史賽克 (SYK) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Stryker earnings conference call. My name is Emmadee, and I will be your coordinator today. At this time, all participants are on a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations, and will be subject to various risks and uncertainties, that could cause the Company's actual results to differ materially from those expressed or implied by such statements. In addition to 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 in connection with the clinical studies and otherwise, that affect the United States Food and Drug Administration approval of new products. Changes in reimbursement levels from third-party payors, a significant increase in product liability claims, changes in economic conditions adversely affect demand, changes in foreign exchange market, changes in economic conditions that adversely affect the level of demand for the Company's products, changes in foreign exchange markets, changes in financial markets, and changes in the competitive environment.

Additional information concerning these and other factors are contained in the Company's filings with the United States 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 from continuing operations for the comparative nine months ended September 30th, 2007. For discussion of non-GAAP financial measures including a reconciliation, appears in today's Form 8-K, filed today with the United States Securities and Exchange Commission, which may be accessed from the 'For Investors' page on the Company's website at stryker.com.

I will now like to turn the presentation over to your host for today's call, Mr. Stephen MacMillan, President and CEO of Stryker. Please proceed sir.

Thank you Emmadee. Good afternoon everyone. Welcome to Stryker's third quarter 2008 earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer, and Katherine Owen, Vice President of Strategy and Investor Relations. As many of you recall from the Q2 call, I had not planned to participate on this call, knowing that it would be in very good hands with Katherine and Dean. However, in light of the current market environment, we thought it made sense for me to join today's call as well.

Like most quarters, we had our share of successes and challenges, and through it all we are pleased to deliver our 31st consecutive quarter of double-digit sales growth. Although helped somewhat by a favorable calendar and currency, overall reported sales growth was 14%, and 12% on a constant currency basis. Net earnings increased a strong 20% in the quarter to $0.66 per share, in-line with our internal budget goals and leaves us on-track to deliver our commitment of $2.88 per share for the full year.

On a geographic basis, growth was reasonably balanced, with the US posting a 13% increase, while international was up 15% reported, and 10% operationally. Our unique footprint of businesses again delivered solid growth overall, as our four largest implant businesses showed sequentially faster growth this quarter than last. MedSurg continues to deliver, though this time led by an extraordinary quarter at Medical, while Endoscopy and Instruments slowed a bit.

By group, our Orthopaedic Implant businesses were up 12% as reported, and 10% operationally. With our US Spine, Trauma, CMF, and Knee franchises posting particularly outstanding results in the quarter, all up at least 18%. Specifically despite the challenge of a very difficult comparison of 31% growth in last year's third quarter, out US Spine business posted a gain of 21%, giving us 20% growth or greater in this business now for 16 of the last 18 quarters.

And not to be outdone our US Trauma team followed last year's 29% growth, with 25% growth this quarter, making it 9 out of the last 10 quarters with growth of 20% or higher, and a great rebound from a softer second quarter. US CMF also put up 21% growth on top of last year's 23% quarter. Meanwhile, our US Knee business also continues to shine, up another 18% in the quarter.

On the MedSurg side, total sales were up a solid 16% as reported, and 15% operationally, with all three franchises again posting double-digit revenue growth. Our Medical team deserves particular accolades this quarter, posting strong 21% growth in the US, and over 30% globally. They were busy.

I am also particularly proud of our leadership team during this time, as we are dealing with numerous regulatory and compliance challenges. While Katherine will provide a few more details in a moment, our leadership has clearly undertaken deep and broad scale efforts to strengthen our quality and compliance initiatives, and yet our team also continues to deliver current results, while remaining very focused on our future as well.

To this end, we are pleased to be launching a breakthrough new hip cup this month, showing that we are keeping our new product engine alive, while also doing major upgrades at virtually all of our manufacturing facilities. Although this has put some strains on the organization, our teams are delivering around the world.

I will now turn it the over to Katherine, who will provide some more detail around some of our new product activity, a regulatory update, and even an update on OP-1. Go ahead, Katherine.

Thanks, Steve. As many of you are aware, we tend to discuss new products only after they have launched, rather than provide details regarding our pipeline. We know this can be frustrating to investors, particularly given the acceleration in R&D spending from 2005 through 2007.

The rationale behind the strategy is aimed at preserving our competitive advantage. Frankly, we view the sales growth we deliver as the best indication as to how successful our R&D investments have been, with the Company targeting eight straight years of double-digit sales growth, despite a slowdown in the Med tech industry, we believe our R&D investments have largely been a success.

Year-to-date in '08 roughly 30% of our total Company sales are from products launched in the past three years. Like many companies we have had delays or projects that haven't worked out as we had had initially hoped, but overall our sales growth suggests we are making solid investments. We would also note that our pipeline is comprised primarily of singles and doubles, that represent evolutionary product improvements, and/or launches versus blockbusters. But it is the consistency and volume of these incremental launches across all off our divisions, that in their entirety have an impact on sales.

We also thought it would be highlighting some of the recent products launches. As Steve mentioned, in early October Orthopaedics launched the Tritanium Primary, which we view as an important new addition to our hip portfolio. This primary Acetabular shell offers enhanced fixation through it's Tritanium Advanced Fixation Technology, a biologically compatible material, combined with ongoing recovery of our Trident franchise, as well as the continued uptake for the Cormet hip resurfacing product, the Tritanium Primary is an important addition to the sales force's product offering.

Shifting to Medical, over the past 18 months, this division has launched a number of new products, including the next-generation InTouch critical care bed. Recall that prior to our launch of the first generation InTouch, we did not compete in the roughly $150 million US acute care segment of the patient handling market. The expansion of our product offering into new market is an important factor driving ongoing share gains for Medical. Given that we have eight different franchises, it is not practical to list all of the product launches, but we thought it would be helpful to highlight a couple as an indication of our R&D productivity, and to underscore our conviction in our ability to sustain double-digit sales growth.

Turning to the regulatory update, as most of you are aware, we currently have three FDA warning letters in place. Two within our Orthopaedics division, and one at Biotech. When we receive the warning letters, we made the strategic decision to implement a quality initiative company-wide, rather than focus strictly on the three facilities that had received FDA actions. This decision is much broader in scope, given our global footprint, as evidenced by the roughly 20 manufacturing facilities we have worldwide.

However, we believe implementing a common set of quality standards throughout the Company, will allow us not only to address the issues raised in the warning letters, but elevate the entire organization to the standard required by the FDA. And it is also true that our comprehensive approach requires significantly greater investments, and will take several years to fully implement. As such, as we have indicated previously, we will spend at least 50 million annually for the next three years on our quality initiative.

With respect to the warning letters, our goal is to report back to you with the results of the reinspection some time in the future. We have not indicated whether or not the reinspections have been scheduled, and we don't plan to. Rather we will keep our updates limited to actual results, versus any subjective commentary on the process, beyond what we have provided on this call.

Clearly our efforts this year have been geared towards making the necessary changes to address the issues raised in the warning letters, with the objective of realizing successful reinspections. Finally, we would note that since the receipt of the Biotech warning letter in April of this year, we have had subsequent FDA inspections of other manufacturing facilities globally, that have gone very well.

We would note, however, that given the breadth of our organization, and the magnitude of the quality improvements we are making, we still have much work to do. Nonetheless, these favorable inspections are important milestones for the Company, and reinforce our conviction that the investments we have made to date, and we will continue to make will continue to pay off. Are we on the right path? We think so. Are we where we immediate to be? No, but we will be.

Regarding OP-1 we would like to give an update with respect to the current status of the pivotal US trial evaluating the product for use in spinal fusion. As many of you are aware, OP-1 putty contains a specific recombinant human protein that stimulates new bone formation, and is currently approved in the United States under a Humanitarian Device Exemption, or HDE, for specific revision spine indications. The HDE approval limits the use of the product in the US to a patient population of 4,000 per year. A related product, OP-1 Implant for nonunion bone fractures, is approved in 28 countries, including an HDE approval in the US.

Recall in that December 2001 we initiated an Open Label randomized controlled pivotal trail of the the OP-1 putty in 24 centers in the US and Canada. The study was a non-inferiority trial comparing the success of OP-1 putty to autograft, in the treatment of degenerative spondylolisthesis with symptomatic spinal stenosis using uninstrumented Postero-lateral spinal fusion. A total of 295 patients were enrolled in the trial, of which 208 received the OP-1 putty, with the remainder implanted with autograft.

The primary end points of the trial included a combination of clinical success, as measured by the Oswestry Disability Index, neurological events, device-related serious adverse events and retreatments, as well as radiological success, as measured by the presence of bone, angulation, and translation. We completed enrollment in the trial in 2003, with a two-year follow-up period. In June 2006, we submitted a PMA to the FDA for the use of OP-1 putty for postero-lateral lumbar spine fusion surgery.

Based on the results of one of the components of the primary end points from the trial, and post filing of the PMA, Stryker decided to collect additional prospective clinical and radiographic data. The additional data was filed with the FDA for their review, and during Q3 we were informed by the FDA that the PMA submission, including the additional prospective data, will be reviewed by the FDA Orthopaedic and Rehabilitation Devices Panel on February 3rd, 2009.

Although there is still uncertainty regarding both the outcome of the panel and the FDA's ultimate decision regarding the PMA submission, we are encouraged that we will have the opportunity to present the broad data package. Under the HDA approval, OP-1 has been implanted in over 40,000 patients to date, which we believe underscores both the safety and efficacy profile of the product. As it would not be appropriate to discuss the specifics of the trial, including the decision to collect additional prospective data ahead of the upcoming panel, we will not be making any additional comments regarding OP-1.

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

Thanks, Katherine. I will begin with the impact of foreign currency on our sales in the third quarter. Foreign currency again had a favorable impact on sales this quarter. The weakening of the US dollar added $26 million to international sales, and increased the Company's overall sales growth by 1.7%. However, the dollar was stronger than we anticipated during the quarter, and the positive impact on sales was much less than we projected during our last call.

Consequently the 1.7% FX benefit compares unfavorably to the 2.5 to 3% FX benefit for the third quarter, that we estimated at the time of our previous call. In the third quarter, the dollar weakened approximately 9% against the euro, and about 8% against the yen when compared to prior year rates. And if currency rates hold near current levels, we expect the impact will decrease fourth quarter 2008 sales by about 2.5% to 3.5% versus the prior year.

Now I will spend a moment on the impact of price and volume mix on the top line. Selling prices were flat on a worldwide basis in the quarter, with domestic prices up about 0.5%, and international prices declining slightly as a result of the April 1st 2008 government reimbursement cuts in Japan. Japanese pricing declined 5% in the quarter. FX was up 2%, as I have already stated, and volume and mix growth was 12% in the third quarter, in-line with the second quarter.

To be fair, both quarters included one additional selling day compared to the prior year. In contrast, our upcoming fourth quarter will have one less selling day than we had had last year. Domestic volume mix growth was 12% in the quarter, and international volume mix growth came in at 10%.

Now I will turn to the segments of our business, our Orthopaedic Implants business, which represents 59% of sales. Saw sales growth by 12% in the third quarter on a reported basis, and 10% in constant currency. All-in we were pleased to see sequential acceleration in the operational growth rates for Hips, Knees, Trauma, and Spine.

We provided sales growth rates by product line in our press release, and I will reference those rates as I provide more detail on our product performance. Turning to Hips, they were up 6% in dollars, and 4% operationally in the third quarter. Hips came back a bit this quarter, with 4% operational growth, compared to 2% in the second quarter. We think the Tritanium Primary cup will provide some impetus to get sales force to get Hips back on track, but this benefit will likely flow more into 2009, as the rollout will be paced throughout the fourth quarter. To mind with a continued uptake for Cormet Hip Resurfacing and increased focus on regaining momentum for our Trident Cup franchise, we expect ongoing incremental improvement for our hip business as we get into 2009.

US Hips posted 4% sales growth in the third quarter. Incremental Cormet Hip Resurfacing sales, as well as growth in restoration modular hip revision, X3 Polyethylene, and Accolade cementless products led the way. Trident sales were off slightly in the quarter, with the rate of decline abating from the second quarter.

Europe saw constant currency Hip sales growth in the mid-single digit area. ABG 2, Accolade, X3 Polyethylene, and Restoration modular hip revision products led this growth. In Japan, local currency hip sales declined at low single-digit levels, due to the government price cuts. Spine gains were in the low to mid-single digit range, led by our Secur-Fit, [SpineCore] and Exeter products. The remaining international markets posted low single-digit operational sales gains, led by the Pacific business where Exeter and X3 Polyethylene helped drive growth.

Now turning to Knees, that business grew 16% in dollars, 14% in constant currency in the third quarter. Our knee franchise has another excellent quarter led by the US. Domestic Knee sales accelerated to 18% growth, bringing our string of double-digit growth quarters in US Knees up to 35. Primary Knees grew at mid-teens levels, with Triathlon leading the way.

Revision knees had an exceptionally strong quarter, with growth in our Triathlon TS Revision Knee, which was launched in early 2008, continuing to accelerate. Growth in Knees is also being helped by the first quarter 2008 launch of our Triathlon PKR early intervention product, albeit on a very small base for that product category. European Knee sales grew at mid single-digit constant currency levels, with growth led by Triathlon and X3 Polyethylene.

Japan also posted mid single-digit operational growth in Knees, but this was higher on a volume basis after consider the impact of the price reductions. Scorpio NRG led Japanese Knee gains. Our Pacific Knee business grew at mid-teens levels in local currency, led by Triathlon. In Canada and Latin-American, Knee sales posted mid to high-single digits operational growth, with Triathlon strong in Canada, and Scorpio leading the way in Latin America.

Turning to Trauma, that business was up 20% in dollars, and 16% in local currency this quarter. Our Trauma business had a great quarter with the US bouncing back from a softer second quarter. Domestic sales growth of 25%, or 22% without military sales, was very impressive, particularly in light of the 29% comparable third quarter 2007 growth for this franchise. US Trauma growth was paced by sales of Gamma3 Hip fracture, Hoffmann II External Fixator, VariAx Distal Radius, and foot plating system products.

International Trauma sales were up 9% in constant currency in the quarter, Europe posted high single-digit operational growth, in Japan local currency Trauma sales grew in the mid-single digit range, with that group closer to double digits on a volume basis. Pacific the remaining international Trauma business, is posting growth above 30% operationally, on a product line basis, international Trauma growth was again led by upper extremity, and foot and ankle product.

Spine grew 21% in dollars, and 19% on an operational basis in the quarter. The Spine franchise posted very strong numbers with the US again leading the way, and overseas operational growth reaching double digits for the first time in over a year. US Spine sales grew 21% against a prior year comparable of 31% growth. Domestic Spine growth was led by Interbody and thoracolumbar products. Spine sales in international markets grew by 13% in local currency, with the strongest growth in thoracolumbar and cervical products. On a geographic basis, Pacific, Canada, Japan, and Latin America all posted strong teens level operational growth, and Europe was solid.

Then last, the Orthopaedics Implants franchise, CMF was up 10% in dollars, and 9% in constant currency in the quarter. CMF growth came entirely from the US, which posted another excellent quarter with growth of 21%. Domestic sales growth was strong in both the maxillofacial and neuro product categories.

Turning to our MedSurg group, the MedSurg group had a very good quarter. Medical put up an outstanding quarter on a worldwide basis, and Instruments and Endoscopy were both stronger overseas. As a reminder, MedSurg is comprised of three significant product categories, Instruments represents 18% of total Company sales, Endoscopy 14%, and Medical 9%, to add up to the 41% total that MedSurg represents. MedSurg Group sales growth came in at 16% for the quarter on a reported basis, and 15% on an operational basis.

Now turning to the three product categories, sales for our Instruments product line were up 13% in the quarter on a reported basis, and grew 12% in constant currency. Instruments had a stronger quarter overseas, with US growth a bit softer in the face of a very tough prior year comparable, and a voluntary recall of our System 6 Heavy Duty power tools. This resulted in a product hold, but the issue has now been resolved, and we are in the early stages of ramping shipments of this product back up.

Domestic sales growth was led by interventional Spine products, as well as Steri-Shield, Irrigation, cement mixing, and navigation products. Sales of System 6 were off due to the recall, but should rebound in the fourth quarter. The Instruments product franchise registered strong local currency growth of 18% in international markets. Heavy Duty and micro power tools posted solid growth overseas, and irrigation and Steri-Shield were very strong outside of the US. On a geographic basis Pacific, Japan, and Canada had had constant currency growth above 20%, and Europe was a low-teens grower.

Now turning to Endoscopy, that business grew third quarter sales 11% in US dollars, and 10% in constant currency. As we expected, Endoscopy sales growth was tempered somewhat compared to the first half of this year, as this franchise went up against last year's third quarter operational growth rates of 21% in the US, and 35% overseas.

Domestic sales growth was led by general surgery products with our Arthroscopy also posting solid growth. International sales were led by general surgery and video products, but the communications category suffered a decline against some larger prior year I-suite installations. On a geographic basis, Pacific had another exceptional quarter, and Europe was solid.

Turning to our Medical business, that was up 31% in the quarter as reported, and 30% in local currency. Medical had an exceptionally strong quarter around the world, domestic sales grew 21% paced by extremely strong growth in beds and EMS products. The international business for medical grew 77% operationally on a small base, and benefited from some one-off orders shipped in the quarter. Geographic growth was led by Latin America and Europe.

Now I will turn to the remainder of the income statement beginning with gross margins. Gross margins were down 140 basis basis points compared to the prior year, primarily as a result of the cost for internal and external resources, assisting with our work on quality initiatives. Margins were also negatively impacted by higher commodity and freight costs, as well as the impact of the significant strengthening of the US dollar during the quarter. This results from timing differences between the negative sales impact of the currency change, and the ultimate benefit of a lower cost to produce goods overseas, which is delayed by the time it takes inventory to turn.

Research and development spending was down 4% in the quarter, but was up 3% on a sequential basis, to reach 5.6% of sales in the quarter. Katharine has already discussed our thoughts in this area in some depth, so I won't belabor the point, but we do believe we are spending sufficiently here to keep a bevy of key projects on track.

So in general, administrative costs increased 11% in the quarter, primarily as a result of increases of sales related costs, as well as normal growth in personnel and related compensation costs. Selling costs include compensation and instrument amortization costs, and grew somewhat below the rate of sales growth, as instrument amortization has begun to slow down.

Operating income increased 18% in the third quarter, and operating margins increased 22.0% of sales. Now a quick breakdown of Other income and expense for the quarter, investment income in the third quarter was 23.5 million, interest expense, offsetting that was 7.9 million, and we also had a foreign currency transaction loss of 3.7 million in the quarter, to bring the total Other Income to 11.9 million for the third quarter.

The Company's effective income tax rate was 27.2% for the third quarter of 2008, in-line with the rate for the second quarter. We are generally comfortable that the annual tax rate for 2008 will fall in the range of 27.4 to 27.6%. As indicated in our press release, we initiated the previously announced share repurchase program during the third quarter, and competed it in early October. During the quarter, we repurchased 9.1 million shares for $596 million.

Our balance sheet continues to be in excellent shape. I will touch on the key asset management areas. Accounts Receivable days ended the quarter at 60 days. This represents an increase of just 1 day, compared to both prior year and prior quarter. Inventory days finished the quarter at 164 days, up 2 days sequentially, and up 9 days versus the prior year.

As most of you know, inventory days normally peak in our third quarter, given the slower Orthopaedic Implant surgery schedule, we again expect this metric to decline during the fourth quarter, as surgery picks up and we pace plant activity. Then I will end with a quick comment on cash flow, cash flow from operations in the first nine months was up 14% to $757 million, and free cash flow was up 20%, from $539 million to 648 million, we are on-track for another excellent year in this area.

With that, I will turn it over to Steve.

Thanks, Dean. As we head into the final quarter we continue to feel good about achieving the goals we articulated at the start of the year. An eighth straight year of double-digit revenue growth, and 20% EPS growth to $2.88 a share. Given the overall external environment combined with our own unforeseen challenges which popped up during year, we feel good about this performance.

We will now open it up for Q&A.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS). Questions will be taken in the received. Your first question comes from the line of Jared Holz with Thomas Weisel Partners.

Great thanks a lot, good afternoon. Could you discuss the visibility that you have in the MedSurg business, not really sure in terms of the timing when you know you are going to get certain orders, but especially in the digital OR business, how many months ahead you can see revenue coming in?

Sure, Jared. I don't know if you heard it. We heard a little crackling on the line with your questions. I think your question was regarding capital spending. About 60% of our MedSurg sales are capital. As a result there is significant interest in the potential for a sales slowdown tied to the current economic environment. Couple thing we would like to point out, first, although we have a hefty capital exposure the vast majority of our sales are relatively low ticket items, and we simply don't have any single product with an ASP in the hundreds of thousands, let alone millions.

As a result, it probably insulates us somewhat from the higher level of scrutiny from hospital capital committees. Second, quarter to quarter the impact of swings that occur with the MedSurg division is generally a function of capital spending budgets, and third, if you recall back at our Analyst Day in May, we took a look a look at hospital capital spending versus US MedSurg sales, and we did see some correlation between the two. However, there is generally a hefty gap in those growth rates, and what we published during, or showed during that period was that there was a range from a low of 15% US MedSurg, to a high of roughly 22 to 23%, compared to a hospital CapEx range of down 3% to up roughly 10%.

So against all of those facts and circumstances, we are cautiously optimistic regarding the potential for our MedSurg franchises, particularly when you layer in our overall relatively low market shares across the world, and our considerable US opportunity that we are now leveraging.

We are also cognizant of how much economic uncertainty there is, and the potential impact it might have on capital budgets and hospitals financial flexibility going forward. Probably it can't be overstated, all of which will be considerations as we prepare budgets for 2009.

Okay, great. On SG&A spending, hopefully you can hear me better now, on SG&A spending do you still see a significant amount of leverage there? I know in the past you have talked about the opportunity to gain leverage from that line item. Do you still feel comfortable going forward that there is a lot left in there?

I think we still have reasonable opportunities for leverage within our SG&A line. We have got certain franchises, particularly our Trauma and Spine franchises, where we have invested significantly in the sales force in the US, and conversely, on our MedSurg businesses, we have invested pretty significantly outside the US in recent years.

We believe those are leverage opportunities, as well as some broader leverage opportunities just overall, in terms of how we run the business and think about the way that we might be able to leverage opportunities for sourcing of products, and where we manufacture them as well, particular as we go through some of these quality initiatives, I think it gives us an opportunity to evaluate kind of our plant structure as well.

Expect the SG&A to come in small pieces over time. More than anything dramatic.

All right, great. Thanks so much.

Your next question comes from the line of Mike Weinstein with JPMorgan, please proceed.

Good evening.

Hey, Mike.

Steve, glad you could join us here. Thanks for doing that. Let me ask first, I am going to ask an income statement question first, and I think probably be helpful for everybody on the line, to get a better understanding of when we look at the release here and what we see playing out with, obviously your gross margins going down because you are spending, and you are offsetting that with your cost controls, and your OpEx line. Help us understand both pieces of that if you would.

Help us understand, why the incremental spending, first of all, is showing up in cost of goods sold line, and then if we think about the R&D, which was down 4% in the quarter, is that fewer people? Is that fewer projects? Is that projects put on hold? How are you getting the tightening of the belt that we are seeing here, that is helping you continue to get to the 20%?

Sure, Mike. Let's start with the gross margin line. As you recall, we had had five straight years of steady gross margin improvement, and as we have been investing this year in the quality piece, that is clearly going to take a step back, probably this year and next year. But I would say then probably beyond that, we will hope to start to get back on that curve of improvement again. Now why a lot of the costs are showing up in there, a lot of it really is within the plants. So it is affecting the cost of goods line as opposed to other parts.

Now on the R&D piece, I would tell you we have not cut back people. It has been more some of the external stuff. I would also tell you it is some of the clinical work. We were quietly continuing to spend on OP-1 to get it there, and we beefed up some of the other projects over the last few years, that are coming through on a project basis, but our people and projects we still feel very good about, and as a reminder we are kind of back to historical norms on the R&D line after a few years of being well above that.

Steve, when you say the external stuff on the R&D spending, are you talking about clinical work, or are you talking about payments to physicians? Help us understand that.

No, more project, it is more I would say it is consultants helping with extra projects, call it Surg projects more than anything.

And remember Mike, we did have a couple of larger trials, with the Spine side with our disk, and as Steve mentioned on OP-1, that just during the normal course of their progression have moved out of the more expensive pivotal trial stage.

In terms of some of your comments on gross margin, it may be helpful to give people a sense of some of the specific areas that kind of fall under that umbrella of the quality initiative. This certainly isn't an all-encompassing set of examples, but just to give some sense of how broad we are going here, and why you are are seeing such impact to the gross margin line, we are introducing a more formal corporate quality system, which sets minimum consistent standards across all of our locations.

That is in areas like complaint investigation, design controls for new product development, and production processes. We are also adding resources to both our site and corporate quality organizations, to implement these improved processes, and also to monitor the key quality data, like complaints and MDRs.

Lastly we have been working across our divisions to improve the control and the efficiency of supplier base, and that is by sharing vendor audits and performance metrics. Traditionally each site did this on their own, even with a supplier did business with more than one Stryker division or site. Again that is not meant to be an all-encompassing list, but it does give you a sense of how broad and deep we are going, and where that falls on the gross margin line.

Katherine, let me ask you, that was very helpful. Let me ask you just one OP-1 question for Katherine or Steve. What we saw in the abstract at [NAF], and what you are talking the about presenting at this upcoming advisory panel, would the incremental value that is really getting you there, the 36-month-CT scans, is that really what you felt like you needed in order to reapproach the FDA?

We think that was, yes, that was probably the key additional data Mike, along with other dialoguing with them.

Great. Thank you, Steve.

Thanks, Mike.

Ladies and gentlemen, as a friendly reminder, please remember to limit your questions to one question and one follow-up to allow other participants to enter the queue. You next questions is from Bob Hopkins, Banc of America, Please proceed.

Thank you. Couple of quick questions. You guys are talking about the spending going out three years in terms of at least $50 million. I was wondering if could you be any clearer on exactly what you mean there? Is that 55 million? 70 million? 100 million? Any rough sense as to what at least 50 means?

It means at least 50. And I am not trying to dodge the question, but if you think about where we started the year we were look at spending 20 to 30 million. That number has gone up throughout the year. Again as we decided really to go very broad and very deep. That was a decision we made.

We think it is the right thing to do. But we are going to be spending more, so we will get into more specifics on the January call, which is when we will give guidance for next year. But you should think about at least 50 as us underscoring the at least, and beyond that we are just going to have to wait until January, Bob.

Okay. And then as sort of a follow-up to that, to some degree on one level it gives people comfort that you are spending all this money on quality, but on the other hand every time we have spoken it has got a longer duration, so you wonder why so much money over a long period of time?

It makes investors nervous that there is a deeper seated problem at Stryker from a manufacturing perspective, so I guess my question really is to Steve, given all that is going on, how comfortable are you that you have got quality systems that are in place, at a level that means the risk of recalls, or the risk of things that could have a meaningful detriment to your ongoing business are quite low, and that this spending program is really just added security?

Sure. As you know, we have got three warning letters in place. We have underscored the magnitude of the investment. I think as we dug in deeper, what we realized is we have got a lot of good quality product, but we haven't had the compliance systems all the way through the Company, as rigorous as we would like.

And therefore, we are looking not just at the facilities that got warning letters, but going much broader across the entire company. We are dialoguing deeply with the FDA as it relates to warning letters, as well as getting better across the board. I would call it, it is the evolution of the Company from a highly decentralized smaller company, to one that is clearly a much bigger company now, with more rigorous controls, and that natural evolution. But it is part of growing up. Katherine?

A couple of things. One of the things, even though we don't give ongoing updates about facilities that have been reinspected, we did think it was important, or have had inspections, we did think it was important to call out, that since the last time we gave an update, which was in April when we got the Biotech warning letter, we have had subsequent inspections of other facilities globally, and those have gone very well. Again, that is just one data point. We still have a lot of work to do. But we did think it was important to convey that, so people could get conviction that the investments that we have been making now for the better part of a year are paying off, and are being appropriately geared in the right directions, as it relates to the quality initiatives.

So Steve are you comfortable saying right now you think the probabilities of recalls are more substantial issues as a result of the current state of your quality is quite low? Is that something you are comfortable saying?

I think we are getting a lot better. I would always want to be careful. As Dean referenced, we just referenced a System 6 recall.

Part of it, as you get better, and apply more rigorous criteria, we are probably seeing ourselves having more, call it shipment holds, or things like that during the course of the year, which we haven't called out, all of which to me are the signs of actually having a more rigorous and healthy quality system. We are almost saying internally, if you don't have any shipment holds, maybe it means we are not being as rigorous, so it's all part of getting a lot stronger.

The way I would look at this, again, when we put our time and energy on to something, I believe our team executes as well as anybody in the industry. And since earlier this year this has become a much bigger focus of our management team, and I am very proud of the progress, but I would tell you this was years of running a business very decentralized with different standards from plant to plant.

The FDA clearly expects in today's day and age, they want big companies to have one system across everything. They don't like the decentralized operations that had different ways of doing things. It's all about harmonizing, standardizing, and getting them all to the same place.

It is going to take us a few years. I think as we dug deeper in from very early in the year we realized, there is probably more work to be done than we fully imagined, and we have taken it now with the full vigor, and that is why we are trying to particularly emphasize the 'at least' because we didn't want people to assume this was the peak year. Deep down I would say '09, I think some people were assuming, okay, and we might have thought very early in the year, okay we spent a lot this year, and it starts to taper back down. I would say '09 is probably going to be higher than '08.

Thanks very much. I will let someone else ask the 20% question.

Thanks, Bob.

Your next question comes from the line of Rick Weiss with Leerink Swann, please proceed.

I would love to ask the 20% question, but knowing you are not going to answer it anyway, I will skip ahead to a couple others here. If I could touch on the economy again. I guess my question is basically, will it be different this time? In the past I think we had all agreed that the economy hasn't had a big impact, the ups and downs haven't had a big impact on hip/knee volumes. Is it going to be different this time? And broadly, where are you concerned as you look across the portfolio, given the chaotic global economies?

Rick, it is such interesting times. You talk to anybody right now, from people selling bottled water to anything else and seeing slow down, I think the way we look at the global reconstructive market is probably still seeing dollar growth in 7 to 9% range. I think we still feel pretty good about Spine and Trauma and most of the markets we are in, and we have not really seen any signs of a slowdown in our MedSurg business, other than our typical product cycle things.

Having said that, we are always paranoid. I think any CEO in today's environment would be nuts to sound overly bullish and feeling that we have got it. I personally think we are going to be in for a very difficult global economy through '09, and maybe into '10. I think it is going to be worse than a lot of people have imagined. We have been trying to brace for that in terms of our own planning. But having said that, I think the fundamentals of our business is, every division right now we still feel pretty good about.

Okay. Turning to the stock buyback with the buyback complete, one, are you considering a new program? And two, maybe reflect on for us, Steve, what it might mean for acquisitions. Do we take this as a sign that acquisitions are less likely, given how speedily you did the share buyback, or the values aren't right right now, so you felt you had time? I would appreciate your perspective.

First off, we are not going to buy a bank. Don't worry about that. That I think we are in a digestion, a little bit of a wait and see mode. I think we certainly could do another buyback.

We also obviously are sitting on the cash, in case the right opportunity might come along. We probably want to sit tight for a little bit, just understanding and seeing how things shake out. I think it is a good time to have a good cash position, and I think we will be clearly wanting to deploy that cash, still primarily via acquisition, but also wanting to see where it plays out.

Rick, if I could just add, relative to the buy back we just, did I think we still feel very good about the economic value that we will get out of the execution of that buyback over time.

I appreciate that.

Great. Thanks, Rick.

Your next question comes from the line of Larry Keusch with Goldman Sachs, please proceed.

Good afternoon.

Hey, Larry.

Steve, again we are obviously not getting into guidance for next year on this call, but I am wondering if you wouldn't mind, certainly as Katharine at some of these recent conferences has certainly opened the door, to the possibility that perhaps that growth objective might adjust down for a period of time.

Could you just walk us through sort of what are the things that are changing at that the margin that may have you start thinking that way? Obviously the costs going up associated with the FDA, and taking care of those processes is one, but sort of what else is sort of moving around, that makes you start thinking that maybe that is a possibility?

Sure. Let me just reiterate what I have been saying since I joined the Company, what is now 5.5 years, believe it or not. Seems like it was just yesterday, but it has been that long. Which is that we would strive to deliver the 20% for as long as possible, but I wasn't going to commit to it indefinitely.

And what we didn't ever want to do was drive the company off a cliff. So to me one of the things that I think our senior leadership job, we are thinking about this Company for the long haul. We want us to continue to be a premier, if not the premier growth company in the med tech space, something we feel like we have been for quite a while, and that is going to mean continuing to invest for the long haul, and not driving it off a cliff. Clearly as you look at next year, currency, if the stays where it is right now, is going to be a much bigger headwind.

We have obviously got our additional spend in the quality and compliance areas. And it is just such an uncertain time right now. Again, certainly premature, but what we don't want to do is drive the company off a cliff. We would remind everybody, 20% is tough to do in the best of times. I don't think it is going to be easy to call 2009 the best of times. It is why we are certainly not going to reconfirm that specific number at this point in time.

Okay. And I appreciate that. We have all seen way too many companies that get stuck on a specific growth objective, and run themselves into the ground, because the management team starts making mistakes.

And that is what we want to avoid.

And I think everybody agrees with that so that is fine. Switching gears just two other questions, on the FX, since you brought it up, obviously a lot of moving pieces there. Latin American currencies have just been absolutely smoked in the last several weeks, so that poses now issues for folks, but could you remind us how you are, again, set up FX, and if you could, if you would be willing to sort of say, for X% move in currency, how much of that kind of falls to your bottom line, when you think about your natural hedges?

Then the other question is, if you would be willing, Steve to just sort of comment on why the Company decided to go and sue the government, because that is something that obviously people get very nervous about, and so if you would be willing to share, again, really what you guys are seeing, and what gave you the confidence to really bring your suit to them?

Let me start with the FX question. Obviously not fully an easy question for any company to answer, Larry, but as we have stated, we certainly believe that we have natural hedges by virtue of where we manufacture product, a reasonable percentage of our product is manufactured in Europe, including primarily our Spine and Trauma products.

Again, as I pointed out on this call, one of the things that you do see is a little bit of timing differential, so the natural hedge when the dollar strengthens as much as it has, doesn't help us as much to offset some of the bad guys that fall to the bottom line more immediately from the translation of our foreign businesses until the inventory turns, because the lower cost of the products that are manufactured in those European locations get stuck in an inventory turn.

We certainly still continue to believe that over time our natural hedges will generally work, although I would also tell you that, and it is very difficult to quantify on a percentage basis, particularly for any finite period of time, exactly what it is. But I would tell you that in general terms, when the dollar weakens, we get some marginal benefit to the bottom line, when the dollar strengthens it hits us a little bit. But over time, we have seen the natural hedges work to basically offset enough of that, that we have been able to manage our way through it, and we don't have any reason to believe that that has changed.

And are you LIFO or FIFO? I forget.

Our inventories are both, but primarily FIFO.

Larry, just to answer the second one on the HHS thing, I call your attention to the fact that it is probably getting a lot more attention from the investment community than I think we would think it fully warrants. At the end of the day if you look closely, basically it is a discovery dispute. It is about the level of information provided as opposed to, okay, you guys have been doing something horrible and all of that, so we are arguing over the amount of stuff to provide to the government is really what it gets down to.

Okay.

I think has been probably slightly overblown. I think we have had a pretty good legal team. Same legal team that has led us through all the last few years, I think very skillfully is leading us through this as well.

Excellent. Thanks Steve.

Thanks, Larry.

Your next question comes from the line of Michael Jungling with Merrill Lynch.

It is Paul Choi filling in for Michael. Hi guys. Maybe first if we could touch on surgeon training programs. We have seen some changes in the way your competitors are responding to the DOJ settlement, for instance reinstating physician training programs, is there anything you guys are doing different going forward now, and how is physician training on Cormet going at this point?

We are obviously working it through the monitors, and being very disciplined to clearly shut a lot of stuff down, I would say it is less than what we have had. We are trying to be very diligent about it. In terms of Cormet training, it is ongoing. We don't routinely give out the numbers of people trained.

Remember, Paul, we went through the needs assessment like everybody else in the first quarter, and had our training programs for the year vetted, and that was finished by the end of the first quarter. The Cormet training resumed in April, and that is continuing throughout the year.

So at least at this point you don't feel any need to make any material changes with respect to physician training?

We continue to work with the monitor, which is the guidelines that they have put in place, and went through that needs assessment, so have there been any changes? Yes. But I think we feel pretty comfortable about training programs that we have in place.

Then as a follow-up on the DOJ settlement, how is it affecting your view with respect to non-settlement areas, such as Trauma, Spine, and Med Surg? Do you guys feel there is a need for a step-up there, as we have seen with one of your competitors, Zimmer, and perhaps Smith & Nephew as well?

We are trying to be disciplined across the whole company.

I don't think we have done, when we look at our training, our education, all of our consulting programs that we had in place, and I will remind you as a market share basis we had fewer consultants than any of our competitors. That data is readily available. That is the same approach that we took throughout the organization so it wasn't like there was a different set of standards as to what was appropriate activity between the different divisions.

Great. Then if I could ask a quick one on crosslinked poly, we are hearing more surgeons reporting some increases in crosslinked poly wear, sort of in out years, maybe the seven to eight-year timeframe, with not too much difference to standard poly. Can you comment what you think is occurring there?

Hey, Paul, maybe we can follow up off-line. I don't think we are seeing that right now.

Sure, sounds good. Thanks a lot.

Your next question comes from the line of Bruce Nudell with UBS, please proceed.

Thanks for taking the call. Steve, I will pose some hypotheticals to you. Maybe you could kind of help, give us a better ballpark on your intuitive feel about how much impact the ecomony might have, so if MedSurg is kind of a 15% trend line business, I know you have been doing a little better than that recently, but if it is 15%, how much is at risk given your sense of the CapEx sensitivity of the business, and then on Hips and Knee side, if the trend line in units has been 6.5, but assume 5%, how much sensitivity might there be next year? Then I have a follow-up.

I would say, Bruce, there might be a couple of points in the market of downside to those businesses. I would also tell you though, I think we feel really good about the trajectory of our new product flow, and our opportunities to continue expanding in other markets. If you think about it, as we think of that business today, MedSurg still has tremendous opportunity outside the United States. So even if the global market slows, I think our ability to take market share is very strong there.

The same, frankly with all of our Orthopaedic Implant businesses. We have tremendous momentum as you see, certainly in Spine, Trauma, CMF, and Knees. Even if those market slow, I think our ability to grow faster in the markets in the US and globally is good. If anything, some day our Hip business is going to start growing, and stop being the big drag that that has been. So even if the markets slow down a couple points, I think we feel pretty good about how we are positioned right now.

Your next question comes from the line of Matt Miksic with Piper Jaffray. Please proceed.

Hey, everybody. Can you hear me okay?

Yes, we can.

So a couple of questions, mostly follow-ups at this point. One on FX. Dean, you were talking about the impact there, the core obviously on the top line, and the way it flows through, the effect of the natural hedges on the bottom line, is it fair to say that normally, we wouldn't think about much of a bottom line impact in a given quarter, because of the way you described your hedging strategy in the past, with the sort of rapid move of these rates in August and September in this quarter, did you see more of an impact on the bottom line than you normally would have?

Probably a tad, Matt. Again, I think more rapid currency moves exacerbates the issue of the timing of the inventories.

Matt, one follow-up on that, remember, with a revenue base last year of 6 billion in sales, there are a lot of moving pieces in any quarter, and I would put, whether it is fluctuations in currency, or legal costs tied to CPA or HHS, or whatever it is, in any given quarter there is some stuff going for us, some stuff going against us, so although the incremental hit may be greater in a given quarter, there are usually some offsets, so I wouldn't focus too much on one single line item for a company of our size.

Of course. But that is helpful. Second, there was a question earlier about the DOJ, but just sort of more broadly, we are I guess about halfway through this NPA cycle that you have, and I just wanted to just get an update on things like, and maybe you have talked about this before, but for the surgeons that you feel you have been able to certify their contracts, are you paying those surgeons again? Are you still on track to sort of wrap this up in the first quarter of '09? Any other changes or tweaks to the status of the DOJ?

I think obviously as you go through something like this there is a little bit of sorting out. Obviously we experienced some of that in the first quarter, when we had some training stuff that didn't go off quite as we had planned, but bottom line, I think the process is working pretty well right now, and we are on-track to move forward with approaches that we have put in place. Really frankly in terms of how we run the business, even beyond the March 2000 expiration.

Okay. But still on-track for that March completion, it looks like.

Yes.

Okay. And then one on, again, there have been some questions on the economy and the impact. In the past, even when sort of capital budgets have come under pressure, I think EMS has sort of held in there, being the municipal side of that business in Medical, and obviously you didn't see any pressure there this quarter, given the numbers, but if you could help us understand how significant that is to you, and as you look out in the next couple of quarters, is that something you are starting to see or think about or worry about more, or something we should be aware of, is municipal budgets and their impact on EMS?

I would answer it just a little bit more broadly than that. I think if you think about our MedSurg business as we have tried to relate to people, it is about 60% capital, so there is going to be quarterly volatility, around what we view as baseline 15% growth, but there are a lot of moving factors in any one of those businesses. Product cycles have a big impact. If you look at the fact getting in the last year to 1.5 years, into the critical care segment of the patient handling market, that is a $150 million domestic business that we didn't participate in.

So something like that is probably going to have a lot more impact than the vagaries of municipal budgets in any given period. So I think if you think about that business overall, there are going to be periods when MedSurg overall is either above or below 15%. It is probably going to be tied more to product cycles.

We gave some insights to that at our Analyst meeting. You can look at the historical trends to get a sense of where we are probably at in product cycles for each of those, then layer on top of that what Steve touched on, the international expansion. You take those in total, that is where we get to that teens type of growth. Then there will be fluctuation around that, given the capital component, and maybe some impact from the economy as well.

Operator, can we go to next question, please.

Again, ladies and gentlemen, please remember to limit your questions to one question and one follow-up. Your next question comes from the line of Joanne Wuensch with BMO Capital Markets, please proceed.

Thanks for taking my questions. Can we go back to gross margins please. Of the 140 basis points year-over-year decline, can you give us more color and parse out how much of that comes from FX, commodities, and increased spending? And I am going to make my second question attached to my first, should we think of the low 67% level, as sort of an ongoing rate, at least over the next several quarters?

Joanne, I am not going to parse it down that deep, but the majority is probably related to the quality spending. The other things are the commodity and freight costs are things that started impacting us earlier this year, so those are carry-overs, probably next in order of magnitude in that FX, probably last. I think the bottom line is I think the gross margin probably will be a little bit stronger. It is probably, at our last call we gave guidance that said that I think gross margins could be down, up to 40 basis points for the year.

I think it is probably going to be a little more impacted than that when we get to the year end. Remember, I think our gross margins for last year were 68.9%. So I wouldn't view this low a gross margin as a trend line. I think it will be a little bit higher, but for the year it is probably going to be a little bit lower than a 40-basis point decline, but I think we will have other offsets that we will be able to manage through that with.

Just to follow up, Joanne, if you look over the next few years, there is clearly an opportunity for us to have gross margin improvement beyond just the expected decline and the magnitude of quality investments we are making. Remember, we have got 20 manufacturing facilities worldwide. We believe there is opportunity for a greater consolidation of certain processes, rather than duplicating these efforts across multiple divisions, and that is one of the things that we are focused on as we think about over the next few years what our margin profile will look like. So we need to think of higher COGS associated with quality controls, but also at the same time, you are still working on increasing the output and increasing consolidating all of those other kind of good things?

We will, Joanne. In the short term there is a greater focus on getting the quality stuff up to where we really want it to be, so the cost savings stuff will probably still be a few years out. If you can't, we want to be careful we can't take on too many things at once, but it is what gives us hope for the long run. Frankly a lot of the quality stuff that we are putting in place will make us more efficient in our operations, and I think we will start to see probably in 2010 and beyond.

very helpful.

Thanks, Joanne.

Your next question comes from the line of Bruce Nudell of UBS, please proceed.

thank you. I snuck in. Follow up to Larry's original question. And just given the inventory turns you have, you look out kind of towards '09, and you say okay, 100 million of FX hit on the top line, 25 million roughly at the operations line, is it like a 5 million exposure that you have? Bigger than a bread box? Any help would be greatly appreciated.

I think I would be remiss to comment with too much granularity, Bruce, just because at this point in time it is a little bit hard to tell what the currencies are going to do. But again, I frame this all within the context of we do believe this is manageable over time, and certainly our past history would reflect that fact. A lot of companies have entered into some pretty esoteric hedging strategies, and those are very, very costly. Today we found our natural hedges work well for us over time. We are comfortable being able to manage our way through that.

Your next question comes from the line of Tao Levy with Deutsche Bank, please proceed.

This is Seth, thanks for taking the question. Did prior EPS guidance include your R&D tax credit, and also actually on the gross margin line, with commodity prices decreasing, are we going to see maybe any benefit over the near term in COGS?

Sure. The R&D tax credit, if you look at our rate reconciliation from our financial statements over the years, we have not gained any real significant benefit from the R&D tax credit. So although I recognize it was reinstated in this last bill, there is not any real significant impact on our guidance that would come from that.

Relative to the commodity price changes, we are certainly hopeful that that will be a benefit as we go forward, since it has hurt us here, but I think time will have to determine kind of how those prices come back over time, but certainly as they have hurt us, as they come back they will help us.

Okay. And just on I guess more on the FDA side, said there was a recall on the instrument business. Can you give maybe a little more color around that, and just something that was caught by your new quality initiative? And also just with the FDA, maybe can you comment on your last correspondence with them?

Let me take the second part first, because that will be shorter. No, we are not going to get into the minutia of the conversations going back and forth with the FDA. I think it makes sense to really focus on when we have got something tangible to report back to you, like the results of reinspections. We have tried to give color about the magnitude of the investments we are making there, and some successes that we have had.

In terms of the system fix late in the third quarter, we did put a shipment hold, and initiated a voluntary recall of the power tool. It was due to an issue that had arisen whereby the trigger can stick after a certain number of uses. Although the incidence level was very low, and there have thus far been no patient safety issues, given our heightened commitment to quality, we decided to have a voluntary recall for the product. As Dean stated the issue has been resolved, and the product is now in the early stages of shipping again.

Where is that product made, and has that site been included in inspection recently?

We are not going to again, go into specifics about what sites have been inspected. We have tried to point out some successes we have had understand a corporate standpoint, but beyond that we are not going to go into any detail, so probably going to move on to the next call, because we still have quite a few people in the queue.

Your next question comes from the line of Michael Matson with Wachovia Capital Markets.

Looking out at 2009, this sort of relates back to the prior question about commodities, but while there are certainly some headwinds that you all are dealing with, I guess I see some things, some costs that should start to roll off, I guess some monitoring costs, potentially after the first quarter commodities, and then your quality system initiatives, while it may not be a positive factor on your margins, the increase there probably won't be as great as this year. So how do we sort of think about that, in terms of offsetting some of these headwinds that you are dealing with?

I think really we are going to focus 2009 guidance on the January call. We did try to call out some of the bigger ticket items in terms of the magnitude of investment that we are making in quality, and as Steve referenced, not thinking about this year as a peak year, we did try to frame our thinking about making the investments necessary for the long term.

We think we have got a great footprint globally, and across multiple segments of Med Tech, and that really gives us our conviction and our ability to sustain double-digit sales growth, but beyond getting into real details about the components that are going to make up next year's guidance, we are going to really wait until the January fourth quarter call to go into that detail.

Okay. Just on OP-1, is the potential for approval there, or launch of that product going to be affected at all by the warning letter at the Biologics division?

We need to get through the panel first, and that will be on February 3rd. Then after the panel we need to get through an FDA decision, so we have got a long way to go. We probably haven't had had the best track record in predicting the ultimate timeline for this product, so no, we could not if we got approval tomorrow, no, we could not launch it while the warning letter is in place, but I think on a timeframe basis, there is probably more work to do on the OP-1 side, to actually get to the approval standpoint, assuming that is what comes out of the analysis of data before the panel and the FDA.

Okay, thanks.

Thank you.

Your next question comes from the line of Doug Schenkel with Cowen and Company, please proceed.

Hi, good afternoon. Thanks for taking my questions. I guess one more question, at least from me, on the broader impact of the economy. Given that a lot of the bad news in the financial market became more pronounced over the past month or so, if there were a slowdown in the pace of Hip and Knee procedures as a result of intensifying economic concerns, would you necessarily have seen it already?

Not necessarily. I think it will play out over time. There are going to be all kinds of swings and roundabouts here, but first off, it is an elective procedure, but you have different pockets. You have people who may be in a job in a small company, and they don't want to schedule it, because they are worried about taking time off and potentially getting downsized while they are out and recovering.

The flip side is you have people that might be worried that they are going to lose their jobs, and want to go in and have something done while they do have health insurance, so again I think there are going to be, as Katherine has said, there are going to be quarterly swings and ups and downs here in different pieces. I think we still feel very good about the long-term trend.

Thank you for that. Then my second question is on the improved quality control spending, is it fair to assume that the difference between your original guidance provided at the beginning of the year for 20 to $30 million in spend, versus the more recent guidance of at least $50 million in spend annually, did have an impact on margins in this quarter, and should we kind of think about those figures as a way to think about how you pace to spend this quarter, and how spending will continue into Q4?

Absolutely. I would say the third quarter was the first quarter we really started to feel the impact of it. And we are going to feel it for a while.

Thank you very much.

Your last question comes from the line of David Roman with Morgan Stanley.

Good evening. Thank you for for taking the question. I will limit myself to one. Just on share count, historically obviously buy backs have not been a big part of the mix. Could you give us some sense, Dean, as to where share count was exiting the quarter, and without an authorization, should we expect to see that number tick back up?

Well, as we said, we completed 9.1 million shares during the quarter, a lot of that because of the pacing of it didn't get into the shares outstanding count. I guess probably the easiest way to hopefully give you perspective, is we think the share count, and obviously some of this is obviously dependent on where the share price itself is, but our best guess of a range of share count for the fourth quarter would be in the 407 to 408 million range.

Then for '09 would we see that number, obviously it depends on what happens with options, but that number should start to creep back up?

It should, and keep in mind, a significant component of the share calculation is the share price itself, and higher share price means a higher share count, and obviously we are expecting and rooting for that over time.

Okay. Thank you.

Great. So with that, just again, we are pleased to have delivered in the quarter. We will remind you that our conference call for our fourth quarter and full year 2008 operating results, will be held on January 27th, 2009, and that is the time when we will discuss our outlook for sales and earnings for 2009. So thank you everyone, we appreciate it.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.