what needs to get addressed.

And on that basis, are expressing a high degree of confidence that we're going to get it done in May.

Got it.

And then maybe just one follow-up.

I was on another call earlier, so if someone asked this, I apologize.

But we've also heard from some competitors that are attempting to more down a more value implant route.

There's been talk of value implants.

Can you provide your thoughts on how the market may or may not accept this type of offering, and what Zimmer and Biomet's competitive response should it actually begin to take off?

Well I think that the positioning of technologies and the solutions.

One needs to make sure that you're innovating in a way and delivering value to a system that is increasingly going to become cost conscious.

And has for the last many years.

The data points that I think are worth emphasizing is the stability of the pricing environment.

It's a pretty narrow bandwidth in our experience over the last not just quarter or two, but couple of years.

By way of price experience, we're continuing to maintain price and retrieve mix opportunities for our premium technologies, and hold those price points.

And the last point that I think is worth emphasizing is that competition is healthy.

If we can't prove out value for the premium technologies, then those prices won't be held.

But that's a fair challenge that should be placed on anyone that's operating within these marketplaces.

It's going to be the case, however, that if one of these so-called value implant providers causes harmful effects to patient outcomes.

That with the movement away from fee for service in jurisdictions like the United States and the cost of re-admissions or complications in those cases being internalized relative to the provider.

They're going to care deeply about making sure that they get it right for the patient, as they should.

So if someone is out to save a little bit of money in exchange for not delivering the right kind of patient outcome, the economic system is going to penalize that provider in a material way.

In a much more significant manner than it has historically.

So we like the clinical results, the quality systems, the attention to detail and the design, manufacture and commercialization of these solutions.

To live in this world and are highly confident that we understand what the stakeholders and customers' expectations are.

And how to partner even more deeply with those providers to bring about a great patient outcome and a cost effective way in the future.

And if anything, are even more excited about our opportunity.

And confident in our capability to contribute to that equation by virtue of the Biomet combination.

Thank you.

You're welcome.

Thank you.

The next question is from David Roman from Goldman Sachs.

Please go ahead.

Thank you.

Good morning, everybody.

I wanted to switch back to the business a little bit and ask a couple of product line questions.

And specifically, I was hoping you could just give us a little bit of an update on the trauma business.

Given what has been some fluctuations in the growth rate there the past couple quarters.

It looks to have stabilized.

But maybe help us understand the opportunities there going forward.

And then secondly, spine, I think you're now going on three pretty solid quarters, particularly in the United States.

Could you maybe just help us understand what are the drivers underpinning that turnaround?

And can we see that growth continue as the comparisons get harder in the back half of this year?

Sure.

With respect to trauma, we stepped backwards a little bit initially over the last few quarters on our US performance.

Maintained pretty solid performance in the O-US markets.

There's sort of a simple answer to the progress that we've made.

We've invested in our product portfolio and innovation.

The Zimmer Natural Nail line is an example of that.

The NCB Periprosthetic Plating System is another good example of that.

Our extra thick system, shoring up that capability on an external fixation has led us to a much more competitive portfolio.

More recently Distal Radius Plating System getting launched.

So we've really rounded out our portfolio, and put our commercial teams in a better position to compete.

And the other half of that is sales force specialization and focus.

And I think that we've advanced more rapidly in the O-US markets than the US markets.

But I think that we're beginning to catch up in the US markets.

When you look at the platform that we've created on the Zimmer side and add to that.

Which is a substantial add, what Biomet possesses by way of product portfolio.

All that does is enhance our capability to win and take share within the trauma space post closing the deal.

It also enhances our capability to build out sales forces that are specialized within the trauma marketplace.

Wherever that makes sense to do so geographically across the globe.

So it's one of the areas among several, sports medicine, extremities, trauma, surgical.

Where this combination and the scale are going to greatly enhance our growth opportunities.

And I'm very confident that what you're going to see is those businesses collectively picking up our overall top line performance as we get deeper into the integration.

And executing the cross-sell opportunities, and the buildout of the commercial teams.

Spine is a similar story.

It was all about investing in the innovation.

We had about 12 launches in 2014.

There's a lot of runway with those launches, and the pipeline on the Zimmer side is rich.

The products that we're picking up through the Biomet combination are very, very complementary to the Zimmer portfolio.

So day one, we're going to end up with a very competitive offering on the core fusion side and some really terrific innovations within the pipeline.

And again, a stronger than ever sales force team on a global basis.

And so I would expect us to continue to perform very well.

Obviously, have more visibility to the Zimmer spine business at this point in time.

But I'm highly confident in our ability to sustain those attractive growth rates, or if anything, accelerate on the Zimmer side going forward for our spine business.

Okay.

That's helpful.

And maybe just a follow-up on the P&L.

Jim, I know in your prepared remarks, you talked about some of the drivers of gross margin.

Can you maybe just go into a little more detail just on how much of that is hedging -- was hedging gains versus performance in the underlying business?

And then presumably, if foreign currency rates hold where they are, that hedge benefit becomes a headwind as you annualize that.

So the underlying gross margin of the business probably being a little lower than that 75.8% that you're quoting for this quarter?

Okay.

So let me start with the foreign currency hedge gains that were recognized in the quarter.

We recognized, David, $28 million in cash flow hedge gains in the quarter compared to approximately $5 million in the prior-year quarter.

Now that's a detail that we provide in our periodic disclosures.

So you'll be able to track what's getting recognized and what we expect to recognize over the next 12 months.

That difference year-over-year drove by itself about 2 points of improvement in the ratio.

But that is offset by approximately 130 basis points related to higher excess and obsolescence charges in the quarter compared to the prior-year quarter.

The higher charges and other charges were driven by ongoing commercialization in new products as well as the effect of placing more inventories into distributor and hospital consignments.

And a product recall as well in the quarter.

That higher level of D&O charges in the quarter is expected to moderate going forward.

Got it.

Okay.

Thank you very much.

You're welcome.

Thank you.

The next question comes from Bill Plovanic from Canaccord.

Please go ahead.

Great.

Thanks.

Good morning.

Can you hear me okay?

We can, Bill, good morning.

Good morning.

So actually just a point of clarification, if I could.

As you discussed divestitures, you've already divested the European assets.

And then as you look at what you know what you have to divest in Japan, and then there's a range for obviously what you're looking at in the US.

I was just wondering if you could provide nominally the combined Biomet Zimmer, what was that on a nominal basis?

Whether an exact or a range just to help us for modeling.

And then secondly, when we talk -- you talk about closure in May.

Should we think late May or June 1st or May 1st?

Or how should we think about that in the models?

Sure.

Well, first of all, I don't want to at this stage, because we haven't closed the transaction or completed the divestitures, even in Europe.

Although we have obviously signed definitive agreements we have still yet to close.

So that's a detail, Bill, that we're just going to hold off providing until the transaction closes.

But we understand that will need to be provided once it does close.

And then your other --

Just for the closing day, should we -- you're talking about May.

When in May should we --?

I'll just share with you the basis for some of the intern internal modeling that we've done and for the guidance that we've provided.

Just to make it a little simpler for us, and maybe for you as well.

The end of May.

Okay.

Great.

That's all I had.

Thank you.

The next question comes from David Lewis from Morgan Stanley.

Please go ahead.

Good morning.

I wanted to come back to the 2016 synergies for a second.

So a couple dynamics.

You're obviously raising long-term synergy numbers around 20%.

But the 2016 number, obviously, is falling below a lot of the consensus expectations.

And you talked about a few issues, FX, tax and timing.

But tax and FX seem largely accounted for.

So the biggest factor seems to be timing.

And I'm trying to figure out, is this deal close timing, or the realization of synergy timing?

Because it feels like the latter.

But could you gives us a lot more detail on that second piece, if it truly is the realization of synergy timing.

Because it doesn't seem like a four to six week delay in the deal would move the number in 2016 that dramatically.

So it must be on the back end, but it's hard to understand exactly what that is.

And if you could give us more detail, that would be great.

And I had a quick follow-up.

I would tell you, David, that it is deal close timing.

As you know, we've reiterated our expectations for synergies in the first 12 months following the closing of the transaction at $135 million.

So that's not changed.

And then we've actually increased, as you said, the guidance for total synergies by year three to $350 million from $270 million.

Now, it is the case that that additional $80 million will come later, not in the first 12 months, obviously.

But it will come in years two and three following the closing of the transaction.

In reference to an earlier question, about the three things that have really changed relative to the earlier expectations.

One is timing.

One is the currency headwind, the tax rate is the other thing that has changed.

I will say, and this is the reason we provided detail in our scripted comments.

That when we look at some of the analyst models that are out there, that it does seem as if, in many cases, the average share count is getting understated for 2016.

I think that's something to look at.

Again, we've provided, on this call, very specific guidance on what we're expecting to see in the average share count.

Remembering that we've put the share repurchase program on hold.

We're going to be issuing another 32 million shares to consummate the transaction.

And then beyond that, we're going to continue to see an increase.

Until such time as we put the share repurchase program back in place, and average shares associated with the employee equity incentive program.

Okay.

And then maybe just -- maybe a quick question on 2015 guidance for a second.

I know there was currency tailwinds and some other obsolescence and inventory headwinds.

But it does seem that there were 70 bps of underlying margin improvement.

And that particular margin improvement, Jim, in the first quarter, why would that not help to offset some of the incremental FX and tax pressures in 2015?

It looks like that would have maybe offset at least half of the $0.10 or $0.15 incremental 2015 headwind.

Again, it's $80 million of currency headwind in the quarter.

And that's high margin revenue.

So while the hedging program is effective in at least partially offsetting the effect of that, it just doesn't fully offset it.

And some of this as well has to do with where it's happening.

Where there's very significant currency headwinds, for example, is in some of the emerging markets.

And in those markets while we do hedge, we don't hedge to the same level because the cost of hedging is so expensive with respect to those currencies.

Okay.

But should the underlying margin performance, if there was underlying improvement in the first quarter, should we expect that improvement to sustain itself throughout the remainder of the year or not?

Yes.

We'll continue to see that through the remainder of the year.

And that is reflected in the updated guidance that we provided.

Okay.

Thank you very much.

Sure.

Julie, we have time for one additional question.

Thank you.

The last question comes from Larry Biegelsen from Wells Fargo Securities.

Please go ahead.

It's actually Craig on for Larry.

Thanks for squeezing us in.

Sure.

Just wanted to quickly asked about EPS growth beyond 2016.

I know you provided guidance of mid-teens or higher in 2016.

And then just wanted to know for the combined Company, what should we expect from an EPS growth?

I'll just reference the longer term, what we talked about in the past and continue to focus on as we put together our longer term strategic plans.

And that is to drive in the range of 8% to 10% growth in adjusted earnings-per-share over the long term.

Obviously, with the combination and now the updated guidance that we provided on synergies in the near term, that growth rate is going to be higher.

But long term, as I said, we put together our five-year plans, strategic plans.

The management team is going to be focusing on what it needs to do to drive that earnings growth in a range of 8% to 10%.

Okay.

Thanks.

And then just as a follow-up, the tax rate, you mentioned the tax rate increasing in 2016.

And just want to see where that goes in 2017 and beyond.

Can you get back down to what your original thoughts were on the combined tax rate?

That's a very good question.

There are a couple of things.

There's a lot of tax planning that is already underway with respect to the combined -- the anticipated closing of the transaction.

And I will tell you that that has been more focused on what the combined enterprise can do to get access to the cash it's going to be accumulating offshore.

And there are some things that we'll be able to do that will enable us to access quite a bit of the cash that's going to be accumulating offshore.

Something in the range of $3 billion to $4 billion over time.

And that obviously is going to provide the management team with an opportunity to do some things that could potentially drive leverage on the bottom line.

Including getting the share repurchase program back in play at some point, accelerating the debt repayments to bring the leverage ratio in line with something that is more in line with what you would expect to see for an investment grade credit.

And then we will be pivoting to, once the deal is closed, some tax planning initiatives that will focus on what the enterprise can do to drive down the effective tax rate over time.

We know that that's going to involve, among other things, moving manufacturing in some cases sourcing more of the demand that's offshore from our offshore manufacturing facility.

And do believe that that's going to provide opportunity to bring that effective tax rate down.

And just is this -- is that something that's going to happen immediately after close?

Can you start seeing a benefit?

Well, the planning will certainly happen immediately.

But the steps that it will take to actually realize the benefit will take more time.

Because, particularly when you're talking about changing sourcing within our own network, we certainly have control of that.

But that takes time.

Those manufacturing transfers take time.

And then it takes time to show up in the P&L to the extent that the inventory -- the tax benefit will be recognized as inventory that's getting sourced from new locations is getting sold.

Okay.

Thanks for taking the questions.

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 8:00 AM on July 30, 2015.

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.