史賽克 (SYK) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Stryker corporation fourth quarter operating results conference call.

Certain statements made on today's conference call 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 Company's actual results to differ materially from those expressed or implied in such statements.

In addition to factors that may be discussed on this conference call, such factors include but are not limited to: regulatory actions, including cost containment measures that could adversely affect the price of or demand for the company's products; changes in reimbursement levels from third party payers; a significant increase in product liability claims; changes in economy conditions that adversely affect the level of demand for the Company's products; change 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 10(K) and quarterly reports on Form 10(Q).

Today's conference call will also include a discussion of adjusted net earnings, excluding the impact of the year ended December 31, of a charge to right off purchased in process research and development in the third quarter of 2004.

For a discussion of this nonGAAP financial measure, including a GAAP reconciliation, appears in the Company's form 8(K) filed today with the Securities and Exchange Commission which may be accessed from the "For Investors" page on the company's Web site at www.stryker.com.

During the presentation all participants will be in a listen-only mode, after which we will be conducting 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, January 26, 2005.

And I would now like to turn the conference call over to Stephen MacMillan, President and Chief Executive Officer. Please go ahead, sir.

Thank you, George.

Welcome, everybody, to Stryker's fourth quarter earnings report for 2004. With me today are John Brown, Chairman of the Board, and Dean Bergy, Vice President, Chief Financial Officer, and Secretary.

We are pleased to report that Stryker closed 2004 with a very good fourth quarter. Net sales were 1,156,000,000, an increase of 15% over the prior year and up 13% operationally.

Net earnings for the quarter increased 21% to 163 million and diluted net earnings per share increased 21% to $0.40 per share.

For the full year, we crossed through the $4 billion threshold, achieving net sales of 4,262,000,000, up a solid 18 percent over 2003.

Operationally, sales were 14 percent higher than last year, representing solid organic growth across our broad base of businesses.

Reported net earnings for 2004 increased 3 percent to 466 million, and diluted net earnings per share increased 3 percent to $1.14.

Excluding the impact of the purchased in-process research and development charge associated with the SpineCore acquisition and taken in the third quarter of 2004, adjusted net earnings for the year increased at a very strong 29 percent and adjusted diluted net earnings per share also increased 29 percent.

Cash flow and Asset Management were also excellent in the quarter and for the year. We generated 555 million in free cash flow in 2004, allowing us to complete the paydown of the Howmedica debt ahead of schedule. And for the first time since 1998, we have begun to build up our cash balance, finishing with 349 million at year end.

So in the year we completed the paydown of the debt, made a key investment in the future of our Spine franchise and ended with a healthy cash balance.

To summarize our fourth quarter sales, we saw broad-based growth offset a bit by expected lower hip growth in the face of strong comparables.

Our Medsurg businesses were very strong in the quarter and with positive underlying orders growth, these businesses appear poised for continued outperformance as we begin 2005.

Domestic sales were 738 million for the fourth quarter, and 2.753 billion for the year, representing increases of 16% and 18% over the prior year.

The U.S. divisions had very good years. Orthopaedics was up 12 percent in the quarter and 17 percent for the year, with a trauma growth over 20 percent for the second straight quarter and solid growth in reconstructive implants.

Unit growth in the quarter was slower as we again faced more difficult comparables related to the prior-year launch of our Trident Ceramic Hip.

Quarterly Knee growth was also somewhat slower, but we believe this category will be reinvigorated as we move through 2005 and pick up momentum from the launch of our new Triathlon Knee.

We are particularly pleased to report that the highly anticipated posterior stabilized version of this product received FDA clearance this month and we will begin rolling PS sets out to the field later this quarter. Based on our only feedback, we fully expect Triathlon to spur renewed momentum in our recon business as the year unfolds.

Spine sales increased 22 percent in the quarter, the third straight Gold Standard quarter, bringing yearly sales growth to 20 percent.

Growth was led by strong sales in our newly emerging cervical and interbody areas, thus beginning to supplement our Thoracolumbar franchise. Our efforts to establish Spine as a separate division, with a dedicated U.S. sales team at the start of 2004, appear to be paying off.

Leibinger Micro Implants sales were up 13 percent in the quarter and 16 percent for the year, led by sales of Craniomaxillofacial implant systems.

This is our first year of double-digit growth in Leibinger since 2000, an encouraging sign that our refocused sales efforts that we put in place in late 2003 are also helping here. Notably, for the year we achieved 15 percent or higher growth for the first time in all domestic implant lines: Hips, Knees, Trauma, Spine, Micro Implants and Biotech.

Turning now to our Medsurg businesses. Instrument sales increased 17 percent for both the quarter and the year, with a solid growth in powered instruments and pain management and excellent growth in interventional pain, Neptune Operating Room Waste Management Systems, Surgical Navigation Systems, and Sterishield.

Endoscopy sales increased 22 percent for both the quarter and the year, with exceptional growth in Video and solid growth in Arthroscopy and General Surgery.

Both our Instruments and Endoscopy franchises are clearly capitalizing on trends toward greater MIS penetration, with the endoscopy division growing at its fastest pace in years. Medical continues to outperform the market with the sales up a very strong 23 percent in the quarter and 20 percent for the year, with excellent growth in beds and EMS products, and good growth in stretchers. After languishing in the late 90s, this franchise is performing beautifully.

Physiotherapy was up 6 percent in the quarter and 10 percent for the year, with same-store sales growth and new clinics arising from start-ups and acquisitions contributing about about equally to the growth.

Biotech had a great quarter with strong shipments of our recently introduced OP-1 putty product for use in revision spine surgery, and our OP-1 product for trauma indications.

Both of these products are being sold under U.S. humanitarian device exemption approvals. We still expect the capacity constraints and the limited U.S. approval will keep OP-1 sales at modest levels through 2006, but we are encouraged by the very positive reception of OP-1 putty.

I will now turn it over to Dean Bergy for more details.

Thanks, Steve.

I'll start out talking about foreign currency. Foreign currency comparisons were again favorable in the 4th quarter, with increased sales by $26 million or about 3 percent in the quarter, bringing the year-end total to just under $121 million favorable currency impact.

If currency rates hold at their current levels, we expect we'll see a positive impact on the first quarter, 2005 sales of around $15 million or roughly one percentage point.

Turning to price volume. Price in the fourth quarter contributed 1percent to our total 15 percent sales growth. Foreign currency, as we said, contributed 3 percent and volume and mix was up 11 percent, bringing the totals for the year to 2 percent for price, 3 percent for foreign currency, and 13 percent for volume mixed with the 18% percent growth in the year.

U.S. implant prices were up about 2 percent in the fourth quarter and 3 percent for the year. Our prices in Japan were down about 5 percent in the quarter and 4 percent for the year as a result of the MHLW price reductions which took effect on April 1 of last year.

Our prices in Europe were up slightly and for the year, volume and mix was up about 15 percent in the United States and 8 percent overseas.

Turning now to our business segments, Orthopaedic Implants, I'll remind you, is about 60 percent of our sales, sales of orthopaediic implants, as we said, increased 14 percent in the quarter and 17 percent for the year, on an as-reported basis at 11 percent and 13 percent, respectively, at a cash and currency bales.

Looking at the sales growth rate by product line, I'll give you the numbers for domestic and international, starting with the as-reported numbers for the quarter.

For Hips; domestically they were up 7 percent, internationally, up 9 percent and up 8 percent in total. Knees were up 13 percent domestically, 12 percent internationally, and 13 percent in total.

Trauma was up 23 percent across all three of those lines; domestic, national, and total. Spine was up 22 percent in the U.S., 14 percent internationally and 19 percent in total.

Leibinger was up 13 percent in the domestic markets, 12 percent international, and 12 percent total.

And for the total business, up 15 percent in the U.S., 13 percent overseas and 14 percent in total.

And now turning to cash and currency results, I'll give you -- the domestic numbers are obviously the same, I'll give you the international numbers and the total.

Internationally, Hips were up 2 percent, 5 percent in total. Knees were up 4 percent international, 10 percent in total.

Trauma, 15 percent international, 18 percent in total. Spine, up 7 percent internationally, 17 percent in total.

Leipinger up 5 percent international, 9 percent in total.

And for the total Orthopedics Implant business, 6 percent at international growth and constant currency and 11 percent in total.

Now some comments on the individual product groupings. Hips, as we said, are up 18 -- 8 percent in the quarter and 14 percent year-to-date. We had a solid quarter in Hips, where we were going, as you know, against very tough comparables from 2003. In the United States our core hip products grew about 10 percent. Their overall growth was dampened by the sales and the revision in hip fracture areas.

Our Trident Ceramic on Ceramic Hip System led U.S. growth, with ceramic insert sales penetration increasing to over 35 percent of our total insert sales in the quarter. The mixed shift to cementless stems continued in the quarter with excellent growth experienced in our Accolade products and solid growth in Secur-Fit.

Revision Hips grew modestly in the quarter as we continued the roll-out of our new Restoration Modular Revision Hip System in the United States. We still believe this is a great product which should hit its stride later this year with full deployment and increased sales force training.

In Europe, Hip revenue growth was led by Trident and we experienced solid local currency growth in direct markets.

Japan, Hip sales declined slightly in the quarter due to the impact of the MHLW price cuts that I alluded to earlier.

Knees were up 13 percent in the fourth quarter and 18 percent year-to-date. We had a bit of a soft -- softer quarter in knees, when compared to the first half of 2004.

The United States, our primary knee business, did well but Revision product sales growth was a bit lower.

Stryker products continue to lead U.S. knee growth and Duracon products were solid.

We began to roll-out instrument set for the CR version of our new Triathlon Knee, midway through the quarter. The early reaction to this product has been very positive. With the approval of the PS version, we are upbeat about the potential for our knee business, particularly as we think about the back half of 2005.

In Europe our Scorpio knee had a very good quarter. Knees picked up a bit in Japan as we continued the transition to our new Scorpio NRG product This was offset to some degree by the pricing impacts. Knees were soft in the rest of the Pacific region.

Trauma products were up 23 percent in the fourth quarter and 17 percent year-to-date. The U.S. trauma business put up its second straight 23 percent growth quarter, the increase dipping slightly to 21 percent of military sales are excluded.

Hip fracture devices and intermedullary nails both had outstanding quarters in the United States with great acceptance of our new Gamma 3 product and continued strong growth in sales of our T2 Nailing System respectively.

International trauma sales were also very strong in the quarter. Japan had another excellent quarter despite the price reduction impact in Europe and the Pacific also put up very good results. Sales of T2 led the overseas growth.

Spine was up 19 percent in the quarter and 18 percent year-to-date. Spine sales growth in the United States was excellent, led by cervical products including the recently launched Oasis posterior cervical plate and the Reflex anterior cervical plate.

[Inaudible] is also regarded in the U.S with our newly -- recently introduced ADX-EL spacer off to a nice start.

International Spine numbers were negatively impacted by the Pacific distributor reorganization initiated in the 2nd quarter. Japan had a great quarter and European Spine sales were solid.

Leibinger, our micro implant business, was up 12 percent in the 4th quarter and 16 percent year-to-date. After many years in the dog house, Leibinger micro implant business had its fifth straight quarter of double-digit growth, led by sales of craniomaxillofacial products. New products have continued to boost the growth for this business.

I will now make a brief comment here on sales force in the U.S.. Our U.S. Recon, Trauma, and Spine business ended 2004 with about 790 sales reps and managers combined and we have plans to increase this number to around 900 in 2005. Remind you, there was also approximately 150 associates and tech reps that assist with these businesses.

And in the U.S., the Leibinger Micro Implant business is going to stay at around in 70 sales [inaudible] managers in 2005.

Now turning to our MedSurg group, I will remind you that 34 percent of our sales come from Medsurg. It's comprised of three operating conditions.

Instruments makes up about 44 percent of that total sales; Endoscopy, 34 percent; and Medical, 22%. Sales from Medsurg group were up 19 percent for the quarter and 20 percent for the year as reported and 18 percent for both the quarter and the year, constant currency basis.

The Instrument side increased 17 percent in both the fourth quarter and the year as reported and 15 percent for both quarter and the year on a constant currency basis.

Turning to the groupings within Instruments, Powered Instruments were up 9 percent domestically and 20 percent internationally for 13 percent total growth there. And other equipment was up 26 percent in the U.S. and 12 percent internationally for 22 percent growth, bringing the totals for the business to 17 percent domestic growth, 16 percent international and 17 percent in total.

Instruments business had a great quarter based on good growth in Powered Instrument Systems and excellent growth in other O.R. equipment. In the United States, Instruments had another strong mid-teens quarter growth and fourth quarter local currency sales outside the U.S. approached double digits.

Sales of heavy-duty and micro-powered tools were very solid in the quarter. Strong growth in other O. R. equipment was led by International Pain Products, Neptune Operating Room Waste Management System, Sterishield, and Pain Management products.

Our navigation products which were out of the instruments bag at the beginning of this year also had another excellent quarter domestically.

Sales force here, we had about -- we ended the year with about 245 sales execs, managers -- I'm sorry, we're going to about 245 from about 215 at the end of this past year.

Endoscopy was up 20 percent in the fourth quarter, 21 percent for the year as recorded and 19 percent for the quarter and 20 percent for the year on a constant currency basis.

Looking at the segments within that grouping, our Arthroscopy business was up 11 percent domestically and 21 percent internationally for a 13 percent total growth in the quarter.

General Surgery was up 8 percent domestically, 31 percent internationally and 12 percent in total.

Video, which continues to be very strong, was up 34 percent domestically, 6 percent internationally, and 28 percent in total. And the total Endoscopy business was up 22 percent in the U.S.; 16 percent O.U.S.; and 20 percent in total.

Endoscopy posted at 6 consecutive quarter of 20 percent or more sales growth and the incoming order trends for this business continue to be very strong.

Endoscopy's quarterly growth was led by video sales for our communications business, helped by the 2004 introduction of Stryker Booms and Lights continues to generate excellent results.

Our 1088 high-definition camera, launched at the start of 2004, is also doing well.

Endosuite sales activity continues to be a major driver for our endoscopy business.

In sales force here, we ended 2004 with about 240 sales execs managers, we are headed towards 260 in 2005.

Medical business was up 24 percent in the fourth quarter or 25 percent for the year as reported and 22 percent for the quarter and 23 percent for the year on a constant currency basis.

The domestic business was up 23 percent in the quarter, 26 percent internationally, and 24 percent -- [inaudible].

Medical division wrapped up an excellent year with another strong quarter. U.S. Sales grew over 20 percent for the second consecutive quarter, boosting the year 20 percent and the international growth was driven by European bed sales.

Incoming orders were strong in the U.S. but international growth is expected to slow down considerably in 2005, given the comparables generated this past year.

Shipments of beds and EMS products led the way in the quarter, with stretchers growing more modestly.

And on the sales force here, we ended last year with about 150 sales execs managers, we're headed towards 170 in 2005.

And then finally, physiotherapy which represents 6 percent of our sales recorded 6 percent growth in the fourth quarter, bringing -- bringing revenue growth for the year in at 10 percent.

Same-store sales, which were up 4 percent for the year, contributed slightly less than half of physiotherapies growth this year -- this past year, with start ups and acquisitions accounting for the remainder.

We ended the year with PT with 428 [inaudible].

Turning to the rest of the P&L, a comment on gross margins, which finished the quarter at 64.3 percent versus 64.5 percent in the prior year. As you can see, gross margins were down -- in the quarter were down both sequentially and as compared to last year.

Absorption declined as we brought our inventory levels down significantly in the fourth quarter of 2004. In addition, our Medsurg businesses, which have lower gross margins, were a bit faster than Orthopaedic Implants in the fourth quarter.

R&D spending was up 17 percent for the quarter and the year as we continue to put increased focus on our development effort. R&D costs also reflect added spending for the development of SpineCore products in the last half of 2004.

SG&A costs were up 14 percent in the quarter and 17 percent for the year, with sales commissions driving a significant portion of the increase. Fourth quarter increase includes higher legal, insurance and sample costs, compared to the prior year.

For the year we have higher sales meeting costs and higher insurance costs compared to 2004 [inaudible] intangibles, amortization declined 25 percent in the fourth quarter and is up 5 percent for the year. I'll reminds you that the fourth quarter of 2003 included approximately $6.5 million in intangibles, amortization related to trade name impairments associated with the Company's branding initiative that we undertook last year in the fourth quarter.

Intangibles, amortizations for all of 2004 was higher due to acceleration of the Howmedica trade name amortization.

Operating income, when you -- it's suggested to remove the purchase in process research and development charge from 2004's third quarter increased 20 percent in the fourth quarter and 25 percent for the year. And the adjusted operating margins are up nicely from last year, finishing at 20.1 percent in the fourth quarter versus 19.4 percent last year and 19.7 percent of sales in the years compared to 18.5 percent in 2003.

Interest expense is pretty minimal. It was $2.2 million in the fourth quarter, down from the last year. For the year down almost 70 percent as we've paid off the debt.

Other income is primarily interest income on a year-to-date basis. The breakdown for the quarter is as follows: Interest income was 1.1 million in the fourth quarter. We had a foreign currency transaction gain of 700,000 or .7 million in the quarter. And we had a minority interest of 1 million, bringing that total to -- income of, other income of 1.7 million in the quarter.

The recorded effective income tax rate for the fourth quarter was 30.0 percent, bringing the reported rate for the year to 35.0 percent.

The reported income tax rate for the year reflects the nondeductability of substantially all of the $120 million up front payment made in the third quarter to acquire SpineCore.

The underlying tax rate, if you remove that in-process research and development charge from consideration, was 30.0 percent for 2004.

Then the effective income tax rate for 2003 was 30.5 percent, with a 2004 reduction attributable to increased manufacturing activity and lower tax jurisdictions.

Our balance sheet is in great shape. I will remind you as you look at the receivables numbers on there that last year we still, at the end of last year, at the end of 2003 the comparative numbers in there against 2004 receivables still had $150 million outstanding out of the accounts receivable securitization programs, so you have to add that back to the prior year to get an apples/ apples comparison out of receivables.

We still have $200 million that can be drawn under that program, but we have had nothing outstanding for the last three quarters that we reported here.

The fourth quarter push allowed us to bring accounts receivable [inaudible] right into that record low level of 58 days which matches the ends of 2003.

On inventory days, we've slowed our plants down considerably to bring our inventory days down by 14 days in the quarter, reaching 122 days, which is just two days over the prior year end. So we're at 122 to end the year.

As you know we have no real significant -- we have no amounts outstanding on our credit facility and we have about $10 million in remaining [inaudible] debt which we expect to pay off as it matures.

You can see our cash flow statement, we had excellent cash flow in the fourth quarter, generating $304 million in operating cash flow.

Excluding impact of proceeds or payments related to the accounts receivable securitization from both years, and we view that as more of a financing type activity, operating cash flow for the year increased 18 percent from 629 million in 2003 to $742 million in 2004.

Free cash flow increased 15 percent over $550 million, leaving us with about $350 million in the bank at year end.

And with that, I'll turn it over to John.

Thank you, Dean. And I must say I enjoy listening to this.

I'd like to make a few comments on our recent leadership transition. When Steve MacMillan joined Stryker at the end of 2003, he and I established a very simple plan whereby 2003 which continues to be John Brown's year, or "my" year, 2004 would be John and Steve's year or "our" year. 2005 would be Steve's year.

Steve was given responsibility for operations when he came to Stryker and really has done an excellent job of learning the industry and running the business.

In preparing for 2005, Steve and his management team put together the budget. I did not participate other than to review it in my role as a director.

As you know, Steve was appointed CEO on January 1 in line with the plan we had initially laid out. The Board and I are extremely pleased with Steve's work and the transition that he and I worked closely together on.

We expect him to have a long and successful career at Stryker.

Stryker is also blessed with a strong and experienced management team. Our 3 group presidents alone have more than 70 years of medical device experience. They are good.

And I look forward to observing the victories of Steve and his team from a little different seat than the one I've occupied for the last 28 years. I wish them all the best as a Director and, I might add, as a shareholder.

Thanks, John. We would now like to touch on our 2005 outlook.

We had a nice year and continue to believe that the orthopaedics industry is a very good business to be in. And that our position as the most broadly based orthopaedic company positions us for continued strong growth.

We are planning for mid double-digit top line growth in 2005, which should peg sales close to 4.9 billion. And with some help from currency and some divisional out-performances, we do hope to approach 5 billion in orders this year.

While we still -- we'll still be facing tough Hip comparables in the first quarter, we feel very good about our prospects for continued broad-based growth through the year.

Combined with expected continued progress on our tax rate, our 2005 net earnings goal should actually exceed our 20 percent growth target, with a healthy 22 percent increase on 2004 adjusted net earnings, or $1.74 per diluted share for 2005.

And on a reported basis, earnings will be up a projected 53 percent from 2004.

We do expect both the 2005 and 2004 EPS amounts to be adjusted downward by about 6 to 8 cents per share when we adopt the new accounting standard requiring the expensing of stock options, which we anticipate doing in the third quarter of 2005.

Now, we'll open it up for a question and answer session. George, please open up the lines.

Ladies and gentlemen, if you would like to register a question on today's conference call, please press the 1 followed by the 4 on your telephone at this time. You will hear a 3-tone prompt to acknowledge your request. If you line -- if your question has been answered and you would like to withdraw your registration, you my press the 1 followed by the 3. If you are using a speaker phone, please lift your handset before entering your request. One moment please for our first question.

Our first quarter is from the line of Milton Hsu with Bear Stearns. Please proceed with your question.

Hi. Good afternoon, everyone. I've two questions.

First, Dean, just talking about the U.S. implant pricing number of 2 percent, it seems to have declined just a hair from the last two quarters and we have just been doing a little more background research on purchasing managers from the hospital side and -- do you get the sense that over the last maybe year or so there's been a stronger push on their end to maybe just get more discounts from the industry?

You know, I think, you know, that the pricing environment is, you know, always a tough discussion between the hospitals and the companies and there's probably a little bit of that.

I think, you know, in our business specifically, you know, we -- particularly in our cement business we've continued, you know, to -- for reasons of wanting to make sure to bring some volume in and also with some settling on our Simplex P, Tobramycin [inaudible] probably a little bit of reduction in price is there [inaudible]. And also our ceramic business, I think, you know, prices have continued to settle there.

But all in all, Milton, I would say that prices are right in the range that we've talked about in terms of where we expect them to be. I think as we talk to you about, you know, where we expect the prices to be, I think we said that we thought they'd be in the 2 to 3% range, and we are right there as we enter into this year.

Okay. Sure.

And then just a second thing on Triathlon. As I understand it it's probably better designed to replace the Durcon line rather than Scorpio line. If that is the case can you just give a sense of -- as a percentage of your total knee sales what Durcon is running at right now versus Scorpio?

You know, I would say it's -- you know, it's less than half, it's still a significant, you know, piece of our business. It's probably close to 50 percent.

Okay. All right, thanks a lot.

Our next question is from the line of Bob Hopkins with -- sorry, from Rob Faulkner, with Prudential Securities. Please proceed with your question, Mr. Faulkner.

Thank you.

Dean, perhaps you can attack this -- if I can follow on Milton's question and ask you for specific pricing for U.S. Hips and U.S. Knees, and what you think the unit -- market unit growth rates are in those businesses?

I'd also like to add a question on the Cervical Spine business. You are doing very well there. Synthese is also doing very well there. Medtronic did not.

Can you give us some color as to the dynamics that are driving what seems to be very divergent growth rates among the players?

[Inaudible] went on the pricing I wouldn't break it down, I would tell you, the Hip and Knee pricing is right in that overall range that we talked about. And I don't think I could add a lot more color there.

In the range you talked about, is that in the historical range?

Well, in the 2 to 3% range.

Okay. And market unit?

We just don't think market unit growth is in the mid to high single digits.

Okay. And finally, the cervical business?

I think on the cervical business I would say, you know, a lot of -- we have some very good products there. Our Reflex plate is doing well. We've got a hybrid system that's come out there and our Oasis cervical system is, you know, been taken up very well by the market, it's being very well-received.

So I think a lot of it is just very good new products that we put out there.

Okay.

Rob, just to add quickly to that, if you think about it, we've largely been a thoracolumbar spine franchise and what we're really doing is building out the line with our new leadership there and really that's been a focus of a lot of our R&D efforts, is starting to broaden particularly cervical. Those products have been very well-received, not only in the U.S. but around the world.

Good. Thanks very much .

Our next question is from the line of Steven Lichtman with Banc of America. Please proceed with your question.

Hi, guys. Just a few questions. First on the spine side, when is the enrollment of FlexiCore expected to be complete? I believe it's soon. And then, when do you expect to file an I.D. E. for CerviCore?

FlexiCore, we would expect to complete enrollment in the first quarter here. And CerviCore -- I'm sorry -- yes, CerviCore, a little bit later this year. But hopefully in the first half would be our objective.

Okay. Got it. And then just, on the medical business, you know, that continues to outperform. What are the expectations -- you know, I know obviously how tough comps here, what are the expectations as we go into 2005 for growth in that business?

Well, you know, the U.S. has [inaudible] very good, Rob, I mean, you know, it's growing significantly faster than market but the incoming orders trends continue to be very, very strong.

We feel very upbeat about their ability to continue outperform the market by a reasonably good pace.

Internationally we've had a very, very strong year. Canada was very strong for most of the year and as I said in the fourth quarter here we got a nice pickup in Europe. I would expect in Europe that the numbers will be quite a bit softer -- or internationally the numbers will be quite a bit softer next year because we have some very difficult comps to go against now. Primarily it's a North American business for us.

Okay, great. And a few last ones for you, Dean, what is the expected tax rate in '05?

I would expect it, Steve, to be around 29%.

Okay. And then, the diluted share count, approximately?

You know, we normally see that increase a little less than 1 percent per -- you know, year on year per quarter. So I would say half to 1 percent, up.

Great. And then, just lastly, what are your thoughts on gross margin as we go into '05? Should we see some improvement there?

I think we will see some improvement. We still expect to get a little bit of pricing and I think the factories will still run a little more efficiently. As I said in this quarter we really did slow the factories down quite a bit here in the fourth quarter, but I do think, going into next year, we've still got a little bit -- we've got some room for gross margin expansion.

Okay. Great. Thank you, guys.

Our next question is from the line of Adam Galeon with CSFB. Please proceed with your question.

Thanks and good afternoon.

First question is on revisions in Hips. Can you just give us an update on where that stands as a percent of business and how that's trending? And also, Steve, I think you mentioned that -- or maybe it was Dean, that restoration modular was off to a slow start. Could you just expand on that a little bit, too?

I think, Adam, relative to our business it's probably in the 10 to 12% range, which we think is a little bit lower than the market. One of the thing we are excited about with the restoration modular system is that it really is our first broad-based revision system. We are -- you know, we're all in the sets out there and it still is going a little bit slow. It requires a little bit of sales force training. We just had our national sales meeting and I think just walking around there and talking to some of the folks there, there is a lot of excitement about the System, and, you know, we think we will get it going quite a bit better as get going in 2005. I think it just takes awhile to get it out there.

We also didn't have the full range of products fully out there. We really hit the mark for the most part by the end of the year, although we still have a few parts of the system to roll-out in early '05.

And as we get it all out there, get the sales force trained up I think we will really start to get it pumped up.

All right. And one follow up on ceramic-on-ceramic if I may.

A number of your competitors talk about not losing any unit shares as a result of not having their own ceramic offering. Can you just take a minute to explain why an innovation like that is not compelling enough for one to disregard his or her brand royalties and come to you?

And I think there's a follow up to that. I think there's been a bit of debate as to the regulatory strategy for some of the -- the -- your competitors set to come to market in 2005 with a ceramic offering. Any thoughts on that we would appreciated too. Thanks.

You know, on the unit penetration, I think to a large degree, you are probably right. We probably have knocked down as much competitive volume as we would have liked, you know, being brutally candid, and -- which speaks to the stickiness, to some degree, certainly, of this industry. And, you know, we have not cracked down. In terms of other people's penetration or other people's regulatory strategy, I don't think we really want to comment on that as to how they are going to get the ceramic tech products approved for themselves.

Our next question is from the line of Michael Weinstein with JP Morgan Securities. Please proceed with your question.

Good afternoon, gentlemen, thanks for taking the call.

With Steve now running these calls, and maybe we -- it's a good opportunity to get his thoughts relative to what's probably the Stryker hallmark which is the 20 percent number, the '05 commentary on the 22 percent growth you outlined was pretty encouraging.

Can you give us your thoughts on that 20 percent number as we look out a little further into the decade, given the -- what's in the portfolio today, how far out can you see or be comfortable with that number and how do you view that number which has been such an important historical target for the Company. relative to the Company's future as being a target of relevance? Thanks.

Sure, Mike. It's a great question. I would also preface it with a very interesting observing. I will tell you, while the 20 percent started with John, it is so baked into the D&A of this organization that our own employees, I think, frankly, are so committed to do it, if we thought about backing off there would be an internal mutiny at this point.

And I think that's an important point, I really do. The -- and there's such pride in us continuing to deliver that and I think a real responsibility.

Now as we look forward, Mike, the way we look at it, the fundamentals of the orthopaedic industry for the next few years certainly continue to look in great shape. Unit volume around the world is going to be good. Yes, we are going to continue to experience probably a little more pricing pressure going forward. But we've got enough growth platforms across the whole Company.

And right now our Medsurg businesses are doing superbly around MIS and everything else. We've got Spine growing, Trauma growing. And as we get Hips and Knees growing again at a faster rate we really see being able to continue that through the '05, '06, '07 frame, at which point our major investment that we've been making today in terms of both artificial disk and also OP-1, should really start to kick in in that '08, '09 time period.

So as you think about the rest of the decade that's kind of what's going through our head right now is the market in our current strength carries us for the next few years while we are making the investments to carry us into the back end of the decade.

That's very helpful commentary.

Let's address maybe the M&A or acquisition question, because there seemed to be some confusion last year stemming originally from John's comments at the [inaudible] relative to the Company's thoughts on acquisitions and having paydown the Howmedica debt, the potential for the Company to make -- to be an acquirer over the coming, you know, 12, 24 months, whatever period that is, and what type of acquisitions if the Company going to be acquiring, would you would be looking for and what are your thoughts on what the Company needs?

Sure. You know, we -- I think we -- you are probably talking about the famous reloading the gun comment.

Yes.

And, you know, at the end of the day we really want to probably focus on technology acquisitions. And want to consider supplemental R&D acquisition.

Our footprint is very strong across the broad-based, both each of the major implant segments in orthopaedics as well as our endoscopy and instruments lines.

So I think the key at this point is, we're trying to fuel more innovation, both through internal investment, but also looking more for probably bolt-on technologies, thing like SpineCore, but ideally not nearly that pricey and not that long-term, you know, other things, but much more in the line of bolt-on, supplemental things than wholesale Howmedica-type, you know, Company-transforming events.

And in all likelihood, as you think about your cash flow the next couple of years, your principal use of cash would be to be -- would go to make those acquisitions versus, say, share repurchase or dividends, so forth?

Yes, we would very much see it that way, as well as some increased infrastructure investments. We are investing a lot certainly in '05 in our biotech facility. You've heard us talk about capacity constraints. We are putting some investments into some of our infrastructure so we can continue to support the growth.

But much more of that kind of stuff than necessarily share buybacks or huge dividend. We did increase our dividend by a pretty significant margin but as you know, you don't by Stryker for the dividend.

Absolutely not. Okay, great. Thank you, guys.

Thanks, Mike.

Our next question is from the line of Wade King with Wells Fargo Securities. Please proceed with your question.

Hi, gentlemen. Thanks for the detail on the call and congratulations on the performance.

First question, just a clarification of the stock option expensing impact on '05 earnings. Steve, you indicated 22 percent in that earnings growth objective and that's starting in the third quarter, stock option expensing. I'm presuming you're talking about the impact of a year would be $0.06 to $0.08?

Wade, that's correct. The -- the fact we know right now the impact that '04 will be $0.06 and we are giving a little bit of a range there. And the way that we would intend to adapt this statement is that, you know, its required to be adapted, starting in the third quarter we had the option to go back and restate all previous periods and that's what we would intend to do.

So you would see basically what's going to be disclosed on our footnote is a $0.06 impact on 2004 be restated and reflected as reducing 2004 earnings and then we would expect a range of 6 to 8 percent, probably, probably more in the middle of that range but we would want to give you some reasonable range there in terms of what the impact on '05 might be.

Steve, do you expect that to settle out looking ahead at approximately a 2 per -- excuse me, a $0.02 per share impact per quarter?

Yes, I think that's -- it's spread pretty evenly throughout the year and I think that's a fair way to look at it.

Okay. Thank you.

Second question, please. You've had some remarkable new product cycles contributing to performance in the last four to six quarters, more, they include obviously growth in the Video area, Powered Instruments, et cetera. Have some of those -- has some of the tail wind from the new product cycles starts to wane a bit, could you just comment on some of the higher contributing additional new products you see ahead that will fill those big shoes?

We will probably touch a little bit more on that at the academy meeting in terms of our typical new product platforms coming forward. So if you will join us next month for that we will probably give you a little more detail.

Okay. Thank you, gentlemen.

Thanks, Wade.

Our next question comes from the line of Katherine Martinelli with Merrill Lynch. Please proceed with your question.

Great, thank you. Good evening. Just a couple of questions.

One, you didn't mention the muscle sparing hip system which I think you had talked about in the third quarter. Is that part of the combined hip product offering that once you get past the tougher comps we should be looking to help accelerate growth or any update on the launch for the muscle sparing?

Katherine, again, I think we will talk about that a little bit more at the academy. So if you will give us a few weeks and we will be able to share a little more information on that.

Okay. That's fair enough.

And then, I just wondered if you could maybe comment with respect to some of the comments that have come from HCA in terms of the gain sharing arrangements they are trying to enter with docs to lower implant costs. I know a lot of this has been tried in the past and has had issues around Medicare kickback.

Are you hearing more from customers who are attempting to go into these gain sharing type contracts and is there anything different this time around that you would think would make them a more viable option?

Katherine, this is Dean. You know, I think -- I don't know that we are hearing a lot more about it. No, I mean, HCA has obviously commented on it. I don't know that we would see anything that would make it more successful than it has been in the past. The same concerns are out there relative to that type of approach.

Okay. And then just one last comment with respect to Triathlon. How much of your business is the posterior stabilizer versus cruciate retaining, just to get a sense for which launch or which system rollout would have a bigger impact, if either?

Right now, Katherine, our business is a little bit more heavily skewed to CR. We've seen PS as a real growth opportunity for us and particularly with the response to Triathlon, where a lot of the initial work was done with the PS. So we see that as our -- probably our bigger growth driver than the Triathlon system.

Is the -- is your breakdown, in terms of being more skewed towards CR, the same as the industry or do you think the industry has shifted more to a PS approach?

We've been seeing a shift a little bit more towards the PS. Though even in recent months there's some questions whether that might be starting to shift back a little in various pockets.

So in the ends of the day we want to have a very strong platform in both and that's why, finally, with our just recent approval of PS, we can now get serious about the Triathlon launch.

And then, just lastly on Triathlon are you from an inventory standpoint with the instrument set now that you have the approval to start launching or is that what we built up over the course of the quarter?

We were, we are pretty well launched in the CR. The PS will take us some time. I would say pragmatically it's going to be March before the PS really starts to roll-out and second quarter until you really start to feel an impact.

Okay. Great . Thank you

Thank you, Katherine.

Our next question is from the line of Glen Reicin with Morgan Stanley. Please proceed with your question.

Hi. It's Matt Miksic for Glen.

A couple of questions. Just following up on the performance of -- I guess the penetration of Trident seemed to be up slightly after kind of moderating, in terms of penetration. And -- I was wondering if you've seen any notable pull-through or uptick related to the relaunch of the DTC campaign in September?

Probably modest to be honest, Matt. I think a little bit of uptick in the penetration rate but probably nothing dramatic.

Okay. And then on the Triathlon, looking forward, I mean, in terms of how you, how we should quantify or think about that impact on growth, is this more of a -- is it more of a mix or price benefit or market share benefit that you expect to see over the next several quarters as that begins to gain momentum?

Certainly hope a bit of both. There is obviously, there will be some mixed gains there but we also thing there are some opportunities here, given that the differentiation of this product, to hopefully start to get a little bit of unit volume from competitive business. We want to make sure we can deliver that before we over-promise here.

Okay. Then one last question here on Hips, back to Hips. I wasn't sure if you commented on your, the penetration of cementless hips versus cemented at this point.

We did not comment on the penetration. We are clearly seeing a shift towards cementless.

I think you had said something like 60 percent in the prior quarter or was that a market number?

I think it's trending up towards there. It's probably between 55 and 60 I would say, Matt.

For Stryker.

Yes, and I think that's in line with the market as well.

Okay. We would have thought the market was a little bit higher. All right.

And this is Glen. Can I I just interrupt with a quick question on some numbers here? When I reconcile the numbers from the larger businesses that you gave us, in order to get to the totals there are some other categories here that have to be getting pretty big, both in orthopedics and in Medsurg.

Can you maybe talk about some of the emerging businesses, either in orthopaedics or in Medsurg that are starting to materialize now that have made up for some of the weakness in some of the larger businesses?

Well, you know, we -- in orthopaedics the other pieces that we don't really talk about are bone cement, upper extremities and other joints and OP-1. And bone cement, we've talked about, has done quite well. The introduction of Simplex P with Tobramycin has driven some mix shift in that business that's helped it.

You know, OP-1, we talked about it in general terms but we are not prepared to start talking about the numbers at this point in time. It's still a reasonably small piece of our business, but the growth is quite significant, year over year, in terms of the percentage basis.

And in Medsurg there is no real reconciling item. I mean I've given you all the pieces of the business there.

Okay. On the cement business, is it possible that business is up 30, 40 percent year over year?

It's not that high, no.

No. Okay. We'll have to talk off-line, then. Thank you.

Our next question is from the line of Bill Plovanic with First Albany Capital.

Great, thank you. Good evening.

Two questions. First, Dean, on the tax rate, as we look into '06 could we expect that 29 percent rate to continue? And then secondly, just on the Triathlon, when you roll out the instrumentation set, is there an MIS instrumentation along with that or is that a follow on, you know, is it integrated or non? That's it.

You know, on the tax rate, and Bill, you're asking me to be quite a seer here, but we feel comfortable that that rate is certainly sustainable. It's really being driven by a lot of the shift of our operations overseas and we are comfortable saying that we ought to be able to sustain a 29 percent tax rate into '06 as well.

And the other question was on Triathlon.

Yeah, that will be an option there for [inaudible] approach and it is integrated.

Is that with the initial instrumentation sets, it does have MIS instrumentation?

Yes.

Yes.

And roughly, you mentioned that you've rolled out -- do you have two separate instrumentation sets, one for the PS, one for the CR?

Well, you know, the base instrumentation is pretty comparable but it's really putting together the sets to be ready to go to PS. So it's, when we talk about sets, there's instrument sets, but then you have to get the sets of implants ready to go as well. That's really more of the latter that we are working on for the late in the quarter launch that Steve talked about.

Okay. And would you -- how many -- I don't know if you'll answer this question or not and I promise it's the last one -- but how many instrument sets do you have out into the market and are we truly at the full roll where it's, within the next quarter or so we will see the uptick? Thank you.

Bill, it's -- you know, in terms of the instrument sets in the field, you know, I tell you it's probably the 3 to 4 [inaudible] range and that is what we believe is enough for the needs of the field right now.

Great. Thank you.

Our next question is from the line of Larry Keuche with Goldman Sachs. Please proceed with your question.

Hi. I'll just rattle the questions off and then let you guys just quickly answer them.

First, I guess for Steve, any thoughts on either dynamic stabilization or nucleus replacement? You obviously have now ventured into artificial disc but wondering if you have any of that technology in in-house or might you start to think about that as an external opportunity?

And then separately, Dean, I may have missed this but what actually was the reason for working down the inventory levels in the fourth quarter? Was that again just focus on working CAP or was there some other reason there that you were running things a little bit cooler?

And then finally on the revision modular, again I think, Dean, you made reference to most of the components of that system being out now. I think the last time we chatted it was sort of 3 out of 7 so I just wanted check on where we stand with that.

Is that it, Larry? Those three?

Yeah, that's it. Thank you.

Okay, I'll take it here. On the dynamic stabilization nucleus replacement, we are looking at things both internally as well as externally. I would tell you quite frankly we are a lot more focused right now on the artificial disc projects that we've got and we are so excited about those. But these other things will have a place certainly in the future of the spine business. You can trust we will probably be there at the appropriate time.

On the revision modular, we are candidly still a couple of months away from having that more fully rolled out. Until we get 7 out of 7, it's probably going to be in the May contract and that's part of what's been a little slower in terms of the uptick here on a restoration system. So there's a lot of excitement about the total system. But until we have the total system out there, some of the folks have been a little more reluctant to really embrace the whole thing.

So we feel great about the system but we are still probably another few months away from having the full system out there.

And Larry, on the inventory reduction, I would say it's a pretty normal quarter to quarter event for us. As you would you expect we are almost trying to manage our assets well. Last year it was a record low of 120 days and frankly we want to be at or below that number but certain parts of the business didn't quite get there but we had our normal year-end push on to -- to drive those as Asset Management goals. So this is just pretty normal.

Okay. And then, Steve, just as a follow-on to the revision modular answer, relative to the sales force training, will you as you get towards May and get all these components, do you have to pull the sales force back in-house and sort of retrain them or -- how do you sort of stagger that to make sure that you are keeping them focused but getting them well-trained?

A great question, Larry. I'll tell you we did a lot of the training just at our January sales meetings. So I think it will just be a little bit of refreshing stuff. But we took them through more detail. This is a pretty big system. And a lot more complexity to it probably than what we've had, certainly, in the revision world. There's a lot of excitement. We'll have to dust all that training and probably, you know, do some of it online and some other stuff, but I don't think we will have to pull people back out from the field for any length of time.

Okay, great. Thanks very much.

Thank you, Larry.

Our next question is from the line of Mark Landy with Susquehanna Financial Group. Please proceed with your question.

Good evening, folks. Didn't you mention that ceramic-on-ceramic pricing has settled in, just an observation, that probably in the prior year that would have helped your pricing a fair amount. I was wondering if you can maybe just give us some thoughts on where you think pricing would be if we took ceramic-on -ceramic out of the mix?

I don't know that that's accurate. I don't think that's accurate. It really didn't -- wasn't really in pricing in the prior year.

It was really in mix.

It was really in mix because the way we do it, we wouldn't have had a comparable in the prior year.

The first year it's really started to impact pricing is in this year in terms of the way we're computing those numbers.

So if we took it out of the mix then as you calculated the pricing would that alter that at all or not? I'm trying to get to whether or not the settling in of the ceramic-on-ceramic pricing is having an overall impact on your pricing or just none at all?

It's funny [inaudible], it's probably impacting a little bit but it, you know, there's rounding that goes on within that, too, so if USM prices were 2-something maybe they would be 3-something. But it's -- I don't think it's that significant.

It could be as much as a percentage point?

I wouldn't say that, no.

Not across the total.

I would say with rounding it might, but if it goes from 2.4 to 2.8 or something like that, but I'm guessing here so I don't want to mislead you. I don't think it's having that big an impact.

And then there's a third competitor now. Can you just maybe offer some observations of what you've see?

Not a lot yet.

Okay. Thanks very much.

Thank you.

Our next question comes from the line of Raj Denhoy with Piper Jaffray. Please proceed with your question.

Great, thank you. Can you guys hear me?

Yes, we can, Raj.

I just wanted to ask you a couple of questions actually on the constant currency [inaudible] you gave for the Hip and Knee market. I think on the Hip side, if I wrote it down correctly, your constant currency growth rate was 5 percent.

And actually, what's intriguing about that is you mentioned you are still getting a fair amount of benefit from ceramic. I think you said it was down 35 percent so there's some mixed benefit there and also cementless continues to increase and also price as well on top of that, and so that 5 percent number, does that imply that potentially units were flat to maybe even down in the quarter?

No, I wouldn't say that. I mean, that's a total number and keep in mind that we've still got impacts coming in from Japan on pricing that are impacting their numbers. That's one of the reasons the international [inaudible] is already up 2 percent on a constant currency basis, as well as, you know, it was still a little bit of impact Steve alluded to in some of our export businesses in Europe that are impacting those numbers a little bit. So I doubt -- there's no way the units are down.

I know you're having a good [inaudible] and I guess 7 percent so, you know, with those mix benefits you are probably getting a little bit of unit but obviously it doesn't seem like much at this point

In the U.S., our primary Hip business, you see very high single-digit unit growth offset by both -- we lost a bid in our hip fracture business, which is -- some of which has gone over to Trauma and also the Restoration, basically the modular revision. So between Revisions and hip fractures a little over 20 percent of our business -- they were neutral to negative. Our primary Hip business, we are still seeing some pretty solid unit growth.

Okay. Then just on the Knee side, I guess there's been a lot of questions, obviously, about Triathlon. You know, 10 percent constant currency in the quarter, and granted, that's a worldwide number. What are your expectations? I mean, some of your competitors are putting up numbers now in the low 20s and I guess we've seen quite an acceleration on that side of the business, on the Knee side of the business.

Do you think you guys can -- will that product have that much of an impact? Do you think it will double the growth rates you are seeing in that business right now?

As a reminder we got about 13 percent U.S., you know, 13 percent growth in the U.S. in the quarter in Knees.

Right.

Certainly we would see that accelerating. Whether it goes north of 20 we certainly would hope so, but we probably temper expectations and say high teens to 20. But probably more in the second quarter and beyond.

We'd still caution you on first quarter as we get -- until we get the PS really locked in. First quarter we will probably still be a little bit weaker in both Hips and Knees, while the rest of the Company is strong and then second quarter and beyond, those really ought to be kicking in.

And so it really could get to be maybe that levels in the U.S., 20% or so?

We would hope so.

Okay. Thank you very much.

Great. Thank you, Raj.

We will take one or two more questions.

Our next question is from the line of Ben Andrew with William Blair. Please proceed with your question.

My question was answered. Thank you.

Thank you, Mr. Andrew.

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

Thanks very much and good evening. Just one quick one.

Can you give us a sense of the OP-1 spend in 2004 and how that will change in 2005 and going forward?

Bob, I don't want to comment on the exact numbers. We are spending a significant amount of money on OP-1 still. As Steve said, we are spending money to increase our capacity and we are still spending a fair amount of money flushing that product line out.

We will spend probably a little bit more money in 2005 and then I think beyond that we would expect, with approvals that we hope to get in 2007 and so forth, to see spending and the hit on the business if you will to our earnings drop, start to decline from that business to the point where it starts to be a significant contributor to the business, as he alluded to in answering Mike Weinstein's question.

And then, in the roughly 16 percent top line growth that you are forecasting for 2005, could you just tell us what the currency assumption is there for the full year? I think you gave it for the first quarter. I didn't hear it for the full year.

I think if currency stays where it is it would probably be about two points.

Okay. Great. Thanks very much and have a good evening.

Great, thanks, Bob.

Our last question is from the line of Joanne Wuensch with Harris Nesbitt Gerard. Please proceed with your question.

Thank you very much. I know we've had a lot of questions on Triathlon so let me ask one last one here. How should we think about the pricing of that in terms of a premium to your other Knee products?

And then as a follow-up, I know you are talking about expanding your sales force. Where should we think of these hires as coming from? Thank you.

On the pricing it's probably about a 10 percent [inaudible] and on the sales force, you know, I think it would come from the normal -- you know, we generally through our industry hire experienced sales reps with medical device experience and that's where you should think of them coming from.

And you had some international distribution reorganization over the summer. Should we think of that as being done at this stage?

You got about another -- you got one more quarter to go on that.

Okay. Thank you very much and have a good evening.

Mr. MacMillan, please continue with your presentation or closing remarks.

All right, thank you, everybody. We will host our annual analyst meeting during the A.O. S. In Washington D. C. at 8 a.m. on Thursday, February 24, 2005. We look forward to seeing you if you can attend.

If not, the meeting will be accessible by phone and the company's Website and the conference call for our first quarter, 2005 operating results will be at 5 p.m. eastern time on Thursday, April 21, 2005.

Thanks everyone and good night.

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation and ask that you please disconnect your lines. Have a great evening.