Zimmer Holdings (ZMH)

Q2 2011 Earnings Call

July 27, 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

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

Daniel Sollof

Matthew Miksic - Piper Jaffray Companies

Robert Hopkins

Michael Weinstein - JP Morgan Chase & Co

David Roman - Goldman Sachs Group Inc.

Raj Denhoy - Jefferies & Company, Inc.

Larry Biegelsen - Wells Fargo Securities, LLC

Kristen Stewart - Deutsche Bank AG

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

Frederick Wise - Leerink Swann LLC

David Lewis - Morgan Stanley

Joanne Wuensch - BMO Capital Markets U.S.

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

Thank you. Good morning, and welcome to Zimmer's Second 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 discussion 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 section.

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 second quarter of 2011. This morning, I'll review our second 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.

Zimmer delivered a solid performance in the second quarter. These results were achieved amidst ongoing challenging global economic conditions and reflect the benefits of recent product introductions across our portfolio. Consolidated net sales for the quarter were $1.14 billion, an increase of 2.1%. And our earnings per share were $1.21, an increase of 11% over the prior year period.

Impressive performances in our Europe, Middle East and Africa and Asia-Pacific geographic segments supported Zimmer's consolidated results in the second quarter. Compared to prior year, Americas decreased 0.5%, while Europe, Middle East and Africa delivered growth of 5.3%, which we believe to be substantially above the market. And Asia-Pacific recorded sales growth of 6.2%.

The continued strong performances of our international segments reinforce the positive impact of investments we've made to improve sales execution in established markets, as well as to strengthen our presence in a number of key emerging markets, which provides significant long-term opportunities for growth. This promise is currently being realized in China, where our Legacy and Montagne businesses continue to perform well. We'll continue to invest in emerging markets, including a strong focus on medical education offerings to help train physicians to meet the demands of a growing patient population.

In the quarter, Zimmer continued to deliver against our financial commitments and targets. I'm pleased that progress in our business transformation initiatives has enabled us to allocate incremental resources to growth drivers, including marketing and selling investments in support of new product introductions. Ongoing investments in our sales channels in a number of markets contributed to an above-market performance in these regions. In particular, we've seen the benefits of scale and key markets, where Zimmer's service capabilities and broad portfolio of new and established, clinically successful technologies have enabled us to secure significant tenders that support continued growth.

Turning to the results of our product categories. Knees sales for the second quarter decreased year-over-year 0.8%, reflecting positive volume and mix of 0.8% and negative price of 1.6%. Our Knee franchise continues to perform consistent with the challenging market in the United States. Increased utilization of PRI and PSI instruments, as well as recent product introductions, including Trabecular Metal augment shapes and cones for revision surgery, contributed solid sales in the quarter.

Outside of the United States, the Knee business demonstrated improvement, including growth of 8.8% in Europe, Middle East and Africa compared with the prior year period, which is the highest publicly reported growth rate to date for the region in this quarter. In the EMEA segment, we were successful in securing large tenders in the quarter, which leveraged the long-term track record of clinical success of our NexGen knee System.

Hips sales in the second quarter increased 1.8%, reflecting positive volume and mix of 3.6% and negative price of 1.8%. Our Hip business continues to benefit from recently introduced customizable product lines, including the Continuum Acetabular System and the M/L Taper stem with Kinectiv Technology.

In the second quarter, we also launched several exciting new additions to our European hip portfolio at the EFORT Congress in Copenhagen. The new Maxera Cup is a large diameter head ceramic-on-ceramic system, that we believe will appeal to surgeons for their younger and more active patients. Building on the long-term clinical success of our CLS Spotorno stem, we introduced the CLS Brevius stem in Europe. These stem features a shorter MIS-friendly design that incorporates our Kinectiv Technology, enabling surgeons to interoperatively address leg length and offset through modular neck options.

In the second quarter, Extremities sales increased 3.6%. Sales of Trabecular Metal products in this franchise continued to be strong. To return to accelerated growth from this category, we're in the process of introducing several products and instruments, including our new anatomical shoulder combined adapters.

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