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Biomet Incorporated (Pending:BMET)

F1Q07 Earnings Conference Call

September 20, 2006 10:00 am ET

Executives

Dan Hann - Interim President, CEO

Greg Hartman - CFO

Chuck Niemier - President, Biomet Spine and Biomet Trauma

Analysts

Steven Lichtman - Banc of America Securities

Katherine Owen - Merrill Lynch

Milton Hsu - Bear Stearns

Michael Weinstein - JP Morgan

Bob Hopkins - Lehman Brothers

Presentation

Operator

Good day everyone and welcome to this Biomet Incorporated First Quarter 2007 Earnings Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I’d like to turn the call over to Mr. Dan Hann. Please go ahead sir.

Dan Hann

Thank you, Stacy. Good morning and welcome to Biomet’s first quarter conference call. Joining me this morning is Greg Hartman, our CFO; Chuck Niemier, President of Biomet Trauma and Biomet Spine; Garry England, COO for Domestic Operations; and Greg Sasso, Senior Vice President of Corporate Development and Communications.

To address any forward-looking statements made during the course of this conference call, we refer you to the paragraph regarding forward-looking statements included in Biomet's first quarter press release issued earlier this morning.

We will begin with sales. During the first quarter of fiscal ’07, net sales increased 5% to $508.2 million. International sales increased 9% while sales in the US increased 3%. Excluding the impact of foreign currency, which increased first quarter sales by approximately $3 million, net sales increased 4% worldwide. We are pleased that Biomet continues to gain market share in the domestic and worldwide reconstructive device market, principally is a result of a significant number of new product introductions and technologies that have recently been launched to our customers. However, the company’s fixation spinal sales were $12 million below management’s expectations during the first quarter of fiscal ’07.

The company has implemented numerous changes in its Biomet Trauma and Biomet Spine operations formerly known as EBI. First, we appointed Biomet’s former COO of International Operations, Chuck Niemier, with a proven operational track record as President of Biomet Trauma and Biomet Spine. Other key senior management changes at Biomet Trauma and Biomet Spine include the appointment of a new Vice President of Finance, with significant financial management experience, most recently with Aircast; and a new Vice President of Sales with over 20 years of sales management experience with J&J Orthopedics and Biomet Orthopedics.

While the revenue numbers at Biomet Trauma and Biomet Spine were disappointing during the first quarter, I can assure you that significant progress is being made. We have implemented a new computer system, replacing the outdated system at the former EBI operation. Additionally, sales support systems which allow the sales representative to place orders directly into the system have recently been installed and will continue being installed over the next quarter. Furthermore, we have begun in-sourcing the manufacture Biomet Spine’s hardware system and within the next nine months we plan to be manufacturing all the company’s spinal hardware systems in-house.

Biomet Trauma and Biomet Spine is currently adding research development and engineering team members in order to accelerate the introduction of new products to its customers. Indeed, Biomet Trauma will launch approximately 12 new products during fiscal ’07, while Biomet Spine will introduce approximately 15 new products during this fiscal year, including ten products that will be shown in North American Spine Society (NASS) meeting next week in Seattle.

We’ve critically examined the former EBI staffing needs and we have eliminated 330 physicians, or approximately 15% of EBI’s workforce, since May 31, 2005. These reductions should allow Biomet Trauma and Biomet Spine to show positive earnings growth throughout the remainder of fiscal ‘07.

Reconstructive device sales increased 9% worldwide to $351.7 million during the first quarter and increased 8% in the U.S. Knee sales increased 11% worldwide and in the United States during the first quarter, against last year’s first quarter growth rate of 17% worldwide and 16% in the U.S. Excluding instruments, knee sales increased 11% worldwide and 12% in the US. With last quarter’s knee market growth estimated to be 6.5% worldwide and 8% in the US, we continue to be pleased with the market share gains we were achieving in knees.

First quarter knee sales growth was driven by continued strong demand worldwide for the Vanguard Complete Knee System and the Oxford Unicompartmental Knee System. The Vanguard Complete Knee System, the most comprehensive total knee system on the market today, provides full interchangeability of the system’s femoral and tibial components to address virtually any anatomical difference regardless of the patient’s race, gender, stature or any other variables. The Vanguard is engineered to provide precise fit for all patients while providing greater bone preservation and competitive high flex systems. The Vanguard System can be implanted using Biomet's microplasty minimally invasive knee instruments or the Vanguard premier instrumentation.

Biomet continues to lead the market in minimally invasive total knee instrumentation as a result of its pioneering work and its technology. Approximately 1,300 sets of Biomet’s microplasty knee instruments have been released in the U.S. during the past three fiscal years.

The Vanguard premiere instrumentation rollout continued during the first quarter with approximately 270 sets now in the field. The premier instrumentation is designed for implantation of the Vanguard System utilizing a conventional open procedure.

The Oxford Unicompartmental Knee System, the only true mobile uni-knee approved for sale in the U.S. has experienced excellent long-term clinical success outside the United States. Results include a 98% success rate at ten years follow up, 95% success at 15 years, with 93% success reported at 20 years. During the first quarter of fiscal ’07, 160 domestic surgeons completed Oxford-specific training with approximately 1,500 surgeons trained during the past two years. During the second quarter, training for the Oxford system is planned for an addition 125 surgeons.

Biomet’s new revision knee system, the Vanguard SSK Super Stabilized Knee, continued to receive excellent market acceptance during the first quarter, as well as the Vanguard PFR patellofemoral replacement, a conservative treatment option for patients with cartilage degeneration isolated in the front mid section of the knee.

On October 25th, the California hospital medical center in Los Angeles will broadcast the first live webcast of the implementation of the Vanguard SSK Revision System which will be performed by Dr. Edward McPherson of the Los Angeles Orthopedic Institute.

The Vanguard SSK features various modular options that provide surgeons with the ability to customize the implant to accommodate the specific needs of an individual patient. Additionally, the modularity of the Vanguard SSK gives surgeons the ability to address complex bone defects often present in revision cases.

During the first quarter, we also continued to roll out Vanguard anterior stabilized implants and instruments. Additionally, the enrollment with the IDE study relating to the rotating platform version of the Vanguard was initiated during the quarter.

Next we’ll look at hip sales. During the first quarter, hip sales increased 8% worldwide and 3% in United States against last year’s first quarter growth rate of 12% worldwide and 7% in the United States. Excluding instruments, hip sales increased 9% worldwide and 4% in the U.S. Biomet’s alternative-bearing products continued to repeat strong worldwide market acceptance during the first quarter while the M2a-Magnum continued to further penetrate the metal-on-metal acetabular market.

Metal-on-metal acetabular system sales experienced 11.5% growth in Europe during the first quarter with 9% growth in the United States. Biomet C2a-Taper Acetabular System featuring ceramic-on-ceramic articulation and our proven porous plasma spray coating technology, continued to experience strong market acceptance in the U.S. with the introduction in fiscal year 2006.

The bone-conserving ReCap Total Resurfacing System, which is indicated for patients in the early stages of degenerative joint disease continues to experience strong market acceptance in Europe. In the U.S., 8 sites have been approved to participate in the IDE study for the Recap Total Resurfacing System and we continue to enroll patients with additional sites pending approval.

Biomet’s Taperloc porous coated hip stems continued to repeat excellent market demand worldwide during the first quarter. In Europe, the Aura, Aura II and the Biometric stems also experienced strong demand during the first quarter. Also, in Europe the bone master hip implant was introduced to the market, which is the first hip device to be offered with hydroxyapatite coating.

Clinical trials are ongoing in the US for a new generation of bone-sparing primary hip stems. The new balance and Taperloc Microplasty hip system will offer the industry’s first and most advanced design features for modern hip stem while maintaining the clinically proven Biomet’s design philosophy. The design rational for these reduced length component wills be suited to those surgeons offering minimally invasive hip procedures along with surgeons whose design preference is proximally coated primary hip. Surgeon feedback continues to be positive with more than 225 Microplasty stems implanted during the past five quarters.

Biomet initiated the launch of the Microplasty ASI, Anterior Supine Intramuscular Hip Program and began conducting cadaver lab training sessions for surgeons in the U.S. and Europe during the past quarter. To-date, approximately 100 ASI instrument sets have been rolled out and more than 80 surgeons have received ASI training with additional ASI labs scheduled throughout fiscal 2007.

ArComXL, Biomet’s highly crosslinked polyethylene, continued to receive excellent market acceptance during the first quarter. ArCom provides a 47% to 64% decrease in volumetric wear rates over standard ArCom in laboratory studies and offers a 30% increase in ultimate tensile strength along with similar wear-particle shape and size with no measurable oxidation exhibited for cell rated agents. Clinical evaluations are underway for Biomet’s Regenerex Titanium Construct, and we are scheduled to initiate the launch a Regenerex cup and augment midway through this fiscal year. As a result of Biomet’s pioneering efforts, Titanium has become a clinically proven material in the orthopedic market, resulting in optimal biological fixation. We believe the long-term clinical success of Biomet’s Titanium implants will translate into strong demand for Regenerex as the material of choice for porous metal constructs.

Turning now to extremities, sales increased 13% worldwide during the first quarter and increased 8% in the United States. Extremity products that experienced strong worldwide growth during the first quarter include the Discovery Elbow, Copeland [Humal] Resurfacing Head, Comprehensive Fracture Stem, ExploR Radial Head Replacement and the Maestro Wrist Reconstructive System, as well as the test shoulder system which is available in Europe.

The Discovery Elbow is a bone-sparing device that features an improved hinge design and utilizes an ARCOM direct compression molding polyethylene bearing. The bone conserving propylene shoulder is a resurfacing system used to treat patients in the early stages of degenerative joint disease. The comprehensive fracture stem is utilized to treat complex shoulder fractures, while the ExploR Radial Head Replacement continued to receive excellent market acceptance during the first quarter due to its modular design, including a tapered stem and a head design to articulate with the patient’s natural bone.

The Maestro Wrist can be used as a total wrist device for hemiarthroplasty for carpal replacement. Test shoulder, which is contributing to extremity sales growth in Europe, provides for maximum bone preservation due to its anatomical design and requires only one instrumentation system or implantation of all designs included in the system, including hemiarthroplasty as well as anatomic and reverse shoulder prosthesis.

Sales of bone cement and accessories increased 9% in the United States during the first quarter and decreased 11% worldwide. These growth rates were up against last year’s growth of 9% in the U.S and 16% worldwide. Biomet’s Cobalt and Cobalt bone cements received good market acceptance in the United States during this past quarter. Biomet’s Stage One Cement Spacer Molds continued to receive excellent market acceptance during the quarter, as the Spacer Mold offers surgeon an advantage over the conventional handmade and pre-made cement spacers.

Biomet initiated the rollout of the Stage One Cement Hip Spacer Molds during the fourth quarter and the full release was completed during the first quarter. We offered wide webcast training sessions for the Stage One Hip Spacer Mold during the first quarter, with more than 100 individuals participating in the training.

Now, let’s transition to dental. During the first quarter, dental reconstructive device sales increased 11% worldwide and in the United States. During the first quarter, a limited release for NanoTight surface technology was initiated for the Prevail and the straight wall Certain Implant designs. Approximately 150 customers worldwide were invited to participate, with full product release planned for the fourth quarter of fiscal 2007. NanoTight is a hydroxyapatite surface treatment that will initially be used on 3i’s Certain and Prevail Implant systems. This technologically advanced surface treatment incorporates a discrete crystalline deposition of nanoscale calcium phosphate, which is applied to 3i’s existing OSSEOTITE surface substructure.

The treatment offers a marked improvement of implant integration performance in terms of the quality of the bone implant interface as well as the speed of Osseo conduction, providing a more rapid and predictable treatment.

During the second quarter, 3i will focus on three key systems to drive growth during fiscal ’07, including: the straight prevail implant, the standard prevail implant and the enhanced NT, Natural Taper implant.

Next we will turn to fixation sales. Fixation sales decreased 5% worldwide to approximately $61 million during the first quarter and decreased 9% in the United States. Internal fixation sales increased 1% worldwide during the first quarter and decreased 10% in the US. External fixation sales decreased 11% worldwide during the quarter and decreased 16% in the US. Electrical stimulation devices increased 8% worldwide and in the United States during the first quarter.

New trauma products include the OptiLoc Periarticular Plating System, Biomet Vision Foot Ring System and the OrthoPak II. The OptiLoc Periarticular Plating System’s proximal tibial plates will introduce during the first quarter. During the second quarter, we plan to launch the OptiLoc system distal femoral plates which are designed for the fixation of lower extremity fractures in osteotomy. Manufactured from titanium alloy, the distal femoral plates are anatomically contoured and incorporate the SphereLoc technology that allows either a locked or non-locked screw to be used in the same screw hole. This comprehensive system offers color-coded implants and instruments for ease of use by the surgeon and the OR staff. A third quarter launch of the Distal Tibial Plate is scheduled which will complete the lower extremity line.

The recently introduced Biomet Vision Foot Ring system is a comprehensive external fixation system designed for the treatment of osteotomies, arthrodesis and fracture fixation indications. This system offers a simplified snap-fit application of all fixation components to the Vision Ring and can be configured into a multitude of constructs ranging from simple fractures to complex reconstruction. The Vision Foot Ring System is made of a lightweight carbon fiber which has radial movement and also provides for increased patient comfort. The OrthoPak II is a next-generation bone growth stimulation system for non-union fractures that offers rechargeable batteries for added patient convenience. Additionally, a new foil specifically for finger fractures was launched.

Craniofacial fixation sales decreased 4% worldwide during the first quarter and decreased 5% in the United States. Products launched during the first quarter were the LactoSorb Pediatric Extraction device, the Thin-Flap low-profile cranial fixation system and the Sterile Track Neuro System. Product introduction planned for the second quarter include the addition of longer screws, 14 and 16 millimeter to the SternaLoc product line for enhanced predictability and expanded out locations.

Also scheduled for introduction during the second quarter is the Resorbable LactoSorb Pectus Stabilizer. This is particularly important outside the US where the standard metal version of the Pectus Bar is not patent-protected. The Resorbable version will differentiate the product in markets outside the U.S. and will be the preferred application for small frame patients throughout the world.

In addition, we expect to introduce [Allogeneic] Plus during the first quarter. This biomaterial combines our current lecithin-based Allogeneic demineralized bone matrix with pro-osteon granules resulting in an improved bone graft material. By combing a scalpel with an osteo-inductive source into one product there will not be a need to subject the patient to a second procedure in order to harvest bone chips for use in the scalpel. This also results in an economic benefit due to reduction in OR time that can be realized.

Next, taking a look at the spinal product segment, sales decreased 6% worldwide to approximately $52 million during the first quarter and decreased 7% in the U.S. Sales of spinal products and orthobiological products for the spine decreased 4% worldwide during the first quarter and decreased 5% in the United States, while spinal stimulation sales decreased 9% worldwide and in the United States.

During the first quarter, the PEEK version of the ESL Elliptically Shaped Lumbar Spine System was launched in the US. ESL's elliptical shape offers optimal surface contact with the [pitegral] body in place. The availability of the ESL and PEEK material broadens the company’s product offering in the segment of the spacer market that addresses the direct posterior surgical approach.

During the first quarter, we completed the rollout of the Polaris Spine System. The Polaris is a next-generation Synergy Spine System offered in a 6.35 millimeter diameter top-loading rod system which utilizes patented helical flange locking technology. Additionally, the rollout of the stainless steel version of the Array Deformity Spine System was introduced during the first quarter. The stainless steel version broadens our product offering for the deformity correction system and builds upon the excellent early clinical experience of the original titanium version. The Array System includes various styles of screws and rods for scoliosis correction.

The U.S. IDE clinical trial for the Regain Lumbar Nucleus Replacement pilot study was initiated during the first quarter. The Regain is a rigid, one piece device made of pyrocarbon which is a highly compatible biomaterial. The device is held in the disc space by the natural bony anatomy of the endplates. The implant geometry is designed to maintain disc height and to provide for normal motion of the lumbar spine.

We are expanding our osteobiologic product offering with the addition of the Biomet DBM platform. Platform consists of freeze-dried sheets of de-mineralized bone matrix putty which can be hydrated using the Biomet Bone Marrow Aspirate Kit to produce a matrix that is osteo-conductive, osteo inductive and osteogenic.

During the first quarter, other product sales increased 5% worldwide to $43.6 million and increased 2% in the United States. Arthroscopy sales increased 13% on a worldwide basis during the quarter and increased 6% in the United States. [R Protect] products experienced excellent growth rates during the first quarter, include the EZLoc Femoral Fixation Device and the WasherLoc Tibial Fixation Device, as well as the InnerVue Diagnostic Scope System. Finishing up with soft goods and bracing, I am pleased to report sales increased 11% in the United States during the quarter and increased 10% worldwide.

I would now like to turn the call over to Greg Hartman who will provide some financial details.

Greg Hartman

Thank you, Dan, and good morning. Effective June 1, 2006, the company adopted the new accounting standard, SFAS 123 R Share-Based Payment using the modified prospective method. In accordance with this adoption method, the company is not adjusting its historical financial statements to reflect the impact of share-based payments. Adjusted results for the first quarter excludes the $0.02 per share impact relating to this accounting standard. In connection with the $4.2 million expense relating to 123 R, $3.4 million is expensed in the SG&A line and $822,000 in R&D.

The following discussion will focus on the company's results on an adjusted basis. During the first quarter of fiscal year 2007, net sales increased 5% to $508.2 million. Gross profit increased 5% to $369.4 million representing 72.7% of sales. This is a 40 basis point improvement over the first quarter of fiscal year 2006.

SG&A expenses increased 5% to $186.6 million, representing 36.7% of sales. R&D expenditures increased 13% during the first quarter to $23.5 million or 4.6% of sales. Operating income increased 5% to $159.3 million with operating margins at 31.4% of sales representing a 20 basis point improvement compared to the first quarter of fiscal year 2006. Net income increased 6% to $106.8 million while diluted earnings per share increased 10% to $0.44 per share.

As far as the balance sheet is concerned, cash increased $32 million despite the $73 million dividend paid during the first quarter and the $7.2 million used to repurchase shares. Accounts receivable decreased $14 million and days sales outstanding declined by four days to 88. In the summer months when sales are softer, accounts receivable tends to decrease slightly.

Inventory increased $20 million during the first quarter and days sales and inventory increased 14 days to 349 days. This increase is mainly in three areas: Europe where a normal inventory build is planned during the summer slow months; 3i where the company is working to get out of a backorder situation; and Japan where the company is launching the Biometric XR and the Vanguard RP.

Cash flow from operations totaled approximately $139 million during the first quarter. With regard to the share repurchase plan, we repurchased 210,000 shares during the first quarter for an amount of $7.2 million. Since December 2001, the company has repurchased approximately $32.6 million of its common shares for an aggregate cash amount of $1.064 billion.

Dan Hann

Thank you, Greg. During the second quarter, we estimate foreign currency will positively effect results by $4 million to $5 million. Consequently, we are comfortable with sales and earnings estimate of $519 million to $540 million and $0.44 to $0.46 for the second quarter of fiscal year 2007 respectively.

I am pleased with the sales growth of the orthopedic reconstructive device category, particularly our knee product category which continue to experience strong market demand with double-digit growth during the first quarter of fiscal '07. Biomet orthopedic continues to lead the market with the introduction of innovative products and technologies, along with its broad product portfolio of clinically-proven products. As mentioned earlier, much work is being done to improve our trauma and spine operations and we are confident that these teams are capable of producing incremental top and bottom line improvement as we progress through fiscal year 2007.

Thank you. With that, we would like to open it up to questions.

Question-and-Answer Session

Operator

We will go first to Steven Lichtman - Banc of America Securities.

Steven Lichtman - Banc of America Securities

Thank you. Good morning guys. Just a few questions. In EBI, you mentioned reduced head count of since May of '05. Had the reduction been pretty consistent during that period, or is it more recently? Did that have an impact in this past quarter, since it looks like most of the EBI segments did take a step back sequentially?

Dan Hann

A lot of the reduction has taken place this past quarter. This has certainly been a quarter of many, many changes, as you gathered. Admittedly, it was a difficult quarter. We were not making the progress initially we had hoped, so we started instituting more changes, beginning with Chuck Niemier taking over the Presidency of that operation. We've also eliminated some additional senior positions. We now have a new Vice President of Sales, which I mentioned; and a new Vice President of Finance, both of whom started during this past quarter, and a Vice President of Manufacturing, and Marketing.

But the Vice President of Sales has made numerous changes already during the quarter. We are turning over the lower end of the sales force, for example, putting in place new compensation plans. Frankly, we're making many difficult changes now, in order to grow sales and earnings in the future. As I mentioned before, going through the conversion of a new computer system this quarter, beginning to in-source our spinal hardware manufacturing, all of these changes create a great deal of disruption. But, yes, we have let go a number of people during the first quarter.

Chuck Niemier

Just also to clarify, our sales force is down almost 5% in size and quantity, and that does make up a portion of the number that Dan referenced.

Steven Lichtman - Banc of America Securities

Sure. Dan and Chuck, in terms of where you stand today, do you anticipate some changes to continue here in the near term, so that process is going to continue here in the near term?

Dan Hann

Yes. We are continuing to implement change and we will throughout the entire fiscal year. I would not expect changes of the magnitude we've seen during this past quarter, but we will continue to implement change as needed in our Spine and Trauma operations.

Chuck Niemier

I would agree with Dan on that. Obviously we want to get the changes done as quickly as possible, so we're on a hard push to get over this part of the process so that we can stabilize -- stabilize is probably the key term -- not only within the sales force, but within our team in-house.

Steven Lichtman - Banc of America Securities

Great. Just changing course, with the artificial disks in the news this week. Can you just expand more on your comments regarding Regain? I think you mentioned it was a pilot study. So when would you estimate more pivotal, if that was what you said? I think you mentioned that was lumbar, so what about on the cervical side?

Dan Hann

The Regain Lumbar Nucleus Replacement, we have started the pilot study this past quarter, actually late in the quarter, and that study will begin with 20 patients. Depending on the results of that study, it will move on to a pivotal study. In terms of the expected approval date, we're looking at 2011 as the earliest date for the Regain Lumbar.

As to our cervical disk project, I think that as you correctly stated, that's the Rescue cervical disk. That will be the same regulatory process, and we intend to start the pilot study within the next ten to 12 months. There the expected approval date would be some time, if everything goes according to schedule, in about 2012.

Chuck Niemier

To add to that also, the story of our competitors, they are going to get in the disk market, obviously quicker than we are. It's obviously not a situation that we're pleased with, but at the same time our competitors have gotten in on a quicker pathway, by acquiring technology from smaller start-ups farther down the regulatory pathway. We're looking at some opportunities now, and we're going to kick them around and see what makes sense, to see if we can't get to the market quicker than the dates that Dan emphasized.

Steven Lichtman - Banc of America Securities

Just lastly on that, it seems like those timelines are a bit of a push out. Is that right, and has there been any design changes, or what has happened in terms of the timeline there?

Dan Hann

Well I think these timelines have been pretty consistent now for the past few quarters. We have not, to my knowledge, there are no design changes that we've implemented. I would also add we do have several posterior motion preservation projects in R&D as well. So that's where we are today.

Steven Lichtman - Banc of America Securities

Got it. Okay, thanks, guys.

Operator

Our next question comes from Katherine Owen - Merrill Lynch.

Katherine Owen - Merrill Lynch

I just wanted to ask a question regarding your distributors. Dan, I know you had talked about changing some things in terms of requiring a minimum number of reps to get some better coverage out in the field. Has that happened yet? If not, when? Would it initially be disruptive, or would that be a relatively smooth transition when you go through that process?

Dan Hann

Katherine, if I can ask for a clarification. Which sales force are you referring to?

Katherine Owen - Merrill Lynch

I'm sorry, I believe you were doing it on the reconstructive side.

Dan Hann

This year we are aggressively adding people on the orthopedic side. Frankly, it's been going very well. I don't have the specific numbers in front of me right now, but we're pleased with the growth and the programs that are being implemented in that area. We are giving incentives to our distributors from a commission point of view to add more reps, for example.

Katherine Owen - Merrill Lynch

Then just a clarification: with the 5% decline in the sales force, was that specific to the EBI division?

Greg Hartman

Yes, yes it was.

Dan Hann

Yes. It was specific to EBI. Katherine, I would add, a lot of that is self-inflicted. As we discussed last quarter, we're trying to lift up that sales force and you're going to have some natural churning of the bottom rung as you start to build it.

Katherine Owen - Merrill Lynch

So just in terms of expectations, are you guys going to self-inflict for a couple more quarters? When do we think it would stabilize, versus starting to see net increases?

Dan Hann

Well, in all honesty, I would not expect to see meaningful change coming out of Spine and Trauma until the back end of this fiscal year. Then as we start to drive the top line, I believe you'll see the earnings driven as well.

Chuck Niemier

I'm repeating from the last question, I mean we're in a stabilization mode right now. We've had significant turnover in the sales force based out of Parsippany, and we've got to get it stabilized, we have got to get it trained, and we have got to get it appropriately organized and appropriately managed.

Greg Hartman

But getting back to your Biomet orthopedics question, Katherine, our goal is to increase that sales force here in the U.S. by about 10% to 15% in 2007.

Dan Hann

One final thing, coming back to your self-inflicted question, again as I pointed out, this past quarter has been a quarter admittedly of many, many changes. I would expect to see the self-infliction to ramp down, as we get greater into this fiscal year.

Katherine Owen - Merrill Lynch

Great. Thanks so much.

Operator

Our next question comes from Milton Hsu - Bear Stearns.

Milton Hsu - Bear Stearns

Good morning, guys. Just specific to the Spine and Trauma businesses, do you expect negative growth all the way up until the end of '07, is that what you meant when you were just talking about the sales acceleration? Or is it going to be flat, low single digits?

Dan Hann

Well, not having a crystal ball, and being in a very turbulent situation at this time, especially with all the changes we're making and the fact that we're trying to stabilize the sales force, if we can hold steady for the next couple of quarters, and then start to bounce, I think that would be a reasonable expectation.

Milton Hsu - Bear Stearns

Okay. And then just kind of a big picture question here, as you stabilize the sales force, how do you do that without really strong, new product flow at this point in time? I know you're probably going to be able to launch a couple more new products as you mentioned through the rest of this year, I guess it's a question of what comes first, the chicken or the egg?

Greg Hartman

Well I would argue we do have a fairly strong flow of products into the EBI sales force, Milt.

Dan Hann

Yes, our issues and our problems within Spine and Trauma are not a lack of good, clinically proven products. We have bigger issues related to restructuring the operation and execution. If you look at our just this fiscal year in the Fixation area, where the OptiLoc Periarticular Plating System, we had a first quarter launch of the Proximal Tibial OptiLoc, in the second quarter we're going to launch the Distal Femoral OptiLoc, in the third quarter we're going to launch the Distal Tibial OptiLoc Periarticulating Plating System. In the Spine side, we've got the Polaris, the ESL, and the Solitaire system, that will all continue to, we believe, to drive sales as we get to the back end of the year.

Chuck Niemier

Basically, I think it's maybe not the chicken and egg, it's more of what do you want? Do you want a good sales force and bad products, or do you want good products and a bad sales force? Obviously you would like good in both courts, but where we're at, we have a very young sales force, and they need to be trained, and we also need to get the fundamental blocking and tackling. It's been a common or very favorite term around Parsippany the last two-and-a-half months, is establishing fundamental blocking and tackling. That goes from a standpoint of not only developing the product, but producing it, getting it rolled out, having appropriate inventory control applications, scheduling, forecasting, all the stuff that's necessary, I think is just good Business 101 practices.

It was in existence, it's starting to develop, I do truly believe we're pulling together now as a team, instead of disjointed components. But it's a $400 million operation, and it takes a lot of inertia to get it moving all in the same direction. What is probably critical of the whole calculation of getting there is time. You have to be a little patient, to get us where we need to go.

But as far as the situation exists, it isn't anything I personally haven't experienced in my almost 26-year career with Biomet. We've had similar issues throughout other divisions for which I've been responsible, and the team that we've assembled there, these guys understand what needs to be done and collectively we're pulling together to get there. It's just a matter of getting established. Probably one of the biggest issues facing us at this point in time is with my change of responsibility, I also inherited a conversion to a complete new computer system. It's been an agonizing process, it is a process I've also been through before many times. But for those of you on this call that have experienced similar situations, it's difficult. It has caused disruption, and it's going to continue to cause disruption for another month or two, but hey, we're getting there.

The thing I'm most proud of is the combined effort of our Warsaw team and Parsippany team in working through this process, and probably for the first time in the history of Biomet that we've got these two entities working together, and I've really got to applaud Dan in is efforts and his vision towards globalizing and centralizing our management function. If it wasn't for that, we would not be anywhere near as far along as we are at this point in time. So that gives me great hope for the future, that we're going to get the ship righted and we're going to move forward.

Now the last thing I'd want to emphasize, I know it's not specifically the question, is it's awful nice to be going through this transition, and not have a working capital issue. That makes it a hell of a lot more palatable and probably easier. So all-in-all, I'd say it's going to be a positive situation long-term, but it's just going to take a little time to get to where we need to be.

Operator

Our next question comes from Mike Weinstein - JP Morgan.

Michael Weinstein - JP Morgan

Thank you, good morning. Can we turn to the Recon business for a minute? Your U.S. Recon business, hips grew in FY06 8%, knees grew 15%, but this quarter hips grew 3%, and knees grew 11%. Maybe we can start just by talking a little bit about that, and maybe you can give us a breakdown between units, price mix, and instruments. Thanks.

Greg Hartman

Well, for the quarter in the knee, 10% was units, 2% mix price, minus 1% in instrumentation. As to hips, 2% units, 2% mix price, minus 1% instrumentation. That's the breakdown for the quarter for the U.S.

Michael Weinstein - JP Morgan

I want to make sure I'm modeling correctly the impact of anniversarying some of your launches last year. As Biomet rolls out, for instance, these instrumentation sets you obviously see a benefit, but then as you hit those comparisons, you're going to have a drag because of that as we see the growth rate. How does that instrumentation comparison look over the next couple of quarters?

Dan Hann

It will be a headwind, Mike.

Michael Weinstein - JP Morgan

Any thoughts on quantifying?

Dan Hann

Well, it will be specifically difficult in the fourth quarter. If you recall last quarter, we rolled out quite a few knee instrument sets here in the United States, with respect to the Vanguard Premier instruments. We quantified that, it was an 8 percentage point increase to our knee sales in the fourth quarter.

Michael Weinstein - JP Morgan

Yes, I'm looking at that right now. How do we think about the mix price component as we go forward for the balance of the year?

Dan Hann

I think we would see that as fairly stable.

Greg Hartman

As Dan indicated earlier, we've been around the 2 percentage point or so over the last several quarters, and we really don't see that changing that much.

Michael Weinstein - JP Morgan

Okay. Just making sure we're think about the right pieces. As we step back from this quarter, obviously EBI had some issues for this quarter versus what expectations were, and overall that obviously impacted your performance. As we look at the next quarter and the guidance you've given, we're assuming overall that the company has some reacceleration. What drives that? How much is it just better performance by EBI, is it a pickup in Recon, what drives the acceleration?

Dan Hann

I would say it's a number of things, improvements on many different fronts. One, we hope to begin making some improvement in EBI gradually. We continue to drive the knee market very well. I would expect to see that continue. I would hope to see a little pickup on the hip side of the market.

As you may recall, coming midway through this fiscal year, we will have the Regenerex launch. We also are optimistic about the balance in Taperloc Microplasty stems. I would certainly hope to see a little pickup in the dental recon market, although the growth was acceptable this quarter, this past quarter that market slowed just a little bit, as did recon. So we would hope that the markets as we get in for the next couple of quarters, pick up just a little bit, which will boost our growth.

We continue to do well, for example in extremities, and I would expect to see positive growth continuing along our extremities line, and we continue to make progress in bone cements. Remember, we will finally get over our headwind that we've had in bone cements for the past few quarters, in the second quarter or third quarter of this year.

Greg Hartman

That's correct.

Dan Hann

We're optimistic about the progress as we move through this fiscal year.

Michael Weinstein - JP Morgan

Just to be clear, the deceleration we saw in the U.S. hip and knee business this quarter, do you think that was an anomaly? Is that going to reverse?

Greg Hartman

I think you have to look at that, and compare it to what the market did, Mike. If you look at our 12% growth in knees, that's almost a 400 basis point improvement compared to the market's growth last quarter in the U.S. of a little bit over 8%. If you look at our 4% hip growth, which as Dan indicated, we weren't pleased with in the U.S., that was only about 100 basis point shortfall compared to where the market was. So I think that if you benchmark against the market, we together did fine.

Dan Hann

Also on the hip side, remember we grew worldwide for the quarter 7% constant currency against a market growth of 4%. So outside the U.S., our hip growth was very solid, and we want to continue to build on that.

Michael Weinstein - JP Morgan

Okay, my last question here, I apologize. The expectation going forward is that you'll continue to grow perhaps slightly above market, but that market growth will accelerate, or market growth will remain the same?

Greg Hartman

We think that the market growth will accelerate.

Michael Weinstein - JP Morgan

Okay.

Greg Hartman

Mr. Hann has to run to a board meeting here shortly, can we have just one more question.

Operator

We'll take our last question from Bob Hopkins - Lehman Brothers.

Bob Hopkins - Lehman Brothers

Thank you very much. Just a couple of quick questions. I'm sorry if I missed this, but did you reiterate your full year guidance that you provided at the end of the last quarter? And if you didn't, could you comment on that?

Greg Hartman

What we do, Bob, is in the fourth quarter we will give guidance for the first quarter of the next fiscal year, and for the entire fiscal year. We just -- in the press release, and in Dan's comments earlier -- gave guidance for the second quarter.

Bob Hopkins - Lehman Brothers

So does that mean that the guidance you provided for the full year previously stands?

Greg Hartman

Well, I trust that Wall Street's going to adjust things based on where we came in this quarter.

Bob Hopkins - Lehman Brothers

Right -- no, I understand that those are two separate things. Guidance and where consensus falls out. So bottom line, you don't have any updated guidance for the full fiscal year?

Greg Hartman

Like we said, we give guidance for that next quarter, and assume that Wall Street is going to put forth your own guidance, or your own estimates, I should say.

Bob Hopkins - Lehman Brothers

I see. Got it. When do you think we can hear about clarity on the issue of current management structure, and the interim title for Dan right now, and just when will that be finalized, do you think?

Dan Hann

Well I assume you've followed the press releases, but we did recently announce that our Board of Directors retained Heidrick and Struggles and McLoughlin and Associates, to assist the Board with the search for a permanent CEO. I think as I previously said, the Board is committed to moving expeditiously with this search, but unfortunately I can't give you a date certain that an announcement will be made. But please bear in mind that this is one of the most important decisions that a Board of Directors can make, so the Board is being deliberate, and they certainly have my full support.

Bob Hopkins - Lehman Brothers

Great. Just two other really quick ones, back to Milton's question, what you're talking about for the Trauma and Spine business, what I think I heard is expectations for relatively flat growth over the next couple of quarters, and then an expectation that towards the end of the year, we might see a pickup in revenue growth. Is that what I heard?

Dan Hann

Yes, I think that's what you heard.

Greg Hartman

We also prefaced that with we don't have a crystal ball but that’s our objectives, and we're relatively confident that we're going to get there.

Bob Hopkins - Lehman Brothers

Finally, on the U.S. hip number this quarter, do you think you felt any impact from Zimmer's wide diameter launch?

Dan Hann

No, I don't think so. Again from a worldwide perspective, we were ahead of the market. We were down just a little bit compared to the rest of the market this quarter. No, I don't think so.

Greg Hartman

I must have missed that press release, Bob. What did you say?

Bob Hopkins - Lehman Brothers

Just that the metal-on-metal wide diameter had been launched --

Greg Hartman

Their large diameter, yes.

Dan Hann

No, we haven't seen any, it has not had an impact.

Bob Hopkins - Lehman Brothers

Okay. Thanks for taking the call.

Dan Hann

Well thank you very much and with that, we look forward to speaking with you again during our second quarter call in December. Thank you again for joining us today.

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Source: Biomet F1Q07 (Qtr End 8/31/06) Earnings Call Transcript (SeekingAlpha)
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