Zimmer Holdings (ZMH)

Q1 2012 Earnings Call

April 26, 2012 8:00 am ET


David C. Dvorak - Chief Executive Officer, President and Director

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

Robert J. Marshall - Vice President of Investor Relations and Treasurer


Bruce M. Nudell - Crédit Suisse AG, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

Daniel Sollof - Barclays Capital, Research Division

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

Matthew S. Miksic - Piper Jaffray Companies, Research Division

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

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

William J. Plovanic - Canaccord Genuity, Research Division

Kristen M. Stewart - Deutsche Bank AG, Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

David R. Lewis - Morgan Stanley, Research Division

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division



Good morning, and welcome to Zimmer's First Quarter 2012 Earnings Conference Call. I'm here with our CEO, David Dvorak; and our CFO, Jim Crines. Before we start, I would like to remind you that our 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

Thank you, Bob. Good morning, everyone, and welcome to our earnings call for the first quarter of 2012. 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 all earnings results on an adjusted basis except as otherwise noted.

Zimmer delivered increased top line sales from the first quarter, highlighted by solid sales execution in our Europe, Middle East and Africa and Asia-Pacific segments. Zimmer's first quarter performance was in line with our expectations, setting the foundation for accelerated growth in the second half of 2012. We continue to be confident on the promise of a robust, new product pipeline across Zimmer's portfolio. Progress on our transformation programs is enabling us to make the strategic investments necessary to fully exploit the opportunities presented by these new products while at the same time meeting our financial commitments.

Consolidated net sales for the quarter were $1.14 billion, an increase of 2.7%, and our earnings per share were $1.30, an increase of 9.2% over the prior year period. In the first quarter, all of our geographic segments delivered year-over-year sales growth. Americas grew 0.8%; Europe, Middle East and Africa experienced growth of 4.2%; and Asia-Pacific recorded sales growth of 6.5%. Once again, we also recorded attractive growth in key emerging markets around the world.

Turning now to the results of our product categories. Knee sales for the first quarter increased year-over-year 2.4%, reflecting positive volume and mix of 4.9% and negative price of 2.5%. This performance was supported by improved sales growth globally, including an impressive 4.7% in Europe, Middle East and Africa and 6.9% in Asia-Pacific. Importantly, we generated more than 400 basis points of sequential improvement in the growth of our knee business in the United States relative to the fourth quarter of 2011.

Throughout 2012, Zimmer will begin introducing significant implant and instrument additions to the Knee portfolio. For example, on the first quarter, we introduced Patient Specific Instruments for the Zimmer unit compartmental High Flex Knee. This innovative system, as well as a number of other offerings to be introduced in the coming quarters, reinforces Zimmer's position in the exciting intelligent instrumentation segment. These streamlined disposable instrumentation systems are clinically relevant, cost effective and highly marketable. We believe they represent the next generation of orthopedic technologies, surpassing current navigation and robotic systems.

And finally, building on the long-term, market-leading success of our NexGen and Natural-Knee systems, at the end of the first quarter, we received FDA clearance for the first phase of our Next Generation Knee System. We're extremely excited to introduce this new system to markets globally over the next several years. As is typically the case with a technology of this magnitude, it will be available on a limited basis through most of 2012 in anticipation of a broad commercial launch thereafter.

Zimmer's hip business delivered sales growth of 2.5% in the quarter, reflecting positive volume and mix of 4.8% and negative price of 2.3%. These results were supported by the Europe, Middle East and Africa region with sales growth of 3.2% and the Asia-Pacific region with 7.6% sales growth. We continue to generate positive mix on our hip business, supported by strong sales of our innovative personalized product lines. For example, the Continuum Acetabular Cup construct continues to grow at attractive rates and offers opportunities for competitive selling. Expanding on our clinically successful barren surface options in the hip category, we also received clearance in Europe for VIVACIT-E, our new Vitamin E highly cross-linked polyethylene.

Zimmer's Extremities business recorded sales growth of 4.8% in the quarter. Our Trabecular Metal Shoulder products again generated attractive sales. As we move through 2012, we're excited by the potential of upcoming new products across a range of anatomical sites in this business, including the lower extremities.

Zimmer's Dental business recorded a sales decrease of 2.3% in the quarter. While we faced market softness outside the U.S., we anticipate improved performance in the second half of 2012 based on the expected impact of a number of recently introduced innovative products in this business, including products and new segments for the company. Notably, we introduced the Trabecular Metal Dental Implant in the United States market at the end of the quarter, and we began to introduce the Zfx CAD/CAM digital dentistry system in some European markets.

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