史賽克 (SYK) 2005 Q1 法說會逐字稿

Welcome to the Stryker first quarter 2005 operating results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions]. As a reminder this conference is being recorded today, Tuesday, April 19th, 2005.

Certain statements made in 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 in 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 of the Company's products; unanticipated issues arising in connection with clinical studies and eventual United States Food and Drug Administration approval of OP-1 and FlexiCore and CerviCore spinal implant products or other new product introductions; changes in reimbursement levels from third-party payers; a significant increase in product liability claims; changes in economic conditions can adversely affect the level demand for the Company's products; changes in exchange marketing, changes in financial marketing 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. I would now like to turn the conference over to President, Chief Executive Officer, Mr. Stephen MacMillan. Please go ahead sir.

Thank you, operator. Good afternoon and welcome to Stryker's 2005 first quarter earnings report. With me today is Dean Bergy, our Vice President and Chief Financial Officer. We are pleased to report that Stryker started the year with a very good first quarter. Net sales were 1,203,000,000, an increase of 16.2 percent over the prior year, and up 14.6% operationally. Net earnings increased 27% to 173 million, and diluted net earnings per share also increased 27% to $0.42 per share. We generated 32 million in cash flow from operations in the quarter and achieved all-time record lows in both days sales outstanding and days in inventory, reflecting strong asset management throughout our businesses.

Our first quarter results clearly demonstrate the strength of our broadly based orthopaedic business, as strong growth across a wide number of our franchises and geographies helped us accelerate our overall growth rate from last quarter by almost two points in the midst of the expected slower growth in U.S. recon.

To summarize the quarter, we experienced double-digit operational growth globally in every product category except hips. Our MedSurg businesses were extremely strong in the quarter and continued to exhibit good growth in incoming orders, indicating continued strength for these businesses. Our geographic breadth also contributed strongly in the quarter as our international businesses grew 9% operationally in the quarter. On a global basis orthopaedic implant sales were 714 million for the first quarter, up 11% operationally and 13% in dollars. Though modest, we saw a small uptick in both hip and knee growth rates; as hip operational growth of 6% was up one point from last quarter and knees were up two points to 12%. Our reported numbers are a couple points higher at 8% and 14%, respectively.

Trauma continued its strong mid-teens growth, up 17% operationally and 20% as reported, as every region in the world posted double-digit growth. Globally, spine performance of 11% operational growth decelerated as strong performances in the U.S. and Japan were offset by weaker performances in Europe and Pacific. Micro implant growth accelerated by three points to 12% globally due to strong performances in Europe and Pacific and a solid U.S. performance. Worldwide MedSurg sales were 423 million, up 23% operationally and 24% in dollars, as our instruments and endoscopy businesses continued to capture on the growth of MIS surgery and surgeons' needs for better imaging products, particularly in the U.S.

As we now break down U.S. and international sales across our franchises, we'll begin with the U.S. Domestically, sales were 775 million, up 18%, clearly led by our MedSurg businesses. Instruments domestic sales increased 21% as our broad offering of powered instruments, pain management, surgical navigation and other operating room solutions continues to position Stryker as a key partner in the operating room. Endoscopy sales increased 35%, driven partially by the late February acquisition of eTrauma which provides picture archive and communication systems for orthopaedic clinics. Excluding the acquisition, endoscopy still well exceeded 30% sales growth based on strong performances across the video, general surgery, and arthroscopy businesses.

Medical posted another exceptional quarter with 30% sales growth led by a number of new products across our beds, stretchers, and EMS lines.

In our U.S. implant businesses, orthopaedics was up 9% in the quarter with trauma up 15% and reasonable growth in reconstructive implants. Hip growth of 5% in the quarter was slower, as we went up against last year's 30% growth rate in the midst of our Trident Ceramic launch. Quarterly knee growth of 13% was in line with the 2004 fourth quarter growth rate. As we have indicated previously, we expect the first quarter to be the low water mark for the year in U.S. recon, as growing momentum behind the Triathlon Knee launch, the Restoration Modular Hip Revision System, and stronger sales execution could lead to steady improvements through the year in both U.S. hips and knees.

Domestic spine sales increased 20% in the quarter, the fourth straight quarter of 20% or better growth. We are encouraged by the progress we are making in establishing Stryker as one of the top four spine companies. Our micro implant sales grew 9% in the quarter, helped by sales of neuro products and our newly introduced Universal Distal Radius products.

Finally, domestically, physiotherapy was up 8% in the quarter, with growth coming from start-up and acquired clinics.

Internationally we had an excellent quarter. Sales were 428 million, up 9% operationally and 13% on a reported basis. As we discuss the international results all growth rates referenced here will be operational results. Europe grew a healthy 12% for the quarter with great strength in our four largest markets, the U.K., Italy, Germany and France; all of which posted double-digit growth in challenging environments. Last year's export restructuring appears to be paying some early dividends as our export division also rebounded to post double-digit growth. Japan was up 6% in the quarter with double-digit growth in trauma and spine and an upturn in recon, which is still recovering from the 5% price reductions experienced in the second quarter of last year. Pacific also grew a strong 14% in the quarter with double-digit performances in Australia, Korea, Taiwan and southern Asia. Canada and Latin America were down 3% for the quarter, but Orthopaedic Implants grew at healthy double-digit rates in these markets.

We also want to provide a quick update on the status of the artificial discs we acquired from SpineCore in the third quarter of 2004. Relative to FlexiCore, the lumbar disc, we are pleased to report that we completed enrollment in our pivotal clinical study during the first quarter. This study is expected to have a two-year follow-up. With respect to our CerviCore IDE, the FDA has asked for additional testing prior to the approval of our IDE for patient enrollment. We expect this additional testing will take two quarters to complete. We plan to submit this data by the end of the third quarter in order to begin enrollment before the end of this year. I will now turn it over to Dean Bergy for more details.

Thanks, Steve. I'll begin with a discussion of foreign currency. As you saw, foreign currency comparisons were again favorable in the first quarter of this year increasing sales by $16.5 million in the quarter. In the quarter the Euro strengthened about 6% and the Yen strengthened about 4% against the dollar compared to the prior year. If currency rates hold at current levels, we expect to see a positive impact on second quarter sales of around $25 million, or roughly 2.5 percentage points.

Now turning to price volume, in the quarter making up our 16% sales growth, price contributed about 2% to that for the total company, FX foreign currency rounds down to-- or rounds at about 1%. It actually is a little bit more than 1.5% but we're rounding numbers here. Acquisitions, also on a rounded basis, contributed about 1% to sales growth. Volume mix was 12% of that 16%.

U.S. implant prices were up about 2% in the first quarter. Prices in Japan were down around 5% in the quarter as a result of the MHLW price reductions which anniversary this quarter. Prices in Europe were up slightly, and for the quarter volume mix was up about 14% in the United States and 9% overseas.

Now turning to our businesses, Orthopaedic Implants represents about 59% of sales, and sales of those products increased 13% in the quarter and 11% on a constant currency basis. I'll give you the breakdown of the sales growth rates by product line, starting with-- with hips. The domestic hip line was up 5%, international was up 11%, for a total 8% on an as-reported basis. Knees were up 13% domestically, 14% international and 14% in total. Trauma was up 15% in the U.S., 22% international, 20% in total. Spine was up 20% in the U.S., down 1% international, 12% in total. And our Leibinger Micro Implant business was up 9% domestically, 19% internationally, 14% in total. Our total Orthopaedic Implants were up 12% domestically, 14% internationally and 13% total.

On a constant currency basis, obviously, the domestic numbers remain the same. I'll give you the international and the total numbers in constant currency. Hips were up 7, on a constant currency basis international 6 in total; knees 10% international, 12% in total; trauma, 18% international, 17% total; spine down 4% international, 11% total; Leibinger, 15% international, 12% total. And then Orthopaedic Implants in total 9% international and 11% total.

Looking at the product categories, hips were up 8% in the quarter and, as expected, we had a softer quarter in hips where we were going against a 25% growth quarter in the prior year. Growth in sales of our Trident ceramic-on-ceramic hip system slowed in the United States, with ceramic insert sales penetration level staying around the fourth quarter 2004 level. Sales growth in the United States was led by our Accolade cementless products, and we saw good growth on a small base in revision hips with our new Restoration Modular System. U.S. sales of hip fracture products were off slightly in 2004.

In Europe hips grew at a low double-digit constant currency levels led by strong growth in Trident products and good growth in Exeter stems. In Japan hip revenue growth was flat in local currency as a result of the impact of the MHLW price cuts. The Japanese market-dedicated stem had a strong growth quarter and the decline in bipolar sales appears to have moderated, as they were up slightly in the quarter. Trident and Exeter sales were solid in the pacific region. Knees, they were up 14% in the quarter. Knee growth was solid against a strong 24% prior year comparable.

In the United States, our primary and revision businesses experienced mid-teens growth. Scorpio products posted solid U.S. growth, but declined slightly as our recently-introduced Triathlon knee began to make some inroads. Knee-to-knee posterior stabilized set demands will likely make Triathlon a stronger second-half story; we are up-beat about this product's chances to resonate with competitors customers.

In Europe knees registered high single-digit constant currency growth led by Scorpio. Japan, knees reached mid single-digit constant currency growth despite the price reduction, as our Scorpio NRG product, designed specifically for Japan gains traction. The Pacific region recorded double-digit knee growth with excellent results from Scorpio and Duracon products.

Turning to trauma, it was up 20% in the quarter. Our U.S. trauma business was up 15% and 19% of military sales, which were heavier in the prior year are excluded. U.S. growth was led by excellent performances in hip fracture devices and intermedulary nails, which are paced by our Gamma 3 and T2 product lines, respectively. We also saw strong internal fixation growth on a very small base. International sales were also very strong in the first quarter with great contributions from substantially all geographies and all product categories. Europe and Japan posted particularly strong growth.

Now turning to spine, it was up 12% in the quarter. Spine posted another 20% growth quarter in the United States. This growth was led by cervical products including the OASYS posterior cervical system and the Reflex hybrid anterior cervical plate, both of which were recently launched. Interbody devices were also extremely strong in the U.S. as our new AVS PL spacer is gaining solid acceptance. International spine numbers were negatively impacted by the Pacific distributor reorganization initiated in the second quarter of 2004, and a soft quarter in Europe. Japan had another great quarter and Canada and Latin America were also strong.

And then finally, Leibinger Micro Implants within the implant-- Orthopaedic Implants product category was up 14% in the quarter. Leibinger had another good quarter, its sixth straight posting of double-digit sales growth. Our recently-introduced universal distal radius product led growth this quarter along with nice sales from neuro products and the Colorado needle cautery product.

Now turning to our MedSurg group, I'll remind you that represents 35% of our sales and is comprised of three significant product categories. Instruments represents 43% of the sales in this group, endoscopy 35%, and medical 22%. MedSurg group sales, as Steve said, were up 24% for the quarter and 23% on a constant currency basis.

Turning to instruments, that product line was up 20% in the quarter, 19% on a constant currency basis. Breaking that down between domestic and international, we were up 21% in the domestic markets, 18% in international markets, getting to that 20% growth number. This business had a great quarter based on very good growth in powered instrument systems and excellent growth in other OR equipment.

In the United States instruments posted a Stryker gold standard. That is, 20% or better growth quarter and constant currency sales outside the U.S. were in the mid double-digit range. Our system 5 heavy-duty power system saw exceptional growth and micro powered tool sales were very solid in the quarter. Growth in other operating room equipment was led by Sterishield, our interventional pain and pain management products, pulse-irrigation, and the Neptune operating room waste management system. Our navigation products also had an excellent quarter around the world.

Now turning to endoscopy, they were up 31% in the first quarter and 30% on a constant currency basis. Domestic sales growth in this business was 35%, international was 14% leading to that 31% total. Endoscopy posted its seventh consecutive quarter of 20% or more sales growth and the incoming order trends for this business continue to be strong. Endoscopy's quarterly growth was led by video sales, which were boosted by the late February eTrauma acquisition, and continued strong growth in our communications business. Our 1088 high-definition camera launched at the start of 2004 continues to generate nice sales growth. General surgery products also had a great quarter in the U.S. And Endosuite sales activity continues to be a major driver for our endoscopy business.

And last but not least within this product category is our medical business, which was up 22% in the quarter and 20% on a constant currency basis. This business grew 30% domestically, 1% internationally for the 22% sales growth. The medical division delivered its fifth straight quarter of 20% or better growth. U.S. sales at a stellar 30% were over 20% growth for third consecutive quarter. As anticipated, international sales growth was dragged down by extremely difficult comps in Canada. Bed shipments were very strong in the quarter. EMS reached the Stryker gold standard in sales growth. And stretcher sales were solid.

Our physiotherapy business reported 8% in the quarter and start-ups and acquisitions covered all of physiotherapy's growth in the quarter. And physiotherapy ended the quarter with 457 centers.

Now turning more broadly to the P&L operating results. Gross margin, profit margins in the quarter, were flat sequentially at 64.3% and down 10 basis points as compared to last year, primarily as a result of faster sales growth in our lower gross margin MedSurg businesses. R&D spending was up 22% in the quarter to 5% of sales as we continue to put increased focus on our development efforts including year-over-year spending for the development of our acquired SpineCore products. SG&A costs were up 9% in the quarter with sales commissions driving a significant portion of the increase. Remember the commission rates are lower in our MedSurg businesses and these businesses exhibited faster sales growth this quarter. Additional commission expense was partially offset by lower meeting costs and slower growth in insurance premiums, and instrument amortization expense.

Intangibles amortization increased 28% in the first quarter, partially as a result of increased amortization related to acquisitions, and the impairment of certain intangibles associated with previously acquired products. And, as you can see, operating income increased 27% in the quarter and operating margins are up nicely from last year to 20.5% of sales.

And I'll now give you a break down of other expense income for the quarter. It includes interest expense of $1.5 million. Interest income of $1.3 million. A foreign currency transaction loss of $0.2 million, a minority interest of $0.2 million, coming to the $600 million other expense in the quarter. The reported effective income tax rate for first quarter was 29.5%. This compares to a 2004 annual underlying tax rate, if we exclude the SpineCore purchased in process research & development from consideration of 30%.

Turning to the balance sheet it continues to be in great shape. Accounts receivable days reached a new record low level of 57 days, five days below the prior year. We also set a record low in inventory days at 118 days in the quarter. At March 31, 2005, we have no amounts outstanding on our credit facility and have about $10 million remaining legacy debt which we expect to pay off as it matures. And we meet with the rating agencies annually, and in February Standard & Poor's upgraded our rating to A with a positive outlook from A- with a stable outlook. And finally, cash flow in the quarter. Operating cash flow came in at $32 million, despite our great performance in DSO and DII. This was down slightly from the prior year as a result of higher cash usage in accounts payable and heavier tax payments. However, we still believe we're on track for a very strong year in operating cash flow. With that I'll turn it back over to Steve.

Thanks, Dean. Now we'll update our 2005 outlook. We had a very good first quarter. We continue to believe we're in a good industry and that our position as the most broadly based orthopaedic company points us in the direction for continued strong growth, even in a changing environment. We are still planning for mid double-digit top-line growth in 2005, which translates to sales of approximately $4.9 billion. Since we exceeded our internal earnings objective in the first quarter, we are increasing our 2005 net earnings guidance by a penny to $1.75 per diluted share. This represents a 22% increase on 2004 adjusted net earnings. And on a reported basis, earnings will be up a projected 54% from 2004. Next we'll open it up for the question-and-answer session. Operator, you may take it away.

[Operator Instructions]. Adam Galeon, Credit Suisse First Boston.

Hate to start on a sour note, but I've got to ask you about the-- the DOJ investigation. Are you guys done responding to those subpoenas? Have they articulated a next step? And, if not, what would your best guess be regarding next step?

Adam, we really can't comment much, as you know, but we're responding and have obviously given them the-- the initial round of information.

Okay. So no speculation on next step?

No, we just really can't do that at this point.

All right.

I'm sorry. I know you want more and we'd love to be able to say more but in reality we really can't.

And, Adam, it's very early on right now, frankly.

Okay. Fair enough. So maybe moving over to the product side. Last update on Restoration Module was that it was off to a slow start. I think you mentioned it as a growth driver, Dean. So what -- what was the-- the rate limiting step there? Was it the national sales meeting? The getting more-- a fuller range of products out the door? Why has that accelerated?

Well, I think right now Adam, as I said it's on a very, very small base so-- and, frankly, last year at this time we were very much in a transition period with this-- with this product grouping. So, you know, I think from our standpoint, it's nice to see a little bit of growth there, but we're certainly expecting much more about-- from this as we go forward; and we've still got a-- a few pieces of the product groupings to get out to be real honest with you. So we're still expecting more here as we go throughout the year and get this thing fully ramped up.

Got it. Just last question. It certainly felt last month-- two months ago at the academy meeting that enthusiasm for the-- the two-incision hip approach really started to wane. So, first question is, does your market intelligence support that view? And if it does, presumably most of those two-incision users were high volume docs, probably willing-- more willing at least in most of the industry to try new things. So did that represent an opportunity for you guys?

To answer your first question, yes, we do definitely see it waning. We think that the science is coming out, you know, consistent frankly with what we've been advocating all along. And we do think that we may benefit from a transition back to gray hip stems with proven outcomes. And that's going to be a big part of our message here as a lot of folks went off and tried some things and, frankly, we've got a great set of stems in our existing bag, you know, we've got some new products coming. But even our existing products are very good. And we do think there's some opportunities there to reaccelerate growth even among our existing hip products.

Milton Hsu, Bear Stearns.

It's Rick Wise trying to substitute for Milton a little bit. Couple questions. First, can you just give us a little more detail on the Triathlon story? Help us understand, when is it fully rolled out, Steve? And you mentioned the second half it's a stronger story, I think, if I'm quoting you correctly. Just help us understand exactly what you meant by that.

In terms of the Triathlon, as you recall, we got the PS approved right at the end of January. We just started rolling out sets in March. And we have a-- a fairly heavy plan for April, May, and June, to be rolling out in excess of 100 sets; and hopefully well more than that each month through the second quarter. So we really see the build being in second quarter and we should certainly start to see an uptick because of that. We're starting to see it already. But in terms of where we're fully deployed where we'd like to be won't be until third quarter. But clearly we see it starting to kick in here in second quarter.

Okay. Obviously the MedSurg performance was outstanding. Again, can you give us a little more color on-- on-- perhaps the new product drivers there? And you mentioned the incoming orders strong. Can you quantify that for us at all?

We don't want to quantify the incoming orders. We tend to stay away from that, but it really gets back to-- if you recall at the academy, we talked about 17 new products rolling out that really go from some of the power tools and instruments, a lot of which are being used in minimally invasive surgery, through a lot of the rest of the operating room solutions. From Sterishield to some Neptune line extensions, essentially. That's our waste management system. And then really a big chunk of it, obviously, through the endoscopy business; from the video. The 1088 camera, as Dean mentioned, just continues to go well. But we saw strength, really, throughout the endo business, throughout the arthroscopy line, the cutters. Really just a lot of strength through and through those product lines; and even into medical as well, where each of the units-- each of the products from stretchers, EMS, and beds, all showing some very nice growth. So there's just a lot of strength in those businesses right now.

And I think, Rick, that, you know, in reality the product launches you saw at the academy are the ones that really hit our sales force at the sales meetings at the beginning of the quarter. And probably those products aren't having that big an impact yet. But what you're seeing is just a continued trend within these businesses and the way they operate of doing a nice job on new products year after year; which keeps the businesses strong.

Right, and just two quick housekeeping things. First, R&D spending was up, obviously, very nicely. Should we think about that kind of growth rate for the year or-- above 5% of sales, however you want to characterize it? And last, on the tax rate was a little higher than the 29% we've been assuming. How do we think about that for the year now?

I'll take the first one and Dean can take the second. On the R&D spending, I think you might expect to see that continue at that percent of sales. We are trying, while our business is obviously very healthy today, Rick; we want to improve our innovation going forward and are looking for more opportunities to-- to fund good ideas, frankly, on the innovative front.

And-- and, Rick, on the tax rate I said in the last call that we expected the rate to be around 29%, this 29.5% is where we looked at in the first quarter. We'll continue to look at that every quarter. I-- I still believe that there's downward bias in that rate and it would not surprise me to see us as we go through the year that it could still come down.

Katherine Martinelli, Merrill Lynch.

Wanted to ask you a question about direct-to-consumer. J&J posted some pretty strong, both hip and knee numbers and specifically cited direct-to-consumer as helping the knee growth. Do you think it's something that you're going to look at more aggressively, maybe beyond the Trident line, in terms of-- in increasing the dollar spend in that area?

Katherine, that's a great question. I-- certainly given their strength and the strength that we had behind our own Trident launch when we were much heavier users of the DTC campaign I think we've got to go back and relook at it. And you would probably expect to see a little more activity from us. But we really-- had a burst, went back and assessed it, looked at it, and I think we're probably coming around to the conclusion that we might want to do more.

And then in terms of consulting agreements, and I know you don't want to get into specifics on DOJ, but was any portion of the reduction in SG&A tied to reduced consulting expense? Are you seeing year-over-year decline if you put the cap on any of those programs?

No. The way we operate, that's not-- that's not a factor there.

Okay. And then just lastly with respect to restoration, I think revisions are somewhere 10, maybe 15% of the recon market. Can you give us a sense for what percent of your domestic recon business is currently revision, so we can kind of get some feel for where that business might grow with the launch of that product?

Katherine, we're probably a little north of 10, so, you know, again, this is why we think with this product we have room to capture additional market share as we go forward. If the product turns out to be as good as we think it is.

Bob Hopkins, Lehman Brothers.

I just want to explore a little bit more on MedSurg, because it's really something that's obviously helped out quite a bit over the last three to four quarters. And-- and specifically on the-- on the medical business, I mean, you're growing it more than three times the market rate right now. Could you just -- or I think that's the case, and if it's not please correct me. But could you just go into a little more detail on the kind of growth levels we should suspect for that particular part of the business going forward and the same for-- for endo? I mean, it sounds like certainly sustainable into Q2, but are these the kind of rates we should expect all year long?

Great questions, Bob. No, you should not expect these rates. Clearly our medical business, at a 30% quarter in the U.S., and 22ish globally is-- is way above anything we would expect for a sustainable level. And we probably see that as being a business that ought to be a low-teens growth business, frankly, in a market that's probably, you know, clearly single digit. But we do think with our product lineup and our opportunities there are continued opportunities for to us take share in that area. So I think we'd see it coming down probably to more the lower teens going forward. But we still think we've got another quarter or two probably of some pretty healthy growth in medical.

On the endo side we probably see that as being a high-teens growth business in terms of revenue and, again, right now we're in a sweet spot of a lot of good product launches and, you know, just a lot of great execution and some good market dynamics that have us performing well above, you know, what we would really think is probably our more sustainable growth rate. Dean, do you have additional comments?

Yes, the one thing I would add on endo, though, is for this year we will continue to get a boost from the eTrauma acquisition, which should help boost that business over the course of the remainder of the year.

Yes, so we may see 20ish for that business for the year.

Okay. And then just one-- one follow-up. And I hate to sound silly, but on the bed business can you just spend one more minute on how one takes so much share with beds? Is it a particular unit that's doing very well? Are you just doing a better job in terms of a focused sales effort? What is it exactly that's driving that?

We think it's a pretty simple but difficult combination of good products that really are standing up and strong quality, as well as great sales execution. But we-- we really think we're bringing a lot of innovation and enduring innovation to that marketplace and-- and standing up to it with a great sales team.

Michael Weinstein, JP Morgan Securities.

Hi, it's Taylor Harris here for Mike. First question just on the MedSurg business, I think at the beginning of the year you had been targeting a sales force increase of 8 to 16%. Is that on track? Is that still the target?

Yes, I think that's in the rough range.

Yes. That's fair. And I think it's fair to say that we're on target with our planned sales force increases.

Okay. And then just back to the Triathlon launch. Could you give us a little color -- maybe give us a percentage of the new -- of the set -- the instrument placements that are going to competitive surgeons? Or-- or give us some anecdotal feedback on how the launch is going with competitive surgeons?

Sure. We don't want to disclose those numbers specifically, Taylor, but we're-- we're opening some doors certainly with it. And, candidly, probably more doors than we did with the ceramic-on-ceramic launch. We're feeling very good about it.

Okay. And then just, Dean, I noticed you didn't give some of the product breakdown within the MedSurg business. Was that a conscious decision? Is that what you're going to be doing henceforth?

Yes, it is.

Okay. Then my final question, I think Mike may want to chime in, U.S. pricing on hips and knees, was that in the range of overall U.S. pricing?

Yes, it was.

2%? Fair assumption?

That's correct.

Actually I did want to ask, just now-- now that you've completed the trial for the FlexiCore device, when do you think you might get some added visibility there on the potential for-- for an approval based on any time line shorter than two-year follow-up? If that potential, exists, when due think you might know that?

It's a great question, Mike. We don't want to get the cart ahead of the horse here. If we see any opportunities we would certainly try to do that but, you know, recall we're also managing a longer term relationship with the FDA and just getting into this really with the spine cord team. So right now we're playing it-- playing it straight with what the original protocol of the study was.

Does Medtronic dictate that to a degree since they're ahead of you guys?

You know what, I really can't comment on-- on their approach.

Ben Andrew, W.M. Blair & Co.

Could you talk a little bit more about the trauma side? You broke out military sales. Could you just be a little more explicit about what the impact there is in terms of the numbers?

Well, Ben, we -- basically because military sales are a little bit come hither type activity, we try to every quarter give you numbers without military sales and, again, the sales it you take those out are 19% in the U.S., a 19% increase. Because those sales were much heavier in the prior year. And, again, it's hard-- it's very hard for us to forecast those, so we're trying to give you what we believe is more the core part of the business, if you will, as we talk about these numbers every quarter.

Okay. And, you know, on the MedSurg business again one of the questions I think that pops up there is what is really going on with the sales organization in terms of changes that you've made to take all the share that you are? Obviously new products are critical there, but are there structural things that you've done? Or what is really going on in the field to help explain this extreme growth?

You know, it's really a lot of blocking and tackling, to be honest. We've got a -- what we call the MedSurg offense here that does a pretty good job of constantly looking at how we can expand smartly, but it -- there's been nothing dramatic other than a little more territory expansion, I would say; you know, as we looked at it we thought there were a few more opportunities as some of our product lines have grown, you know, to break up some territories and put a few more feet on the street, and it does seem to be paying off for us.

Okay. And then another question, I know that you've probably gotten it a number of times, but when you look at some of the attempts for gain sharing arrangements by different hospital groups and whatnot, have you guys signed any of those types of contracts? Or would you intend to sign any contracts along those lines, not specific customer question, but just more generally?

We deal with each customer on the terms that they need to be. I am not aware that we've entered into anything with specific gain sharing.

There's nothing that we've done on that front at this point, Ben.

We would also probably remind you there's -- you know, there's a lot of bluster going on externally on some of these and, you know, there's separate negotiations that go on that we don't want to comment on. But internal and external may not -- sometimes I think the external may be a little worse, or sound worse.

And I think it’s fair to say that gain sharing is fraught with a lot of potential issues from the standpoint of a doctor and whether they'd want to associate with that, and, you know, I think there's been a lot of comments and surveys that have been done by the analyst community around that. And I think there's just a lot of questions in the air about whether something like that could ever be really effective.

Sure, sure. Last quick question. I know, Dean, historically you've given us volume and mix kind of as a combined number. Can you just give us a sense what the breakout is between those, just on a qualitative basis if nothing else? Just so we get a sense of where that's really being driven. Is it more-- how much of that is coming from mix?

Yes, you know, I would say that there's always, most of it is coming from volume, and I really don't have the details to break that out; but, anecdotally, and from what we know from talking to our people, the majority of that number as it has been in, you know, all of the recent periods we've presented-- is from volume.

Ed Shenkan, Wells Fargo.

I just wanted to follow up on the gain sharing theme here. To better understand what the impact could be to Stryker, either positively or negatively, in the upcoming year; and as you look forward to several years, is this something that comes up periodically that you think is well thought out by your customers, that they really are going to push to implement even if they get minimal gains, you know, initially for future gains later on? What are you really, you know, how do you see this kind of playing out?

Sure. You know, we -- clearly these things surface from time to time. And I think we're at the early stage again of a lot of external talk, but with all of these things, as you start to get into them and start to wrestle with the realities of dictating for surgeons to change a practice. If they've been putting in, for example, a Stryker Trident hip for four years running and they're very used to the service that we provide there, you know, in the-- in getting ready for that surgery and conducting that surgery; and to then say, okay, you know, to save 50 or $100 on that surgery we want you to use a different product that you haven't ever put in before. You know, there becomes a lot of discussion, I think, at the surgeon level going back and forth in the hospital. The dialogues are not just between the hospitals and the manufacturers. They're also, candidly, between the hospitals and the surgeons.

And so the more you get into this and the intricacies of malpractice and everything else, what sounds easy at 50,000 feet gets a lot harder to implement logistically, and I think we've seen this before in the industry. Having said all that, do we continue to expect a tougher in pricing environment going forward? Yes. You know, keep in mind, we as a company think we've been very responsible in, you know, traditionally over the last few years our price increases have averaged less than the rate of inflation. So we've been very mindful and trying to bring more value, and more service along with our products as we go.

So if we see that, you know, we've literally had 2% price that we've taken in 2003, 2004, and that's probably what it'll be this year. If that number goes to 1 or 0, we think we're well cushioned. It's also where our broad-based business model and having the MedSurg business and, frankly, our businesses around the world insulate us a little bit better than just, say, a heavy focus on, for example, U.S. recon.

Okay, and one other follow-up. Stock options. You don't plan, I guess, on expensing them in '05, even ahead of the rules, and just clarify that. And then guidance, you didn't give guidance for the upcoming quarter. Was that -- is there any guidance you could give us?

You know, on-- on stock options, you're exactly correct. Our practice here really has been to follow the guidelines that are being put down by the regulatory bodies in terms of what we adapt. So, in accordance with what we had said last time and now with the change provided by the SEC this past week, we would not plan to adopt until 2006. And, again, we don't think it's-- it's a very significant impact on the Company. It's maybe $0.06 to $0.08 per-- on an annual basis and, you know, we-- we have never given quarterly guidance really. Our guidance is based around the year and we're continuing in that vane.

Bill Plovanic, First Albany.

Just a couple questions-- or a question in regard to new product cycles. Talk about the Triathlon is just rolling out now in the knee area, you have the restoration in the hip. Wondering if you could just give us a bit of a peek into what's coming in the next-- if you have anything else coming in the next quarter or two?

Bill, those are really the primary things right now that are-- that we're focused on over the next quarter or two. Later in the year we will have, certainly, our X 3 poly, our sequentially cross-linked poly coming out in our hip line that we're also excited about, but in the knee line it's really going to be Triathlon.

Larry Keusch, Goldman Sachs.

I guess, Steve, you-- in your comments, you mentioned in the recon business, particularly in hips and knees, that you expected not only new products to help but better sales force execution. And I just wanted to dive into that a little bit further. Could you speak about what you are doing with the sales force to improve that execution?

Sure. You know, you don't have to be a genius to probably figure out we're doing a pretty good job on the MedSurg side, and we think there are some principles that we can apply from how we've been leading that side, frankly, into the orthopaedic side. They are different businesses, but as you recall we just put Mike Mogul in to run our U.S. orthopaedics business who came out, actually began his career with us as an instrument sales rep. And then, you know, grew up as an instruments region manager, then went over to the orthopaedic side, went to Europe, and he's come back. And I think he's seeing some opportunities to, you know, we've got to do a couple things better in our orthopaedics business.

One is execute our new product launches internally. And B, we think we can dial up the sales force performance. We've got a lot of great, great sales performances going on around the country, but not 100% of them. And, looking at it a little closer, I think you can expect to see some improvement over time here as well.

Okay. Then two other quick questions. Also, in your commentary you talked about new products coming in hips, obviously we know about the X3 poly, but were you referring to new stems coming, you know, in the course of this year, or perhaps in time for the academy for next year?

Yes, we do have the Secur-Fit, which will be rolling out a little later this year as well. The Secur-Fit slim neck stem that we did touch on at the academy. It would be more of a second half event.

Okay. And then final question for you. Again, I know there are sensitivities around discussions regarding contracts for recon and gain sharing and all those sorts of things. But is it fair to say that -- and I think you alluded to this -- what you hear externally, again, may not be consistent with what's going on within those negotiations, would it be fair to say that at some of the extreme numbers that have been thrown around out there, probably are moderating as those discussions go on?

That's a pretty insightful observation, we'd say. And these-- these negotiations are tough, but they've always been tough, they continue to be tough; but I think your observation there is a-- is a very astute one.

Steven Lichtman, Bank of America.

Just wanted to follow up on Bob's question earlier on the endoscopy business. I think you had mentioned sustainable high teens growth. Just wanted to confirm that that is what you think Stryker's growth is. And, if so, what do you think the underlying market is growing at this point relative to that?

Sure, and, you know, we think probably the underlying market is more low teens, and we think our sustainable rate is more high teens, and we do think this year on an annual basis we'll probably be in excess of 20% for this year.

Right. And in this quarter you grew over 30%. Was there anything beyond the acquisition in particular that was -- provided some tail wind in this quarter that we may not see the rest of the year, or what-- what should we see for the rest of the year in that business?

You know, we had the 1088 camera which was launched last year in the first quarter, this was sort of the fourth quarter of it. So I would probably draw the analogy it was kind of like our first quarter last year on hips, where you're hitting the peak of, you know, that first year at the end, that fourth quarter where you're going indexing against not having it in the base. So I think, you know, we see continued real, real strong demand for the 1088 camera. It's got such great resolution, the high-definition resolution to it, but we'll now be starting to index against its launch.

Couple for Dean. On acquisitions, would you be able to break out, on an absolute basis, the contribution to the sales line in the quarter?

The only time we've really done that is when it's significant. Let's just say it rounds up to 1%, so, you know, it's-- it's a reasonably small number but it rounds up to 1% of sales.

Lastly, on SG&A, could you give us a sense for the year as a percent of sales what we should be looking for on that line?

For the year? You know, I think, you know, right now, as we look at our projections, it's probably our low water mark for the year. You know, as we talked about, our MedSurg sales were extremely strong this quarter. We did have a couple of things that probably drove it down. I would expect it to come back up closer to the 38 range, probably 38-plus. So, you know, I think we have touched our low water mark for the year.

[Operator Instructions]. Jason Wittes, Leerink Swann.

First off do you have any thoughts on DRG 209, whether there will be any changes upcoming this year to that code?

We would probably expect them to be modest.

Any thoughts on whether revisions might be separated out from primaries or is that not on the agenda?

We're not sure. We think that would make sense. Clearly it's a more complicated procedure and that would probably-- probably be a good thing.

Okay. Also, on the Triathlon knee, can we assume that there is a price premium on that knee relative to the -- to other products?

Yes.

What kind of magnitude are we talking about?

You know, modest in the 10ish, you know, high single to 10% range relative to Duracon.

And one last question, and that is just on ceramic hips. I guess, Dean, you mentioned that they are staying at about where they were fourth quarter, which I believe was somewhere around 32%. Is that kind of where you think it's going to stay for the rest of the year or do you have any hopes of it starting to move up a little-- tick up a little as the year progresses?

It's around mid-30s. And I think it would probably be our expectation that it would hang in around there. We certainly have hopes that would it go higher, but I think, realistically, it's prudent for us to think about it's being at that level.

Okay. And one last question. Just a little bit of a clarification on the tax rate; 20.5 this quarter but you're saying you're probably going to be able to tweak it down as year progresses. Is 29% average out for the year a good estimate or is that a little too high given-- or low given the performance this quarter, or the tax rate this quarter?

Well, you know, again, we look at it every quarter. I think given how we're managing the business, I don't think that's too low for the year, eventually. But, again, we'll look at it every quarter.

[Operator Instructions]. JoAnn Wuensch, Harris Nesbitt.

Quick question. As we see a larger and larger percentage of your revenues shift towards MedSurg products, could you talk about the differences in the gross margins between those products and Orthopaedic Implants?

JoAnn, it varies by the businesses, but -- they're-- they're 15 to 20% lower, probably, in that range across the businesses; but I would also remind you that the -- you know, the SG&A costs on those businesses are quite a bit lower, too.

Okay. And then as we think about your cash flow you've got -- you've talked about not wanting to make a large acquisition which leads me to thinking that with that cash flow you're making either many small ones and/or purchasing more shares aggressively. Could you sort of tell us how you're thinking right now about those two items?

Sure. We're-- we're compiling cash right now and we're going to spend it as we see fit. We have indicated that we think smaller acquisitions or, frankly, R&D technology acquisitions would continue to be the place to spend it; but, you know, we're also not compelled to spend it. We don't see anything, we don't mind accumulating a little bit of cash. We don't see doing necessarily a stock buy back that was part of your question there, you know, and we don't mind accumulating cash right now.

There are no further questions at this time.

Okay. Well, in that case why don't we go ahead and wrap up. And just thanks, everybody, for your time today, and we will have our conference call for our second quarter, the 2005 operating results, will be at the same time, 5:00 p.m. eastern time on Tuesday, July 19, 2005. So we'll talk to everybody then. Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your line. Have a great day.