史賽克 (SYK) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Stryker earnings conference call. My name is Jonathan, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session after the prepared remarks. (Operator Instructions).

As a reminder, this conference call is being recorded for replay purposes. Now, certain statements made in today's conference call may contain information that includes or is based on forward-looking statements within the meaning of the Federal Securities law that are 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. Such factors include, but are not limited to, weakening of economic conditions that could adversely affect the level of demand for the Company's products; pricing pressures generally, including cost containment measures that could adversely affect the price of or demand for the Company's products; changes in foreign exchange markets; legislative and regulatory actions; unanticipated issues arising in connection with clinical studies and otherwise that affect US Food and Drug Administration approval of new products; changes in reimbursement levels from third party payers; a significant increase in product liability claims; unfavorable resolution of tax audits; changes in financial markets; changes in the competitive environment; and the Company's ability to integrate acquisitions.

Additionally, information concerning these factors are contained in the Company's filings with the US Securities and Exchange Commission including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. At this time, I'd like to hand the call off to Mr. Stephen MacMillan, Chairman, President, and Chief Executive Officer. You may proceed, sir.

Thank you, Jonathan, and good afternoon, everyone. Welcome to Stryker's first quarter 2011 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. Consistent with prior calls, I will make some summary comments regarding our quarterly results before passing the call over to Katherine and Curt to provide more specifics.

As most of you have seen by now, we have provided a reclassification of our revenue in order to better convey the major sales drivers including MedSurg, Reconstructive, and Neurotechnology and Spine. This was prompted in part by our recent Neurovascular acquisition which broadened our existing presence in the neurosurgery space. With the reclassification, you can now see the totality of our Neurotechnology sales, which includes both Neurovascular and neurosurgery revenue, and topped $178 million in Q1 on top of $320 million of annual sales in 2010. And, for the total Company, sales exceeded $2 billion in the quarter for the first time ever.

Our Q1 results reinforce many of the key themes that we expressed at the start of the year, including -- one, the strength of our balanced, diversified revenue model. Two, the leverage provided by our capital allocation strategy which includes acquisitions, buybacks, and dividends. Three, our commitment to driving internal innovation as evidenced by the strong 23% increase in R&D on top of a 17% increase for full-year 2010. Four, against all of this, there remains our continued focus on driving quality first through our ongoing investments in quality and compliance.

As many of you on the call are aware, we are highly committed to the business model that has fueled our Company's growth from the start which is leveraging our core offering and expanding into select adjacent markets. This has resulted in a balanced portfolio that spans a number of important segments of medical technology, and it's the diversity of this portfolio that allows for a consistency in our financial results, both top and bottom, even though certain portions of our business are inevitably more or less challenged in any given quarter.

Q1 was no exception, with relative softness in our Reconstructive business more than offset by the strength across our key MedSurg franchises. Additionally, Stryker Neurovascular is off to a strong start in its first quarter as part of our Company with the team reversing multi-year trends of sales declines and delivering positive year-over-year revenue growth in the United States.

Our first quarter results also continue to build on our strategy of optimizing our capital allocation which includes the benefit of a series of acquisitions we've completed over the last 12-plus months, including the MEDPOR assets of Porex Surgical, Gaymar Industries, and as mentioned, Neurovascular. All three businesses are in line or above our initial expectations and reinforce our commitment to focusing our acquisition activities on enhancing our core franchises and expanding into key adjacent markets.

Beyond acquisitions, our multi-pronged cash strategy also includes continued buybacks in the first quarter, and, as a reminder, in our ongoing efforts to maximize shareholder return, our most recent dividend represented a 20% year-over-year increase. The strength of our balance sheet and continued robust cash generation allows us to pursue a multi-pronged approach to capital allocation while also making the critical investments in our business that will drive innovation.

We started the year with the expectation we would deliver adjusted diluted EPS in the range of $3.65 to $3.73 per share, an increase of 10% to 13%. With Q1 adjusted EPS up 12.5% to $0.90, we remain confident in our outlook for both sales and earnings in 2011.

In summary, we view our Q1 results as compelling evidence of the benefits afforded by our unique sales footprint, bolstered by a strong balance sheet that provides us with the flexibility to further augment both sales and earnings growth. With that, I'll turn the call over to Katherine.

Thanks, Steve. My comments today will focus on acquisitions as well as elective procedure trends and implant pricing. As Steve mentioned in his comments, we are pleased with the performance for Stryker Neurovascular in the first quarter as part of our Company, and although we don't typically provide quarterly updates regarding specific acquisitions, given the relatively larger size of this deal, we thought we would offer some additional context.

Recall that just prior to our announcement of the definitive agreement to acquire the business, Neurovascular received the long-awaited FDA 510(k) clearance of its next-generation Target coil, a key milestone given coils represent roughly 50% of the $1 billion worldwide neurovascular market.

This was followed in late December with 510(k) clearance of the next-generation coil detachment system that allows for coil detachment in less than 10 seconds which is a demonstrable improvement over the prior system that required upwards of one minute to detach the coil. Throughout our due diligence, we consistently heard from customers that the length of time required for coil detachment was a key competitive disadvantage for the Neurovascular system, and we believe that's been addressed with these launches which helped drive positive growth in the US sales in Q1.

In addition to the positive trends in the Neurovascular business, we're also pleased with the early performance for both Gaymar Industries within our medical franchise and the MEDPOR assets of Porex Surgical which is part of our CMF division. Both acquisitions are examples of transaction focused on strengthening our core product offering, and the teams are off to a solid start integrating these businesses.

With respect to elective procedures and implant pricing, many of the trends that developed during 2010 still remain headwinds at this point in 2011. Although the market improved modestly in Q4, as we noted on last quarter's call, we did not view the results as indicative of a major rebound. Rather, we were and remain cautious regarding the hip and knee market pending evidence of a sustained improvement in the economic environment.

We are highly encouraged by the acceptance in the market of our latest hip offerings, ADM and MDM, which position us well in the large bearing head segment of the reconstructive hip market, and similar to Q4, are driving a favorable mix benefit that's partly offsetting the continued negative reconstructive pricing trends.

There are no noteworthy developments with respect to reconstructive pricing from what we've seen for a number of quarters. Overall, we believe procedure volumes in the hip and knee market are largely stable recognizing that the myriad macro issues are dampening elective procedures. Given the degenerative nature of osteoarthritis and the progressively debilitating pain that results, we firmly believe that patients currently deferring hip and knee replacement will re-present at some point.

In the interim, although the recon market growth is below historic norms, the collective strength of our broad-based product offering is driving total sales growth consistent with our expectations at the start of the year. And, with that, I'll turn the call over to Curt.

Thanks, Katherine. I'll start my comments by first pointing to our press release and highlighting the information in our supplemental sales reporting. We have made some notable changes to include new reporting segments as well as the addition of selected segment revenue disclosures. We believe this reporting will aid investors in further understanding the reach of the Stryker business and the range of our product and services offering.

Looking at the first quarter, total Company sales increased 12% on a reported basis and 10.2% on a constant currency basis. Strong core MedSurg product growth, coupled with the acquisitions principally reflected in our new Neurotechnology segment, paced our growth. On a GAAP basis, diluted net earnings per share were $0.78, a decrease of 2.5% versus Q1 of 2010.

We have noted the Neurovascular inventory step-up, other acquisition and integration-related charges totaling $46 million, net of tax, as a non-GAAP adjusting item in our earnings release. Excluding the charge increases our reported US GAAP diluted earnings per share of $0.78 to $0.90 per share. The US GAAP diluted net earnings per share decline of 3% then becomes growth of 13% when excluding the identified non-GAAP items.

In addition to the revenue and earnings performance, additional highlights include steady cash generation and the repurchase of 4 million shares totaling $250 million during the quarter. Finally, the integration activities for the MEDPOR, Gaymar, and Neurovascular acquisitions remained largely on track through the first quarter.

In reviewing the quarter in more detail, I will start with a discussion of the components of our revenue growth. In the first quarter, volume and mix contributed 6% to the top line, acquisitions added 6%, and currency contributed to an increase in top line sales by approximately $32 million and improved the Company's overall reported sales growth by 2%. Finally, Company-wide selling prices declined 2% on a worldwide basis. The number of selling days was effectively equal with 2010, in most markets.

Looking at our reporting segments, I will start with Reconstructive products which represented 45% of our sales in the quarter. Reconstructive products include our hip, knee, trauma, and other reconstructive lines. Our CMF and Spine results are not included in the Reconstructive segment.

Reconstructive products increased 2% as reported and were flat on a constant currency basis. Knee results were especially challenged, driven in part by a softer market and our lack of a shape-matching offering. Our hip line was slightly better both in the US and international markets, and we remain encouraged by our offering and the early feedback from the rollout of the MDM product. Trauma posted solid US gains against slight declines in the international markets.

Next, I will turn to the MedSurg product segment which represented 38% of sales in the quarter. For reporting purposes, MedSurg today is comprised of Instruments, Endoscopy, Medical, and the Ascent Healthcare business. The NSE and Interventional Spine offerings are no longer reported in the instrument segment under MedSurg.

In total, MedSurg sales increased a strong 13% as reported and 12% on a constant currency basis. Acquisition added 2.3% to the reported increase. For consistency, if we back out the one-time medical conversion sale we reported in the first quarter of 2010, MedSurg growth would have been a strong 14.7% on a constant currency basis.

Additional highlights in the quarter include both our Endoscopy and Instrument segments recording double-digit US and international growth, and the Medical segment having a very solid US performance supplemented by the Gaymar offering. Overall, the results of MedSurg reflect the continued strengthening of our core product offering which we have further augmented through selective acquisitions.

Finally, I'll introduce our Neurotechnology and Spine product segment which represented 17% of Company sales in the quarter. For reporting purposes, the Neurotechnology business is comprised of our CMF business, previously reported under our Orthopaedic Implant segment, the NFC business previously reported under our Instrument segment, and our newly acquired Neurovascular business.

The Spine segment is made up of our spinal implant business previously reported under Orthopaedic Implants, as well as our Interventional Spine business previously reported under the Instrument segment. We would note that the revamped reporting is intended to provide investors with better granularity regarding the scope of our product offering in these segments.

In the quarter, the Neurotechnology and Spine product sales increased 48% as reported and 46% on a constant currency basis. Adjusting for acquisitions and currency, Neurotechnology and Spine sales recorded a 4% increase. Highlights in the quarter include exceptionally strong organic growth from our Interventional Spine and NSE offerings as well as the positive influence of the MEDPOR and Neurovascular acquisitions.

Conversely, spine implant sales remain challenged, both from a volume and price standpoint.

Regarding the Neurovascular business, we are pleased with the first quarter results and are proud to report that this business delivered strong performance in the US market which has been the focus of the new Target coil launch. Additionally, results in key international markets are trending in a favorable direction. Finally, we continue to communicate and work closely with our new customer base, and, in general, are finding a welcome reception to the Stryker acquisition of this important and innovative business.

I'll now turn to the income statement, beginning with our gross margin performance. On a reported basis, gross margins declined 190 basis points to 65.8% as a result of the Neurovascular acquisition inventory step-up. Excluding this charge, margins remained steady at 68.5% in the first quarter, inching down 20 basis points from fourth quarter levels, while exceeding prior year by 80 basis points. Also recall that in the first quarter of 2010, gross margins were suppressed by 30 basis points for the Ascent acquisition inventory step-up charge. Overall, the adjusted margin is a solid starting point for 2011 and is within our expected range.

Research and development continued as an area of investment priority moving to 5.5% of sales which is consistent with our investment level in the second half of 2010. Absent the influence of the Neurovascular business, total Company R&D spend still increased at double-digit levels.

Selling, general and administrative costs represented 38% of sales. Adjusting for acquisition and integration-related charges for the Neurovascular acquisition, SG&A finished at 37.3% of sales. This is in line with our prior year levels. We remain comfortable with fluctuations in these categories as priorities materialize.

Reported operating income decreased 5% over prior year and moved to 21% of sales, reflecting the impact of the Neurovascular inventory step-up and acquisition and integration-related charges. Adjusted operating income increased 10% while the adjusted operating margin decreased 50 basis points versus prior year to 24.3% of sales.

Other income and expense reduced pre-tax income by $12 million in the quarter. Components of this included investment income of $7 million, offset by an FX transactional loss of $1 million, and interest expense of $17 million. The Company's effective income tax rate was 25.4% for the first quarter of 2011. Excluding the tax benefit associated with the Neurovascular acquisition-related charges, our effective income tax rate would have been 26.2% for the first quarter.

Of note, our tax rate reflects a tax credit to offset the Puerto Rico excise tax recorded in SG&A. This credit effectively decreased our rate by 50 basis points and will be recorded similarly in future periods. As a result, we are updating our 2011 tax rate expectations to a range of 26.0% to 26.8% from the previous range of 26.5% to 27.3%. Again, keeping in mind the offsetting costs for this adjustment is recorded in SG&A.

In terms of the balance sheet, we ended the quarter with $2.9 billion of cash and marketable securities, down $1.5 billion from year-end 2010. Obviously, this balance has been reduced given the January 3 closing of the NV transaction and the associated $1.45 billion payment. As a reminder, we have $1 billion of debt on the balance sheet associated with our January 2010 debt offering.

On the asset management side, account receivable days ended the quarter at 59, which represented an increase of three days compared to the prior year and fourth quarter, well within our normal range. Days in inventory finished the quarter at 161 which was up seven days sequentially versus year-end and 10 days against the prior year level. The impact of the Neurovascular acquisition and related inventory step-up impacting the P&L netted a higher dollar amount running through the cost of goods and impacted the DII calculation by reducing days in inventory by five days. On cash flow, we continue to perform well with cash flow from operations of $205 million and free cash flow of $150 million.

Finally, in the first quarter, we repurchased 4 million shares for a total spend of $250 million. We currently have open authorizations totaling approximately $575 million. In summary, the first quarter was a solid start, but we still have plenty of opportunity for improvement along with our ongoing integration efforts in the quarters ahead.

Turning to our outlook, our guidance, as Steve noted, remains unchanged. Currency remains a positive, and if rates hold near current levels, we would expect second quarter sales to be favorably impacted by approximately 3% to 4% when compared to 2010. Using current rates, the full-year currency impact on top line sales would be an increase in a range of 1.5% to 2.5% when compared to 2010, up from the original expectation of 0.5% to 1.5%.

We are maintaining our outlook calling for a net sales increase of 11% to 13% in constant currency. Excluding the impact of foreign currency as well as acquisitions, sales growth is projected to be 5% to 7% for the full year.

Adjusted diluted net earnings per share are anticipated to be in the $3.65 to $3.73 range, representing an increase of 10% to 12% over 2010 adjusted diluted earnings per share. We also now anticipate acquisition and integration-related charges associated with the recently completed Neurovascular business to reduce reported diluted net earnings per share by approximately $0.28 to $0.30 versus the previously noted $0.21 to $0.25, driven by higher costs associated with the inventory step-up while other integration costs remain on or ahead of plan. With that, I'll turn the call back over to Steve.

Thanks, Curt. In closing, our Q1 results put us on track to deliver on the commitments we outlined at the start of the year. Moreover, the balance provided by our portfolio continues to reinforce the strength of our strategic focus on strengthening our core and broadening into key adjacent markets.

We remain focused on maximizing shareholder return through a multi-pronged cash strategy that leverages our balance sheet as evidenced by our ongoing pursuit of acquisitions, dividends, and share repurchases. We look forward to executing on our financial goals and delivering strong results that will continue to define Stryker as a leading player in the medical technology market. With that, we'll now open it up for Q&A, Jonathan.

Thank you, Mr. MacMillan. (Operator Instructions).

Your first question is from the line of Mr. Rick Wise with Leerink Swann. Please proceed, sir.

Good afternoon, Steve. Hello, everybody. Maybe we can talk a little bit about -- start off with recon. Talk about the market a little bit. As you indicated, it still sounds like market growth is challenged.

Can you talk on the knee side a little bit, Steve, about OtisMed and where you stand in terms of getting the products you need? And, maybe, talk a little bit more -- flesh out your comments about the rollout of the new hip products. And, when -- clearly it seems like you've outperformed, but when do you expect that slow moving train to pick up a little more steam?

Sure. Thanks, Rick. On OtisMed, it is back with the FDA. We've got a 510(k) in with them going through the review process. I think just given where things are with FDA these days, we're just leery of committing to when that might be. We would certainly hope it will be before the end of the year, but that one has clearly turned out to be a little more complicated for us than our initial expectations.

On the hip business, I think while the hip market looks soft, we really like where we are. I think the rollout of MDM, which as you know we launched at the Academy and is just in the early innings of getting the rollout. We should start to see some pickup on that here in the second quarter but continuing to build through the year. And, we think that MDM -- all of the surgeon feedback that I've picked up -- MDM ought to be a much bigger addition to our portfolio than the ADM was last year. And it's a great build on that, so I think we're a lot more excited about where that's going.

Okay, and just the follow-up, maybe on earnings. Clearly, you've kept your guidance range stable, but you are talking about lower tax rate and following first quarter results. Might you be a little more comfortable at the mid- to upper end of that range given the way the acquisitions are performing, et cetera?

Rick, I think what we wanted -- or what we tried to call out in the tax rate discussion is while we're adjusting that range a little bit lower, keep in mind, there's a comparable offset up in SG&A as it directly relates to the Puerto Rico excise tax credit that we're able to take and that the IRS has opined upon. So, that's really where the tax rate adjustment comes into play. So, it's not necessarily an enhancement to earnings.

Overall, we have one quarter under our belt. We feel good about the results. I think it would be premature to make a comment where we feel we're going to fall within the current range of $3.65 to $3.73.

Your next question is from the line of Matt Miksic with Piper Jaffray. You may proceed, sir. Mr. Miksic, your line is open.

Hello, can you hear me okay?

Now we can, yes.

Sorry about that. So, a question first on just the knee side of the business. Katherine, you called out that much of the conditions in the market that have been with us for several quarters remain intact. Knees, so far, even though it's kind of early in the reporting season seem to be shaping up to be a little on the weak side.

Do you look at this as -- is it a -- do you believe that it's a market softness in the first quarter? Is it comps? Or should we be concerned that there's any transfer of share here in the first quarter? And, then, I have one follow-up.

I don't think we lost share, Matt. I think it's more of a softness in the market, and it feels like to us the knees have been a little bit more susceptible to the economic downturn. Some of the patients tend to be a little younger, as you know, and probably been slightly more deferred.

I actually am very encouraged. I think we're encouraged. While we don't like the numbers, the fact that we're probably the only Company without a shape match technology out there I think speaks to the strength of Triathlon. That when the dust settles here for the quarter, we think our knee numbers won't be that bad. And, we probably did not lose share in the quarter.

Okay, and then one follow-up on Neurovascular. Just from your comments, it's hard to see given your new reporting lines. But relative to where you started the year -- we're one quarter in. Is it off to a slightly stronger start than you hoped for? Is it right in line with your expectations? Any color on just how you think Neurovascular is tracking at this point?

Sure, Matt. If I understood the scope of the question, through one quarter, we feel good about Neurovascular. And, there's two sides to that statement. There's the integration and ongoing integration efforts. Those are largely on track with our expectations.

On the commercial side of the business, where I suspect the majority of your question is focused, we're encouraged by the early results of the Target coil introduction which was principally focused in the US market; and in select international markets, we're very early there on the Target coil launch. And so far, so good.

Keeping in mind in both cases, it's still only 90 days into the program underneath Stryker and with the new product. So, I would say quarter one is about in line with our expectations as we built our models, and we're hopeful that we can continue on that path.

Your next question is from the line of Joanne Wuensch with BMO Capital Markets. You may proceed.

Thank you very much for taking my question. I actually have two. One, your 37% plus or minus SG&A rate is sort of where you have been looking at for the last couple of quarters. Is this a new go-forward rate that we should think about?

It's a great question. I've always tried to qualify that with a final statement saying we are comfortable with variations here. Because those are the areas where we elect to make investments in selling organizations, marketing programs, and we want to retain that flexibility and certainly we think that our P&L allows us to retain that flexibility.

As of right now, that flexibility has been deployed into R&D as evident by the last say three, four quarters' increase in R&D. As a matter of routine, I think we said that, in 2011, we thought that that broad SG&A category would be in that 37% to 38% range, and, after one quarter, we think we're on track with that. Always reserving the right to make select investments in various marketing or sales programs.

Thanks, and then as a second question. What surprised you -- positive or negative -- now that you've owned the Neuro division for 90 days? Thank you.

Hard to say the positives. The real positive of that business is the team. We just absolutely love the leadership team and the quality of the team that came over. I think to build on it from there, Joanne, we probably are very cautiously optimistic about the initial rollout of the Target coil, particularly in the US, and we just don't want to get ahead of ourselves here. But, it's off to a nice start.

Your next question is from the line of Mike Weinstein with JPMorgan. You may proceed, sir.

Thank you. Hopefully, you can hear me okay. Couple questions. Let me just start with this big picture from the first quarter. The Ortho business as you traditionally reported it doesn't grow this quarter constant currency, and MedSurg has another very, very strong quarter. Does seeing this three months into the year change how you're budgeting for the year in your spending across the various businesses?

Not dramatically, Mike. We've always got a little bit of swings and roundabouts, and I think the funny part, as you well know, over a number of years here, our MedSurg business is probably consistently more on the upside, and Recon has been a little slower. I think you more than even some others had been predicting the first quarter was still going to be a challenging one in Ortho, and I think your hypothesis there was accurate.

And, I think it's all within our realm, and it just speaks broadly to our broader strategy which is we're much more than a hip and a knee Company. We love our hip and knee franchises, but like the overall piece and have enough flexibility in there to continue to deliver very good results even in a soft Recon market, much as we did for much of last year.

Curt, can you just chime in on FX? I think most people view Stryker as having some natural hedges in place but not having an active synthetic strategy for translational risk. And, so the fact that you've had this incremental tailwind develop over the last three months to the top line, people would like to get some view on the bottom line benefit over the balance of the year. And why you didn't reflect that in your updated guidance.

I think number one, your opening statement is correct. We don't have -- we view ourselves as having more natural hedges than we do any form of synthetic hedge. That's an accurate statement. The top line and what we tried to guide people to over the last couple years is that it's not simply a straight drop-through on any top line impact of FX to the bottom line.

That was really, I think, reflected last year as you looked at the swings in the multi-currency payers from our manufacturing network through our distribution network and how that moved across the gross margins. And, therefore, when we look at the FX potential impact that we've modeled based on current rates, the drop-through that we're seeing right now is not meaningful from an EPS impact, and therefore, would not yield us to move the overall outlook.

And, again, probably be updating currency rates in 30, 60, 90 days depending on how fast or how volatile the global economy is. If we go back to 2010, it seemed like about once a month, we were trying to make an adjustment on currency.

Your next question is from the line of Raj Denhoy with Jefferies & Company. You may proceed, sir.

Hi. Good afternoon. Wonder if I could ask a little bit about -- you mentioned the MedSurg division continues to kind of defy some of the skeptics out there. And, again, you've put up a very strong quarter, particularly it looks like in the international markets.

Curious if you could comment just on what you're seeing on the demand side there. There's always lingering concerns about what might happen in Europe with some of the budgetary concerns there, but maybe you could just offer some thoughts around the outlook.

I think the big issue that we would say with our MedSurg business is first and foremost, we had said throughout 2010 we didn't think it was a one-hit wonder off of 2009 comps. That it was really more a little bit back to a return to historically strong business results.

The other piece that we said as it relates particularly to the international businesses for both Instruments and Endoscopy, they've been relatively underdeveloped outside the United States. So, we have seen, even in a slow market, the ability to gain market share for those franchises, and I think that's what we're really seeing. And, we continue to feel great about those businesses.

Okay, and just on Japan. I don't think you mentioned in your prepared remarks. Have you seen any impact, and are you expecting to see any lingering impacts of the events in Japan?

We saw truthfully very little. It was marginal. Certainly some hospitals -- some franchises experienced it.

I think the bigger concern for us, frankly, and again, everything is manageable when you have multi-franchises is our Endoscopy division in the second and third quarters might experience some shipment delays from some of the products that we source out of Japan. But, again, it will be de minimis. So, nothing that we're particularly worried about.

Great, thank you.

Your next question is from the line of Michael Matson with Mizuho Securities. You may proceed, sir.

Hi. Given the speculation out there about a potential acquisition of Synthes by J&J, I was just wondering if you have any perspective on how that could potentially impact your Spine and Trauma businesses? It seems like there might be an opportunity to pick up some market share there. I was just wondering if you would agree with that?

Yes, I think at this point, given there is nothing been publicly announced, we typically wouldn't comment. I think as people have seen in any acquisition, particularly sizeable ones, there can be disruption and opportunities and challenges for the acquiring company. But, beyond that, we wouldn't make any specific comments as it would truly be very speculative at this time.

Okay, and second question on the Spine business. Can you just remind us where you're at with your CerviCore cervical disc approval?

Right now, the status is we continue to work on the product in preparation for submission. That's probably about the extent of information we would discuss on that.

All right, thanks.

Thanks.

Your next question is from the line of Jason Wittes with Caris & Company. You may proceed.

Hi. Thanks for taking my question. First, a follow-up from Raj's question about OUS growth. As you guys may know, I've been off the sell side for a little while and just came back. But, if I look back three years ago, I remember that OUS was a pretty big opportunity in terms of underpenetration for you guys.

But, as I come back and look at the numbers, it's still not as present as I would have expected, but now you're saying that you're starting to gain share. Is there a change in strategy that's occurring right now?

It's a little more of a focus for our international division, particularly on Instruments and Endoscopy. But, candidly, we have not made the progress we would like partially because particularly our MedSurg businesses continue to grow pretty well in the US. And, so, to balance it much differently, it just hasn't really made a huge headway. We still see bigger opportunities going forward, Jason.

I think also, Jason, if you look over those last three years that you reference, a couple of those were covered by the economic contraction. And, like all companies, we had to pull back in some of our investments, and some of those new expansions were the subject of some of those reductions during that period of time.

Okay, just one more. If I look at what you're saying, you're basically saying that price is pretty stable in terms of all your businesses. Mix, I imagine you have some visibility on. But volumes, especially in the Orthopaedic business, are not something you have a lot of visibility on. Is that a fair characterization of the way things are right now?

Obviously, everything looks pretty stable. But, if I look at those three components, the volume piece is what you're waiting for, and you don't really have beyond maybe a quarter visibility.

I would say on the reconstructive implant business we're clearly seeing a softening as the overall market is seeing that deferral of procedures. It doesn't seem to be getting markedly worse. But, clearly, there hasn't been a rebound, and we would say that's probably tied more to visibility around just an overall improvement in the economic environment.

Okay, so basically you're looking to the economy as the driver there in terms -- as opposed to checks from your salespeople and doctors in terms of what they're saying in terms of patient backlog, et cetera?

No. What we're saying is we think the input we'll receive from the various channels and market intelligence we do, be it talking to patients or doctors or our sales force and hospital administrators, et cetera. The input we will receive from that probably won't materially change as it relates to elective procedures until we see some improvement in the economic environment since there's a very clear tie-in to unemployment particularly as the average age of the implant recipient has been coming down, and it's been compounded by some of the extra pressures tied to increasing deductibles, et cetera.

And, I would acknowledge clearly Q1 is the hardest comp quarter, and as the year unfolds we should see easing comps as well as the benefit from the uptake on MDM, specifically on the hip side, as well as the rollout of OtisMed, ADM, and MDM internationally.

Okay, great. Thanks a lot.

Your next question is from the line of Mr. David Lewis with Morgan Stanley. You may proceed, sir.

Good afternoon.

Hey, David.

Steve, what is clear over the last few quarters, and specifically this quarter, is MedSurg is clearly accelerating. I know you've tried to talk us away from thinking about your year-over-year comps, but it does look like it's accelerating. What's less clear to us is the pieces that are accelerated -- the pieces that are doing well.

There is actually a fair amount of inorganic stuff in there now between Ascent as well as Gaymar. Can you help us draw a picture between the core Stryker and Endoscopy and beds, and the more recent Stryker which is some of the new acquisitions?

Yes, take this really simply, David. Our Endoscopy and Instruments businesses, both of which grew at double-digit rates in the US and outside the US, and therefore globally, is virtually entirely organic. If not completely organic growth.

The medical business has Gaymar dropped in there which is worth a little bit -- certainly some growth for them. And then Ascent is caught in the total MedSurg but is growing. But clearly, the double-digit growth by Endo and Instruments is just very strong, executional growth with product growth, sales growth, and a lot of the singles that we talk about all the time. So, but make no mistake, that's very clearly organic growth.

Okay, and then maybe another question on organic trends. R&D elevated this quarter. I think it's the second straight quarter you've talked about this increasing R&D investment. Obviously, there's a step-up year-on-year because of Neurovasc.

But, as you think about the organic R&D being spent on the old Stryker maybe help us understand what that is growing at. And give us a sense of where that's being spent because obviously it seems to be either accelerating or in excess of your peers.

Let me go back to last year which is a very clean year; it was 17% increase for the year. And, if you particularly saw it, you saw a heavy increase in the second, third, and fourth quarters. So, I would say David as we've made progress on our quality and compliance initiatives, where we really had rediverted so many of our R&D resources for the previous few years, as we've gotten our new systems in place, we've gone back to starting to invest a little bit more in R&D, and it's across-the-board.

It's every division. And, again, as you know our product line is deep and broad. Not a lot of home runs in it. It's spread across-the-board each division continuing to see opportunities for innovation and opportunities for new niches and new product upgrades.

And then we continued, as Curt mentioned, with double-digit increases even on the base business here in the first quarter. So, I think it's speaking to frankly as we look around we still think there's a great opportunity for innovation in every category that we're in.

Okay, thank you very much.

Thanks.

Your next question is from the line of Derrick Sung with Sanford & Bernstein. You may proceed.

Hi. Good afternoon.

On your hip business, while it looks like you may have grown in line this quarter, last quarter you had a very strong above-market growth rate that you put up in hips. So, from a sequential basis, it looks like there's kind of a substantial step-down.

Can you help us explain that? Was there something unique that happened last quarter that you are not seeing this quarter, or what would explain that sequential decrease?

Derrick, I'll take this, and what we tried to comment on in the fourth quarter and be fairly consistent on is it's very difficult to draw any major trends on a single quarter's results. And particularly in the hip and knee market where share shifts fairly slowly reinforced by the fact the rest of the market there is a sizeable chunk that hasn't yet reported. So it's kind of hard to know where our numbers are going to shake out from a market share basis.

But you really need to look at rolling four quarter trends to get a sense of who is gaining, who is losing share, and who is staying stable.

At this point, although nobody is pleased from a macro standpoint with the relative softness in the hip and knee market, we feel very good particularly as our products roll out on MDM and over the course of this year and the international rollout of those products from a competitive position that we're in very good shape.

I wouldn't point out anything that would say sequentially from Q4 to Q1 that there's a disconnect. Q4 tends to be a seasonally stronger quarter, and I think that's probably what partly drove a relatively stronger overall market in Q4. And which is, again, why we've tried to be cautious because it's very difficult to draw any conclusions from just a sequential quarter comparison.

Okay, thanks. And, on -- in your Endoscopy business, you saw very strong double-digit growth in the US. How much of that is a -- how much of that is from timing of shipments or sales that were pushed off from the prior quarter? Because I remember you mentioned that that was an issue for some of the weakness that you saw last quarter.

And, how much of it is organic, and can we expect to see it moving forward for the rest of the year?

Derrick, this is Curt. Just if I'm understanding your question, you're looking at our first quarter US shipments for Endoscopy and questioning how much of that came from delayed shipments in the fourth quarter?

That's exactly right, Curt.

Certainly, a little bit of that happens over every year-end as customers tend to get to the end of their spending cycle, and they put a whole bunch of orders in; and then from a capacity standpoint, our ability to ship all those gets stretched. I don't think we're going to break that out as a percentage or a dollar basis. It's part of the normal year-end process any time you have capital equipment involved.

So, I think what you probably want to just look at is how those things have occurred year-over-year for a number of years. Perhaps absent 2009, but certainly a little bit of that is influencing the first quarter. But it doesn't materially change the results. Endoscopy had a good first quarter, I think, is the sound statement to make.

Okay, thank you.

Your next question is from Doug Schenkel with Cowen and Company. Go ahead, sir.

Hello. Thank you, and good afternoon. My first question is on the Recon side. From a share standpoint about 60%, actually a little bit more of that -- of the hip and knee market has reported at this point. Clearly, volumes seem to be tracking below the expectations of some others who have been a bit more bullish on a recon recovery.

Just to be clear, have you heard anything that would suggest there was an impact on volumes during the quarter? Whether it was weather or flu or COBRA roll-offs? Or was Q1 really just a continuation of what we've seen over the last few quarters with some modest improvement in Q4?

I think we would agree with your latter comment. A lot of the macro trends that we saw starting to emerge in Q2 last year remain in effect, but nothing different that we would call out.

Okay, and then just moving to the P&L. There's been some focus on the fact that the environment is becoming a bit more inflationary. Oil prices are up. Some other component prices seem to be rising. Anything that we should be focused on specific to Stryker as we model out the rest of the year, specifically at the gross margin line?

Nothing that would be of a material nature that we would discuss.

Okay, thanks for taking the questions.

Thanks, Doug.

Your next question is from Adam Feinstein with Barclays Capital. You may proceed, sir.

All right. Thank you, and let me start by saying congrats to Steve for the nice plug in the Journal last week. I think they referred to you as one hot ticket so certainly a nice plug.

I just wanted to just to ask you guys about the components of your revenue guidance here. And, certainly, I know you don't give specific targets, but just it seems like relative to most of the Street models in the quarter Ortho was weak. MedSurg was stronger than expected. So, as you guys think about it relative to what you were thinking for the quarter, is that the right way to look at it?

Was the question in reference to the first quarter or our outlook?

Well, I guess both. But, I guess should we think about -- once again, I know you didn't give specific guidance by segment. But, just relative to most of the models, it seemed like the MedSurg was stronger than expected and Ortho being weaker.

So, I guess as you guys were thinking about coming into the quarter, maybe that was the way you guys were thinking about it and the Street models were off. But, just curious. Or are you guys, even though you're keeping your revenue guidance the same, should we think about the growth drivers as being different?

Yes, Adam. I think it's a very good observation, and I'd say, in a lot of ways, it probably paralleled last year as well. If you looked at our original budget for 2010, we would have forecasted better Recon and generally orthopaedic implant growth and lesser MedSurg. And, at the end of the year, I think it speaks to the fact of how strong our total Company is. As you well know, we exceeded our original guidance for last year, even in a year when the recon market did things that none of us anticipated.

I think certainly our Recon business was softer this quarter than we would have fully budgeted. I would also tell you we're very much almost exactly on plan with what we planned for the year. And, every year, we get there in different ways. So, it's -- I think you're spot on.

Okay. Great, and just a quick follow-up. Just with the M&A environment heating up in recent days, obviously you guys just closed on a big deal. But, what is your appetite in terms of doing additional deals? And, how are you thinking about utilizing your cash?

I would say really no change to what we've been articulating, and probably people are familiar with the three-pronged cash strategy. It's M&A, it's dividends, and it's buybacks.

And M&A, we're going to be primarily focused on transactions in our core like the Gaymar, like Porex, as well as key adjacent markets like Neurovascular. And that is the game plan, and that's going to continue going forward.

All right, thank you.

Thanks, Adam.

Your next question is from the line of Bob Hopkins with Bank of America Merrill Lynch. Please proceed, sir.

Hi. Thanks, can you hear me okay?

Yes, Bob.

Great. Good afternoon. So, first question is on organic constant currency revenue growth. I think you guys reported a little over 10% constant currency growth, and then about 6% growth from deals which gets you to about 4% constant currency organic growth in the quarter.

Which, one, is my math right? And, two, if it is right, it's a little bit below the 5% to 7% you forecast for the year so what do you expect to accelerate as we go forward here?

Bob, number one, your math is right. Number two, and I hate to use comparables as the excuse, but Q1 2010 is our toughest comparable when you look broadly at all the totality of the Stryker franchises. So, as we look forward, we still think the 5% to 7% range is the right range based on what's being projected -- based on how we see the markets unfolding.

Okay, great. Anything product-related though? Sorry, just to follow-up on that.

New product-wise that will drive?

Yes, any major new product launches in the back three quarters that would drive acceleration?

Well, I think part of it is on the Reconstructive side -- the expectation of how MDM will be embraced by the market coming on the heels of ADM. And, the timing that it takes to roll sets out, do surgeon training. Some of that groundwork was laid with ADM. So, our expectation is that MDM will have a pickup.

We've got -- the other franchises have what Steve refers to as singles and doubles that continue to roll out, and those tend to build month over month as the year progresses. So, I wouldn't call out any one item. I would just say it's a bunch of singles and doubles right now in the core business.

Okay. And, then just one follow-up on the knee side. Everyone that's reported knee numbers so far has reported sequential deceleration. Everyone is reporting negative growth, and, so, and I understand comps are a little bit tougher this quarter. But, do you really feel that the knee market is stable here?

Everyone keeps using this word stable, but it doesn't really seem to be that way when you just look at the numbers. J&J tried to point us to sequential growth trends.

So, I just was wondering if I could get your comments on the knee market. Do you really think it's stable here? And, is it just tough comps in the quarter? Or has there been a little bit of sequential deceleration in your view?

I think stable is a fair characterization. Clearly, in the second quarter last year things changed. I think it's hit a new period, but I don't think it's falling much further at this point.

Your next question is from the line of Rajeev Jashnani with UBS. Please proceed, sir.

Thanks for taking the question. With respect to gross margin going forward, I was just wondering if you could comment on, with the mix of businesses, how you see gross margin unfolding. Really not so much over the year but longer term?

Well, clearly, we've tried over the last 18 to 24 months to take some steps organizationally to provide additional focus at the gross margin line. The first being the appointment of an executive over our global quality and manufacturing.

Coming from a highly decentralized org structure, we believe there are opportunities within our manufacturing network for things as simple as synergies across spend categories, core competency manufacturing. However, each one of those initiatives is predicated on first making no dramatic change that impacts the hard work that many people in the Company have done on the quality front.

So, we've tried to signal that longer term we see opportunity in gross margin. Recognizing that it will be tempered a little bit with the first focus on quality, and number two, tempered in a fashion such that we may need every one of those gross margin dollars to offset other challenges that come into the business. Be they declines in price or commodity price changes, labor rate changes in various markets. So, we think there's opportunity, but it's not going to materialize three, six, nine, 12 months. It's going to materialize over time.

Thanks.

Your next question is from the line of Kristen Stewart with Deutsche Bank. You may proceed, ma'am.

Hi. Thanks for taking the question. Katherine, I was wondering, in the beginning of your remarks, you had commented on pricing and mix trends. For the Recon business in the US, was pricing and mix still negative? I recognize hips is probably doing better with the rollouts. But, can you just maybe help us understand in aggregate if it's still negative?

And, maybe give us an update on what's going on in Europe. If I look at the businesses, it looks like Europe is still obviously a bit of a problem spot. It looked like trauma and extremities was a bit soft this quarter. Just any broad comments on Europe, and when we might expect a recovery specific to the Recon business?

On the pricing -- pricing as we've tried to give some qualitative directionality around it. Pricing in hips and knees is still negative, it was marginally better sequentially. And it is partly offset by mix with a little bit better contribution on the hip side which you would probably expect given ADM and MDM. But, I wouldn't call it materially different but marginally better from a Q4 to Q1 basis.

And, with respect to Europe, there's nothing significant that we'd point out as a departure from prior trends. We are working through some of the fallout as we talked about from the move we made over a year ago to discontinue certain products and terminate certain distributors which did upset certain customers. And, there's work to do to build those relationships back up.

On the positive side, we are rolling out OtisMed internationally. ADM and MDM, as well. So, there's some nice components coming on the new product side which will certainly help. Particularly as we get to the back half of the year because as you know with the Recon products, it does take a little bit of time to get traction there.

Okay, great. And, then, on Ascent, if I look at the numbers reported, it looks like that business was up only about 6%. Can you just comment on trends there? And, can we expect -- I know, this is being greedy -- but any historical restatements to help us rebuild models in the new reporting style?

I'll take the second question first. The restatement -- we've provided some detail that goes back through 2010 in the press release by the new reporting segments.

Your question relative to Ascent -- probably back into some rough estimates on how that business did in the first quarter. As with any business that disrupts markets, challenges competitors, there's likely to be quarter-over-quarter disruptions. But I think the broad story on Ascent is we feel very good about the direction of that business. We think we're on the right side of the cost question as it relates to hospital supply.

And, over the long term, the thesis that we went into the Ascent acquisition with remains very much in place, and we think over the long-term it's going to be one of the great franchises for Stryker. We're not too wrapped up in the subtle quarter-over-quarter variations right now.

Okay, but you're not going to give out like hip numbers, knee numbers and that? I see there just the major divisions historically.

Just the top segments. You're correct. We're not going to go back into the hip, knee, and restate that.

Okay, thank you.

Your next question is from the line of Matthew O'Brien with William Blair. You may proceed.

Good evening. Thanks for taking the question. Just to follow-up on Kristen's question a little bit -- on the mix side of things -- compared to historical levels, are you still able to get the same type of pricing premium on new products that you are introducing? Or is that narrowing slightly in this environment?

I think right now, without getting into specifics, we feel good about the ability of new technology to drive a price premium. I think the question -- we've talked about this a little bit on the last call was that perhaps the tail on that price premium was a little bit shorter than it had historically been. And, that's probably a direct outcome of better pricing transparency as comes about with better healthcare IT systems and/or consultant groups out there that sell services around pricing.

But, in general, across the portfolio of Stryker products, new innovation is still able to command a price premium.

Okay, and then one quick follow-up. As far as you made some comments on Interventional Spine being pretty strong, and it looks like it was primarily internationally. Can you just provide a little more color on what's driving that growth?

The Interventional Spine business has a number of product platforms in it. What I would probably point to as the segment or the franchise there is an item we introduced about a year ago called the iVAS balloon technology for vertebral compression fractures. And, as our selling organizations both in the US and globally have been able to introduce that technology to customers and show the totality of our portfolio, we're the sole company who can do both vetebroplasty and kyphoplasty approaches inclusive of not only the devices but also the cements.

We've had a wonderful customer reception with that, and it's simply going through the training, education, and distribution pathways. And, we like the direction that that business is headed.

Okay, just real quick follow-up on that. Are you seeing -- I know you're a smaller player there, but are volumes improving? Or is it just strictly a share-taking event for you?

Well, it's probably a little of both. Vertebral compression fractures aren't going away. There's roughly 700,000 new ones a year.

There's been some reimbursement pushback based on different market segments, and studies that have come out. But, each of those has been disputed, and you still have patients with pain. And, long-term, we still like the outlook for the market.

Your next question is from the line of Charles Chon with Stifel Nicolaus. You may proceed, sir.

Great, thanks. Curt, just a quick follow-up to a question that was asked before. You discussed that even though organic growth came in at 4% for the quarter, the 5% to 7% organic growth guidance is the right range for 2011. Is that to suggest that based on what you're seeing in the second quarter thus far, considering that year-over-year growth comparisons are easing from the first quarter to the second quarter, that all the businesses are trending better?

We're not going to get into any comments relative to the second quarter. We want to finish reporting the first one. It's to suggest that, number one, the first quarter is a tough year-over-year comparable when we look across our broad franchises. And, number two, we still like the product line-up in the core business across all of our franchises and how that plays out in the global markets.

Okay, so -- and just the other question on that is just -- is it possible that year-over-year seasonality could be -- or I'm sorry, sequential seasonality could be changing in any way? So, whereas historically we would see decent growth through most of the year with the exception of the summer months, that, now, in the post-recession environment, procedures are just now being more loaded into the back half of the year?

I think there's certainly been a transition. It's hard to quantify, but I think you've seen volume increases in the fourth quarter, and I think that coincides with higher deductible levels that people are experiencing. And, I think it probably has been influenced somewhat by the global environment. So, we have seen what we think are different patterns in the fourth quarter as compared to say years before 2007, 2008.

Right, that's what I was thinking. Just a real quick question on Target coil. Can you give us a status update on where the launch is. At the time of the International Stroke Conference, it seemed that Stryker was conducting a very controlled launch with substantial case support and monitoring. It seems that Neurovascular was selling out of all the Target coils that you were making. Can you give us an idea of where we stand now with that launch?

I think in my opening comments we said the focus of the Target coil launch had been the US market, and we're starting the introduction of that in the international markets. Obviously, it's a very complex manufacturing process, and we're pleased with the progress on the manufacturing side. And, to the extent that supply continues to increase at the rate it has, we'll be able to further expand the selling and marketing effort on a global basis.

So, first 90 days really focused in the US market and continuing to roll across the various international markets and really trying to be mindful of the customer base here. It's a small, tightly knit society, and we want to do our best to get the product in front of all of our clinicians. That's really hard to do on a global basis in addition to working through all the regulatory approvals, but that's the path we're on.

We're trying to stay in high touch with all of our customers. Communicate with them clear expectations, and we hope that through the second quarter here, we're able to continue on that path.

Your next question is from the line of Jeff Johnson with Robert W. Baird. You may proceed, sir.

Thank you, good afternoon. Steve, a couple questions, I guess. Let me start on the Spine business. Any comments you can make on your Spine results in the quarter? Or any change maybe you're seeing in market dynamics whether it's pricing in the US? Or commercial payer approval rates? Anything along those lines?

I don't think we saw much change really from the second half of last year to be honest, Jeff. Obviously, it looks like a very weak market right now. I think the three companies that have reported in the last week have all been minus 1 in the US, and we were right in that line. None of us are thrilled probably.

And, how would you, Steve, expect that to maybe trend over the next few quarters? Obviously involved in a legal dispute with one of your bigger competitors there. Should we think of legal expenses going up for that? Or potentially, the Spine growth rate ticking down, or is it too small to matter at this point?

Too small to matter. I think we're focused on getting our product flow improved out of that business as we've been talking about for some time. And we've got some new leadership in there and feeling good about where it will go. But as you well know, any of the implant businesses take some time to reaccelerate momentum.

I think that was the last call, Jonathan?

Yes, sir. That was the last question in queue, sir.

Great. Well, thank you very much for joining us today, and hopefully you'll see again we continue to deliver the strength of our broad-based model. And, our conference call for our second quarter operating results will be held on July 19, 2011. Thank you, everyone.

Ladies and gentlemen, thank you for your participation in today's call. The presentation has now ended. You may now disconnect. Have a good day.