史賽克 (SYK) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Stryker earnings conference call. My name is Emity and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions).

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 risk 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 31st, 2009. Further discussion of these non-Generally Accepted Accounting Principles financial measures including Generally Accepted Accounting Principles reconciliation appears in the Company's Form 8-K filed today with the SEC. The Company's SEC filings may be accessed from the Investors page on the Company's website at www.stryker.com.

I would now like to turn the conference over to your host for today, Mr. Stephen MacMillan, Chairman, President and CEO. Please proceed.

Thank you, Emity, and good afternoon, everyone. Welcome to Stryker's second 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. Turning to our Q2 results, I'll offer perspective on some key achievements in the quarter and an overall assessment before turning the call over to Katherine and Curt for more detail.

Having completed Q2, with constant currency sales growth coming in at 7%, which is clearly toward the higher end of our targeted range for the year, we feel well positioned to deliver on our 2010 sales commitments. With an ongoing focus on operating expenses and solid gross margin, we realized a 15% increase in operating income, while still driving a mid-teens increase in R&D spending year-over-year and a net earnings increase of 10%, putting us on solid footing to achieve our targeted per share earnings goals that we outlined back in January of $3.20 to $3.30, up 8% to 12% year-over-year, despite facing a larger foreign currency revenue headwind. And we are clearly pleased with our demonstrated ability to execute on our sales and profit outlook.

Perhaps more importantly, Q2 was highlighted by the resolution of the remaining two FDA warning letters which follows the previous lifting of the biotech and Mahwah warning letters. The removal of the warning letters is an important milestone that validates the multi-year efforts of countless people within our organization and reinforces our commitment to executing on our Company-wide initiative. It has allowed us to redirect some of our R&D resources that were focused on remediation and resolution of the warning letters back to more traditional R&D activities. And we probably can't overstate the fact that as it does relate to our quality journey, there is still work to do and we'll continue to invest in quality on an ongoing basis. We know we have made significant improvements in our systems and our culture and we look forward to continuing to work with FDA to realize our objective of a best-in-class quality system.

As many of you on the phone well appreciate, given the diverse nature of our eight key mid tech franchises, coupled with our broad geographic presence, in any given quarter there are parts of our business that perform ahead of our initial expectations, while others that lag. With respect to the former, we are particularly pleased with the results achieved by all four of our MedSurg franchises. Led by medical, which posted an impressive 21% year-over-year US sales increase. Better than expected, even adjusting for the favorable comparisons. And, after working through some challenges in Q1, tied to our quality initiative, Instruments posted strong quarterly growth of 12% in the United States.

On the flip side, our reconstructive implants business was below our expectations in the quarter, while international also struggled to a greater degree than we anticipated. And while US implants were still in positive territory on a year-over-year growth rate, the low single digit increase was disappointing. Although we are very encouraged by the early reception to our new hip products, as those of you who have followed the orthopedic industry for some time are well aware, the full impact of new reconstructive implants takes a number of quarters to realize, given the significant training and education, coupled with rolling out of the needed instrumentation.

Looking at our international results, as we've discussed, the decision we made to discontinue certain products and distributors in late 2009 is causing some short-term sales disruption. And it's worth underscoring that our commitment to the objectives of our overall quality and compliance initiatives require us to proactively make decisions across all our businesses in order to achieve our goal of becoming a best-in-class organization. Although from time to time this can create sales disruption, we are fundamentally strengthening our organization for the long term. At the same time, it's fair to say that we are seeing better momentum across our MedSurg franchises, a trend we expect will continue throughout 2010, underscoring the inherent strength of our diverse product portfolio. The latter of which reinforces our conviction in our ability to deliver on both the sales and earnings goals we outlined at the start of the year.

With that, I'll turn the call over to Katherine.

Thanks, Steve. Consistent with prior quarters, I'll provide some additional commentary and perspective on several key topics including our quality initiative, our international Q2 performance, and our spinal results. On the regulatory front, as was previously announced, Q2 is highlighted by the resolution of the remaining two initial four FDA warning letters. Although there has been some investor speculation that this may result in the ability to lower the magnitude of our investment in our quality initiative, there's no change to our outline three year and roughly $200 million quality spend, which began in earnest in the second half of 2008. Rather, warning letter resolution is an affirmation that the plan we outlined is moving in the right direction. As we move to the second half of 2011, we expect a down tick in the spending as the one time investments associated with the three year plan are completed. However, as we discussed, there will continue to be ongoing investments in quality on an annual basis. We have not quantified what portion of the $200 million is one time in nature, but we would expect to redirect that spending into R&D, sales force expansion, or to help offset the expected increase in costs associated with healthcare reform.

Looking at our international Q2 performance, we noted that the impact from our decision to discontinue certain products and terminate specific distributors is greater than anticipated. As we move into Q4 we should be through the bulk of that drag created by these actions. More importantly, although there's been some short-term disruption in top line impact, we believe the decisions we made back in Q3 put us in a much better position from both a quality and efficiency standpoint in the long run.

Lastly, looking at our spinal results, we are continuing to see the multi-pronged impact from competitive inroads, increased pricing pressure combined with reimbursement delays and the early stage of our new product roll-out. Importantly, there continues to be tremendous opportunity for innovation in the spinal market given the unmet medical need for many patients with back pain, and we believe we have a significant opportunity to bring differentiated products to market. Admittedly we are being negatively impacted by some competitive product offerings which have allowed inroads in certain accounts and share gains with some of the more basic spinal implants. Combined with the delays in some of our own new product introductions, we have seen our spinal business come under pressure. We are addressing some of the product gaps with the ongoing rollout of two new cervical plates, although as we discussed previously we would anticipate that our spine franchise will still be facing pressure for the remainder of 2010.

With that I'll now turn the call over to Curt.

Thanks, Katherine. Overall, Company-wide second quarter results finished in line with our expectations. Sales increased 7.6% on a reported basis, and 6.9% excluding currency. Generating diluted net earnings per share of $0.80, an increase of 9.6% over Q2 of 2009. On the revenue line, the Ascent acquisition contributed 2.4% to our reported growth rate, and for the first half has contributed 2.2% to our 10% reported gain.

On the earnings side, a particularly strong gross margin and sustainable impact from some of our 2009 operating expense management efforts allowed us to deliver a very strong EBIT performance. The balance sheet remains very healthy and we again demonstrated strong cash flow generation in the quarter. Finally, after completing the first half of the year, we like the P&L trends and more importantly, remain on track to achieve our full year Company objectives.

In reviewing our second quarter performance, as Steve noted in his opening comments, we are pleased with the MedSurg results and trends appear to be running ahead of expectations. Conversely, there were two areas that came in below the targeted levels. Specifically, reconstructive implants and broadly speaking our Europe business. In addressing these areas our teams are focused on three key initiatives including, one, completing the approval process of the Otis med product offering to address the growing demand for shape matching technology in the knee market. Two, the continuation of the two new hip launches which have not yet had a meaningful impact on sales but require investment and time by our sales force to train and educate doctors. And three, the impact from our decision to discontinue certain products in Europe and terminate certain distributors. On the Otis med front we have filed the 510(k) and are working diligently with the FDA towards an approval in 2010. In the hip area, the ADM and rejuvenate offerings will be fully rolled out as we exit 2010 and head into 2011. The early feedback here remains very positive.

Lastly, in the international marketplace, the discontinued products and terminated distributors are having both a direct and indirect impact on our European results. We have experienced some sales disruptions beyond the discontinued products from certain customers who were unhappy with our obsolescence plan. Although we anticipated some short-term sales challenge, we would remind you that over the long term these actions will allow us to operate more efficiently in a higher state of overall compliance.

Turning to some specifics in the quarter, and starting with foreign currency. In the second quarter, currency contributed to an increase in top line sales by approximately $11 million, and improved the Company's overall reported sales growth by 7/10 of 1%. Through the first six months, reported sales have been increased by approximately $69 million, or 2.1% from currency. Looking to the third quarter, currency moves to a headwind and if rates hold near quarter end levels, we would expect third quarter sales to be unfavorably impacted by approximately 1% to 2% when compared to 2009. Again, using quarter end rates, the full year currency impact on top line sales would be a decrease in a range of flat to down 1% when compared to 2009. This is clearly a big change from the original expectation of a favorable impact of 1.5% to 2.5%.

Next, I'll spend a moment on the impact of price and volume mix on the top line. In the quarter, Company-wide selling prices declined 1.5% on a worldwide basis. Largely consistent with the first quarter, but keeping in mind that this is the first full quarter to reflect the new Japan price cuts. Volume and mix added 6% to reported sales growth. The number of selling days was effectively equal to 2009 in most markets.

Reviewing the business segments, I'll start with Orthopedic Implants which represented 59% of our sales in the quarter. Total Orthopedic Implants recorded a 2% increase on a reported basis, and a 1% gain in constant currency. Hip and knee growth slowed in the quarter to the low single digit range although with new product launches underway and a Q4 anniversary of the discontinued products terminated to distributors in Europe, we are confident for the outlook of improving performance in the coming quarters. At the segment level on a worldwide basis, our hips slowed in the quarter with growth of 3% as reported in dollars and 2% in constant currency. In the US market, hip sales were up 2%. To reiterate, we are encouraged by the reception of both the ADM and rejuvenate products. While sampling, training and conversion to these platforms unfavorably impacts near term performance, we are confident these transitions will leverage our growth in the quarters ahead. This is consistent with our experiences in the initial stages of the highly successful Triathlon launch as well as other implant launches. In the international markets, hip sales increased 1% on a constant currency basis.

Our global knee segment slowed in the quarter, reporting a 1% gain but was flat on a constant currency basis. US knees posted 4% reported growth, while our O-US knees were down 7% on a constant currency basis. The global trauma segment recorded a 7% increase in dollars and a 7% increase in constant currency. Our US trauma segment recorded its third consecutive quarter of double-digit growth, delivering a 13% reported increase while our international trauma sales were up 3% on a constant currency basis in the quarter. Our global spine segment continued to face challenges in the quarter, reporting a flat performance on both a reported and constant currency basis. Our US spine sales decreased 3% as reported versus prior year. And solid sales performance in international spine markets delivered constant currency growth of 7% in the quarter.

Next I'll turn to the MedSurg group which represented 41% of our sales in the quarter. MedSurg today is comprised of our instruments, endoscopy, medical and the Ascent healthcare business. In total, MedSurg sales increased 16% both as reported and on a constant currency basis. The Ascent acquisition added 6% to the reported increase, while the core MedSurg business segments delivered 10% reported growth in the quarter. Sales for the global instrument segment rebounded from the slow first quarter start, growing 9% in the second quarter as reported and 8% in constant currency. In the US market, the instrument segment reported a 12% gain, paced by sales in the neuro, spine and surgical navigation markets. Internationally, instrument sales were flat in constant currency.

Our endoscopy segment reported a sales increase of 8% and advanced 7% on a constant currency basis. In the US market, endoscopy sales continued to improve, recording 9% growth. While our OR suite communication solutions remained slow, nice advances in endoscopy services, general surgery and video products were recorded. Internationally, endoscopy sales also delivered positive results, recording a 3% constant currency gain. Finally, our medical segment saw global sales improve 20% in the quarter as reported, and 19% in constant currency. US medical sales increased 22% in the quarter, on the strength of increasing shipments across beds, stretchers and our EMS offering. Our international medical sales increased 9% in constant currency. Overall, we're pleased with the results and the trends from our MedSurg business segments in the quarter.

I'll now turn to the remainder of the income statement starting with our gross margin performance. Gross margins were particularly strong in the quarter at 69.3%, which represented a 210 basis point increase over second quarter 2009 levels. This improvement was paced by lower costs associated with inventory charges, higher absorption, and the favorable currency impact on costs from our Euro based manufacturing network. So while Euro based sales and resulting profitability did take a hit in the quarter, the non-Euro denominated sales in currencies like the yen, Aussie dollar and US dollar experienced higher gross margin performance from the lower cost of Euro manufactured goods. Simply put, the multi-currency mix of our manufacturing and distribution activities prevents correlating currency movement on the top line with that of gross margin and profitability across quarters.

Finally, while Q2 was a large uptick over Q1 levels, it is worth recalling that Q1 was negatively impacted by both the Ascent inventory step-up acquisition accounting, and the low margin one-time medical conversion order. For the first half, gross margins of 68.5% are in line with expectations, and we expect future quarters to remain in this range given all the variables mentioned above.

Research and development spending represented 5.4% of sales in the quarter, while increasing 15% over 2009 levels. For the year, R&D is now at 5.2% of sales and up 13% over 2009 levels. Our expectations remain that full year R&D spending will finish in this range as a percentage of sales as we continue to ramp up our innovation efforts. Selling, general and administrative costs increased 7% over 2009 levels. While decreasing 20 basis points to 37.6% of sales versus 2009. We continue to believe our actions in 2009 are having a positive impact while also allowing us the flexibility to make the appropriate investments. Again, we remain comfortable with fluctuations in these categories as opportunities and the related spending materialize.

On the 7% constant currency sales growth, operating income increased 15%, and the operating margin increased a robust 160 basis points versus prior year to 25.5% of sales. Other income and expense reduced pretax income by $6 million in the quarter. Components of this included investment income of $12 million, offset by interest expense of $16 million, and FX transactional losses of $2 million. Lower investment yields continue to limit earnings on our invested cash even with higher cash balances. Finally, the Company's effective income tax rate was 27.9% for the second quarter of 2010.

In terms of the balance sheet, we ended the second quarter with $4.03 billion of cash and marketable securities, up $1.07 billion from year-end of 2009. As a reminder in the first quarter we completed our $1 billion debt offering. Asset management remains an area of focus and our results remain in a tight range. Accounts receivable days ended the quarter at 57, which represented a decrease of three days, compared to the prior year. Days in inventory finished the quarter at 163, which, while up 12 days sequentially versus first quarter, was down four days against the prior year level. On cash flow, we continue to perform well with cash flow from operations of $327 million, and free cash flow of $290 million. On the share repurchase program, we did not execute any additional repurchases in the quarter. Year-to-date, we have 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 closing, we feel good about the outlook for our MedSurg franchises including the recent Ascent addition to the Stryker portfolio. Additionally, we have identified the key issues to be addressed to accelerate momentum in our reconstructive and international businesses. Against this backdrop 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. At the close of the market today, First Call consensus estimates stand at $0.77 for the third quarter. We view this as a reasonable estimate.

In summary, our Q2 results keep us firmly on track to deliver our full year guidance, while obviously noting we have some segment and geographic market issues to resolve in the quarters ahead. Through the first half, we think our results line up nicely with our full year expectations.

With that, I'll turn the call back over to Steve.

Thanks, Curt. In summary, we continue to believe that our unique product footprint is an important competitive advantage and provides us with significant opportunities for share gains, new product development, and acquisitions. Combined with our considerable cash balances, our tremendous cash flow generation, and the overall strength of our balance sheet, we are highly encouraged by our prospects to deliver continued top and bottom line growth.

With that, we'll now open it up for Q&A so I'll hand it back to you, Emity.

(Operator Instructions). Your first question comes from the line of Bob Hopkins with Bank of America. Please proceed.

Hi.

Can you hear me okay? Yes, Bob.

Great, thanks for taking the question. First question I would like to ask, just very simple big picture question on hips and knees. Can you talk a little bit about why you think the growth in your hip and knee business slowed sequentially from what we saw in the first quarter? And then now that we've seen Biomet and J&J and you guys have reported, do you think the hip and knee markets have slowed a little bit here in the second quarter? And if so, why?

Bob, it's obvious that people are going to look at the headline numbers on hips and knees and be a little more concerned. Let me tell you why we feel pretty good and why we're not as concerned. Simply, the overall number, are we a little disappointed? Yes? But here's where we are. We're in the midst of rolling out basically two new product lines in the hip franchise. And we saw this with Triathlon. It takes us three or four quarters to get going. We use the analogy back in the early days of Triathlon, if you remember, starting a new product launch for us is a bit like getting a freight train going. It takes a little while. While we're out educating, surgeons are trying it and going through that, and once we get rolling we get rolling. And all the feedback we're hearing from the field, the confidence that we have in our team, is very, very good. We think our hip franchise will be well poised.

Would it have been nice to have taken off a few more points in the quarter? Yes, but I think the market, frankly, we also think was just ever so slightly slower this quarter. I think even they're bringing it up to a higher level. We think right now hips and knees are a mid single digit grower. In any given quarter they're up or down a little bit. We still feel good about those fundamental markets and our ability to take share. We're in that transition to new products in hips.

And on the knee side, frankly, I think we've got some pent-up excitement for Otis Med, probably some guys just waiting for that to come onto the market hopefully later this year. And they're spending some extra time on hips. So if we didn't have those product launches coming in hips and Otis Med sitting out there in knees, would we be a lot more concerned? Yes. But knowing what we've got going, I'm just thoroughly convinced our teams are taking the right efforts.

The other piece I would tell you, just to give a little more perspective on the whole international piece, we've discontinued some products that certainly hurt us on the reported sales growth line. They are going to dramatically help us going forward here on the gross margin line. And there are trade-offs there that as we get rid of some of these products that we've been serving individual markets and have been consuming a lot of inventory, a lot of plant time, a lot of resources, getting rid of those has a little pain in terms of your reported sales growth, but we feel very confident that this is going to pay off down the road for us and you start to see it. That's not the whole blip up obviously in gross margin, but it's a contributing factor. So I think we feel better than the numbers for this particular quarter suggest and still feel very good about the longer term trends.

The Japanese price cuts take a little off in terms of your overall growth rates for this quarter. Might that have accounted for a point of it? What I'm getting at is if the market softened just a little bit, what was the source? Was it weaker pricing? Was Europe a little weaker? Again, not Stryker specific questions but just from a market perspective I'm curious where you might have seen a little incremental weakness? And do you think you are losing a little bit of share?

Based on at least J&J's numbers this morning, I don't think we think we're losing share, certainly not in the US. We're probably losing a little share in Europe as we go through the digestion. As Curt acknowledged and Katherine acknowledged, we've lost some customers as a result of discontinuing some of the products. We think we might have lost a little bit of knee share in Japan in the quarter that we think we'll get right back over time here. But overall, I think we're feeling all right. Katherine?

I would just add, we're not seeing anything different on the pricing trends in terms of the pricing pressure that's existed in the recon market. I would just say if the recon market overall is a mid single digit grower, which we think it is, I think you have to view that as in a plus 2, minus 2 bracket in any given quarter because these numbers are never perfectly linear. So growing low single digits in a market we think is mid single digits. Not where we want to be but not so much of an outlier that we sit and question is there something fundamentally different with the market this quarter. We'll have to see how subsequent quarters shape up. But going back to the product launches that Steve spoke to, we feel pretty good about our ability to gain market share, recognizing there's nothing that points to a market growth that's going to be significantly different overall on a multi quarter basis in that mid single digit range.

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

Thank you. Steve, you're probably going to get beat up over the course of this call about the performance in the hip and knee business and overall ortho. I know you're not necessarily surprised by that. But the two key performance in US hips and knees was probably your lightest performance in a long, long time. And I just want to understand, particularly on the knee side of the business, the dropoff momentum. I know there was no difference in selling days, it sounds like pricing was relatively the same versus what you saw in the first quarter, the last couple quarters. Is there anything else you could point to as to why you would have lost that much momentum this quarter versus the last several quarters?

I think, Mike, as you well know, first off, I think we've proven ourselves over the last five years that we've been growing our knee business well above the market and certainly been hopefully a share taker in that business. I do think what we had going on this quarter is with Otis Med in the approval process, so that's out there a little bit. And for the first time in call it five years, our sales force actually has some hip products in the bag that they're excited about. So there's probably more focus on selling hips than necessarily knees. And we'll get that right back. So I think as we've been doing the extra education on the hip line, probably might have taken our eye ever so slightly off the ball in knees.

I think we would also like to see where the rest of the competitors report. We think anecdotally in the US, both hips and knees, the market may have been a little bit softer this quarter, and again, don't think people should over-react that, gee, the market is slowing down. But I think we're always quick to beat ourselves up on what we could be doing better, and trust me, we've always got that list. I think when the dust settles, we're not going to be that far out of where even the market settles out for the big companies.

Just with your own internal -- disregard the market growth rate -- so internally are you going to be surprised, if you do believe there might have been some distractions this quarter, if you don't see a bounceback in the third quarter?

We would hope to bounce back somewhat, but I would probably temper the expectations a little bit. I think the next big catalyst in knees for us is Otis Med. We're probably the only company out there without a shape fitting option on the market right now and we think those are important. We actually think we've also got a real game changer in Otis Med. We need to get that through the FDA. Once that gets through, I would expect you'll see a very quick re-ramp to our knee business.

Your next question comes from the line of David Lewis with Morgan Stanley. Please proceed.

Good afternoon. Just maybe switch over from recon for a second here and focus maybe, Curt, on gross margins. I know you tried to provide some visibility but obviously a much stronger trend than we expected and you're saying it's sustainable above a level we would have expected. Can you help us understand, given some negative mix in recon, more specifically in terms of basis points, the different gives and takes driving that number higher?

David, you're right, I did try to give some visibility and it is an immensely complex topic when you look at a network of 21 manufacturing plants. I think if I go back to my opening comments here, a large percentage of our manufacturing is euro cost based. As currency moves, as the dollar appreciated against the euro, and as you look at the relative sales in the US market, and as you look at our other markets where you saw currency fluctuation against the euro like the Aussie dollar or the Japanese yen, when you look at those relative currency movements, when you look at the mix of products they have in the markets, the uptake on those currency moves that hit the profits and the gross margin performance are far more significant than the downside pressure that you feel from that simple currency movement in the European market. I think if you go back to our 2009 10-K, and I think it's note 15, we break out the EMEA sales as roughly just below 20% of total sales. And keep in mind, that's entire EMEA and you should assume euro based sales are a smaller percentage than that. If you just use that as a percentage and think about where the majority of our sales and therefore the majority of our profits are, you can see that a decrease in the manufacturing costs are going to have a substantial impact on the gross margin level.

I don't know if that helps you or confuses you. I can tell you it also gets in another factor that plays in here, is the inventory turns by business unit and how those flow through. So there's progressive layering of the puts and takes as currency moves in any given quarter that are impacting the gross margin line across these various selling entities.

David, I'd probably just give a little other perspective on it. If you go back and you look at the years of call it '05, '06, '07, we were on a steady march up on the gross margin piece. We then obviously took a detour as we invested heavily in our quality and compliance initiatives. And I think where we're hoping is and we've been saying is some of those investments would start to yield additional benefits over time. And to me, one of the real take-aways and the strengths of this quarter, people ought to look at and say wait a minute, there was a much higher mix of MedSurg, a lower mix of Implants and look at the margins we're getting. That does make us feel pretty good without overselling this particular quarter, which was certainly unusually high. That there's still a lot of power in this. I think that's certainly what you're getting at.

Okay. Steve, maybe I'll ask you the recon question a different way. There really are two issues as I see it. There's European disruption, distributor disruption, and then there's obviously delayed product cadence. At this point where do you see greater visibility? Do you see greater visibility in regaining share or restimulating growth because of new products, or do you see a quicker fix to some of the European distribution disruption?

I think we feel not great about the quarterly results but very good about the direction we're on, and I think the visibility will become clearer certainly in the second half of this year. Should our hip business start to be building momentum here in the third quarter? Yes. Is it going to suddenly leap up to double digit growth? No. This is going to be a freight train getting going on hips in the US, much as Triathlon did. I think you're going to see the same thing out of Europe. I would dare say we think second quarter was the bottom for Europe, and that's probably going to be -- I hate to use the Nike swoosh again, but I think we see probably our European business coming out in a swoosh-like fashion again of the third quarter, it'll probably be certainly better than the second. Fourth quarter will be incrementally better than that. Not a tremendous bounceback but I like the programs that our teams are putting in place, the product flow that we have, the basic execution that we've proven ourselves to be pretty good at. So it's really going to probably be both. But neither of them will be, hey, third quarter's this incredible bounceback.

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

Thank you very much. I have two questions. The first one has to do with Otis Med. I understand you've submitted that to the FDA. Where are you in terms of your conversations with them, if you could give us any idea? And then part of that question is where are you in terms of thinking about product roll-out? Do you need to staff up sales force and all that kind of good stuff?

Hi Joanne. On the Otis Med, we have filed the 510(k). I would say that our hope and what we're working towards with the FDA is to get approval or clearance sometime this year, but beyond that probably won't go into any specifics on the discussions but that's certainly the internal goal and expectation. And then your second question was?

My second question has to do with pricing. We're beating this to death on every other company call so why not here. Can you parse out some of the pricing that you're seeing in, say, your hip, your knee, your spine, and then get a little bit more specific on the MedSurg portion of the business, how hospitals are reacting to that division. Thank you.

The short answer is we're not going to go into detail by division, by franchise. We tried to give some color commentary in that we haven't seen any major changes in trends on our implant pricing. Clearly, it's being offset by better pricing in other businesses on the MedSurg to get to that total Company price of down 1.5%. You could assume it's a little bit higher than that on the recon implant side. But again, no major departure from what we've seen in prior quarters.

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

Hi. Good afternoon. Thanks for the questions. Turning to the bright spot here in your sales, which is MedSurg, can you talk a bit about what you're seeing is driving the growth first off on the hospital bed side of the business? What are the implications of your numbers towards hospital CapEx spending? Are you seeing construction starts come back? What are you hearing from your customers there? Any color would be great.

Derrick, I think the story overall in MedSurg, and you can apply this somewhat to medical, is number one on the disposable side, the volume trends there remain consistent. They remain at or above what I would call overall procedure trends so that really has an impact on the endoscopy and instruments business. On the capital side, which is where we felt most of the pressure at the end of '08 and certainly into 2009, we are seeing a return on the capital side, the capital equipment sales and purchases. I think that's evident both in the instruments and the endoscopy side. Absent, on the endoscopy side, the OR communications suites which have a longer build-out. And then clearly for our medical business, we noted that we're seeing a consistent return of capital sales on beds, stretchers and the EMS platform.

And I think what this is indicative of is these equipment segments that we sell into really on instruments and endo are part of the procedure. You can delay those purchases for a while but as hospitals return to a more financially sound position, they're electing to reinvest in the equipment that's generating the procedural volumes. On the medical side, it's the upgrades, it's the perhaps defined as smaller purchases than we may have seen pre 2008 but certainly the volume of purchases of capital expenditures is going up. And then the internal metrics that we use to define hospitals in this state of capital liquidity has certainly improved over the first and second quarter of 2010. So overall, we like the trend. Again, being very cautious here. I don't see it returning to 2007 levels but we certainly see far more willingness to engage in conversation and purchase on a capital equipment side.

Okay. Thanks. And then as a follow-up, turning back to Europe recon sales, I'm specifically wondering about your perspective not just on your specific business and issues that you're facing there but the broader market. There have been concerns around the austerity measures that some of the countries are taking, whether that's going to impact healthcare spending and ultimately trickle back down to impacting overall either procedure volumes or pricing on the orthopedic front. Can you comment on what your expectations are there through the end of the year, into next year and what you're seeing and hearing from your customers out there?

I think we're hearing a lot of the same rhetoric in terms of clearly there's some budget pressures resulting on some of the various governments. There's been discussions around austerity measures. However, that yet hasn't translated into any real changes as it relates to reconstructive implants or any key measure that we can quantify at this point. I think it does point to the fact that just the overall economic environment in Europe is going to be challenging. And as we've talked about, we have our own specific issues that we'll be working through for the rest of the year. That probably suggests there isn't a huge offset from a more robust European market. But we haven't seen any significant changes in procedure volumes as it relates to austerity measures. However, the actual implication or what comes out of some of that rhetoric I don't think has really played out yet. So it's something to watch, not something we can quantify but reinforces the fact that we're probably going to see pressure on our European business this year.

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

Good afternoon. Maybe I'll touch again on spine. Couple questions. Could you go into, help us understand maybe some of the three components you talked about -- the competitive inroads, the pricing and the early stage issues. And maybe help us understand what was most significant and maybe what's going to change. And just a large spine question, do you need to do deals, Steve, to get the spine business going or is existing pipeline and your strategy sufficient to make this a stronger performer again? Thank you.

Sure. Let me take the pricing piece of it first. I think our pricing was similar to the last quarter, which is down. Pricing has gone negative in spine. I think that is going to put a little more pressure on that market and have it growing a little slower. I think we also saw a little bit of procedural slowdown but we're not totally sure whether that's us or the market. From a competitive standpoint, I think what you've got a little bit going on in spine, dare I say, is I think that the large companies that are very compliant and have robust sales and marketing compliance programs, I hate to say it, I think are seeing some slightly slower growth than some of the smaller ones.

And in terms of launches, we obviously had some gaps in our portfolio, certainly in the cervical plating line. We're filling those this year. Those are rolling out. And so we've got, I think, a strengthened pipeline coming. I'd say this was probably a transitional period for us for the better part of this year as we're transitioning in and getting some new products out the door. And ultimately I think we think we're of sufficient scale to be able to compete and don't need acquisitions to get bigger in that space. I think we feel like we're one of the bigger companies in the area.

Just a last quick follow-up. It sounds like there was a little bit of surprise in the quarter on the recon side in terms of exact magnitude of performance. Just thinking back to the sense of the environment was stabilizing that you talked about at the May analyst meeting, was June unexpectedly weak or is June, July, are we seeing, if you will, the double dip effect on procedures happening? Is that what's going on? Thanks.

We never want to get into monthly reporting, much as I know actually we should probably go to weekly reporting. I think the whole quarter just turned out to be a little bit softer, Rick, than probably what we were expecting or anticipating and we spent a lot of time trying to figure it out. We do think certainly on the other results that were reported earlier in the day, we worried, as we always do, are we outliers. We don't think we were as much outliers. It felt like just procedures were down a little bit on the margin. Katherine, I don't know if you want to add anything to that.

The only thing I would add is, going back to if you agree with the assumption this was a mid single digit type market growth, we grew in the low single digits. It's not dramatically off and it's awfully tough and very challenging to try to read too much into one single quarter's trend, especially when there's been no real change in the environment, no new real change in procedure options for these patients. It's a fairly predictable patient population, a fairly predictable surgical approach. Nothing really significant we're seeing on the pricing side which leads us to believe this is just one of those quarters that happened to be somewhat below that mid single digit growth, but it's tough to read too much into a major change in trends from that based on one quarter's results. It's not meant to sound like an excuse for us growing weaker than the market to the degree that we did, but I also just think you have to take a step back and realize it's probably not that far off that mid single digit number and there's going to be quarters where it's above or below that range.

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

Hi. Thanks for taking our questions. Got a couple follow-ups on some of the topics that have been covered. One on spine and then one on ortho. One of the things that one of your larger competitors talked about today, I think for the first time, we've heard about pricing pressure before, we've heard about modest volume slowdown before in spine, but talked a little bit about reimbursement as being an issue. Have you seen anything like that in your spine business? Can you think of where that might apply to? Has it impacted you at all?

If what you're referring to, we made some comments on that, there has been to some degree some pushback by some of the payers on certain procedures, primarily in the Thoracolumbar area. Whether or not that creates a backlog or not, I think it's just too early to know. But there's probably been some dampening effect on procedure volume tied to that, for that specific segment of the market.

So it would be like pre-certification, that sort of thing, might push out procedures. But is there anything like denial of coverage or other things going on for the core procedures that you do, lumbar fusion, cervical fusion, anything like that?

I can't say that it's not happening anywhere but I wouldn't point to that as being a major trend or something that we would quantify.

Your next question comes from the line of Douglas Schenkle, Cowen and Company. Please proceed.

Good afternoon and thanks for taking my questions. First, you guys provided a decent amount of commentary on why recon was slower in the US and it's been obviously something that's come up a decent amount in the Q&A. In the context of the Q&A, you mentioned that spine volumes may have slowed down a bit in the quarter, maybe it's a little too early to say that it's just you guys or the market. But with that as a backdrop, I was wondering how confident you are that there was no real new economic impact on volumes in the quarter, say maybe people rolling off of COBRA or a decline in consumer confidence or something else. So maybe if you could just comment on that as my first question. And then second question relates to metal on metal. I was just hoping we could get an update on your thinking as to your ability to maybe benefit from what seems to be an accelerating move away from metal on metal. Thank you.

In terms of the first one, any macro issues, we've not heard or really picked up any macro things. I continue to feel, I want to say this the right way, that I know from the analyst community you spend a lot of time focusing on quarterly movements that so oftentimes a couple of companies had an extra selling day one quarter, a few extra selling days or the way the days fell that these quarterly variations look much greater than what really plays out in the long-term trends. We still feel very good about the long-term trends of the business.

And back to our own business, and metal on metal, I think we feel really good about where our hip business should go over the coming quarters. This quarter, again, everybody's going to look at it and we figure you're going to look and everybody's a little disappointed. Back to the fact that the metal on metal segment is no longer growing and in fact is probably starting to turn south. And our ADM roll-out coming right into this, we think we're in the right place at the right time. The coming quarters will tell that. Again, I think it's what keeps us from being more concerned and nervous. If we weren't sitting here with a great product roll-out going in to offset that metal on metal decline that's likely to be hitting and we didn't have something in the shape fitting area on our knees, it would be a very different tone. But again, I think we feel really good about a couple of those major trends and our position in them. And again, the coming quarters will tell.

And Doug, I think on that note, it's instructive to look at the overall Company results in the second quarter. Even if we are a little bit disappointed with some of the individual segments or geography risks, I think it's important to recognize the Company delivered pretty sound results relative to our outlook and relative to our guidance. So it should underscore some of the strength of the mix of the Company.

Your next question comes from the line of Vivian Cervantes with Maxim Group. Please proceed.

Hi. Thank you for taking the question. I appreciate your comments on spine and that you noted no real change in the macro. I'm hearing some comments about a review on the reimbursement front for kyphoplasty and vertebroplasty from, I believe, Noridian. Any color you could share with us on that and how it might impact your [i-Bass] business or products.

Sure, Vivian. The review of both vertebroplasty, kyphoplasty and the acceptance or nonacceptance by payors, from our chair, is not necessarily a new dynamic. Certainly did hear that Noridian was taking a harder look and we believe that across the various markets, that, number one, we stay highly engaged with payers, we stay very connected to directional trends there. And we have our clinical resources that we try to line up and help educate payers on, number one, the clinical outcomes that are derived from these procedures and the overall benefit to the healthcare spend system that accompanies these procedures when you look at the other options. Certainly know that there are pressures in both vertebroplasty and kyphoplasty. Various payers come up, change their reimbursement outcomes and decisions on a somewhat frequent basis. So we're used to dealing with those challenges and we certainly respect their right to change those decisions and we continue to maintain our offense, to educate both payers as well as physicians, clinicians and patients.

Thank you, that's helpful. For my last question, I appreciate the fact that you're building up gaps within your portfolio and we see that in hips, we see that in spine and in knee. Do you feel that there are any other gaps that you would like filled in at this point or do you think that you've covered all the bases currently?

We feel we're in pretty good shape. There's always specific opportunities that we don't go into Vivian because as soon as we do people start to speculate about acquisitions other things. I think what we feel is we're sufficient scale in every business that we're in and we're always looking to supplement, as well.

Your next question comes from the line of with Raj Denhoy with Jefferies. Please proceed.

Thanks for taking the question. I wonder if I could ask about the MedSurg business. Two quarters now you've posted close to 10%, or just about 10%, ex acquisition growth there. Is that a sustainable number now, 10%? Do you think there's even a chance you could accelerate that back? Where do you think we are on a run rate basis there?

Raj, we definitely like the trends in the first and second quarter and I think we're probably going to be a little reserved in our comments relative to sustaining or perhaps increasing. But I think it is safe to say we have seen a return on the capital side of those businesses. Not fully returned. And we do like the momentum that all the organizations are demonstrating, and that momentum is very consistent contagious in those businesses. And certainly as we look at procedure volumes, that natural inherent replacement cycle with a lot of our capital equipment is starting to materialize. You couple the factors of hospitals a little bit more sound financial footing, a little bit more willing to invest the capital dollars they have available or have access to, a great product offering across our businesses, and highly engaged selling organizations, we like that combination and it's starting to materialize in favorable results.

And then to the previous comment, we continue to add new products here, not ones that I would call overnight game changers but ones that continue to engage our selling organizations as well as our customers so that they are advancing the state of the art and the technology in those procedures. So you feel pretty confident that the trends in that business sustaining? We like the trends and think they point us in the right direction.

The next question comes from the line of Michael Matson with Wells Fargo Securities. Please proceed.

Hi. It sounds like there's a lot of excitement about the Otis Med product and I was just wondering what your thoughts are on that product category overall. Are you seeing your competitors actually starting to get traction there? And where do you see these custom instruments fitting in with navigation and robotics and these other technologies that are out there?

Sure. I think the real simple answer, Mike, is we're encouraged by the technology. Otherwise, we would not have entered the space. That's a very simple statement to make. And I think as you look at the concept overall of shape matching and what it enables, which we went into some length at the analyst meeting in terms of the custom approach, the speed with which the procedure can be accomplished and all of those other indications that we believe exist with this technology, we're excited about the future. And I think our orthopedics organization is excited about the opportunity.

In terms of the continuum of care, if you think just for a minute about the knee space, today the market is largely defined by what I would call the traditional jigs, fixtures and instrumentation, the metal. The other end of the continuum you have something like surgical navigation which takes that metal and puts it into bits and bytes and it's really for more of the leading edge orthopedic surgeons who enjoy the interaction with the technology, while also driving a phenomenal clinical outcome. Shape matching is somewhat of a blend of the two parts in that you're taking that instrumentation, you're making it a customized unique approach for the patient, for the doctor, but you're also enabling some of that alignment. And depending on how you use the technology, anatomical or mechanical, your enabling some of that more specific alignment that you perhaps get out of the navigation side of the business. So I think it fits very well in the broad continuum if you define the knee continuum as starting on one end with metal and finishing on the other end with software.

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

Hi. Thanks for taking my question. Steve and Curt, I guess the fear that J&J instilled in everybody, or should have instilled, is that insurance companies, commercial insurance companies are going to lower the payment to cost ratio for commercially insured cases or change the carve out and mark up formulas for implants. Your trauma results certainly don't suggest that. Is there anything systemic going on? And are hips or knees going to be treated any differently than spine, for instance, or do you think this is just the luck of the draw in terms of a quarter but no structural change in reimbursement formulas?

We think this is much more luck of the draw. Clearly the long-term trend is slightly lower growth rates and a little more pricing pressure. We continue to think there's going to be volume and there will still be premiums for innovation. We think people are probably going to overreact as they typically do to bigger movements. Sometimes to the upside too. We've said this in other quarters when people thought there was a secular shift up and we said hey, hold your horses. We don't think it's necessarily a secular shift up. We don't think this is a secular shift down.

Looking at the spine market, volumes or case growth of around mid single digits, so you think that some positive mix in the long term trend line is still positive, where possible, where you could get like a 7% market out of 5 points of units?

Absolutely.

Your next question comes from the line of David Roman with Goldman Sachs. Please proceed.

Good evening and thank you for taking the question. Maybe if you could just talk a little bit about use of cash during the quarter. Curt I think you said you didn't repurchase any stock. Maybe you could just elaborate on your thoughts with respect to how we should think about the share count, particularly with the stock having moved down from the levels where I think you commented you had repurchased year-to-date.

Sure, David. I think what I would first do is take you back to our introductory comments when we did announce the share repurchase authorization, that this repurchase authorization was intended to be used to offset dilutive effects of share based compensation and other opportunistic buying moments, if you will. I would couple that with the other comment that we've been making for quite some time now, that our preferred use of cash is M&A. So I think we've tried to instruct people that the goal here is to not rush out and fill the $750 million authorization as quickly as possible. But rather, use it at our disposal, at our discretion. Certainly in the quarter there was some movement in the stock price. In some instances it was below the average of the previous shares purchased. But it was, again, the program at our discretion and decision made that at that moment in time it was not in our best interest to purchase shares.

Okay. Then maybe just if I look at R&D spending year-to-date you've had a pretty significant increase, and maybe some of that has come from savings as it relates to compliance spending. But is there more of a shift here that you're trying to signal that you think there's better opportunity to develop products internally versus making larger acquisitions and the deals that we'll see you do will be more technology and tuck-in in nature, and that over time we should see R&D grow faster than revenue?

David, I wouldn't read too much into the relationships here. I think, again, as we headed into 2010, we tried to be very clear that R&D as a percentage of sales should be right in the middle of that historic 5% to 6%. And in the quarter we were at 5.4% and I think it's safe to read into my comments that the R&D spend should finish the year right in the mid-point of that 5% to 6% range and certainly as a percentage increase over 2009 levels. It's going to be double-digit and probably ahead of sales. I think we have a high degree of confidence in our R&D teams and as they move out of what I would call more of the remediation work and into the more direct product development, as more and more products kick up, you should see this number go up and we'll continue to make the appropriate choices and therefore the appropriate investments here. I don't think it's a mandate on our feelings about M&A.

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

Hi. This is Matt for Adam. Can you hear me?

Hi, Matt.

I have two quick ones. The first one is on Otis Med again. Assuming that you get approval here near the end of the year, how big of a percentage of the business do you see that for you guys? And if the hip launches are freight trains, what is this? Is this a commuter rail? What's the speed of the launch?

When Otis gets approved, we think we'll get a fairly quick ramp because there have been a number of doctors that had some experience with it and waiting for it to come. So I think that will be a quick train leaving the station. The hip launches are more the cross country freight train, with a whole bunch of cars behind it, slow to get going and once it gets going should be hard to stop.

And do you see that converting accounts for you or is that more a positive mix?

The hip line? Really both will help convert accounts and be mix. We see both of them as having opportunities to make competitive inroads.

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

Good afternoon. Just a quick question on Ascent. Can you give us a sense what the early lessons have been in the US since you've been closed now for a couple of quarters, or maybe a little more. And then how you see the process unfolding in terms of going international and when we might expect to see some revenue contribution there.

We like it, off to a very good start in the US, and I would say for at least the first year or so, we're really focused on mining that business, learning as much as we can about it before we start to really go too far abroad. There's so many individual regulations country by country, even within the EU, that there's a lot of regulatory heavy lifting that will have to occur around the world before that becomes more of a global business.

Steve, has there been any change at FDA relative to process in terms of gaining new indications here in the States?

For Ascent or for things in general?

For Ascent. But if you want to comment in general, obviously there's been some changes there.

Not that I'm aware of on the reprocessing front. And in general, obviously everything that's done with the FDA right now is certainly getting higher degrees of scrutiny than historically.

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

Thank you. Two questions. The first is coming into today, most of us thought that knee and hip lines would be okay based on the Biomet results that were reported last week. Biomet, they're on a different fiscal year and I think their quarter just ended on May 31st. So I'm wondering, I'm trying to correlate the difference from what Biomet reported and what you and J&J reported and I'm wondering is it possible that June was just an awful month for implant volumes? Or did you guys just see weakness every month of the quarter? So that's question one. And then secondly, you mentioned Europe was weak because of these distributor issues. Should we assume that underlying European trends are okay, volume trends, and can you quantify what the distributor and sales distraction did for you guys in Europe in the quarter? Thanks.

On the recon side I would go back to our comments throughout this call. We haven't seen anything major in terms of changes, whether it be procedure volume, we haven't seen anything major in terms of changes in pricing. We're not going to go into the monthly commentary because then you get into what company had more Mondays in their quarter than the other company because more procedures are done on Mondays. Or who had extra selling days. There's a lot of different variables if you're going to start to get into that level of granularity. I think overall this was just a modestly weaker low single digit growth quarter for us on the recon side versus what we view as market growth of mid single digits, but again feel well positioned given the new products being rolled out that we talked about fairly extensively at this point as it relates to longer term growth.

In Europe, I would say that the overall market is probably challenged just by the economic environment. And we have not broken out the revenue impact from the distributors or discontinued products and probably not going to go there but that's certainly a portion of the weakness that we saw in the quarter.

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

Thank you. Good evening. Steve, was wondering, or Curt, you mentioned that Japan maybe lost some share in knee. If you could provide any color there, that would be helpful.

Two comments on Japan. This is the first quarter where they experienced the full impact of the price cuts. That was really the lead comment. And I think in one of the Q&As, we commented that perhaps we lost a little bit of share in knees in Japan. That's about as straightforward as I can get. Nothing fundamentally underlying that. No direct blow-up that caused that. I think we would put that more in the operational and execution category than any particular event.

All right. That's helpful. And then just I think about those cross-currency impacts and all that. Obviously tough to track all those different currencies so won't even try from that standpoint. But dollar really started to, or the euro really started to fall off, as I think about it that way, earlier this year, coming back to the 130 level. But it sounds to me like you think those gross margin benefits, just from that cross currency issue, can probably continue at least for the next two to three quarters. Is that a fair comment?

I think what I was trying to allude to was the way our inventory turns through our system, various products have different inventory turns and that impact month over month continues to layer up on the gross margin line. Some months you have a positive variance, some months you have a negative variance and it's the netting of all of that that really drives your gross margins. But my comment relative to the rest of the year was that we felt the first half margin of 68.5% represented a very stable forward look.

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

Thanks for taking my question. Just curious, as you look at MedSurg O-US, it seems to be recovering a little slower than the US,. And given what's going on over there in a macro issue, would you expect that recovery to take longer in general?

A little bit, Bill. I think the bigger issue probably also is the US fell off faster and is therefore coming back faster. Europe never fell quite as deeply as the US and probably isn't, therefore, recovering quite as much.

Okay. That's all I had. Thanks.

Your next question comes from the line of Sameer Harish with Needham & Company. Please proceed.

Hi, guys. Good evening. Just a follow-up on some of the previous comments in terms of recon and spine. It seems like you're talking about common themes in terms of pricing pressure and competition and a refocus on new product cycle. But we haven't seen as much detail on spine in terms of what those new products are going to be. Are the two new cervical plates enough to get you back into a growth trajectory or is there more behind the plate there?

If you go back to some of the comments in the call, the two cervical plates we started launching in the first quarter but will take several quarters to fully roll out really fills some gaps in the bag, but they were important gaps in terms of being able to have a full offering with our customers. We wouldn't call those game changing innovations. We'd call them important products to maintain a competitive product offering. There's clearly more in our pipeline and new products that we expect to introduce and feel really good about the opportunities for innovation in spine. We haven't gone into any details there, or really with any of our products. That's really more for competitive reasons. But that's not the end of the R&D story in spine. But it's the bulk of what we'll be rolling out this year. Again, going back to my comments, I think you can assume spine's going to be facing some challenges for the better part of 2010.

The second question, I think some of your competitors have begun talking about opportunities outside of US and Europe as material contributors to growth in forward years. Where are you guys in terms of thinking about some of those other markets and when do you think they may start contributing?

We do have some efforts but they're very much in the early stages underway in emerging markets. We're really refocusing in terms of specific target markets that we're going to focus our efforts on. From a revenue contribution, it's not material at this standpoint but clearly just given the size of the opportunity in emerging markets, we're very much focused on leveraging our product portfolio, but again at this point it's still very much in the early stages.

The reality is for all the pressures on the US, we still feel very good about the core US market. We have year-to-date double-digit growth in the United States. And we think there's great opportunity outside the US but we're not taking our eye off the US ball either.

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

Hi. Thanks so much for circling around. I did have one additional follow-up. And if I may, I'm going to make that two follow-ups just so I don't get cut off again. There was one question on beds, I think someone drilled into the strength in the bed segment and Curt you gave some color and I appreciate that. But I didn't pick up a sense of to what degree construction is maybe picking back up or to what degree that was a factor. And then again, I have one follow-up.

Matt, you didn't miss it and you didn't pick it up because I didn't offer it.

Any color that you would like to offer?

It's what I would call simply unqualified color. We have anecdotal information that there has been some reemergence of reconstruction. It principally comes from those health systems that financially have been on and remain on sound financial footing. It's certainly not at the levels of '07, '06 and '05.

Okay. And then the follow-up on orthopedics, and with apologies for beating this dead horse. But I remember going back a couple of quarters, there was some talk about -- and I remember hearing from folks in the surgeon community about some sense that patients were in a let's get this procedure done before healthcare reform changes everybody's coverage. We heard about that in December, we heard about it again in Q1. And both of those quarters turned out to be pretty strong. As Katherine mentioned, you guys have looked at this from all angles to try to figure out what the slowdown might be due to. Is that something you've considered? Is that a factor at all? Could we be in the middle of a little bit of a pause as we catch back up mid-year? Any color or thoughts would be appreciated.

I think as we looked at the whole economic impact, whether it was patients losing jobs and not getting procedures done or worried about losing jobs and not getting procedures done, or then the quote/unquote, catch up, that may have an impact or have had an impact on any given quarter but we really view it on the margin. It's not something that we've seen that's to any degree that we could really quantify it and call it out as that's causing some disruption in the quarter. So to that point as we get out a couple quarters, could it look on the margin a little bit stronger as some of those patients come back in, it's possible. We've really gone and looked at is there some change in underlying patient demand, is there some change in options for these patients as it relates to hip and knee procedures, is there some big change on pricing. And the answer to all of that is no which is a big part of what reinforces our belief that, yes, in any given quarter you'll see some anomalies around that mid single digit growth but nothing that suggests we're seeing a real deviation away from it on a multi quarter basis.

I would now like to turn the call over to Mr. Stephen MacMillan for closing remarks.

Thank you, Emity. Obviously a lot of questions on certainly the recon side. I think we pulled a lot of people's attention back to our full year and full Company results that we feel very good about the plan we're on. Every quarter has its little ups and downs. We certainly had a few this quarter. And we'll be back to report on our third quarter 2010 operating results, that call will be held on October 19th, later this year, 2010. So thank you everybody.

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