史賽克 (SYK) 2003 Q1 法說會逐字稿

Welcome to the Stryker Corporation first quarter operating results conference call.

During the presentation, all participants will be listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1, followed by the 4 on your telephone.

As a reminder, this conference is being recorded Wednesday, April 16th, 2003. Now for our forward-looking statement. Certain statements may contain forward-looking statements. They are based upon management's current expectations, and are subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. In addition to factors that may be discussed in this presentation, such factors include but are not limited to regulatory actions, including cost-containment measures, that could adversely affect the price or demand for the company's products. Changes in reimbursement levels from third-party payers. A significant increase in product liability claims. Changes in economic conditions that adversely affect the level of demand for the company's products. Changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment. Additional information concerning these factors is contained in the company's filing with the Securities and Exchange Commission, including the company's annual report on form 10-K, and quarterly reports on form 10-Q.

I would now like to turn the conference call over to John Brown, chairman, President and CEO. Please go ahead.

Thank you. Eileen. Welcome to Stryker's first quarter earnings report for 2003 with me today are Dean Bergy, Chief Financial Officer Chief Financial Officer and Secretary. [technical difficulty] and David Simpson, EVP.

We're pleased to report that Stryker began the new year with the strong first quarter. For the first quarter, sales were $847m, an increase of 20% over the prior year -- $847m.

Excluding the impact of foreign currency The net sales were 15% higher than last year, and net earnings increased 28% to $104m, and diluted net earnings per share increased 28% for 51 cents a share.

We generated $75m in free cash flow in the first quarter, allowing us to reduce debt by about $53 million. Debt plus securitization dropped from 617 million to 576 million, a drop of 50 million. Domestic sales were 546 million for the first quarter, an increase of 17% over the prior year.

Substantially all of the U.S. divisions had great first quarters, and we think are well positioned for an excellent year and years to come.

Howmedica Osteonics was up 21% with strong growth in spine, trauma, and reconstructive implants. Instrument sales increased 16% in the quarter with solid growth in powered instruments, sister Star shield (ph), pain management, and strong growth in Neptune. That's our waste management collection system. And per coetaneous cement delivery.

Endoscopy sales increased 18% with strong growth in video systems, general surgery and solid growth in arthroscopy. Our bed and stretcher business, the medical group was up 19% in the quarter, with strong growth in hospital beds, stretchers, and ambulance cots. Leibinger sales decline 13% in the quarter, and physiotherapy was up 5% in the quarter.

Turning now to international, international sales were up $301m million for the first quarter for an increase of 27% over the prior year. Foreign currency comparisons added $37 million to the type top line to of the n in the quarter. Excluding the impact of foreign currency, enter international sales increased 11%. On a local currency basis, most of the international businesses had excellent results. Europe grew 15% and ¼, with strong performance in the United Kingdom, Scandinavia, Benelux, Spain and Italy. And Japan grew 11% in the quarter with strongest performance with orthopedic implants as well. Pacific was up 5% for the quarter, with strong performances in Australia and China. And Canada and Latin America were up 2% for the quarter. I might add that Canada is also be impacted for a certain extent by the SARS disease.

Orthopedic implant sales for the quarter were $491m million, an increase of 24%. That's based on strong shipments of reconstructive products, spinal products, and trauma implants. Excluding the impact of foreign currency, sales of orthopedic implants increased 17% in the quarter. MedSurg sales world wide were 304 million, an increase of 18%, based on higher shipments of power surgical instruments, endoscopic systems, beds, stretchers, and the craniomaxillofacial implants. And here excluding the impact of foreign currency, sales of MedSurg equipment increased 14% for the quarter.

In the new product area, we've been talking to you for over two years about Trident. The Trident acid tablet system for polyethylene (ph) is our fastest-growing cup system, and the Trident ceramic on ceramic hip system is selling very well in Australia and Europe, and after we're into the two-year waiting period for our ceramic supplier to have the process approved by the USFDA.

We're pleased and excited to announce in February that we finally obtained FDA clearing to sell the inserts here in the U.S. We're just now in the process of rolling this product out to our field sales force. That started late in the quarter and we expect to see sales start ramping up beginning in the second quarter. We also received Canadian approval for Trident ceramics late last year.

The system 5 heavy duty power instrument system was introduced last year, and it sold well here in the first quarter. This fifth generation battery powered instrument system is the best ever, and it continues to generate a lot of interest in the O.R.s across the U.S. and across the world.

The Tit enter Mel lar (inaudible) intermingle (ph) system continues to have a big impact on trauma sales. It provides a wide range of fracture repair options for the tibia, humerus, and femur using a common set of instruments. The next generation of CS spinal implant systems introduced in the fourth quarter is off to a strong start.

The new Xia screws are lower in profile, easy to insert and provide more placement options, and the new Xia instruments are easier to use.

The EIS, (inaudible) launched at the end of 2001 is our fastest-growing reconstructive implant for the second straight year.

The Scorpio superflex knee was launched in U.S. mid 2002 in the U.S. and it along with its counterparts in Japan and Pacific. It's doing well in the premium price flex knee market. The decompressor perk tainius (ph) for aspiration of herniated disk material was acquired in the first quarter of 2002, and generated very nice sales volume here in the first quarter. The EMS stair pro evacuation chair is off to a great start. This is an evacuation system for the emergency crews.

Turning to sports medicine allographs, under our recent agreement with Regeneration Technologies, Stryker began distributing human allograph human tissue for U.S. sports medicine surgery late in the first quarter. The stripped allograph tissues processed by RTI for use in reconstruction repair of the knee, hip, shoulder, wrist, elbow, foot, and ankle. The sports medicine products include menisci, (inaudible), precision tooled anchors, screws and pins, and fresh osteocondo allographs.

Mental Invasive knee and hip procedures at Stryker are coming along nicely. We believe Stryker we have a strong position with the development of its Scorpio total knee instrumentation to complement the surgical technique to less invasive total knee replacement. It was pioneered by Dr. Peter Benudi.

The Multi (inaudible) study to valid date ate the safety and reproduce stability of these procedure is going well, and we expect it to be completed sometime during the summer.

In mental invasive hips, we have designed unique instruments for use in single incision total hip (inaudible) procedures. products to total hip replacement. Similar instruments were used in the mental invasive hip study conducted by Dr. James Wince, which was described in a peer reviewed article published in the Octobers of "Orthopedics Today."

And we're conducting an extensive evaluation of this procedure, and the instruments, intend to make it more broadly available to clinicians when the evaluation is completed again around June or July. OP-1 did well in the U.S. in the first quarter, and we've added to our specialized sales organization and increased the number of hospitals using the device. The product is becoming well established in Australia and continuing to grow there.

Europe is doing much better as they develop dedicated OP-1 product managers, in key country markets, and Canada is off to a good start.

We are recruiting patients to the North American uninstrumented posterior lateral spine fusion trial and expect to complete enrollment by the end of this year.

We're also making plans to a clinical trial with the ray cage in OP-1. In Japan we enrolled patients in a phase 2 instrument ed posturalateral (ph) spine fusion clinical phone trial using OP-1, which we expect to complete this year.

And with that, I'm delighted now to turn the speaker over to Deane, who will cover the financial results in more detail. Then we'll come back for a close and Q&A.

Thanks a lot, John. As John talked about, in the area of foreign currency, the comparisons there were very favorable in the first quarter, increasing international sales by about $36.7m million, or 16%, and that's the best result we've had there in a long time.

As if the foreign currency have done very strong versus the U.S. dollar. If the currency rates hold at their current levels, we would expect to see a positive impact on sales of about $25m million in the second quarter of 24 this year.

In price volume, U.S. implant prices were up about 5% in the first quarter. That's the range they were at in the fourth quarter and last year as well.

Prices in Europe and Japan improved modestly during the quarter, and if you look at the overall price volume analysis, price contributed 2% to our sales growth in the quarter, foreign currency, as we mentioned, contributed 5% to sales growth.

Acquisitions contributed 2%, and volume mix was up 11% to get to our 20% sales growth in the quarter.

The acquisition impact we talked about relates primary to the July 1st, 2002 acquisition of surgical dynamics.

We're no longer disclosing sales of FDII products separately because cross over sales for Styker thoracal (ph)lumbar and cervical products to products to former customers have made this comparison less meaningful.

We did lose some interbody cage sales in the transition, but we believe this business has stabilized.

About half of the dedicated U.S. spine sales force is effectively selling interbody cages now and we expect ramp-up through out 2003 as our training takes hold. In terms of volume mix, it's up about 12% in the U.S. and about 9% overseeing coming to that 11% consolidated total.

Now let me give you some numbers on the sales growth by product line, specifically in the orthopedic implants. I'd remind you that orthopedic implants represent about 56% of our total sales, and the orthopedic implant sales increased 24% in the quarter. Looking at it by the individual products that we break out there and breaking it into domestic and international components, hips were up 8% domestically and 27%internationally for 17% total growth in hips.

Knees in the quarter were up 15% domestically. 23% internationally for 19% total growth, trauma was up 33%, domestically and 28% internationally for 30% growth in the quarter. Spine was up 114% domestically, and 36% internationally for 79% total growth, and on a total basis, for orthopedic implants, domestic sales were up 21%, international sales was up 21%, and the total was up 24%.

Turning to those same numbers on a constant currency basis, obviously the domestic numbers are the same, but the international numbers is up 11% for hips 8% for knees, 10% for trauma, 21% for spinal, and 11% in total. So then if you look at the total orthopedic implant sales be category in constant currency, hips were up 10%, knees were up 12, trauma 19, spinal 72, a total of 17% in constant currency.

Looking at the product lines in a little more detail, hips as I mentioned were up 17% in the quarter, (inaudible) stems cement continues to lead the growth there given by our HA stems, the accolade, and citation TMZF and Secur-(inaudible)Fit. Revision stems continued to do well in the quarter led by our T 3 modular revision hip system. Sales of acetabularace tabular were solid, those were driven by the Trident and ceramics overseas.

Again, to remind you the Trident acicular this system utilizes the same cup and shell locking mechanicism as the polyethylene and ceramic lines. In Europe or Trident Exeter and ABG 2 hips all did well in the quarter. In Japan, we benefited from nice growth in super Secur-Fit, super EIN, and ABC ceramic on ceramic hips.

As John mentioned, our or supplier of passed aluminum ceramic components for Trident passed its USFDA inspection, which the manufacturing process in February, and we began rolling out sets to the field sales force late in the first quarter. As we said, this will continue through out the second quarter when we expect to see an impact on domestic hip sales.

Knees were up 19% 2349 and a quarter. We had another great quarter in knees, with Scorpio providing excellent growth in the United States market. Scorpio TS and Duracon TS revision systems are doing extremely well, the Scorpio's flex knee for patients requiring extended range of motion was launched in the United States last year and it's growing rapidly. And our modular rotating knee hinge is also been well accepted in the U.S. Our deep flexion knee product, Scorpio Superfelx, continues to do well in Japan, and a similar product is making inroads in the Pacific market. As John mentioned, EIUS, or new minimumally (ph) invasive uniknee continues to be our fasting growing recon product.

In Europe, the mobile baring (ph) scorpion knee it was introduced earlier last year and we also have a U.S. IDE under way for that product. Trauma was up 30%, continuing a great growth trend in the United States and overseas.

Or T 2 interMel laer (ph) instrument nail which was launched in 2001 continues to do extremely well. The system was completed in 2002 with the introduction of the humeral nail, and it was the best performing product in 2002, and that pace has continued in 2003. We also believe this product is opening up new selling opportunities for other trauma products in the international markets. In trauma, also our Gamma hip fracture devices did very well on the first quarter, as did our external fixation devices which were helped by some military sales in the quarter.

And in a smaller segments of the trauma market, or (inaudible) pelvic reconstructive system which it was launched here last year is continuing to grow rapidly.

Spine was up 79% in the quarter, does of course include some impact from the SDI acquisition and the domestic numbers particularly, but the Xia Thorocal (ph)lumbar systems are growing nicely with the Xia 2 introduction late last year.

The reflex interior cervical plate also continues to do well. Last year's addition of spinal implant products from surgical dynamics completed the Stryker Spine line up by adding interbody cages in the U.S. market as well as other systems as well as other cervical and thorocal (ph) lumbar systems.

Those additional cervical and thorocal (ph)lumbar products are doing well, and as we mentioned, we expect U.S. the interbody cage sales to ramp up throughout the year. For Howmedica Osteonics sales force they entered the first quarter with about 765 sales reps and managers and expect to build that total to around to about 800, and there are also about 200 associates and tech reps that go on top that number.

Turnings to our met surgeon group, it represents about 36% of our total sales, comprised of four operating divisions.

Instruments which represent about 42% of sales, endoscopy representing about 31%, medical 20%, and Leibinger, which represents 100% -- or 8% -- I'm sorry -- 8% of sales.

MedSurg group sales were up for the quarter up 18% as reported and 14% on a constant currency basis. Turning to the components there, instrumentings, sales were up 22% in the quarter on an as-reported basis, and 18% on a constant currency basis.

Our On you powered instruments business did very well. I'll give you the numbers.

Domestic/international breakdown, up 13% domestically, 43% international, for 22% total growth in powered instruments, and other O.R. equipment was up 20% domestically, 42% internationally, for a total of 25%. On a total basis, domestic was up 16%, international sales up 44%, for a total of 22%.

The instrument division had an excellent quarter an based on steady growth and powered instruments systems (inaudible) and strong shipments of our other OR equipment. Stara I-shield (ph), irrigation, pain management, per coetaneous cement delivery and the Neptune system were especially strong in the quarter.

An important sales driver continues to be system 5, which is our next-generation heavy duty powered instrument system and that was launched in the second half of last year. As we mentioned, the decompressor diskectomy probed acquired in the fourth quarter 2002, being sold by our instruments reps focused on pain management, and it's off to a nice start.

Turning to endoscopy, sales were up 17% as reported and 15% on a constant currency basis.

The arthroscopy product line had 9%, domestic sales growth, 10% international sales growth, and 9% total growth.

General surgery products were up 17% domestically, 25% internationally, and 18% on a total basis.

Our video systems did about very well domestically, up 23% and 8% internationally for a total growth of 20%, and a total basis (inaudible) domestic sales were up 18%, international sales were up 13% and 17% on a total basis.

Again, the endoscopy division had another solid strong quarter based on strong, solid growth in video and general surgery, solid growth in arthroscopy, it continues to be a lot of activity in the Endosuite and communications area, which is driving some of what you see in the video there. And as John mentioned, our contract with regeneration technology kicked off in February and the allographs are being sold by our endoscopy sales force primary for sports medicine.

The Leibinger product line was up just 2% in the quarter, domestic sales were down 13, international sales were up 26%. As you know, Leibinger split its sales organization beginning this quarter to bring the focus to thecraniomaxillofacial and the navigational businesses systems separately. The domestic business, as you hear from the numbers, it was soft this quarter, particularly in navigation, but we did well internationally, and we do expect the sales force changes we have made to make a difference later this year.

The medical business was up 16% on an as-reported basis and 14% on a constant currency basis. Domestic sales were up 19%, and international sales were up 6%. The medical division had another excellent quarter in the U.S. Our hospital beds, stretcher and ambulance cot sales were strong, based on new products, and a stronger sales force.

Physiotherapy, as we mentioned was up 5% in the quarter.

Start-ups and acquisition contributed all of physiotherapy's growth in the quarter, as same-store sales were down 2%, and we're now up to 350 PT centers from 331 at the end of the year.

The clarification in Medicare guidance effective July 1, 2002, has continued to impact our near-term sales growth here, but we believe physiotherapy is adjusting to the new pricing environment and expect sales to pick up as we move throughout the year here.

Turning to the operating results in the PL Our overall margins in the quarter were up from 63.7%or last year to the quarter for 64.5% in the first quarter of this year.

The faster growth in our higher margin, orthopedic implant business boosted our margin somewhat in the quarter, and the transition out of our orthopedic implant manufacturing facility is on target, and we expect this to play a big role in our long-term goal of increasing gross margins but again we don't expect to see a lot of impact from that until 2004. The R&D ratio as a percentage of sales increased a bit from last year. It was 4.8% in the prior year first quarter, and it was 5.1% this year.

The SG&A ratio also increased slightly from the prior year, from 39.4% to 39.9%, partially as a result of some higher insurance costs in the quarter, and also just remember that orthopedic implants, which are going a little faster right now, in addition to contributing some higher margin also carry a little bit higher cost to distribute.

Operating income increased 21% in the first quarter, and the margins, operating margins were on par at 19.5% of sales. Interest expense continues to decline nicely.

I'll remind you that we also, for purposes of the way we look at it, add in the accounts receivable securitization discount, which was about a half million dollars in the quarter. So if you add those two together interest expense was down from $11.3m million last year to $7.5m million in the first quarter this year. Intangible, amortization increased approximately $3m million in the first quarter, and that's primary as a result of the surgical dynamics acquisition.

Other income is primary comprised of interest income and foreign currency gains and losses. I'll give you the breakdown on that.

Interest income was half a million dollars in the quarter, we had an FX (ph) gain of $1.2m in the quarter, and then we have a little bit of minority interest that was $200,000 in the quarter, bringing us to a total other income of $1.5 million.

As noted in our press release, the income tax rate declined a bit more this quarter. As you recall last year, we ended up with an annual income tax rate of 31.8%, but the adjustment to get there was taken in the fourth quarter. So the rate that we're going against in the first quarter from last year was 33%, but the further decline from 31.8 to 31 was primary as a result of tax benefits from manufacturing in Ireland and Puerto Rico.

The balance sheet continues to be in great shape.

I'll remind you that we have the accounts receivable securitization, and that remains steady at $130m million in the quarter, which is comparable with last year.

Accounts receivable days increased one day from the record low that we had set in December 2002, up to 59 days from 58 days at the end of the year. That compares with 60 days in the prior year quarter.

Inventory days are down nicely, compared to the prior year first

quarter.

Last year, they were at 147 days they have declined to 138 days this quarter. That's up a bit from the record low we set at the end of the year of 126 days, but still in very nice shape.

As John mentioned, the total debt plus accounts receivable, securitization decline $53m million in the quarter based on an extremely strong operating cash flow that we had in the quarter.

The debt ratio just continued to improve. Our debt to EBITDA ratio has dropped to 7.5. And our interest coverage ratio is almost up to almost twenty times now. And for a final comment, you can obviously see our cash flow statement. We had great first quarter cash flow record, a record of $104.2m cash million from operations and obviously we feel great about that. With that, I'll turn it back over to John for some wrap-up comments.

Okay. Thank you, Deane. Just overall from our viewpoint, we had an excellent first quarter, and if the foreign currency stays strong against the dollar, we think that we're in a great position to hit the three and a half billion dollar mark in sales for the full year.

Looking -- and I won't give you exact numbers for the next three quarters, but I think you can be thinking in terms of 18% to 20% increase in the second quarter, and then in the third quarter and fourth quarter, it will probably drop back a little bit in the 15 to 18 percent range. Also, obviously we reported more earnings this quarter than had been expected based on the first call report. We think that's going to continue.

Our goal for the full year is $2.15. That's up from the $2.10 we gave you when we reported on year end 2002. So we think that overall that the earnings in the next three quarters are going to continue to be good.

Obviously the way we treat the taxes in the fourth quarter will affect that, since we took all the reduced tax -- reduced taxes in the fourth quarter last year, so that comparison will be a little bit different, but going forward we're looking for $2.15 for the full year. And for your purposes, that's guidance internally, that's the goal.

And with that, Eileen, we're open for Q&A.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1, followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1, followed by the 3. If you're using a speakerphone, please lift the handset before entering your request. One moment please for the first question. Our first question coming from the line of (inaudible ) with Fulcrum Global Partners. Please proceed with your question.

Good evening. Very nice quarter. I was wondering if -- I think you already might have broken it out, but if you would review the recon growth overseas price volume mix, and also comment mix and particularly in Europe, if you're seeing any pickup in France and Germany specifically.

Well, you know, France, I think had a very nice quarter. I think they did have double digit sales growth. Germany was a little bit -- I think was more the high single digits. We don't really break down specifically price volume. As I mentioned the prices in Europe increased just modestly. And, you know, we mentioned that internationally overseas growth was about 9%.

Thanks. Next?

Our next question coming from the line of Scott Davidson with U.S. Bancorp Piper Jaffrey. Please proceed with your question.

Good afternoon. And nice quarter.

Thanks Scott.

John, You referenced the czars issue in Canada. As we look ahead throughout the rest of the year, Can you talk about maybe impact on other geographies, particularly Asia?

Obviously it's practically shut Hong Kong down, I think all your companies will be reporting that. The rest of China, it really hasn't hit it that hard yet, but we have our fingers crossed. I just -- It would be hard to predict. Your guess is probably as good as mine. I think clearly the world is waiting to get control of this and doing everybody they can to isolate it. Travel to the far east has really been curtailed. And we as a company are doing much more video conferencing as opposed to traveling there. So all of that will affect commerce on a day-to-day basis, including healthcare. I cannot tell you, Scott, when it's going to be under control. Don't know.

Fair enough. Then another issue that is on a lot of people's minds right now is just that challenges to hospital budgets, sort of broadly defined, didn't seem to see an impact in terms of your capital equipment sales in Q1, but as you talk to the sales force, are you hearing any change in tenor of what they're hearing from accounts and any change on the willingness on the part of hospitals to sort of move forward in terms of big capital purchases?

That's a good question. I would tell that you our great salespeople always say it's not the -- the competition is not other companies, it's always the budget. So that's something we've had to deal with capital sales for years. We have a leasing program that we're very, very active in, and that helps minimize the amount of capital that institutions have to put up to buy capital equipment. I don't know, and I have not personally heard any major change there in general. Hospitals, they need new equipment. They're reluctant to spend the money unless they have to. That's not new. I don't think there's been any change in trends.

Thanks very much.

Our next question coming from the line of Bruce Jacobs with Deutsche Bank.

Thanks. Congratulations guys. Great quarter. There's some fixation among investors on the pricing topic. Can you comment on how relevant you think the DRG changes that happened, how relevant those will be to your decision on pricing this fall, and also what ends up sticking with customers this fall?

Well, we have not made our pricing decisions for the fall yet, and frankly won't reveal those to the investment community until we give them to our customers. So -- I'm not trying to be flippant, but it's a little too early to talk about it. And I would say, in general, Bruce, pricing is still good. That would be the way I describe it.

I'm not asking you to pinpoint a price estimate, but to the extent that number is up or down X percent, how much of an impact does that have? Does it have an impact on your eventual decision on pricing?

Dave would love to comment on pricing, and you haven't heard from him, to Dave, so it’s time for him to talk, take it away.

Bruce, just as an example, we had already made our pricing decisions last year before we knew what the DRG rates were going to be.

Okay. So I'll take that to mean it doesn't necessarily have a huge impact on your decision there. A separate topic, on just mix benefit, there's also talk about how long you and others can continue to benefit from an upgraded mix. I presume that while you're maybe running at a cross-link polymixture, you'll be picking up it on ceramic on ceramic. Can you just talk about whether or not the type of benefit you’ve seen from product mix that will that continue in the quarters to come?

Well, clearly continuing to shift to the higher end products, and what's driving that is the baby boomer population that's rolling into the front side of the receiving [ inaudible ] orthopedic treatment for orthopedic ailments, hips and knees. So I think that's going to go for several years.

Guys, last quick question. I'm just wondering, has there been any philosophy change at all internally on the willingness to show earnings up side surprises? In the past you guys have often times reinvested. I'm wondering if you've changed your philosophy there. Perhaps it was just Dave holding you back before and now you're letting it flow there.

We follow the Sarbanes-Oxley regulations to the tee. And always have.

But obviously you can make decisions whether you want to reinvest in your business or not. I'm wondering if there's more of a willingness to show up side.

I don't think it's really changed. We're a growth company and we're going to continue to invest in the company. We and want to give a good return to the shareholders. So I would say overall it hasn't changed.

Bruce, we have continued to increase or sales force, we've done that in the spine sales force. We're adding people in OP-1. And, you know, just a decision to -- given the way our trauma business is growing to [ inaudible ] as well.

And we've thrown more money Leibinger business. We continue to invest for the long term here and we continue to do that.

Okay. Fair enough. So we get our cake and eat it, too. Thanks, guys.

The next question is from Michael Weinstein with J.P. Morgan.

And it's Adam Galling (ph) calling in for Mike. Picking up where Bruce left off, you did come out a bit higher than where we thought you would come out .in terms of operating expenses. I'm particularly concerned with R&D. You gave some granularity on SG&A for R&D, but with R&D at 5.1% of sales that’s the highest in some time on a better than expected sales basis, this is, so there any particular place where these dollars went?

Well, Adam, I think, you know we -- one thing we're still doing is looking at what we're doing in the OP-1 programs, and, you know, there is a bit of shifting that goes on from quarter to quarter in terms of what -- you know, how that facility is used for R&D versus, you know, products for sales, and so I think that will influence that percentage a bit. But, you know, we have also recently focused the organization. John has made it a focus in the last year and a half to really put some more focus within the organization on R&D, specifically with some recognition programs and things like that. We've always said that for R&D, we're not going to be constrained by exactly what we -- by percentage of sales in terms of what we spend. We're going to look for good ideas. When they're brought to us, we'll let the organization spend R&D. So I think you're seeing the organization react to that a little bit, and gear up to where we want to go for the next couple years on a product development fund.

One quick question on gross margin, which is also exceptionally strong. You mentioned that being attributed to the geographic mix of Roth-implant sales. I don’t think that we can really decipher anything out the ordinary from the results. Can you illustrates. Ask you just give us some more color on why the gross margin was so strong?

What I was saying was not geographic mix as much as the mix of sales growth. In other words, our orthopedic implant sales were up 24% versus 18% in MedSurg and 5% in PT. Obviously orthoimplants is a higher margin business, so to the extent those sales are growing faster, that will bump up our margin a bit. And we'll start to see a bit of impact from the Rutherford closing, but again that's going to impact us more in 2004.

Our next question coming from the line of Rick Wise with Bear Stearns. Please proceed.

Good afternoon John again, on the U.S. hip numbers, which I think I clearly understand should be ready to reaccelerate, you know, with the ceramic on ceramic approval. Can you help us characterize what we can expect? How do we quantify -- when we're looking at that line for the rest of the year, can you get back to upper teens growth? Or if you think that in dollars. Or help us understand what the up side might be in any way you choose.

Well, I would tell that you I'm going to be personally very disappointed if we give you a single digit number again. I think there was some slowdown -- my sense is there was a bit of a slowdown in the first quarter. The guys were hoping to get ceramic on ceramic and probably didn't hit the hip business as they should have, but I think you'll see that go back to double digits in the second quarter. I'm reluctant annual to say where it's going to go, because I don't know, but I can tell you this, that we believe that in time ceramic on ceramic will account for 15% to 20% of r so of our U.S. business – hip business. Thanks John, and I think (inaudible)Ed has a question, too. Turning to the medical that division, bed and stretcher market and I think according to our estimates that's ground has grown about 7% or so. Are you taking share from Washington and Hillrom?

I don't see how we could be growing as fast we are without doing that. I'm always reluctant to poke a competitor in the eye, and particularly these guys, because they're both good. Our sense is that we are taking market share. But Because I agree with you, I don't think the market is growing 7% personally. Do you think it might be growing high single digits?

No. No. I think it's lower.

We think it's lower.

Low single digit. And I think that goes to one of the very first question about capital expenditures. That's the last thing you can get a hospital to buy is a hospital bed. And just a last follow-up, John, you've been sort of generous in the past in reflecting on areas of interest to Stryker as you maybe potentially looked to expand the portfolio over the next who knows what, two to four years? Any thoughts you could share with us about areas that you might look at or are thinking about or might be important to the portfolio?

If you looked at the MedSurg business, we don't make a big deal of it, but the decompressors, the little acquisition we made at the end of last year?

Right, third quarter last year.

That's the kind of thing we're interested in the instrument side of the business. I would say overall in the endoscopy area, we're interested in anything that would expand our position in that market.

From my picks to instrumentation to other auxiliary products that would be used in the procedure. Thanks very much.

Our next question coming from Steve Hamill with RBC Capital Markets. Please proceed.

Hi, Steve.

Hi, John. Congratulations, and good afternoon.

Thank you, sir.

Sure. In terms of the trauma business, obviously you continue to accelerate there and have some great product launches that are doing well, but I curious do you think there's actually a market acceleration within trauma?

That's a good question. I don't think people go out and bang themselves up intentionally. I'm not trying to be flippant, but I kind of have the sense that the market might be a little heftier and growing a little faster than we had thought it was all along. You guys probably have a better fix on that in a than I do, but Dave, what do you hear?

That's a very, very good market, and my recollect is it's growing close to 10%, and it's a very healthy and good size market to be in.

It certainly would seem like 10% is better than where it would have been in prior history.

I may be one or two points high on that, but it's growing -- it's a good growing market.

And then in terms of the balance sheet, I was curious about inventory levels. You've done such a fantastic job of bringing down inventory levels over the last two years and now well below any of your competitors. Is that something we should think has been bottomed out now? Or is there still progress to make below the 125 days you posted in the fourth quarter?

We're going to continue to bang on that. You're giving us a lot of credit relative to our competitors. We do have a different product mix than them. We're not quite as pure on orthopedic implants, but we think we do a good job of managing handling our inventories. On the other hand, we'll keep the pressure on the folks to bring those numbers down.

Can you give us any sense on what DSOs you have for the orthopedic business? Not DSOs but inventory days.

They're higher.

Dean is getting kibitzed here by Dave.

I'm learning from the master.

Watching out of one corner of his eye. I understand.

He put his hand over his mouth.

Thank you, Steve.

Our next question coming from the line of Kathryn

Martinelli (ph) with Merrill Lynch necessarily, please proceed with your question.

Thank you. Congrats on a great quarter.

Thank you.

Just a question, John, in terms of your comments on what you were viewing of the deceleration on the second half, obviously still very solid at 15 to 18%, but it seems if we adjust for currency, based on just where the exchange (inaudible) that might actually suggest an acceleration of growth in the second half of the year, and I wonder if that was consistent with your thinking.

Yes.

Even in the face of some of the comps? And any sense for which business would be the key driver?

I think excluding currency, I would say it should be a built better.

And then just separately, on the share count, which was a little bit below our thinking, I wanted to see if we should be assuming if there was share buybacks we should be assuming continues or increasing the share count going forward.

You just cost dean $10.

I didn't even make the bet.

Kathryn Martinelli I want half of whoever won it.

Okay. I think you can assume that the shares will be around in that range and will kind of bump up through out the year, Kathryn. There's a lot of moving pieces to that calculation. The share price with the dilution calculation and all that has a lot to do with how we calculate that number.

But it would move up sequential from this level?

Yeah, to some degree.

Kathryn Martinelli, Lastly, with respect to the ceramic/ceramic, realizing it might compete with the metal/metal, which is seeing some good growth with this 38 diameter head. Is that an option with the ceramic system, or is it really a metal on metal specific size?

I don't know the answer to that.

I don't know much about metal on metal.

You're ahead of us.

Fair enough. Thanks a lot.

We compete with metal on metal. I know that. Dean H. Bergy: Okay.

Our next question coming from William Plovanic from First Albany.

Good evening, question. In regards to the foreign exchange, you've seen a lot of positive currency gains. How much of that is flowing through the P&L, or is it most of it just hedged?

Well, you know, it's difficult to tell.

Obviously we're getting the top line benefit, but because we manufacture in various and diverse locations as well, not that much of it flows down. I think what Dave has told you over the years, we're getting currency hits on the top line, but it hasn't had that much impact on operating income, and I would tell you the same thing. When we get pickups on the top line, those aren't flowing down nearly as much to the bottom line, although obviously we'll get some benefit from that.

Okay. Then, I don't know if you said anything in regard to the tax rate. I know it was 31% in the first quarter, but what is your tax rate guidance for the full year?

We're not giving guidance. We're certainly very comfortable with 31%. I think we still longer term are looking to manage the tax rate down. The closure of Rutherford, and some movement of some products to ire land Ireland and Puerto Rico which has been happening over time is impacting that rate, and we still think there's further movement downward available, but I wouldn't forecast that for this year.

So 31% in the first quarter, just keep that stable through the year is probably our best bet then. Lastly, you talk about the split of the Leibinger sales force, and you've had some challenges in that Leibinger division. Some of your competitors have had some challenges in that whole division as well. I was wondering if you could give us color on what's going on in the marketplace in the U.S.? Is it a shift towards different types of products? What do you really think is causing the impact there?

We think it's execution. So don't suggest it's not a good market. We still think that we've been poor at executing our strategy, and first we think we had a bad strategy trying to do both with the same sales force. You have to give us time here. I'm with you as far as being impatient about getting better results, but I think we're going to have to let this flow for a couple quarters to get a better feel of what we can do in the two different markets. And we're just in the process of really getting that organization teed up -- the two organizations teed up to go after the separate markets.

Great. Thanks a lot, and again, great quarter, guys.

Our next question coming from the line of Greg Halter with Lynch Jones and Rind Incorporated.

Hello, guys.

Fabulous quarter. I just have some housekeeping issues. If I could, Dean, do you have the figure for accounts payable and short-term debt?

Well short-term debt we know. I don't have accounts payable off the top of my head. Short-term debt will be $7.5 million.

Okay. On your cash flow statement, there's a purchase -- business acquisition of 4.3. Does that represent carryover from previous deals?

A little bit, and then there's also some PT acquisitions made during the quarter there, which was normal.

Your receivables were up 26% year over year. Is any of that spurns is (inaudible) impact? Is there any or issue going on there?

Absolutely. You're seeing that with all of our balance sheet.

I noticed with the equity as well, it was up about $150 million and earnings were up $104m, obviously a currency impact there. Do you have a like for like receivable number?

I'm sorry. I don't understand your question.

Xing out the currency on the receivables for this period.

That's why we gave you the DSO, Greg.

Okay.

The DSO was 138 at the end of this quarter versus 126 at the end of the year.

Great. Thank you.

Thank you, sir.

Our next question coming from the line of Bob Hopkins with Lehman Brothers. Please proceed with your question.

Thanks and good afternoon. John, a quick question, if I may. Would you please give us a comment on how you think the merger between center fell (inaudible), Smith and Nephew might impact the environment, and your thoughts on potential ma for Stryker and specifically is perhaps spine as area where there might be opportunities?

Well, it's probably not appropriate for me to make any real comments about the Smith and Nephew center pulse merger. I would tell you that based on what I know about it, there's not a whole lot of duplication of footprint, so they should not have the integration issues that we needed to go through. In most cases, we had common common footprints, so we were really struggling with how to manage territories and regions and countries. I don't think they'll have quite as much trouble as we did or as much of a challenge. My suspicion is they'll do it and do it well.

But for Stryker, would you characterize this merger as neutral, something that makes the landscape more competitive, or perhaps an opportunity for you?

Well, the first conclusion one has to reach is that there's now one more party to the race to who's going to be the largest orthopedic company. There were two, and now there's a third entity that's going to be in that race. So in that sense, I think the competition will heat up. Whether there are specific opportunities for us to take business away from the any entity, that's we'll have to see. That will depend on how well they execute. Those are smart guys. They're going to do their best to keep the business.

As far as your latest thoughts on opportunities for you guys, specifically any commentary around spine?

Well, of course, it's only been nine months since we did one spine acquisition. I would say we're probably not going to do another big spine acquisition in the next few quarters, but we look at every opportunity that coming through the door, and we make decisions on the basis does it complement what we are doing and will it help grow our business? We're not starting out with a grand scheme that eliminates or in turn points us towards any major acquisitions at this point.

Okay. Thanks very much.

Thank you.

Our last question will come from the line of -- have I ho vas (inaudible), please proceed with your question. Your line is now open. Please proceed with your question. I think he's gone.

I am showing there are no further questions at this time. Please continue with your presentation or closing remarks.

All right. We assume we have no more questions. We appreciate everybody tuning in here late in the afternoon. We hope that you found the report helpful, and we're very enthusiastic about the future. We think that Stryker's going to have a good year. You've gotten our guidance on our goal on earnings for $2.15 for earnings, and you know that our goal for the top line is that we're looking for about 3.5 billion.

So with that, we're delighted to talk to all of you, and just if you want to pencil in on your calendar, we'll be talking to you about 90 days from now on Tuesday, July the 15th, at the end of the report for the second quarter. So Tuesday, July the 15th, at 5 00 p.m. Press release will go out at 4 00, and we'll plan on the conference call. Again, thank you so much for your patience and interest. Have a good day.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.