Zimmer Holdings' CEO Discusses Q3 2011 Results - Earnings Call Transcript

Zimmer Holdings (ZMH)

Q3 2011 Earnings Call

October 27, 2011 8:00 am ET

Executives

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

David Dvorak - Chief Executive Officer, President and Director

Robert Marshall -

Analysts

Adam T. Feinstein - Barclays Capital, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Michael N. Weinstein - JP Morgan Chase & Co, Research Division

Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

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

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Joanne K. Wuensch - BMO Capital Markets U.S.

David R. Lewis - Morgan Stanley, Research Division

Presentation

Operator

Welcome to the 2011 Financial Results Conference Call. I would now like to turn the call over to today's host, Mr. Bob Marshall, Vice President, Investor Relations and Treasurer. Sir, please go ahead.

Robert Marshall

Good morning, and welcome to Zimmer's Third 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 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 Zimmer's earnings call for the third quarter of 2011. This morning, I will review our third 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 will state all sales in constant currency terms, and I will discuss our earnings results on an adjusted basis.

In the third quarter, Zimmer continued to deliver against our financial commitments. Sales improved year-over-year, supported by above-market performance in a number of international markets. Our third quarter and year-to-date results continue to reflect the benefits of recent product introductions across our portfolio, backed by investments in marketing and selling. Consolidated net sales for the quarter were $1.03 billion, an increase of 2.4%. And our earnings per share were $1.04, an increase of 8.3% over the prior year period. Compared to the prior year, Americas sales were down 0.5%. While Europe Middle East and Africa delivered growth of 6.7%, and Asia Pacific reported sales growth of 7.1%. We believe we gained share in the quarter in a number of established markets in our Europe, Middle East and Africa and Asia Pacific segments. Over the last several quarters, we've made strategic investments in these regions to improve operational and sales performance contributing to these impressive results. China and other emerging markets also continue to generate strong growth, reinforcing their long-term potential.

Turning now to the results of our product categories. Knees sales for the third quarter decreased year-over-year 0.5%, reflecting positive volume and mix of 1.4% and negative price of 1.9%. While the knee market in the United States continues to be soft, our international operating segments delivered strong growth of 6.5% in Europe, Middle East and Africa, and 6.6% in the Asia Pacific region compared with the prior year. Globally, we're encouraged by increasing utilization of our Posterior Referencing and Patient Specific Instruments. Strong sales were also generated from our Mobile Bearing Knee and from revision products including the Rotating Hinge Knee.

In Europe, we believe Posterior Referencing Instruments are driving competitive gains. Additionally, there's growing interest in Patient Specific Instruments, which delivered sales growth globally of more than 70% in the quarter over the prior year period. Going forward, we're extremely enthusiastic about the product innovation pipeline we're pursuing within our knee franchise. This pipeline is populated with a range of technology innovations we believe will create significant value for patients, surgeons and hospitals in the coming years. We expect to begin to introduce these offerings in 2012.

Hips sales in the third quarter increased 3.9%, reflecting positive volume and mix of 5.5% and negative price of 1.6%. These results included strong above-market performances in international operating segments with Europe, Middle East and Africa generating 6.5% growth and Asia Pacific delivering 10.7% growth compared with the prior year.

Globally, we continue to see steady adoption of our most personalized product lines including the Continuum and Trilogy IT Acetabular Systems and the M/L Taper Stem with Kinectiv Technology. Outside of the United States, we're also benefiting from the increased penetration of hard bearing ceramic products, including the recently launched Maxera Cup and delta ceramic liners used in conjunction with the Trilogy IT and Continuum Cup Systems.

In the third quarter, Extremities sales improved 4.4%. Our Trabecular Metal Shoulder System continues to perform well against a number of new entrants into this increasingly competitive space. To accelerate growth in our Extremities business, we will be introducing new implants and instruments through the remainder of the year and into 2012 including products for upper extremities as well as other anatomical sites.

Our Dental business delivered solid sales growth of 9.2% in the third quarter. The Americas business generated growth of 18%, comprising organic growth of 4.6% as well as the contribution of existing Puros and CopiOs Allograft products distribution arrangement. Slower growth in international markets resulted from temporary distributor inventory reductions, as well as suppressed procedure volume in certain European markets resulting from broader economic factors.

New products, including the recently introduced Zimmer CurV Pre-Shaped Collagen Membranes contributed strong sales in the quarter. Following positive feedback from clinical assessments, we're preparing to launch Trabecular Metal implants to the European dental market more broadly, expanding the application of this proprietary and clinically differentiated technology.

In the third quarter, we again delivered above-market double-digit sales growth in all geographic segments in our Trauma business. Sales increased 14.2% over the prior year period, including standout 21.4% growth in Europe, Middle East and Africa. After several successive quarters of leading growth, Zimmer is becoming an established player in the Trauma market. With a comprehensive portfolio of innovative products, including the anatomically designed Zimmer Natural Nail family and the NCB Periprosthetic plating system for complex fractures, our sales teams are having success driving business in Level I Traumatology Centers.

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