Zimmer Holdings (ZMH)

Q3 2010 Earnings Call

October 28, 2010 8:00 am ET

Executives

James Crines - Chief Financial Officer and Executive Vice President of Finance

Paul Blair - Vice President of Investor Relations

David Dvorak - Chief Executive Officer, President and Director

Analysts

Charles Chon - Stifel, Nicolaus & Co., Inc.

Matthew Miksic - Piper Jaffray Companies

David Roman - Goldman Sachs Group Inc.

Robert Hopkins

Michael Weinstein - JP Morgan Chase & Co

Kristen Stewart - Credit Suisse

Derrick Sung - Bernstein Research

Frederick Wise - Leerink Swann LLC

Adam Feinstein - Barclays Capital

Bruce Nudell - UBS Investment Bank

Joanne Wuensch - BMO Capital Markets U.S.

Presentation

Operator

Mr. Blair, you may begin your conference.

Paul Blair

Good morning. I am Paul Blair, Vice President of Investor Relations for Zimmer. I would like to welcome you to the Zimmer Third Quarter 2010 Earnings Conference Call. Joining me today to host this call are David Dvorak, President and Chief Executive Officer; and Jim Crines, Executive Vice President, Finance, and Chief Financial Officer.

This morning we will review our performance for the third quarter, provide you with an update on certain key matters, present an update on our outlook for 2010 and conclude our discussion with a question-and-answer session. We understand that this is a very busy reporting day, and we'll do our best to keep today's call close to an hour in length. Therefore, we ask that participants pose one question with one follow-up to allow as many callers as possible the opportunity to take part in today's call.

Before we get started, I would like to point out that this presentation contains forward-looking statements within the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995, based on current expectations, estimates, forecasts and projections about the orthopedics industry, management's beliefs and assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that could cause actual outcomes and results to differ materially from those in the forward-looking statements. For a list and description of the risks and uncertainties, see the disclosure materials filed by Zimmer with the Securities and Exchange Commission.

Zimmer disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, further events or otherwise.

This presentation also contains certain non-GAAP financial measures. A reconciliation of such information to the most directly comparable GAAP financial measures, along with other financial and statistical information for the periods to be presented on this conference call was included in the press release announcing our earnings, which may be accessed from the Zimmer website at www.zimmer.com under the section entitled Investor Relations.

In addition, we routinely post important information for investors on our website in the Investor Relations section. We intend to use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor the Investor Relations section of our website in addition to following our press releases, SEC filings, public conference calls, presentations and webcasts.

A rebroadcast of this call will be available from approximately two hours following the conclusion of today's call through the end of the day on November 11, 2010, and can also be accessed from the Investor Relations section of the Zimmer website.

At this time, I'd like to introduce David Dvorak, President and Chief Executive Officer of Zimmer.

David Dvorak

Thank you, Paul, and good morning, everyone. We're glad you could join us for today's call. This morning, I'll review our third quarter 2010 results and provide some commentary on general market conditions. Jim will then discuss additional financial details.

We delivered solid earnings and cash flow performance in the third quarter, notwithstanding challenging global economic conditions that negatively impacted procedure rates. Our performance reflects a focus on disciplined spending in executing our strategic plan. A core element of this plan involves a new product introductions across our businesses. These introductions will position us for an improved performance in the fourth quarter and accelerate growth beyond 2010 as the economy strengthens.

Net sales for the quarter were $965 million, a decrease of 0.5% on a constant-currency basis, and our earnings per share were $0.96 on an adjusted basis, an increase of 9.1% over the prior year period. For the quarter, our Americas and Europe, Middle East and Africa segments experienced constant currency sales declines of 0.4% and 3.8%, respectively, while the Asia Pacific region grew 4.2% constant currency.

Knee sales for the quarter decreased year-over-year 2.7% constant currency, reflecting negative volume and mix of 0.4% and negative price of 2.3%. Important advances for Zimmer Knees included a broader rollout of our Patient Specific Instruments and a limited rollout of our posterior referencing instruments.

Moving into the fourth quarter and to a greater extent throughout 2011, we expect to see accelerating growth with these knee instruments being deployed broadly. A number of additional MRI centers have been certified to process our Patient Specific Instruments, and we have had continued commercial success based on the unique and differentiating features and benefits of our system.

Meanwhile, early clinical feedback on our posterior referencing instruments have been very positive. Recent National Joint Replacement Registry data continues to demonstrate outstanding long-term clinical success of our NexGen and Natural-Knee product families, and we're confident that our enhanced instrumentation options will drive increased adoption globally.

Our Hip business performed above market in the Americas in the quarter with sales improving year-over-year, 2.7% on a constant-currency basis. Overall, our Hip sales increased 0.5% constant currency, reflecting positive volume and mix of 2.7% and negative price of 2.2%.

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