史賽克 (SYK) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Stryker earnings conference call. I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll 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 managements current expectations and be subject to various risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied to such statements. In addiction to factors that maybe discussed in this call, such factors include, but are not limited to, further weakening of economic conditions that could adversely affect the level of demand for the Company's products, pricing pressures generally including cost containment measures that could adversely affect the price of, or demand for, the Company's products, changes in foreign exchange markets, regulatory action and anticipated issues arising in connection with clinical studies and otherwise that affect the 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, unfavorable resolution of income tax audits, 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 constant currency sales performance and adjusted dilutive net earnings per share for the year ended December 31, 2008. Further discussion of these non-GAAP financial measures, including GAAP reconciliations appears in the Company's Form 8-K filed today with the United States Securities and Exchange Commission which may be accessed from 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. Stephen MacMillan, President and CEO of Stryker. Please proceed, sir.

Thank you, Emity, and good afternoon, everyone, and welcome to Stryker's first quarter 2009 earnings report. With me today are Curt Hartman, our Vice President and Chief Financial Officer and Katherine Owen, Vice President of Strategy and Investor Relations. As many of you are aware, Curt assumed the role of CFO effective April 1, 2009. Although he has been working closely with both Dean Bergy and our financial team since the latter part of 2008, certainly some fun times for Curt to join in that role.

Turning to the review of our quarterly results, 2009 has thus far presented us with some challenges, but we've also achieved a few noteworthy successes. We believe these achievements are particularly impressive in light of the current economic environment. Looking at the quarter, we note the following highlights. Despite the unprecedented global economic slowdown, six of our eight key product franchises delivered mid single to low double digit constant currency revenue growth, demonstrating the strength of our diversified business model, strong cost controls throughout the organization as evidenced by the 1.5 percentage point reduction in SG&A as a percent of sales despite ongoing selective investments in our sales forces, ongoing benefit from our geographic footprint as evidenced by the fact that although in the US, our endoscopy and medical franchises were under pressure in the quarter. Both posted solid mid-teens growth internationally, continued strength of our balance sheet with our total cash and marketable securities balance totaling $2.2 billion, the successful launch of a number of important new products, including the Q1 rollout of our endoscopy 1288 camera, wireless monitor and light source, expansion of our medical divisions footprint, with our latest entry into the US surfaces market via the launch of our impression offering and the successful completion of the Department of Justice's 18 month monitoring period which was completed on March 27.

To be fair, Q1 also presented us with some disappointments. Most notably, our decision to revise downward our full year sales and earnings guidance as the capital environment has proven more challenging than we expected at the start of the year; however, it's worth noting that although hospital capital budgets remain under pressure, we have started to see some encouraging signs of customers looking to resume capital purchases. Much of this is still anecdotal, and we would remain appropriately cautious regarding the near term outlook for the roughly 25% of our revenue base that's tied to capital purchases, but it does suggest the cycle may be bottoming.

Overall, we are encouraged by our Q1 results and our ability to sustain topline growth despite the economic conditions while also continuing to invest heavily in our compliance initiative and new product launches, and the actions we undertook in Q4 when the first signs of the market slowdown appeared to aggressively implement meaningful cost controls have had considerable impact and should allow us to deliver solid earnings growth for 2009. Meanwhile, our growing cash balances and the overall strength of our balance sheet uniquely position us to capitalize on potential opportunities. With Q1 now under our belts, which we suspect will be the most challenging quarter of 2009, we feel well poised to deliver on our commitments for the year. With that, I'll turn the call over to Katherine.

Thanks, Steve. I would like to provide an update and some perspective on three topics that have been a focus of a number of questions from the investor community. Specifically, one, reconstructive implant pricing and elective procedure trend; two, hospital capital budgets and thirdly, the outlook for OP-1.

Firstly, with respect to recon implant prices, there has been some speculation that the current economic environment will drive greater downward pressure on implant prices. We've actually seen similar concerns in the past with various factors serving as the catalyst for the " Imminent" collapse of implant pricing including game sharing, national account contracting, the DOJ investigation, the DOJ settlement and more recently, the economic environment. However, despite these events, reconstructive ASPs have been relatively stable since 2004, decreasing at roughly 1% to 2% annually, although this has been largely offset by more favorable pricing for spine and trauma. Part of the lack of meaningful downward pressure on recon implants is tied to the favorable reimbursement trends in recent years including the severity adjustment index that allows for higher reimbursement for more challenging patients such as those often seen as teaching hospitals.

Admittedly, there are projects where we have seen greater pressure of late and we expect that trend will continue; however, we continue to see solid uptake for premium price product such as our X-3 Poly and the recently launched titanium hip cup, indicating physician preference for products that provide a value add to patients. As we have discussed throughout the quarter, we have seen some pockets in the US where there's been a delay in elective procedures, primarily with non-Medicare patients owing to the economic environment. Given that it's typically the debilitating pain that drives the patient to undergo re constructive surgery, we suspect the deferral of surgery will last months and not years, moreover towards emphasizing that the overall impact from these isolated delays on our recon business have been relatively modest as that business was still up 6% operationally in Q1, which is not meaningfully off from the 7% to 9% secular growth rate for the industry. Put another way, despite the unprecedented economic environment, the compelling clinical results from joint replacement for patients coupled with the importance of this procedure for hospitals is evident in the ability of this market to continue to sustain solid revenue growth.

Turning to hospital capital budgets, although the backdrop remains tough, we are seeing some early signs that have heretofore not existed, suggesting some hospitals are looking to resume purchases of critical products. We would emphasize the importance of not overestimating either the speed of the recovery or how quickly these early signs will translate into a meaningful rebound in revenue as we expect this to translate into first stabilization in the year-over-year declines in our capital businesses followed by a gradual acceleration, but beyond the timing of a recovery in the hospital capital market, we remain committed to our ongoing strategy of expanding our footprint and entering adjacent markets. For example, our medical franchise has broadened its offering in the US surfaces market with the recent launch of Impression, our first meaningful product introduction in the roughly 400 million replacement services segments, a category that's growing in the high single digits as hospitals increasingly migrate to this for-purchase product. This strategy is incrementally expanding our patient handling franchise, allows us to capture market share and helps blunt the impact of the overall slowdown in the capital purchases market. Put more simply, although there's pressure on the market, our share of the market continues to expand.

With respect to point three and the outlook for OP-1, we are clearly disappointed by the non-favorable FDA panel recommendation that we received late last month, given the long term history of this product's use in patients under our various existing indications, we believe in both its safety and efficacy. We are reviewing a variety of options available to us, recognizing we do have a base of customers including patients and physicians that rely on this product, and that's an important consideration, and we are encouraged by our early clinical results evaluating OP-1's efficacy in soft tissue. We expect to report back to you in relatively short order with more specifics regarding our strategic plan for OP-1, but in the interim while this process remains underway, we'll defer any additional comments. With that, I'll now turn it over to Curt to provide a more detailed financial update.

Thanks, Katherine. I'll start this afternoon with a discussion of the considerable impact that foreign currency had on our first quarter sales. The strength in the US dollar in the majority of our overseas markets reduced international sales by $87 million in the quarter and reduced the Company's overall sales growth by 5.3%. To underscore the magnitude, I would note that this dollar amount is approximately equivalent to the entire gain recognized in 2008 from currency and is approximately $20 million greater than the adverse impact noted in the fourth quarter. Unfavorable currency movements in the quarter versus last year included the dollar strengthening approximately 15% against the euro, 38% against the British pound, 36% against the Australian dollar. The dollar did weaken approximately 11% against the end when compared to prior year rates. If currency rates hold near current levels, we expect foreign currency will decrease second quarter sales by approximately 5.5% to 6% when compared to 2008. At these rates, the full year impact will be in a range of 3.5% to 4.5% when compared to 2008.

Next, I'll spend a moment on the impact of price and volume on the top line. In the quarter, selling prices across the Company were essentially flat on a worldwide basis despite a 7% pricing decline in Japan. As a reminder, the Japan pricing decline is tied primarily to the reimbursement cuts introduced in April of 2008. On the volume mix side, growth was 4% in the first quarter which had one less selling day compared to the prior year. Volume mix was generally as expected for our orthopedic implant products, but volumes were off considerably for our endoscopy and medical businesses, particularly in the US market. Overall, our domestic volume mix growth was 1% in the quarter and international volume mix growth came in at 8%.

Now I'll turn to the product categories. Product growth detail has been provided in our press release and I'll reference those rates as I provide more detail in our key segment performance metrics. For this discussion, I'll start with our orthopedic implants which represented 61% of our sales in the quarter. Sales of orthopedic implants were flat in the quarter on a reported basis and grew by 6% in constant currency. Our hip business was down 2% as reported in dollars, but up 6% operationally in the first quarter on a global basis. The modest acceleration in growth from both prior year and Q4 levels was expected given the comparables. The Trident and X-3 lines paced our growth on a global basis. As a reminder, the Trident supply issue of 2008 began late in the first quarter with the largest sales impact being felt in March through June time frame.

In the US, hip sales were up 3% in the quarter. X-3 Poly delivered the largest gain and was joined by our Trident and restoration modular hip system. Our sequential growth rate increased three percentage points over the fourth quarter. International hip sales delivered a nice quarter, increasing 9% operationally. Our European hip sales, the largest of our international markets, increased at a high single digit rate. Nice gains in Nex 3, Trident, Accolade and restoration module hip provision products were offset by declines in other hip products. In Japan, hip sales declined at low single digit levels on an operational basis due to the government price cuts.

Moving to our knee franchise, the Company recorded sales growth of 1% in dollars and 6% in constant currency in the quarter. The US knee business had a solid quarter in a somewhat slowing market, reporting growth of 8%. This growth again came on the strength of our Triathlon line, which as you recall, has been expanded with additional line extensions. Internationally, knees were up 4% on an operational basis. Europe and Pacific knee sales increased while Japan knee sales were impacted by the previously mentioned government price cuts; however, we're encouraged by the outlook given the recent launch of the Triathlon system in Japan. Moving to trauma, the trauma business slowed somewhat over fourth quarter growth rates, recording a 2% gain in dollars and an 8% increase in local currency this quarter. US trauma maintained double digit growth at 10% and would have been 13% if military sales were excluded. This was a strong performance when considered against last year's 23% sales growth. Sales of the Gamma-3 hip fracture, foot and ankle and upper extremity products lead our US trauma growth.

International trauma sales were up 6% operationally in the quarter with Europe posting mid single digit constant currency growth. In Japan, local currency trauma sales declined in the mid single digit range. On a product line basis, international trauma sales were paced by growth and hip fracture, upper extremity and foot and ankle products. Our spine business recorded another solid quarter, growing 8% in dollars and 11% on an operational basis. US spine sales recorded 13% growth against an exceedingly difficult prior year comparable of 25% growth. Domestic spine growth was lead by inner body and thoracolumbar products. International spine sales posted operational growth of 9% lead by thoracolumber products also. Japan recorded operational growth at low double digit levels and Europe grew at mid single digit levels operationally.

Now I'll turn to the MedSurg group which represented 39% of our sales in the quarter. As you are aware, MedSurg is comprised of three significant product categories: instruments, which accounts for 18% of the Company sales, endoscopy, which accounts for 14% of Company sales and medical, which accounts for 7% of company sales in the quarter. Within MedSurg, approximately 60% of sales come from capital equipment and as you are all aware, given the external environment, this made for an exciting quarter. Against this, MedSurg sales growth was down 5% as reported and off 1% on a constant currency basis. This is down from the 6% gain reported in the fourth quarter of 2008.

Touching on the product categories, sales for the the instruments line which as it reminder, generates 40% of sales from capital equipment, reported an increase of 4% in the quarter and 8% operational growth. Instruments US had another solid quarter with sales up 11%. The focus on products to serve markets outside of orthopedics delivered strong results while the traditional power tool franchise did slow somewhat owing to capital constraints. Other key disposables and service revenue also posted strong gains. International sales growth was softer at 3% with Japan posting double digit results. These gains were somewhat offset by our European results which were essentially flat on tough year-over-year comparables and timing of some shipments into the market.

Next is the endoscopy segment, which reported first quarter sales that were down 5% and off 1% in constant currency, despite the fact that approximately 60% of sales are from capital equipment. Endoscopy US sales as reported were down 7%. Strong shipments of communication suites and growth in our disposal based business were essentially offset by the drop in video cameras and accessories. I will note that US sampling of the new 1288 camera system is complete and first quarter trials have been well received. International sales remain strong and recorded 16% operational growth, continuing the favorable results posted in the fourth quarter. Every international market recorded positive local currency growth and we continue to be encouraged by our expansion in these markets.

Finally, I'll talk about our medical products, which generate approximately 90% of sales from capital equipment. Globally, medical sales declined 22% in the quarter as reported and 18% in constant currency. Medical US sales declined 27%, which was a bit outside of our anticipated range. Favorable news was found from increased growth in our rentals and service business but the obvious impact of declining bed and stretcher sales more than offset this gain. International sales results again delivered favorable news, posting 18% constant currency growth with positive results in both bed and stretches after the big year-end finish.

Now I'll turn to the remainder of the income statement, beginning with gross margins. First quarter gross margins declined 160 basis points compared to 2008. As we have previously noted, gross margins in Q1 were impacted by significant investments in our compliance initiatives, recalling that there was very little of this spending in the year ago quarter. Margins were also negatively impacted by a slowdown in some of our manufacturing plants in response to a softer top line. Sequentially, the 67.8% is a slight improvement over the second half of 2008. Research and development spending was down 6% in the quarter to 5% of sales. This is at the lower end of our historical range owing to the timing of expenditures associated with typical new product development cycles.

I would note we would expect R&D as a percent of sales to move forward from these levels over the course of the year. Selling, general and administrative cost decreased 6% versus prior year and as a percentage of sales dropped a further 60 basis points over 2008 full year results. This is primarily a result of our divisional focus on spending controls initiated early in the fourth quarter in response to the slowing global economy. Despite significant progress as it relates to cost control efforts, given the top line pressure, operating income overall decreased 1% in the first quarter where operating margins increased to 23.7% of sales.

Next, I'll provide a breakdown of the other income for the quarter. This was made up of $15.6 million of investment income, offset by interest expense of $8 million and foreign currency transaction loss of $400,000. Clearly, lower investment income in the quarter resulted from the dropping yields which are approximately 200 basis points lower than the year ago levels. The Company's effective income tax rate was 27.3 for the first quarter of 2009, down 80 basis points from the first quarter last year and down 10 basis points from the 2008 full year rate. We expect our full year 2009 ETR to be substantially in line with our reported full year 2008 tax rate. Additionally, as noted in our press release, we are in receipt of a proposed tax adjustment from the IRS related to our cost sharing arrangements. As indicated in our release, we intend to defend our positions vigorously and will be deferring any additional comments on this topic.

Turning to the balance sheet, the obvious comment is that it continues to be very strong and overall, there was very little change in the balance sheet from year end. Cash and marketable securities increased by approximately $50 million during the quarter. Accounts receivable days ended the quarter at 59, which represents a decrease of one day compared to the prior year. For the quarter, accounts receivable days averaged 58, which was similar to the fourth quarter of 2008 and two days below the average for the first quarter of 2008. These ranges are in line with historical and we feel represent excellent performance given our geographic footprint. We have not felt any significant change in payer behavior; however, in light of the current global environment, we are maintaining a diligent focus on this important asset. Days in inventory finished the quarter at 174, which was up 19 days sequentially and 12 days versus the prior year. The average days in inventory for the quarter was 165 versus the 155 average for the fourth quarter of last year and the 153 days for the same period last year. As a former operating executive with a manufacturing background, our inventory days are a subject of much focus. The two biggest factors impacting this number are compliance initiatives and the sales slowdown. Neither of these events are surprising so it is fair to assume that we will get better in this category with the progress evident as 2009 unfolds.

Next, I'll provide commentary on cash flow. We had another very strong quarter. Cash flow from operations grew 43% to $272 million and free cash flow was up 51% from $160 million to $242 million. This increase was predominantly driven by lower working capital requirements. Conversely, the first quarter tends to be a seasonal low for us in terms of net cash flow given the payment of the dividend in January and other cash uses that occur only in the first quarter.

Finally, in closing, I'd like to offer some comments regarding our underlying assumptions and 2009 sales outlook for certain key markets. With respect to reconstructive joint replacement, we assume that we'll continue to see some level of elective procedure deferral that will modestly impact the overall industry growth rate by an estimated one to two percentage points, suggesting market growth in the mid single digit range on a worldwide constant currency dollar basis in 2009. Our Trident and CMF franchises are largely immune to any economic slowdown given the predominantly non-elective nature of these businesses, so we continue to assume market growth in the high single digit range. Given spine's exposure to elective procedure slowdown, we assume the market slows to the high single digits versus the low double digit rates it has been sustaining.

Turning to our MedSurg franchises, these markets are more challenging and given that approximately 60% of total MedSurg sales are classified as capital purchases. We expect to see low to mid single digit year-over-year declines in this business on a quarterly basis for the remainder of 2009, owing primarily to continued weakness in medical. To further help you with your modeling, we believe our medical business is stabilizing from a dollar perspective but would remind you that growth rates will remain under pressure and we would emphasize the exceedingly challenging year-over-year comparisons for this franchise in Q3. Also by way of reminder, our instruments business is facing a very challenging comparison in the second quarter given the 22% constant currency growth recorded in the previous year and as such, we would expect the year-over-year growth rates to slow from Q1 levels.

For our 2009 outlook, we are making a revision based on the above assumptions. As most of you are aware, we tend to challenge our organizations at our top and bottom line growth targets aggressively, which has historically served both the Company and our shareholders well; however, the significant economic slowdown, particularly its impact on our MedSurg franchise, was greater than expected in Q1, prompting us to take a more conservative stance as it relates to the remainder of '09. As we finalized our budgets in late Q4, the markets were in considerably greater flux and our insights into our hospital customer spending plans were more limited. Four months later, there are still uncertainties, particularly as it relates to both elective procedures and the markets outside the US, with the latter having remained fairly insulated from the economic slowdown. But despite these uncertainties, based on trends in recent weeks and incoming order patterns, we feel comfortable with our ability to achieve our revised sales target of 2% to 5% operational growth for 2009 which assumes low single digit constant currency growth in the first half of the year with a modest acceleration in mid single digit range in the second half.

With respect to earnings, although recent trends indicate that our capital based businesses are bottoming, we're taking a more cautious stance with respect to our guidance with our full year EPS target at the mid point of a $2.90 to$3.10 range, up 2% to 10%. We would reiterate that given year-over-year comparisons, compliance spending, FX and our assumptions regarding our top line, we continue to expect earnings to be stronger in the second half of the year which currently does not appear to be fully reflected in first call estimates. With that, I'll turn the call back over to Steve.

Thanks, Curt. Before we open up the call to Q&A, we would like to make just a few brief closing comments. As our revised guidance reflects, we are considerably more cautious regarding the outlook for the remainder of 2009 versus our expectation at the start of the year, given lingering uncertainties relating to elective procedures and hospital capital budgets that at this point have been well vetted. Although we've seen evidence that the downturn in hospital capital purchases is bottoming and we have adjusted for the impact on elective procedures, we are opting to set the low end of our sales and earnings range at a level that we believe reflects any reasonable downside risk to the assumptions in our outlook that Curt discussed in detail and quite frankly, given our own disappointment that we failed to accurately forecast our sales and earnings outlook to investors at the start of the year, we believe it's critical that we set expectations at a level that removes as much doubt as possible regarding our ability to deliver.

It's worth underscoring that our conviction and our ability to deliver low single to low double digit earnings growth, even in the face of a difficult economic back drop, in large part reflects the impact from the myriad actions we proactively initiated in the fourth quarter to leverage our cost structure. The moves were Company-wide and have unlocked meaningful earnings power despite a challenging top line and underscore the importance of these actions. Beyond allowing for solid earnings growth in 2009, our efforts on the cost front should position us well to drive greater P&L leverage as we exit the current recession.

Finally, our results once again speak to the unique competitive advantage of our diversified revenue base and underscore the significant opportunities we have to drive continued growth across numerous geographies. There's another point I'd like to make here. It's clear we are facing some short term challenges, but we would be remiss if we did not remind you that we remain very excited about our longer term growth prospects. With the investments we've made in previous years to build a more diverse orthopedic implant franchise as well as our initial expansion of our MedSurg businesses outside the US, we continue to see great growth opportunities for all of our franchises in the years ahead and our balance sheet remains a source of strength which should also serve us well going forward. We look forward to providing you all with a more detailed update regarding our key franchises and new product launches at our upcoming analyst meeting which will be held May 20 in New York City. Lastly, the conference call for our second quarter 2009 operating results will be held on July 21, 2009 and with that, we'll now open it up for Q&A. So Emity, if you want to lead us here into questions?

(Operator Instructions). Your first question comes from the line of Bob Hopkins with Banc of America Merrill Lynch. Please proceed, sir.

Hi. Thanks, and good afternoon.

Hi, Bob.

Hey Steve, thanks for the opportunity to ask a question here. The first question I have has to do with the guidance on the top line, because if you look at the mid point of your guidance, would suggest that basically for the rest of this year, you expect your results to be somewhat in line with the growth that you put up in the first quarter. In other words, you expect things will basically stay the same for the rest of the year relative to the 3.3% growth that you had in the first quarter. But then you also went on to say that you think hips and knees may decelerate a little bit and spine may be a little bit tougher and you hope that the MedSurg stuff holds in, so I'm just wondering if you can kind of reconcile those two things and talk a little bit more specifically about the encouraging signs that you mentioned within the MedSurg business.

Bob, it's Katherine. Just want to jump in with one point of clarification. Our comments regarding elective procedures and our assumptions regarding spine and trauma were really intended to give a little bit more color to what was baked into our assumptions than we've historically done and really aimed at helping people understand how the year is going to progress. We've seen a lot of that in the first quarter. We've talked throughout the first quarter about some of the impact on elective procedures, both for hips and knees as well as on our spine business, so I would not view that as something that is changing meaningfully from the first quarter into the rest of the year, that somehow is going to result in a meaningful deterioration in those businesses as the rest of the year unfolds.

Okay, but still, the basic premise here is that things will stay the same with what you saw in the first quarter and just wondering if we can put a little more color around that, especially as it relates to specifically what you're see with MedSurg, and then I have one quick follow-up.

Sure, Bob. Let me take a second crack here. I think from an overall implant standpoint, I think we feel pretty good about being able to deliver consistent results with what we had in the first quarter. As you look to the balance of the year on the MedSurg side, instruments will probably slow a bit, I think particularly as Curt referenced, the second quarter is a really funny comparable, but hopefully, endo and medical over the course of the year should certainly not slow any worse, and if anything, by the time we start coming to the fourth quarter those comparables get better.

So I guess Steve, as a follow-up then, just to clarify, could you talk -- you mentioned some encouraging signs within MedSurg. Could you just talk a little bit more specifically about what you're seeing? Is this anecdotal evidence of people saying they are going to place orders or are these actual orders happening? Just a little more color around that would be really helpful.

Sure. It's anecdotal in both fronts. I would say it's certainly, some of it is feeling -- some of our team feeling that they are a little closer to getting some orders. I would also tell you I think our sales force is learning that they've got to go deeper in figuring out how to penetrate the accounts to shake some of the capital free, but I think we also, again, we're trying to be cautious here and while we're saying we're seeing some pockets, we are not declaring a bottom. And I think that's why we want to still be cautious there.

Bob, this is Curt. I think one additional comment there is as we've indicated over the first quarter, we do have a pretty high degree of contact with the large integrated delivery networks across the US market and as we've tried to put labels on their spending patterns, be they frozen, be they on the other extreme very fluid, and I would tell you over the last six to seven weeks, we've not seen a meaningful change in those rates, and by that, I mean they've not continued to be higher number of accounts freezing capital spending. We've actually seen them moderate and stay stable, which we think indicates or bodes well for the dramatic swings -- versus the dramatic swings we saw in the first six weeks of the quarter.

So it stopped getting worse. It hasn't yet turned up, but we're viewing that as hopefully, some pockets of hitting bottom. But again, I think we all, in this environment in particular, we've -- given our over aggressive approach coming into the year, we certainly don't want to declare we're at the bottom yet.

Bob, just one additional follow-up, because this is probably a point that's worth covering in some detail, and you probably are well aware of this fact, but it is important to recognize when we talk about capital purchases, hospitals do not view all capital equally. There's a very big difference between capital purchases. They need to facilitate procedures, which is a lot of what we offer versus some of the really big ticket items. So some of the trends that we are seeing right now with respect to incoming order patterns and some of the feedback we're getting from our sales force may be different for different companies that offer higher ticket items.

Right. Thanks, Katherine.

Great. Thanks, Bob.

Your next question comes from the line of Rick Wise with Leerink Swann. Please proceed.

Good afternoon, everybody.

Hi, Rick.

Couple things. You talked about one adjacent market for the bed business, an attractive opportunity, and I'm sure you're looking there for others. Are there significant other opportunities you might want to highlight that you're thinking about that we could hear more about as the year unfolds?

Hey Rick, I think we're going to probably defer that a little bit until we go to May. We thought at the May 20 analyst meeting where we're going to dive into a lot of that across our franchises. We thought it was worth mentioning the medical one for two reasons. One, they did just launch the Impression offering and it's a fairly meaningful market that we are not really in right now, so we thought it was worth highlighting and as you know, we tend to talk about products after they are launched. And secondly, it's one of our businesses that has been under the most pressure, it is the most exposed to capital. So as a way to explain where some of our conviction comes from, that the businesses is stabilizing, we thought it was worth pointing out they are also expanding into new markets, but we'll address your comment -- your question more fully at the analyst meeting.

Okay, let me ask two quick follow-ups then. The spine market you highlighted is growing high single digits instead of low double digits. Could you give us a little more color on your perspective? Is this people deferring procedures in your view, just what's going on? And last, maybe you could give us an update on the FDA inspection issues. You'd said in the fourth quarter we have two times as many FDA inspections going on as compared to the prior year, i.e., suggesting progress. Again, any comments there would be helpful, thanks.

Sure, Rick. Let me tackle the second part of your question first as it relates to the FDA inspection. At this point -- because it will be relatively short. At this point, not a whole lot of color to add. We obviously remain extremely focused on addressing the issues raised in the warning letter to lead to the successful reinspection while also continuing to make the investment in our compliance initiative across the Company, because we're going to continue to have FDA inspection. Beyond that, there's not a whole lot of new updates from our last call, but as those updates become more meaningful, we'll certainly circle back in with everybody. As it relates to spine, I think it is exactly what you said. It's similar to hips and knees in that we're seeing deferral. A little tough to know how long they will be and it's certainly not something we're seeing across-the-board, but rather pocket where some physicians are seeing some slowdown.

Thank you.

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

Thank you. Thanks for taking the questions, guys. Let me start with just a couple areas that were obviously notable in the quarter. You talked about the medical business, the bed business, which certainly within the Company is feeling the biggest impact from what's happening at the hospital level. You said you thought the sales levels had stabilized, which is maybe good and bad, because the first quarter is usually your widest quarter of the year. How do you get visibility around that? How do you get visibility around the idea that sales are may stabilizing at current level and how far out can you see?

Rick, -- or Mike, this is Curt Hartman. I think what we would look at in our medical business at the dollar reported level in the US market, our comment there is we believe it's stabilized or effectively, we don't expect it to go any lower. Our visibility is that typically in the medical franchise, those orders are well in advance, and they're scheduled shipments because if you think of the size of the bed frames that are coming in, these come in in large trucks. It's a very much scheduled in advance event. You may have patients on beds that have to be moved onto new frames, so these things are pretty far out into the future and as we look at our incoming or expected order flow, we still see news of favorable outcomes in the future. We don't -- I refer back to the summary of customer calls that we make, we don't see things continuing to degrade out into the future.

Okay, let me touch on another item then, had a real slowdown fourth quarter, first quarter that was your knee business where you had sustained double digit growth in your core knee franchise for several years now, but since the economy is starting to have an impact on the knee market, we've seen that are the other players that reported this far. Could you talk a little bit about knee volumes and the backlog at your customer base what you're hearing from surgeon, maybe just compare it to some of what we've heard about backlogs coming in and what visibility you might have on that portion of the market which seems most susceptible to the economy, with that portion bottoming over some point in the balance of the year?

Sure, Mike. The knee market right now, I think it was a little surprise to us, it did feel like the market itself was certainly a little bit slower here in the first quarter and particularly in the United States, but a little bit outside. We are hearing just a range of stories right now from some of the docs at some of the leading big institutions not affected at all and then other both geographic or institutional folks who have gone from a six to eight week waiting list down to very little waiting list, and it just really seems very pocketed and no clear trend other than there are certainly some people pulling back, and I think again, that's part of the reason for our conservatism here as we go. The simple thing would be to say hey, we're going to bounce back into the double digit knee growth range we've had certainly over a number of years, but I think again, we're just a little more cautious and hearing some of those pockets that it looks like you're probably picking up as well.

Great, let me do two questions, then I'll let some others jump in here. One Steve, with what's happened to your markets over the course of the last six months and the changes in your business plan for 2009, are you doing anything with your compensation structure for sales reps to help people through this tough period improve retention, not that retention has ever been an issue for Stryker. But are you doing anything with your comp structure that we should be aware of? And then second, on the tax issue that you raised today in the press release, can you give us any sense of range of potential impact there? Thanks.

Sure. On the comp structure piece, and I'll give the second part to Curt. On the comp structure, we are paying very close attention to it. We have not modified, or making significant modifications at this point in time. Partially because we want to see how things continue to play out, but obviously, our salespeople are very important to us and we do pay close attention to that.

And Mike, on the tax issue that is raised in the press release, as we indicated, we're not going to go into great detail there. What I will tell you is that this is a multi-year process. The Company is constantly being evaluated for its tax positions, that's just part of the normal process. We're in receipt of a letter that is very specific in nature of what they're looking at in terms of cost sharing arrangements with various of our foreign manufacturing entities, and we feel these positions are very well justified and we will defend them vigorously and as such, we expect this process to play out over many years. We're not going to get into any amounts here. Suffice it to say, we feel good in the position that we established long ago on these cost sharing arrangements.

Just to clarify, do you know of any other companies that received a similar letter, and will you be releasing a copy of the letter in the 8-K?

We are aware of other companies that have received this letter, some in med tech, some outside of med tech.

Again, we ask participants please limit their questions to one question and one follow-up. Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Thank you very much. Looking a little bit longer term here, you have hospitals that are delaying purchases. Do you have a feel for how long they can delay these products? Is this more when the money is available they will purchase it? How do we think about return to growth?

Joanne, it's -- there's really a very big range, not only for our own businesses but for all companies offering hospital capital purchases. If you look at certain products like power tools, for example, those are keys in facilitating surgery that are necessary for hospitals to make money. They do have a very specific lifecycle and they do need to be upgraded. Other products like beds and stretchers where you see greater impact, those can be delayed for a longer period of time, so it really is all over the map. What we've tried to do is set the expectations based on what we've been able to glean from recent weeks on order trends across all of these businesses, appropriately risk assess which is really what's at the bottom end of the range as opposed to what we're expecting to play out this year and recognizing there's going to be variability between endo, medical and instruments given they vary with respect to their capital exposure.

Just a couple of housekeeping. In your guidance, what are you assuming for the share count?

One sec -- are you talking for the full year '09?

That would be helpful, yes.

Give us one sec.

While you're looking for that, you spoke about cost controls. Could you give us an idea or flush out what kind of cost controls you've been able to put in place? Thank you.

Sure.

Joanne, it started with headcount control. I will tell you as we typically dramatically expand our sales forces at the start of every year and do a lot of hiring very early in the year, we sensed this -- at least one of the things we certainly sensed was it might be a little more difficult. So it started, frankly, with headcount control, and then we're doing all the usual -- certainly at this point, looking at our travel budgets and a lot of the standard stuff. Longer term, there are also a lot of opportunities, frankly, on the supply side, the manufacturing side, the sourcing side, that we're also getting into that frankly, we think will yield more benefits probably in 2010 and beyond. So there's both short term stuff but also, we're using this as an opportunity to look deeper at our cost structure to wrestle out more costs in the 2010 and beyond period as well.

And Joanne, this is Curt. On the share count assumption, you should use approximately 399 million shares.

Thanks.

Great.

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

Hi, thanks for taking the question.

Hi, Matt.

How are you?

Great. Never been better.

First question on beds, and then I have one follow-up. Business came off here in the US more than we were expecting and sounds like more than you were expecting. OUS was kind of in line, but I just -- looking at the second quarter comps, it looks like you're heading into some tougher comps beginning in the second quarter. And then also was wondering how confident you are that you won't see the same kind of freeze up on the international markets, say later in the year that you've seen in the first quarter and again, I have one quick follow-up.

Sure, Matt. Second and third of course, we're clearly going into two additional tough comp quarters on the medical business in the US and even a little bit internationally. I think -- and that's going to make it a challenge. Having said that, again, I think we feel like we're probably at an absolute level, an absolute run rate that we probably won't go much below based on what the order trends have been, really for now, say four months or so running. As we think about the international piece, the growth rate looked pretty nice in the quarter, but we would remind you, frankly, our international business is tiny, and so we think even if the capital starts to freeze up a little bit more internationally, we still have so much opportunity and runway because we're just getting started there.

Okay.

One quick -- Matt, just one quick follow-up, I'd also just call you back to the comments we made in the beginning about some of our new product launches like Impression that's going into a $400 million market that we aren't really in, so our ability to expand that footprint is part of what also helps going forward.

Yes, I caught that. How -- what sort of share do you think you could conceivably get in that market over time?

Well we're starting close to zero, so higher than that. But I don't want to throw out share numbers. It's really just intended to help you guys understand that strategy of continuing to expand medical's footprint.

Sure, sure. No, in beds, I guess -- in beds, I'm just trying to understand, is that a market that's sort of split like two or two and a half ways like the rest of some of the other bed markets you're in, or is that there's a different dynamic there?

Are you talking about the number of competitors?

Or yes, in other words, like if we think about that $400 million add, is that something that you have one large competitor, two large competitors that are in it and then now is there a chance to play, or is it a more complicated adjacent market?

It's fairly concentrated with just two, three key players and then there's some much smaller players on the periphery and again, we'll go through a lot of this in a lot more detail at the analyst meeting next month. Good, and then one follow-up here on spine. I think you mentioned that the comps are getting a little tougher, maybe some increase in deferrals there, but I know there was tough comps last year too, and it just seemed like the drop was pretty significant and primarily in the US, like six or seven points constant currency sort of sequential drop is more significant than we've seen in that business probably for the last two years or so. Is there anything else going on there competitively? Is there anything else going on in terms of your distribution or geographically that's impacted that business?

Sure. First off, the base obviously is getting harder and harder as we go into -- I guess -- I think we've had eight straight years right now of 20% growth, so we probably are starting to bump up against that. I'd also tell you, Matt, there's a couple of little self inflicted things. We made a couple of changes in sales force stuff in a couple of key geographies that we think will strengthen us for the future that it probably set us back a touch in the quarter, and that business is still of the size -- one or two of those can actually affect a couple of points of growth. So I think over time, that team has shown us they know what they're doing and they will be back.

Okay, that's helpful. Thanks for taking the questions.

Great. Thanks, Matt.

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

Hi, good afternoon.

Hey, folks.

So I have a quick question on clarification. When you talked about the hips and knee markets earlier on, how has that changed from what you were saying at the beginning of the year? Has it gotten a lot worse, or has that been about the same? I feel like some of your commentary throughout the prepared remarks is a little bit all over the place.

Yes, I would say 6% operational growth on hips and knees in the quarter, I'd just go back to our comments that it's been a relatively modest impact and we still expect the market to grow one to two points shy of that 7% to 9% secular growth rate. So I wouldn't say it's a dramatic impact. Probably the biggest change is when we were entering into the year, we were talking about the potential for this to happen, and what we're seeing now and what we've alluded to throughout the quarter, actually, is that we are seeing it in reality in certain pockets but clearly, with us looking for the market to grow mid single digits and with similar growth rates that we put up in the quarter, I wouldn't say it's a major impact.

Okay, great. And then the price cuts in Japan, so what happens as we move into April? Are there new price cuts? Are we fully anniversaried then so we should see pricing internationally improve a little bit?

I think the price cuts in Japan as it relates to hip and knees are two year movements, so these cuts were put in place in April of '08. We would not expect anything additional on the hip and knee side until some time in 2010; however, in the calendar year 2009, there are other categories that have been looked at and price cuts proposed. They are on smaller franchises like CMF and in our trauma business, and we're not ready to talk about what those numbers may be at this point in time, but we are expecting some price cuts in 2009. It is possible that again in 2010 they could revisit the hip and knee market and look at additional price cuts there, but again, it would be very early for us to speculate on that.

Okay, great, thanks.

Great. Thanks, Tao.

Your next question comes from the line of Raj Denhoy with Thomas Weisel Partners. Please proceed.

Hi, good afternoon. I wonder if I could ask a little bit on some of the expense lines. Particularly gross margin and then some of the other operating expenses. You mentioned that on the gross margin line you're seeing some compliance costs run through there as well as just some slowing in the manufacturing volumes. Are these trends, I imagine we should see continue for the rest of the year, so we really shouldn't expect much expansion in that margin?

I think those are fair comments, and I'd just point to the first quarter of '08, there really was not a sizeable number from a compliant standpoint running through there. That's fully anniversaried and we are running at a full pace across our manufacturing network with the compliance spend. In addition, as you look at the external market and the revenue growth we're guiding, you should expect that we'll continue to slow some of the manufacturing sites most impacted by the economy, and I think what we would guide you to is a gross margin in line somewhere between what we recorded in the first quarter and perhaps 20, 30 basis points lower over the course of the year.

So actually ticking down over the course of the year?

Potentially in it. Again, guessing a little bit here on what happens, with procedure volumes as we don't 100% have clarity as well as guessing a little bit on what goes on with the capital outlook through the second half of the year, while we feel optimistic given some anecdotal information, we just frankly won't know until we get there and as I stated in my inventory comments, we are very focused on driving and managing our inventory levels, so there's a secondary impact on gross margins from that.

Okay, and then -- that's fair. And then on the other operating expenses, SG&A and R&D, obviously R&D was quite low this quarter and you mentioned the timing of some expenses. On a dollar basis, should we look for that to start ramping again as we move through the year, or is your cost containment mindset going to kick in here and keep the number relatively low?

I think our comments on R&D, and I need to give you a little bit of, perhaps a longer term perspective. As you'll recall, back in the mid 2000's, we ramped R&D up substantially, and some of this downward trend in R&D as a percentage of sales is a reflection of some of that spending migrating over the generally two to four year lifecycles of product development within our Company. As we look at the remainder of '09, we do expect R&D as a percentage of sales to move forward on an absolute dollar basis. It will be within the range of what you saw in the first quarter, perhaps a little bit higher.

Okay and then just the last line on SG&A. Is that the line we should really expect to see the cost containment play through and expect that number to maintain relatively where it is, or should we see it expand as we typically do over the course of the year?

We're very focused on SG&A right now and have been really going back to the early part of the fourth quarter, and the organization is rallying around this as an area of savings to leverage our future earnings, so I think the number that we're showing for the first quarter is a relatively safe assumption that we're going to try to maintain that for lower levels.

On an absolute dollar basis?

On an absolute dollar basis, I think you should see it perhaps moving lower.

Okay, and then just one last clarification. I think you said the tax rate, we should expect it to be the same as it was in '08. Was that correct for the full year?

Substantially in line with the reported full year '08 tax rate, yes.

So slightly higher than we saw here in the first quarter?

Yes. It may move back and fourth a little bit. It's a little bit hard to predict, especially as business volumes have changed, the manufacturing source of those items is going to move our tax rate around a little bit up or down. So right now our best estimate is it will be in line with the '08 rate.

That's very helpful, thank you.

Thanks, Raj.

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

Thanks for taking my question. Steve, I have a question for you. Most of the things we're talking about today are transitory in nature. CapEx should come back, surgical volume should come back, certainly. The question I have, and it's something that longer term investors are fearful of, is that there has been a period in the past,'92 to '99 when commercial insurance payments and cost ratios compressed and that had an adverse impact on the price environment, a significant adverse effect on the industry. Is there anything that you see either in the healthcare reform packages that are circulating through Congress or just the economic pressures on employers that could result in that payment to cost ratio going from around 1.3 back down to about historical nature of 1.15 or so? And then I have a follow-up, thanks.

Sure, Bruce. There's nothing specifically that we've seen to that effect. Having said that, I think we're continuing to assume that certainly, the days of the early 2000's of very positive pricing are long gone, and we've got to figure out how to make money in a -- basically a flat pricing environment to even -- as it's been the last few years, particularly in recon, modestly down. Having said that, I tell you, we also continue to look at every market we're in and from a patient standpoint, knowing there are opportunities for more and more surgeries. If you still look at it, there are a lot of people that still are great candidates for joint replacement that don't have them. The younger population is going to continue to demand and want products and ultimately, I think we'll be willing to pay up if there's more co-pays and things like that. So I think we certainly see some payer pressure, but we also continue to feel that one of the pieces that I think is getting missed in all the current pressures are people are going to need their joints replaced and need spine surgery and everything else is still going to be there for us, and we think the companies that are there are still going to do very well.

So I guess, just to put a finer point on that, that period,'92 to '99 looked like it was --ASPs net of price and mix were minus 5% per year. Do you see that as likely? And my second question is really pertaining to -- I noticed, and I think it was a Wall Street Journal report, they said that the FDA has been encouraged to revisit Class 3 devices that have been 510K'd and that there will be a grace period in which perhaps PMA-like data sets will be submitted to retain the label on those devices. Is that likely, and would that complicate your life immensely if in fact a corporate warning letter issues? Thanks.

Sure. First, I'll answer three questions, even though you sort of only asked two. We don't see it going that negative. Back to your comment about the 5% of the '92 to '99 period. The specific Class 3 piece, obviously, as it turns out, our particular businesses are relatively uneffected by that label. Having said that, I think the FDA will overall be working on and looking at probably more data rather than less data over time. On the third part, just as it relates to corporate warning letter, we would remind you, we continue to invest a lot and we had a lot of work to do. I think that's become more painfully clear to everybody. Very proud of a lot of the work we've done. We've still got work to do. We've been investing very heavily, as you see in the margin side, but each month that goes by, it's a month we're closer to the other end and yet again, there's probably still many, many months before we're completely where we want to be, but each month goes by feeling better.

Thanks so much.

Bruce, this is Curt. I would add one additional comment here in terms of long term EPS guidance, both for pharmaceutical and med tech companies, and that's the debate that's going on right now relative to corporate tax rate on foreign earnings, and dependent on where that shakes out and what potential number shakes out, you could see the industry, med tech and pharmaceuticals with a much different earnings outlook.

And do you feel that -- how vulnerable is Stryker on the (inaudible) of companies?

It all comes down to what that rate, if that law advances and what that rate winds up being. So it would be premature to speculate because it is all based on how that law, if there is a law, is set up, what rate it is and what kind of reciprocal tax rate alignments are with the international markets that companies like Stryker have foreign operations in.

Thanks so much.

Great. Thanks, Bruce.

The next question comes from the line of Ben Andrew with William Blair. Please proceed.

Sure, thank you, and maybe just one quick follow-up from Bruce and then a separate question. Looking at the mix dynamic, given the relative lack of kind of cost benefit analysis and higher mix of products, at least from randomized trials, is there more exposure there longer term as we see pressure on reimbursement structurally?

I think that one is a little bit tough to answer. I think we're clearly seeing an FDA that's looking for more data and some of the commentary that's come out of the proposals from the administration about wanting to see more clinical data. How it plays out with different priced products, we're really at a period of absent any real detail to put some parameters around that.

Okay. And then just a second question, as you think about the MedSurg or the capital equipment portion of that, has the softness you've seen -- can you characterize it as a mix of either orders not coming in or actual deferrals of existing orders or out right cancellations? And what sort of policies do you have on that sort of behavior pattern, because it seems to me -- I guess the main question is, is that a mix of those things?

I think the principal outcome right now of slower or lower MedSurg revenue is the deferral of orders. We're not seeing big trends in cancellation of existing orders or complete elimination of orders, and I do think deferrals are the biggest majority. And on that, as we look across the segment, we don't see any share losses either, so it's just an overall deferral or delay in the order trends, which I would assign as a majority of the revenue decrease.

The only additional color I'd add on to that is if you think about the products that we have within MedSurg, whether they be power tools or the endoscopy products like the video cameras, those are all necessary to performing surgeries, so in essence, they have to be deferrals. You cannot just stop making those purchases. It's not like there's an option to you if you don't have a power tool to go about doing a hip or a knee replacement or at least not an option you'd really want to consider. And on the bed side, even though there's probably a greater ability to defer some of the medical products as capital budgets start to come back and hospitals resume building, those purchases will have to be made just simply to meet the volume demand.

Thank you.

Great. Thanks, Ben.

Your next question comes from the line of Matthew Dodd with Citi. Please proceed.

Good afternoon.

Hi, Matthew.

Couple questions. First, when you look at your general recon forecast for Stryker, what are you assuming in share? Should we assume it's flat or up for '09?

I think you could probably assume that share trends are relatively consistent with what you've seen. If ever there's a period where we've gone through potential upheaval, it's over the last 18 months with the monitors and even then, you saw shares relatively stable. We tended to do better on knees and not as well on hips. Probably more of a migration to the mean between the two of them but in general, you really have never seen a dynamic play out in the recon market where you've seen dramatic changes in share shifts, and we would expect that trend to continue.

And then one follow-up on the recon market. Internationally, other than Japan where you're seeing impact of price, are there any other decent sized markets that are seeing an economic impact, or is it pretty consistently stable across the board?

It's relatively stable outside the US. Remember, as it relates to the orthopedic business, a lot more of that comes under nationalized healthcare, so you don't see the same out of pocket pressure that some of the individuals in the US have seen. When we talk about elective procedure deferrals, that's much more of a US based comment and again on a selective basis, because it's not a widespread trend we're seeing uniformly across all of our accounts. On the MedSurg business, probably partly because our shares are so low and we're at the very early stages of that expansion, we haven't seen the same impact. Certainly can't rule that out, quite frankly, it's part of what's dialed in to the low end of our forecast as we talked about trying to address any reasonable downside risks, one of those would be much greater pressure on the ex-OUS businesses.

So when you give the 1% to 2% decline in volumes, you're really only seeing that in the US at this point?

On the reconstructive?

On recon only, right.

Yes, that was much more of a US based comment.

Alright. Thank you.

Great. Thanks, Matt.

Your next question comes from the line of Ed Shenkan with Needham. Please proceed.

Just wanted to follow-up then on the pockets of weakness in the US. We heard about that at the orthopedic Surgeons meeting in February. Are there more pockets now, and have the pockets of weakness, have they gotten weaker since then?

I wouldn't say there's any real change in the comments that we made back at the academy where we talked about seeing some pockets of elective procedure weakness. It's very much the same trend that we were noticing back earlier in the quarter. It hasn't worsened, it hasn't gotten better.

And on the international side for capital equipment, just wanted to follow-up on the earlier questions that people had. Has that slowed off as much as the US already, and have you seen the impact as profoundly already on the international side?

I think what we were pointing to, and certainly you'd see it in the numbers given medical and endo regarding the mid-teens outside the US but were down domestically. Our international MedSurg businesses have fared much better and as we commented earlier, part of that is the nature of that market. It isn't seeing same capital pressure, but part of it is also we have much smaller bases in those markets so we're in much more of a growth mode. And again, the low end of our range is designed to reflect some of the worst case scenarios that could play out such as greater downward pressure on the international businesses going forward.

Okay, thank you.

Great.

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

Hi. I guess I'll ask the obligatory use of cash question. By my math, a share repurchase would be pretty accretive. Just wondering what your plans are there and then I guess the second part of that question would be how much of your cash is overseas and would there be tax issues with repatriating some of this, and is that why you're not going to necessarily use that cash for buyback?

There really hasn't been any change to our overall strategy as it relates to cash. We view it as multi-pronged, meaning that whether that is looking at M&A opportunities, potential for share buybacks which we did last year, as well as the dividend which we continue to increase in recent years. M&A remains our preferred use of cash. Clearly in this environment, we've had an opportunity to revisit certain areas given where valuations are, but I'd also remind you, I wouldn't interpret the lack of seeing deals close as a lack of activity. We have very high hurdle bars that relate to due diligence and also where we think about valuation, we think that served us well in the past. As we look at different opportunities and we'll continue to do so, share buybacks remain a potential use of cash. We do not currently have one in place. That could change going forward, but nothing to announce at this time.

And Mike, I'd reinforce Katherine's earlier comment that acquisitions are definitely the preferred use of our cash at this point in time and to your second question relative to our cash position, US versus OUS, we historically have not broken that out, but it's safe to assume that over time, we've built a large cash position outside the US, and certainly any time you repatriate those funds, you're going to pay a tax penalty over the rates that are applied in those respective international markets.

Okay. And then just one additional question. I noted that you don't want to say a lot about the tax issues and the letter that you received from the IRS, but you did note in the press release and I guess if you've gotten these in the past, you haven't, as far as I'm aware, notified us about them, so you say that it's material. What is your threshold for what you would consider to be material?

I would answer that question two ways, Mike. It's noted in the press release because it's a very specific letter related to a very specific issue called cost sharing arrangements, and cost sharing arrangements, if you were to dive inside the IRS, they've noted as a tier one agency issue and by that, the IRS defines a tier one agency issue as an issue that they intend to investigate across various industry segments, if not industry in its entirety and as such, they've taken a very aggressive position and from an internal standpoint, we felt it was best to disclose it. I'm not going to get into the level that we define as material relative to Stryker overall.

Alright. Thanks.

Your next question comes from the line of Doug Schenkel with Cowen & Company. Please proceed.

Hi, good afternoon, and thank you for taking my questions. First, OUS knees were a bit light of our forecast while OUS hips were a bit better than I expected, reversing trends from at least the last few quarters if not years. Can you provide some color on the reversal? Is this largely a function of comps, reversion to the mean, change in strategy or something else, and is this dynamic expected to continue over the next few quarters, and then I'll follow-up with my one follow-up question.

Doug, I do think on international hips, we're thrilled with the 9% operational growth in the first quarter. I would tell you if you don't back into the first quarter of '08, you would see the comparable was relatively soft. We are encouraged, however about our European hip results, and there has been some additional focus in that market on the recon product offering. Over on knees internationally, the comparable from the first quarter of '08 was in the mid single digits, so year-over-year, the 4% is not going up against what I would call an arguably tough comp and overall, I don't have any good rational reason why the number dropped to the 4% range that we reported outside of the selling day impact that we experienced in the first quarter, and a few what I would call minimal issues related to product supply as we continue to work through our remediation efforts on various aspects of the knee systems.

Okay, and then my follow-up is a bit of a high level question. I think back in January you indicated that you expected double digit sales growth and at least 15% EPS growth in 2010 and beyond. Independent of what you described regarding an uncertain outlook for the tax treatments, is there any reason to believe that there's been a change in your thinking on longer term goals?

No. Clearly, the short term environment is worse than what we anticipated, but I think it gets back to we continue to feel great. Think about it this way. Each franchise we're in, we can look at every single one of them and say you know what? We can grow each of these businesses a lot, both in the US and internationally. And there's not one business we're in right now that I'd say we would get out of. What's really interesting, is if you actually dig a little deeper and look into some of the numbers, almost every one of our franchises had double digit local currency growth in either of the US or international in the quarter. Hips and knees were the only two that didn't. So I think we continue to feel very good about the longer term and probably, I think Bruce Nudell referenced it earlier, but we're in a short-term -- a little bit more short-term challenging, but still feel good about the ability to be a top line, double digit growth company and solid EPS growth beyond north of that as we go forward.

The one follow on comment I would make, if there's been some positives that have come out of what has clearly been a challenging time, not just for us, but the market overall, it has prompted us, as we've talked about, to really take a very hard look at a lot of our spending. Some of that's short term in nature to deal with the environment, but as Steve alluded to earlier, a lot of that is taking a look at some of the inefficiencies that have come out of our decentralized structure. Certainly don't want to lose the decentralization, it's a big part of what drives the success of this organization, but when you look at our vendors, our suppliers, the benefits that come out of the investments and the remediation there's going to be longer term leverage driven out of this P&L that doesn't go away simply because the market environment starts to get better.

Doug, the other funny part, if you look over the last eight years or so, we feel like we've built a great footprint. That footprint has been working beautifully for us. Right now in the very short term it's probably working a little bit against us, but as soon as the fundamentals -- we get through the short term period, we continue to feel that the long term fundamentals of the footprint we have plus the cash position we have, the culture we have, are going to continue to distinguish us as market share gainers and growing faster than most of our competition.

That's great. Thanks a lot for taking the questions and have a good night.

Thank you, Doug.

The next question comes from the line of Kristin Stewart with Credit Suisse. Please proceed.

Hi, thanks for taking the question.

Hey, Kristin.

I just wanted to go back to the guidance, and I'm sorry if I missed this, but the recalibration from 6 to 9 to 2 to 5, is that just solely due to MedSurg expectations, or are you also recalibrating all of it and what to expect in orthopedics?

We really tried to walk through a lot of the assumptions back in Curt's earlier comments, so I'll reiterate them briefly. We talked about expecting to see the pressure on the elective procedure market as it relates primarily to hips and knees and spine, trimming a couple off points off the overall market growth for those businesses, that's what we saw in the first quarter and that's what we're assuming continues to play out throughout 2009. The bigger changes relative to our prior thinking really goes back to our MedSurg businesses. We talked about -- give you some specifics that help, in the modeling Curt referenced the fact that we expect medical to be relatively stable on a dollar basis, on a quarterly basis going forward based on these coming order trends, based on some of the intelligence we've been able to gain -- gather from our sales force as well as from some of our customers that we track on a weekly basis, recognizing tough third quarter comps for that business and tougher comps for the instruments business in the second quarter, so the bigger change relates to those two franchises within MedSurg with some residual or more modest impact on ortho businesses.

Okay, because I thought last time there was some hair cut in the numbers already for ortho, so it sounds like maybe a little bit more this time around? Is that fair to say?

Yes, we've changed the rates downward, so I think that's a fair statement.

Okay, and then just thinking about the orthopedic business, I know you guys were saying that there was an extra selling day this quarter, but last quarter a year ago, you had obviously talked about Easter having a negative impact, so is it kind of net/net, kind of equivalent effective selling days? And I know in the hip business, you had the recall a year ago as well, so have you guys looked at what the growth rates maybe excluding that Easter fact and excluding the hip recall a year ago?

Kristen, this is Curt. We've looked at all that and a little bit more. If you looked at the first quarter of '08, there's actually a day in there for leap year, and you lose a day because of Easter. If you look at the first quarter of '09 and you look at the Stryker vacation calendar, we lose a day for New Year, so when I normalize everything and look at the average day sales rate on our reconstructive implants, it's a little higher than our reported rates because of those various day changes year-over-year. So I really didn't want to get into all that detail because it sounds like excuses, and I'd rather just report a really good, strong recon number.

Okay.

Yes, and we did talk that the Trident, really the impact of that recall was felt in the March through June time frame, when you look at supply disruptions and refielding of that product.

Okay. Thanks.

Thanks, Kristin.

Your next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed.

Thanks for taking my call. I have a question on marketing spend behind knees and hips. Your top competitor, Zimmer, is out talking about spending more to educate physicians and hopefully rebuild market share. I understand that you're looking to slowdown SG&A spend, but can you comment about the spend that you're going to put forward in 2009 behind knees and hips to maintain, if not continue to gain share? And then as a follow-up, let's just assume that Zimmer is successful later this year in regaining market share. Is there some wiggle room in the Stryker numbers that will allow you to spend more in the back end of the year if you need to preserve market share? Thanks.

Glenn, I think on the spending categories, we've not historically dove into the various divisions respective marketing plans. I think on those two categories you identify, our orthopedics division, both in the US and internationally, under the plans that were outlined and approved through the federal monitor have laid out training programs as it relates to hips and knees. This would also apply to our spine and other orthopedic implant franchises, and that -- there's been no reduction in those plans. The targeted spending that we are looking at really relates to items that are on the periphery that as an organization, that's decentralized like Stryker has grown have crept up into other areas of the business, and those are the ones we're really focused on. And so I don't think that you should assume that things that are germane to growing the business are first on the radar screen to be cut and removed from our plans. I think you should assume that those things on the edges are the things we're going after aggressively and working to remove out of the plan. And as it relates to the second half of the year, if we thought there was a great marketing plan that would drive our revenue in any of our product segments, we would probably be targeting that right, especially considering the external forces in the market, and I think fundamentally what we have seen over time drive product growth is a combination of highly innovative products and great salespeople, and we're going to stick to that model for the time being.

Okay, great. Thank you.

Okay, next?

Your next question comes from the line of Jeff Johnson with Robert Baird. Please proceed.

Thank you, good afternoon. Just a couple quick ones if I could, guys. One, spending rate on OP-1, can you put any color around what you're spending currently in that area? And also, any change at all in the quality investments? Is '09 still planned to be the peak year of spending that incremental $5 million to $40 million I think you talked about last quarter? Should we still expect that see that tick down in 2010?

Sure, Jeff. We aren't going to get into the detail on OP-1. Once we sort that out, we'll talk more about that. In terms of the quality, I do think this is probably the peak year. We will continue to be making major investments beyond that, but the delta, in terms of the increase is -- this should be the peak year for that. And then ultimately, ideally, some of what we'll be learning is getting better and more efficient in the years ahead, so I think we're going to have just one or two more -- two more questions.

Alright. One quick follow-up if I could there Steve, or asking a clarifying question to Curt. The percentage level on SG&A, you talked about that maybe staying at this level, but the absolute dollar coming down. As I look at your revenue line, that should, I think be in reverse. Am I thinking about something incorrectly there, or I could ask you to clarify that?

No, you've got it right. It will be up modestly on an absolute basis.

But the percentage -- so the correct part of your statement, Curt, was that the percentage stays around this level?

Yes.

Okay, great. Thanks.

Great.

Your next question comes from the line of Bill Plovanic with Canaccord Adams. Please proceed.

Great, thanks. Just one follow-up on OP-1. Does the panel recommendation have any impact on the HDE that you currently have in place, or could have an impact on that approval?

No, Bill. Hey, by the way, congratulations. I think you nailed our sales forecast, I think to the exact penny from what I recall, but no, it does not affect the HD status.

Great. That's all I had. Thank you very much.

Your final question comes from the line of Greg Halter with Great Lakes Review. Please proceed.

Yes, good afternoon. Last call you had mentioned some raw material costs and challenges and so forth in cobalt chromium and so forth. Just wondering if you could provide some color around that specifically and others generally in what you're seeing there?

Greg, right now we would not be calling out any specific raw material issues from a cost standpoint that are having meaningful impact on our overall business, and I think we're going to leave it with that comment. The diversified nature of our business, we're going to have pluses and minuses across any one of these raw materials be it resins, be it cobalt, chrome, be it shipping rates and fuel surcharges. These things are going to move up and down over the course of the year across the various businesses and right now, there's nothing of substance impacting our ability to deliver our P&Ls.

Okay. And last one here, I believe you had anticipated capital spending for 2009 to be a $150 million to $190 million. Any thoughts that that has changed at this point?

I think that's in the safe to high end of the range right now. Obviously, as we build an annualized capital plan, some of those expenses are targeted or geared towards what I would refer to as plant capacity expansions or operational efficiency improvements, and to the extent that any of these plants have seen meaningful slowdowns, we're probably going to hold back on those spending. Conversely, there may be other categories that are targeted as a specific market that we now have an opportunity to go after, so I think the range is still appropriate, if not perhaps a little bit lower.

Okay, and I presume the Impression product is somewhere in a facility where you don't need to spend?

Yes, that's pretty minimal.

I think you can assume that that's pretty well taken care of at this point.

Okay, great, thank you.

Okay. Alright. Thank you, everybody, for the questions. We'll wrap up. Just a quick reminder to everybody, May 20 will be our analyst meeting, so for all of you, we'll give a little more light into a lot of what's going on at that point in time and then again, a reminder, July 21 will be when we report our second quarter, and thank you all very much. Bye-bye.

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