Zimmer Holdings (ZMH)

Q1 2011 Earnings Call

April 28, 2011 8:00 am ET

Executives

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

David Dvorak - Chief Executive Officer, President and Director

Robert Marshall -

Analysts

Michael Matson - Mizuho Securities USA Inc.

David Roman - Goldman Sachs Group Inc.

Robert Hopkins

Michael Weinstein - JP Morgan Chase & Co

Raj Denhoy - Jefferies & Company, Inc.

Kristen Stewart - Deutsche Bank AG

Derrick Sung - Sanford C. Bernstein & Co., Inc.

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Adam Feinstein - Barclays Capital

Presentation

Operator

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.

Robert Marshall

Good morning, and welcome to Zimmer's First Quarter 2011 Earnings Conference Call. I'm here with our President and CEO, David Dvorak; and our Executive Vice President and CFO, Jim Crines.

Before we start, I would like to remind you that statements made during this call that are not historical may be deemed 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 filings with the Securities and Exchange Commission 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 that was furnished in this morning's current report on Form 8-K. This information is also available on our website, www.zimmer.com, in the Investor Relations under Financial Information Reconciliation.

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

David Dvorak

Thank you, Bob. Good morning, everyone, and welcome to our earnings call for the first quarter of 2011. 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. As in previous quarters, I'll state all sales in constant-currency terms, and I'll discuss all earnings results on an adjusted basis except as otherwise noted.

Zimmer delivered solid sales results across all geographic segments and most businesses in the first quarter, resulting in improved margins and earnings. At the same time, operational improvements enabled us to accelerate our innovation strategy with a 10% increase in research and development investment in the quarter. Consolidated net sales for the quarter were $1.12 billion, an increase of 3.3%; and our earnings per share were $1.19, an increase of 16.7% over the prior-year period.

Through the first quarter, we again experienced year-over-year sales growth in all of our geographic segments. Americas grew 2.0%; Europe, Middle East and Africa delivered what we believe to be market-leading growth of 4.2%; and Asia-Pacific again recorded impressive sales growth of 6.9%. These results were delivered against the backdrop of an unprecedented tragedy in Japan, one of our major markets. Zimmer is committed to supporting our colleagues and customers in Japan who continue to demonstrate tremendous resolve in navigating the impact of the recent disasters.

Turning to the results of our product categories. Knee sales for the first quarter decreased year-over-year 1.0%, reflecting positive volume and mix of 0.7% and negative price of 1.7%. Outside the United States, our knee franchise delivered a stronger quarter compared with the prior-year period. On a global basis, the Zimmer unit compartmental High Flex Knee and NexGen Rotating Hinge products generated solid unit sales growth in the quarter. We also recently released several new products in Knees that leverage proprietary Zimmer technologies, including a range of Trabecular Metal augment shapes and columns, which significantly strengthen our offerings in the Knee Revision category and the NexGen LPS Mobile System, that now features Longevity Highly Crosslinked Polyethylene.

Looking forward through 2011, we expect sales of these new products and increasing utilization of PSI [Patient Specific Instruments] and PRI [Posterior Referencing Instruments] instrument sets to contribute to elevated growth in Knees, supported by improved execution and easing comps in the second half of this year.

We again delivered above-market growth in Hips in the first quarter, with the sales increase of 4.7%, reflecting positive volume and mix of 6.7% and negative price of 2.0%. Once again, the strong performance of our Hip business was supported by robust sales in the Americas, which delivered 5.0% growth and significant improvement in the Asia-Pacific region, which generated sales growth of 10.2%. We continue to benefit from improved mix on our Hip business, supported by sales of recently launched innovative product lines, including the Continuum Acetabular Cup System. The performance of the Continuum System reinforces the value of products designed to provide customizable treatment solutions, to enable surgeons to match their patients' lifestyle demands.

Our Extremities business posted solid growth for the quarter with sales increasing by 10.7%. The value of our proprietary technology is evident in the performance of this business, where sales of our Trabecular Metal products continue to be noteworthy. The Trabecular Metal Reverse Shoulder System is now the number one selling product in the reverse shoulder category.

Zimmer's Dental business continues to significantly outperform the market with first quarter sales of 20.8%. This impressive performance was broad-based and represents organic growth of 13.2%, as well as the contribution of our restructured RTI distribution arrangement. We're greatly encouraged by the continued strength of our Dental business, which maintains a broad and growing portfolio. In the first quarter, the newly released Tapered Screw-Vent Implant System with Crystal [ph] Options delivered healthy sales in the United States, and we're excited to launch this product in other global markets in the second quarter. We believe the overall Dental market is showing signs of recovery after a challenging period.

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