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.

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?

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…

Thanks, David. I will review our third quarter performance in greater detail and will then provide an update regarding our fourth quarter and full year 2011 guidance. Zimmer's total revenues for the third quarter were $1.031 million, a 2.4% constant currency increase compared with the third quarter of 2010. Net currency impact for the quarter was positive, increasing revenues by 4.5% or $43.1 million. Favorable currency contributions were driven mainly by our euro, Japanese yen and Australian dollar denominated revenues. Our adjusted gross profit margin in the third quarter was 75.8%. This represented a sequential improvement of 80 basis points over the second quarter and a decline of 150 basis points compared to the third quarter of 2010. This reduction resulted primarily from the impact of foreign currency hedging losses. The company's R&D expense constituted 5.9% of sales in the quarter, which represented a 6.6% increase when compared to the prior year period. R&D expense -- expenses continued to rise in line with or ahead of reported revenue growth. Our product development and clinical programs represent key drivers for accelerated growth. We believe the market will continue to reward innovations that provide value across a broad spectrum of stakeholders, including patients, clinicians and hospitals, our ongoing efforts in research and development focused on meeting this fundamental challenge. Selling, general and administrative expenses were $444 million in the third quarter, an increase of 8% on a reported basis. In line with our prior guidance and comments regarding seasonality, SG&A expenses represented 43% of sales for the quarter. Legal costs increased bad debt expense and a higher mix of revenues from developing markets, offset savings from our transformation initiatives within the quarter. SG&A expenses were also negatively impacted by foreign currency translation, which added approximately $19 million in the quarter compared with…

Thank you, Jim. Improved sequential performance in a number of international markets, as well as the positive contribution of innovative and proprietary product introductions across the portfolio, with a foundation for our solid performance in the third quarter. Looking ahead, we're not waiting for broader economic conditions to improve to deliver increased value to our stockholders. Our goal is to deliver at or above sustained market growth in each of our geographic segments and product categories. To achieve this goal, we will maintain a rigorous focus on our strategic priorities, which include a commitment to product innovation, an ongoing emphasis on emerging markets and disciplined sales and capital deployment. We also will continue to pursue opportunities for further external development where potential targets can deliver meaningful returns at a reasonable timeframe. Our current portfolio comprises the industry's most comprehensive clinically successful and customizable products. We're confident that we can continue to create value for all stakeholders with these offerings. The performance of our global sales teams in the last several quarters demonstrates what can be achieved when the industry's leading musculoskeletal solutions are delivered with strong sales execution. At Zimmer, we're focused on meeting our financial commitments into the future and to delivering both short and long-term value to our stockholders. And now, I'd like to ask Zatania to begin the Q&A portion of our call.

[Operator Instructions] And your first question comes from the line of Adam Feinstein with Barclays Capital.

David, your comment is about the utilization trend is being weaker than what you would view as normalized in population growth and such. So clearly, hedging cost is a big goal in the current environment with lower revenues. You guys have talked about your cost saving plans of $50 million in close savings. Maybe just give us an update and maybe just talk a little bit more about opportunities there. And then at the same time, just also wanted to get your thoughts you were talking about utilizing the balance sheet. You guys bought back a lot of stock in the quarters. Just as you think about additional opportunities going forward, I just wanted to get your thoughts in terms of the opportunities for additional stock buybacks and other uses of free cash flow.

Adam, this is Jim. I'll take a stab at answering that question, at least with respect to restructuring and transformation programs. As we've said before, the benefits from these programs are estimated at $100 million on an annualized basis with $40 million or $50 million, as you pointed out, to be realized in 2011. We're on track to realize the $40 million to $50 million of savings in 2011. As we said before, we expect the benefits to be somewhat evenly distributed between cost of goods and selling, general and administrative expenses. And at this point, I would tell you although we are now anticipating to be spending less in 2011 and are beginning of year guidance contemplated, our expectations with respect to the savings are unchanged. So we are effectively getting a higher return on the capital we are investing in restructuring and transformation. And to give you just the specific details on the adjustment to what we're planning on spending this year, some of the background as to why our forecast on spending has changed. Certainly, initiatives including those pertaining to manufacturing and distribution include potential changes that are still under evaluation. So as I said, some of the costs we have anticipated incurring in '11 are now expected to be deferred to 2012. We're now projecting to record pretax charges of $55 million to $60 million within the 2011 operating period related to restructuring and transformation. And as well we -- as we previously indicated, we're also effectively recognizing approximately $15 million to $20 million of integration costs related to recent acquisitions. That $70 million to $80 million in total compares with our guidance at the beginning of the year of $90 million to $100 million. Lastly, I would tell you that we are very excited about the opportunities we have to enhance the profitability of our business through the initiatives. The work we've completed to date validates the assumption that we can create value for our stockholders with programs that focus the organization on achieving operational excellence.

Okay. Great. Just on the additional stock buybacks or just uses for free cash flow, just wanted to get some updated thoughts there since you guys have used up most of the repurchase.

Sure. This is Jim again. We do typically return approximately 1/2 of our net income to stockholders on an annual basis through share repurchase programs. We have also used leverage opportunistically to acquire shares. And just to give you an idea how we think about that in evaluating the opportunity, we give careful consideration to our leverage ratio to ensure that we remain within rating agency guidelines for investment-grade credits. We also seek to maintain available capacity within those guidelines that will allow us to execute on strategic acquisition opportunities when they arrive. And we are interested in acquisitions that fit with our focus on musculoskeletal health and have the potential to create value for our stockholders. So as we said, as I indicated in my prepared remarks, with the enterprise value trading at less than 7x EBITDA, we saw a compelling opportunity in the quarter and decided to act on it.

Your next question comes from Bob Hopkins with Bank of America.

David, first question for you. It looks like, looking at your numbers and the numbers that others have reported, that the global hip and knee markets got worse on a comp adjusted basis in Q3, and you're lowering your top line constant currency guidance by 50 basis points, and that suggested things might have gotten worse as you exited Q3. So is that a fair assessment that things in your view are getting worse? And any other color you can provide on what you're seeing, especially in U.S. knees, would be very helpful.

Sure, Bob. I don't think that we see things getting worse. I think that the projected slight pickup in light of what we anticipated to be off of easing comps in the second half of the year really didn't materialize to the same degree that we expected at the beginning of the year in Q3, and so we're sort of projecting that out in Q4 as well as part of our guidance. But the overall market doesn't look like it slowed down in both those categories to us, Bob. I think that if anything, the hip market looks like it picked up on a global basis, and probably the knee market ticked down. The size of our U.S. Knee business is large and a bit more emphasized than some other companies, I suspect. So that step-down in even in tens of basis points in the U.S. market, we're going to feel the effect of that. But nothing about that changes our view as to the longer-term prospects of the business. These procedures will come back. And I think that people are just being pretty careful across the industry at projecting when there's going to be a pickup in those procedure rates. But we know those cases are out there.

I guess, I was referring to sort of on a comp adjusted basis, given how much easier comps are. So putting that aside though for a second, just in terms of what you hear from your sales organization especially in the United States, and the different metrics that you can look at in terms of backlogs or conversations with physicians, is your view in the U.S. that things are not getting worse in Q3 versus what you've seen in Q2?

I don't think that there's a material difference from what we've been dealing with in the prior couple of quarters or even the prior year, Bob. I think that people are anticipating a strengthening, and it really didn't materialize. And so on a relative basis, there might be a bit of disappointment in that regard. But I don't think that things are materially turning down in procedure rates at this point in time.

Okay. And then just one for Jim. Just this quarter, basically, you didn't have much in the way of operating income growth. You did have good EPS performance based on the buyback. And I guess, my question is, how long can that continue, where you can continue delivering high single-digit EPS growth based on buybacks or lower tax rate versus not seeing much in the way of operating income growth? So I'm just trying to get a sense for how sustainable you feel high single-digit EPS growth is if the current environment doesn't get better.

Sure. In fact, as you pointed out our updated guidance implies a little to no leverage at the operating profit line. But keep in mind to date in 2011, we've seen very strong results out of our international markets. Much of that coming from emerging markets where we are continuing to invest in expanding our local prices while seeing in the form of direct sales channels, at least given the stage of their development of those markets to have higher operating expense ratios. So there will be opportunities going forward as we establish more critical mass in those markets to get leverage. There's certainly opportunity to see leverage return to the P&L, notwithstanding what we're doing on the restructuring and transformation front as we see growth restored in our biggest market here in the U.S. That opportunity frankly, is pretty significant. If we can get back to mid single-digit growth in the U.S. market, we'll have some significant opportunity to see leverage return to the P&L. And as I said, we're also really excited about the opportunities we have to enhance profitability through the -- with the operational excellence initiatives. We're making progress. These are -- it involves some pretty significant changes to our business model, and we're still in the early stages, at least with respect to the operations side of the business, including distribution and manufacturing. You should know that we have hired in new talents with, we believe, the necessary expertise and things like Lean Six Sigma principles and quality excellence. We have engaged third parties as well to assist in what is an enterprise-wide drive to transform our manufacturing and distribution facilities and processes. So not only do we expect to get greater efficiencies and manufacturing and distribution, which will lead to lower costs, but we also expect to achieve a state of quality excellence that goes well beyond compliance with regulatory standards.

Your next question comes from the line of Michael Weinstein with JP Morgan. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: I want to follow up on Bob's question to a degree. If we look at the 5 last years, Jim, you guys have generated -- and this isn't taking 2011 here, you generated about $4 billion in free cash flow and to end up having returned $3.6 million, $3.7 billion in share repurchase over that period, so obviously incredibly high amount. I think I'd speak for a bit in the call and say that in the amount you bought back this quarter was obviously a strong statement. People like to see what you're doing with your cash. But if we say that under the assumption that the environment doesn't get any better anytime soon and that your revenue growth is kind of continuing at this maybe 2.5%, 3% level because of your other markets are doing. Is what we've seen in 2010 in really as much as anything -- sorry, 2011 is really as much as anything, what we saw this quarter -- this big buyback, this -- we're going to try and take 2.5%, 3% revenue growth. And if the markets are giving us better, we're just going to return our cash to shareholders. Is that what we should expect going forward just that? And again, I'm talking about this whole mixture if, okay, if our revenue growth doesn't pick up, if our end markets pick up, the best thing for us to do is continue to buy back our stock until it does.

Well, I have to tell you, Mike, that, that's not the way that we think about it. Our strategy has several sort of several elements to it. But at the high level, we believe, continue to believe that there are opportunities for growth, and so we continue to invest in a pretty aggressive way in innovation. And I would tell you we are really excited about the opportunities we're going to have to drive, take advantage of growth as we -- more normalized growth as we see that return at some point to the developed markets, but also drive share gains with some of the investments we're making in some new and innovative technologies across all of our product franchises. We -- there's certainly another element to the strategy, but it focuses on the business model and where we have opportunities to drive operational efficiencies. And we think those opportunities are pretty significant, that will lead to enhanced profitability. And then, finally, there's another sort of element to the strategy which we're focused on and sort of focused on with your question. We are committed to returning some of the free cash flow that we generate. That commitment will remain in place, but we're also interested in deploying capital for its acquisition opportunities, as I said, when they arise. So I don't -- we don't want people to think that we're not looking for opportunities to deploy capital towards acquisitions. We are going to be disciplined. We talked about how we think about that. We had some pretty high hurdles that we've put in place internally, including benchmarking acquisition opportunities, even share repurchases, but we think those opportunities are out there. And hopefully, we'll get a chance to execute on some of those opportunities in the short to medium term. Michael N. Weinstein - JP Morgan Chase & Co, Research Division: I think I'm pushing on it a little bit, Bob, and some others were as well, in part because it's -- your markets are doing what they're doing this year. There's only so much you can do about that. And so as a result, your top line is growing 2.5%, 3% and you're trying to grow your operating margins. But obviously, that's a challenge, given the mix of growth that you're seeing within your businesses. So you're turning, let's call it, 3% to 4% EBIT growth, maybe it's 4% and the 10% EPS growth this year because of the 6 points you're getting from share buyback. So the level, which you buy back stock going forward dictates whether you're a mid single-digit EPS grower or a 10% EPS grower. So that's I think the sensitivity from everybody on the call and on the street. Everybody's applauding the buyback this quarter, but I'm kind of wondering what's the right formula going forward?

Mike, I think one of the things that we're very focused on is ensuring that we take full advantage of the growth opportunities that we have. And as you said, there's a bit of that at this point in time, and I don't think it's for everything at all that is an externality in the way the procedure rates -- you even saw a bit of an uptick on the Hips side from sequentially from Q2 to Q3 of this year. And I think that, that's a sign that those procedures are still out there. I mean, the economy didn't get healthier. Consumer confidence didn't improve, but the need that those patients have broke through that barrier, and we saw a little bit of an uptick. I think the same thing will happen in Knees, and it's difficult to predict which quarter it will begin to occur. But those patients are still out there. In the meantime, we want to make sure that we're positioning the company to take full advantage of the growth opportunities that we have within Reconstructive, but as well in the emerging businesses, Spine, Dental, Trauma, Surgical and the emerging markets. And we're breaking through, making good progress in those investments, and I'm quite confident that you're going to see improved top line performance in all of those areas as we move forward. We've got the right product pipelines. We're strengthening our distribution channels. We're focused exclusively on this musculoskeletal space where we think we can just outcompete people, even in a slower market. And you can see where that's happening, even in big categories, like Hips. You can see where it's happening, where we have smaller market share in categories, like Trauma. And as we get all those cylinders firing, we're not going to have to rely on the growth numbers that you articulated to be able to sustain that earnings per share growth performance. And if you couple that with leaning out the operational expenses, as Jim has been discussing, to fund some of those initiatives in the interim period and still provide nice growth in earnings per share and be responsible about what we're doing with the cash and capital deployment. And as you emerge from this period and procedure rates tick back up, you're going to have a lean built P&L, the right pipeline and a global distribution channel to push those products through, and I think you're going to really like the results.

[Operator Instructions] Next we have Derrick Sung with Sanford Bernstein. Derrick Sung - Sanford C. Bernstein & Co., LLC., Research Division: I wanted to turn to the product cadence for your hip and knee line in the U.S. I guess, if I look at sort of kind of the growth pattern around your U.S. hip growth, we saw a nice acceleration coming into back half of last year into early part of this year as a result of new products. That seems to have slowed down a bit, and we've seen kind of a steady deceleration growth over the last few quarters. So I'm wondering on the hips side, is that -- is kind of the -- are the new products now starting to contribute less and less to your growth? Is that kind of what we're seeing on the hips side? And then on the knee side, you talked about your new product introductions into next year or in next year. How long does it take for those products -- traditionally, it's taking at least 6 to 9 months for it to see an impact for those new products in your numbers. So I guess, what I'm wondering is next year, do we kind of see a period where you're not seeing as much contribution from your new hip products with the new knees products rolled out yet, and we kind of get into this kind of period of all above, below market or no longer above-market growth? Maybe you could talk us through that a little bit.

Sure, Derrick. I think on the hips side, as we've said in the past, we felt that we have the right stem portfolio going back a couple of years and continued to innovate in that regard. But we have some gaps on the cups side and we feel really comfortable with what we've done to put out the right solutions on the cup side. We continue to see traction with those products. Admittedly, our performance in Q3 was a bit of a step-down on the hips side, and we'd expect that to come back and strengthen in future quarters. I don't think that there's anything of any significance in a way of a product gap that creates a barrier to us performing very well in the hip category within the United States market. And you can see that we're doing well with those products OUS. We are growing up into double digits in Asia Pacific with those products. We're finding terrific traction with all the products that are U.S. based in Europe. But then, we also have some unique products, including the Brevius Stem and the Maxera Cup that are specific at this point in time largely to Europe. So I feel very confident that we have the right portfolio of solutions in the hip category at this point in time, and there's no reason that we shouldn't be able to sustain our at or above-market performance in that category going forward, which is a trend rate for us relative to what has been going on in prior years within that important category. On the Knee side, we've talked about some of the instrumentation gaps that we have and developed in more contemporary solutions in that regard and then availing the Posterior Referencing-oriented surgeons to the NexGen knee system with…

Sure. So the temporary restraining order was extended out. And now we're heading towards a preliminary injunction hearing before the year is out, Derrick, on that. And so we won't be launching the product before that preliminary injunction hearing is held and the matter is resolved in a preliminary way through that process. And then we're anticipating the underlying case to go to trial sometime next year. It could be in the first half of next year, but those schedules can move around some. So the most likely scenario is that the product won't launch this year. And then we'll have to wait to see the outcome of the preliminary injunction hearing later on this quarter before we understand what will happen in 2012 with respect to that launch. But again, we believe that we and Seikagaku are not infringing the patents of Genzyme in that case, and we intend to vigorously defend our position in that case.

Our next question comes from David Lewis with Morgan Stanley.

Just 2 quick questions. First, Jim, and I apologize if I missed it. Your gross margins in the fourth quarter were a little bit stronger than we were expecting. Can you just walk through the components -- I think you talked about mix but specifically, sequentially mix and currency and the impact that had on gross margins?

What I would tell you is that it's really kind of the way you compare it to -- if you're comparing it back to the prior period in the third quarter of last year, we actually saw gross margin step down at about 150 basis points. And really, nearly all of that is attributed to the hedged losses that are running through cost of goods. And that's in line with what we anticipated coming into the year and in line with the guidance we provided for the full year. I will say that with respect to the full year guidance of 75%, given the strength this quarter and the way that things are playing out by quarter, it it's quite a bit of a step-down in gross margin in the fourth quarter, which could be attributed to somewhat higher unit cost as a consequence of some pressure on volumes as we anniversary out of some large pipeline inventory build that took place in 2010, and also recognized and realized the effects of the higher mix of revenues from international markets where our devices are generally sold at lower average selling prices. As a consequence, our gross margins are a bit lower.

And David, maybe just more of a strategic question. I know you've been getting a lot of outlook and strategic questions on this call. But for the last 8 or so quarters there's some pressure in the recon markets. You remain convinced, as you mentioned with the hip business, this particular quarter that those businesses can recover. But as we think about your strategic planning, obviously, I'm sure you'd take more than a 6- or 12-month view. As you think about your strategic planning, what are you running this business to in terms of your M&A strategy as it relates to spending levels? As you think about 3 to 5 years now, what is your updated outlook in terms of what the recon business can grow? Are you thinking about a low single-digit business, mid single-digit business? Are there still hopes that this could be an up or single-digit business? Because you can sort of predict when the markets recover, but I imagine you're thinking strategically about what these markets could grow, and I wonder if you can share with us your thoughts.

Just to keep that assumption centered, we think about it as a mid-single-digit growth market upon normalization. And the timing of that is difficult to predict because you're really relying on some form of positive momentum and the macroeconomic climate to cause people to become more confident that if they're in jobs, they're not going to lose their job while they're out getting one of these procedures, or they get enrollment rates back up in the U.S. due to the -- as it relates to the unemployment levels, et cetera. But there's no doubt in our mind when you do the demographic analysis that you can look at something in mid-single digits, and you're making some assumption to get there as to what kind of a mix benefit you're going to have if you innovate properly and you're doing things -- you're going to improve patient outcomes but also being responsible and acknowledging the cost pressures that are on the customers, then I feel very confident as well that you're going to be able to offset any sustained price pressure with mix opportunity. And so I think that, that's an appropriate way for us to think about this market.

And David, is there a catalyst you can think about that would lead you to believe that mid single digits is not appropriate and low single digits is appropriate. And if that were to happen, so, one, is there a catalyst for that? And if that were to happen, are there changes that you can and make to operating structure and capital deployment according to that changing growth?

Well, one of the things that we're going to consistently do, David, is examine within the musculoskeletal care space the portfolio to ensure that we're overdragging our investment in the higher growth areas, and there are subsets of this space that are higher growth areas, both by product category and geography. And that's a lot of what we've been doing this year. Most of that effort has been funded by the transformation initiatives as we repurpose dollars and redirect people towards those opportunities. So that's one thing that we can do. And then, of course, there's going to be a constant effort on our part on the inorganic growth side. We generate a lot of cash. Our preference would be to redeploy that cash in external development and acquire our way into adjacencies that make sense within the musculoskeletal space and ensure that we're attacking those higher growth areas to put ourselves in a position for sustained growth and to get the top line up, even in a difficult market. And I think that, that is doable. But at the same time, we're going to be very disciplined and responsible about how we price those deals and which ones we go after to make sure that we're going through all that effort and doing all the work so that it redowns to our stockholders benefit.

Your next question comes from the line of Charles Chon with Stifel, Nicolaus. Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division: I'd like to dig a little bit more into the strength outside the U.S., especially in hips and knees. And you spoke to how new products in instruments are driving the relative outperformance there, but is it really just that? Or is there more to the story, because you speak to infrastructure buildout and I'm wondering if you could be a little bit more specific on what the company is doing there? Are you acquiring local distributors? Are you moving into regions that are being overlooked by competition? And what is the margin profile on the incremental growth outside the U.S.?

Sure, Charlie. And this is an area that we -- I think have done a better job of focusing on strategic planning efforts. And then our annual operating planning efforts have shined a brighter light in some of these areas where we either have -- we're underrepresented relative to our global market share and profitable developed markets, or we're underinvesting in emerging markets that provided us with significant opportunities. So there are places where we've decided to go direct and do forward acquisitions of distributors because those are markets where we want to have more control, more direct control in the future and the markets that we feel are very attractive. But more importantly, we put more feet on the street in accordance with where we saw opportunities. I think that the OUS channels are doing a nice job of picking up on the opportunities they have for the emerging business markets that we have, meaning, Spine, Dental, Trauma and Surgical. So they're attacking those opportunities, and they have an infrastructure and channel that allows them to go after those opportunities and expand our market share there. And then, the emerging geographic markets have been a point of emphasis. We did a transaction in China with the Beijing Montagne deal last year. The integration is going well. We're continuing to grow our legacy business in that same jurisdiction. So it's a whole variety of strategies that we're executing relatively well right now, and you can see the returns that we're starting to develop in those markets. Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division: How much would you say that the emerging markets constitute of your OUS revenues? And how quickly is that segment growing?

It's a double-digit grower in the scheme of the overall revenue base. It's not a big percentage, so we're growing at a very rapid rate off of a small base. Charles Chon - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And my second question is just on the U.S. knees, more of the market, really. I can appreciate the dynamics are related to some of these macro issues that are impacting the market. But we've also, in recent years, seen an increase in competition, including customized implant solutions, robotic-based implants, which may not be as well understood when just looking at the numbers from companies that report results each quarter. So I'm just wondering do you think the perceived market softness could be masking to a degree some of these increased competitive dynamics. And for Zimmer, as a market leader in these, how do you guys contemplate these competitive issues?

I think that there is some level of traction on that front, but we have visibility to those numbers, and at least some of those instances and can estimate it out in other instances, Charlie, that cause us to believe that there is a pretty clear view as to the market. I think there has been a procedural slowdown. It's been more profound in knees than it's been in hips over time. And we've sort of seen that play out across the global market as well as between those 2 major product categories. I think that on your broader question, we're going to continue to innovate in this space, and I referenced that in my prepared remarks. We're not going to get specific about how we think the market is going to respond to the different offerings or what our specific strategies are in that regard. But I would tell you that I believe where we're headed is to take ourselves to a place where we're providing better patient outcomes in a cost-effective manner. So I'm very confident in our ability to compete against some of those -- some of those threats that you were referencing in the knee category going forward.

[Operator Instructions] Next, we have Joanne Wuensch with BMO Capital Markets.

One of the things I get from investors a lot is what about the price in Orthopaedic. And it's remarkable how consistent the price for your products in terms of price pressure has been. Do you have a view on why that may be so stable?

Well, I think, Joanne, there have been different geographic segments contributing to that price pressure, sort of at different places and time. And so we have had a pretty good experience in the European markets. We have significant market presence and share in those developed markets. There is negative price pressure in some of those markets. There's still some opportunity in other markets. And our price performance there has been somewhat augmented by some of the forward acquisitions we've done within that channel. The lumpiness that we see coming out of Asia Pacific is largely driven by the largest market there, Japan. So we go through the 2-year cycles and then get a year break as that anniversaries out then head back in for another 2-year cycle, and that's been the pattern for an extended period of time. Within the United States, it's more the case where it's been outlier pricing coming back, gravitating back towards the mean. And so, we have more statistical visibility to that one than you do in other areas that might be driven by central pricing controls because of the national healthcare system or austerity measures coming out of the centralized healthcare system. So in this case, obviously, it's the product of negotiations with a lot of customers. And the trend that we've seen that has been most forceful has been instances where there have been outlier pricing, the high side and they're pushing that pricing back towards something that is much closer to the mean. And over the course of the last several years, we can see that, that subset of our customer base on the high side getting cut down substantially, and that gives us a level of confidence that as we gravitate back towards the mean, the ongoing pricing risk in the future should be -- should wane over time.

Okay, that's helpful. My second question is the division that received the 483 letter from the FDA, can you tell us which one that is? And/or do you have any products that are pending regulatory approval in it?

Sure. It's the worse operations, Joanne, so that's predominantly the Reconstructive business. We do have products that are in the 510(k) process from that facility. We, in fact, just received the clearance within the last couple of weeks on a pending product in that case. So again, what we're committed to addressing the subsequent matters pointed out in the observations, we're deeply committed on the quality side. And I will tell you that the organization understands that there is no higher priority. It's the foundation of our core values, and we'll work hard to make sure that we get that area right. But I also want to emphasize that our objective, as it relates to quality, isn't just regulatory compliance. We have a vision for quality excellence that's integrated into operational improvement initiatives. And so we're on a journey from where we started several years ago to the promise land, and the promise land for us is world-class quality excellence in that category. And obviously, a byproduct of that is going to be regulatory compliance. But that isn't the extent of our objective or the end destination for us.

Your next question comes from the line of Rajeev Jashnani with UBS.

You've spoken quite a bit regarding the mix of geographies that are contributing to growth but also putting some pressure on margins, and you've also discussed some of your lean initiatives. And I was just wondering if you could talk about the net effect of these factors as it relates to the company to show leverage on the gross margin side, as well as on the SG&A side over the intermediate term.

Sure. Yes, as David indicated a couple of minutes ago in response to a question, the revenues at this stage, revenues from the -- what we define as emerging markets for our business, still represent less than 10% of our total revenue. Those again are markets that are growing in the area of 15% to 20%. Yet at the outsets, there are markets that because of the investments that are being made in the early stages of developing those businesses that are operating at lower EBIT margins, lower gross margins and lower EBIT margins than our total consolidated margin. But over time, we intend to run those businesses in a way where we are driving them towards an EBIT margin that is very much aligned with what we realize today. And when you look at our consolidated P&L, we -- we know we can do that. We've seen that in the way other markets have developed outside the U.S. We get there even in the event that average selling prices are lower and gross margins are a bit lower. We get there by setting up the business model in a way that service model, if you will, such that we're spending less money in, say, sales support than we do relative to our higher-priced markets. So in the short term, it's putting enough pressure, I guess, on EBIT margins, it's offsetting some of the savings we're seeing on the restructuring and transformation initiatives. But over the long term, we expect to get positive leverage as our percentage of revenues from those markets increases.

That's helpful, but I apologize, I'm going to try to push on this a little bit more. And I know it's difficult to put a final point on it, but when do you see better leverage coming out of those markets to drive better leverage for the organization overall? Is that something that you would care to try to put?

Well, we do our strategic -- yes, sure, we do our strategic planning of 5 years and our expectation and understanding how much more revenue is going to be coming out of those markets is at a consolidated level. We expect to see increased profitability over that 5-year strategic plan.

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

I just wanted to follow up on price if you could give us the U.S., EMEA and then Asia Pacific and then, any color that you might have on what to expect next year with Japan since -- unless the price cuts will roll back in come April?

Sure, Kristen. Americas was minus 1.5% in the third quarter. Europe was positive 0.4%, and Asia Pacific was minus 0.8% for an overall blended total of minus 0.9%, which is bang on where we were in the prior 2 quarters of fiscal year 2011. With respect to Japan, as you said, the expectation is that sometime in the first quarter, we would see pricing revisions coming out from the FAP process and that those would become effective at the beginning of April. All one can do at this point, because it's early enough in their process, is speculate about what that might look like. And I think that if you were looking for a number to put on that, I would say something in the mid-single digits reduction in price, just because that's kind of the pace that we've been on over the last couple of rounds. And I would think that, that would get blended in over the course of a 2-year time period, which has been consistent with what's transpired the last round or two.

And you've mentioned earlier that there was a -- Europe pricing was augmented by some forward acquisitions, can you just maybe explain that? Is that why EMEA was up 40 basis points?

This is Jim. Kristen, that is the case. Some of it's contributing to the positive price we're seeing at EMEA. Are these -- and distributor acquisitions in some of the emerging markets that have allowed us to capture margin that was previously captured by independent stocking distributors, and that is in the way we're measuring price and is getting reporting as positive price.

Okay. So excluding that, was EMEA kind of flattish then? I can imagine that it [indiscernible] much...

Well, we haven't provided that detail. And I think that's probably -- it's either, as I said, that may be a fair assumption, but again, I haven't done -- other than the math, I can't tell you exactly what that is.

And then, just on the 483, I just wanted to get a sense for what the next steps were -- you've mentioned that the FDA was going to be coming back to inspect. Do you have a sense of timing because this may just be a little bit of an overhang and just trying to understand kind of what the path is going forward, and I guess what the potential risk could be if it does escalate a little bit further?

Sure. So this is an area that we're going to maintain a lot of focus on, and not just as it relates to the Warsaw operations. These end up being learning experiences that we translate across the global operations to ensure that we're doing the right things and making sure that we're continuously raising the bar on our standards and formed by views of best-in-class in any of these areas. And so that work can become relatively expansive because, obviously, what we wouldn't do is just address an observation as it relates to the particular instance that has been identified. We're going to take those learnings across the Warsaw operations then, of course, review those same areas across other operations on a global basis. Some of the observations are a bit more straightforward to address than others. I think that we've made substantial progress. I would tell you all the observations at this point in time, we believe that we have substantially addressed probably a majority of the observations. But that doesn't mean that there isn't significant work yet to be done to fully address all the observations. And so, we'll be on that path. We've met with the FDA to discuss our -- this is after we submitted our written response to the observations, had a discussion with them, understand what their expectations are and are providing periodic reports to them voluntarily, so that they understand what our progress looks like on a month-to-month basis. And so I would expect that the reinspection would occur in the coming months, but wouldn't be able to pinpoint a particular date at this point in time. So as needed, we provide more information on this. But I do think that it's important for people to understand that we're going to take any observation that we get, whether it's from the FDA or a notified body or our own internal audit process very, very seriously. And we take these observations very, very seriously. But one should also conceptualize a bit the number of Form 483s that go out and understand the context in which we're operating. So we believe that these quality systems, robust quality systems aren't just important because we want to produce good products. We believe that those quality systems are important because those practices are just fundamentally good business. And so our commitment is 100% on this front, and we'll make sure that we get it right.

Could we be facing, I guess, additional spending levels going forward just kind of broadly, as you adopt some of the changes across all of your facilities from the sound of it? So [indiscernible] quality or it seems like you guys have been doing that for quite some time already.

We have been, and I would tell you that those quality initiatives are so integrated into our operational improvements that, that's really where we would capture those going forward. So it's part of transformation initiatives. And in the past several years, we've been making substantial investments in this area. So our guidance would contemplate anything that we would do in that regard going forward, Kristen.

Your next question comes from Matt Miksic with Piper Jaffray.

A couple of questions. But just, if I could, a clarification. I was hopping back and forth between a couple of calls. The letter is a 483, right? It's not a warning letter. Is that correct?

That's correct.

Or are we talking about the same thing?

They are the same thing. And it is a Form 483 with the observations listed.

Okay. So not a -- maybe a few steps down below the severity of, say, a warning letter for a facility, just for clarification. One question on some of your emerging markets, you talked a little bit about -- you mentioned Montagne in China and also your Legacy operations there. Could you talk a little bit about how those 2 businesses are sort of developing together? Has one helped the other, and if so, how? In particular, I'm curious about the development of the knee market in China.

Sure. I would tell you that the Legacy Zimmer business, Matt, has been focused on the premium price segment within that market, whereas Beijing Montagne's business was more focused on the middle market side from a pricing standpoint. That company had been predominantly focused on the hips side, had developed products and is beginning to do more on the knee side, but most of that business historically had been hip focused. And so we like the fact that we're going to have product offerings appropriately positioned for the different subsets of that growing market. I would also tell you that there have been some significant benefits to better understanding the distribution channel that had been built up by Montagne prior to the acquisition and then figuring out how we can further leverage that distribution channel even in instances on the premium side of the markets. So there have been terrific synergies. I think that the team has done an excellent job of integrating that business and executing year one's business plan. And they've done it at the same time where they have not lost momentum on the legacy business. So we feel good about the progress that we've made, particularly in the last year or two, within that important emerging market.

Okay. And then just for clarification, maybe growth in that market, is it really growing above and below market? And maybe just to sort of benchmark it for folks what do you think that -- the Orthopaedic market in China is growing, either in your sort of Legacy, your top Tier or in the middle market, whichever you're willing to talk about would be helpful. And then I have a follow-up on Trauma.

Yes, it's a double-digit grower, and it's going to be a sustained double-digit grower in our eyes. And we're getting all that growth, and we believe then some at this point in time relative to market growth, Matt. I mean, and just in magnitude, it's a $1 billion market or so that's going to become a $2 billion market in a couple of years. So none of these businesses in a market like that are going to be -- although impactful on the consolidated results in the short term, they provide nice growth, and you can see some of that growth coming through and positively impacting the geographic segment results on the top line. But in due time, I think that they will have a similar impact on the consolidated results for the company and, hence, start to focus on them.

Great. And then, on Trauma and maybe in Dental also, both have been performing well. If you could talk about your view there on what's been working for you in Trauma, is it products, is it distributor strategy? And then sort of a similar question on Dental. It was working for you there, how much of what you're showing is a result of the healthy market? And how much is what you're showing maybe a result of some of the products you're rolling out?

Yes, I think, in neither instances is it all that complex because it frankly isn't in this business. We've done a good job of innovating in both of those categories, Matt, and provided meaningful innovation in the eyes of the customers. And then, at the same time, concurrent with the investment that we've made and execution on the product development side, we've been investing on the sales channel side. And then getting those 2 things aligned, you can start to see the results we produced. And if you focused on the Trauma side, again, this was a plan that was developed 5-plus years ago. We've been executing that plan, and we knew that there were no short-term solutions to some product gaps that we had but sustained that investment, executed and getting the new products out the door. And the Zimmer Natural Nail line puts us in a very competitive position with these anatomically contoured nails within the Intramedullary Nail subset of that market. And we have a very competitive plate and screw offering in advance of that. So we put those 2 things together and then enhanced our investments and focused within the sales force on a global basis, and you started seeing the results that we've been seeing for the last 3 quarters now. So the key is to keep that pipeline flowing on the product side and to continue to make smart investments on the sales and marketing side and sustain that growth going forward. But it's a business that I feel very confident we're going to be able to maintain that momentum with respect to.

And the Dental. In particular, I guess, you've shown yourself to be interested on the strategic side there, that doesn't seem like that's been what's driving your growth here. Is that still an interest? And then, maybe talk a little bit about the market.

Sure. This is a market that we like as well. It provides a bit of a diversification relative to the payers that we see in most of the other businesses because it is more private-pay generated. That's its strength, and that's this market's weakness. And when the economy was facing the downturn in the early stages, obviously, this is a market that got hit harder. And I think that even now, you can see, although it stabilized over the last year, you can still see some lumpiness in the market performance. We saw OUS in a more significant way in Q3 than we did within the United States market, but we saw somewhat in the United States market as well. So again, in a stable economic environment, this is a very underpenetrated market. This is a solution that offers clinical and aesthetic benefits. But you have to have the customers with the wherewithal to trade up and buy a better clinical and aesthetic solution. And so it's going to be a bit more cyclical, directly in accordance with what the general economy is doing. So we like the space a lot. As you said, in an external development world where we could find a way to get more market share through inorganic growth. We would want to do that, but we're going to be disciplined about that. And I think that particularly because of the potential volatility of this market in accordance with the general economy, we're going to be disciplined about how we grow that business. And I think that we have a terrific team that have executed very well and if we find the right opportunities, we'll augment. If we don't, we're going to keep investing internally in this business. And I think our leadership team there will continue to have success going forward.

We've got time for one additional question.

Your final question comes from Larry Biegelsen with Wells Fargo Securities.

Just 2 questions here. First, what do you think procedure growth is for the U.S. new market in the third quarter and the second quarter, and is it decelerating? I'm wondering if the mix benefit from Patient Specific Instruments are masking a very weak procedure growth there. And my second question is on Extremities. For you guys, it has been a little bit below market for a couple of quarters. What's going on there? And has the market slowed? And what's your expectation going forward?

Sure. Good questions. I would tell you that on the U.S. knee side, I don't know if the market has changed dramatically. I think that there, on a dollar basis, could have been a step-down of 20, 30 basis points from negative 1-point something to negative 2.0 or 2-point something. And I think that most of that is procedure based, Larry. I don't think that across the broader market, we're in a big mix benefit period. I think that there's probably some mix opportunity that some are enjoying. The Patient Specific Instruments in that space is an area that probably most are getting some benefit from. But there aren't a lot of new system launches that would be driving benefits. So I think that you're operating in an environment where pure price is probably minus 2 for most, or at least lower single digits negative. And so that's how we see that space at this point in time. With respect to Extremities, we continue to do very well with our Trabecular Metal solutions within Extremities. And so the majority of our business and the majority of the market at this point in time is shoulder focused. And we have some product portfolio development efforts that are ongoing to address other anatomical sites, and so that's part of the answer for us. And then shoring up our upper extremity offering at the same time is part of the answer for us. But I think if that market continues to be healthy, it may have stepped down a bit but I don't think all that much, I still think on a global basis, it's a low double-digit grower. And I think it will continue to be primarily because there's meaningful innovation going on in that space to provide better solutions for patients than what they have had in past years. So we continue to like the Extremities market, and you're going to see us continue to maintain our focus on that market in our product development plans.

So with that, I'd like to thank everyone for joining the call today and for your continued support for Zimmer. We're glad that we could finally find our call coordinator, whose name began with a Z for today. We look forward to speaking to you on our fourth quarter conference call. It's scheduled for 8 a.m. on January 27, 2012. And so with that, I'll turn the call back to you, Zatania.

Thank you again for participating in today's conference call. You may now disconnect.