Zimmer Holdings Management Discusses Q2 2012 Results - Earnings Call Transcript

Zimmer Holdings (ZMH)

Q2 2012 Earnings Call

July 26, 2012 8:00 am ET

Executives

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

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

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

Analysts

Kimberly Weeks Gailun - JP Morgan Chase & Co, Research Division

Robert A. Hopkins - BofA Merrill Lynch, Research Division

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

Matthew Taylor - Barclays Capital, Research Division

Matthew Keeler - Crédit Suisse AG, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

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

Chris Hammond - Goldman Sachs Group Inc., Research Division

Steve Beuchaw - Morgan Stanley, Research Division

Rajeev Jashnani - UBS Investment Bank, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

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 J. Marshall

Good morning, and welcome to Zimmer's Second 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 second quarter of 2012. 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. I'll state all sales in constant currency terms, and I'll discuss all earnings results on an adjusted basis.

Consolidated net sales for the quarter were $1,125,000,000, an increase of 1.8%. And our earnings per share were $1.34, an increase of 10.7% over the prior year period. In the second quarter and for the first half of 2012, Zimmer delivered improved operating margins and earnings growth. The company continued to make meaningful progress in our commercial and operational excellence programs, delivering savings in line with our long-term goals.

Compared to prior year, we experienced sales growth in all of our geographic segments in the quarter. Americas recorded sales growth of 1.2%; Europe, Middle East and Africa delivered growth of 3.2%; and Asia-Pacific sales grew by 1.6%. Although our Americas growth rate accelerated sequentially from 0.8% in the first quarter to 1.2% in the second quarter, this performance still fell short of our goal of growing all 3 of our geographies at above market rates.

Our ongoing commercial excellence efforts, however, are focused on raising the performance of certain territories in the United States to the level of the many others that continue to perform well and are growing above market. These efforts, coupled with the strength of our current and upcoming new product introductions, give us confidence that we will accelerate our Americas growth rate in the coming quarters.

Our international segments continued to deliver solid results, despite challenging prior year comparisons due to the company anniversary and out of large knee tender in Europe, Middle East and Africa, and the impact of the biannual price reductions in Japan, which became effective in the quarter.

Turning now to our product category results. Knee sales for the second quarter increased year-over-year 0.8%, reflecting positive volume and mix of 3.6%, a negative price of 2.8%. Once again, our international segments contributed solid performances, with Asia-Pacific delivering growth of 5.9% in the quarter.

Globally, we continue to benefit from increased utilization of Zimmer Patient Specific Instruments, for our NexGen and Natural-Knee systems, as well as the Zimmer Unicompartmental High Flex Knee System. These intelligent instrument offerings are competing effectively with other more capital-intensive navigation and robotic systems. We're also highly encouraged by the progress of the limited developer release of our Next Generation Knee System. We look forward to expanding the limited release of this system later this year, which we are confident will significantly accelerate our Knee growth rate moving into 2013.

Hip sales in the second quarter increased 1.9%, reflecting positive volume and mix of 4.6%, a negative price of 2.7%. Here, our Europe, Middle East and Africa segment outpaced the market with growth of 4.4%.

In the quarter, our Hip business once again benefited from strong sales of the Continuum Acetabular System, reflecting continued interest in this differentiated system, which incorporates our proprietary Trabecular Metal technology.

In the quarter, we received FDA clearance for VIVACIT-E, our new highly cross-linked polyethylene formulation, which incorporates Vitamin E technology.

Building on the long-term clinical success of our

longevity highly cross-linked polyethylene, VIVACIT-E is designed for long-lasting performance in patients with the most demanding lifestyles. We're excited to make this latest innovation available to customers in the United States and other key markets around the world.

The introduction of VIVACIT-E further reinforces the productivity of our research and development programs. The material represents a step forward in orthopaedic material science, offering unique anti-oxidant properties for superior wear resistance. We believe that VIVACIT-E will become another premium differentiated platform technology for Zimmer like our Trabecular Metal Technology.

In the second quarter, extremity sales increased 6.4%, including an impressive 21% sales growth in our Europe, Middle East and Africa segment. This improved performance included steady sales of Trabecular Metal products globally.

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