史賽克 (SYK) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Stryker earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. Certain statements made in today's conference call may constitute forward-looking statements. They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the Company's actual results to differ materially from those expressed or implied in such statements. For information concerning these risks and uncertainties, please see 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. The Company does not undertake any obligation to update or revise any of its forward-looking statements.

Today's conference call will also include a discussion of constant currency sales performance and adjusted diluted net earnings per share for the year ended December 31, 2009. Further discussion of these non-generally accepted accounting principles, financial measures, including generally accepted accounting principal reconciliations appears in the Company's Form 8-K filed today with the SEC. The Company's SEC filings may be accessed from the For Investor's page on the Company's website at www.stryker.com. I would now like to turn the call over to Mr. Stephen MacMillan, Chairman, President and CEO. Please proceed.

Thank you, Saylee. Good afternoon, everyone, and welcome to Stryker's first quarter 2010 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. With the first quarter of 2010 now complete, there's a lot we feel good about, including the acceleration in our sales and income growth, the resolution of the Mahwah warning letter and a number of new product launches. Yet, there's clearly still work to do as our instruments, spine and some of our international businesses are not performing where we would like to see them.

At the time of our last conference call in late January, we had just completed one of our more difficult years in navigating through a series of major challenges in 2009. The year presented us with significant uncertainties that tested our organization, but also served to galvanize our Company around a clear goal of emerging from this period a stronger competitor. In a year where we had to play a lot of defense, we kept playing offense as well. We believe our results demonstrate the merits of the investments and actions we have taken in recent years in compliance, in innovation and in acquisitions.

With the resolution in Q1 of the Mahwah New Jersey warning letter, we have tangible evidence that the considerable investments we have made and will continue to make in our compliance program are on the right path. Our journey is not complete and we remain committed to the $200 million three-year initial program we outlined to FDA as we continue to raise the compliance bar throughout our organization.

The recent positive news from FDA has strengthened our resolve that the cultural transformation well underway throughout the Company is taking hold. Yet we are also pleased that during this period of meaningful investments, we have been able to successfully execute on key R&D programs that have resulted in important new product launches for our orthopedics and MedSurg divisions, some of which we highlighted at the recent American Academy of Orthopedic Surgeons meeting held last month. Although we have redirected R&D resources to remediation efforts over the past couple of years, we have also worked hard to deliver key new product launches and to continue our commitment to innovation. On the M&A front, we are pleased with the progress to date of our late 2009 acquisition of Ascent which, as the market leader in the reprocessing of single-use medical devices, allows us to partner with our hospital customers in order to deliver tangible cost savings and enhanced environmental sustainability without sacrificing quality or innovation.

At the end of Q1, we also closed on our previously announced acquisition of Sonopet, which augments our instruments product offering with an ultrasonic aspirator, hand pieces and accessories used in neurosurgery. Against this backdrop, we are pleased that we delivered on our commitments in the quarter, with total sales increasing 12% on a reported basis and up 9% in constant currency. Excluding the impact from the year end 2009 acquisition of Ascent, sales were up 6% to 7% on a constant currency basis. Encouragingly, on a global basis, with the exception of instruments, every key franchise posted revenue gains in the quarter, with particularly robust performances from our knees, trauma and medical franchises.

With the improving top line and our ongoing focus on operating efficiencies, we achieved diluted EPS growth of 13% in the quarter to $0.80. We are pleased with the improving profitability profile, which reflects the impact of numerous initiatives put in place over the past couple of years, coupled with our gradually reaccelerating top line. Although one quarter clearly does not make a year, our Q1 results reinforce our conviction in our ability to realize our 2010 commitments while continuing to make the ongoing investments in our compliance initiatives. With that, I will now turn the call over to Katherine.

Thanks, Steve. On today's call, I will provide some additional commentary as it relates to recent new product launches, pricing and hospital capital spending. On the new product front, we were pleased we had the opportunity to highlight several of our recent introduction at last month's AAOS meeting. This included the ongoing launch of two new hip systems, including the first mobile bearing hip system available in the US, our ABM with X3 advanced bearing technology. This innovative design allows us to offer the benefits of a larger head bearing system without the need for metal on metal articulation. We believe this offering will, over time, allow us to carve out a segment of the larger head hip market, a category where we have opted to remain on the sidelines as we evaluated and developed an offering that may provide an improved safety profile.

We are also rolling out our restoration modular system, which allows for greater intraoperative flexibility to help achieve optimal fit and performance. Combined, these products should help to drive continued gradual improvement in our hip franchise over the coming quarters. In spine, we filled an important gap in our product portfolio with the launch of two cervical plating systems. And although the full impact from these launches won't be realized until the second half of 2010, the ability for our spine organization to further round out its bag is an important component of the expected improvement in our spine sales as 2010 unfolds.

Looking at pricing, for the total Company, pricing was down roughly 1% in the quarter, largely in line with the prior quarter. And it's worth noting that over the roughly past five years, the total price impact for Stryker has been essentially flat, which we believe underscores the benefit and stability provided by our diversified sales footprint. We would also note that the relatively neutral impact from pricing over this period occurred despite the fact tha certain franchises and geographies were individually experiencing a much stronger, and in some cases, a much more severe impact from price. Reconstructive implants continue to experience pricing pressure as expected, although our ability to realize positive mix fueled by the launch of innovative products help mitigate a meaningful portion of the pricing pressure.

Lastly, with respect to hospital capital budgets, we continue to project a gradual recovery as the economic environment slowly improves. Given our mix of businesses, the considerable year-over-year variability and comparisons, as well as individual challenges and opportunities that exist with any of -- within any of the MedSurg divisions, the slope of the recovery is unlikely to be linear. But over a multiquarter period, we expect our MedSurg franchises to post slowly improving top line growth, consistent with the goals we set out for the businesses at the beginning of the year. Curt will provide some additional commentary as it relates to the expected quarterly progression of our MedSurg businesses later in the call. And with that, I'll now turn the call over to Curt.

Thanks, Katherine. I'll start by saying overall, we're pleased with our first quarter financial and business results. In the quarter, sales increased by 12.4% on a reported basis and 8.7% on a constant currency basis, generating diluted net earnings per share of $0.80 which represents an increase of 12.7% over Q1 2009. Components of our growth included the Ascent acquisition, which we are very excited about, contributing 2.3% to our reported growth rate and a one-time medical order added another 1% to our sales increase. Internationally, we did have some challenges as our business segments outside of spine and trauma remained soft. As a reminder, our international reconstructive implant business has been negatively impacted by our decision in 2009 to obsolete certain products and streamline our distributor model. These changes were part of the restructuring charges announced in Q3 '09. Although these moves do create some short-term headwind, compounded by the market softness in the euro zone, as 2010 unfolds, we expect a gradual strengthening in our international reconstructive implant performance.

Encouragingly, our operating profit leverage and earnings performance demonstrated the sustainable impact that some of our 2009 business transformations can have over time. Our balance sheet remains very strong. We again delivered strong cash performance to start the year, and coupled with the capital structure changes initiated in late 2009 and the very successful January $1 billion debt offering, we clearly have financial flexibility to pursue our strategic objectives. On that note, I'll move on to the impact that foreign currency had on our sales.

In the first quarter, currency contributed to an increase in top line sales by approximately $58 million and improved the Company's overall reported growth by 3.6%. Looking at the second quarter, currency should remain a positive and if rates hold near current levels, we would expect second quarter sales to be favorably impacted by approximately 1% to 2% when compared to 2009. Using current rates, the full year currency impact on top line sales would be an increase in the range of 0.5% to 1.5% when compared to 2009, down from the original expectation of 1.5% to 2.5%.

Next, I'll spend a moment on the impact of price in volume mix on the top line. In the quarter, Company-wide selling prices declined roughly 1% on a worldwide basis while volume mix was generally as expected, adding 8% to reported sales growth. The number of selling days was effectively equal with 2009 in most markets. Moving to the business segments, I'll start with orthopedic implants, which represented 60% of our sales in the quarter. Total orthopedic implants recorded an 11% increase on a reported basis and a 6% gain in constant currency. On a worldwide basis, our hip segment posted results that were very similar to the fourth quarter with growth of 9% as reported in dollars and 4% in constant currency.

As has been mentioned, we are encouraged by the rollout of both the ADM and rejuvenate products and would look to their impact on future quarters' results. In the US, hip sales were up 7% while in international markets, hip sales were flat on a constant currency basis with gains in Japan offset by a low single-digit decline in Europe. Our global knee segment continued to deliver solid results, posting 12% sales growth in dollars and an 8% increase on a constant currency basis. The US market continues at a robust pace while Europe remains soft. As mentioned, the US knee segment remained strong, delivering reported growth of 12% against the prior year gain of 8%. Outside the US, these were down 1% on a constant currency basis with solid gains reported in the Pacific region, offset by a decline in Europe.

Global trauma segment recorded a 15% increase in dollars and 11% increase in constant currency. This was a nice start and really builds on our fourth quarter results. Our US trauma segment recorded solid 13% growth to start the year, while international trauma sales were up 9% on a constant currency basis in the quarter, with sizable gains recorded in Europe. Our global spine segment delivered 10% growth in dollars and an 8% increase on a constant currency basis. These results were slightly better than fourth quarter results, and the US market has begun the rollout of a cervical plating system, filling a big void in our portfolio. With that said, US spine sales remain below historical ranges recording 5% growth in the quarter, consistent with our expectations at the start of the year, given price pressure and some key gaps in the product portfolio. With the recent new product introductions, we do anticipate stronger top line results as we move toward the second half of 2010. We continue to enjoy strong international spine sales with constant currency growth of 16% in the quarter paced by double-digit gain in all international markets. This marks the fourth consecutive quarter of strong international spine segment results.

Next, I'll turn to the MedSurg group, which represented 40% of our sales in the quarter. For reporting purposes and to reflect our acquisition of Ascent, MedSurg today is comprised of our instruments, endoscopy, medical and Ascent healthcare businesses. In total, MedSurg sales increased 15% as reported and 12% on a constant currency basis. Acquisition added 6% to the reported increase in the one-time medical conversion order contributed 3% to reported growth. From a transparent view, we would report organic MedSurg growth of 6% in the quarter. Sales for the global instrument segment grew 1% in the quarter as reported and were down 1% in constant currency. In the US market, the instrument segment reported a 1% gain against a tough prior year comparable of 11%. Internationally, instrument sales declined 9% in constant currency. Overall, instruments orders growth outpaced shipment growth, with shipments constrained by execution issues.

Given accelerated orders trends, easier comps and better execution, we expect instruments growth to improve from Q1 levels, as 2010 unfolds. Our endoscopy segment reported a sales increase of 9% and advanced 6% on a constant currency basis. Our US endoscopy sales stayed on the positive trend started in Q4 by recording 6% growth. First quarter uptick in video capital sales was partially offset by continued pressure on our communication system installations, a trend we expect will remain throughout 2010. Internationally, endoscopy sales also delivered positive results, recording a 4% constant currency gain. Finally, our medical segment saw global sales improve 30% in the quarter as reported and 26% in constant currency. These are great numbers to report, but they do require some explanation. US medical sales increased 34% in the quarter, and I would caution the enthusiasm by noting that medical was a recipient of a large one-time conversion of rental products that added 19% to its growth rate. Absent this, we are still pleased with the organic 16% growth, but remind you to review this performance against the prior year comparable, which was particularly favorable. Our international medical sales increased 1% in constant currency.

Overall, I would summarize the MedSurg quarter at the macro level as follows. Ascent is performing as planned, if not modestly ahead of our expectations. Medical had a solid start. Endoscopy is demonstrating gradual acceleration, while our instrument segment needs to balance execution issues against growing demand for its products.

I'll now turn to the remainder of the income statement, beginning with our gross margin performance. Gross margins remain steady with those reported in Q4 at 67.7%, while decreasing 10 basis points over 2009 first quarter levels. Of note, reported margins were suppressed in the quarter by 30 basis points as a result of the Ascent acquisition inventory step-up charge. Overall, this is a solid starting point for 2010 and is within our expected range. Research and development spending represented 5% of sales in the quarter, while increasing 12% over 2009 levels. We expect to continue to ramp up our spending here as the year progresses.

Selling, general, and administrative costs increased 8% over 2009 levels, while decreasing to 37.1% of sales. The sales growth has certainly helped our leverage here, as we feel we are making the appropriate investments, and we remain comfortable with fluctuations in these categories as priorities materialize. Operating income increased 18% and the operating margin increased a robust 110 basis points versus prior year to 24.8% of sales. Other income and expense was essentially zero in the quarter as higher interest expense associated with our debt offering was offset by earnings on our invested cash and a small foreign currency transaction gain. Lower investment yields continued to limit earnings on our invested cash, even with higher cash balances. Finally, the Company's effective income tax rate was 27.8% for the first quarter of 2010.

In terms of the balance sheet, we ended the first quarter with $3.94 billion of cash and marketable securities. This is up $983 million from year end 2009. As a reminder, in the quarter, we completed our $1 billion debt offering, issuing $500 million of five-year notes and $500 million of 10-year notes. The offering was completed on January 12, resulting in coupons in the five-year notes of 3.0% and 4.375% on the 10-year note for an average cost of 3.69%. We are very pleased with this outcome.

We're off to a good start on our asset management. Account receivable days ended the quarter at 56, which represented a decrease of three days compared to the prior year. Days in inventory finished the quarter at 151, which was up six days sequentially versus year end, but down 23 days against the prior year level. On cash flow, we continue to perform well, with cash flow from operations of $275 million and free cash flow of $243 million. Finally, in the quarter, we repurchased 2.1 million shares at an average price of $51.74, for a total spend of $111.1 million under our currently authorized $750 million share repurchase program.

In summary, Q1 was a good start on many fronts. Though as noted, we still have some select operational and market issues to resolve in the quarters ahead. We are encouraged by indications of strengthening across our business. More broadly, we feel the last three quarters have delivered steady improvement.

Turning to our outlook, our financial forecast for 2010 remains unchanged. We are maintaining our outlook calling for net sales increase of 5% to 8% in constant currency. Diluted net earnings per share are anticipated to be in the 3.20 to 3.30 range, representing an increase of 8% to 12% over 2009 adjusted diluted earnings per share. Importantly, this range includes the interest expense associated with our public debt offering which translates into approximately a nickel per share and also now reflects less positive impact from currency than initially expected.

At the close of the market today, First Call consensus estimates stand at $0.80 for the second quarter. We view this as a reasonable estimate. Supporting this outlook, our assumptions include continued stability in domestic hip and knee markets yielding mid single digit market growth rates, while international markets outside of Europe see volume growth in the low to mid single digits. European markets remain most challenged, but we anticipate a modest improvement from Q1 levels. Additionally, we anticipate modest improvement in our performance, given the ongoing expected impact from the changes we implemented in late 2009. Against that backdrop, we think global hip and knee market growth rates will average low to mid single digits on a constant currency basis in 2010. The trauma and CMF markets remain stable and appear to be moving in high single digit ranges. Finally, in spine, we see high single-digit procedure volumes, but forecast continued pricing pressure.

Turning to our MedSurg franchises, we assume modest growth in capital spending defined as a low to mid single digit increase. We reiterate they will likely experience quarterly variability as it relates to the growth rates for all three of the traditional MedSurg businesses, given the swings in year-over-year comparables. We would not model the recovery of our MedSurg franchise as strictly a function of the percentage of sales that are tied to hospital capital budgets. In summary, our guidance continues to assume 2010 global MedSurg market growth in the mid to upper single digits on a constant currency basis. With that, I'll turn the call back over to Steve.

Thanks, Curt. Before we open up the call to Q&A, I would like to offer some closing comments. Although the recent economic upheaval combined with our own compliance issues may have given the appearance to some of you that we were a company in triage, we actually kept our heads above water, remained focused and throughout this period, continued to make a number of important investments in our organization that are beginning to yield tangible results. Some of that was apparent at the recent AAOS meeting, where we highlighted a number of important new product launches.

Although our business remains one largely defined by the proverbial singles and doubles as it relates to new products, taken in their entirety, these new product introductions underscore that innovation still matters and is a key component of our strategy to deliver accelerating top line growth going forward. With our considerable balance sheet and access to liquidity, we are also well positioned to continue to deploy cash on the acquisition front, if the appropriate strategic opportunity presents itself. Finally, in stark contrast to where we were a year ago, we feel very good about our ability to deliver on the financial targets that we presented to you back in January. With that, we'll now open it up for questions and answers. Saylee, back to you.

Thank you. (Operator Instructions) Your first question comes from the line of David Lewis with Morgan Stanley. Please proceed.

Good afternoon.

Hi, David.

Steve, just a few quick ones here. First, of all, just market sentiment on spine. You have other players in this marketplace that are really talking about negative true pricing dynamics. You really focus much more on filling product mix issues within your pipeline. Can you sort of talk about how the issues have changed the last two quarters? Do you still believe this is exclusively a mix and product innovation issue for Stryker, or do you think there is some evidence of pricing pressure in the spine segment?

There is certainly growing evidence of pricing pressure, David, don't get us wrong. Having said that, as you know, we're never going to blame things like that on our performance. We still see significant opportunities to grow our spine business and do it back to innovation and execution and feel like we're just through a couple of quarters here where we were slow in cervical plates. They are coming out, and I think we continue to be bullish on the spine market. But certainly more pricing pressure going forward than, say, existed in the '06, '07, '08 time frame.

Okay, very helpful. And then another question, and end market dynamics. Steve, do you think about OUS trends, how much of this do you think is simply pressured international markets versus some of your recent restructuring activities and distribution disruption? What's the predominant driver as you see it for your recon business for OUS?

Sure. I'd probably give you a couple of -- one big button, then I'll answer it more specifically. I think where we feel really about good things right now is each of our businesses that are soft, we know exactly what's going on and have a very clear plan to see them accelerating. The European piece really is focused primarily on our recon business, and that is where as part of our whole remediation efforts and our quality undertakings, as we mentioned in the third quarter last year, we took some charges.

We discontinued a number of, say, for example, single-market products in Europe and also changed some distributors. That is going to be with us through the next few quarters as we flush through that. But we think frankly from just a profitability and ability to service things going forward, we'll be much better, but there's always a couple of quarters of pain as you discontinue long-standing products that we've had in those markets for 20-plus years in some cases. But frankly, long-term, when you think about inventory management, working capital, everything else, just didn't make as much sense for us. So I think we can see our way clear to restrengthening there.

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.

Thank you very much. I have two questions. One of the things which you did not mention is OP-1. I was curious what it would take for you to totally pull the plug on that product.

Sure, Joanne. We're continuing to evaluate that, and we will report at the analyst meeting next month as to kind of where we are on that.

Thank you. My second question has to do with the European market. It sounds as if you're having some sort of internal, particularly Stryker issues associated with Europe, but could you contrast and compare that to the broader end market and what stage of recovery that's in?

Sure. Again, as always, we are always going to be more self critical. I think those of you who have gotten to know us over the years know we'll be a little more self critical. There's been a number of times where I think we've reported some weaker results and then said it's ourselves and then it turns out to be the market. I do think the broader European market is pretty soft right now. And net of companies that might be making acquisitions might make growth look a little bit better in those numbers. I think the core markets are a little softer right now. Having said that, again, we're in a period of, really probably four quarters as we anniversary through the products we discontinued and other things like that, that will look a little bit worse, but ultimately, we know we're making them stronger for the future.

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

Thanks. Two quick questions. First, you mentioned instruments and execution issues. Can you just go into a little bit more depth there, please?

This is Curt. I think the execution here is, if I boil it down real simply, it's getting product out the door. Doing it in a manner that coincides with all the effort we've put in on the remediation front and fighting our way through those new processes to satisfy all constituents.

Is that something that is going to take a few quarters to work through, or is it something where you identified already in Q1, and --?

It will be a few quarters, Tao. You know what I would tell you, it's very similar to what we went through in orthopedics division as we've cascaded our quality and compliance efforts throughout the corporation and, by the way, for those of you who may recall, we had a fairly tough inspection early last year in the instruments division. We're doing additional remediation work there and putting into effectively our new corporate compliance. It does mean some products are getting put on ship holds and things like that, and that ultimately takes us a little while to work through. So I think you'll see a steady, steady progress here through the year on instruments, and probably the worst is behind us.

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

Thank you. Even if I backed out the $15 million or so in one-time sales from medical systems, we still had a really good quarter. I know you've emphasized for the last month or two that that was going to be a particularly easy comp. How do you view the medical comp in the second and third quarter? They look like they are equally as easy.

Yes, they are still pretty low, Mike, and I think we're more cautiously optimistic that our medical business is coming back. Having said that, when we were down, really the first three quarters of the year were pretty ugly. So even coming back with reasonable growth right now, we're still back below 2008 levels. I think ultimately we'll start feeling really good once we're back above 2008 levels, and that's probably not quite yet in the plan for medical this year. But I think we are seeing a nice, healthy rebound.

So just to clarify, Steve, if we're thinking about medical growth over the next -- call it short-term, next couple of quarters and your comps are still relatively easy, should we think about double-digit growth that's reasonable? (inaudible), but the trauma business had a good quarter, and that's another market where we were a little bit worried about in the fourth quarter based on diminished pricing capabilities and diminished mix for some companies. But your business accelerated this quarter, so maybe if you could add some more to that. Thanks.

Sure, Mike. Back on the medical piece, I think we're -- we certainly are hoping for double-digit growth. I think it would probably be, call it right around low double digit would be I think the minimum we would really consider success. So hopefully we will be in that range. And then on the trauma business, I would say I think the trauma market was probably fairly robust in the quarter, if you think about it. Certainly, the east coast of the United States had quite the winter. Even, I think you in Dallas had a couple of big storms, if I recall, and certainly throughout Europe, there was also an unusual winter. You look at places like the UK, when London gets a foot of snow, we certainly benefited from that. So I think we're pleased with our trauma business, but we would probably chalk a little bit of it up to weather, just so we don't start patting ourselves on the back.

By the way, if we come back a year from now and want to remind people that it might have been a slightly better than usual quarter. Having said that, we feel pretty good about what we are doing from a pure execution and product flow standpoint and everything else.

Your next question comes from the line of Bob Hopkins with Banc of America. Please proceed.

Thanks very much. Can you hear me okay?

Yes, Bob.

Great. I was wondering if you could talk just a little bit more about Europe, because one of your competitors reported a few weeks ago, made a pretty definitive comment that they saw a turn in certain countries within Europe. So I was wondering if you could just provide a little bit more color on what you're seeing there. It doesn't sound like you're willing to make that kind of a statement. So just looking for a little bit more color on the pace of recovery in that territory from a market perspective.

Yes, Bob. The one part I would be careful with as you relate to Europe is how much of the big five versus how much are in other markets, and I would tell you, we've probably been a little more conservative in some of the other markets, and I would call that Greece and things like that. So within the big markets, we're seeing a little bit of a turn, and certainly the UK is suggesting that, I think both the conservatives and labor are saying they are going to be committed to a positive NHS and not cutting back. So we think the business will be there, but we have seen a growth in waiting lists, and we haven't seen anything I think yet for our business that says it's turning significantly. Katherine, I don't know if you had something else to add there.

Bob, the one comment I would add to it is given that we're one of the first companies to report, it's always a little hard to gauge the market and then you combine that with what we do know very definitively, which is we're absolutely seeing the impact from some proactive decisions that we made in late last year. So it's always hard to ferret out how much of it is market versus how much of it is our own decisions to make us more efficient. So we're probably a little more inclined to attribute the weakness in our business to the stuff we know, which is the actions we took, and a little hesitant to say too much about the market other than to say it's clearly not back to business as normal in Europe. But until everybody reports, it's a little tough to know because a few points can have a meaningful impact on what the overall market looks like it's doing.

Okay, and then for -- second question, just wanted to ask another one on the state of the global hip and knee market, you guys made a comment as to the way you're thinking about 2010 being a low to mid single-digit market globally on a constant currency basis. I guess my question related to that comment is, is that completely consistent with what you've been thinking over the last couple of quarters for global growth, and then your comments on price with mix essentially making up most of the price decline. I just want to make sure that these comments, the tone that you're trying to set here is a very consistent one relative to what you've said over the last couple quarters, or just fishing to see if there's any subtle changes in your commentary.

Completely consistent with how we've been feeling about it. And I think if anything, we're a little more encouraged about where our hip business might go given the recent launches. And we're frankly still incredibly pleased with how well our US knee business continues to thrive with Triathlon, to still be posting double-digit knee growth in the US, just feeling great about that. And again, the Europe softness, we know what's behind it.

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

Hi, thanks. Thanks for taking the questions. Just one on a couple of your new products and then I have one follow-up. So on ADM hip and the vertebral augmentation product you downloaded at AOS, just wondering where these have launched currently if they are launched, if they are launched fully, and then maybe if you can give us some color on when and where we can see them start showing up in the numbers.

Sure. I think they are both what we call in early rollout mode. They've just been presented to the sales forces, I would say the ADM is probably a month or two ahead. As you well know, typically with the recon launch, it takes the better part of a year before we're really out widely in terms of having all the sets and being able to go in and get cases tried with the docks and a couple of follow-ups. And on the IVAS product, that is really just very early stages, is only in the hands of a few reps at this point. It has been cleared, gotten 510-K clearance, which it had not quite at the academy. That has just come in, and that's now in the early hands of rolling out. So these are things I think we see as just kind of building through the year and probably won't hit full stride, frankly, until 2011.

Okay, and those are -- are either one of them in Europe, just to be clear?

The ADM has been in Europe, actually for quite a while. So that's really a new US launch. The IVAS, I'm not -- I don't think we've got it in Europe yet.

Okay, and then a follow-up just on -- looking at all the news around sort of shipping passengers logistics and so on, thinking about your business and your fulfillment centers, is what's going on in European shipping, European transit air traffic having anything to do with your ability to replenish supplies of implants, or no?

At this point, no, but if it were to continue over a few more weeks, there would probably be some little interruptions here or there. But it's actually why we consciously had our European recon being a little softer right now so we get through the volcano period, then come rocking back. But I think we are okay for a little while.

(Operator Instructions) Your next question comes from the line of Michael Matson with Wells Fargo Securities. Please proceed.

Hi. I just wanted to ask you about your expectations for your R&D spending as a percentage of sales. It seems like it's getting increasingly difficult to get products through the FDA and with the 510-K reform, it potentially could get harder, requiring more data and so forth, as well as data just to help market your products. So, do you think you can really sustain that at 5% over the next few years, or is that something that's going to creep up over time? Lot of your peers, at least outside of the orthopedics area, have talked about expecting R&D to head up.

Mike, this is Curt. The answer is no, we absolutely expect it to go up. I think at our January call, we commented that the outlook for this year was to be moving that number more to the traditional midpoint of our 5% to 6% range. I remain committed and convinced that we will get there this year, as we look at our quarterly projections in the future periods here. The first quarter was a 12% increase.

You well know that R&D projects take a little bit of time to ramp up once you give them the go ahead signal, and we remain very committed to increasing our investments in R&D for the right projects. So I do think by the end of the year, we'll be in that midpoint of 5% to 6%. As the FDA story somewhat unfolds, we'll figure out what adjustments we need to make, if any. Just as are reminder, we do have a lot of products that are in the market today under what I would call a very heavy 510-K where there has been a lot of clinical information submitted to support those, things like surgical navigation systems, et cetera. So we do have some experience with what I would call the deeper requirements, but obviously, we don't know the full extent of the change, but we're ready to make those investments to keep the innovation side of the business moving right along.

Okay, thanks. And then just any commentary around -- I think you talked about capital spending in general, maybe in the US. I'm not sure if I heard your early comment on the capital -- hospital capital spending trends outside the US and in Europe.

I think the comment we made was hospital CapEx in the US, probably low to mid single digits. Didn't make any comments relative to the OUS because it is a little bit harder to predict, given the single payer systems and how they are allocating their financial priorities, be it going into weightless reductions where there's a ton of consumables or whether it's capital enhancements. And I think it's probably a little inappropriate right now for us to make the call on what the OUS numbers look like outside of what we're seeing in our own business.

Okay, thanks.

Great, thanks.

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

Hi, good afternoon, and thanks for taking my question.

Sure, Doug.

The Ascent revenue number for the quarter looked a little bit better than I would have expected. Any chance you could provide any more color on why the growth -- how you got the growth to such robust levels, whether this was better than expected, and I guess finally understand what opportunity may exist for sales internationally?

Sure. I think that the very first part is we got a heck of a team and a great business in Ascent, and they are executing beautifully, and I think we're trying to stay the heck out of their way. So they know what they are doing and have a great value proposition frankly, when you look at the pricing pressures that hospitals are under, so I think that's great. We're assessing the international opportunities. We'd tell you this is an area where the regulations vary hugely country to country. So there's a lot that needs to be done in terms of penetrating the international web, but we certainly see that as a longer term growth opportunity.

And then on metal on metal, any signs that you might already be picking up share due to a move away from metal on metal with some of your competitors, or do you think you're really going to have to wait until ADM with X3 to gain steam on that opportunity?

Hard to say we've picked anything up. We do feel great about the timing of the ADM launch and think that it's coming right at the right time. But again, back to just recon, it takes a little while for that business to flip. But we really like the position we're in, given the market dynamics. As you know, we've kind of taken some lumps and set out at large head game until we found an offering that we thought would really bring an improved safety profile and a meaningful point of difference to the market. And we're just in the process of rolling that out and feel good about the chance. But again, that's not even going to be a big spike in the second quarter or anything like that. It's going to be a very steady build, but the initial read, certainly what we're hearing back from the field is very positive.

Your next question comes from the line of Derrick Sung with Sanford Bernstein. Please proceed.

Hi, good afternoon.

Hi, Derrick.

On the US side for hip and knees, in particular for knees, we've been seeing a pretty steady reacceleration in market growth rates over the last couple quarters, and I guess what I'm wondering is how close are we to where we were before you started seeing the deferred procedures, when the economy turned down? Are we still far ways from there, or are we sort of 80% of where we were in the marketplace before the recession hit?

I guess a couple of thoughts. If you look back to '09, I think a lot of the concerns heading into the year was that the economic meltdown was going to result in a big drop-off in elective procedures. But if you look at what actually took place over the course of '09, the market slowed, but really marginally.

So at the same token, if you look to 2010, we're not anticipating some big rebound, which is why we've talked about that kind of mid single digit recon growth, recognizing it's not going to be linear and it may bounce around a point or two in either direction in any given quarter. But I think we would be stating a level of accuracy that we just don't have because it was such a marginal drop-off to say that we're at some percentage point in the recovery. I think maybe there's some pent-up demand, but again, it's probably just on the margin, just as last year any negative impact was relatively modest against the overall market growth.

Okay, thanks. And then let me ask you a question on the pricing pressures that you're seeing in spine. And specifically, I'm just wondering, if you compare the pricing pressure that you're seeing on spine with the pricing pressure that you're seeing on the ortho recon side of the business, it sounds to me like it's worse in spine than it is on the hip and knee side. And I was wondering if that's the case and if you could speak to as to what fundamentally might be the difference in the markets. Are you seeing more competition, price competition between the manufacturers on the science side that you're not seeing on the recon side, or what else fundamentally might be different between the businesses that would lead to different pricing pressure that you're seeing there?

I would just remind you a couple of things that we brought up before. We did have some key gaps in our spine product portfolio. And if you asked anybody in our spine team, they would point to that being the number one headwind for us, but it also does create periods of time where you're going to see greater pricing pressure, as we talked about on the last quarter. Both those businesses, the businesses being recon and spine, are seeing price pressure as we talked about and trend similar to recent quarters. But I would just remind you, too, if you look at the total Company, pricing is down 1% and has been relatively flat, which we call up 1 or down 1 vicinity for a number of years now. So I wouldn't read a whole lot into any modest differences that may be taking place between one franchise or the other. Those are two businesses that are seeing pricing pressure rights now, as expected, and it is a trend that we think will probably continue, at least in the near term.

Your next question comes from the line of Steve Lichtman with JMP Securities.

Thank you. Hi, guys. Just a first question on the US recon business. As your hip business ramps up with new product flow, with the same rep obviously carrying hips and knees, should we anticipate any softening, a little bit on the knee side, just given that Triathlon is well into its launch? Or do you still see a long runway there on the knee side?

Great question, Steve. Because as you well know, it's rare for a company to have both franchises going well at the same time. And that's the clear mission for our knee team, knowing that the momentum is about to shift within our organization towards hips. And I think they actually still feel really good and obviously, we have a 510-K submission on OtisMed and hope to bring some news to that ideally later this year, whatever, as well. So our goal is to have great growth in both. The truth will play out.

Okay, thanks, Steve. And then just secondly, on this one-time benefit in the medical business, any sense of what the impact was to the bottom line in the quarter?

Yes, we're not breaking that out, Steve, but obviously, it was a one-time order and just thought it was important to call it out so that people don't get overly excited about the growth rates from a one-time event.

Your next question comes from the line of Adam Feinstein with Barclays Capital. Please proceed.

Thanks. Good afternoon, guys. Can you hear me okay?

Yes, Adam.

Hi, this is actually Dan Volpi calling in for Adam. Quick question on spine. I'm looking at, looking at the US business here, grew 5%. I know you guys talked about pricing pressures. Was there also a hit to volumes in the US? In the quarter?

No, any volume piece was frankly, just our product bag. I don't think w saw a big -- our US spine was very similar this quarter to last quarter.

Okay, great. And looking at -- I know you guys talked about -- in the recon business, you guys talked about 1% of pricing pressure and then of volume mix benefit of I think about 8%. Was just wondering, was there enough positive mix there to offset the pricing pressure? And I guess relating back to spine, is there just not as much of an inherent mix benefit in the spine business? Just want your color on that.

I think you need to go back. The comment we made was total Company, not hip and knee. Total Company price was minus 1, volume contributed 8% for total Company. Those comments were not specific to hip and knee.

Okay.

Results in the quarter.

Okay, thanks. And then just, maybe just lastly, given you guys are going into the metal-on-metal hip business, do you guys -- just curious to hear what your feedback is from ALS, given the issues.

Going into the metal-on-metal markets, probably -- we're going into the larger head segment where we're going in with a non-metal/metal offering. So the ADM is not a metal/metal product, but it does go into the larger head space, it's more just of a clarification. And I think we're just going to have to wait and see how things play out. There was noise at this recent academy meeting around metal/metal, but quite honestly, if you go back to the AOS last year, year before, year before, there's been noise around metal on metal for a number of years. And whether or not that has discernible impact on metal/metal trends, I think we're going to have to wait to see how that plays out in the coming quarters. I think we're more excited about the fact that we have a product offering that gets us into the roughly third of the market where we haven't had a presence and we think we've got a pretty good competitive offering there.

And we certainly felt pretty good coming out of the academy.

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

Hi, it's Rajeev Jashnani for Bruce Nudell. Thanks for taking the question, and congrats on a nice quarter.

Thanks.

Sure. Just on the MedSurg business, I was wondering if you could comment on how the business is doing relative to what you would consider to be steady state underlying demand, so excluding any applied disruptions that you may be experiencing presently on instruments.

Well, I think the answer is the consumable portion of the business tends to track with procedure volumes. And as procedure volumes incrementally move forward from perhaps where they were a year ago, we're definitely able to keep track there. The capital is obviously tied to the CapEx budgets of the various hospital customers or group purchasing organizations that may influence those capital spends. And clearly, that is not at steady state in any sense of the word, yet fundamentally over the last three quarters, we have seen gradual improvement in that component of the business, which I think is evident by the broader trends in the businesses that have capital components, medical, endo and instruments.

But 1% growth for instruments is not where we expect to be in terms of steady state.

No.

We clearly see that moving north.

No, I understand that. It wasn't at the underlying demand as opposed to the quarter results. Just on that issue, would you expect to see improvement in instruments in the second quarter? Would this -- would there be a same-level impact in the second quarter as well?

Well, I think couple thoughts to help frame that. We did comment in the opening remarks that we do expect to see steady improvement in the instruments business. We also commented that their first quarter last year had 11% growth. So it had a tough comparable, and they are working through some execution issues. We do feel good moving forward that there will be steady improvement. I don't think we're going to attempt to quantify that at this point in time, but we do think that there will be incrementally better results quarter-over-quarter here as we move forward.

Your next question comes from the line of Kristen Stewart with Credit Suisse. Please proceed.

Hi. This is actually Catherine for Kristen. First question, can you just quantify the impact of the Japan reimbursement price cuts this month on your business?

I don't think we've -- going to put it in dollar terms. I think what we've communicated when the reimbursement information was released was that we felt, number one, the reimbursement cut and impact on Stryker would be far less than the last round was. The last round was really focused on trauma where Stryker has a leading market position. And we feel this one will be in the low single, mid to low single digits on the overall Stryker Japan business, but we haven't put dollars to that.

Okay, and then when do you expect to see improvements on the gross margin line as the spending on the warning letters roll off?

I would not draw a direct correlation of the removal of warning letters with improvements at gross margin. Certainly,the spending for quality remediation has the largest impact on gross margins. Some of that spending would be the new base. Some of the spending in the early onset as we go facility by facility is one-time. But the longer term impact of that quality remediation will be felt in the gross margins, but it's not an immediate light switch event. And right now, we're not commenting on gross margin improvement because our sole focus right now is getting through all of the remediation issues that we've communicated to the FDA, and we're still calling for that to be some time into 2011, as we look at the three year window that we initially rolled out. So right now, no comments gross margin, favorable improvements as it relates to quality remediation decreases.

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

Thank you. Good afternoon. A couple of things here. I know you guys don't like to talk about monthly trends by any means, but Curt, just taking your comments on strengthening, I think some of your final comments you made about strengthening her exiting the quarter, it sounds like you guys feel good at lease about the trajectory of the business exiting the quarter. Is that a fair comment?

Jeff, I would clarify that comment a little bit. I think I said we like the trend over the last three quarters. So if you go back to what we would define somewhat as our low point of '09, that in-between second and third quarter, we felt third quarter was a step in the right direction. The fourth quarter built upon that, and we think the first quarter continues to build upon that. And frankly, to the adage the numbers don't lie, the quarter was a pretty good quarter, as reported. So we're encouraged by the results building on the three-quarter trend here, and I think I have to go back to the third quarter of '08 to see numbers in this range. So, yes, we feel better where we are today, and we would hope to continue that performance as we go forward in 2010.

Thanks,I think I misheard you on the three quarters versus three months, so my fault there. And then last follow-up question, just on Europe on some of the distributor transitioning, has there been any kind of inventory returns going on with that, anything you can quantify that you can see falling off as of February, March, something like that? Any clarification you can provide there? Thanks.

No, there's no inventory returns related to the distributor transitions that we've made in some of the European markets. This is more about a transition in the way we approach the commercial market. And as Steve alluded to in his comments, those transitions take time at the customer level and then you layer on top of that some of the product obsolescences we did, both in the orthopedic implant and the MedSurg categories and how they influence our international results. Those are the factors that I would point to here, and nothing that you're going to see materially one quarter over the next because of these individual events.

Your next question comes from the line of Vivian Cervantes with Maxim Group. Please proceed. Ms. Cervantes, your line is open.

Yes, thank you. Can you hear me okay? Thank you very much for fitting in my question. I appreciate your comments on innovation and your commitment to it and also your comments on keeping an eye out on how seemingly difficult FDA environment evolves. That said, I just wanted to get your thoughts on possibly deploying your cash position to acquire companies with products that can easily fit into your portfolio as sort of offset to potential delays on the FDA front.

I think, as we've articulated previously, our preferred use of cash is first and foremost, M&A that makes solid strategic sense, and that's going to follow one of two paths, or potentially a combination of both. And we've got a very diverse sales footprint and a lot of sales people out there where we can leverage that by adding products that further round out the bag, and that will be one avenue we'll look to for M&A. But we're also going to look for growth platforms that we think make solid strategic sense, and I would point to a sense that it id doesn't necessarily fit into any one division, but we think is something that makes solid strategic sense from a top line perspective and from an ability to drive long-term growth. But that's going to continue to be the key guiding principles around our M&A.

Okay, got you, that's helpful. And finally, just a follow-up, on your 715 million share repurchase program, do you have a set timeframe on when that needs to get used up?

No, the $750 million share repurchase authorization is an open authorization that we put in place, and it's really to be deployed with board support and management discretion, to perhaps offset dilution associated with the employee compensation programs, employee stock purchase plans, things of that nature, or to perhaps be opportunistic in the market if something were to adversely impact stock price as it relates to broader economic events, but there's no set calendar on wrapping that up.

This concludes the Q&A portion of the call. I will now hand the presentation back over to Mr. MacMillan.

Great. Well, thank you all very much for sitting with us and again, we feel pretty good about the start to the year, and we'll be back with our analyst meeting in May and then our conference call for our second quarter operating results will be held on July 20. So, hopefully we'll see a lot of you in May. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.