史賽克 (SYK) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2006 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, Thursday, April 20th, 2006.

Also, as a reminder, certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations, and will be 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 these presentations, such factors include, but are not limited to, pricing pressures generally, including cost containment measures that could adversely affect the price of, or demand for, the Company's products; regulatory actions; unanticipated issues arising in connection with clinical studies and eventually United States Food and Drug Administration approval of additional OP-1 applications; the Flexicore and CerviCore spinal implant products, or other new product introductions; integration and other issues that could delay the introduction of the recently acquired Sightline product line; changes in reimbursement levels from third party payors; a significant increase in product liability claims; changes in economic conditions that adversely affect the level of demand for the Company's products; changes in foreign exchange markets; changes in financial markets; and changes in the competitive environment.

Additional information concerning these and other factors are 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 on the 3 months ended March 31st, 2006, of a charged to write-off purchased in process research and development associated with the acquisition of Sightline Technologies Limited. Further discussion of this non-GAAP 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 Investor" page on the Company's website at www.Stryker.com. I would now like to turn the conference over to Mr. Stephen MacMillan, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Tim, and good afternoon, everyone. And welcome to Stryker's first quarter 2006 earnings report. With me today is Dean Bergy, our Vice President and Chief Financial Officer. While concerns persist over the outlook for orthopedic and med tech companies, we continue to focus on delivering strong results. And, just as we did last quarter, we are pleased to report another strong quarter, with sales up 10%, adjusted net earnings up 20%, and R&D up a healthy 25%. In the midst of a strong currency headwind and various other pressures around the world, our unique collection of businesses once again delivered superior growth and provided a remarkable consistency in our performance.

Specifically, net sales for the first quarter were $1.32 billion, up 9.8% on a reported basis, and up 12.3% operationally. Adjusted net earnings prior to the Sightline acquisition were up 20% to $200 million, and adjusted diluted EPS increased 20%, $0.49 in the quarter. As Dean will speak to further in a few minutes, the P&L also showed some real strength. Our net contribution was up 1.5 points over last year to 65.7%, and our operating income margin was up 1.1 points to 20.8%, showing steady progress, driven by continued operational strengthening. In many ways, our first quarter mirrored much of our fourth quarter's success, with a few positive new wrinkles. Again, 8 of our 9 global franchises grew at double-digit operational rates. On a worldwide operational basis, our orthopedic implant sales grew at the same rate as last quarter's 11%, and MedSurg came through yet again, delivering stronger than expected 17% growth, close to last quarter's 18% level.

Now, for a few more details. On a very positive note, we are particularly pleased to report that every single one of our U.S. orthopedic implant businesses, knees, trauma, spine, CMF and, yes, hips, delivered sequential upticks in growth versus fourth quarter, though they were admittedly aided by 1 extra day in the quarter. Trauma led growth in the U.S., up a strong 23%, while spine was up 21%, CMF up 19%, knees up 13%, behind the continued strength of Triathlon, and hips encouragingly began a modest recovery, up 3%. Overall, our U.S. orthopedic Implant business grew 11%, up from 9% last quarter.

In a nutshell, we feel really good about where our implant businesses are headed in the U.S. The establishment of our stand alone spine division at the start of 2004, is clearly helping us emerge as a major player in this fast growing market. And our 8 consecutive quarters of 20% growth are evidence of this success. The establishment of dedicated trauma and CMF units within our U.S. orthopedics division in the last 2 years is also having a positive impact, as trauma has now delivered 20% growth in 4 of the last 7 quarters. And CMF has now delivered 3 straight quarters of double-digit growth. And while we are not celebrating yet, we are encouraged more each day by the developing turnaround of our U.S. orthopedics Division, which showed its second straight quarter of accelerated growth.

Meanwhile, MedSurg continues to post strong results. Globally, MedSurg delivered 17% operational growth, as our anticipated short-term slow-down, or in Cy Johnson terms, lumpiness, at U.S. endoscopy, was offset by acceleration in our U.S. instruments business, our seventh straight quarter of 20% or greater medical growth, and strong international growth. Our more recent focus on driving our instruments and endoscopy franchises outside the U.S. is beginning to show, as each of these franchises grew over 20% operationally outside the U.S., and accelerated versus last quarter. These franchises continue to be a very important part of the Stryker growth story. And the recent PlasmaSol and Sightline acquisitions should provide even more growth for the future.

Internationally, we also posted another strong quarter of double-digit operational growth, with every region posting 10% or greater growth, except Japan, which posted solid mid single-digit growth. The impact of currency here is dramatic however, clipping a full 9 points off the combined operational growth rate of our 3 largest international divisions: Europe, Japan, and Pacific, reducing growth from 11% to just 2% on a reported basis. In light of this currency hammering, it underscores how pleased we were to report an overall 10% growth rate for the Company. We continue to be pleased with the breadth of our international growth as evidenced in a region like Europe, which posted 12% operational growth despite a slow-down in the UK, where the NHS cutbacks at the end of the fiscal year dampened our performance. But while the UK softened, very strong 20% plus performances in Germany and Spain, combined with high teens growth in Italy, provided another great quarter of double-digit growth in Europe. Looking across our franchises outside the U.S., we also had a number of notable performances, with trauma up 12%, spine up 19%, endoscopy over 30%, and instruments at 20%, underscoring our broad-based growth. And in our Pacific region, 7 of our 9 key franchises grew 20% or greater; a real model of our broad-based strength.

We are very pleased with the resurgence of our global knee franchise, with Triathlon rolling out overseas, we posted 15% global operational growth in knees, with strong performances everywhere, as Europe was up 17%, Pacific up 24%, and Canada up 31%. Additionally, Japan's knee business was also up a strong 19%, behind the continued expansion of our Japan-specific Scorpio NRG Knee, which continues to be widely adopted. We are clearly excited about where our knee franchise is headed on a global basis, with Triathlon and Scorpio leading the way.

We would also like to update you on OP-1. We are pleased to report that we have now seen the data from the pivotal U.S. trial and are proceeding full speed ahead with submitting our PMA by the end of June. While there are always risks and no guarantees around any FDA submission, we feel good about both the clinical efficacy and safety of OP-1, as well as strong surgeon support. We know many of you would like more data here, and we will ultimately share it in due course. But we hope you appreciate that our primary focus at this point is on gaining FDA approval, and we do not wish to publicly share information prior to FDA review.

Before handing it over to Dean, I would like to reiterate a couple of thoughts from last quarter's report. We have earned a reputation through the years of delivering consistent, yet superior earnings growth. We set aggressive goals, we deliver on our commitments, and we let our results do the talking. We think our unique collection of orthopedic implants and medical technology businesses, and how we run them, once again, delivered strong results. I will now turn it over to Dean for more details.

Thanks, Steve. I'll start with foreign currency. Impact of foreign currency on the first quarter was roughly comparable to the fourth quarter of 2005, reducing sales by $30 million or 2.5 % in the quarter. This was at the midpoint of our projection, but probably a bit higher than consensus estimates. In the first quarter, the dollar strengthened 9% against the Euro and 12% against the yen compared to the prior year, and obviously took a big toll on our international sales results in the quarter. Currency rates hold near our recent levels. We expected impact of currency will reduce second quarter 2006 sales in the range of 1% to 2%, when compared to the prior year.

Now, I'll turn to the price volume analysis for the quarter. I obviously touched on foreign currency, but price in the quarter was flat. Acquisitions added 1% to our sales growth in the quarter, and volume mix was at 11%, adding up to the 10% reported sales growth. Prices were up slightly, both domestically and outside the U.S., but rounded to zero. Acquisitions added 1 point to the top line, and volume mix at 11%, stayed right in the steady plane we have seen for the last several years.

Now, turning to our segment sales, orthopedic Implants, which represents 58% of our sales, sales of those -- that category increased 7% in the first quarter, and 11% on a constant currency basis. And now I'll give you the sales growth rates within orthopedic Implants, broken down by product line. Starting with hips, domestic sales were up 3%, international sales were down 3%. These are the reported numbers for flat reported growth in hips. Knees, domestic, were up 13, international up 10. Total up 12. Trauma, domestic up 23, international up 2, 9% reported total growth for trauma. Spine, domestic up 21, international up 12, and a very strong 18% total. In our CMF business, domestic was up 19, international down 5 on a reported basis, so the total was up 7. And then for orthopedic Implants in total, domestic up 11, international up 3, and the total up 7.

Now, turning to the constant currency results, I'll give you the international and the total line. Obviously, domestic's the same. Hips, international, was up 4, and total was up 3, on a constant currency basis. Knees, international, up 18, and total up 15. Trauma, international up 12, total up 15. Spine up 19, total up 20. CMF up 1, total up 10. And for the total orthopedic Implants line for constant currency, international up 10, and the total up 11.

Now, a little more granularity on the categories. Hips were up 3% in local currency, and flat in dollars in the quarter. The U.S. hip sales rebound a bit in the quarter, posting their best year-over-year performance since last year's first quarter, and their first sequential uptick in 8 quarters. 3% growth is more modest, but our longer term expectation, it is obviously headed in the right direction. U.S. hip sales growth was led by another good quarter from Accolade, and continued growth in revision hips with our Restoration Modular System. X3 polyethylene also continues to do very well. In addition, our hip fracture business delivered a slight uptick in the quarter. In Europe, hips grew at low to mid single-digits on an operational basis, led by Trident and Restoration Modular. In Japan, local currency hip revenues were off slightly from the prior year, with the [inaudible] and Bipolar sales more than offsetting increases in other categories. Pacific constant currency hip sales grew at mid single-digits, with solid growth in Trident and Exeter.

Now, turning to knees. They were up 15% operationally, and 12% in dollars in the quarter. You can see knees had another excellent all around quarter. In the United States, primary knees had another very good quarter of double-digit growth as our Triathlon knee continued to be well accepted in the market. X3 polyethylene on our knee products is also being extremely well received. Our U.S. Revision business turned in a mid-teens growth quarter, led by Scorpio. In Europe, knees grew at high-teens level operationally, led by Scorpio and Triathlon. Our Japanese knee business also recorded local currency growth just shy of 20%, driven by sales of the Scorpio NRG product designed specifically for that market. Pacific had another quarter with greater than 20% operational knee growth, led by Scorpio and Triathlon.

Now, turning to trauma, that was up 15% on constant currency, and 9% reported in the quarter. Our U.S. trauma business had an outstanding quarter, posting 23% growth, 21% of military sales are excluded. Growth in intramedullary nails and hip fracture devices exceeded 20%, led by the T2 and Gamma 3 product lines respectively, and external fixation products posted very solid mid-teens. International trauma sales grew at 12% on local currency. Europe posted low double-digit operational sales growth, while Japan slowed a bit to mid single-digit local currency growth. Trauma sales growth in the remaining international markets was extremely strong on a much smaller base of business. intramedullary nails led our international trauma sales.

Spine was up 20% operationally, and 18% in dollars in the quarter. Spine had an excellent quarter around the world. In the United States, spine sales reached 20% or better growth for the eighth consecutive quarter. U.S. growth was led by interbody devices. Sales of thoracolumbar and cervical products were also extremely solid in the quarter. Spine sales were also strong in international markets, falling just short of achieving 20% constant currency growth. Sales of thoracolumbar and interbody devices led our international spine performance. Europe and Pacific had excellent quarters, and Japan posted low teens operational growth.

And last, but certainly not least within this category, our CMF business was up 10% on local currency, and 7% in dollars in the quarter. Our CMF business posted a very solid quarter on the strength of a great performance in the United States. U.S. growth was led by neuro products and sales of Cranio-Maxillo facial implants, [inaudible].

Now, turning to MedSurg group, that represents 37% of our sales. MedSurg had another strong quarter. As a reminder, MedSurg is comprised of 3 significant product categories. Our instruments product category, which represents 43% of the group, endoscopy at 35%, and medical at 22%. MedSurg group sales were up 16% for the quarter, and 17% on a constant currency basis. Now, turning to the groups within MedSurg, sales of our Instruments product line increased 14% for the first quarter, and 16% on a constant currency basis. We break the reported numbers down to domestic and international. Domestic was up 15, international was up 13, for the 14% reported growth. And then on a constant currency basis, international was up 20, and the total was up 16 in constant currency business -- on a constant currency basis.

The Instruments business had a very good quarter. U.S. sales were strong, and international sales growth was excellent, as I said, attaining 20% on an operational basis. Power and instruments grew at low double-digit levels in the quarter, and other OR equipment registered another mid-teens growth quarter. Micro and heavy duty power lines were both solid, and other OR equipment sales were led by Navigation, the Neptune Operating Room Waste Management System, interventional pain products, and [stirshield].

Now, turning to endoscopy, that business was up 16% in the first quarter and 17% on a constant currency basis. Breakdowns, domestic and international on a reported basis, 13% domestically, 30% internationally, and 16 in total. And then on a constant currency basis, international is up 36 to get to that 17% constant currency total. Endoscopy posted good very good quarterly growth on the strength of nice sales performances in general surgery and video. General surgery growth was over 20% in both international and domestic markets, and was broad-based on a product basis as well. Video sales were led by our communications and imaging businesses. Arthroscopy products did extremely well internationally, but were soft in the U.S.

And then our medical business was up 17% in the quarter on both a reported and constant currency basis. That business was up 21% in the U.S., 6% internationally as reported for the 17% growth. Our medical division had an excellent quarter. U.S. sales surpassed 20% growth for the seventh straight quarter. International sales were boosted by low double-digit local currency growth in Canada. Medical's growth in the quarter was led by beds and our EMS cots. And then physiotherapy, which represents 5% of our sales, recorded 3% growth in the first quarter. Start-ups and acquisitions were responsible for all of physiotherapy's modest growth. And physiotherapy ended the quarter with 502 PT centers, up from 488 at the end of the year.

And now as I turn to the rest of the P&L, I would remind everyone that we adopted the FASB statement requiring us to begin expensing stock options this quarter. Since we elected to modify a retrospective transition method of adoption, prior year amounts presented in our press release have been restated to reflect the expensing of these costs in the first quarter of 2005 also. As Steve said, gross margin, profit margin in the quarter were up nicely on a sequential basis, and as compared to the prior year at 65.7% of sales. We continue to benefit from very good management of manufacturing and inventory obsolescence costs in the quarter.

R&D spending was up 25% in the quarter to 5.8% of sales, as we continued to emphasize product development efforts. This increased emphasis is reasonably broad based across the Company's various businesses, and we are absorbing development costs related to recent technology acquisitions. SG&A costs increased 10% in the quarter to 38.3% of sales, with sales related costs driving a large proportion of the increase. These costs -- sales related costs include compensation and higher instrumentation -- instrument amortization costs associated with the recent new products, such as Triathlon.

And as you saw from our press release, the first quarter of 2006 included a $52.7 million charge for purchase in process research and development, related to the acquisition of Sightline. This acquisition, which included a $50 million dollar up-front payment in the quarter, paves the way for our initial entry into the flexible endoscopy market. Operating income adjusted to remove the purchase in process research and development charge from 2006, increased 16% in the quarter. And as Steve pointed out, operating margins are up nicely from last year, to 20.8% of sales.

Now, I'll give you a quick breakdown of other income expense for the quarter. Includes investment income of $8.4 million, interest expense of $2.9 million, a foreign currency translation loss of -- or transaction loss of $100,000, and minority interest costs of $200,000, to get to the $5.2 million of other income that we show on the quarter. And lastly, the underlying effective income tax rates, if the Sightline purchase in process research and development is excluded for the first quarter of 2006, was 28.5%. This compares to a restated first quarter 2005 effective income tax rate of 29.3%, and a 2005 annual underlying tax rate, if the PlasmaSol purchase in process research and development and the impact associated with the repatriation of foreign earnings are excluded from consideration, of 29.2%.

And then turning to the balance sheet real quickly. It's, we believe, in very nice shape, and asset management continues to be very good. The accounts receivable days ended the quarter at 57 days. That is exactly in line with the prior year at this time. The inventory days finished at 119 days, 1 day above the March, 2005 level. At March 31, 2006, we have $137 million of debt outstanding, which we expect to pay off over the next 3 to 4 months. And as you recall, this reflects the overseas borrowing we made to complete the repatriation of foreign earnings under the American Jobs Creation Act in the fourth quarter of 2005.

And then cash flow for the quarter, you saw cash flow from operations was $20.7 million in the quarter. As you know, the first quarter is always our toughest cash flow quarter of the year. We have a number of expenses accrue the year and come due for payment. This year was no exception, but we did generate the $21 million cash from operations, which was about in line with last year. And I would tell you that we believe we're on target for another excellent annual cash flow performance. With that, I'll turn it back to Steve.

Thanks, Dean. Now we'll touch on the 2006 outlook. Most of you will recall that in our outlook for the year, we outlined several expectations, each of which played out in the quarter. 1, our MedSurg business would be a little lumpier and softer in the first half. 2, we felt our U.S. orthopedics business would show a continued strengthening through the year. And 3, currency pressures would be significantly negative in the first half. In summary, we feel we're off to a very nice start in 2006. Sales are up 10%, adjusted earnings up 20%, and we are on track to deliver on our goal of 21% adjusted net earnings growth in 2006, to $2.02 per share. To underscore the financial strength of the Company, we are also absorbing the development costs for both the PlasmaSol and Sightline acquisitions for the remainder of this year; 2 acquisitions which are clearly dilutive this year, without reducing our guidance. So again, we are delivering strong results today, while investing significantly in our future. Now, we will open it up for questions-and-answers. Tim, if you want to take questions?

Thank you, gentlemen. [OPERATOR INSTRUCTIONS] Mike Weinstein, JPMorgan.

Afternoon, gentlemen. Nice quarter.

Thanks, Mike.

Let me ask you first on the gross margin line. Dean, I think you had commented on the fourth quarter call that we should look for somewhere between 50 and 80 basis points margin of gross margin improvement over the course of this year. But, obviously, in the first quarter, we've already gotten 150 basis points. So how do we think about the next 3 quarters and think about the year now, in light of what we saw here?

That's a great question. You keep great notes, Mike. I think I would probably be pushing the estimate of what I told you up a little bit. I think this quarter was a very -- a very good one. But -- so I don't think we're going to see necessarily 150 basis points. But I think it is going to be stronger than what I had said previously. I think it is probably likely to be in the range of probably closer to 100 basis points for the year. I think we're seeing some of the things that we've done in the past in terms of some operational efficiencies start to pay off. And I think we're also seeing a little bit of the flip side of some of the currencies that -- hits that we get, that come through the top line in terms of where we manufacture products. It's s coming back on some of that side, too. So I feel pretty good about saying that we'll probably get at least a 100 basis points for the year.

And that shows up in terms of upside in the bottom line? Or does that go back into R&D, because obviously R&D was very high this quarter.

Well, you talked about our estimate. We're not changing our estimate for the year. So I think you can assume that that will come in other categories. I think SG&A is probably going to be the category where we see a little bit more of a hit than I might have expected, as we look at how the costs are rolling out there. We are doing some investing in the sales force, which we think is valued investment. And probably I would also tell you, you saw stock compensation, that is probably coming in a little bit hotter than what we might have anticipated. I gave you a range of $0.08 to $0.09 on that. I think it is probably going to be at the top of that range, and that's hitting primarily the SG&A line. So I think SG&A is going to be a little bit hotter than what we had expected as we roll out the way we look at the year now.

Steve, can you give us any more light -- we keep pushing you to give us some more insight into where all this R&D spending is going, other than to OP-1. Is there anything you can add, versus what you have said previously?

Mike, I think again, it is very broad-based, and I do think that you will see a lot more probably as we talk, certainly about third quarter results. We've got a lot of new things that will be coming in the second half of the year across a number of businesses. A lot in MedSurg, frankly. And I think the biggest part I would probably encourage you to think about is, we're absorbing the Sightline acquisition. And that's clearly requiring some fairly significant investment for the balance of this year. That is probably one of the bigger new additional buckets that we're absorbing, without taking our guidance down.

And then in the last -- I mean, that is the last question is the -- is the OP-1 question. Which is, you went ahead and made a comment that you've seen the data, and that you're moving full steam ahead. The obvious question we're all asking is, well, you didn't say whether or not you hit the end point of the trial. Would you be moving full steam ahead if you did not hit the end point?

Great question, Mike. We figured you would be on this one. It is possible we would be moving ahead even without hitting the end point, but it would need to be with very strong data. And I would tell you, we feel very good about the data that was generated from the clinical trial.

Great. Thank you.

Milton Hsu, Bear, Stearns.

Hey, Steve, just the comments about the lumpiness in MedSurg. Is this -- can I categorize this quarter's performance as the trough in the lumpiness?

You know what? I think probably it will be next quarter, Milton, to be honest. Just the way the product cycles are rolling out. And, we were frankly, a little bit more encouraged with where the numbers came in, because I think a little bit, the U.S. was down, but international was getting a little stronger. But we might still see a little bit of a downturn just in the second quarter, and then probably come rocking and rolling back in the third.

Okay. And just the timing of these products are pretty much being launched in the second quarter, and also it seems to be just the endo portion of the MedSurg that you're referring to. Is that correct?

I think they will be a little softer, and they were this quarter, and probably will be for another quarter.

I think you might see a little bit of that in instruments, too, Milton.

Okay. Great. And then just a second question. Probably wouldn't be a complete discussion without something on DRGs. But when you look at the IM nailing, DRGs, and trauma, you have got some pretty good proposed increases going forward. Is that going to impact the business any? And then the second part of that is, there is some -- the language in the proposal that's very suggestive of spine getting hit more next year, and just your comments on those 2 things. Thanks.

Milton, let me start with the second one first. I think on spine, obviously we never would be happy with a decrease, although that's a category that has been getting some pretty good increases over the years. So it is probably not that surprising. I would also -- I'm sure you know and others know that relative to Medicare in our spine business, it is not generally as big part of our business as it is for other parts of the business. Maybe 30% of that is reimbursed by -- through Medicare. And certainly, we were maybe a little bit surprised and happy to see what's going on in the trauma thing. And certainly welcome that. I think overall we feel generally pretty good, although there is obviously a lot of sorting out to do still relative to the proposals on the DRGs. So we'll have to see how that comes in as they roll out in final form as we get to August.

Okay. Thanks.

Jason Wittes, Leerink Swann.

I guess no discussion would also be complete without, if you could break out the price mix and volume for implants, as well. I know you gave the overall Company.

Yes, Jason, it is really not significantly different.

Okay. And if -- I guess--okay, that makes sense. And also, in terms of the acquisition impact, that you say you're absorbing this year, if I were to -- if we were to -- is that a $0.01 to $0.02 impact we're talking about here? Or how can we quantitate that, the impact from the acquisitions this year on the P&L?

That's probably fair.

Okay. That's simple enough. And 1 final question. You talked about the new polyethylene sort of having some traction. Are you getting some major price increases for that? Or how is that sort of flowing through the numbers right now, if we look at the impact on hips and knees?

It's a part of what is going on there, obviously. But I would tell you that we certainly are getting some price uplift there, we think commensurate with what the technology brings to the table. And -- but I can also tell you it is not a real significant impact, or relative to mix in the whole -- in terms of rolling everything out.

And related to that, what percentage of hips and knees -- I guess, what percent penetration of hips and knees does that product represent at this point? Can you break that out for us?

I really can not. It is still in its infancy. But I think obviously, we're pleased with the initial reception.

Okay. Thank you very much.

Katherine Martinelli, Merrill Lynch.

Question on MedSurg. Particularly given how strong the growth was outside the U.S. So one would be, should we not assume that there is that big a gross margin differential, because I would have thought with MedSurg stronger in the quarter, particularly with the strength outside the U.S. we might have seen not quite as robust a gross margin. That is the first question. And the second one is, could you give us any sense of what the split is now, maybe versus a year ago, for instruments and endoscopy between the U.S. and OUS, because it seems like, given the investment you guys made, maybe perhaps were underestimating what that OUS business could contribute over the next few years.

[inaudible] In terms of the gross margin, there is not that big of a difference outside the U.S. The pricing of our MedSurg products is actually reasonably solid outside the U.S. In terms of the second part of your question, the split. The split has actually not changed very much, yet, because the U.S. businesses are still so much bigger and still have been growing at such strong rates. So it's the kind of situation where we could grow our OUS business, or outside the U.S. business at 25%. And with the U.S. businesses still collectively growing in the high teens, you know, it is only going to shift it by a point or 2. So we still think there is significant upside to our MedSurg businesses outside the U.S., really for quite a ways to go.

Okay. That's very helpful. And, Steve, maybe with respect to your targeted revenue range, the 11 to 14% for the year. In terms of what would get you towards the higher end of that, is that more tied to upside in Ortho? Is it some of the impact from new products that it is too difficult to calibrate now on the MedSurg side of the business?

Yes, I think we'll know a lot more, really, probably in third quarter, Katherine, depending on some things we've got hopefully to roll out both in the U.S. and abroad, both in MedSurg, as well as a couple of things on the implant side. So I think we're probably still on the more cautious side. I think as we said all along, the first half was going to be tougher. So we're pleased to be really at 12.3% operational growth in the first quarter. Second quarter is probably going to be on the lower side, and then third and fourth we feel I think really strong about. But we'll have to see how hot things get.

And then just lastly, with respect to some of the changes you made in the recon business and the sales force, and I think you started adding bodies more aggressively to your recon group in the second half of last year. Are you starting to see traction from them? Or is that really what would kick in the second half of the year, in terms of what could help accelerate the growth on the hip side beyond just easier comps?

We think those sales force additions, frankly, will still not begin to pay off until the second half of '06, or frankly beginning of '07, in terms of our planning. And yet we'll be hopeful that some of that will be kicking in. Our SG&A line, as Dean mentioned, a little bit higher. We've ramped up the sales forces also a little bit more even in MedSurg here during the first quarter than we might have even been expecting to, as we gear up for some additional things coming.

Okay. Great. Thanks.

Michael Matson, Wachovia.

In terms of, I think, last quarter you talked about Japanese pricing, particularly the impact in '06. Just wondering if there's any sort of update there, and what the impact would be in '07?

As you know, the latest round of cuts kicked in the first of April here, Mike. So we're going to be going into a rougher time in Japan. And our trauma business, probably getting hit a little bit more, particularly next year. I think we've kind of said 5 to 6ish percent this year, and roughly similar, maybe 6 to 7ish next year. And at the end of the day, I think this is where the way we manage the business, we expect that some of the other franchises will pick up where we get hurt. Trauma may get hurt a little bit, but our knee business there has had 4 straight quarters of double-digit growth. Our spine business has grown 7 straight quarters, double-digits in Japan. And frankly, our instruments business for the last 3quarters has really taken off over there. So as always, we try to deal with these things and find other ways to compensate.

All right. Thanks. And in terms of your artificial disk programs and studies, have you changed the way that you're going about gathering data and incorporated any sort of economic data there to try to address some of the issues that -- or preempt some of the issues that we've seen with the Charité disk product?

Great question, Mike. I would tell you we have initiated some discussions with CMS. And while we've not -- we have started -- certainly the Flexicore study was started and conducted a quite awhile ago, we finished those surgeries. So there was nothing that we added to that study. We're in the 2-year follow-up period on that. But I will tell you, we're gathering some additional data that, recognizing reimbursement is going to be an issue, we think we have got a great product here. Actually, great products. And want to work with CMS to get us coverage in the most favorable light. So we're dialoging with them as we speak.

All right. Great. And then finally, in terms of the instruments division, I know that your powered instruments are one of the bigger drivers there. What is the timeframe for the launch of the next generation, and I guess, the System 6 instruments, if you can say?

Mike, as you know, we typically don't say that, because we don't want to purposely slow down things in advance of a launch. So you can be sure we're working on something, and we'll keep you posted.

All right. That's all. Thanks a lot.

Sorry. Thank you.

Raj Denhoy, Piper Jaffray.

Just a couple questions actually, on the hip side of the business. In particular, U.S. hip number is improving a bit here. But I think it is still lagging the overall market a bit. In the past quarters, I think Dean has mentioned that Trident sales were down a bit. Sort of implying that maybe there is a bit of a negative mix benefit going on. And I'm curious how big of a factor you think this is, and whether we're still seeing some of that now. How long it might take for that to kind of flush through, and for the market to really kind of find the right level of penetration for that technology?

Raj, I think the thing that I would say on that is, with X3 that has muddied the waters a little bit. But we think that there is a reasonable technology play there, with X3 and ceramic. So to the extent we're seeing a little bit of ceramic degradation, I think it is really just being picked up by X3. So I don't see it really impacting our overall business. It seemed to us that Trident penetration had pretty much settled really for really the last year, year and a half. And I don't think the overall scheme of things, when we look at those things together, that we would say anything different there.

So you're really not seeing much push-back, I guess. I mean, that technology is not really -- I mean, there is not hospitals now sort of on a wholesale basis, kind of denying people using that technology.

No, not at all. I think what we would say is that our boundaries are probably still more within the context of our ability to get competitive surgeons. And that is why I think we still may have upside. But I think that depends on the sales force strengthening things, and we'll work on it.

Great. And then just on -- .

We are doing some demand matching there. We recognize that a ceramic on ceramic hip is not necessarily something that you are going to put in an 85-year-old patient.

Sure. I guess I'm just more curious about whether it is kind of settled out here, now. And whether there really is much push-back, but it doesn't sound like there is.

No, I don't think so.

And then just secondly on CORE and reservicing. Any updates on thoughts, or on approval timings, both yours and I guess some of your competitors, as well?

I think watching what happens to other people -- it is one reason we're gun shy on predicting approvals. I think if I were to read the literature over the last 2 years, there were 2 competitors that were going to have this product approved quite some time ago. Where obviously we have got the submission in, working with FDA, and we're gearing for what we've been hoping is an approval for us probably early next year. And really can't comment much on competitive ones.

What about thoughts around whether you're going to need a panel or not? Has that changed at all?

You know, probably not. You know, we'll see where they shake it out. There's probably a reasonable chance that there will be.

Great. Fair enough. Thanks a lot.

David Lebowitz, Thomas Weisel Partners.

Thank you very much for taking my question. Quickly, with respect to the recent fiscal year '07 proposed IPPS rule, what was your thoughts on the DRG relative weightings, versus your expectations?

Dave, I think that we probably came out maybe a little bit better than we expected there. As I said before, there is a fair amount of I think, discussion still to play out, relative to everything that they're trying to do, including the cost versus charged base. And I think we'll have comments and others will have comments there. I think generally, we feel like to the extent that they maybe start to look at severity-based payments, that that probably makes a lot of sense. I think we are still concerned about the way the rules are written right now. About what it could mean in terms of the way new technologies are accepted. And some of that might have to do with how they tighten up the systems, in terms of looking at legs and the data that they are dealing with, and all that as well. So I think there is a fair amount to shake out. But if you'll just look at the base numbers that came out, I think we were reasonably pleased with how those shook out, relative to expectations, I think.

Based on the proposal for severity weighted DRGs, how do you think that might impact the group going forward?

I think there is the possibility for some real potential positives there, to the extent that they recognize that there is a higher cost to treat patients that have co-morbidities; patients that have diabetes, patients that may be heavier, that have longer hospital stays. I would draw an analogy to what happened with the revision code, where there was a recognition of a higher cost procedure and a higher payment for that. And to the extent that that's the way that it goes, which is what would make sense, I think that we would view that as a positive.

Sure. Thanks for taking my question.

Larry Keusch, Goldman Sachs.

Steve, I want to just clarify 1 thing, and then just a couple quick questions. As relates to OP-1, could you just, again, share your thoughts on the timing for approval? And then, secondly, are you suggesting that we won't see the data until there is presumably an FDA panel meeting?

Yes, which I think is pretty consistent with where we've been all along. And I know everybody is dying to see it sooner. In terms of approval, Larry, we expect to get the submission in here at the in the end of the June. If we can turn it around in 12 months, we're still hoping and optimistic for a second half '07 product launch on a main scale basis in the U.S.

Okay. Great. And then I'm wondering if you can talk a little bit about -- it certainly seems like a lot of the major concerns about pricing in the large joint recon area have abated with sort of gain sharing off the table now. And obviously, the proposed IPS -- IPPS certainly being reasonably benign. So could you talk a little bit about how you think just unit growth is in the market, and kind of talk about hips and knees and perhaps revisions within hips?

Sure, I think we feel pretty good about where the market is still going. The 1 question that probably really we haven't been concerned about all along is unit demand. And I think unit demand for knees, on a global basis, we're seeing very much in the high single-digits and potentially, some quarters maybe touching close to 10. Hips do seem to be a little bit -- a few points below that right now. And I don't know that we've got the greatest answer in the world, other than it looks like there has clearly been an uptick in knees over the last few quarters. And certainly some additional revisions. Hip market, there is a little bit more in the revision piece going on right now. But we don't see any major deviations or significant changes in our unit volume forecast going forward.

Okay. Super. And then lastly, on acquisitions, you obviously have done a couple smaller ones. You're generating terrific cash flow, minimal debt. Can you just again sort of talk about just strategically, are there any components of the business that perhaps you're more aggressively thinking about acquisitions? Or--and I guess 1 area that I'm thinking about is, is there anything that you might need to add to the large joint or the recon business in general? For example, you don't have a shoulder. So I'm just trying to think broadly, as where you guys are thinking about going, because it sounds like you'll continue to do some things here.

Great question, Larry. I think those are exactly the kind of acquisitions we're probably continuing to look at, which are gap fillers. And additional technology plays that grow out from our current base. We have got the sales forces. As you do say, our extremity business is pretty small and there is a gap in our portfolio. The other piece of it, say from an R&D standpoint, we're doing some internal development there, and some of what we've been doing is quietly in licensing. Different technologies that can fill certain gaps, whether it is in spine, whether it is in trauma, and there might be some things in recon. We're certainly on the prowl, probably more aggressively than we have been historically.

But it sounds like -- .

But I continue to expect it to be technology plays, and gap fillers, or going into adjacent categories that are still close in, like we've been doing with our endoscopy business over the years.

But it sounds -- I'm sorry, Steve. It sounds like, in general, you're happy with the scale of the business.

We are. You know, we don't feel sub scale anywhere. We don't feel like we're deficient and need, for example, a lot of sales people, or a lot of R&D people in any certain area. I think, if anything, we've been overinvesting in our own infrastructure, Larry, from both a sales and an R&D standpoint. Even while times have been good, so that we can keep the flow going into the years ahead.

Great. Okay. Thanks very much.

Bob Hopkins, Lehman Brothers.

Hey, quick question on MedSurg. So, either you guys really define lumpiness differently than most people do, or you are positively surprised with the way that quarter came out. Because during the AAOS meeting, I mean your stock almost went down 10% on that lumpy comment, and on a couple of other things. But I'm just curious, I wish the rest of the companies I covered would define lumpiness the way you do. Were you surprised at something post-AAOS that made the results come in so relatively strong the way people are thinking? Or, just walk me through what went on there.

We're glad you picked up on that. Because we do think that 17% was pretty good growth for a business that we categorized and we tried to set up as could be concerning in the first half. We were positively surprised. And I think 2 things happened. Cy Johnson's team is just an unbelievably good team. And they deliver quarter after quarter, and continue to defy gravity, relative to the markets that they play in. And I think they surprised us a little bit to the upside. The other part that we say is that our international expansion of these businesses is really getting some traction right now. You know, part of what we've been doing, and we talked a little bit about it at the academy last year and again this year, is we are expanding our sales people outside the U.S. on these businesses. And when you see 30-plus percent growth rates for our Endo business, it really helped offset a little bit of the lumpier U.S. business. So I still think we expect a lot more growth in the second half than in the first half, but we're pretty pleased by it.

Now, the other thing is, you kind of whetted everybody's appetite with some of the potential product launches in Q3 and Q4, specifically in MedSurg. And I understand your reticence to talk about them in any level of detail. But just to kind of maybe put them in some boxes. Are these evolutionary product categories, where you've got a bell or whistle to an existing product line? Or are we talking about some entirely new product lines that will be new areas for you?

Probably some really cool bells and whistles.

Okay.

Some great continued, but significant, product upgrades. But certainly more upgrades than necessarily new items.

Okay. Great. Thanks for your help, guys.

Steve Lichtman, Banc of America Securities.

Just a couple of questions. Can you just give us an update on the Cervicore trial, the enrollment, how is it going? And when would you expect approximately enrollment to be completed?

We're very pleased with how the enrollment is growing right now. Our plan was to have the enrollment completed by the first quarter of '07. We're certainly on track to be able to hit that goal at this point.

Okay. Great. And then, at AAOS you talked about i-Suite, the name change from Endo-Suites. Can you just talk a little bit more about the plan there? Where you are in terms of broadening that platform in the hospital, and where you are with that?

Sure, you know, it's, Steve, it is another one of those areas that, as we get success in one part of a hospital, we almost get called into other areas. And I think rather than calling it the Ortho-Suite or the Endo-Suite, it is having a more significant impact. And we're seeing it both in the U.S. Frankly, it is also part of what is starting to get a little bit of traction globally. Outside the U.S. we're starting to see some real interest in the i-Suites, as well. So we're kind of continuing to follow the market, and we'll see it both in orthopedics, but also a little bit beyond orthopedics in the hospitals.

Okay. Great. Dean, you mentioned within medical, I think particularly you called out Canada. I seem to remember awhile back that was a big driver. Are we entering a new cycle there in particular? Or is this maybe just a one-off quarter in Canada?

Yes, I wouldn't read anything specifically into that, Steve. I would tell you that we have a very high penetration in that market. So,, we're continuing to push the business there. But, I think more than anything, if I would talk about our Canadian business, we are pleased with how the overall business is doing, and how we're doing in the other parts of our business there, too. And, we'll continue to have focus on all parts of it. But I think, to use the term we've been throwing around a lot here, I think Canada is liable to be more lumpy than that. And I wouldn't expect huge, huge things. But we also always have high expectations, internally, at least.

Okay, great. And lastly, Dean, the FAS 123 costs, the 14.8. Is that all in SG&A? Is it about 90% in SG&A? Can you characterize that at all?

I can't give you the exact breakdowns. You can figure it out from seeing the restated numbers from last year, but that's a pretty good breakdown. It may be 80, 80 there, and 10 and 10 in cost of sales, and 10 in R&D, but most of it is in SG&A.

Got it. Great. Thanks, guys.

Matt Miksic, Morgan Stanley.

Question on just sort of the tone within the quarter, within the first quarter. Was there anything that you saw in terms of sort of improving procedure flows from the start to the finish? Did you get off to a slow start? Get off -- maybe pick up at a faster finish in the quarter? Any color you can give us on that?

Probably the biggest thing that is always hard to tell is the impact to the academy on U.S. business, that probably dampened a week in March. But overall, I think we are feeling that our orthopedic implant business in the U.S. is generally, over the last 6 or 8 months been showing a general uptick. And some months we might take 2 steps forward, then 1 back. But we're clearly pleased with the trends of what's going on within that business for us.

And on the MedSurg side, anything different there?

No, I think it was -- they obviously had a strong finish. Which was great, but they often have strong finishes to a quarter. So I don't think anything unusual.

Okay. And then question on some of your -- some of your other recon businesses, like extremities and bone cement. Can you give us an idea of how those performed in the quarter?

I would say those were flattish in the quarter.

Okay. Were either of them down at all?

Maybe just a tad in UER, but I don't think anything of significance, that's material.

Okay. And then finally, just as we look at the rest of your year, and sort of how price and mix and some other things have affected us, or will affect you in the second half of the year, particularly as you look at Japan and, I don't know if we're going to see an improvement or annualization of maybe some of the price impact in the latter half of last year. But how should we think about price throughout the year? Is this sort of an improvement in the second half? Or how shall we model that?

Yes, I think for our purposes, we've been pretty much planning just about flat globally for the year. Between the ratcheting down in Japan. Still the tighter market in the U.S. and Europe with its usual pressure. So I think we're assuming about where we've been. We'd remind you, last year we had about 1% price globally, this year and it will probably be zero, maybe zero to 1. [inaudible]

So if Europe stays kind of the same, and Japan sort of starts to take on the effect of the new prices there, is it safe to assume that you're thinking that price will sort of slightly improve in the U.S. to offset some of this decrease in Japan as we get into the second half of the year?

You know, I think, Matt, that is a little too micro to fully capture. It was up a tad, as I said in the U.S., pricing, and Japan could impact us a little bit. But, it just all feels like it is kind of in the flattish zone right now.

Okay. All right. Well, thanks for taking the questions.

William Plovanic, First Albany Capital.

2 quick questions. First of all, how much of a contribution was the 1 extra day in the quarter? And in the second quarter is it normalized, or are we off -- we down 1 day? And then secondly, some of the general surgery-type companies had reported some slow-down in elective surgeries in the back half of last year. Did you experience that? And just thoughts on are we seeing a reacceleration in the elective surgeries? That's it. Thanks.

Bill, first off, great question on the quarter. It is probably a point to a point and a half in some of our implant businesses, that you get. We got a positive point to a point and a half this quarter. And actually in the second quarter, we will be down a day. So on the MedSurg businesses, it doesn't make as big of a difference. On the implant ones, we will be down. So, having the same numbers next quarter would be an improvement over this quarter, just based on the -- having 1 more day this time, 1 less next time. Your second question was on the elective surgeries. I think we've seen a modest uptick probably in the quarter, but nothing dramatic. We would always love it to be more. And I think the academy always takes its toll. I mean, it happens every year, certainly in a quarter, different months, from time to time.

Okay, great. Thank you so much.

Tao Levy, Deutsche Bank.

On the -- if I look at your guidance, your revenue guidance range, if you hit the upper end of that 15%, do you normally let -- will you let some of that trickle down? Or does that just mean you're going to spend a little bit more on some of the OpEx?

It's a good question, Tao. I think because we're already absorbing a lot of additional costs, particularly the Sightline acquisition and some other things, what we typically will do is invest back in the business where it's appropriate. Having said that, I think it's too early for us to predict any upsides. I think we still see additional opportunities to invest to get ready for '07, and some neat things that we should have coming in '07, as well. So we'll probably be plowing it back in. But we'll see how the year plays out.

The other thing, Tao, I would say, just on the topline, is currency could play a role here, too, in terms of where that reported number comes in. And obviously, that has some implications potentially, as well. And it's still, as Steve said, very early in the year.

Okay.

And we do feel, Tao, as a reminder, we feel 21% earnings growth this year will be pretty good in this [inaudible] company this year, I think.

Very good. On the Triathlon, are there any other products within that family that you need to roll out, or still expected to roll out here in the U.S.?

Yes, you know, we're working on a difficult primary knee, as well as a few wedges and just kind of some of what we call supplemental pieces. And then, ultimately, we'll probably be looking at a few other pieces to kind of just round out that line, as well.

But nothing material that would really -- that's really missing that will accelerate growth in the knee line?

Probably nothing else. I think right now, adding X3 to it, and Triathlon it is still getting a -- it's still got a lot of momentum. And we think a lot of upside just with the existing line. The product has been very well received. Surgeons are, I think, very pleased with what they're seeing with it. We think there's still some nice momentum behind it.

Okay. And just lastly, I'd love to get your thoughts on the transition that's going on over at Biomet. And your thoughts on, is this consolidation going to happen in the orthopedic space this year? Are they too big for Stryker to go after just on the FTC issue, and any thoughts there would be great.

We typically don't talk about any specifics, probably better directed towards them. I would say that -- we've continued to say that we're more of a fan of technology acquisitions than necessarily monster acquisitions at this point in time.

Okay. Great. Thanks a lot.

Robert Faulkner, JMP Securities.

We've covered a lot of ground so far. I wondered if you could comment on the DOJ investigation, if there is anything else going on there? And also, Dean, do you see any difference in price trends on hips versus knees?

Rob, on the first one, as you well know, we typically do not comment on DOJ investigations while they're under -- while they're happening. So sorry we can't give you more on that.

Rob, on the hip/knee thing, I would say from a macro standpoint, probably not. I think the one thing that I commented on before to this group, is sometimes it does make a difference on product cycles, and where things are in the rollout. And to that extent, prices sometimes do tend to settle a little bit more on new products, and that probably may be happening a little bit in this case. But as you can see, with pricing pretty much flat, I would tell you there is not a lot of standard deviation amongst any of the categories here.

Okay, good. Thank you, that's it.

All right. Well, thank you, everyone. We certainly appreciate you joining us. And we'll be back together again. I think to wrap-up in a nutshell, we feel pretty good about the quarter. We're excited about where the business is going. We think we're seeing a little bit of a turnaround in our U.S. orthopedic Implant business. Our MedSurg businesses, while still a lumpiness ahead of us, continuing to be strong. And we're optimistic for the rest of the year. Our conference call for our second quarter 2006 operating results will be held on July 20th of this year. So we'll talk to most of you then. Thanks a lot.

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

Thanks, Tim.