史賽克 (SYK) 2003 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Stryker Corporation, fourth quarter operating results conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, January 29, 2004.

Certain statements made in today's presentation may constitute forward-looking statements. They are based upon management's current expectations and are subject to various risks and uncertainties that could cause the companies actual results to differ materially from those expressed or implied in such statements.

In addition to factors that may are discussed in this presentation, such factors include, but are not limited to, regulatory actions including cost containment measures that could adversely affect the prices or demand for the company's product, 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 filings with the Securities and Exchange Commission, including the Company's annual report on Form-10K and quarterly reports on Form-10Q. I would now like to turn the conference over to Mr. John Brown, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you and welcome, everyone, to Stryker's fourth quarter earnings report for the year 2003. With me today are Steve MacMillan, President and Chief Operating Officer, and Dean Bergy, VP, Chief Financial Officer and Secretary. We are pleased to report that Stryker closed the year on a very strong note. For the fourth quarter, net sales were 1 billion, 1 million an increase of 21% over the prior year.

Excluding the impact of foreign currency sales was 15% higher than last year. Net earnings increased 26% to 134 million, and diluted net earnings per share increased 27% to 66 cents per share. For the year, net sales were 3.625 billion, an increase of 20% over the prior year. Excluding the impact of foreign currency, sales were 16% higher than last year. Net earnings increased 31% to 454 million, and diluted net earnings per share increased 31% to $2.23.

Excluding the restructuring and acquisition-related items recorded in the third quarter of 2002, net earnings for the year and diluted net earnings per share both increased 27%. As you recall, the restructuring and acquisition-related items, including last year's third quarter were for costs to close the Rutherford, New Jersey manufacturing facility, and a credit to reverse certain howmedic (ph) acquisition related costs specifically. The items together resulted in a pretax charge of 17.2 million, which equates to 11.5 million after taxes, or 6 cents per diluted share.

Cash flow and asset management were excellent in the quarter and for the year. We generated 649 million in cash from operations in the year 2003, and reduced debt, plus accounts receivable to securitization, by 192 million in the quarter, and 456 million for the year to 176 million at year-end.

Domestic sales were 636 million for the fourth quarter, and 2.333 billion for the year, representing increases of 19% and 18% respectively. The U.S. divisions had just a great quarter and a great year. Howmedica was up 21% for the quarter and 22% for the year, with extremely strong growth in reconstructive implants, and solid growth in spine and trauma systems.

Instrument sales increased 16% a quarter, and 17% for the year, with strong growth in power estimates and excellent growth in the net T and operating room waste management systems, and Steri-Shield pain management for continuous delivery. Endoscopy sales increased 18% for the quarter & 19% for the year with strong growth in video and arthroscopy and strong growth in general surgery. Medical was up 17% a quarter, 15% for the year with excellent growth in hospital beds, EMS, and solid growth in stretchers. (inaudible) sales were up 17% in the quarter, and 2% for the year, led by sales of micro implant systems. Our service business physiotherapy was up 14% a quarter and 11% for the year, primarily on the strength of new start-ups and acquisition.

International sales were up 365 million for the fourth quarter, and 1,292 billion for the year, representing increases of 25% and 24% over the prior year. Foreign currency comparisons were at 47millions of sales in the fourth quarter, and 146 million for the full year. Excluding the impact of foreign currency, international sales increased 9% for the fourth quarter and 10% for the year. On a local currency basis, most of the international divisions had a very good year, and in particular Europe grew 14% for the quarter and the year, with strong performances in the UK, Pellalox (ph), Italy, Scandinavia and Spain. Japan grew 1% a quarter and 7% for the year with the strongest performance in orthopedic implant. Pacific was flat for the quarter, were up 6% for the year, with the strongest performances in China and Australia. Canada and Latin America were up 12% in the quarter and 11% for the year, with the strongest performance in Latin America.

Orthopedic implant sales were 574 million for the fourth quarter, and 2,093 billion for the year, representing increases up 21% and 23% respectively, based on strong shipments of reconstructive, trauma and spinal implants. Excluding the impact of foreign currency, sales of orthopedic implants increased 14% for the quarter, and 16% over the year. MedSurg sales were up 369 million for the fourth quarter and 1.309 billion for the year, representing increases up 22% and 18% respectively. That's based on higher shipments of power surgical instruments, endoscopic products, hospital beds and stretchers, micro implant and surgical navigation systems. Including foreign currency, sales of MedSurg equipment increased 17% in the quarter, 15% for the year. It was a good year for MedSurg.

Concerning our physiotherapy, we announced in late December that physiotherapy associates and Stryker had received a subpoena from the U.S. attorney's office in Boston in connection with a department of the justice investigation, physiotherapy associated to building and coding practices. We are responding as quickly as possible to cooperate with the Department of Justice, but we don't have anything to further report on this matter at the present time. On our branding initiative, we completed work in the fourth quarter on the key aspects of a Stryker branding initiative. We believe this effort will leverage our total company strength, and establish better overall awareness with striker's capabilities by our customers and employees, while continue to maintain the strengths inherent in the centralized operation of the company.

Intangibles whether amortization for the fourth quarter of 2003 is approximately 6.5 million higher as a result of trade name impairments associated with the branding initiative, we're dropping some of the old names. In the area of minimally invasive co-joint procedures, we look forward to 2004 as we continue to make nice progress in the areas of instrument deployment, technique refinement and training. Stryker will facilitate a menu of MIS techniques for the instrumentation we plan to provide to our clinics.

We think navigation will play an important role and successful less invasive procedures, believe our navigation business will help us further in an integrated approach. (inaudible) training will be available in various forms including on-line training providing computer simulation, as well as through the American Academy of Orthopedic Surgeons training center in Chicago, and established standards of excellence throughout the world. In minimally invasive knees we have validates of safety and reproducibility of the mid-fastiss approach, using a Scorpio total knee instrumentation, and will have instrumentation and approaches to be able to complement our new Triathlon knee that could be launched in the second quarter of 2004.

We have approximately 100 knees estimate strips in the filed, and plan to ship another 275 sets in the first quarter of 2004. In minimum related hips, our Accolade hip system is currently being used to form single, many a decision (inaudible) after plastic procedures. Accolade hip instrumentation is an excellent complement to complete these procedures. In addition, we have another 70 custom instrument sets in the field. Minimally invasive hip procedures, and plan to ship approximately 200 sets of specialized retractors and light sources in the first quarter of this year, and second quarter we plan to launch state of the art hip instrumentations for needs in this area.

Moving on to our bone growth factor. OP-1 shipments rebounded in the quarter when compared to prior quarter and year, as we resolve the product release test which had impacted supply in the U.S. market. We're still working to a lease test impacting a portion of our receipt sales of OP-1. As we said previously, we're increasing our manufacturing capacity, but expect that capacity constraints will keep sales below market demand for OP-1 during the next few quarters. During the fourth quarter, we evaluated patient involvement in our North American posterior lateral spine fusion trial.

After correspondence and discussions with the FDA, and review of our enrollment compliance, we concluded that's we could end enrollment at 297 patients. These patients will receive a two year follow up before submission of a PMA. In Japan we completed enrollment in our 32 patient pilot study of an estimated posterolateral spine fusion using OP-1 late in the third quarter. These patients will receive a one year follow up before we apply for a phase 3 study. And now I'm delighted to turn the microphone over to Steve MacMillan for Steve's comments and observations on our first $1 billion quarter and for the year.

Thanks, John, and good afternoon, everyone. Now for a little more flavor on our first billion dollars quarter, and one in which our worldwide orthopedic implants and MedSurg groups each exceeded 20% growth. Including 21% and 22% reported growth respectively. This is now the sixth straight quarter of 20% or greater growth in our orthopedic implant business. Though we were admittedly clearly held by currency, as operational growth was 14% in the quarter. Growth was again strong across our largest implant product lines, as we recorded 23% growth in hips, 19% in growth knees and trauma, while our spine business grew 16% versus last year. These results were again helped by currency, which Dean will elaborate on further.

We are particularly please bid our US hip business, which was driven by solid adoption of our trident, ceramic on ceramic hip grew 26% over last year, and accelerated even further from last quarter's strong 23% growth rate, 21% in Q2, and the 8% achieved in Q1. Clearly a dramatic improvement throughout the year. Early data from our patient education campaign launched in late September, and featuring legendary golfer Jack Nicolas suggest the campaign has been well received by both prospective patients and the orthopedic surgeon community. It to becoming clear that our unique Trident ceramic on ceramic hip is receiving wide spread adoption, as ceramic inserts accounted for about 30% of our insert sales in the quarter.

Despite the obvious focus on hips in the quarter, we were also pleased with another strong quarter in knees, particularly the US market where sales grew 18%. Our bone cement business was also extremely strong in the quarter, driven by Simplex P, our bone cement antibiotic combination which was approved in the second quarter. Less we get too confident, our hip and knee franchises outside the US showed more modest growth in local currency. The reported growth exceeded 20% in both categories due to big currency gains. Essentially, softness in Japan Pacific offset strong performance from our European business. Spine sales are softer than in recent quarter, and we expect renewed strength from both of these franchises in the first half behind a number of new product launches.

In addition to the strong implant performances, our MedSurg group capped a great year with fourth quarter sales up 22%, or 17% on a constant currency basis. This growth was driven by plus 20% growth rate in endoscopy, line binger and instruments business, which include a number of products that are being used in minimally invasive surgeries. Both of our endoscopy, instruments and medical businesses continue to outstrip the markets and as John mentioned, our physiotherapy business reported 14% sales growth, rounding out a quarter where all three-business groups posted at least teen growth rates.

We instituted a couple of changes in our sales force organization during the quarter to improve our selling efforts in 2004. In the first instance, we established a fully focused spine sales for in the US at year-end. The second sales force change was to move our navigation products in the US out from a lininger business into a line navigation with our well-established instruments sales force. We anticipate this will also have a significant and positive impact on our lininger business in 2004, as we'll now be better focused with that organization, and we think we saw the beginning of a lininger upturn in the first quarter. You'll also notice a significant increase in our R&D spending both in the fourth quarter and the year, as we ramp up our innovation efforts, some of which will begin to hit in the first half of 2004, and now we'll turn it over to Dean Bergy, our Chief Financial Officer for more details.

Thanks Steve, I'll begin with a discussion as I normally do about the foreign currency impacts in the quarter. As you have seen, the foreign currency comparisons were again favorable in the fourth quarter, increasing our international sales by $47 million, or 16% of the international scales total, bringing the total year impact to $145.9 million, or 14% impact on those sales. In the fourth, the euro strengthened approximately 20% and the yen increased against the dollar compared to the prior year. If currency rates hold at their current levels, we expect we could see a positive impact on sales of about $45 million in the first quarter of 2004.

I'm now turning to a price volume analysis of sales in the quarter and for the year. In the -- for the quarter, price impact was 3%, the foreign currency impact on sales was 6%. There was no impact from acquisitions in the quarter, volume and mix were up 12% to get to our 21% sales increase in the year -- or in the quarter. In the year, price impacted sales by a positive 2%, foreign currency was favorable by 5%, acquisitions added 1% to sales and volume mix was up 12% getting to our 20% sales growth for the year. In the US, implant prices were up about 6% in the fourth quarter and 5% for the year. Prices in Europe were up slightly in Japan and the Pacific, prices were down slightly for the year. The acquisition impact as I said dropped to zero in the fourth quarter and 1% for the year, with the acquisition of surgical dynamics reached its anniversary in the fourth quarter. Volume and mix was up about 13% in the US and 10% overseas.

Now turning to our business segments, starting with orthopedic implants which represents about 58% of our sales. Orthopedic implant sales increased 21% in the fourth quarter, and 23% for the year, on an as reported basis, and 14% and 16% respectively on a cost and currency basis. Turning to the products within orthopedic implants. For the fourth quarter, I'll give you domestic and international sales growth by the product lines, and then also turn to accounts and currency. In the quarter, hips, as Steve mentioned domestically were up 27%, 20% internationally, and 23% in total. Our knee product line was up 18% domestically. 21% internationally, 19% in total. Trauma products were up 9% domestically, 24% internationally, and 19% in total. Spinal implant systems were up 13% domestically, 20% internationally, and 16% in total. And for total orthopedic implants up 21% across the board domestically, internationally, and in total.

Now turning to constant currency, the domestic line is obviously the same, and for the quarter, international hips were up 4% internationally, or 16% in total on a constant currency basis. Knees were up 5% internationally, 13% in total, trauma was up 8% internationally, and 8% in total. Spine was up 6% internationally, and 11% in total, and the total orthopedic implant business international growth was 5% on a constant currency basis, and 14% in total. Some comments on the individual product lines. Hips, we had extremely -- another extremely strong quarter in hips, led by our Trident ceramic on ceramic hip system in the United States.

On united base, ceramic insert sales were around 30% of our total insert sales in the quarter. We're still comfortable with the level of inventory in the field we have to support demand for our Trident ceramic sales. We continue to see a shift to cementless stones which are used in the higher end ceramic procedures. Growth in this year was driven by our Accolade, secure fit HA, and Meridian TMZF products. Our revision stems also continue to do well the quarter. Sales of the ours acid tabular cups were also strong driven by the trident tabular system for both polyethylene and ceramics.

The year-end, Trident hat that had a strong quarter and others too continued their strong performance. In Japan, our Cementless hips were solid, the cemented hips were soft. Japan continued to see a slight mix ship from hip to trauma products as a result of the manner in which certain hip fractures are now being treated. On knees, we had another very good quarter in knees, with Scorpio providing growth, and Dura con showing good results in the United States. The Dura com TS and the Scorpio TS were vision systems were also solid.

Scorpio flux knee for patients requiring an extended range of motioning was launched in the US last year, and continued to show good progress in the fourth quarter. In The Europe, our Scorpio knee showed excellent fourth quarter growth and Duracon also had a solid quarter. Our posterior stabilized deflection knee products, Scorpio flex PS had a good quarter in Japan, and our Scorpio flex knee also had a very good quarter in the Pacific.

EIUS, our minimally invasive new knee continued its fast growth. Our trauma slowed down the quarter. The T2 learning nail system, however, had another strong quarter, and it continues to set new sales records. Sales of our other trauma products were softer in the United States, particularly in external fixation of where we were going against a tough comparable. We also believe that we may have lost the best sales force focus with the strength in trident and some total and bone cement as well as slight delays in the launch of certain new products.

Hip fracture and external fixation products were solid outside the United States, particularly in Japan. Spines, sales growth was led by the sales of forickia lumbar products, particularly our ZX2 system which was launched late last year. The reflex anterior cervical plates also had a good quarter, and sales of interbody cages recorded for surgical dynamites were up slightly in the quarter. Howmedica will be noticed Orthopaedics under the new brand architecture ended the year with about 760 sales reps, manages, we have plans to increase this number closer to 900 in 2004. I'll give you a brief breakdown on our 2004 goals here in terms of the breakdown in net sales for. We're planning about 500 recon reps to 110 trauma reps, 190 in spine, and about 100 managers to get close to that 900 number. Now turning to our MedSurg group, which as John indicated had a great quarter and a great year. MedSurg I will refresh your memory represents about 36% of our sales and breaks down into four operating divisions. Instruments represents about 41% of those total sales for MedSurg, endoscopy about 31%, medical around 19%, and our lightinger business around 9%.

Medsurg group sales were up 22% in the fourth quarter, and 18% for the year. On a reported basis, it's 17% for the quarter, and 15% for the year on a constant currency basis. Turning to instruments, instruments was up 23% in the fourth quarter and 22% year-to-date as reported, and 18% for both the quarter and the year-end on a constant currency basis.

As you know, we have two product lines that we report to you here in the instruments business, in the quarter, our powered instruments business was up 15% domestically, 47% internationally, and 24% in total. Other OR equipment is up 17% domestically, 36% internationally, and 21% in total. So, for the total instruments business, there was 16% domestically, 43% internationally, and 23% in total. The instruments division had a great quarter based on excellent growth in powered instrument systems and strong shipments of other equipment. Domestics growth was strong all year, and we continue to pick up market share internationally.

Our system 5 heavy-duty power system had an excellent quarter and year, and micro powered tools registered strong double-digit growth. Steri-Shield, the Neptune operating lace management system, pain management and percutaneous cement delivery also sold extremely well, and the de-compressors discectomy probe recorded in the fourth quarter of 2002 continues to show solid sequential growth. The US sales force we're planning to take up to about 210 sales execs and managers from about 190 as our 2004 goal in that business.

Turning to our endoscopy business, they were up 23% in the fourth quarter, and 22% for the year, as reported, and 20% for fourth quarter, and 19% for the year on a constant currency basis. We break this business into three areas that we share with you, arthroscopy was up 25% domestically in the fourth quarter, 30% internationally, so 27% total growth for arthroscopy. General surgery was up 12% domestically, 21% internationally, 13% in total. Video was up 17% domestically, 75% internationally, and 27% in total.

So the total endoscopy business was up 18% domestically, 44% internationally, and 23% in total. Endoscopy had another strong quarter based on great growth in video and arthroscopy and solid growth in general surgery. US growth was excellent, and we had another great quarter overseas where we have a lower market penetration have been building or sales forces. Our camera sales were very strong, and there appears to be a lot of interest in the endo communications area. Stretcher showed solid growth and sports medicine products continued to ramp up nicely.

In the United States, the endoscopy division as of 2004 goal in terms of increasing sales executives, managers are planning to go to 250 from 210 at the end of this past year. Turning to our lininger business, they had a great fourth quarter, up 24% and 10% for the year. In the quarter, domestically, business was up 17%, 31% internationally as I said 24% in total. The lininger micro implant business has been building solid momentum, and registered gold standard growth in the fourth quarter. As you know, we have been concentrating our efforts here on increasing focus and improving the quality of the sales force. Navigation also rebounded with a strong showing on a much smaller base. Beginning in January of 2004, as Steve mentioned, our instrument sales for will contain all navigation products in the United States. We believe this is a better strategic fit as we look to jump start this product line. And fourth quarter the lininger micro implant business, we're continuing to expand the sales for there from 70 to 75 folks.

Medical business was up 16% in the fourth quarter, and 12% for the year on an as reported basis, and 13% for the quarter and 10% for the year on a constant currency basis. Domestically, the business was up 17% in the fourth quarter, 14% internationally for that 16% sales -- total sales growth. Medical division had a very good quarter, our stretcher business was extremely strong, boosted by some international business, and our EMS line had another good quarter. US hospital bed sales came back there in the fourth quarter. And the trends still look good. Medical division in the US is planning to go to 160 sales execs managers, compared to 140 last year.

And to cap it off, physiotherapy had another solid quarter with 14% growth in the fourth quarter, bringing the year-to-date growth to 11%, as has been the case in recent years, start-ups and acquisitions have contributed most of that division's growth as same stores sales are up 3% for the year. PT now has 374 centers as of the end of 2003. Turning now to the P&L operating margins, overall margins in the quarter were up nicely from last year, we see the boost from the real line of our orthopedic implant manufacturing facilities, improved performance in our new MedSurg facilities, and stronger fourth quarter volume. Sequentially, we also benefitted from a higher mix of orthopedic implant sales.

R&D spending is up 27% year-to-date, on a year-to-date basis, the R&D ratios increased from 4.7% of sales in the prior year, to 5% as we continue to put increased effort on our development. SG&A ratio is up compared to the prior year in the quarter and for the year to date, 38.6 in the quarter versus 38.1 in the prior year, and as you know we have grown our dedicated sales forces, and been faced with higher insurance costs this year. In addition these costs are up in the quarter due to higher amortization expense associated with longer instruments, and higher advertising costs associated with the patient education campaign.

So all in all, our operating income increased 27% in the fourth quarter, and operating margins were up nicely from last year, due to the increase in gross margin percentage. Operating income was 21%, sales in 2003 versus 20.1% last year. Interest expense is getting to be pretty much a non-story, but interest expense plus the accounts receivable securitization, that discount was .7 million in the quarter, bringing the interest expense plus that number to 4.1 in the quarter, down 56% from the prior year and total interest expense plus the securitization was 25.2 million for the year versus 23 million in the prior year, down 41%. Intangible amortization increased 7.7 million in the quarter at $16.5 million for the year. For the fourth quarter, as John mentioned includes approximately $6.5 million in intangibles and amortization related to the trade name impairments as adopted by the company in the fourth quarter. The remained of the increase for the year, for the quarter and the year is primarily attributable to acquisitions, specifically the surgical dynamics acquisition for the year. Other income I'll give you the breakdowns for the quarter but the core interest income of the 1.9 million was 800,000 of that we had foreign currency gain of 1 million in the quarter, and minority interest was 100,000, adding up to about 1.9 million of other income in the quarter.

As you saw, the income tax rate -- or as you know the income tax rate for the first nine months was reduced to 30.5% in the third quarter, and this rate was maintained in the fourth quarter. In 2002, the income tax rate for the year was reduced to 31.8% for the year and the fourth quarter bringing effective tax rates for that fourth quarter to 28.9%. This is for 2002. So that means the effective annual income tax rates were the respective years were 30.5 for 2003, and 31.8% for 2002. As we said, the point of rate we got some thing relate primarily to increased manufacturing and lower taxing sections which is Iowa and Puerto Rico.

Turning real briefly to the balance sheet, we've got a very strong balance sheet at the end of the year. I'll remind you that the receivables have been reduce by the effect of our accounts receivable securitization program. You know that we expanded that program during the second quarter from the previous $130 million maximum to $200 million. However, given our excellent cash flow in the fourth quarter, we currently have $150 million outstanding under that program at the end of decline, versus 130 million at end of the prior year. In the receivables, we have strong fourth quarter push and that allowed us to bring our accounts receivable base in at the same record low that we hit at the end of last year, 58 days. Our inventory days, we've been working on this all year, and have been pushing against last year's record, we did set a new record, 120 days at the end of the fourth quarter this year, versus 126 days last year. Of course, we were able to reduce, as John said, the accounts receivable securitization and total -- and debt combined by 192 million in the quarter, and 456 million for the year to get it down to $176 million.

As you can see by looking at the press release, our operating cash flow was extremely strong for the year, finishing at $649 million, $629 million with the proceeds from the accounts receivables securitization are excluded. This is up 22% from last year, despite a little bit heavier tax stated burden than 2003. With that, I'll turn it back over to John.

Thanks Dean, and thanks, Steve. We're going to open it up for questions, and then we'll do a wrap-up after the Q&A period. And Chris, so, if you would bring in the questions

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Rick Weiss with Bear Stearns. Please go a head.

Hi, it's actually Milton Shoe. A couple of questions, can you go into more detail on Japan, looks like on a constant currency basis, I was real drag on the international sales growth, and related to John can you comment on what you expect pricing to be this year as each of you kind of resets that?

Well, I guess a couple of thing is. One, we did have some price cuts in Japan this last year that affected us, and we made real sure that there was no effort at all to do any kind of loading, so that could have affected the year-end close, but in general, Japan is in good shape's realize that the numbers are not exactly overwhelming, but I would tell you that we've had very tight cost control, and it was a nice profit producer, and nice profit growth for the year. So don't read too much into the absolute number.

OK. And then the pricing question, when they reset, you know, U.S. device pricing, or imports, I should say.

Steve is kicking me. He wants to answer the question.

OK. Dean? I think what we expect right now is that restrictive prices will not be as -- hit as much as originally had been anticipated. I think we are. And restructuring prices decreases in the 4% to 6% range, and that would kick in probably at the beginning of the second quarter. In Japan, as, understand it, has took a look at the reference pricing that they look at in conjunction with looking at the prices and reached a conclusion that on -- that relative to orthopedics they're in line.

OK. Thanks. And just one follow-up I just heard that sophomore dynamic and stiff fuse spine and cut back on funding a lot of these educational trips for surgeons, and more a big picture kind of question. What do you think that will do with SG&A or sales and marketing spending for the industry? Thanks.

My prediction is that our guys will find another place to spend the money, but I can't speak for Medtronic or the other companies. But I don't think it will have a marked effect on our ratios. Not a big difference.

Certainly our budgeting, and this was known as we went into that season, does not reflect significant changes in those ratios.

Our next question comes from Robert Faulkner with Prudential Securities. Please proceed with your question.

Thank you, gentlemen. Wonder if you could talk about that age-old question of pricing here in the U.S. This is the season for some -- a read on that, and I'll follow up with something after?

OK. Rob, we -- I think we feel good about -- as you know, we put our price increases in September. We reported 6% price increase. I think we feel pretty good about that going through to the next year, September price increase. There are some price increases that come in December, but generally, I think we would feel comfortable in indicating that price -- U.S. implant prices will probably be for us in the 4% to 6% range, positive for that time period.

And am I right in saying that sounds like acceleration compared to last year?

Well, I think you've got to keep in mind that there is mixed to some degree that's involved in that in terms of what products get sold. You know, it's in line with where it has been, I think, for the last couple of years.

OK. And finally, wonder if you could comment on hospital spending in general. Many of your businesses are exposed to their propensity to spend. What do you see in trends of up, down. Are they cutting back, or are they still spending?

Dean Bergy It's in pockets all over the place. In the U.S., we're still seeing a number of build be and some reasonable be strength. I will tell you I think in Japan, we saw certainly a slowdown in the fourth quarter. I think that was part of our softness in Japan. We certainly saw some slowdowns in Europe at year-end, as people rose up to the end of the year. And overall, we don't anticipate a huge drop-off.

OK. Great. Thank you very much.

Thanks, Rob.

Our next question comes from the line of Bruce Jacobs with Deutsche Bank. Please proceed with your question.

Thanks guys for taking my question. On the DTC front, you mentioned the response had been positive this far. Can you talk about how you'll measure the effectiveness of that campaign? And I don't know if you've commented or can comment on what kind of investment you're breaking, but wonder what you've made on investment, and what kind of returns you're expecting?

Without getting into the specifics of what we're spending on it, we are monitoring it closely, and really tracking it among a number of fronts. There's quantitative data in number of people that we've contacted, number of consumers that we've been coming to our website that we refer on to positions. So our whole key has been to be very careful with it to be working in conjunction with the orthopedic surgeon community, so we been able to contract how many people are contacting our site, referring them on to physicians, then trying to track through in terms of the real impact of the who has gone and had an implant done. You know, that whole cycle takes several months, and all the early indications are there has been a lot of increased pickup in terms of people seeking out surgeons for dialogue, and then its really in the surgeons hands.

And you mentioned in the course of the call about some re branding efforts. Can you talk in a little more detail about what exactly you're doing, what you're dropping, and just how the brands will position going forward? Thank you

You know, it's really quite simplistic. Obviously he with had the how med cake acquisition back in '98, and we have continued to carry the Howmedica Osteonics name, which is a mouthful for our reps and confusing for lot of our customers and increasingly know about Stryker, so we're going to call each sec E segment Stryker something or other. So we're now going to have Stryker orthopedics in terms of Stryker Howmedica Osteonics, and we think that will clear it up with our customers, make it simpler for our folks.

Last question on gross margins line, you exceeded our expectations there, and can you talk about how much Rutherford figured in there, and the what we should expect for 2004? That's all, I had. Thanks guys.

Bruce, I would tell you that I think we reported last quarter that the Rutherford transition was pretty much complete, so this quarter reflects substantially all of the Rutherford benefit. I think we probably have a little bit of upside on it, and not a lot from Rutherford, I think where we can get better is in some of our Meds rG facilities we've brought on line. We've made progress is there in the fourth quarter. I think we've got room to get a little bit better as we go into '04, so we've got a little bit of room on a margin line right now. Obviously the other thing that will impact it is what happens as we look at price and cost reductions as we go forward perform but I would say a good part of the Rutherford is reflected in the fourth.

Our next question comes from the line of Katherine Martin with Merrill Lynch. Please go ahead with your question.

Thank you Tow questions .One was a follow up on the DTC, is trying to understand this. In '04, is this something you really views a targeted for the Trident, or would you be broadening some of the director consumer initiatives to see if you could increase market share for all of your hip lines overall. I'm just trying to determine how specific these campaigns are or will be.

Kat at this point, it's really focussed our ceramic on ceramic, the Trident hip. We don't see necessarily going out and doing all of our products with this campaign.

OK. That's help. Thank you. And then secondly, just in terms of maybe what you're hearing on minimal bearing our sense was that the might get a deficiency letter, but then again, it may go to a panel, are you anticipating a down classification this year, and it just a matter if it does happens of taking one of your mobile bearings that you have outside the U.S. and filing a 5 10-K on that system?

We understand a deficiency wire is the works or could be coming, so that's going to make that a little bit tricker, a least expand the table for potential down classification. now having said that if we do have an IDE going on in the U.S. on our mobile bearing knee, with about 70% complete right now, but there is a two year follow up on that. You know, so obviously a down classification doesn't take place, it will be up, you know, at least probably two and a laugh to three years before we're able to get something on the market in the U.S.

OK. Great. Thank that's very help. Thanks.

Our next question comes from the line of Jason Weiss (ph) with Morgan Stanley.

First a quick follow-up on Japanese price changes upcoming. Is it mainly your recon business, which is exposed, or can we just assume about 9% of the business falls under that say four to 5% tax cut that you're predicting?

It's mainly recon and some spine.

OK. Second question on your new rep hires, how quickly do you expect them to start turning profit. If we were just trying to think of a revenue number for those reps, what's a good way of thinking about isn't it in other words, is it a take three months before they start really becoming use., or is it a longer process than that?

Typically, we would expect two to three quarters.

Two to three quarters? And also you have mentioned 500 recon reps and 2004. How many were there in 2003?

Hold on one sec, around 450.

Our next question comes from the line of Wade King with Wells Fargo Securities.

Good afternoon and Congratulations on a strong quarter, gentlemen. Two questions, please. Didn't hear you say anything about guidance, John. Were you going to save that for the closing remarks, or could you comment on any changes to guidance in the top and bottom line?

Dial that after we get through the Q&A, Wade.

OK I'll be patient. Secondly, you mentioned the completion of enrollment at a couple of hundred patients on one of your spinal trials. Could you describe the expectation to your follow up, could you describe the time line in your view for PMA filings for final application, and any expectations on time to market in that regard?

Essentially, we've got a two-year follow up from when the last patient was in, so that would be fourth quarter of '05. We'll then take some time to turn around and get that thing filed, so we're really talk at least a year beyond that, so we would assume conservatively by '07.

We would have very brought labeling for spine, what we have at this point for trauma. We don't want to get into the specific details at this point.

And there that be your significant efforts as relates to a spinal application in the U.S. market for OP-1.Will 0 for the product and spine?

That will be the big break through for us.

OK. Very good gentlemen. Thank you very much.

Thanks wide wade

Our next question comes from Ben Andrew with William Blair and Company. Please go ahead with your question.

Good afternoon. Just wanted to ask a couple of questions. First on the international hip and knee group, looked a little softer on the basis. On they are there dynamics there? Could you help us understand?

We point out again, Europe was actually very strong. Europe had hip growth on a unit basis, one went into the high single digits, and knee growth was in the low double-digits. We saw the softness in Japan and the rest of the Far East, and looked like we just saw some Slow downs in all of the market dynamics particularly in November and December there, as a lot of folks were cutting back at year-end.

But that's not something we should be looking for as we go into the first part of the year?

We're hoping to see that pick back up.

OK And second on the spine business, can you talk about what you doing to help that recovers entirely product flow or things that you've done with the sales for, et cetera to get that back where you would like to see it?

Yeah, it's really a couple of things. Both products flow standpoint, and leadership standpoint, and we mentioned last name time that we have taken one of our top executives number put him in charge of the business during the fourth quarter, and then have made a structural change particularly to focus on the U.S. business. Essentially our spine selling organization in the U.S. used to report in through the recon business, and what we're doing is working that out now and having that report directly to Tim, who is the global head of our spine business, so we are growing this business and setting its up now as the rest of our businesses, as it has gotten bigger, as we have started to dial up the product flow. And we have got some work to do here, Tim has jumped in here very quickly, and I think you'll see our spine selling organization U.S. responding, as well as our new product development efforts really start to accelerate over the coming year.

but we should probably back end load that because I'm not aware of any major new products that are coming in the next couple of quarter.

Yeah, I think you would be better backlogging it.

OK Thank you very much.

Our next question comes from the line of Joanne Wuench.(ph) with (inaudible)

Thanks and Good quarter. Let me take a look at ceramic on ceramic as being 30% of the product mix. What are your goals over the next 12 to 18 months to expand that? Also, how do you differentiate your ceramic on ceramic from the competition?

We -- in terms of how high this number can go, we're not sure to be honest. And the 30% very much pleased us. Probable apply ahead of some of our expectations, and we're seeing how high it can go. In term office how we' redifferentiating it, we think we have the best products of folks between both the insert, instrumentation, and the product we're using it with, we think we've got a competitive point of difference, we've got a great track record now both outside the U.S., certainly in Canada, and Europe, and catching on in the U.S., and really trying to drive it that way.

OK. Thank you very much.

Our next question comes from the line of Michael Lockman with Think Equity Partners. Please go ahead with your question.

Good afternoon. Thanks for taking my questions. First with regard to your sales for adds, looking like you're adding pretty aggressively across the board. Have you been able to make any opportunistic additions, and I guess along the same line somewhere you been able to pick up any incremental business due to any field disruption at this point?

We have we've certainly been approached bay number of folks, due to some of the merger stone. We picked up a few here and there around the world, but we're not systematically try to go out and pick up business that way. We're focused on getting the best people we can and growing them internally, but we certainly have seen a little bit of pick up.

Great. And with regard to M & A I know you folks a are picked to on some internal business transactions yet your balance sheet is getting stronger each quarter. Any thought on M & A over all, and any specific areas we might be looking for?

Well, Michael, we're at ways looking for new opportunities, and traditionally the company has gone after ideas. I would say the at which time in that area would be stepped up this quarter as our balance sheet gets much stronger. I don't see us doing a company at the moment. I don't see another How medical deal before us at the moment, but we would look at them very carefully.

Great. And then finally, you've done a good job of bringing the tax rate down over time in recent quarters. Any thoughts on the tax rate we should be looking at '04?

You're right, Michael, we have been working to reduce that. You know we have been moving some production to lower tax rate situations. And I think right now if we go into I still would be comfortable having the tax rate click down another half point to 30%.

Great. Thank you.

Our next question comes from the line of Bill with First Albany. Please proceed with your question.

Great, Thank you. Good evening.

Hi. Bill.

Just one house keeping, Dean, what do you expect in Capex or '04, and then secondly, you know just clarification. I don't think you have an artificial disk the works, but if you have anything that you would like to talk about?

Bill, I would just say on Capex, you know, you probably saw in our press release we've got a couple of MED Surge facilities that we're working on in terms of capital for the year, as we've talked about. We're also looking to increase our capacity our work facility expansion plans for our biotech business, so I think Capex could be a little higher than it has been. I would peg it probably in the 150 to 180 ranges we think about going into the year here. And on the artificial disk, we do not have a significant program underway at this points, but I guess the best way to describe it is we're watching and looking.

Great. Thank you very much.

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

Good afternoon, this is Rick for Bob. John, I had a quick question for you. I was wondering if you could give us a flavor for the new products that would be launched at AOS.

We're not prepared to tell you what we're going to launch at the AOS. It's -- one thing right now is the best time to introduce the products would be at the academy, along with our competitors as opposed to doing it on this phone call, and I'm not trying to stiff you, we just feel that's a more appropriate way to do it.

OK. Fair enough. House keeping question for Dean. I was wondering if that amortization step up that we saw in the fourth quarter was a one-time event, or it's going to flow to '04.

What I would say really is, you know certainly we evaluated and took an impairment charge for the trade names in the fourth quarter. Having said that, the way which you do this is you analyze how the cash flows on the trade name going away is going to impacted, and that doesn't 100% happen overnight, so there will be a shortened life on the remaining trade name intangible that was there, and there will be a little bit higher amortization in the -- in the 2004 year from what you might normally have expected on a normal run rate basis, taking the 6.5 million out, and I would say over the course of the year, that could be maybe another $3 million or so, and then it will trail off as we go into the next couple of years, as we view the cash flows related to that trade name intangible trailing off.

Thank you.

Our next question comes from the line of Michael Weinstein with J.P. Morgan Securities. Please proceed with your question.

Hi, this is actually Rog for Mike. You mentioned in your comments about M IS, the use of navigation, in fact that your internal navigation system is kind of a differentiating factor for you, and I'm wondering if you could talk about how important that's going to be ultimately.

Navigation at this point has been a great technology that's looking for a way to make money, I think for everybody that's in the business. But we think that 5 years from now this is going to be a major -- used significantly in most of the surgeries. We are trying to figure out how to get there, but we think we have a great product. We had it been sold in a very diffuse way this year, and that's why we've put it down in the hands of our instrument reps, and we feel good about what they'll be able to do with it. But the jury is still out, and we'll continue to see during this year.

As far as a differentiating factor in trying to work on M IS, and having your own internal navigation systems as opposed to most of the companies that use, you know some body else's along with their products, do you feel that's going to be a major differentiating factor what you guys bring in to the market place.

We think if we do it right, it will be. Clearly, you know, certainly when you get into the LOR and you start talk about minimally invasive surgery, it really can be a great help, and the surgeons that have clearly maximized and figured out how to use the navigation systems using it very well, and we do thing that will catch on, particularly as a younger generation of surgeons continue to come up. Here just a lot more comfortable with these kinds of vehicles.

Great. Thanks a lot.

Thanks, Chris.

Mr. Brown, there are no further questions at this time. I'll now turn the call back to you. Please continue with your presentation or closing remarks

OK. Well, we appreciate everybody joining us this afternoon. Just kind to wrap up, and also answer Wade's question about guidance. We would like to say that we really had a great year. For me, personally, I think resolving the issue of leadership transition has been resolved now. Steve has been with us about 7 months, and it has really done a super job, so we're delighted to have that.

We refer to year '03 as my year, and year '04 as our year, and we fully intend to be working together as we go forward. Stryker is turning in good numbers, but we are under no illusions. The competition is too. We are looking for continued growth in the orthopedic market, and we think we are well on our way to doing the five and five that we publicly announced.

For the year 2004 we're looking for revenue of about 4.2 billion. That would be up probably in round numbers about is 16% to 17%, and we really are hoping that the fourth quarter of '03 will be the first of a long string of revenue hitting a billion or better each quarter going out, so that would give you some idea of what we're looking for in the top line of the first quarter of this year.

As far as earnings guidance is concerned, we think that first call has got it right. It has projected that we'll do $2.68 per share diluted basis, and that's our intent, to go for that approximately. We will be introducing a number of new products at the upcoming academy meeting. We've got an analyst meeting scheduled for March the 11th at 8:00 that morning, and we're hoping that many of you that are on this call can join us for that. The three of us will probably not have a whole lot to say. I'm sure Steve will have something to say.

But in general, this is a time and place for you to get to meet our senior executives that are running the company, and president will be Ron Lawson, Johnson, and Jamie Kindler. Our senior officers and the division heads, so we'll welcome you to that meeting, and help you prepare for some formal presentations to answer your questions about new products.

And then we're looking for the first quarter results to be presented at 4:00 on April the 15th, a date that I think everybody is familiar with, and then another phone call at 5:00 p.m. on April the 15th. And with that, I will tell you that we're delighted you joined us today. We hope you found the report useful and helpful, and we'll hear overnight I guess what you have to say, and we'll know at 9:31 what the market says about us. So have a good evening.