史賽克 (SYK) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Stryker Corporation second quarter 2006 earnings conference call.

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 material 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 eventual United States Food and Drug Administration approval of additional OP-1 applications, the FlexiCore and the 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 -- pardon me, 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 six months ended June 30th, 2006, of the first-quarter charge to write off purchased in-process research and development associated with the acquisition of Sightline Technologies, Ltd. 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 web site at www.stryker.com.

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 Thursday, July 20TH, 2006. I would now like to turn the conference over to Stephen MacMillan, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Claudine, and good afternoon, everyone. Welcome to Stryker's second quarter 2006 earnings report. With me today is Dean Bergy, our Vice President and Chief Financial Officer.

We were pleased to report that in the second quarter we once again delivered on our commitments, with sales up 9% to 1.33 billion, net earnings up 20%, and EPS growth of 21% to $0.52 in the quarter. To summarize the quarter for you in a quick thought. Orthopedic implant sales were stronger in the US but soft internationally, while MedSurg was softer in the US as anticipated, but surprisingly strong internationally, once again underscoring the strength of our unique set of businesses to consistently generate strong results.

As we hit the mid point of 2006, we thought it would be appropriate to review our progress versus seven key commitments we outlined at the start of the year. These seven commitments were, and I'll summarize them quickly and then go into more detail, first, our US orthopedic business which shows steady improvement through the year. Two, MedSurg would be lumpy in the first half, especially in the US, but we'd be accelerating our efforts internationally. Three, our Spine, Trauma, and CMF businesses would continue to be strong. Four, we would file the OP-1 PMA by the end of the second quarter. Five, continued investment in R&D at a rate higher than sales. Six, deliver double-digit sales growth for the sixth consecutive year. And seven, deliver 20% or greater EPS growth. We will now review our second-quarter results in the context of these goals. My comments on sales results reflect our performance on an operational basis.

First, US Orthopaedics. Our turnaround efforts in this important division are clearly beginning to pay off. We are pleased to report that this division showed its third straight quarter of sequentially improved performance, with sales up 9%. Before elaborating further, we should also point out that because our first quarter had one extra selling day and the second quarter had one less day, the reported results for this quarter understate the sequential improvement by 3 to 4 percentage points. Specifically, behind the continued strength of our Triathlon knee, our reported US knee business was up 13%. And think about this next point for a moment -- our global knee business posted its 23rd consecutive quarter of double-digit growth.

Also in our US Orthopaedics division, our Trauma business was up a very strong 24%. And our CMF business continued its turnaround, up 17% in the quarter. Our US hip business reported modest 2% growth, though again did accelerate from last quarter by several points on a day rate basis. Globally, our hip business remained flat in the quarter as fewer selling days outside the US impacted all of our implant lines.

As you know, we've talked over the last 18 months about an increase in our R&D activities, and we are pleased to report that help is finally on the horizon for our hip franchise. In the last few weeks, we began a rollout of a hip resurfacing product outside the United States, marking our initial entry into the hip resurfacing market. While sales will be limited initially, we expect this to breathe renewed life into our international hip business over the coming quarters. This also marks the first in what will be a renewed stream of new product news in our hip franchise in the quarters ahead.

Our second commitment. MedSurg would continue to be a key drive of growth, though we cautioned that the first half would be softer in the US ahead of some key second half product launches. We also stated our intention to accelerate MedSurg growth outside the US, where these franchises have been historically underdeveloped. True to form, our Instruments business was up a fair 11% domestically in the quarter, 16% outside the US, and 12% globally.

Meanwhile, Endoscopy was up only 6% in the US, but up a much stronger than anticipated 37% internationally, leading to much healthier than expected 13% global growth in the quarter. Meanwhile, Medical continued its gravity-defying performance with US sales up 25%, marking the eighth straight quarter of 20% or greater growth for Medical. Encouragingly, both Instruments and Endoscopy are about to enter renewed periods of accelerating growth as both are just releasing major new products. At Instruments, we launched the new System 6 line of heavy-duty power tools in June. And at Endoscopy, we are just in the process of launching a completely new, high-definition camera, monitor, and light source. And we would comment here that initial field feedback on these products at both Instruments and Endoscopy has been very favorable. Net, we feel very good about where these franchises are headed based on both new product flow and expected continued geographic expansion.

Third, our Trauma, Spine, and CMF franchises would also continue to grow at above market rates, especially in the US market. In the quarter our global Trauma business was up 13%, powered by exceptional 24% growth in the US. International Trauma was up a more modest 7% as good results in several markets were dulled by a flat performance in our important Japanese market as we begin to absorb the next round of price cuts. In Spine, we posted 14% global growth led by US growth of 16%. Global CMF growth of 8% was also led by very strong 17% US growth, marking our third consecutive quarter of 15% or greater growth for this franchise in the US. Collectively, these three franchises, along with OP-1, are on track to exceed $1 billion in revenue this year.

Our fourth commitment was to file the OP-1 PMA by the end of the second quarter. This represented, by far, the largest and most ambitious filing we have ever undertaken as a company. While we were pleased to report in late June that the PMA was submitted to the FDA, our energies will now be focused on securing US approval as well as submitting applications outside the US for a spinal indication based on results of the pivotal US trial.

Our fifth commitment was to continue to increase our investment in R&D in order to continue strengthening our pipeline for the future. Through the first half, R&D spending is up -- is up 19% over last year and was up 13% in the quarter. Importantly, the increase in R&D that we initiated in 2004 should begin to be felt in the coming quarters. New products such as hip resurfacing for the international markets will be just the beginning.

Our sixth commitment was that we would deliver double-digit sales growth for the sixth consecutive year. At the mid point of the year, local currency growth is 10.8% and reported growth is 9.4%. And we feel good about our ability to deliver on this commitment.

Our seventh commitment is to deliver 21% earnings growth this year to $2.02 per share, and two quarters in, with $1.01 in hand, we are exactly halfway to our goal. So we like our chances here. As we enter the second half of the year, we feel good about what we have delivered and even better about where we're headed. Our three largest franchises -- Recon, Instruments, and Endoscopy -- are all poised for accelerating growth in the second half behind new products, enhanced sales execution, and greater globalization. As you know, we established very aggressive financial goals for the year and are once again on track to honor our commitments.

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

Thanks, Steve.

I'll begin with the impact of foreign currency on our sales. Foreign currency had a reasonably negligible effect on second quarter sales, reducing them by $5 million, 0.4% in the quarter. In the second quarter, the dollar was basically flat against the Euro and strengthened about 7% against the yen compared to the prior year. If currency rates hold near recent levels, we expect the impact on foreign currency on third quarter 2006 sales to be about neutral.

Next I'll turn to the price volume analysis for the quarter. That's really very simple. All of the 9% sales growth really came from volume and mix in the quarter. Prices were up slightly in the second quarter, but again rounded to be reported as flat. International prices were down slightly in the quarter as we began to experience the impact of reimbursement cuts of about 6% in Japan, which took effect on April 1st.

Volume mix at 9% was a bit soft, but came in generally as advertised with expected slower sales coming from our domestic Instruments and Endoscopy businesses, and our implant businesses having one less selling day in the US and two less selling days in Europe when compared to the prior year. Our upcoming third quarter will also have one less domestic selling day on a comparative basis.

Now I'll turn to our segment sales. Orthopedic implants, which represents 58% of our sales, saw sales increases of 7% in the second quarter on both a reported and constant currency basis. And as I go through the sales growth rates by product line for orthopedic implants, you'll note that the international numbers are a bit softer than those from the first quarter. A couple of factors are driving this. First, is the MHLW price reimbursement cuts in Japan, which will impact us on into 2007.

Second, and more transitory in nature, our European business was negatively impacted by the lesser number of selling days in the quarter, manifested in the form of a long April Easter holiday. That holiday occurred in the first quarter of 2005. But here goes with the sales growth rates by product line within orthopedic implants. Hips were up domestically 2%, internationally down 3%, and flat on a reported basis. Knees domestically were up 13%, up 5% internationally, and up 10% in total. Trauma was up 24% domestically, 5% international, and 11% in total. Spine on a reported basis up 16% domestic, 8% international, and 13% in total. And CMF up 17% domestically, down 4% international as reported, and up 8% in total. And then the total category was up 10% domestic, up 2% international, and up 7% in total.

Now turning to constant currency results, obviously the US numbers are the same, but the international numbers I'll give you, the international and total numbers for each product line category for constant currency. So international for hips was down 1% in constant currency, total was flat. Knees, international up 6%, total up 10%; Trauma international up 7, total up 13; Spine, international up 10, total up 14; CMF, international down 3, total up 8. And for the total orthopedic implant category, international up 4, and total up 7.

Now for some comments on the individual product categories. Hips, which were flat in local currency and in dollars in the quarter, US hip sales growth came in at 2% in the quarter, but would be boosted by a couple of points if we considered the impact of one less selling day in the quarter compared to the prior year. Our Accolade cementless hip products had a good quarter and sales of our Restoration Modular system continued to drive nice growth in revision hips. X3 polyethylene inserts continue to be extremely well-received, and we are seeing a significant number of trade ups from Crossfire, as well as use of X3 with ceramic heads. Our hip fracture business also grew slightly in the quarter, the second straight growth quarter after four down quarters. European hip sales were up very slightly on an operational basis, lead by Trident and the Restoration Modular Revision products. In Japan, local currency hip sales were down in the mid single-digit range as we generally held serve on volume to adsorb the price cut impact. Pacific hip sales were also soft in the quarter, but this was partially offset by modest growth in both Canada and Latin America.

Now turning to knees. They were 10% operationally and in dollars in the quarter. Knee sales in the United States were up 13% for the second consecutive quarter. The second quarter was several points stronger on an average daily sales growth basis. Primary knees grew at high teens levels on continued excellent sales of our new Triathlon knee. Growth in X3 polyethylene penetration also contributed to the increase in primary sales. Our US revision knee business posted low teens growth led by Scorpio. European knee sales grew at low single-digit levels on a constant currency basis, led by Triathlon, which is still in the early rollout stage in Europe, and Scorpio. Our Japanese knee businesses reported mid single-digit operational growth with [nice line] increases from our Scorpio NRG product partially offset by the reimbursements cuts. Pacific had a good quarter in knees reporting low double-digit local currency growth, led by Scorpio and Triathlon; and Canada and Latin America had great quarters in knees on a much smaller basis.

Now turning to Trauma. They were -- and that category was up 13% in constant currency and 11% in dollars in the second quarter. Our US Trauma business put up another exceptional quarter, posting growth of 24%, 20% military sales are excluded. Every product category grew at 20% or better, led by strong performances from our Gamma 3 and T2 products in hip fractures and intramedullary nails, respectively. International Trauma sales grew at 7% of constant currency. Europe reached double-digit operational growth, but the price cut impact -- cut impact contributed to flat local currency, Japanese Trauma sales in the quarter. The combined remaining international Trauma markets grew over 20% on a small base.

Now turning to Spine. Spine was up 14% operationally and 13% in dollars in the quarter. Our Spine business had a very good quarter. In the United States, sales growth of 16% was led by strong growth in interbody devices. Sales of thoracolumbar and cervical products were solid in the quarter. Spine sales were also solid in international markets, finishing at 10% constant currency growth. International sales growth was led by sales of thoracolumbar and interbody device products.

Pacific had a great Spine quarter, and Japan posted high single-digit operational growth. And Europe, for the reasons previously discussed, booked a mid single-digit local currency growth after a very strong first quarter. And then last, but not least in this category, CMF was up 8% in local currency and in dollars in the second quarter. Our CMF business posted a solid quarter on the strength of another strong performance in the United States. US Growth was led by neuro products and sales of craniomaxillofacial implants reached low teens growth levels.

Now turning to our MedSurg group. That group represents 37% of our sales and had another strong quarter. As a reminder, MedSurg is comprised of three significant product categories. Instruments, which represents 42% of the group, Endoscopy represents 35%, and then Medical represents 23%. MedSurg group sales were up 14% for the quarter on both a reported and constant currency basis. Now, looking at the individual elements here, sales of our Instruments product line increased 12% in the second quarter on both a reported and constant currency basis. If you look at the breakdown there between domestic and international, they're up 11% domestically and 16% internationally in constant currency leading to that 12% constant currency and reported sales growth. Our Instruments business had a good quarter. As we expected, US sales were a bit slower as our sales force manages through the introduction of the new System 6 heavy-duty power tools. System 6 was rolled out late in the quarter and is receiving excellent early reviews. Instrument sales were strong in international markets led by Japan and Europe. Power instruments grew at mid- to high-single digit levels in the quarter, and other OR equipment put up a mid teens growth number. Microtools led powered instruments and other OR equipment sales were led by the Neptune Operating Room Waste Management System, Navigation, Sterishield, and Interventional Pain products.

Now turning to Endoscopy, that business was up 13% in the quarter on both reported and constant currency basis. In constant currency the business was up 6% domestically, and as Steve has already told you, up 37% outside the US. Endoscopy's business also slowed in the United States as they worked towards the third quarter launch of some exciting new, next-generation video products. However, another exceptional quarter outside the US helped bring growth for this franchise up to 13%. Endoscopy's quarterly growth was led by video and general surgery, both of which posted mid teen sales growth. All product categories posted growth in excess of 20% outside the United States. And this is now two straight quarters where international Endoscopy sales have exceeded operational growth of 35%.

General surgery led the US, and our communications and imaging businesses helped offset the expected decline in camera sales for the video category. Net, our Medical business, was up 23% in the quarter and 22% on a constant currency basis. The domestic business, as we've said, was up 25%. International was up 14%, leading to that 23% reported sales growth. Medical had another exceptional quarter, strength in the US market continued. Sales growth over 20% for the eighth consecutive quarter. International sales were led by excellent performances in Latin America and Europe. Medical's growth in the quarter was led by beds, [and EMF] cots, and sales of stretchers were solid.

And then our physiotherapy business, which is our last segmented sales category, representing 5% of our sales, as you can see, physiotherapy sales were basically flat in the quarter. Growth from acquisitions in this business was offset by the divestiture of a very small portion of their business, and we would expect this to negate any revenue growth for this business for the remainder of the year. And I'll just give you an update on PT centers here. We have now 489 centers, that's down from 502 at the end of the previous quarter.

As I now turn to the remainder of the P&L, I would remind everyone that our financial statements now reflect the adoption of the FASB statement that required us to begin expensing stock option costs. We elected the modified retrospective transition method of adoption, and the prior year amounts presented in our press release have been restated to reflect expensing of these costs in prior periods. Gross profit margins in the quarter were up nicely on a sequential basis, as compared to the prior year.

We continued to benefit from good management of manufacturing and inventory obsolescence cost, and we have been running the plants faster to prepare for new product launches. R&D spending was up 13% in the quarter as we continue to emphasize product development efforts. This could increase emphasis as reasonably broad-based across the Company's various businesses, but is most prevalent in our Biotech and Spine businesses. We completed the Biotech PMA filing in the quarter, and we continue to incur heavier costs for clinical work surrounding artificial disc development at Spine.

We are also absorbing development costs related to recent technology acquisitions. SG&A costs increased 7% in the quarter with sales-related costs driving a large proportion of the increase. These costs include compensation at higher instrument amortization and sample costs associated with recent new products such as Triathlon and System 6. The increases were partially offset by decreases in insurance costs and certain controllable expenses such as meetings and travel. Operating income increased 16% in the quarter, and operating margins are up nicely from last year to 22.0% of sales.

And now I'll give you a quick breakdown of other income expense for the quarter. Obviously we -- we had net income here in the quarter, investment income represented $8.3 million of income in the quarter. Interest expense checked in at $2.4 million. We had a foreign currency transaction loss of $1 million in the quarter. And then minority interest of $200,000 was also a negative, bringing that in at 4.7 million of other income in the quarter. You can also see that we lowered the effective income tax rate for the year during the second quarter partially as a result of a favorable tax law change that was enacted during the quarter.

The underlying effective income tax rate for the first half of 2006, after excluding the impact of the non-deductible Sightline purchased in-process research and redevelopment, was 28.2%. This compares to a restated first half 2005 effective income tax rate of 29.3%, the 2005 annual underlying tax rate. If the PlasmaSol purchased in-process research and redevelopment and the impact associated with repatriation of foreign earnings are excluded from consideration, of 29.2%.

Now turning to the balance sheet, we think that's in nice shape and asset management is good. Accounts receivable days ended the quarter at 57 days, on par with the first quarter and up 2 days from the prior year. Inventory days finished at 129 days, 5 days above the June, 2005, level. We have built inventory in advance of our key second half product launches, but also believe we have a bit of room for improvement in overall inventory management. During the second quarter, we repaid 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 at June 30th, 2006, we have just $14 million of debt outstanding. And then just briefly on cash flow, we believe we have good operating cash flow in the quarter and the first half and continue to believe we are on target for another excellent annual cash flow performance.

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

Thanks, Dean.

And now a couple of words on the rest of our 2006 outlook. As we've stated, we feel very good about the first half of this year. One where we've again delivered clearly on our commitments. As we look to the second half, we are in position to deliver accelerating sales growth on enhanced strength from our Recon, Instruments, and Endoscopy franchises. We also plan to continue investing in the future of our current businesses while continuing to look for opportunities to build out our broad-based platform. We are tightening our sales estimates slightly, and now forecast top line growth in the range of 11 to 13% for the year, and we would point out here that we will also have one less selling day in the third quarter, as Dean mentioned earlier.

We are also holding tight on our earnings guidance and plan to deliver adjusted net earnings per share of $2.02, growth of 21% against last year's adjusted net earnings per share. On a reported basis, this projects to $1.89 per share, growth of 20% versus last year's reported EPS. We think these numbers will put us in rare company among our medical device industry peers and demonstrates once again why we believe Stryker should be a core holding for investors.

Now we will open it up for questions and answers.

[OPERATOR INSTRUCTIONS]. Mike Weinstein, J.P. Morgan.

Hey, guys. It's actually Taylor Harris here.

Hey, Taylor.

Hey there. So first question is just -- about the acceleration in revenue growth throughout the year. And I think that you were at about 10.5% organic in the first half, and you're talking about going to 11 to 13% for the full year. So how would you spread that across MedSurg and Ortho? Just the acceleration?

I think we'll see it in both groups, and probably picking up steam into the third and then the fourth quarter as these new products roll out. But I think what we're seeing, Taylor, is we're seeing a clear uptick in our US Recon business that we're feeling very good about. And we think international Recon will probably come back a little bit in the third quarter here, as well. And MedSurg with both Instruments and Endo starting to hit new product cycles, we see both of them really accelerating.

In the US Recon, is that a new product story on the acceleration, or are there other factors that you see leading to greater acceleration in the second half?

I would say right now it's really been the blocking and tackling of getting our sales organization back motivated and executing well again. And a little bit of the continued strength that Triathlon is bringing for us.

And I think X3, too, has been a nice addition in both hips and knees, Taylor.

Okay. So you -- in your mind are the comps easier in the second half?

They -- they certainly are for hips. Knees have been strong, as you know, for us for quite sometime. We're pretty proud of our track record of double-digit growth rates in knees. I think that's unparalleled. But I think hips clearly we have weaker comps. But we'll also have better execution.

Okay. And then just one other question. On Johnson & Johnson's call, they referenced that one of the factors that may have been leading to a volume deceleration this year was just a bolus of surgical procedures last year due to the removal of patients from Cox-2s. Is that plausible in your mind? Are you seeing anything like that?

We think it's plausible. I would tell you, I think we think the biggest second quarter issue here was actually Easter. With all due respect, when we look at our -- April was a pretty soft month. And I think both particularly outside the US but also inside the US. We think it was that much. And we think the market may be starting to gain a little more steam.

Okay. So you saw -- so you saw that month to month through this quarter?

Yes.

Okay. Thanks a lot, guys.

We leave the quarter feeling -- feeling pretty good about -- I think, frankly, where the market, not just ourselves, probably is headed. We always assume if we're doing well that it must be the market. But I think we leave the quarter feeling better about where it's headed.

Raj Denhoy, Piper Jaffray.

Great. Thanks. Good afternoon.

Good afternoon, Raj.

If I could just follow up a little bit on Taylor's question. I think coming out of the first quarter and I think also in the fourth quarter of last year, guidance for revenue growth for this year was 12 to 15%. And I think you mentioned you now tightened that to 11 to 13. And I'm just curious what's prompted you to take a little bit off the top there? I mean, is there anything you're seeing structurally? I guess you mentioned that things are still good out there. But just curious why you'd take that range down a bit?

Raj, we'd probably clarify that we were 11 to 14 on a reported basis I think for the year when we started out. Now we're really looking at that as 11 to 13. I think with -- candidly, our Instruments launch was delayed. The System 6 we had hoped to get out earlier in the year. And I think it just had a -- a few products that were probably just launching a little bit later than we would have liked. But overall still feel the same trends -- trends picking up as we -- as we go through the year.

And I think -- I think the second quarter outside the US was certainly a little softer, particularly for our implant businesses, than we fully expected. I think the UK slowdown that I think a lot of people talked about, the German strikes, as well, both the university hospitals and then going to the community hospitals in Germany. So I think we've had just a couple of -- couple of situations there that have us just tightening it up a little bit.

Okay. And then just -- you did mention that are you pretty encouraged about what you're seeing out there in the marketplace. And I guess I have to ask this sort of ubiquitous pricing question. I mean, are you seeing -- how is the pricing environment out there right now? Are you seeing much pushback still, or is it stabilizing a little bit?

I think we'd categorize it as stabilizing. It's still tough, and I think it's going to continue to be tough. But, again, as we've probably been saying all along, it's not cratering. And we're trying to bring more value to the game.

And I think going in, we said pricing would be kind of flattish, and it's held that way for two quarters, Raj, so I think right now we see it doing kind of what we expected.

Okay. And then just one last one. I'll get back in line. On the resurfacing front, you mentioned you launched a product now overseas. And I'm curious, is that a Corin product? And then secondly, is there any update on the Corin product with the FDA here in the US?

Good question, Raj. The product outside the US is not a Corin product. So our relationship with Corin is just in the US. And we don't have much of an update. I think we've continued -- as it relates to the US, we've continued to think that'll be an '07 -- probably an '07 timeline for potential launch there.

So is that an internally developed product then that you're launching outside?

Largely, yes.

Okay. Fair enough. Thank you very much.

Thank you, Raj.

Katherine Martinelli, Merrill Lynch.

Thank you. Good evening, you guys.

Hi, Katherine.

A couple questions. You had mentioned the System 6 and then also the new, high-def camera. Are there any other product launches we should be thinking about within MedSurg? Is it really those two products and the delay that you talked about in terms of getting them out at least with the -- the System 6 ended up just pushing off customer purchases because sales kept saying it's coming, it's coming? Is that the way to think about it?

Exactly right. And frankly it's as much that the sales force knows that it's coming and they're not going to sell in one of the old lines of power tools if they know it's on the horizon. So that's really what led to the second quarter slowdown. Those are really the biggies. I would also tell that typically when we launch a new camera, and particularly monitor at endoscopy, that will often carry some of the other things with it. So to launch a new camera and new line of heavy-duty power tools those really should carry those businesses certainly through the second half of the year and well into '07.

I think we would also be remiss, Katherine, if we didn't point, and Steve mentioned it before, that there is a new light source and monitor that really builds out this video package with the camera and the light source, and I think it's important to -- in a lot of the -- well, not a lot, but some of the improved visualization, that we think this will make this a tremendous new and extremely well-received product as it comes out here.

And are you guys comfortable from a -- from an inventory standpoint that you have enough for a cleaner -- a cleaner planned rollout of the product? Steve, I know there was frustration with how Triathlon rolled out initially. So I'm just wondering, were you surprised by the delay, or is it just one of those things?

Yes. We did not take the Triathlon team and put them on this. I think we -- actually, one of the things we're trying to do is come out with a little more high-impact launches and building a -- a few more complete products and getting a more complete sampling program up-front. So that we can hit the ground running a little bit quicker. And there were a couple of little issues with System 6 that hit us that internally -- I think some of our own timelines we tend to be probably a little more aggressive than realistic. But we feel really good about where things stand now.

And then just one last question, if I may. You started -- you made the changes to the Recon management team a year or so ago. And over the last few quarters, you've really downplayed the impact from the sales force additions. It sounds like there's been at least on -- on listening on my end, a discernible change in terms of really feeling like you're starting to see the impact. Is that a fair statement that those numbers or what you're seeing in the US Recon business is now starting to see that impact from some of the sales folks you started adding in mid '05 or thereabouts?

Truthfully, Katharine, it's probably still pretty minimal in terms of where that real impact is coming from. I think it's coming from better focus and a better engaged sales organization. The true impact of the numbers we think is probably still ahead of us.

Okay.

Part of what we've been doing with a lot of the additional folks we've been hiring is having them train and shadow, not necessarily having them spun out into territories yet. So one reason I think we feel pretty good about where we'll be headed next year.

Okay. So that's spinning them out into territories, that's an '07 event versus '06?

More so. There's a couple of little adds here and there right now. But we'd -- we would not attribute the growth right now to that. It's really just that organization starting to hum again under Mike Mogul's leadership.

Great. Thank you.

Thank you.

Bob Hopkins, Lehman Brothers.

Thank you, and good afternoon.

Hi, Bob.

Hey, two quick questions for you. First of all, I think in previous quarters you'd mentioned that you thought that -- that the second quarter would be the trough for MedSurg growth. Is that still your -- still what you believe at this point?

Yes, absolutely. And I think you asked last time, we thought we'd gone further down. And once again, I tell you, we got surprised on the upside by our Endoscopy business outside the US and Medical, frankly, continues to just astound us.

So 14% you think will be the trough for the year?

We think for MedSurg, yes.

Okay, great. And then, Dean, I was wondering if I could ask you just to fill in a little more detail on the hip and knee side. You give an awful lot, but you did mention the selling day in the US then two selling days OUS. You gave us numbers for US that tried to adjust for that one selling day. I was wondering if you could give us just worldwide growth rates for hips and knees that try to adjust for the selling days in both the US and OUS and sort of eliminate the impact from that so we can get a better sense of the sequential quarter growth rates.

We haven't done a lot of that math. It's a little bit fuzzy.

But did I hear you -- did I hear you right when you said about 2 percentage points for both hips and knees in the US, was the impact of that one selling day, in your opinion? I mean, we can obviously do the math. But I'm just wondering what your opinion is.

It's probably almost three.

Probably almost three, yes.

And another simple way to think about it, Bob, is you think about your models, say, for the next quarter. One day of implant sales is about $13 million for us.

Okay.

So if we have one less day and the percentages are the same, it's probably worth about that.

Okay.

And in the case this next quarter, it is just one less day domestically.

Got it.

A little less than 10.

A little bit less, yes.

Okay. Perfect. And then the final question I have, sort of a standard one for Stryker conference calls. I was wondering if you could tell us is there a planned panel date yet? And is that -- for OP-1, and is that still the way you plan on sort of formally releasing the data from your pivotal trial?

There is not a planned panel date. We're still waiting for the formal acceptance by the FDA of our file, which we would hopefully receive by mid August. So I think we'll wait at that point then we would expect the questions to come and have a 100-day meeting. I would not expect the panel before next year at this point. I think one of our competitors had filed -- I want to say in September of last year, another BMT thing, and they've not yet had a panel for that. So we're guessing it probably will not happen this year. And that still would be when we'd expect to release data.

So we won't see any data at NAS?

I would not expect to, no.

Okay. Great. Thanks so much, guys.

Thanks, Bob.

Matt Miksic, Morgan Stanley.

Hi, thanks for taking the question.

Hi, Matt.

So one on margins. You mentioned running manufacturing a little -- a little hot this quarter, building inventory for some new product launches. Is that -- was that -- I'm also wondering with these other products, these video products, some of your Medical products, the strength in Medical growth, do you get much mix on the Medical side, MedSurg side of the business? Have you been seeing a mix improvement that -- that would also kind of help drive your margins a little?

Well, I think within our businesses we are always focused on a little bit of cost reduction and trying to drive better mix. I think we're getting some of that, yes.

Okay. Anything else in terms of distribution or anything else that's driving -- I guess the questions are just coming out of a slightly weaker Recon quarter that's showing some very nice improvements in margin.

Yes. I mean, we talked about -- obsolescence is always a factor. And it does hit us a little bit harder when we had new product launches, particularly on the implant side. And we had a little bit stronger activity in the first half there last year. But by and large, I think you're see some of the results of some of the cost improvement in our margins. I think as -- I would ask you to keep in mind as we go into third quarter that the mix does generally hit us there.

We do usually have a sequential downtick in margins in the third quarter because we have a lesser percentage of our business in -- in implants in that quarter. But other than running the plants faster, there's not that much that's driving them up, other than things that are probably reasonably sustainable at this point in time.

Okay. And then in hips, in the US in particular, wondering sort of where your -- when you think you'll start to see some improvement there. We know, I think, that Trident has been under some pressure, the comps were relatively tough. But what -- when do we start to see some improvement in hips?

We think -- we think you'll see a little bit this coming quarter. And frankly, again, on kind of an average daily sales basis, we were up probably three points better this quarter than last quarter. So I think that's the range of improvement that -- we've kind of talked about steady improvement through the year. And I think that's what we expect.

Okay. And I think last year you talked about maybe taking some pricing pressure or mix around ceramics. Do you think you're -- you've annualized that now?

I don't think we're seeing a lot of pricing pressure specifically on ceramics. We are seeing, as I mentioned, a little bit of mix shift with people coming in to X3, vis-a-vis ceramics. And that's a little bit lower selling price. But by and large, on the margin, it's not a significant impact to us. Because we're also seeing upgrades on Crossfire.

Great. And then just one last one. I mean, the -- the looming issue for me, anyway, since the end of June has been this -- the antitrust subpoena. Any -- tough question to answer, but do you get the sense that we'll learn anything any time soon about this investigation? Do you get the sense that you'll be able to tell us anything sooner as you compare it to, for example, the consulting agreement DOJ investigation that's kicked off last year?

Sure, Matt. Great question. And we'll actually give you a modest update here. We're actually pleased to tell you that the scope of this recent subpoena has been narrowed. And we can't comment much more than that, but we can tell you that.

Well that's -- that's a great update. Thanks for that, Steve.

Thank you.

Thanks for taking the questions.

Sure. Sorry we can't tell you more.

Ed Shenkan, Needham & Co.

Hi, Steve. I can't resist to follow up there. The scope has been narrowed. Is that in terms of timeframe or other things that they're looking into when you say narrowed?

It'd probably be other things other than time.

Okay.

Talk to either product line or geographical narrowing.

Okay. Product lines and -- and geographies. Okay. Was it narrowed for the whole industry, or is it specific to Stryker?

You know what, that I do not know.

Okay. But it -- and when did that occur? Is that the last week or so, or --

Yes, just recently for us. And, again, can't speak for anybody else. But --

Well, please don't hold back on other good news. Don't wait for the next caller to ask a question, Steve. The other question I have is as far as OP-1 on label expectations, could you give us an idea of how broad or narrow you would expect the label might be?

That's a good question. We would hope -- [hope for a pretty good] posterolateral fusion indication as it gets into specific negotiations with the agency. I've been through this enough in my life to always know that they may find some idiosyncrasy or something and try to narrow the label somewhat, but we don't anticipate any significant narrowing from what we're going in with -- asking.

So I assume you haven't gotten questions back until they affirm that everything's in the PMA. Is that right?

Yes. This is a massive PMA. And my hunch is they're still just moving it around and getting it to the various offices.

And -- just remind us, what's the expectation as far as when the approval might come?

You know what, I -- I think our best case would be 12 months. But I think the pragmatic reality of how these things are going right now, we're probably assuming more of an 18 month. So as we build our plans for next year, we're probably not going to have much in the way of -- of revenue from a major US launch. I think we really see it probably being more of an '08 event. Would love it to be in '07. And the optimist in us has us thinking -- preparing for a second half '07 launch. But I just want to be -- and if we get one -- one inquiry that could stop the clock for anything like that, and it -- I think that's a reasonable assumption that that could happen.

Okay. And then -- the last question, just a follow up on the narrowing of the scope. You said within geography. Remind us, was the scope -- what had you said -- was it US, and what other countries originally? So that we understand how much it might have been narrowed.

Let me just clarify. My comment around geography was really around the question around timing. Was it -- was it linked to timing and I said, No, it's not timing. It could be product line or geography as the way it may have been narrowed. And that's probably about all we can say at this point.

All right. Hey, thanks, Steve.

Sure. Thank you, Ed.

Brian Weinstein, William Blair & Co.

Hi, it's actually Ben Andrew. Good afternoon.

Hi, Ben.

Couple quick questions. Trauma continues to put up some good numbers. Can you talk a little bit more specifically about what's driving the US performance off of tough comps?

Sure. More than anything we think it's just -- it's great sales execution. We have -- actually, maybe to follow on from Katharine's question earlier, we have beefed up that sales organization a little bit in numbers over the last year in the US. Not dramatic. But I think we're -- we're getting a higher -- higher caliber of -- of people.

We're making probably a little more penetration into some of the level-one centers. And I really call it, it's the blocking and tackling and greater focus as we've tried to have those folks really more dedicated towards Trauma and -- and less trying to double bag things with both Trauma and Recon. We'll -- looking forward, we will have some additional product committees coming, but it's been more blocking and tackling and some minor product additions here and there so far.

Okay. That's interesting. And then just one other quick question -- the gross margin looks like it's the best you've had in recent history. I mean, there's the obvious culprits, Physio down a little bit, but should we read something into the mix of Ortho versus MedSurg there in terms of other than just kind of running the plants at higher velocity?

I think -- I think, Ben, we continue to feel that the MedSurg businesses get underestimated. And our teams over there are doing a pretty nice job of incrementally trying to keep moving the margins up. It's not dramatic. But these are pretty good businesses for us. And I don't think we take quite the hit that prevailing wisdom would say that we do. The other piece I would point out is when you look at an implant business, the margins are certainly better in the US than they are outside the US. Our MedSurg margins might hold up a little bit better on a global basis.

Okay. And is there any reason that that gross margin would come down from these levels as we go forward?

Yes. It's -- well certainly in the third quarter, as Dean mentioned, we do see the sequential downturn because they still are lower certainly than implants. But I think what we expect to be able to continue to show is gradual improvement year-over-year. It may be only 10 or 20 basis points here or there. But we're constantly trying to beat last year. Division by division, plant by plant. And on a total company basis. So we'll be continuing to strive to move that margin up over time. But gradually.

I guess one last question. As you think about the German volumes with these -- this second round of strikes kind of rolling through, how do you handicap that? And how do you guys try to think about that as you project volumes out into the coming quarter?

That's a good question. Dean, do you have a good answer for that?

Well, I do think it's difficult, but obviously our European folks are looking at their total business and trying to roll that up into their forecast. It may hurt us a little bit. I mean, our German business is -- is probably an area where we're striving for a little bit more market share, too. So it may not hurt us as much. But we've also been doing nicely in that business. So it's -- it's one where we're obviously not taking it lightly, either.

And another point I would point out here is that we're really proud of our European team. When you think about what happened to the UK early this year, and I would go back two or three years ago, our European business was really driven on the back of the UK for much of '02, '03, '04. And over the last year, year and a half, we have really stepped up our performances in the rest of the countries. And year-to-date, France, Germany, Italy, and Spain, for us, are all at double-digit growth rates while the UK is down in the low single digits. And there's no way that our European business a couple of years ago could have had low to -- low single-digit growth in the UK and still posted double-digit overall growth. So what's been great about our European business is it's become a much more broadly-based and stronger business, both implants and increasingly with MedSurg contributing and further broadening that base out to help insulate us from some of these individual pressures.

Okay. Great. Thank you.

Great. Thanks, Ben.

Larry Keusch, Goldman Sachs.

Hi. Good afternoon. Couple of questions. I'm just, Steve, trying to understand the hip resurfacing product that you talked about. It would seem to me that from a margin perspective, profitability perspective, you'd -- you would want your own global resurfacing system. And if you've developed this one internally, or largely internally as you mentioned, I'm just trying to understand sort of what are the dynamics with the relationship with Corin, and are you precluded from actually bringing your own product into the US over a period of time?

That's a great question. You know what, when I said it's internal, it is internal, but with another partner that we quietly work with on this. And so there are some restrictions there. I think in the long run your point is good. And that might be something we'd be thinking about well down the road. But it certainly at this point in time, we're being pragmatic in terms of playing a little bit of catchup from where we've been on the resurfacing game. Which if you think about it, 15 months ago we didn't have anything. And now we're sitting here launching something abroad, and we've got the rights to something coming in the US.

Okay. So think about, obviously, for the foreseeable future, your hip resurfacing product line is sort of a lower margin product line for you guys.

Yes. I think that's a fair -- fair way to categorize it. And we will deal with Corin certainly in the US.

Right. Okay. And then you teased us a little bit as you were speaking to hip resurfacing and mentioned that there would be some additional products coming on the hip line. Given that that's a focus of people on this call, do you want to give us any sort of sense of what else might be coming? And I guess along with that, do we have to wait for the academy to -- to actually see something?

I don't think you'll have to wait for the -- if you have to wait for the academy, Dean and I are probably going to pound our heads against this table because -- much as we've loved reporting low hip numbers, we're kind of excited to start getting them going. I -- I think as we sit here today we're pretty confident that we may have some news in the second half of this year in the US other than resurfacing. And I would hope that when we come together for the next call, we might be able to start to shed a little bit of light on that.

Okay. So I mean, should we think of this as potentially a -- a new hip -- new hip line?

Probably not to that degree yet.

Okay. Okay. And then just --

-- One of those areas that we're not in today but we may want to be in.

Got it. Okay. And then lastly, just talking about subpoenas and DOJ, can you just update us on -- I know this is a business people don't talk about, but update us on where you stand on the PT business with that -- that investigation.

We are trying like heck to get that resolved. As you know, that'll -- that would be three years running come this November. We have been -- I would tell you we've been pushing the government I think to try to get that one resolved faster than they're pushing us. And it's just a matter of continuing to kind of plod through things and -- and get it cleaned up. It's one that we would very much like to get put behind us.

Okay. And then just lastly for Dean, two questions, Dean. Any -- have you been able to quantify at all in Germany with the strikes how much that may have hurt you in the second quarter? And then along with -- you kind of glossed over this and went through it pretty fast. It sound like there was a divestiture of some centers in the PT business. Does that take out as much as half a percentage of growth in your revised guidance?

Well, as I said, I think on -- the way to think about -- I'll answer the second question first -- I think the way to think about PT is really just to think about PT revenue as being pretty flattish for the rest of the year. And that'll -- that'll guide you.

Okay.

And I think relative to the German strikes, it's not that significant a portion of our business. As Steve said, I think the guys have done a pretty nice job of coming behind and rallying behind other product lines within that market and within Europe more broadly. So obviously it's hurt us a little bit. But I don't think it's anything that's close to a point of growth, even internationally.

Okay. Great. Thanks very much, guys.

Sure. Thanks. Lar.

Steven Lichtman, Banc of America.

Great, thanks. Hi, guys. Just wanted to -- couple of follow ups here. In Endoscopy, I was wondering if you could talk about the rollout of the products that you mentioned including the camera. Are they in the sales force hands already, is that happening now, could you just give -- just a little more granularity in terms of the rollout in Endo?

They will be hitting the sales force's hands within a matter of, hopefully, days. So won't -- won't really affect July sales much, but should start to kick in really for the -- the last couple of months of the quarter, should start to ramp up.

Got it. Great. And then within -- and that's all of the products, the camera, light source --

And the monitor, yes.

Okay. And then within knees, Triathlon you mentioned early days in Europe, can you just give a little bit more granularity on that, and then in terms of where you are in Europe, and then where are we in the US would you say in terms of the rollout of Triathlon?

Sure. I think in Europe we're still in the early stages in Europe certainly. And I would also tell you we've got a lot of renewed life and a lot of strength still on our Scorpio line in Europe that's still doing a lot great things, as well as in Japan where it's really Scorpio that's driving what we consider to be great knee business in Japan. Regarding the US, we feel really good that we finally got the MIS instruments out. We have the posterior to stabilized to cruciate retaining, but we have additional things coming on Triathlon. We think we're on to as close to a blockbuster knee product as I think we could find. And so we're increasingly finding other things that we'll be coming out with to supplement the Triathlon line and continue to broaden it out. And particularly maybe help us actually convert some competitive users who have different preferences over time. And so we've got things geared up really over the next few quarters to kind of keep breathing some new life into Triathlon and continue the momentum.

Okay. And then when we have these quarters with less selling days, those principally impact implants and not MedSurg, correct?

Much more so, yes. The only part of MedSurg they affect would be the disposable pieces from the OR. But we largely consider it not having as much of an effect on the capital side. But it -- but it does pure and simply, you hate to say it because it can sound like an excuse, but it does affect the implant businesses.

Okay. And then, Dean, lastly, if you mentioned this, I apologize. But tax rate for the year? What's the number we should use for the year at this point?

We've lowered it through six months to 28.2 on -- through that period of time. And I'm very comfortable with that rate for the year. Now, I know we're at 28.5. I said it had downward bias and I think we're very comfortable with 28.2 for the year now, so for the last six months, as well.

Okay. Great. Thanks, guys.

Thanks, Steve.

Greg Halter, Great Lakes Review.

Good afternoon, guys. And congratulations on good results.

Thanks, Greg.

You've commented about the inventories being built in front of some new product launches and so forth. Wondered if you could comment on being up 11.7% year-over-year. Any sense on what percentage of that increase is due to that new product build?

I think, Greg, that a majority of it is, if you think about the things we got going on in -- with System 6 and just as we expand on our business, you've got System 6, you got the new products that we've talked about, Endoscopy, which we started significant builds for by the end of the quarter. And even in -- even in Spine we've got some new products coming. As I mentioned, I think we've got a bit of room for improvement. So I wouldn't tell you that we can't bring it down in some of the businesses. But by and large, a majority of the increase is probably due to new products out.

Okay. And a similar question is on the receivables, up 12.12 -- 12.2% year-over-year. I wondered if you could elaborate on that and whether or not there's any securitization in the figure this year or last year. I don't know if that one thing was last year, but for this year.

We -- we've done a -- we've done a little bit of securitization, none domestically in recent times. We do it in a very, very small number of markets, particularly in Europe where it makes sense to do that. But I'm talking regions within countries, so nothing of any significance there. And the increase year-over-year is not something that I'm real concerned about. I mean, I still think anything under 60 days is pretty darn good performance for us. So width of a couple of days is not something that's troubling me, although I'll -- hopefully our divisions aren't listening to this because I want us to get back to where we were and we were at 54 at the end of the year. I certainly want to get back to at least that by the end of this year. And I think we'll be on track to do that.

Okay. And reading through some of your filings, you have a ERP system, I believe, in the implant area that's going into effect here. And obviously there's been a lot of horror stories about ERP systems and just wondered if you could give us an update on how yours is progressing.

Sure. We probably could add to some of the horrors, but we're behind them. We implemented at our Orthopaedics division, which is our largest division, we implemented that really at the end of the first quarter. And we are doing it at a couple of other divisions really as we speak here in the third quarter. But overall, you look at it, there's always a few bodies laying around it feels like if you implement those things, and there's a lot of work. But nothing here that's going to interrupt the business.

And I would say, too, real frankly, Greg, that is -- that is probably one of the things that's hurting our DSO performance a little bit as we went through that. We probably weren't quite as quick with some of the invoicing. But I think we were on top of that. And any time you're adapting to a new system in terms of trying to figure out how to get the data to do collections and stuff like that, that's a little bit more difficult. And so that's probably hurting those days just a tad. But nothing that we're concerned about.

Okay. Well, again, that's great to hear because we've had quite a few problems with the ERP systems being implemented.

Not -- not to say that we didn't have a lot of heroic performances within our company. I will tell you that.

Okay. Well, again, good to hear. One last question. If you could break down the business in total on a geographic basis, that would be helpful to me at least.

In terms of --

In terms of sales.

Okay. The US is about 65 --

Right.

-- Percent, outside the US is the other 35.

Right. But can you break that down further by maybe region or country?

By region --

Say, Europe and Asia, Latin America, Japan, so forth.

I -- I don't have the figures right in front of me, Greg. It's pretty readily available, actually, within our annual report. Japan represents about 8% of our sales. And --

And Europe is -- Europe this year'll be probably 18, 19%.

Right. And then, kind of the rest of the world we really don't break down. But that's obviously the Americas and the rest of the Pacific rim.

Okay. Great. And congratulations on the fine results.

Great. Well, thanks a lot, Greg.

Scott Thomas, Edward Jones.

Thank you for taking my call. Just a couple of quick questions. With the announcement of the hip resurfacing going on in Europe, should we read into that that you might be coming out with a metal-on-metal product either internationally or in the states on a regular primary line?

I would not read that into the -- into the resurfacing.

Okay. Well, then another thing that I want to ask if I should read anything in or not, and you can tell me if I shouldn't -- the PTS divestitures. I know there's always a lot of questions as to the future of that division. Can you just describe a little bit of the divestitures you did, and is that something that we should expect longer term?

No, I think what -- the divestitures were actually a small little kind of subunit that our PT businesses started which really was doing executive physicals and some things like that. It was a line called Life Signs that we just decided was even tangential to that business and decided let's clean that up, focus a little more on profitability than necessarily sales growth. And I think that's about all we'd say at this point in time.

Okay. Final question, I know this is asked every once in a while, so I'll ask it again. If you look out over the last self years, and you guys in terms of earnings performance as well as top line has been pretty outstanding. If you guys do 20% this year, you'll be up almost compounded 80% over the past three years. On your tenure, Steve, your stock really hasn't done a whole lot. How do you look at uses of cash in terms of repurchases and things like that? And also, how do you maintain the focus with all the outside things going on?

Sure. Great question. I think it's -- as we think about redeploying the cash, at this point so far, we've really been turning it into the smaller acquisitions. The new technology plays. And I think we've been pleased with that. And, frankly, we've been plowing it back into our R&D efforts. A lot of which I don't think is fully appreciated. And -- and candidly, we haven't talked a lot about them. But it'll start to be felt in the -- in the years ahead.

As we build more cash, particularly in the second half of this year, we'll need as a company to be thinking a little bit more about what we do, whether it's in terms of share repurchases, enhanced dividends, or potentially some bigger acquisitions along the way. But we're continuing to stay very focused. Your last question, I tell you, it is -- there's obviously a lot going on in the outside world. And we're trying to just focus on running a great business. I would tell you that there's a lot of days I feel right now kind of like I probably felt in junior high at one point where the whole class gets held after because somebody acted up. And all you can do is keep being yourself and keep doing things the right way. Things hopefully over time will take care of themselves. And that's what we keep trying to focus on. Thank you.

[OPERATOR INSTRUCTIONS].

Okay.

Milton Hsu, Bear Stearns.

Hey, guys. I just have two quick questions. Promise. Dean, just the net margins for MedSurg versus Ortho. I think in the past, it's been about a 200 basis point difference. Is that -- can you give those numbers to us, and is there any sense that that might be narrowing, that delta?

It might have narrowed a little bit here in the quarter and first half. But that's -- that's still a pretty good indication of where those are at. But in reality, as Steve said, I think the MedSurg folks are continuing to drive them up. And, frankly, over time we think on the orthopaedic implant side they'll come up, too. We're doing a lot of investing in those businesses and in our Spine business. And in our Trauma business as we work on the US sales forces and product development, particularly in Spine. And then OP-1 is still to come, what will happen with that business. But I think there's a lot of room for that to grow as well as continued operating income growth on the -- on a margin basis on the -- on the MedSurg side.

Okay. And then, Steve, just a question on hip resurfacing. Is the initial plan to just tackle the -- the more developed markets, the UK and Australia, at this point? And then if that is the case, how do you unseat the sort of incumbent, MMT, at this point?

Sure. That's a great question, Milton. We will focus on the key countries. And we'd probably throw Canada in there, as well. And initially we're really going out to just some key surgeons. So I would say this would be a slower ramp up. It's a new business for us, and we're trying to learn from it.

So we'd probably say don't get the sales expectations too far ahead of us here at any time in the next quarter or two. But we do see -- frankly, we feel pretty good about the product we're bringing. We think there are some minor points of difference relative to ones out there. And I think probably a simple way that we're thinking about it in the shorter term, Milton, is that doctors that we do a lot of business with and have strong relationships with who've been using a competitive hip resurfacing product because we don't offer one, if we could just get their business from resurfacing, that'll -- that'll be a nice start for us.

Okay. Thanks, guys.

Great. Thank you, Milton.

David Lebowitz, Thomas Weisel Partners.

Thank you very much for taking my question. Going back down to the balance sheet on inventory, it's -- inventory turns have declined consecutively for the last two quarters and look as though they're the lowest point since late '04. And I'm just curious, has there been a difference in your expectations for market growth that have affected -- that -- I guess it led to your original inventory plan that is differentiated from the actual realized sales growth?

David, really -- it really does have more to do with getting ready for product launches and the way we're managing the inventors for that other than -- we've probably deviated a little bit from our expectations because of the timing of some of the launches, as Steve -- particularly the System 6 launch. But other than that, there's not any real significant deviation here from our plans.

So should we expect to see that get better over the next few quarters?

Well, we always have -- we generally have an uptick in the third quarter because of the factors that I mentioned before, which is that because of the summer season, orthopaedic implant surgeries go down. And we don't bring the inventory levels down. And that is our highest inventory category. Because we want to stay poised for the start of the fourth quarter, which is always strong. So I would expect that they could tick up still on a days basis in the third quarter. But then I think we'll bring them down pretty strong in the fourth quarter and get them back to where we -- where we'd like them to be by the end of the year.

Okay. On the hip resurfacing product, you mentioned that there are some minor differences between that technology and other technologies out there. What -- what might they be actually?

We're probably not going to elaborate quite at this point. We'll give you more of an update as we get it rolled out.

Sure. Has there been any -- I guess what's the commentary from Corin on you guys taking them on overseas?

I don't think -- they're -- we're very good partners with them. I think they understand the situation we're in. And I wouldn't say we're taking them on as much as we're entering that market.

Sure. Sure. Thanks for taking my question.

Great. Thanks, David.

Michael Matson, Wachovia Securities.

Hi, thanks for taking my questions. I guess I'll start with Endoscopy. And the i-Suite or Endosuite opportunities there. Just any kind of update you can provide in terms of how things are going there. And penetration levels of the suites at hospitals. Is there still a lot of room there to grow that, particularly with these new products that you're launching there?

We think there's continued -- certainly continued significant opportunities for penetration in the -- in the years ahead. And a new camera and light source and monitor always a nice little catalyst hopefully to continue getting that business going well. And also, frankly, we're expanding that business outside the US and starting to get some of the i-Suites going abroad, as well.

All right. And then you mentioned that there's one fewer selling day in the US in Q3. How does Q4 look? Is that basically in line with Q4 of '05?

Q4 actually flips doesn't it, Dean?

Yes, I think we -- I think we do actually --

I think we'll actually have one more day in Q4. So -- which will probably make the comps look a little more favorable in Q4 than, say, the underlying growth.

Okay. And then I'm going to ask one more question. And I'm sure that -- that you've gotten this question before. But I thought kind of in light of the flat growth that we're seeing in the physiotherapy business -- I guess I just want to kind of query you on the strategic view of that business, and is that something that you would ever kind of look at divesting?

We -- we'll always be looking at our portfolio. And try and make sure that each business is delivering and performing. And continue to shape it as we go over time.

All right. Thanks. Appreciate it.

Great. Thank, Mike.

Bye.

Brian Wong, First Albany Capital.

Hi, thanks for taking my question. I just wanted to know if you could clarify on your international sales force for MedSurg, is that a direct or a stocking distribution force?

Most places it's direct.

Okay. Thank you. That's it.

Great. Thanks, Brian.

Mike Weinstein, J.P. Morgan.

Hi, sorry to come back in here. We just want to clarify a couple items. One, just the commentary about the narrowing of the scope of the investigation and your comment on that and the answers you gave. I mean, should we assume that narrowing the scope means that it applies to a specific business that you're in rather than the whole company?

Yes. I think that's fair to -- certainly fair to say.

Okay. And then, Steve, the commentary about the timeline from submission to potential panel and approval for -- for OP-1. I was trying to recall and my memory's fuzzy because we're all getting old. But how long it took the original InFuse application to make its way to both. And I think my recollection was that it was probably just over 12 months. Do you know?

You know what, Mike, I don't know, and I'm older than you so my memory's fuzzier

You also weren't having to pay as close attention back then. But, yes, I think it was just over 12 months. Is there any -- is there -- has the -- I assume that there hasn't been nearly that level of dialogue with the agency to give you a sense on timeline for reviewing application like this.

There really hasn't.

Usually you want to push the agency to do things faster rather than take more time.

Oh, you can trust us, we'll be pushing. It's complex filing in that it's also being reviewed by a couple of different offices down there, because of it being both, frankly, a device but also biologic. The device group does not have a lot of experience with biologics, so they are farming some of the work out to one of the other offices -- actually probably two of the other offices within FDA. And as you know, there's different players today than certainly some of the players are in common. But some of the office directors and some of the deputies are different today than were there for InFuse.

So there's probably some re-education that has to occur on some of this. And I just -- my experience particularly from -- my former life of having been around a lot of MBAs and things like that, just always know that you never quite know how these thing are going to go. I'd rather be conservative than -- than overpromised.

Understood. Last question is to make sure we're all on the same page, I don't think -- you probably haven't thought about this, but the -- the acceptance of the submission at the 45-day mark, is that something you would communicate to the stream?

I don't think so. I think -- you know what I'd probably tell you, Mike? If it wasn't accepted, I think we'd probably -- we would communicate that because that would be a surprise to us.

Yes.

And I think -- but otherwise, we're assuming acceptance.

Yes. Understood. Okay. Thanks, guys.

Thanks, Mike. Any other questions, Claudine, or is that it?

No. There are no further questions so I'll turn it back to you, sir.

Okay, great. Well, thank you, everybody. We certainly appreciate your time. I think as we -- as we go into the third quarter, we're feeling good about where we're headed. And our conference call for our third quarter 2006 operating results will be held on October 17. So we'll talk to you all 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, everyone.