Zimmer Holdings Inc ZMH
Q1 2013 Earnings Call Transcript
Transcript Call Date 04/25/2013

Operator: Good morning. I would now like to turn the call over to Bob Marshall, Vice President, Investor Relations and Treasurer. Mr. Marshall, you may begin your call.

Robert J. Marshall Jr. - VP, IR and Treasurer: Thank you. Good morning, and welcome to Zimmer's First Quarter 2013 Earnings Conference Call. I'm here with our CEO, David Dvorak; and our CFO, Jim Crines.

Before we start, I'd like to remind you that discussions during this call will include forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties.

Please refer to our SEC filings for a detailed discussion of these risks and uncertainties. Also, the discussions during this call will include certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included within the earnings release, which is available on our website at investor.zimmer.com.

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

David C. Dvorak - President and CEO: Thank you, Bob. Good morning everyone, and welcome to our earnings call for the first quarter of 2013. This morning I'll review our first quarter financial results providing commentary on the year's progress to-date and highlights from our performance. Jim will then provide additional financial details. I'll state all sales in constant currency terms, and I'll discuss our earnings results on an adjusted basis.

We achieved our financial commitments in the first quarter, delivering leveraged earnings per share growth. During the quarter, we continued the introduction of significant new product offerings across the portfolio which will accelerate top line growth for the balance of 2013.

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

Consolidated net sales for the quarter were $1.14 billion, an increase of 1% and our earnings per share were $1.41, an increase of 8.5% over the prior year period. In the first quarter, Americas sales grew by 0.1% while Europe, Middle East and Africa experienced growth of 1.8% and Asia Pacific achieved growth of 2.8% year-over-year.

We continue to deliver attractive growth in key emerging markets around the world. It's important to note that the quarter included two fewer billing days in the United States and in a number of other key markets compared with the prior year period. On a like billing day basis, relative to prior year, we estimate consolidated net sales growth for the quarter would have been 3.4%.

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

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

During the quarter, at the American Academy of Orthopaedic Surgeons' Annual Meeting, Zimmer officially introduced Persona-The Personalized Knee System. Surgeon response at the meeting was outstanding and clinical feedback from the first several thousand Persona surgeries has been excellent. The Persona System redefines personalization offering unprecedented options for patient specificity. To create a more natural feel and normal function for patients post-operatively, personalized implants and precision instruments ensure a better fit intraoperatively without the compromises inherent in competitive systems.

Persona-The Personalized Knee System is the most comprehensive and highest fidelity system ever developed, featuring anatomically accurate implant components and finer increments. The Persona system also leverages Zimmer's proven Trabecular Metal and VIVACIT-E technologies for exceptional performance.

We look forward to further penetration of this truly differentiated system as we continue to deploy implant and instrument sets in all geographic regions. Also, at the AAOS meeting, we launched iASSIST Knee, the Personalized Guidance System, which elucidate great interest from the surgeon community.

iASSIST Knee represents the next step in intelligent instruments offering significant benefits to patients, health care providers, and health systems. This innovative technology comprises disposable digital components that provide accurate intraoperative feedback and alignment validation during joint replacement, supporting more streamlined and personalized procedures.

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

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

As we build upon early success with each of these new technology offerings, we expect to deliver improved sales performance in our knee franchise globally. Hip sales decreased 2.4% in the quarter, reflecting positive volume and mix of 0.5% and negative price of 2.9%. Sales decreased by 1.3% in the Americas, 2.4% in Europe, Middle East and Africa and 4.8% in Asia Pacific compared with prior year.

We’ve established a comprehensive portfolio of offerings in our hip business supported by our proprietary Trabecular Metal Technology and by VIVACIT-E Advanced Bearing Material. Expanding our portfolio further, we recently received 510(k) clearance in the United States for the Avenir stem, a product that has enjoyed success in our European markets and that is compatible with the increasingly popular anterior spine approach.

Going forward we expect to leverage these broad offerings to improve performance in our hip business. Zimmer's extremities business recorded sales growth of 7.0% in the quarter. Our Trabecular Metal shoulder products continue to generate attractive sales. At the AAOS meeting we introduced the Trabecular Metal total ankle replacement system, which supports a unique lateral surgical approach.

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

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

Sales in our dental business decreased 1% in the quarter. We continued to face market softness internationally, with some stabilization in implant volumes in the United States. Zimmer Dental is receiving broad interest in the Trabecular Metal Dental implant for which positive clinical results have recently been published.

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

Our trauma business continued to deliver impressive growth in the quarter with sales increasing 10.7%, including 17.5% growth in Europe, Middle East and Africa. Once again, sales of our differentiated Zimmer Natural Nail products were strong in all regions. We also recorded increased sales of Plate and Screw Systems, including the NCB Periprosthetic Plates.

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

Zimmer Spine reported a sales decrease of 10% compared to the prior year period. In the United States we faced some disruption in the quarter stemming from actions taken during the fourth quarter related to our PEEK Ardis Interbody Inserter.

We do expect to resolve these issues by the second half of this year. Meanwhile, international results improved, including stable sales in Europe and growth of 19% in Asia Pacific. As we moved through 2013, we anticipate recent product introductions will contribute to improved performance.

Zimmer's surgical and other business delivered sales growth of 16.8% in the quarter including impressive performances in all three geographic segments. These results were supported by increased sales of our tourniquet and skin grafting products. Capitalizing on the acquisition of Dornoch Medical Systems we closed in late 2012, we recorded strong sales of our Transposal Fluid Waste Management system in the quarter.

I'll turn now to a couple of comments regarding the broader market and pricing. Although the global muscle skeletal market continue to be influenced by general economic conditions in the first quarter, growth rates remain in line with our expectation. With respect to pricing, we experienced price pressure of negative 2.0% in the first quarter and that’s a stable trend from the prior year and consistent with our guidance.

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

James T. Crines - EVP, Finance and CFO: Thank you, David. I will review our first quarter performance in more detail and then provide additional information related to our 2013 sales and earnings guidance.

Our total revenues for the first quarter were $1.139 billion, a 1% constant currency increase compared to the first quarter of 2012. As David noted, on a like billing day basis, estimated sales growth would have been an increase of 3.4%.

Net currency impact for the quarter decreased revenues by 1.2% or $13 million. The negative currency impact for the quarter related principally to our Japanese yen denominated revenues and was partially offset by positive currency impact from our euro revenues.

Our adjusted gross profit margin was 74.5% for the quarter. The margin ratio declined 30 basis points compared to the first quarter of 2012. In the quarter, foreign currency hedge losses to negative price offset cost savings from our operational excellence in transformation programs.

The Company’s R&D expense decreased 10.2% on a reported basis when compared to the prior year. As noted in the prior quarter, the decrease in R&D expense continues to reflect a natural decline related to the completion of a number of large projects as well as the efficiency benefits of transformation initiatives implemented in this function.

Selling, general and administrative expenses were $461 million in the first quarter and that 40.5% of sales were 10 basis points below the prior year. In the quarter increased selling and marketing and distribution cost associated with the commercialization of a number of new products as well as direct sales integration in certain key markets were offset by savings stemming from our transformation initiatives.

Special items amounted to $33.5 million in the quarter. Included in special items are costs related to our global restructuring and transformation initiatives, certain litigation related charges and integration costs connected with recent acquisitions.

Adjusted operating profit interest income the quarter amounted to $333.9 million. At 29.3%, our adjusted operating profit ratio was 40 basis points higher than the prior year first quarter.

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

Adjusted net earnings were $240.8 million for the first quarter, an increase of 4.1% compared to the prior year. Adjusted diluted earnings per share increased 8.5% to $1.41 on 170.7 million average outstanding diluted shares. These adjusted earnings per share are inclusive of approximately $0.06 of share-based compensation. At $1.28, reported diluted earnings per share increased 9.4% over the prior year first quarter, reported EPS of $1.17.

Our adjusted effective tax rate for the quarter was 24.8%, a decrease of 210 basis points compared to prior year. This rate reflects the full recognition of the R&D tax credit related to 2012, which was reinstated in January 2013 with the enactment of the American Taxpayer Relief Act. Our reported effective tax rate for the quarter was 23.1%.

During the quarter, we repurchased 5.4 million shares at a total purchase price of $392 million, enabling us to return increased value to stockholders. Approximately $623 million of authorization remains under our repurchase program that runs through December 31, 2014. The Company had approximately 169 million shares of common stock outstanding as of March 31, 2013, down from 177 million as of March 31, 2012.

Operating cash flow for the quarter amounted to $180.5 million, a decrease of 13% from $207.4 million in the first quarter of 2012. The decrease is driven by the ongoing build out of pipeline inventory in support of new product introductions.

Net inventories were $1.039 billion at the end of the first quarter, an increase of $44 million from prior year end 2012. Adjusted inventory days on hand finished the quarter at 311 days, an increase of 10 days compared to year end 2012.

As of the end of the first quarter, net receivables increased to $913 million from $895 million in the first quarter of 2012 or 2% over prior year. Our adjusted trade accounts receivable day sales outstanding finished the quarter at 70 days consistent with the prior year.

Depreciation and amortization expense for the first quarter amounted to $85.1 million. Free cash flow in the first quarter was $105 million, $54 million lower than the first quarter of 2012, we defined free cash flow as operating cash flow less cash outlays for instruments and property, plants and equipment.

The decrease in free cash flow reflects necessary investments in our product pipeline inventory and planned deployment of instruments to support the full release of Persona and other new products.

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

I'll turn now to our guidance for 2013. In our earnings release this morning, we reiterated that the Company expects full year 2013 revenues to increase between 2.5% and 4.5% constant currency when compared to 2012. We now expect foreign currency translation to decrease our reported 2013 revenues by approximately 1.5% for the full year. Therefore, on a reported basis, our revenues are projected to be between 1% and 3% above 2012 results. Previously, the Company had estimated foreign currency translation would decrease revenues by approximately 0.5%.

For the second quarter, we expect revenues to increase between 3.5% and 4.5% constant currency and between 2% and 3% on a reported basis when compared to the prior year. As a result of the change in outlook for foreign currency translation, we now anticipate higher hedge gains to be recognized in 2013; consequently, our gross margin ratio is expected to be between 75% and 75.5% for the full year.

Our guidance for R&D, SG&A, and interest expense for the full year remains unchanged. However, as we continue to support new product launches in the second quarter, our SG&A expenses for the quarter is expected to be at or near the high end of our full year guidance range.

Moving down the income statement, we now anticipate more significant tax benefits from our manufacturing network optimization efforts. As a result, we expect the 2013 full year effective tax rate to be around 26%.

Full year 2013 adjusted diluted earnings per share guidance remains within a range of $5.65 to $5.85. As previously indicated, to arrive at our anticipated reported GAAP earnings per share, you should subtract total charges for special items of $135 million pre-tax or approximately $0.60 per share.

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

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

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

David C. Dvorak - President and CEO: Thanks, Jim. Coming into 2013, Zimmer advanced a number of clinically differentiated new offerings through regulatory clearance and the initial stages of commercialization. Through the first quarter, we continued to receive a steady cadence of regulatory clearances for new products and technologies, demonstrating the ongoing productivity of R&D programs.

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

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

To improve our sales effectiveness and support of these new product introductions, we continue to make progress in our commercial and operational transformation programs. While we make the necessary investments to support our new product introductions, these programs also are generating savings that are in line with our long-term targets.

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

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

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

Transcript Call Date 04/25/2013

Operator: Matthew Taylor, Barclays.

Dan - Barclays Capital: This is actually (Dan) stepping in on for Matt. Just a quick question, I appreciate the comments you made on Persona and how that really becomes a more meaningful contributor towards I guess the back half of the year. Can you discuss, Gel-One, which you called out as a meaning contributor this year, power tools, VIVACIT-E, some of those pipeline items, are those kind of also expected to ramp the year or is it really mainly Persona where it is more of a back half contributor?

David C. Dvorak - President and CEO: We have exciting new offerings in all of our product categories, Dan, and I think it’s fair to say that the general launch plans for each of them would have them ramping as the year progresses, so if you look at knees, obviously Persona is the largest launch in the Company's history. We are just beginning that (general) release and the academy was really the formal initiation of the launch program, so that will ramp as the year progresses, but we do expect it to be impactful in 2013. Within hips our VIVACIT-E products has been out for a couple quarters and so the penetration rate continues to increase there and that's going to be a significant help within our hip business, the Avenir Hip Stem will just get going in the second quarter and so that will be a second half event for sure. Then you get into extremities, the total ankle replacement and now the Nexel Total Elbow, that really will continue to sequentially progress through the year within the extremities business. You asked about Gel-One; Gel-One really was launched in earnest at the very end of last year and we look to make good progress, are right on track if not a bit above our planned expectations coming into the year within the first quarter and feel very good about the execution that we're running to within that opportunity category and the list goes on and the others, I mean there is obviously very significant opportunity within the surgical business with some of the internal development projects that have been initiated and successfully completed over the last several years as well the external development projects, including the Transposal Fluid Waste Management System. So you should expect to see sequential improvement. I would tell you that I'm very confident that you're going to start to see some of the early benefits of these launches in the second quarter.

Dan - Barclays Capital: Then just one quick follow-up on R&D. It's a little below. We're expecting a little below than our 5% kind of range. I appreciate your comments on – I know you guys kind of completed a large number of projects. The transformation initiatives are obviously helping there, but as far as like a normalized rate going forward (is current), the 5% kind of a good rate or I'm just kind of curious about where you'd see that in longer term in normalized, I guess?

James T. Crines - EVP, Finance and CFO: I think that that is a good rate. It could differ in some periods, a bit below that. It could accelerate a bit above that. We will regulate it over time, but as far as the midpoint expectation, Dan, I think that reinvestment at that level was an appropriate way to think about it.

Operator: Bob Hopkins, Bank of America/Merrill Lynch.

Ravi - Bank of America/Merrill Lynch: This is (Ravi) in for Bob. My first question is just on Dornoch and really just how much capacity does Dornoch have to pick up loss business from the Neptune recall. For example, I think when you acquired Dornoch, they were doing about $10 million in revenue, but if the opportunity is there for them to do $30 million to $40 million, do they actually have the capacity to do that?

David C. Dvorak - President and CEO: They do. It's been a terrific effort I will tell you from the point of closing that transaction to ramping up production relative to the opportunity that we have before us and I want to give a shot out to the Dornoch team and the broader integration efforts that taking place within the organization because it is – it's been heartening to see the amount of work that people have been willing to put in to fully exploit the opportunity we have. We believed that was going to be a good fit and plug meaningful gap and address an opportunity that we have within our surgical portfolio and it exceeded our expectation to date, but we look to do big things in that category this year.

Ravi - Bank of America/Merrill Lynch: I just wanted to get your thoughts on the pending AAOS statement on the clinical benefit of hyaluronic acid. When are you expecting that letter to come out? Do you think there is any chance that they change their mind or what the impact of that letter to actually be on Gel-One and just the overall HA market?

David C. Dvorak - President and CEO: We aren't overly concerned about the outcome of that. The letters, I recall, went out for comment and I think the comments were due in the early part of March. There is speculation that the guidance document, whatever form it takes, may become available sometime perhaps next month. But I will tell you that the productivity that we're seeing within the sales force on the Gel-One product, and if you think about the entire trend within the field where payors are highly interested in early interventions and solutions that might represent either a deferment of a more significant procedure or even addressing that patient's issues to a point where a procedure – a follow-on procedure could be avoided, there is a high, high level of interest because it's a very cost-effective way to treat patients and care for them. So I don’t think that that market is going to go away and we've received terrific feedback on the users of Gel-One to-date. So, I believe that we're very well-positioned and I think irrespective of what comes out of the guidance document, we're going to continue to be able to address a significant clinical need with the Gel-One product.

Operator: David Lewis, Morgan Stanley.

Steve Beuchaw - Morgan Stanley: It's Steve Beuchaw here for David. A couple of housekeeping questions for Jim first. Number one, looking at the SG&A spend in the quarter, could you help us quantify or somehow dimension how much spend there was tied to the rather significant lineup of launches?

James T. Crines - EVP, Finance and CFO: I'm not going to get into providing very specifically what we’re spending, the exact dollar amounts on the promotion activities that occurred over the course of the quarter. I would just point out that if you look back over the past several quarters, SG&A has been on a very positive trend in terms of having us bring the ratio down through the restructuring and transformation initiatives that we have underway. Those programs are still progressing in line with our long-term plans. We're hitting the targeted milestones that we have outlined with each of those programs. But we are, as we pointed out, in the short-term reinvesting some of those savings in support of these new product launches. As I also pointed out in my comments, that's going to continue on into the second quarter. It's impacting and will impact on the ratio again in the second quarter, but as we progress through the balance of the year, you can expect to see us get back on kind of positive trend in terms of continuing to bring that ratio down as a percent of sales relative to prior period.

Steve Beuchaw - Morgan Stanley: One more housekeeping; did you happen to call out the impact of the MedTech tax in dollar or percentage terms in the P&L?

James T. Crines - EVP, Finance and CFO: It's not yet reflected in the P&L as we pointed out the fourth quarter call. The tax as it gets reported and paid, it gets capitalized, in our case in inventory initially. It will begin to show up in the P&L in the second half of the year and we’ve estimated that we would expect to see somewhere in the order of $10 million to $15 million of charges working their way through cost of goods in each of the third and fourth quarters as we work our way through the balance of the year. It did impact on cash flow in the quarter. It's included in the increase that I referenced in my comments in inventory that we saw in the first quarter.

Steve Beuchaw - Morgan Stanley: Then one for David, thinking about Europe specifically, you have a competitor that is expressing to the investors they have quite a bit of conviction in their ability to execute in Europe on share gains and commercial execution. Does your plan for the balance of the year anticipate that you continue to gain share. Can you just speak to the dynamics there and how you expect them to play out specifically in Europe?

David C. Dvorak - President and CEO: We do clearly expect to be continuing to take share in Europe, Steve. This is a business that's performed extremely well for us, for a good number quarters now and they continue to outperform the market. I think as we saw in maybe the second half of last year, and it looks like continuing into 2013, some of the developed markets are tough markets to grow and yet our team has been capable and delivering results that are consistent with several hundred basis points of above market performance I believe within the developed markets and then executing very confidently on the plans within the emerging markets, and so we absolutely do believe that we're going to be able to continue even if the market is a bit challenged at least the subset of them that are considered to be developed.

Operator: Matt Miksic, Piper Jaffray.

Matt Miksic - Piper Jaffray: One question just on APAC and Europe, particularly, it looks like a slight difference there may be in terms of hip and knee growth. Could you talk maybe about anything that's happening there in particular or any other (indiscernible), anything that's happening in those regions, any changes maybe you’re making there to help drive growth in those regions and then I have one follow-up?

David C. Dvorak - President and CEO: Sure. I think that the general program is a consistent one with the last several quarters, Matt, and again, I think that we’re outperforming the market in those developed countries by several 100 basis points we believe. Obviously, within the quarter we had a much stronger performance in knees than we did in hips, but we have some programs underway. To address that we have a good set of new product introductions that are going to assist in our hip performance on a global basis too and I referenced a few of those in the prepared remarks. So we’re going to continue to leverage this team and I believe we’re going to continue to see terrific results. I do think, Matt, that the hip market was a point or two slower than the knee market in Europe and at least in those developed countries. So that explains part of the disparity of performance relative to our own results as well.

Matt Miksic - Piper Jaffray: Maybe just sort of on similar lines and appreciate the color on price mix sort of hips and knees, but also currently noticing a little bit of a difference there and that mix is not usually a big part of the your story in Europe, but the difference seems to be predominately in mix. Could you maybe talk a little bit about, being as the relative difference and maybe trends you’re seeing in knees and so there is more flattish mix in hips?

David C. Dvorak - President and CEO: Yes, I think that there is a bit of a difference at a given point in time and I think if you look at where we are doing well and where we have opportunities for improvement within the hip franchise, some of the recent launches in the areas that are most supportive of revisions and I think that some of the competitors have had opportunities to accelerate the growth of their revision business, probably in a way that they didn't initially plan for it. But we've got a great pipeline, we are going to be able to exploit what we currently have and I'm excited about the things that are coming in the next handful of quarters, Matt, and I think that that will improve both our opportunity for unit and particularly in the premium side of the hip business with revisions and that obviously translates into mix opportunities at the same time.

Operator: Larry Biegelsen, Wells Fargo Securities.

Craig Bijou - Wells Fargo Securities: It's actually Craig Bijou on for Larry. Just a quick question on the EPS guidance. It looks like they were coupled with the gross margin improvement, tax rate improvement, so there is couple benefits that you are going to have for 2013 for the full year and I just wanted to see what – if there were any takes in terms of possibly raising the guidance or – sorry, negative impacts?

James T. Crines - EVP, Finance and CFO: Sure. Craig, the most significant negative impact would be the devaluation of the Japanese yen, which we've seen decline in value over the past six months by about 20 – somewhere in the neighborhood of 20% to 30%. We have a large business in Japan. It represents about 8% of our total consolidated revenues. So, while we are hedged and that's what's leading us to sort of lift the guidance for the gross margin ratio, for the year in absolute terms, we do lose some gross margin out of that business. We're able to offset that to some degree with hedges, but to be clear we're not fully hedged. There is some loss there. So we've taken that into account obviously, together with the lower effective tax rate. Again, the change in outlook with respect to the hedge gains been reiterating the guidance that we've provided for the full year. So all of that's sort of factored into the guidance that we've provided.

Craig Bijou - Wells Fargo Securities: Then one follow-up on Persona. I guess, what can you share about the metrics you're tracking in terms of what you deem to be successful adoption. So is it something like surgeon conversion and would you ever share that with us?

David C. Dvorak - President and CEO: Sure. I mean that's one of the key metrics and no, we're not likely to share with you, Craig, but we're rolling that – look, this is a very large multi-generational launch and it is formally initiated. So it includes a lot of instruments that's going out and you can see that reflected even in our cash flow statement with the instruments spend within the quarter and the investments that we're making there. So it's the biggest, fastest launch, but you'll recall that last year, we were slow walking this one to be absolutely sure that we had everything right, and I think that the methodical approach that we took in 2012 set us up very well for executing the plan that we have for 2013. So metrics will include obviously as a threshold matter getting the instruments sets out and deploy the allocation of those sets globally to opportunities that are consistent with our strategic priorities. As it relates to the launch and one of the areas that you mentioned is obviously very important to us to get those instruments sets into the hands of competitive surgeons and took up competitive units by virtue of the deployment of those instruments. So that is an area among several where there is a lot of intense target qualification and literally day-to-day and hour-to-hour attention being given to that elements of the Persona launch. What I would tell you is the interest level is very high including among competitive surgeons and the feedback that we've received today. The clinical outcomes from these cases has been nothing short of outstanding. So, I am very optimistic that this is going to be a successful launch and set us up not only to have good quarters as 2013 progresses, but good years ahead within our primary knee franchise.

Operator: Michael Weinstein, JPMorgan.

Kim - JPMorgan: This is (Kim) for Mike this morning. First question is on Gel-One. So you made some comments earlier in the call on Gel-One progressing ahead of expectations for you guys during the quarter. Can you just talk about why that is, what's been going better with the launch and maybe some of the progress that you are making with formulary status?

David C. Dvorak - President and CEO: Sure, we are making progress with specialty pharma side and establishing the appropriate hub relationships, and I think that we have a good plan and we continue to execute on all the infrastructure that needs to be established to fully exploit the opportunity, but in addition to that I would tell you that I think that, the reason that we're so confident that we're going to be able to do at or better than plan, and this is our plan as opposed to some of the speculation that the analysts have put out as to what 2013 might look like in this category, but we are still optimistic about our performance because fundamentally I think that the engagement level and the oversight of the sales of the product is high and excellent, respectively. We're doing all the right things, gaining a lot of momentum and engagement with the sales force. We knew that in the first phase of the launch. It was going to be all about leveraging our existing relationships. That starts with us ensuring that our sales force those that possess those relationships are engaged and making it a priority to ask for this business and to become more familiar with the sale which is a little bit different sale than what they have grown up doing on the implant side. So all the indications are very positive, and it’s one of a handful of top, top priority products for us this year because obviously it's a big opportunity for topline acceleration as it's a new product category and so there is no revenue cannibalization and fortunately we're in a position where we have several others that fit that same definition.

Kim - JPMorgan: A follow-up maybe for Jim on the second quarter guidance. So I think the guide looks like it's coming maybe a hair below the street on the topline and obviously some of that is currency, but certainly below on the bottom line. Can you just remind us, is there any delta in selling days in the second quarter and maybe it would be helpful, the gross margin might be swing factor there. How should we think about the gross margin sequentially from 1Q to 2Q?

James T. Crines - EVP, Finance and CFO: Kim, first of all on the billing days, as we said coming into the year that, I think everybody understands, we had two few billing days in the first quarter. We got back those two days, one each in each of the third or second and third quarters. I think that what I would focus on, I guess, with respect to the second quarter is the, just the stage of where we're at with the all of the new product launches. David talked about the fact that there are new launches occurring across nearly all of our product franchises and all of those launches require some level of support in terms of promotion activities, training activities, whether it's sales force training or surgeon training. So we're clearly going to be fully invested in supporting those launches to take full advantage of the opportunities we feel we have accelerate our top line growth. Then the other thing I would just point out is, probably helpful to go back and look at the SG&A ratios that we report out on a quarterly basis and I think if you do that, you would see that we typically gain much more leverage in the back half of the year, typically in the fourth quarter just as a consequence of the seasonality of our revenues and that rate, and the opportunities that we have to leverage our fixed cost in the fourth quarter relative to the earlier quarters in the year. I don't know that that's really fully appreciated in the analyst models, as I look at them, but it's really no more than that, that kind of leads us to the guidance that we provided for the second quarter.

Operator: Derrick Sung, Sanford Bernstein.

Derrick Sung - Sanford C. Bernstein & Co.: First a quick clarification on Gel-One, you mentioned Gel-One in the same – at the same time that you are talking about knee sales and I just wanted to clarify, our Gel-One sales now being logged in your knee sales category. Are they still in the other and if you could perhaps breakout how significant the contribution to that category from Gel-One was.

James T. Crines - EVP, Finance and CFO: Derrick, as a matter of fact – this is Jim. If you look at the sales table in the release, you'd see a footnote at the bottom of the table that does indicate that certain product sales have been reclassified from surgical and other category to knees. Now this is in recognition of the fact that we have a growing portfolio of early intervention devices that are generally used in treating pain or osteoarthritis of the knee joint, including Gel-One, DeNovo, but as well the DeNovo NT Natural Tissue Graft and our Chondrofix Osteochondral Allograft and recognized that these products are all sold through our global reconstructive sales channels and are expected to become an increasingly important sub category within our knee franchise, especially in the way in which they can be co-marketed with our partial knee replacement devices like the patellofemoral joint is in the uni knee. We have to help you with your sales models rather we will be positing a schedule on the investor page for our zimmer.com website showing the adjusted product category sales by quarter for the prior year. Those adjustments in response to your last question by quarter are small. The aggregate sales of the products were less than 1% of our consolidated sales in 2012, but again we anticipate significant growth in the sub category early intervention devices going forward.

Derrick Sung - Sanford C. Bernstein & Co.: Then just a quick follow-up on Dornoch. Could you give us a sense for the contribution that Dornoch made to your other category this year as well, or this quarter as well?

David C. Dvorak - President and CEO: It was relatively significant within the surgical line, but I would tell you probably round number something in the range of (half) the growth when you take that overall growth rate.

Derrick Sung - Sanford C. Bernstein & Co.: Turning to Persona, so one of the sort of consistent messages that we'd gone back from AAOS as we sort of surveys surgeons on their feedback to Persona -- there is generally strong enthusiasm many surgeons were very interested in using the product, but we did hear quite a few of them say that they weren’t sure if their hospital would be willing to pay a premium price for that product. So I was wondering if you could maybe give us some color on how you're approaching those discussions with the hospitals. How you're approaching that push back and kind of maybe what you're seeing there, that would helpful.

David C. Dvorak - President and CEO: Sure. What you are describing is not a different dynamic than any other product category or launch that takes place within the industry and I think we are all pretty familiar with the pricing environment that we are operating in and I think that that across the various competitors you get pretty consistent messaging as to what that pricing environment looks like, but I would tell you that one of the reasons that we are so enthusiastic about the opportunity that we have with Persona is that we do believe that we hit the mark with respect to innovation in a way that is going to resonate with various stakeholders that are going to be involved in the decision process, so we've spoken a lot about why we believe that this is going to prove to be a more personalized solution and improve the fit, feel and function from the patient's perspective. Your question specifically is to how you sell through the surgeons and the hospital administrators and other decision-makers in that process includes the fact that we developed a instrumentation and intelligent instrumentation that we believe can not only deliver a terrific result for the patient, but can make economic sense to the hospital administrators, the kitting of the instruments, and enhance the opportunity to make the procedure go very smoothly, less instruments sets, shorter OR times and improved turns, lower central sterilization costs with the instrument configuration, preoperative planning system that will enhance the productivity of the ORs, and the quality outcomes as well and then the advanced technologies. Obviously, the patient is going to care a lot about a premium technology like VIVACIT-E with 90% wear reduction test that we're going to be rolling out and publishing, but the surgeons and the hospital administrators are going to be able to focus and find a lot of value from elements of this system that include the fact that it's going to be the first fully cementless construct featuring Trabecular Metal technology on the femur, tibia and patella, and you can do some math around that in the OR for set time for cement and how much that adds to the procedure and again, on the patient side, that's increased tourniquet time, et cetera. So we just feel like this has been a huge effort that we've been able to pull together innovations not only on the implants, but the instruments, the configuration of those instruments, preoperative planning systems, intraoperative technologies that include eLIBRA, ISS, PSI and when you integrate all of those elements together, there is a value proposition for patients, surgeons, hospital administrators alike.

Operator: Joanne Wuensch, BMO Capital Market.

Joanne Wuensch - BMO Capital Market: Thank you much for taking the question and for that explanation on Persona related to price. I do have a question on extremities. I listened to you talking about the total ankle as well as a new elbow. Can you please remind us of where you are on the shoulder business?

David C. Dvorak - President and CEO: We do well in the shoulder business. Again, we've had tens of quarters of double-digit growth with our Trabecular Metal product offering on the shoulder side. So, we continue to innovate in that area, but we have a significant share position at this point in time and, frankly, Joanne, at this point with early launches in the ankle and relative market size, and elbows, even though we have significant leadership position in elbows, our extremities business to-date is all shoulders effectively.

Joanne Wuensch - BMO Capital Market: Then on the sales force side, can you give us an idea how you are adjusting those headcount numbers as you enter all of these new product launches?

David C. Dvorak - President and CEO: I mean, we obviously are expanding the sales force in a manner that's consistent with the focus products. So, in some instances that means more feet on the street as general sales reps. In other instances, it means enhancing the general reps' capabilities with the field specialists. So it's a combination of the two. I would tell you that it's probably a combination of those two on a global basis, but most significant emphasis placed on more feet on the street within the United States market because there are more of those product opportunities reside at least initially here.

Operator: David Turkaly, JMP Securities.

David Turkaly - JMP Securities: Just to push it a little bit on the Persona metrics, but given your size in the knee market today and all the new products you have from instrumentation and kitting, and the features you spoke about three quarters less than the year. Would it be fair to say that you expect to lead the knee market in the Americas before this year is out, i.e., take share?

David C. Dvorak - President and CEO: We going to have you present to our sales force at our National Sales Meeting, Dave, that is out goal. Look, we are the global leader in knees, and we have been added for a good number of years with respect to these various innovation efforts that have matured into the Persona System as well as all of the related and complementary surgical instruments and intelligent instrument offerings. So when you pull that together, you take the continuum of care with early interventions, the patellofemoral joint, the Zimmer ZUK, on the uni side, with excellent clinical results and leveraging off of our terrific legacy of next-gen and K2 systems and advancing into the next generation of solutions with the Persona offering. If we can't get this one right, shame on us, but we will.

David Turkaly - JMP Securities: Just as a quick follow-up on Gel-One. Obviously non-ortho guys used these products. I wonder, if you have any evidence that – where you stand today that some of your core non – just your hip and knee franchise guys have utilized the product or if that share is a little stickier to get into the non-ortho docs?

David C. Dvorak - President and CEO: Yeah, I think that our initial push, Dave, is within the ortho space, because that’s where we have the relationships. Now, we have phased plans as to how we are going to get after bigger and bigger pieces of this market, but the instant offense for us is clearly on the ortho side. Then with the establishment of the specialty pharma relationships, the pull-through scripts that flow, but again fundamentally we're leveraging our relationships with the orthopedic surgeons.

Operator: Richard Newitter, Leerink Swann & Company.

Richard Newitter - Leerink Swann & Company: Just two quick ones. First on extremities, I appreciate that most of your extremities right now is focused on kind of the upper segments within the body, but maybe just some of your competitors are seeing very strong growth in foot and ankle. I understand that your total ankle product is going to probably catapult you more significantly into that arena. Do you have any other internal or external plans for some of the kind of other (non-total) ankle replacement portions of that market that seem to be growing and where do you think you are on the – or how quickly do you think that total ankle replacement can begin to have foot and ankle impact?

David C. Dvorak - President and CEO: Good question. I mean it is (indiscernible) that we’re very interested in taking more advantage of obviously a fast growing space. You referenced Trabecular Metal Total Ankle Replacement System and that really is our entree into that space, but just to answer your general question, yes, we do have both internal and are interested in external development opportunities to expand our offering and make sure that we're working our way promptly towards a comprehensive offering and that anatomical space.

Richard Newitter - Leerink Swann & Company: Then just maybe a quick one on Spine. You said you had a bunch of new products anticipated. I wasn't sure if that commentary is directed for Asia Pacific specifically or the U.S. as well or globally? Can you just comment on what some of those new product areas might be? Then secondly on Spine, it looks like your pricing actually improved a little bit sequentially, any changes in the reimbursement landscape or price negotiation conversations?

David C. Dvorak - President and CEO: Sure, it did improve as you can see sequentially and it was fundamentally an anniversarying out of some of the more significant price downs that we experienced in prior periods in them. So, in our case a bit of stabilization on price and certainly want to work towards optimizing the chances that that we make that a trend. But we're a small player within that space, so it's tougher for me to give you much value, by the way, of extrapolating our experience into a broader market environment. I mean it certainly doesn't feel to us as though it's getting worse relative to where it was, and I do think it's an early sign of stabilization within our business on the price front. With respect to product development, we're very focused on innovating within the core fusion space and so the products that we have developed and begun to launch are focused in that area. We're doing very well with the Trabecular Metal interbodies, obviously some of what you saw in the U.S. business that I think would have make progress otherwise in the quarter, faced some headwind because of the PEEK Inserter that we had field action with respect to, but as I said we're well on our way to get in a 510(k) trial and getting that inserter and as a consequence the interbody back into our bag. Moving forward with that, I believe that will happen before the year is out on the clearance side. But in the meantime, we’re executing better OUS and I think that the spine team has done a good job of developing cost-effective solutions for some of those OUS markets in the core pedicle screw side, those products are getting launch. I think that we’re going to see productivity from those launches. Then back in the U.S., you know we've launched a couple of products that are important relative to the space. One of which is maybe a bit more niche, but an important one and a nice innovation and then are just beginning to launch, what I think will become meaningful within the year and that’s the APEX System that is more geared towards deformity and complex spine cases and that’s a subset of the market that is not insignificant that historically we didn’t have much of an offering to be able to compete effectively within. So I’m quite confident that we’re going to see sequential improvement within our Spine business as this year progresses.

Richard Newitter - Leerink Swann & Company: If I could just one last one on my first question on the foot and ankle space. Just can you maybe tell me what areas of that market do you think are most important as you kind of look to broaden out your scale. Is it on the distribution side? Or is there specific product area that you'd like to have?

David C. Dvorak - President and CEO: Well, I think it’s – for us it starts with the products. Obviously, you’re familiar with the space and so the call point becomes a bit different, but none of the distribution channel issues are paramount and so you’ve got the products to sell. So I believe that the TM Ankle is going to be a different (snicker). I think we’re going to be able to further leverage TM into that space and then obviously we have much of the capabilities necessary to do anything by the way of plating solutions and innovate within that space, because it's very transferable from our other businesses, including our trauma business. So we like it. We are going to grow it. We'll compete very effectively within that space going forward. As we have with other business segments, we are going to be hopefully smart methodical about the pace of investments in various areas and try to avoid the progress being serial across product development and distribution channel expansion, but you have to have the products before the sales force can become a productive investment for you. So, I would put it in that order.

Operator: Jeff Johnson, Robert Baird.

Jeff Johnson - Robert W Baird: David, just wanted to start with you on Gel-One and I think we are all trying to feel out here, can this be a $35 million, $70 million, $100 million product line this year, but as I think about the fact that you touch about 25% of the knee guys out there in the U.S., would it allow you that the formularies you are getting on, some of the commercial payor formulary, some of the work you're doing in the specialty pharma, getting on those panels. Would it be possible for you to touch or for a third to be maybe a half of your knee surgeons to have access to Gel-One this year?

David C. Dvorak - President and CEO: This is the first full year of the launch, Jeff, and I have no doubt that this is going to become a significant product category. First of all, it's a great product and the clinical results and the feedback that we are receiving is extremely positive. So there's some infrastructure to continue to build out on the sales side and some of which you were just referencing. We're doing exactly what we should be doing in that regard. I think that expectations for this product – I would tell you that, I look at it and say if you do the math on the subset of the market that we're going to have immediate access to, again, focusing on leveraging our orthopedic surgeon relationships, this can be tens of millions of dollars in 2013. But I think you start working your way up towards something like 50 and that's just – that's a big number to come out of the blocks and if you look at any of the competitors within this phase and the pace of penetration in the first full year, that would be, I believe, far and excess. Now, we're going to keep pushing the opportunity, but just to manage your expectations a bit, I'd frame it out to you that way.

Jeff Johnson - Robert W Baird: That's helpful. We've been saying 30 to 35. So I think it sounds like that. But it's kind of with where your expectations might be anyway.

James T. Crines - EVP, Finance and CFO: Yes.

Jeff Johnson - Robert W Baird: Jim, just one last question then for you, and obviously your big competitor, they reported last night has a slightly different hedging strategy than you do. But they pointed to the low end of their guidance range just given some of the end movements and what have you. Did you make any comments at all about the range of your guidance given some of the foreign currency headwinds you'll be dealing with this year?

James T. Crines - EVP, Finance and CFO: No. Very comfortable with the guidance we provided coming into the year and so we've taken into accounts the effects of the end evaluation in terms of what that will have in our business for the full year. We've – as I said earlier on the call, are going to have some opportunity to offset. To the extent we're not fully hedged, the hedge has certainly helped us recover some of the loss, top line and the impact that has on margin, but to the extent we’re not fully hedged. We have other opportunities mentioned. The fact that we’re going to have – now expecting to have a lower effective tax rate for the full year to offset the impact of the end evaluation. So very comfortable with the range we provided coming into the year and obviously, reiterated that in the release and on the call here this morning.

Operator: William Plovanic, Canaccord Adams.

William Plovanic - Canaccord Adams: Last but not least hopefully. Just two questions really, one and both SG&A related. Just to understand, as you talked about leverage through the year. I would take that’s predicated on a revenue increase and not a spending decrease? Then the second question is, as you look at the program you’re going through in terms of cost reduction. Is there a tipping point or a big step up at any point as you’ve eliminated some prior SKUs or what have you that help us drive some further benefits to the operating line?

James T. Crines - EVP, Finance and CFO: Let me just start up by kind of reiterating what we said coming into the year about the restructuring and transformation initiatives, in terms of how they’re going to impact on the current year. We expect to generate full year savings that are the actions that are going to be taken this year of about $80 million, $30 million to $40 million of that will be realized within the year. More of that perhaps in the second half of the year to work our way through the year and those actions are taken. So it is the case that there are cost reductions that are occurring as we work our way through the balance of the year, and that together with the leverage we are going to be able to gain from an accelerated top line are what will drive kind of leverage we are looking to achieve for the full year in SG&A. So it is a combination really of realizing that $30 million to $40 million in savings that we talked about coming into year, in terms of how that's paced out over the course of the year, together with the leverage, as a I said, from an accelerated top line as we get into the balance of 2013. So that again gets us to that 39.5% to 40% expectation that we have for the full year Bill.

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

James T. Crines - EVP, Finance and CFO: Yeah, I will say, there's no doubt that the revenue ramp is going to provide a meaningful lead to us, meaningful opportunity to drive leverage in SG&A in the back half of the year.

David C. Dvorak - President and CEO: I'd like to thank everyone for joining the call today and for your continued interest and support for Zimmer. We look forward to speaking to you on our second quarter conference call, which is scheduled for 8 AM on July 25. With that, I will turn the call back to you Marley.

Operator: Thank you very much. Thank you again for participating in today's conference call. You may now disconnect.