Biomet F3Q06 (Qtr Ending Feb 28, 2006) Earnings Conference Call Transcript (BMET)

Mar.21.06 | About: Biomet Inc. (BMET)

Biomet, Inc. (Pending:BMET)

Q3 2006 Earnings Conference Call

March 21, 2006, 10:00 a.m. EST

Executives:

Dane A. Miller, Ph.D., President and Chief Executive Officer

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Gregory D. Hartman, Senior Vice President and Chief Financial Officer

Analysts:

Taylor Harris, JP Morgan

Ashley Jarden, Bear Stearns

Bob Hawkins, Lehman Brothers

Katherine McNally, Merrill Lynch

Matt Miksic, Morgan Stanley

Jessica Gladstone, Harris Nesbitt

Operator

Good day everyone and welcome to the Biomet Incorporated 3rd Quarter 2006 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to President and Chief Executive Officer, Dr. Dane Miller. Please go ahead sir.

Dane Miller, President and Chief Executive Officer

Thank you Augusta. 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 3rd Quarter press release issued earlier this morning. The following discussion will focus on the company’s results on an as adjusted basis. Adjusted results exclude inventory stepdown from the March 2004 acquisition of Merck KGaA’s interest in the Biomet Merck joint venture and the June 2004 acquisition of Interpore. Net sales increased 5% to $506.3 million during the 3rd Quarter of Fiscal 2006, gross profit increased 3% to $363 million representing 71.7% of sales. Cost of goods sold was increased approximately $1.5 million during the Quarter due to the previously announced increase from the supplier of the company’s antibiotic delivery system in Europe. SG&A expenses increased 3% to $185 million, representing 36.6% of sales. Our national branding campaign increased SG&A expenses by approximately 60 basis points during the Quarter compared to the 3rd Quarter of fiscal 2005. R&D expenses increased 3% to $21.1 million or 4.2% of sales. Operating income increased 4% to $157 million with operating margins at 31% of sales. Net income increased 4% to $106 million while diluted earnings per share increased 8% to $0.43 per share.

Now looking at sales, excluding the impact of foreign currency, which did decrease 3rd Quarter revenues by approximately $13 million, net sales increased 8% worldwide. International sales for the Quarter increased 11% on a constant currency basis while domestic sales increased 6%.

Moving on to our core business reconstructive sales, we saw reconstructive sales increase 6% worldwide to $346.6 million during the 3rd Quarter with a 9% increase in the US. On a constant currency basis, reconstructive device sales increased 10% worldwide. Hip sales increased 11% in the US during the Quarter and 8% worldwide. The 3rd Quarter hip sales increased 11% worldwide, constant currency. If you would exclude the domestic sale of instrumentation, hip sales in the US increased 12%. Domestic sales of metal-on-metal acetabular systems increased 39% during the Quarter and currently represent 48% of Biomet’s hip articulation units. During the 3rd Quarter, the M2a-Magnum Biomet best selling metal-on-metal system in the US continued to experience excellent market demand. In addition, we now have 10 sites participating in the US clinical study for the ReCap Total Resurfacing System. During the 3rd Quarter, we received FDA approval for the C2-a Taper Acetabular System featuring a ceramic-on-ceramic articulation and our proven porous plasma spray coated technology. With this most recent edition to our alternative bearing line up, we believe Biomet currently offers the broadest range of hip articulation systems in the country.

During the 3rd Quarter, Biomet sponsored a live Internet webcast of the ASI, anterior supine intramuscular surgical technique. Dr. Roger Emerson from Dallas, Texas used the Biomet Microplasty Minimally Invasive Instrumentation designed specifically for this unique procedure. The webcast has received in excess of 12,000 hits. Observers witnessed a truly minimally invasive hip technique with no muscles being cut during exposure of the joint. In addition, a Microplasty ASI cadaver training lab opportunity has been scheduled for May 4th.

ArComXL continued to receive excellent market penetration as it represented 42% of our metal poly-articulation units in the US during the 3rd Quarter and have obtained a 46% penetration level for the month of February. Our second-generation highly cross-linked polyethylene ArComXL provides 47-64% decrease in volumetric wear rate over the standard ArComXL in lab studies with no measurable oxidation exhibited under accelerated ageing and the 30% increase in the tensile strength with similar wear particle shape and size. Additionally, Biomet submitted a 510(NYSE:K) for E-poly-acetabular liners during the 3rd Quarter. E-poly uses vitamin E to quench the free radicals in polyethylene reducing oxidation, thus improving long-term viability of that material. As you may recall, we obtained rights to this technology through a licensing agreement with Massachusetts General Hospital. We believe this technology will further improve the work characteristics of machine polyethylene bearings as well as direct compression molding components.

During the 3rd Quarter, Biomet received FDA clearance for acetabular augments manufactured from Biomet’s new Regenerex ultraporous construct. As a result of our early efforts, titanium has now become a well-established material in orthopedics with a proven history of success. We believe this will support excellent market acceptance of our Regenerex product line. We are very excited about our strong hip pipeline and encouraged with Biomet’s industry leading hip growth during the 3rd Quarter.

Moving on to knees, knee sales increased 8% in the US during the Quarter and 6% worldwide against last year’s industry leading 3rd Quarter growth rate of 36% in the US and 31% worldwide. Knee sales increased 9% worldwide on a constant currency basis. Excluding this, domestic sales increased 10%. The 3rd Quarter growth for knees was driven by the continued strong market demand for the Vanguard Complete Knee System and the Oxford Unicompartmental Knee System. In addition, Biomet’s OSS System experienced solid sales growth during the Quarter. The Vanguard Complete Knee System continues to be the most comprehensive total knee system on the market providing for greater bone conservation and competitive hi-flex systems while allowing for up to 145 degrees of flexion. The full interchangeability of the Vanguard System’s 9-Femoral and 9-Tibial sizes offers precise matching of the implant components with the patient’s knee anatomy. During the 3rd Quarter, we initiated the launch of anterior stabilized components and instruments for the Vanguard Complete System.

In addition, we are currently scheduled to roll out 100 sets of Vanguard revision instruments during the 4th Quarter. As you recall, Biomet introduced the Vanguard Revision SSK, Super Stabilized Knee System on a limited basis earlier this year. Biomet was the first company in the industry to offer minimally invasive total knee instrumentation and continues to lead the market with this technology. Prior to the 2nd Quarter of this fiscal year, the Vanguard System has been offered only with Biomet’s Microplasty Minimally Invasive Knee Instrumentation. During the past three fiscal years, approximately 1250 sets of Microplasty Total Knee Instruments were released in the US with an estimated 1250 domestic surgeons having completed the microplasty total knee instrumentation training. The roll out of Vanguard Premier Instrumentation designed for implantation in the Vanguard System using a conventional open procedure was initiated during the 2nd Quarter and is ongoing through the remainder of the year with approximately 170 sets already in the field. Additionally, we initiated a limited introduction of the Vanguard Anterior Referencing Instruments during the 3rd Quarter.

The rollout of the Oxford Unicompartmental Knee System, the only free-floating meniscal unicompartmental bearing system, was approved for sale in the US during the 3rd Quarter. More than 260 surgeons completed Oxford specific training in the US during the Quarter, with the total now exceeding 850 domestic surgeons during the past six months. During the 4th Quarter, an additional 100 surgeons are scheduled to complete Oxford training in the United States. Excellent long-term clinical results have been demonstrated by the Oxford uni outside the US with a success rate of 98% at 10 years and 95% at 15 years. Contributing to 3rd Quarter knee growth, Biomet’s OSS, Orthopedic Salvage System, provided the most complete product offering for salvage procedures. The OSS is designed for use in complex revision cases as well as trauma and oncology procedures.

Moving on to extremity sales, we saw an increase of 21% in the US during the Quarter and 16% worldwide. On a constant currency basis, extremity sales increased 20% worldwide. Numerous devices contributed to the strong extremity sales growth during the 3rd Quarter including the Discovery Elbow, the Copeland Humeral Resurfacing Head, the Comprehensive Fracture Stem, the ExploR Radial Head Replacement, and the Mosaic Humeral Replacement System. The Discovery Elbow is a bone-sparing device featuring an improved design using ArCom direct compression mold polyethylene. The bone conserving Copeland Shoulder is a resurfacing system used to treat patients in the early stage of degenerative disease. The Comprehensive Fracture Stem available in both cemented and pressfit versions is utilized to treat complex shoulder fractures. The Mosaic System is a modular shoulder system designed for revision, salvage, and oncology procedures. Recently introduced extremity products experienced strong market acceptance including the ExploR Radial Head Replacement and Maestro Wrist Reconstructive System. ExploR is a modular device comprising of a tapered stem with a head designed to articulate with the patient’s natural bone. The Maestro Wrist can be utilized as a hemiarthroplasty for carpal replacement or as a total wrist replacement.

Sales of bone cement and accessories decreased 10% in the US and 15% worldwide during the Quarter. These rates were again very tough comparisons from last year’s 3rd Quarter growth rate of 36% worldwide and 78% in the US. The 3rd Quarter sales of bone cement and accessories decreased 8% worldwide on a constant currency basis.

The rollout of Cobalt and Cobalt G bone cements was completed during the 3rd Quarter. These cements were developed internally and offer high-contrast materials providing a benefit with minimally invasive reconstructive procedures. Biomet’s StageOne Cement Spacer Molds introduced during the 2nd Quarter experienced excellent market acceptance during the 3rd Quarter. The Spacer Molds are used in stage one of a two-stage revision procedure technically involving septic joints and offer surgeons an advantage over conventional handmade or pre-made cement spacers. Biomet also received FDA clearance for StageOne Cement Hip Spacer Molds during the 3rd Quarter and the rollout will be initiated during the 4th Quarter.

Dental reconstructive sales increased 13% in the US during the 3rd Quarter and 12% worldwide; excluding the impact of foreign currency, 3rd Quarter sales of dental reconstructive implants actually increased 16%.

During the 3rd Quarter, our 3i subsidiary launched the Advanced Cutting Technology, ACT, drill used to create the implant osteotomy. These reusable drills are designed to offer enhanced cutting geometry as well as modified laser marking and scoring for improved depth visibility. We received FDA clearance for the PreFormance Post provisional abutment. The PreFormance is a temporary abutment manufactured from teeth material allowing for easy modification by the clinician, making it particularly appropriate for provisional restoration of an implant. The abutment is available in both straight and pre-angled versions, featuring the titanium interface for improved strength and quality of fit, and is designed for up to six months of intraoral use. The launch of the PreFormance Post is scheduled to begin during the 4th Quarter.

Additional new products being launched during the 4th Quarter by 3i include the 3-Prevail line extension of the new OSSEOTITE Certain Prevail Implant System and Osteocision Incision Surgical Drill System. The 3-Prevail implant is designed to eliminate the expanded platform features which sometimes could be challenging when mandibular ridge width is inadequate. Osteocision Surgical Drill Systems provides a miniature handpiece for improved access between teeth and an electronically controlled irrigation system. In addition, during the 3rd Quarter, the FDA cleared Optics Plus a renowned collagen membrane. Optics Plus provides long lasting failure function and excellent tissue response for guided bone regeneration as well as improved handling characteristics with a more flexible membrane.

Moving on to fixation sales during the 3rd Quarter, worldwide fixation sales remained flat at $62.3 million and increased 1% in the US. Fixation sales increased 2% worldwide on a constant currency basis. Lorenz Surgical’s cranomaxillofacial fixation sales increased 7% in the US during the 3rd Quarter and 4% worldwide. Excluding the effect of foreign currency, cranomaxillofacial sales increased 5% worldwide. Internal fixation sales increased 15% in the US and 4% worldwide during the 3rd Quarter. On a constant currency basis, internal fixation sales increased 7% worldwide.

During the 3rd Quarter, electrical stimulation devices increased 1% in the US and worldwide. External fixation sales decreased 11% worldwide the 3rd Quarter and 12% in the US. Excluding the impact of foreign currency, external fixation sales actually decreased 10% worldwide. The 3rd Quarter internal fixation sales continued to benefit from the successful rollout of EBI’s PeriTrochanteric nail. This hip fracture system features a unique single lag screw concept with multiple lag options for various fracture patterns. Introduction of this system augments EBI’s portfolio of internal fixation products designed for use in the growing hip fracture market. The rollout in clinical evaluation of the OptiLock Periarticular Plating System for lower extremity fractures is ongoing and we are receiving excellent feedback from the market. In addition, anatomically pre-contoured plates, so the system is designed to allow use of different diameter bone screws in locked and unlocked options providing increased surgically flexibility with minimally invasive techniques and approaches. Introduction of this unique system to the market will enhance EBI’s portfolio of femoral products used in the treatment of complex periarticular fractures. EBI continues to receive excellent feedback regarding its pediatric locking nail for treatment of femoral fractures and reconstructive procedures. EBI have a wide range of internal and external fixation product offerings to treat a variety of femoral fractures in children, which uniquely position the company as a leader in this market segment. EBI will continue to expand product availability over the next two Quarters to increase penetration in this market segment.

Looking now at the spinal product sales, we saw spinal product sales increase 2% worldwide to $53.9 million and 3% in the US during the Quarter. Spinal product sales increased 3% worldwide on a constant currency basis. Sales of spinal implants and orthobiological products for the spine increased 9% worldwide and in the US during the 3rd Quarter, while spinal stimulation sales decreased 3% in the US and 4% worldwide. The rollout of the Polaris Spine System, which was initiated during the 2nd Quarter, is ongoing and should help to pick up momentum in spine sales during Fiscal ‘07. The Polaris is a 6.3-mm diameter top-loading rod system utilizing patented _____ locking technology. The PEEK-OPTIMA version of the Ibex Spine System, which was EBI’s first PEEK offering, received good market acceptance during the 3rd Quarter, additionally during the 4th Quarter EBI anticipates regulatory clearance for the PEEK version of the ESL, Elliptical Shaped Lumbar Spine System, and our stainless steel version of Array Spine System. ESL is EBI’s first spacer designed for direct posterior surgical approach. Pending the regulatory clearances, EBI plans to introduce these two new systems at the end of this fiscal year or the beginning of Fiscal ‘07. EBI’s clinical trial for the Regain lumbar nucleus replacement is scheduled to begin enrolling patients during the 1st Quarter of ‘07. Regain is a one-piece device made of pyrocarbon.

Looking briefly at other product sales, we saw an increase of 6% worldwide to $43.4 million at an increase of 4% in the US during the 3rd Quarter. On a constant currency basis, other product sales increased 8% worldwide. Sales of soft goods and bracing products increased 4% in the US during the 3rd Quarter and 2% worldwide. Arthroscopy sales increased 10% worldwide during the 3rd Quarter and 7% in the US. Arthroscopy sales increased 12% worldwide on a constant currency basis. Arthrotek products experienced excellent growth during the 3rd to include EZ-Loc Femoral Fixation device, the WasherLoc Tibial Fixation device, the InnverVue Diagnostic Scope System, and the Ti-Screw Anchors for shoulder repair. New arthroscopy products scheduled for introduction during the 4th Quarter are the ___ Fixation Device, the Bypass Suture Passer and the Bio-Port Interference Screw and Sport Mesh Tissue Reinforcement for rotator cuff repair. Looking at analyst estimates, we estimate foreign currency will continue to negatively impact our financial results with the 4th Quarter sales likely to affected by approximately $11 million. Consequently, we remain comfortable with sales and earning estimates for $530-540 million for the 4th Quarter and per-share earnings in the range of $0.05 to $0.46 per share.

In summary, we continue to be pleased with our market-leading growth from the important reconstructive device categories despite extremely difficult year-over-year comparisons in the important knee product categories. We’re pleased with the moment of certain EBI product categories, particularly internal fixation devices. In addition, after several Quarters of decline in sales, we’re pleased with the rebound in electrical stimulation device sales and the acceleration in growth of spinal hardware and orthobiological processors. Additionally, the product pipeline is strong as is seen in our history, as we will be introducing more than 100 new products in technologies at the American Academy of Orthopedics Surgeons’ Annual Meeting in Chicago beginning tomorrow. Just as reminder, our analyst meeting at the academy is scheduled for Thursday in the Grand Hall Room at the Wyndham Chicago Hotel at 633 North St. Clair Street. The reception will begin at 4:30 and the meeting to begin at 5 o’clock. We look forward to seeing some of you at least there. Thank you very much.

Questions?

Question-and-Answer Session

Operator:

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you can do so by pressing the “*” key followed by the digit “1” on your telephone. Keep in mind that if you are using a speaker phone just press your mute function to allow your signal to reach our equipment. Again, that’s “* and 1” if you have a question or a comment. We’ll pause for just a moment to assemble the queue.

Our first question will come from Mike Wenside with JP Morgan.

Taylor Harris, JP Morgan

Thanks, it’s actually Taylor Harris here for Mike. Dane, a few weeks ago you did an interview where you pointed to revenue growth on a forward-looking basis in the 8-10% range, and I just wanted to clarify the timeframe that you were thinking about around that comment, and then perhaps can you break that down for us into the recon business and EBI just on growth expectations over the next few years for those two separately?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Okay, we think for some reason the U.S. market for reconstructive has experienced a little bit of a slow down in the last Quarter or so. We expect that to reverse itself in the very near future within the next couple of Quarters. There is some kind of waxing and waning in that market. We think on a continuing basis the growth in total hip and total knee replacement, which is our core business, will be in the upper single digits/lower double digits kind of the range and we expect to be at or above market growth rate going forward. With respect to EBI, we’ve had a bit of a difficult time I think principally related to sales management. I think we have those issues behind us and we expect to see our growth rate return to market growth rate in all of EBI’s businesses in the next few Quarters, and I think this Quarter was an early indication that in fact we have turned the downslide of attempts occurring at EBI and we’re now headed back toward a nice growth rate in the next few Quarters.

Taylor Harris, JP Morgan

So, the hips and knees are going to grow upper single, low double digits, does that imply EBI growth at or below the 8-10% overall range?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Probably mid single digit range, Bart, may be you should address that.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Well I think mid single digit sounds like a reasonable number. I think we have something to prove to ourselves frankly where we can go, but presumably we’re on the upswing and at least we gain the momentum, I’m comfortable with that estimate, yes.

Dane A. Miller, Ph.D., President and Chief Executive Officer

But certainly we also have other businesses dental recon which should certainly grow at faster rates than that. The market for dental recon is in the kind of low-to-mid teens, so we would expect them to grow to those ranges for that piece of our business as well.

Taylor Harris, JP Morgan

Okay. For the EBI businesses, the mid single digits, is that what you consider market growth in those businesses or is that below market?

Dane A. Miller, Ph.D., President and Chief Executive Officer

With the exception of spinal business, we think that’s about market growth rate. We also expect to see spinal business growth rate to pick up to market growth rate as well, which is probably mid-to-upper teens.

Taylor Harris, JP Morgan

Okay. I guess, if I add all that up it sort of feels like the 8-10% is conservative, but do you think that that’s the case or should we really be thinking about 8-10%?

Dane A. Miller, Ph.D., President and Chief Executive Officer

I would hope that’s conservative.

Taylor Harris, JP Morgan

Okay, and then just the last question, Dane, your comment on the recon market having slowed down over the past couple of Quarters and looking for a rebound in your term, any thoughts around what the drivers both on the downswing and the upswing will be?

Dane A. Miller, Ph.D., President and Chief Executive Officer

We don’t know what happened to the recon market. In experience over the past couple of years, some very strong growth rate, unexpectedly strong growth rate, and a year or two before that the European market experienced some unusually strong growth rates. There is some kind of waxing and waning that goes on in that market. I’m not sure any of us fully understand what or why, but if you look demographics, if you look at the percentage of the arthritic populations that are currently underserved in the U.S. today, clearly the reconstructive market is poised for some very strong growth as far as I can see.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

And a lot of us are going up against some very difficult knee comparisons, especially in the U.S.

Taylor Harris, JP Morgan

Okay, and then let me actually just slide one more question in here and then I’ll drop. On the growth margin front, is your core growth margin in total recon hips and knees improving and then the overall corporate margin being dragged down by other factors, or is that not the case?

Dane A. Miller, Ph.D., President and Chief Executive Officer

I think our core margins in reconstructive are pretty steady. We have seen some other segments that have brought that down a little bit, and clearly we’re focusing on mechanisms for getting pricing up and cost of goods down.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Taylor, I think that’s about your last question.

Taylor Harris, JP Morgan

Okay, thanks a lot.

Operator:

Thank you. The next question will come from Milton Hsu with Bear Stearns.

Ashley Jarden, Bear Stearns

Hi, this is Ashley Jarden for Milton, he’s going to jump on the remote today. I just wanted to touch upon your gross margins going forward and whether you think they should improve, looks like a slight decrease this Quarter, if you can just comment on that?

Dane A. Miller, Ph.D., President and Chief Executive Officer

We expect going forward growth margins to improve modestly, week down on growth on bottomline coming from growth on topline, but we think there’s some real modest improvement in cost of goods.

Ashley Jarden, Bear Stearns

In cost of goods, and in terms of the cost of goods just more specifically, where you see that coming that, is that personnel, is that more in terms of the factories running efficiently, can you comment more specifically on that?

Dane A. Miller, Ph.D., President and Chief Executive Officer

With improved manufacturing technology and improved efficiencies within manufacturing, we certainly aren’t going to see labor rates go down or anything like that, but we think there are probably ways of improving our efficiencies in manufacturing and have done so over the past decade or so.

Ashley Jarden, Bear Stearns

Okay. Regarding that one more, are there any unique cost of goods areas within your business that you’re seeing that coming from, is it recon or is it across the board?

Dane A. Miller, Ph.D., President and Chief Executive Officer

We’ve had some pressure on the cost of goods sold in the last couple of Quarters due to the price increase with our retailing product in Europe. It was a $3 million hit last Quarter, $1.5 million this Quarter, it will probably be another $1.5 million next Quarter. In addition to that, internal fixation devices have been growing well from a topline standpoint but it’s had a little pressure on cost of goods sold due to the instruments that go out to the sales force. So those are two main areas. And it need to be forecasted, we’ve experienced over the past couple of years some pretty dramatic increases in raw material cost, we don’t anticipate those increases in raw material cost to continue going forward. Certainly raw material cost will not go down, but we don’t expect to see the increase that we’ve seen in the last couple of years.

Operator:

The next question will come from Bob Hawkins with Lehman Brothers.

Bob Hawkins, Lehman Brothers

Okay thank you, good morning. First question is, you obviously showed strength in most of your core businesses this Quarter and you had, I think relative to your expectations on the topline and certainly streaking senses, the numbers were right by about $5-10 million. Looks like relative to your expectations about $3 million of that was currency, could just articulate what was the balance on the topline?

Dane A. Miller, Ph.D., President and Chief Executive Officer

I think it was across the board. There is no particular operating unit that was more responsible for that than any other. Certainly as we get EBI back on track, I think we’ll see both topline and bottomline continue to improve through that operation, but I don’t think there’s any particular yellow flag out there with any growth operations. We were just a little soft and you’re absolutely right, currency hit us by about $3 million more than we expected and if you put that $3 million back on topline, we’re basically at the low end of the estimates for projections for 3rd Quarter results.

Bob Hawkins, Lehman Brothers

And then on EBI, hopefully this isn’t trying to pin you down too much relative to the way you’ve been talking, but this is probably the 3rd Quarter where we’ve seen stabilization, otherwise revenue growth has been the same roughly for the last three Quarters. When do you think we might see a sequential uptake in revenue growth in EBI, again not holding at you when you’re going to get to market rates of growth, but just when do you think we might see a sequential uptake, is it 4th Quarter, is it 1st Quarter, I was wondering if you could be specific with that one at all?

Dane A. Miller, Ph.D., President and Chief Executive Officer

May be Bart should respond. I need to point out though that after several Quarters of the erosion in topline at EBI, this is the first Quarter that we’ve seen, as small as it may be, at least a positive increase in revenues at EBI. So, I think we’re seeing some early signs that EBI is turning the Quarter and with that may be Bart should respond.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Well my response will be in the same range. We’ve had our 1st and 2nd Quarters in the fiscal year actually sloping down. I think we’ve changed that around, heading in a different direction now. That’s mostly driven by civilization of sales force and improved sales force management a little bit and better organizational structure. How long is it going to take to get to a higher degree of growth, I don’t know, but nobody has any incentive to wait, and that’s obvious. Clearly, we have our work cut for us but I think as we stabilize and grow our stimulation business and continue to focus on the internal fixation business on the trauma side, roll out the Polaris system, focus on the product, the next couple of Quarters should be an improvement.

Bob Hawkins, Lehman Brothers

Okay, thank you, and just very quickly the last question that I have is on the currency. Since this Quarter was roughly a $13 million hit, just to help us understand the bottomline impact, a $13 million hit on currency, is that a penny or two for you guys, is there any way to quantify that?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Well that’s $13 million on topline and so one would assume looking at our average margins and average percentage income that some 20% or 30% of that probably ended up impacting bottomline, so that’s it.

Bob Hawkins, Lehman Brothers

Okay, thanks very much.

Gregory D. Hartman, Senior Vice President and Chief Financial Officer

Probably a penny Bob.

Operator:

Thank you, we’ll go now to Merrill Lynch with Katherine McNally.

Katherine McNally, Merrill Lynch

Thank you. A couple of questions. One, it sounds like direct consumer spending was around $3 million in the Quarter, which was down sequentially but not dramatically, should we be thinking about a similar type of sequential decline over the next couple of Quarters, is this Quarterly runrate we should be factoring in?

Dane A. Miller, Ph.D., President and Chief Executive Officer

The question had to do with…we expect that to decrease in the Quarters going forward…

Katherine McNally, Merrill Lynch

At about that same little shy of a million sequential decline over the next few Quarters?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Yeah, that’s probably a good round number.

Katherine McNally, Merrill Lynch

And then in terms of the domestic knee versus hip growth, with knees not as strong as hips, which is a little bit of a bucking of the trends and with the industry seeing stronger knee growth, would you attribute that to coms or do you think you may have seen some share erosion in these in the Quarter given that some of your competitors have been coming out with some new products?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Well first our growth in hips is certainly well ahead of the market. We don’t see the market growing any differently this most recent Quarter than it has over the last several Quarters. We’ve just introduced some new products in the hip area that have really had a very positive impact on our hip growth. With respect to knees, we were up against some enormous Quarters…3rd Quarter last year with our knee growth, the fact that we now…last year 36% growth last year, I think we just had a very strong 3rd Quarter last year in knees and I’m not sure what all explains it, certainly new products are a factor, the Vanguard and the Oxford, but I’m not sure we grew this Quarter a lot slower than the market frankly.

Katherine McNally, Merrill Lynch

Okay and then just lastly on the tax rate; versus your competitors, you guys do have a higher tax rate, has there been any discussion about possibly shifting manufacturing to lower tax jurisdictions to try and bring that down or any initiatives underway to attempt to lower the tax rate?

Dane A. Miller, Ph.D., President and Chief Executive Officer

We have an almost continuous process underway to look at ways of more creatively reducing taxes. I guess we all feel good getting into bed at night knowing that we’ve paid our fair share of taxes, but we’re also going to look creatively at ways of reducing that.

Katherine McNally, Merrill Lynch

Okay great, thanks.

Operator:

Thank you. We’ll go next to Morgan Stanley with Glen Reicin.

Matt Miksic, Morgan Stanley

Hey thanks, Matt on the line. I think Glen is on the line as well, but thanks for taking the question. So the question at the 4th Quarter guidance, I understand that’s actually going to have a more significant impact on the topline. I was wondering if you could help us understand how much of the bottomline impact is accounted for good FX, because it did come in a little bit lower than the range of estimates that are out there and I think lower than your prior full year expectations?

Dane A. Miller, Ph.D., President and Chief Executive Officer

I guess in round numbers whatever topline effect is created by currency, you can expect somewhere of 10-20% of that will flow in the bottomline. If topline is affected by $10 million, we would expect bottomline to be affected by $1-2 million.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

It’s probably about a penny, Matt.

Matt Miksic, Morgan Stanley

About a penny?

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Yeah.

Matt Miksic, Morgan Stanley

Okay and then a question about SG&A, came in a little bit later, I’m assuming some of that is just also the nature of FX in your model, were you expecting this to be kind of a lower level again in the 4th Quarter, sort of consistent with the 3rd Quarter, or how should we think about SG&A going forward, maybe at the percentage of sales?

Dane A. Miller, Ph.D., President and Chief Executive Officer

I wouldn’t expect SG&A to increase certainly as the percentage of sales going forward and our objective is to effect at least a modest reduction in SG&A as a percentage of revenue.

Matt Miksic, Morgan Stanley

Going into the 4th Quarter you say?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Yes, 4th Quarter, end ’07.

Matt Miksic, Morgan Stanley

And then, if I may, just one last question…the fine product that you talked about rolling out, the Polaris rolled out in the 2nd Quarter is starting to have an impact and maybe more significantly in 2007, can you help us may be understand just the mechanics of what it takes to make that product impactful for EBI?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Bart that’s probably a good question for you.

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Well, the most critical thing here is to get the appropriate instrumentation set out into field and to roll that out. As you might imagine, that is a significant exercise that could clog up your manufacturing quite significantly. So, we need to plan that, do that carefully and make sure that we don’t make mistakes there. And subsequently the issue is planning and once we have our instrument sets we have our implants produced, then it’s all a matter of ramping up in the 4th Quarter and then the 1st Quarter of next fiscal year. We should be ready from there.

Matt Miksic, Morgan Stanley

Okay, the 1st or 2nd Quarter we should look for some evidence of that, to actually have any impact on the market may be?

Bart J. Doedens, M.D., Vice President, Biomet, Inc., President, EBI, L.P.

Right.

Matt Miksic, Morgan Stanley

Terrific. I want to try to better understand the gross margin issue. As we look at next year, you’re going to have the help of getting rid of the added cost of the antibiotic, you’re going to have the full benefit of sourcing instrumentations from China, and if you’re going to have growth on your revenue base and you’ve got a figure of at least a third to 40% a year cost or fixed, why are you tentative on the gross margin line, why wouldn’t gross margins improve in a very strong way in 2007?

Dane A. Miller, Ph.D., President and Chief Executive Officer

Well, I’m sorry if I sounded tentative, I apologize. I was attempting to be conservative and I point out with respect the instrument production in China will be an ongoing process. We will have all of our instrumentation shifted to China manufacture probably for several years. It’s not all going to take place in the remainder of ’06 and Fiscal ’07, but once again, I attempted to be conservative not tentative.

Matt Miksic, Morgan Stanley

Okay, what’s working against you on the gross margin line, at least as we look at 2007?

Dane A. Miller, Ph.D., President and Chief Executive Officer

The traditional cost of labor and cost of raw material I guess as much as anything. We have been able to generally offset that historically with improved manufacturing efficiencies. We think that that will be possible going forward, but certainly as cost of living increases so will pressures on our manufacturing cost.

Matt Miksic, Morgan Stanley

Thank you.

Dane A. Miller, Ph.D., President and Chief Executive Officer

Let’s take one more question.

Operator: Thank you, that will come from Joanne Wuensch.

Jessica Gladstone, Harris Nesbitt

Hi, this is Jessica, thanks for taking the question. Two quick questions; what were your share buybacks in the Quarter and can you talk a little bit about what’s in your other income line?

Gregory D. Hartman, Senior Vice President and Chief Financial Officer

Share buyback to the Quarter, we bought back about $52 million worth and the other income line basically is from deals, also from investments that we had out there when we first hit Quarter.

Jessica Gladstone, Harris Nesbitt

Thank you.

Dane A. Miller, Ph.D., President and Chief Executive Officer

Well thank you very much. I’m sure some of you will be in Chicago in the next few days and we think we have an excellent academy meeting shaping up, lots of exciting new products and we hope you visit our exhibit in Chicago. Thank you very much.

Operator:

Thank you. That does conclude our conference today. We’d like to thank everybody for their participation, have a nice day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!