史賽克 (SYK) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Stryker earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen only mode. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes.

The company would like you to know that certain statements made in today's conference call may constitute forward looking statements. They will be based upon managements 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 the factors that may be discussed in this call 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 with connection with clinical studies and eventual United States Food and Drug Administration approval of new products, changes in reimbursement levels from third party payers, a significant increase in product liability claims, changes in economic conditions that adversely affect the level of demand for the company's products, changes in foreign exchange markets, changes in financial markets, and changes in 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 report on Form 10-Q . Today's conference call will also include a discussion of adjusted net earning from continuing operations for the comparative nine month period ended September 30, 2007 and 2006. Further discussions 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 Investors page on the company's website at www.stryker.com. I would now like to turn the presentation over to your host for today's call, Mr. Steve MacMillan, President and Chief Executive Officer. Please

Thank you, Katina. Good afternoon, everyone. And welcome to Stryker's third quarter 2007 earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer, and Katherine Owen, Vice President of Corporate Strategy and Investor Relations.

From start to finish, our results this quarter were fundamentally very strong. While additionally benefiting from currency as well as one extra selling day in the U.S. Net sales of $1.45 billion were up 18% and up 15.7% operationally. While net earnings also grew over 20%. We stated at the start of the year that our primary focus was on executing against what we felt were strong organic growth opportunities. As we began to realize the impact of our R&D and sales force investments from the last couple of years, we believe this quarter's results, on top of two already strong quarters, demonstrate that this executional focus is serving us well. Overall, the 15.7% operational growth was our strongest in the last several years, and represented another sequential up tick from last quarter as the breadth and depth of our unique set of businesses once again contributed to strong growth.

A few highlights include international sales accelerated from single digit growth last quarter to low double digit level this quarter. This growth was widespread, with hips, knees, trauma and our endoscopy franchises all showing accelerating internation growth in the quarter. Our growth was again broadly based and balanced. On a reported basis growth rates for U.S. and international were both 18%. With international growth up 11% operationally. In the U.S., orthopedic implants were up 16% while med/surg reached 20%. Globally orthopedic implants were up 13% operationally and med/surg was up a strong 20%. Our U.S. spine and trauma businesses continue to perform exceptionally with both growing around 30% in the quarter. Seven of our eight global franchises again generated global double digit operational growth.

We also know a number of you often wonder about the sustainability of our med/surg businesses. Well we are pleased to report that these important franchises continue to post stellar growth. In fact, for the first time this decade, our endoscopy and instruments franchises both posted 20% or greater growth in the U.S. and globally in the same quarter. And medical reached 17% domestic growth in the quarter. While each of these businesses accelerated versus last quarter, and are clearly running above their long-term expected growth rates, they continue to deliver strong underlying and sustainable growth. To provide a little context here, this represented the 33rd consecutive quarter of double digit growth for our global endoscopy business. Instruments has generated double digit growth in 21 of the last 22 quarters. And medical posted its 16th consecutive quarter of double digit growth. While this quarter may have been exceptionally strong, we continue to feel very good about our ability to deliver strong and sustainable med/surg growth.

While the quarter brought a lot of highlights, there are always things we can do better. At the top of this list remains our hip franchise, making the July FDA clearance of our hip resurfacing product very welcome news. We are currently focused on conducting comprehensive surgeon training, and therefore do not expect a meaningful contribution from resurfacing until next year. But it is very nice to now have this in our bag heading into 2008. Secondly, while our Japanese business showed some stability in the quarter, the price cuts continued to take a toll. And finally, we continued to work on enhancing our quality and regulatory systems to better meet the increasing standards at FDA. When we step back from it all, however, we are encouraged that despite softness in one of our largest franchises, and year to date declines in our second largest country, Japan, we are posting very healthy growth rates. Finally, the quarter also brought a welcome resolution to the DOJ. investigation when began in 2005. We have now wrapped up two of these investigations, orthopedics as well as physio- therapy in the last two quarter and are pleased to be looking forward.

In conclusion, it was a very nice quarter and while we with like to celebrate, we very much feel the pressure of the high expectations which we have established, and therefore our investors have for us. Our team remains focused on delivering today while investing and planning to keep the growth coming. I will now turn it over to Dean for more details.

Thanks, Steve. I'll begin with the impact of foreign currency on sales. Foreign currency was again favorable this quarter, adding $29 million to international sales, and boosting the company's overall sales growth by 2.3%. In the third quarter the dollar weakened approximately 8% against the Euro and strengthened about 2% against the yen compared to the prior year. If currency rates hold near current levels we expect the currency will increase fourth quarter 2007 sales by about 2.5 to 3% when compared to the prior year, which would bring the projected favorable impact on total year 2007 sales to just over 2%.

Now looking at price volume in the quarter, pretty simple here. Foreign currency as you have seen in the press release contributed 2 points of growth in the quarter, and the remaining growth all came from volume and mix. So 16% volume mix growth for 18% total growth. Selling price were flat in the quarter. Domestic prices were up modestly but this was offset by a hit to our international sales line from the price declines in Japan. Japanese pricing was down 7% in the third quarter reflecting the impact of the January 1 and April 1 2007 MHLW reimbursement cuts. Volume mix growth as I said was 16% in the third quarter. A 2 point acceleration from the second quarter. Domestic volume mix came in at 17% and did benefit from one extra selling day in the quarter, compared to the prior year. International volume mix growth of 12% accelerated from 9% in each of the first two quarters.

Now, turning to our business segments, orthopedic implants, which represents 60% of our sales, saw increase of 15% in the third quarter on a reported basis and 13% operationally. The sales growth rates by product lines are included in our press release and I'll reference those rates as I provide more detail on performance in each product category.

So, turning to hips, hips were up 9% in dollars and 6% in constant currency in the quarter. The global operational hip growth rate matched that from the second quarter. U.S. hip growth finished at 6% and was led by sales of X3 Polyethylene inserts, Accolades to mount the hips and Restoration modular revision hip products. Although we officially launched the Core hip resurfacing product line in the U.S. in the quarter, it did not contribute meaningful sales volume as our primary efforts in this arena were focused on training and education. In Europe, hips grew at low double digit operational rates led by Trident, X3 Polyethylene, MITCH resurfacing and Accolade products. In Japan local currency hip sales declined in mid to high single digit levels. MHLW price reductions were responsible for all the decline with volumes up just slightly. A Secur-Fit hip product saw reasonable volume growth, but this was partially offset by the declines in Bipolar, Omnifit and [Centur] products. Operational hip growth in the remaining international markets came in at low double digit levels led by strong growth in Latin America.

Turns turning to knees they were up 16% in dollars and 13% in local currency in this quarter. Knees posted another very good quarter. U.S. knee sales were up 14% but primary knees registering mid teens growth and the revision category growing at low double digit levels. Primary growth was again dominated by Triathlon and X and Scorpio led the way in revision. In Europe local currency growth came in at low to mid double digits but by exceptionally strong Triathlon growth and steady sales of Scorpio. Japanese knee sales grew at mid to high single digits operationally with the growth attributable to our Scorpio NRG product line. The remaining international markets posted aggregate mid teens level local currency knee growth with Triathlon posting excellent results in Pacific and Canada and Scorpio leading the way in Latin America.

Turning to trauma that product was up 19% in dollars and 16% on an operational basis in the third quarter. Our trauma business had another great quarter led by continued strong success in the United States. The domestic trauma business grew 29% in the third quarter, 28% if military sales are excluded. This represents the seventh consecutive quarter of greater than 20% growth in the U.S. market. All categories were strong with Gamma3 hip fracture devices, T2 Intramedullary Nails, and VariAx Distal Radius the leading products. Despite being weighed down by Japanese price productions, international trauma sales grew 8% in constant currency. Europe grew its trauma business at mid teen levels operationally. Japan experienced mid to high single digit local currency sales declines of solid buying gains would shoot up by an approximate 14% sales decrease. Trauma sales growth was around 30% operationally in the remaining international markets led by Canada and Pacific.

Turning to spine, that was up 24% in dollars and 22% operationally in the quarter, our spine franchise obviously had a great quarter led by the U.S. business, which recorded its fourth straight quarter with growth over 20%. U.S. spine sales were up a robust 31%. Growth was pretty consistent across all product categories, and was again led by Thoracolumbar products, interbody spacers and our posterior year and anterior cervical products. Outside the U.S. spinal growth was just 4% of local currency with interbody devices the strongest selling product category. On an operational basis Pacific and Canada had excellent quarters in spine, growing above 20%, the results in Japan which had mid single digit growth in Europe where sales declined slightly were below our expectations.

Now turning to craniomaxillofacial products, this was up 20% in dollars and 18% in local currency and in the third quarter. CMF sales continued their recent strong trend in the United States market growing 24% in the quarter, their fifth straight quarter over 20% growth. U.S. sales performance was again led by Neuro product and our Hydro Set Injectable Bone Substitute. Sales outside the U.S. grew 4% of constant currency with pacific and Europe the leading growth markets.

Now turning to med/surg they had an excellent quarter with accelerating growth from all three product franchises and in both the domestic and international categories. Med/surg is comprised of three significant product categories. Instruments makes up 17% of company sales, endoscopy 14%, and medical 9% leading to the total 40% of sales that come from med/surg. Med/surg group sales were up 22% for the quarter in U.S. dollars and 20% in constant currency. Domestic growth picked up nicely for instruments and medical on a sequential basis and international growth for instruments and endoscopy demonstrated continued strength.

Now looking at the businesses individually, sales for instruments product line increased 22% in the third quarter as recorded and we're up 20% in constant currency. Instruments had a great quarter, particularly in the U.S. where sales growth came in at 22%. Domestic sales were again led by exceptional growth and heavy duty power tools, as well as an excellent quarter in navigation. Neuro spine and ENT products also registered strong growth in the U.S. International sales of instrument products were up 16% operationally with growth overseas led by neuro, spine and ENT products and heavy duty power tools. On a geographic basis the story was much the same as the second quarter with Pacific over 20% operational growth and Europe hosting mid teens local currency growth.

Now endoscopy, which was up 26% in the quarter as reported in 24% in constant currency, had a tremendous quarter. Its best since last year's exceptionally strong fourth quarter. The U.S. posted a second straight 21% growth quarter paced by strong eye sweep and general surgery sales. International sales were up 35% in local currency, with all products exhibiting exceptional strength in geographic growth led by Europe and the pacific.

And then last but certainly not least within our med/surg group, our medical business was up 16% in the quarter as reported and 15% operationally. Medical put up another solid quarter with accelerating growth on a sequential basis. U.S. growth was led by a second quarter from our stretcher products and strong EMS sales. International sales were very strong in the Latin America and Pacific regions.

Now comments on the remainder of the income statements. As expected the gross margin percentage declined slightly compared to the prior year. As discussed during the last call, our 2006 third quarter gross margins benefited from reduced royalty costs attributable to royalty agreement expirations. Year to date margins are up 40 basis points versus last year and remain in good shape to continue our trend of year over year expansion. Spending on research and development grew by 20% in the quart and reads 6.7% of sales, their highest percentage level since the fourth quarter of 2005. We continued to develop both internal and acquired technologies and increase R&D spending across most of the businesses at a very healthy rate. SG&A costs increased 16% in the quarter, slightly lower than the growth rate in sales. Sales related costs accounted for the majority of this increase. Selling costs include compensation and higher instrument amortization costs, along with continued overall investment in our sales forces. Operating income increased 22% in the quarter, and operating margins increased to 21.1% of sales

And now for a brief breakdown of our other income expense for the quarter, investment income came in at $23.2 million in the quarter, that was offset by interest expense of $11.4 million, and a foreign currency transaction loss of $1.2 million, bringing the overall other income in the quarter to $10.6 million in the quarter. Interest expense was higher in the quarter as we recorded a higher level of tax interest expense associated with our tax accrual balances. The company's affected income tax rates were 28.1% and 27.9% for the third quarter and the first nine months of 2007 respectively. The rate for the first nine months of 2007 is impacted by higher than average rate on the tax benefit associated with patent and the patent impairment charge recorded in the second quarter.

Now a quick look at the balance sheet, which finished September in very good shape. Accounts receivable days ended the quarter at 59 days up one day compared to the prior quarter and consistent with the prior year. Inventory days finished the quarter at 155 days, up 6 days in the quarter, but down 4 days from the September 2006 level. Inventory days normally reach their high water mark in our third quarter given the slower orthopedic implant surgery schedule in the quarter. We expect to see these days measure decline markably during the fourth quarter as surgery schedules bounce back and we continue with our second half slow down in plant production pace. As of September 30 we do have $17 million of debt outstanding that is all classified as current. And just briefly on cash flow, we continued to have a great cash flow year with $661 million cash from operations in the first nine months, that is a 33% increase from last year's $497 million. So with that, I would turn it back over to Steve.

Thanks, Dean. With three quarters down, 2007 is heading toward the finish. Even a little better than we planned at the out set of the year. We are in great shape to deliver our seventh straight year of double digit sales growth. As it relates to fourth quarter, many of you will recall that we are facing difficult year over year comparisons, given the exceptional growth achieved by several of our franchises in last year's fourth quarter. However with a bit stronger than expected third quarter on the board, we have raised our sales guidance for the year, and believe we will hit constant currency top line growth of 13 to 13.5%. On the bottom line, we continue to forecast 20% adjusted earnings growth, with $2.40 the projected target for the year. We have also continued to invest in R&D and sales force expansion it this year. While every project doesn't always develop exactly as planned, we believe we benefit from broad approaches in these areas. Similarly, our business has been built as a unique footprint over time, with measured acquisitions and R&D investments. We would expect this methodology to continue to serve us well as we evaluate potential uses for our growing cash balances. We'll now open it up for questions. We'll hand it back to you Katina.

(OPERATOR INSTRUCTIONS). First question comes from the lane of Mike Weinstein, representing JPMorgan. Please proceed.

Thanks a lot, it is actually Taylor, here for Mike. My question is, obviously the top line growth was very, very strong this quarter. And perhaps surprisingly so not just in med/surg but some of the orthopedic businesses outside of hips and knees. So just to focus on trauma, spine, CMF, was there anything there that is surprising you in terms of how strong those businesses are performing? And then secondly, I know you have made a lot of sales force investments in those areas. Is any of to strength, do you think, one-time in nature this year, due to the sales force investments you're making?

Taylor, I think if you look at particular trauma and spine businesses, historically, we've probably been underdeveloped from a market share standpoint in the United States. A few years ago we made a strategic commitment to really strengthen those business and it's happened through both the sales force expansion as well as, frankly, a much stronger focus on R&D and just focused leadership. And the same frankly for our craniomaxillofacial business. I think we are seeing the impact of the leaders we have put in place there and having great impact and while we don't expect those numbers to continue, certainly trauma and spine at 30%, we think we can be growing significantly faster than the market here still for many quarters ahead, again would not expect it to continue up close to 30, but certainly can they be better than the market? We certainly think so. And candidly, outside the U.S. we still have some opportunities. Our spine business in Europe was pretty soft this quarter. We are always looking at the opportunities where we can do better. But it is important to note those businesses, collectively, will be well over a billion dollars this year and have probably been kind of quietly overlooked in the aftermath of hips and knees and they have become sizable and very profitable and high growth businesses for us and clearly playing a bigger part of our overall growth.

Okay. Great. And one additional question. You referenced the tough comp you have in the fourth quarter. You are guiding I think organically the growth of 10.5 to 12.5% which is certainly lower than what you have done in the past two quarters. Is that really just a comparison issue? Or should we read anything into that as you look forward to 2008, and what type of growth we should expect next year?

Purely a comparison issue. Do not worry about a slow down. As a reminder the numbers probably aren't posted yet. Last year in the fourth quarter four of our five implant businesses grew 20% or greater. Knees, trauma, spine and CMF globally were all up over 20% and endo just absolutely blew it out with 27% growth. Frankly it looked like there was a lot of capital that needed to be spent probably in the hospitals in the fourth quarter as we had launched the 11-88. Last year's fourth quarter was clearly a blowout, just as we are going up against that, we continue to feel very, very good about the direction. But we just wanted to be candid in that.

Sure. So as we think about 2008, should we expect performance roughly in line with those seven? Or are there areas where you expect to do better or worse? And then I'll drop.

Well, hips will be better. You know, I think we'll give guidance for '08 in January. Let us finish this year first. But I would say on a high level basis what you should probably expect is things like trauma and spine are probably going to slow down a little bit. Hips will probably accelerate a little bit. All in, hopefully Japan won't be quite the drag that it's been this year. But it may not be a star next year and we'll give you guidance. But we feel pretty good. There is always challenges, we're always nervous but we feel pretty good about what you'll be able expect in '08.

Great well congrats on a very good quarter.

Great. Thanks Taylor.

The next question from the line of Bob Hopkins, representing Lehman Brothers. Please proceed.

Hi. Good afternoon, thanks for taking the call.

Hi, Bob.

Just a couple of quick questions here. First, Steve you mention in your prepared comments that obviously med/surg above long-term expected growth, I think we have probably asked this before. But would you be willing to tell us what you think expected growth rate is longer term for this group of businesses as you look out you know the next two to three years?

Sure Bob. I think we continue to think about medical as a low teens growth business. If you look at the medical marketplace, candidly it is probably a high single digit growth market. But we continue to see opportunities to grow at least a factor above that, which puts us into the low single digits -- or low double digits. For instruments I think we think of that roughly as a mid teens growth business. Again that market is probably growing in the 10 to 12-ish. But we continue to broaden our product line and move out. Plus again as we remind you, both our endo and instruments businesses have been underdeveloped outside of the U.S. and part of the sales force expansion have been investing in those businesses outside the U.S. which should allow instruments to grow we think in the mid teens level. And endoscopy longer term we think of as mid to high teens growth business. So I think the 20%s are typically going to be the outliers. But we are going to throw a few 20s on the board from time to time. But I think those are probably the best longer term expectations.

That is very helpful. Now on the endo part, mid to high teens is that for you or the market or both?

That's for us. That's for us. Again I think we think we are significantly out growing the market and it is probably marginally in the U.S. or modestly in the U.S. and again, significant opportunities outside the United States. You know, we again, those two businesses endo and instruments, this had been focused really just on the U.S. market for a long, long time and we are seeing that opportunity.

Okay and then on Japan, if pricing were flat, I'm sure I could do this math but if you have it. If pricing were flat this year, what would you have grown in Japan?

Well, we're down about 7%. In pricing.

In pricing?

Yes.

So but I mean in other words, I'm trying to get a sense for once pricing anniversaries, what kind of growth out of Japan we can expect.

You know we'll see where it plays out. Keep in mind there is yet another round of price cuts coming.

Right.

This was sort of a bi-annual thing that usually just hit in the even-numbered years. Or the past bi-annual one because it was so draconian, they spread in to three pieces over two years. So unfortunately we're going right back into another one next year. But we hope it will not be as significant as what we've been through. We also have been you know probably getting better about trying to get some products registered and some other things to ultimately do a better job ourselves in Japan going forward. I don't think it's going to be a dramatic turn around. But we feel a little bit better about where we are headed. There will still be more price cuts on the horizon in all likelihood

And than just really quickly on spine, do you think you have the critical mass to really take on the top three share players?

Yes. Yes, we feel very good about where we are there.

Great. Thanks for your time.

Thanks, Bob.

Next question from the line of Mark Mulligan representing Piper Jaffray. Please proceed.

Good afternoon.

Hi, mark.

Just to start off on actually the beds business. You signed the agreement with Universal Hospital Services a few months ago. Just want to find out how that agreement is structured and what sort of impact you would expect it to have.

Sure. I don't think we'll give any details on how it is structured. We will tell you over time it opens up a very nice play into the rental market where we've never historically played. We would is also tell you we are probably still in the top of the first inning in terms of any real impact as that goes out. It is a new business for us, a little bit new for them in terms of being partnered with us. We feel very good about all the initial feedback. But the impact really hasn't yet been felt and we think that is one of the reasons that we'll be able to grow our medical business again faster than the overall market. Because we are entering a market that we're not in today.

What portion of the beds business is rental? Of the market overall?

Mark, I don't think tea a big portion today a lot of what you see in rentals really have to do with surfaces. This is a little bit of a new avenue. So I think we have to see how it develops. We like our relationship. You know we think it will be a broad perspective to allow us, along with UHS to talk about a broader offering to product with the ability to rent products as well as buy them.

Fair enough. On the hip resurfacing business in Europe with the MITCH product, can you just give us an idea of what sort of traction you're getting with that? And maybe any lessons learned for the launch of format in the U.S.?

Sure. You know what, it's going reasonably well. I think the challenge, candidly, and the difference is in the U.S. we are number two to market and we come from a strong position and in most of the European and foreign markets we have been 6th or 7th player in. So it's okay, you know, doing okay for us. It's been a nice round out but probably many had the impact we would hope and expect it will in the U.S.

Okay one final one and I'll hop off. It looks like the instrument sales in the U.S. jumped quite a bit sequentially. I don't know if that is just an artifact of my model or not. But if that's correct is there a product launch or anything that is driving that?

System 6 is, really our System 6 heavy duty power tools are really driving the business right now.

And how long has that been out on the market?

We initially launched in the third quarter of last year. But I would say it is really hitting its traction. It is kind of, I would say tail end of third. Probably September. It's really hitting our traction and we see it usually hit the traction a few quarter after it's been out. I think that's right the sweet spot that we just hit this last quarter.

So you would expect it to continue for another couple of quarters then?

Probably. Whether it is quite that level. We never want to plan it is quite that level. You know, 20% plus growth in our instruments business is clearly a little more stratospheric, but I think we do see it being healthy coming forward for a few quarters.

Okay, very good. Thank you, Nice Quarter.

Thanks Mark.

The next question comes from the line of Tao Levy representing Deutsche Bank. Please proceed.

Good afternoon. A couple quick questions. First maybe you could chat a bit on the U.S. side on the orthopedic implants, especially in knees, you guys are performing very well. Could you comment how you think you guys are doing relative to the market growth? And if you are taking share who's most vulnerable out of your competitors?

You know, we'll answer the first part. Not the second.

Okay.

The first part, I think we continue to be very pleased with Triathlon, particularly going against multiple years now of very difficult comparables, and at a stage in the life cycle when typically a product would have slowed much more significantly than where we are. And I think that speaks to the overall traction and interest that Triathlon has had. So I think again we prefer just to really talk about you know, probably how we're doing relative to the market. We know there's been a lot of buzz and talk about a lot of other knee systems. But we continue to feel very, very good about Triathlon.

Do you think you took share in the quarter?

Probably not much. We probably grew ever so modestly faster than the market. As we have here for a number of quarters. But you know it is just on the margin.

Got you. Maybe you could comment a bit on the sight line product. I recall that's supposed to be a Q-4 launch if I was correct. What are the expectations that we should be thinking about for that?

Sure. We are working through some final commercialization issues on that. And it may or may not be fourth quarter. Candidly it is probably going to shift into next year. The great part is our business strong enough, healthy enough, I think the key here is because we are going into a new market, we want to make sure. We are going against a very formidable competitor. We want to make sure we really have everything buttoned up from a complete manufacturing product execution as well as customer trials and frankly have the sales force and everything geared up. In all likelihood it is shifting that it will move into next year to be more effective.

Like a second quarter '08?

You know we are still sorting it out. That is probably fair.

You know I think some time in the first half is fair.

And then for Dean in the third quarter you talked about the interest expense that you had I guess your tax accrual.

Right.

Is that something that is going to continue going forward or do you pay that down? You know every quarter the other line had been progressively increasing and this quarter is down about $6 million. I'm just trying to think going forward, now that you have a larger cash balance, how should you be modeling that.

It does relate to our tax reserves and it probably was a little heavier this quarter than I would anticipate it being. But it is a more specific calculation than it used to be under the new accounting rules that we adopted at the outset of the year under this Fen 48 pronouncement. So it is probably going to be more volatile than it's been in the past but I would expect this quarter is probably a little heavier on the margin in that category than you might normally see.

Great. Thanks a lot. Good quarter.

Thanks.

The next question copples from Raj Denhoy representing Bear Stearn. Please proceed.

Hi good evening guys.

Hi Raj.

I wonder if I I could ask about the strategy behind the spending. You guys put up a really good quarter again on the top line. You increased spending across the board in selling and marketing as well as R&D. You returned just 20% again on the bottom. I say just.

Just 20? Come on.

When it comes right down to it. If you guys keep doing this well on the top line, does there become a point where you start allowing more to fall through? You are really knocking out of the park on the top line here.

You know Raj, our goal is to keep this going for as long as humanly possible and I think what we are seeing is we continue to find more ideas on the R&D front to be able to spend and little pockets of sales forces here and when times are good, I think we want to continue to fuel this, so that we have more and more things to carry us into '08 and '09 into 2010. So I probably would expect more of it to continue to be reinvested, given we have set such an aggressive earnings goal relative to most sane companies.

Sure.

And we are thinking about trying to keep it going for as long as possible.

Fair enough. Fair enough. Maybe I could just ask one on the resurfacing side. You mentioned your training surgeons this quarter is there any metrics you can give us around that. How many surgeons you have trained? If we can expect these guys to start ordering implants here in the fourth quarter?

Yes. The numbers so far are very small. And we tend to not give specific numbers. But I'd remind you that the product was cleared in July. By the time we got our final labeling and all of that and prepared to do the sales training, it really didn't start until the end of August and we are doing a lot of fairly detailed training. So it was almost insignificant in the quarter. I think here over the fourth quarter it will certainly start to see a little bit more and go back to just on the previous question, too. Again what we probably remind you is, this healthier than usual top line growth that you are seeing right now is really the reflect of some of the additional investments we've made over the last couple of years. Again while times were good, so that we could keep investing and that's what our hope really is here.

Right. Fair enough. It does seem to be working. I guess just lastly, you know, another kind of broader question on med/surg. You know I think one of the things that sort of distinguishes you guys is your very broad offering in that segment. We are hearing some rumblings of hospitals signing exclusive contracts with you guys to sort of outfit hospitals and those sorts of things. is there anything to that? The fact that you guys are able to offer such a broad you know product sweep? So that is allowing you to kind of really out pace the market here?

We think that is a key part of our success. It starts product by product. But when you collectively put together our various businesses we do think it is helping us.

Great. Fair enough. Thanks.

Great. Thanks Raj.

The next question comes from the line of Jason Wittes representing Leerink Swann, please proceed.

Thank you very much. Just wondering first off a general question, you gave the general impressions on pricing for the region and I know we always pick on hips and knees, but clearly you are coming out as a more diverse identified company, especially in this quarter. Can you give us an idea of where your impact may be strong particularly in your implant business, I would love to get sort of a landscape of where you have decent price and where it's tough.

Jason, you know it is really not that distinguished. It is in a reasonably tight range. So you know, I don't --, obviously we wand to be a little more circumspect with our comments on pricing. And I think it's in a tight enough race that it is not even really fair to distinguish.

So I mean are you implying there is not a big difference between the hip and knee business and say the spine and trauma business at this point?

Not of real significance. Obviously the one thing we do call out is Japan and that is the one area where we are seeing significant price declines. As you all know, the rest of our businesses are in reasonably tight ranges.

Okay. I guess I won't push further on that. But I guess you know, you implied that you think you have enough critical mass to go after the spine market in a big way and certainly that seems to be the case, looking at the numbers. For trauma you know it's been the last couple of quarters here really took off. Is that also a situation of critical mass? Or is it largely because you hired, I would say quite a few sales people about a year ago and they are just staring to finally pay the dividend?

It's pieces of both. We have really had six straight quarters over 20% now.

That's right I correct myself.

And we had a couple of 30% there actually I think it is seven straight quarters right at 20%. I think we've probably moved into the number 2 position, we think in the U.S. marketplace and have a pretty good offering. And yet we still have some gaps in our product line that we are working to fill here in the coming years.

Okay. Go ahead I'm sorry.

We feel good about where we've come from and still feel like there is runway ahead of us.

In terms of R&D can we assume your focus of your R&D products over the next year are certainly going to be still in the areas that are really growing fast right now? Spine, trauma and (inaudible)? Is that the way we should think about the focus?

It's everywhere. Also going to be in hips you know additional things in knees and across our endo and instruments businesses. We really you know are reinvesting in every one of our franchises right now. And again we remind people constantly that a lot of our success is built on singles. Not home runs and a lot of this is just you know, quietly introducing another product here, whether it is a cervical plate and spine or different spacer for the interbody space or a hand plate or a distal radius plate for example in trauma. No one of these things are this incredible break through that's worth highlighting. But collectively across the business they really add up and start to load the bases and constantly bring some runs in for us.

Okay. In terms of next year I guess formal guidance is going to have to wait until January. But I suppose we can all say you are sticking to the 20% rule on the bottom line?

I think that is a reasonable assumption.

Great. Thank you.

The next question from Joanne Wuensch representing BMO Capital Markets. Please proceed.

I'm still laughing at the 20% being reasonable.

Thank you, Joanne.

Anyway your spine business in the U.S. is quite, quite strong. And outside the United States in the single digits. What do you need to do to get your OUS business sort of pumped up?

Get better. It is, I think, greater focus. And we've been, you know, we've probably shift the balance a little bit toward the U.S. and I think it have been a little bit quicker to launch products in the U.S. Candidly we've probably had some opportunities to strengthen our sales teams dedicated to spine particularly outside the U.S. I think we've still had not as dedicated resources outside the U.S. A lot of cases the spine people have been carrying other products and we are probably where we were in the U.S. several years ago when we had recon and spine under the same rep. So there is probably some opportunities there to do what we do pretty well, which is better focus.

Okay. So it's fair to say. We should see U.S. sales growth closer to the market's mid teens growth rate and OUS growth maybe strengthen?

Probably. Though I would say international may take a little bit of time. I wouldn't expect that in the fourth quarter. I also wouldn't expect us to revert to the mean to the market in the U.S. quite as quickly either.

Okay. And since no one's asked it, how are you feeling about acquisitions these days?

You know, we continue to be looking. And frankly, since Katherine's joined us, she's surfacing a lot of good ideas. I would tell you we've been fairly active poking around and yet we are in such a position of strength that we feel very patient and comfortable not to overpay. We still think there is a lot of assets out on the market that candidly are, premium priced or priced to perfection at this point in time and we are going to bide our time and still look to broaden our footprint over time. And we'll see where it plays out. But we don't feel any burning urgency to have to do a deal this year, or whenever.

Okay. And last question. When might we see some clinical data on your artificial disk program?

On the artificial disk? We have filed the FlexiCore, the lumbar disk.

Cervical, sorry.

The cervical, we are close to wrapping up that study.

Okay.

And, hopefully the enrollment on that certainly should be completed this quarter. So then we'll be in a position to start to analyze the data. There is also the two-year follow-up, as you well know. So we are still a little bit of ways away from that. But all the initial anecdotal feedback we are hearing is positive.

Great. Thank you.

Great. Thanks Joanne.

The next question comes from the line of Brian Wong representing Broadpoint Capital. Please proceed.

Thanks for taking my question. Most of my questions have been taken. But I just wanted to ask, now that we are closer to 2008, if you might be willing to give us any sort of progress on your OP-1

You know, I think what we've continued to say with this Brian is just take it out of your models. It may be quite awhile. We have given most of what we've said over the last ten years has probably not been clear, has probably been rosier than what we expected, this could be awhile and we just continue to say take it out and we'll be back to you at some point.

Okay. Fair enough.

Thanks.

Then in terms of you know, you mentioned what you might be thinking about for acquisitions. Any other uses of cash? Such as a buy back, that might be in store?

You know, we would -- we continue to look more on the acquisitions front. We don't mind building up a cash position at this point, to be ready to pounce when the time comes. But obviously, if that were to continue to build, you know, we'll certainly be thinking about possibly both dividend, buy back, those kinds of things.

Okay. And then, given the fact that you guys have settled with the Department of Justice on the hip and knee side, I was wondering if you had heard any rumblings in terms of similar sorts of investigations on spine or across the industry?

Not that I'm aware of.

No.

Okay. Fair enough.

You know we know there was one a few years back with one of the other companies.

Right.

We have not heard, we are not aware of anything now.

Okay. Great. Nice quarter. Thanks, guys.

Great. Thank you, Brian.

Next question from the line of Michael Matson representing Wachovia. Please proceed.

Thanks for taking my question. It looks like you had really strong growth in your more capital intensive part of your business. I'm just wondering, given what we've seen in the credit markets over the summer, the late summer here, if there's any risk that hospitals may have a more difficult time in financing their capital budgets over the next six to 12 months.

We've asked ourselves that question, Mike and frankly, we think our stuff is enough under the radar screen that, a lot of our stuff is as you know, smaller, relative to major, major expansion and we think we are in reasonable shape there. But it's -- it's a great question and one that we've been kind of wondering a little bit ourselves. We think the fundamentals of our med/surg businesses are still in good shape.

Okay. And then just in your spine business, I was wondering if you've seen any kind of an impact from or if you're concerned about any kind of an impact from Medtronic's cervical disk products? Because it seems like the numbers they have put out for their training program seem pretty aggressive it seems like they have trained a lot of surgeons if a short amount of time and there may be a risk of cannibalizing some of the cervical products.

They are obviously the 800 bound gorilla in this space. A company we have tremendous admiration and respect for in the spine world. I think we still see enough opportunities we are obviously a little concerned by it. I think we are probably not going to be posting a bunch more 30% growth quarters. But I think we continue to feel good about our underlying strength and where we are going with our own portfolio to be able to grow at greater than market rates.

All right. And then in the knee area, are there any plans to pursue an approval for a mobile-bearing knee? And then just any updates on where the reclassification of the mobile bearing knee stands at this point?

Mike, we do have a trial under -- that is underway, with our mobile bearing knee. It is actually our mobile bearing knee which is called the Scorpio Plus does extremely well overseas. And we have a trial that is underway in the U.S. But we're not completely enrolled at this point this time. Relative to down classification, I haven't heard anything more recently. And I think we are assuming that that may not happen. So we are going to continue along the path we have been on. Obviously there is reasonable follow-up here. So it would be some reasonable period of time before we would have that product in the market in the U.S.

We also don't feel we need to have the every offering that every competitor has. We feel very good about Triathlon and the benefits and patient satisfactions frankly with Triathlon.

That's all I've got. Thanks a lot.

Great. Thanks, Mike.

The next question comes from the line of Matt Miksic representing Morgan Stanley. Please proceed. Please proceed.

Thanks for taking the questions.

Hey, Matt.

So we are getting around to the bottom of the barrel here. But a lot of great questions and I appreciate the time. A couple on maybe some of the product lines. Triathlon you have talked about improving your growth and penetration. Triathlon overseas in Europe and Japan. Can you give us an idea maybe what has been the dynamic there, what you have changed, if anything, and over the long run, is there anything, you know what does the penetration look like? Is there anything different about that market that you know, what kind of legs does that have? No pun intended.

Probably nothing dramatic, Matt. I think to be candid we think the international market is probably a little healthier this quarter and I'm not sure we did anything brilliant. We are seeing uptakes from Triathlon as people shift over, but we also got a lot of very loyal Scorpio users.

Just as a point of clarification, the product is not approved in Japan. So the knee results in Japan are coming from our Scorpio and our [G] product.

Got it.

But I think we will continue to see certainly uptick from Triathlon the more surgeon's that see it, the acceptance is certainly very good. But I wouldn't say we did anything magical this quarter by any stretch.

So in terms in your innings analysis, where are you in terms of like innings in Europe? And then does this get approved? And when? In Japan?

You know, obviously the products have been well-received in the markets where it is launched. I think we are probably in earlier innings in Europe, Matt. You know in Japan, I think we would certainly seek approval there, although the NRG product, which was designed specifically for the Japanese market and the Japanese anatomy is doing very, very well there. So I think we are very comfortable with our offering in the market today.

Okay. And just on Japan, follow-up to some of the questions earlier on pricing. Did you mention what exactly the cut's going to be? Is it coming in, in January or is it coming in April and we just don't know?

We think it'll be in April, but we don't know what they are yet, it's not been resolved yet. That is a lot of (inaudible) that will happen over the next few months.

Okay and if I remember correctly the typical bi-annual cycle it is like we start to hear noises in January, February and maybe a final number the end of February, March something like that.

Yes and it usually kicks in April 1.

Got it. A follow-up on spine. You talk about having critical mass. It certainly looks like the investments in the line and everything else is paying off. Is there anything in particular that really stands out that's driving the business? And maybe also is there anything in your bag of products and spine that -- that you feel like you don't have? The gap that doesn't seem like you have much in the way you are performing. But what else do you think you need to have a full bag of spine?

You know, I think we're there now. I think it's what ail really driving the growth. When you think about what's happened in spine we have gone from four years ago having a spine division you know that was essentially sold alongside our recon folks. We had some dedicated spine reps, but we had some multi-baggers. And we basically had a thoric lumbar business. A lot of the success over the past few years has been dedicated sales people and filling out the line. I think there are a lot more spine surgeons who feel comfortable being able to walk into the OR knowing that Stryker can serve all of their needs. Instead of just being a specialist therefore just a scoliosis surgery. We have gotten much more of a cervical line much more of an interbody line, we have put ourselves I think in a much better position. There are no gaping holes. There are still product improvements and ideas. Obviously ultimately the disks will be there. But you know, most of the holes we feel we've done a pretty good job of filling or have plans to continue to fill and round it out. But I call it now, there is no gaping holes. Now it's a matter of icing on the cake.

Okay. So waiting for sort of the total disk replacements motion, dynamics stabilization might be another area we could expect something from you?

Yes. That will be one of the obvious ones. Again that scenario that was incredibly hyped a couple of years ago, it's there. And it will be you know, we'll certainly I'm sure, be there with a lot of other folks.

I have been waiting for this for awhile. But do you think we'll see anything new in that area? Are you going to keep us waiting until the very last minute?

Probably not from us this year. I wouldn't expect anything from us this year.

Okay. That is good to know. A couple of follow ups on hips, you talked about the resurfacing having an impact some time next year. Between now and then, is there -- do we get the domestic hip growth up to the market? Or has that happened in concert with resurfacing like second quarter say next year?

You know, probably it happens in conjunction with resurfacing. Would we like it to happen a little faster? Yes. Will it actually happen? I wouldn't commit to it until we have resurfacing.

Okay. Fair enough. And then on trauma, just last question. You are obviously doing great there, as everyone has noted. And it's an area where I think we have an industry meeting this weekend. Similar question to spine. Is there any place there that we can expect a new push in products? Or gap that you are filling? Or is it just you feel like it is execution? You are just going to keep hitting it with the bag you've got?

It is going to be a lot like spine, which is continuing to introduce you know singles in terms of product lines and continuing fill out the bag. To also be able to you know, serve the trauma surgeon as we're now serving the spine surgeon. Which is them having the confidence that they can go into any trauma case and we have the products there for them and we're close to being in that situation. But I wouldn't say we're 100% there yet.

Okay. Great. Well thank you for taking the questions.

Great. Thanks, Matt.

You bet.

Next question comes from the line of Bruce Nudell representing UBS. Please proceed.

Hi. Thanks for taking the question. I just, about two of the med/surg markets. I had a question about trauma. You know, we have actually counted procedures, where we actually went and counted codes. And there's been virtually no unit growth for the last five or six years across the states we measured. Could you explain? Is there enough mixed shift left in that category to keep the underlying market growing at 10%? And the second -- the second question I have is about the instrument business. It would seem to be fundamentally a replacement business where you have number one market share. Is it just so dominated by surgeon preference that you come up with a better drill, or other power tool, and the surgeon has the wherewithal to basically purchase you know basically guarantee mix up shift every year? Thanks a lot.

Sure. I want to take the second one first. I think the surgeon still is very critical in the instrument's decision. You know, these are the products that are in their hands. While they're cutting into people and everything else. And it really does matter. They are the ones that need to make those decisions. On the trauma side, I think we continue to see some mix, opportunities. Clearly with you know, the introduction of the locked compression plates and all that stuff over the last few years probably drove it you know that mixed piece, higher than maybe a long-term sustainable growth rate. So we might be in the thinking about it as certainly high single digits, maybe right around 10. But that's probably where our general thinking is.

Thanks so much.

If I could add a little bit to that. On trauma, I would add that at least relative to the mix up shift on locked plating, we haven't seen a lot of that in our business, specifically, because it has not been as big a part of our offering. Instruments just one follow-up point there. I would remind you that a reasonable proportion of that business is a disposable business that's blades and attachments that go on to the capital equipment that's sold that's used in the procedures every day. So that part of the business is, you know, really based on procedural growth and is very repeatable.

So, in terms of the disposable component, what is the unit growth? You know the underlying surgical unit growth?

It is very comparable to what you are seeing at the knee surgeries. Because it's, you know, primarily used there and in other procedures.

Thanks a lot.

You are welcome. Thanks, Bruce. A few more it looks like Katina?

Yes, sir. Next question from the line of Jeff Johnson, representing Robert W. Baird. Please proceed.

Thanks for taking the question guys. Couple of things here. MHLW reps two weeks ago seem to be stepping up the rhetoric a little bit on pricing in Japan next year. Do you have any feeling that those comments were directed specifically to orthopedics and other parts of devices. That is the first part of the question. Then second, any insight into are these price cuts something that will continue to go on over the next decade, or are they going to continue to reduce the [arison] percentages or add lower price markets to the market basket. Or is this something where we finally reach an end at some point in a year, in two years, in three years.

Sure Jeff, regarding their comments I think they are directed more broadly at all medical device companies. Regarding the price cuts, I think we are assuming for our strategic planning purposes that they'll pretty well go on in purputuity. And hopefully just another year or two but I wouldn't plan on it.

So they just always find a way to sneak those percentages down or add more countries to the market?

We think they do and frankly we continue to feel that they're not really dealing with some of the underlying issues in their health care system, for example the average hip patient is spending 20-25 days in the hospital. Where as in the U.S. its 2-3 days. They're are just certain parts of their health care system their not yet wrestling with the fundamental realities. There is only so much we are going to be able to change. We certainly are trying as a industry. I can't promise we've got it nailed. Haven't cracked quite as well as we'd like to yet.

Thanks on that, Just qualitatively I guess, on volumes for large joints in the U.S., hips and knees specifically. Obviously some question on where volumes were in '06. It seems like in the early part of '07 you were talking about volume seems to be picked up. Do we still see volume trends stable to improving in the U.S. there year?

I think modestly. Nothing breakthrough Seems to be a reasonable year.

Okay. Great. Last question just on spine with the (inaudible) product over in Europe. Is there any opportunity to bring opportunity something like that in the U.S. Has that got it to stay a European product?

You know, Jeff, I can't comment specifically on that. It is obviously very, very new to Europe and you know, something we are exploring. No comment on what it might look like in the U.S. at this point.

All right. Fair enough. Thanks, guys. Appreciate it.

Great. Thanks, Jeff.

Next question comes from the line of Steven Lichtman, representing Banc of America Securities. Please proceed.

Hey, guys. Just a few quick ones here. First, just in terms of the level of investment. Obviously you mentioned continuing to plow back. Is it fair to say that the level of investment on the SG&A and R&D side may be a little lighter here looking forward than it has been the last couple, so when we think about the P & L the leverage may be more from than on the gross margin side a little flatter in terms that have leverage?

Great observation. Yes, I think that's -- that's how we'd probably see it.

Okay great. And in terms of the couple acquisitions you made in med/surg, the Tourniquet System, Level of Consciousness, would you characterize those as single opportunities? And will they contribute begin to contribute next year? Just trying to get a scale for those acquisitions?

Yes. They're -- they're again singles. I think the Tourniquet will probably be more meaningful next year than necessarily Level of Consciousness. I think we think the Level of Consciousness monitor will be a slightly longer ramp. It is those kinds of things that probably allow us to have our instruments business growing a couple of points faster than the market and again probably get us into that mid teens range instead of the call it 8 to 12ish or whatever that the market might be growing.

Okay. Great. Last one, Dean. On the tax rate. Is this a good tax rate to use for the fourth quarter? Do we see a still downward bias maybe into next year?

I think we see downward bias for the longer term. But probably it is fair to say at this point in time of the year that the rate will be very close to where it is year to day 28.1%.

Fair enough. Thanks guys.

Thanks Steve.

Our final question comes from the line of Larry Keusch representing Goldman Sachs. Please proceed.

Hey guys.

Hey, Larry.

Just want to ask one big picture question. This is sort of thinking over the next several years. This industry obviously has been characterized a lot by service levels among sales organizations and close ties to physicians and who's going to get up in the middle of the night and deliver the product, etc. But I want to explore a little bit about how you guys are thinking about the importance of innovation and what makes this challenging is obviously the long time lines that physicians measures outcomes in this space, and I'm talking primarily large joint recon. So maybe you could just talk a little bit about how important innovation in that space is going to be over the next several years and just an update on how you're thinking about whether we're going to revisit types of cost reduction modalities. Maybe not gain sharing specifically but where's that ultimately going to go, does that resurface as well?

I think we continue to see the service component as a very important part of this business and really ultimately we think the key to success is a combination of clinically revelant innovation and great service levels. There will be innovations and as you know with us we're not always going to be first with the innovation and orthopedic surgery particularly Total Joints are very successful, so what we're trying to do is be careful that anything we bring really is enhancing the surgical experience and the patient experience. But I think we'll continue to have opportunities for additional innovation as we get better designed, better materials, but there is also going to be candidly probably some marketing stuff out there. We won't be on the leading edge of that kind of stuff. Again its going to be a combination of both service and innovation. We think we are poised across all of our businesses to deliver against that model. Regarding pricing, we just assume its going to be long term pricing pressure. The unit growth is going to be there. There will be pricing pressures of the certain meaningful innovations. Will probably continue to be able to garner mix upgrades and some of that.

Okay. All right. That's terrific. Thanks have very much guys.

Great, Larry. I think that wrapped it up for questions, Katina?

Yes, sir.

We'll just make a couple of final comments. Our conference call for our fourth quarter 2007 operating results will be held on January 23rd, 2008. And at that point we will discuss our outlook for 2008 sales and earnings. We also wanted to make you aware that we are planning a change of timing and venue for our annual analysts meeting, which has traditionally been held in conjunction with the American Academy of Orthopedic Surgeons meeting. We now plan to hold our analysts meeting on May 8 in New York city and hopefully, you'll be able to join us at that time. Again we feel good about where we are and we are very focused on delivering a solid fourth quart and wrapping up the year and moving into 2008. Thanks, everyone.

Ladies and gentleman thank you for your participation in today's conference. This concludes your presentation. You may now disconnect.