史賽克 (SYK) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Stryker earnings conference call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to take the time and read the Safe Harbor Statement. Certain statements made in this presentation may contain information that includes or is based on forward-looking statements within the meaning of the federal securities laws 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, resolution of tax audits, changes in financial markets, changes in the competitive environment, the Company's ability to integrate acquisitions, and the Company's ability to realize anticipated cost savings as a result of work force reductions and other restructuring activities.

Additional information concerning these and other factors are contained in the Company 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.

I would now like to turn the call over to Mr. Curt Hartman, Interim Chief Executive Officer and Vice President and Chief Financial Officer. Please proceed, sir.

Thank you, Derek. Good afternoon, everyone, and welcome to Stryker's first-quarter 2012 earnings report. Joining me on the call is Katherine Owen, Vice President of Strategy and Investor Relations.

In terms of the format for today's call, I will provide opening comments, and then turn the call over to Katherine for an update on several key focus items. I will then cover the financials before opening the call up to your questions. Consistent with previous quarters, our press release contains additional detail that we encourage you to review, relating to our quarterly performance.

On that note, first-quarter sales finished at $2.16 billion, up 7.2% as reported, and 7.4% in constant currency. As shown in the supplemental sales chart in the press release, it is clear that our revenue growth was balanced, both by segment and geography.

The quarterly and year-over-year increase in our Reconstructive segment sales augmented continued strength in MedSurg and a solid showing from Neurotechnology and Spine. The balanced revenue growth reinforces our conviction in the benefits provided by our diverse offering, supported by a strategy of internal innovation and focused acquisition.

More specifically, our Reconstructive results were led by a solid sequential and year-over-year acceleration in both hip and knee implants. Within MedSurg, instruments delivered strong growth of over 10%, fueled by the launch of our System 7 power tools, and our Sustainability Solutions business delivered another solid high growth quarter.

Finally, within Neurotechnology and Spine, solid gains from interventional spine, neurovascular, and neurospine and ENT were partially offset by continued challenge in our spinal hardware segment.

Overall, sales excluding currency and acquisitions posted an increase of 5.2% in Q1, versus our 2% to 5% expectation for the full year. With these sales results, our adjusted per share earnings increased 10% to $0.99. The 10% adjusted earnings per share increase is in line with our target for double-digit per-share earnings growth.

Additionally, this performance includes absorbing roughly $0.015 per share of one-time SG&A expense associated with the previously-disclosed separation agreement.

Finally, I'll provide an update regarding the Board's search for a permanent CEO. As stated previously, the Board, in conjunction with an outside search firm, is conducting a comprehensive and thorough search of both internal and external candidates.

That process is ongoing, and although the timing of an announcement is impossible to predict, the Board is comfortable with the pace of the review. In the interim, as our Q1 results reflect, we remain focused on executing our strategic objectives, and delivering on our financial commitments. The results of these efforts underscore the collective strength of this Company, which includes our global offering of products and services, our dedicated employees, and the strength we have built with our customers and markets.

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

Thanks, Curt. There are four key topics where I will try and provide some additional details, including hip and knee pricing and elective procedure trends, an acquisition integration update, our global quality and operations initiatives, and an update regarding key new product launches.

Starting with pricing. In an attempt to provide greater granularity by our key segments, and to help facilitate your modeling, the press release includes a breakdown of our sales growth by volume, mix and price for our three key business segments, Reconstructive, MedSurg and Neurotechnology and Spine.

As it relates to our hip and knee pricing trends, during Q1, US pricing remained negative in the low single digits, and was largely offset by favorable mix, particularly within our hip segment. Although the overall trend improved again this quarter, our forecasts do not assume a meaningful change in the pricing environment, and we continue to assume pricing is modestly negative and partly offset by mix.

Turning to elective procedure trends, we did not see any meaningful reacceleration in volumes during the quarter. Rather, the environment appeared stable. Recall that our assumptions for full-year reconstructive sales growth, excluding currency and acquisitions of less than 3%, are predicated on the assumption that there's no notable change in elective procedure trends.

Given the progressive nature of OA, combined with the fact that we are essentially entering year two of the recession-induced slowdown in elective procedures, an uptick is possible, but as yet is not evident. We are comfortable with the assumptions we outlined at the start of the year, and believe we are appropriately resourced to execute on the financial targets for our reconstructive segment in 2012.

Shifting to the acquisitions update, as many of you are aware, we completed a series of acquisitions in the 2010 and 2011 timeframe. With respect to the deals completed in 2011, in total, they contributed over 2 percentage points of sales growth in Q1, and while recognizing there are always challenges with any M&A activity, overall, we are generally pleased with the integration progress and the financial results achieved to date.

With respect to our most recent acquisition, we continue to target 510(k) clearance of Concentric's stent retriever device in 2012 or possibly 2013 and look forward to the opportunity to further leverage our market-leading presence in stroke care, with this next-generation device targeted at the ischemic segment.

Going forward, our [BD] activity remains focused on targets that both leverage our existing sales footprint, while also elevating key adjacent market segments.

Next, an update on our global quality and operations, or GQO initiatives, which are part of our previously-discussed efforts to drive greater efficiencies within our decentralized model, while maintaining our focus on quality. We are now starting to see the initial signs of the leverage we are targeting from these efforts, as 2012 will be the second consecutive year of favorable standard cost improvements, following years of standard cost increases.

As we look ahead to 2013, we expect to see continued improvements with incrementally higher standard cost reductions year-over-year. More specifically, we expect to deliver a minimum 2% reduction in standard costs in 2013, which represents another sequential year-over-year improvement.

We are also working to improve the efficiency of our global plant infrastructure, which includes the closing and divestiture of two facilities, which is currently underway, while we are consolidating a third facility into an existing plant.

In addition, we are in the process of consolidating a portion of our US distribution to one facility, which should be largely complete by year-end. The benefit of this initiative will include lower freight costs within SG&A, and to a lesser degree, leverage at the fixed and variable cost line.

Finally, we are starting to see the benefit from our ongoing investments in quality, such as improved reliability of new product launches, which is the obvious benefit to our customers, while also helping to lower warranty expense within SG&A.

By way of example, looking at our System 7 next generation power tool, the customer complaint rate is less than 1%, which compares favorably with the prior generation System 6. While we have highlighted some clear positive steps on our journey to drive greater efficiencies, we have also seen some challenges. Of note, given the heightened level of M&A activity, we have added meaningfully to our manufacturing footprint with 11 additional plants, only partly offset by the aforementioned closing, divestiture and consolidation. Integrating these facilities has resulted in some margin pressure, which will continue during 2012.

And as we take a more comprehensive look at our manufacturing footprint, we are focused on reducing inventory in certain areas, which also adds pressure to the P&L near term. All told, we believe the myriad initiatives underway within GQ&O are having a positive impact, recognizing we're still in the relatively early stages, but with the benefits that will be evident in our P&L on a long-term basis.

The acceleration in this contribution is one component behind our conviction in our ability to deliver on our stated goal of double-digit per share adjusted earnings growth, including in 2013, when we will also be absorbing the impact of the medical device excise tax.

Finally, a few comments regarding key new products within our major business segments. Starting with Reconstructive, our hip sales continue to see the benefit from the uptick of both the ADM and MDM mobile bearing systems, that allow for a large hip head without the need for a metal-on-metal component.

Combined, ADM and MDM represented approximately 21% of our US hip cup procedures exiting the quarter, up from 17% at the end of 2011, underscoring the market's receptivity to an alternate large head implant system.

The launch of Accolade II, our next-generation version of the highly successful Accolade primary hip system, is now underway. Accolade II offers a better implant fit for a wider range of patients, and given surgeon familiarity with the existing Accolade platform, we anticipate a relatively faster rollout than the normal timing for a new hip or knee system. Recognizing it will cannibalize existing Accolade sales to some degree, but we also expect to see competitive surgeon conversions.

Within our MedSurg segment, we are pleased with the market acceptance of our System 7 power tool, which helped drive over a 20% increase in US heavy duty sales in the quarter, reflecting both customer upgrades and competitive conversions. And Stryker's Sustainability Solutions delivered its fifth quarter of sequentially higher sales with over 20% year-over-year growth, owing to additional 510(k) clearances of products that can be reprocessed, as well as a more favorable competitive environment.

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

Thanks, Katherine. As noted, positive growth across our three segments, coupled with acquisition growth, principally in Neurotech and Spine, increased Company sales 7.2% on a reported basis and 7.4% on a constant currency basis.

With respect to earnings, we delivered encouraging results with adjusted diluted net earnings per share of $0.99, representing growth of 10% over Q1 of 2011. On a GAAP basis, diluted net earnings per share were $0.91, an increase of 16.7% versus Q1 of 2011. A reconciliation of non-GAAP to GAAP EPS is provided in the tables accompanying today's press release.

In reviewing the quarter, I'll start with a discussion of the components of our revenue growth. In the quarter, volume and mix contributed 6.9% to our top line growth, acquisitions added 2.3%, and currency decreased top line sales by approximately $4 million, and decreased the Company's overall reported sales growth by 20 basis points. Company-wide selling prices declined 1.7% on a worldwide basis.

We did have an additional selling day versus 2011. The calculation would compute a 1.6% favorable impact to growth rates. We would note, however, that the extra day principally benefits our procedure-driven business to include reconstructive and other implant lines, while capital sales are not materially impacted by variations in selling days.

Finally, by way of providing additional information, the details regarding the components of revenue growth for each of the three reporting segments are provided in today's press release.

Looking at our reporting segments, I'll start with reconstructive products, which represented 44% of our sales in the quarter. Reconstructive products include our hip, knee, trauma and other reconstructive lines.

Our Reconstructive segment had a solid quarter, with sales up 5.2%, both as reported and on a constant currency basis. First quarter growth in hips, knees, and trauma and extremities improved sequentially from fourth-quarter results. Acquisitions added 6% to the trauma top line. Overall, it was a nice performance for our hip and knee implants, which posted both sequential and year-over-year revenue growth. Importantly, our results included positive growth in the Reconstructive lines across our European market.

Next, I'll turn to the MedSurg product segment, which represented 38% of sales in the quarter. For reporting purposes, MedSurg is comprised of instruments, endoscopy, medical, and the Sustainability Solutions business.

In total, MedSurg sales increased 7.5% as reported, and 7.9% on a constant currency basis. Results were paced by a strong performance from instruments, and another quarter of solid performance by our Sustainability Solutions business. We expect instruments and Sustainability Solutions will remain growth drivers for the quarters ahead.

Internationally, our medical and endoscopy segments reported strong performance. However, in the US market, medical was disappointing after eight quarters of solid results, and endoscopy, as previously mentioned, is looking toward a strong second half product introduction cycle. Overall, the results for MedSurg reflect continued strength and we remain encouraged by the new product plans and look forward to a solid 2012 from MedSurg.

Our final segment, Neurotechnology and Spine, which represented 18% of Company sales in the quarter, increased 12.4% as reported, and 12.3% on a constant currency basis. As noted in the press release, acquisitions added 8% to the constant currency gain, reflecting the performance of the Orthovita and Concentric acquisitions. We continue to generate strong high-teen growth from our interventional spine and NSE offerings, as well as the positive influence of the NV business, which is now part of the underlying growth.

Finally, Spine results, while greatly benefiting from the Orthovita acquisition and new product introductions, remain under continued pressure in the spinal implant category in terms of both price and volumes.

I'll now turn to the income statement, beginning with our gross margin performance. On a reported basis, gross margin finished at 67.2%. This included $14 million of inventory step-up and other restructuring-related charges. Excluding the charges, margins finished at 67.8%, which is down 70 basis points from last year, but up 50 basis points from the fourth quarter.

Factors influencing margins in the quarter relative to the prior year included a 50-basis point decline associated with the previously-mentioned pricing pressure. Additionally, margins were negatively impacted from higher inventory charges, while the impact of currency and our quarterly sales mix were not meaningful in the quarter.

Overall, we expect gross margin in Q2 to be generally consistent with Q1, with modest year-over-year improvement anticipated in half two, and full-year levels trending slightly above 2011.

Research and development finished at 5.2% of sales. Overall, the absolute dollar spend was consistent with anticipated levels, as noted in the January call. SG&A costs represented 37.9% of sales, and adjusting for restructuring and acquisition-related charges, SG&A finished at 37.5% of sales. This is slightly higher than our prior-year levels, although represents leverage after considering the impact of the separation agreement in the first quarter, which is recorded in G&A.

Reported operating income increased 12.5% over prior year and was 22% of sales. Adjusted operating income increased 4.7%, while the adjusted operating margin decreased to 23.7%, as a result of the previously-mentioned items. Other income and expense reduced pre-tax income by $8 million in the quarter, but was $4 million favorable versus prior year. Components of this included investment income and interest of $12 million, offset by interest expense of $20 million.

And finally, the Company's effective income tax rate was 25.2% for the first quarter of 2012. This is in line with our expectations, and was 20 basis points lower than Q4, after excluding the impact of tax settlements and inventory step-up.

In terms of the balance sheet, we ended the quarter with $3.3 billion of cash and marketable securities, which was a decrease of approximately $100 million from year end 2011. As a reminder, we have $1.75 billion of long-term debt on the balance sheet associated with our January 2010 $1 billion debt offering and our September 2011 $750 million debt offering.

On the asset management side, accounts receivable days ended the quarter at 61, which represented an increase of three days compared to year-end. Days in inventory finished the quarter at 169, which was up 11 days sequentially versus year-end and eight days against the prior-year level, partially reflecting investments in new product introduction cycles.

Turning to cash, in the first quarter, we generated cash flow from operations of $35 million. Overall, we're not pleased with that performance. Finally, in the first quarter, we repurchased approximately 1 million shares for a total spend of $50 million. We currently have open authorizations totaling approximately $653 million.

In summary, the first quarter was a solid start and we remain comfortable with our initial sales and earnings targets that we provided at the start of the year. Specifically, we anticipate sales growth at 2% to 5% for the full year, excluding the impact from currency and acquisitions, and will deliver not less than double-digit adjusted per share earnings growth.

Currency remains a slight headwind, and if rates hold near current levels, we would expect second-quarter sales to be negatively impacted by approximately 1% to 2% when compared to 2011. Using current rates, the full-year currency impact on top line sales would be negative in a range of 0.5% to 1.5% when compared to 2011, which is consistent with our original expectations.

In closing, we look forward to building on the strength of our first quarter results, maximizing performance of the various acquisitions, and continuing to launch new products, resulting from our ongoing investments in internal innovation.

With that, we'll now open the call up to your questions.

(Operator Instructions). Our first question is coming from the line of Bob Hopkins from Bank of America. Please proceed.

Great. So this quarter, from a hip and knee perspective, you've got an extra selling day and you've got some easier comps, and we're all going to be busy trying to adjust for those items. But I was wondering if you could help us in that regard. When you look at your hip and knee sales rates on kind of a same-day sales basis in Q1 versus Q4, do you think the volume of procedures is roughly flat in terms of the level of Q4, or was there an uptick sequentially?

Bob, it's Katherine. It's probably closer to flat, stable, as we mentioned in our prepared comments. It feels like the environment may be getting a little bit better, but with just one quarter and some of the seasonality, seasonal anomalies that happened between Q4 and Q1, it's probably too soon to say we've seen a real change in the trend. But it certainly feels very stable at the moment.

Okay, that's helpful. And then Curt, on the operating margin side in 2012, when you net out all the comments that you made, how much operating margin leverage should we expect in 2012? And then if you could also just comment on the cash flow generation in the quarter, that would be helpful as well.

Sure, Bob. I think when we look at operating margins, we started the year with an assumption that we would roll through the year and finish somewhere a little bit north of 68%. I think we remain committed to that. I would point back, however, to some of Katherine's comments, in her prepared comments, relative to the integration of the facilities and the investments that those require to bring quality systems on par with what we have across our global network at this point in time.

In addition to some of Lonny's efforts in GQ&O, you do require upfront investments before you see the long-term benefit of those. As Katherine tried to comment, we are seeing some of that benefit starting to show up in standard costs that impact future periods. So we're encouraged, though acknowledge it's early.

On cash, as I said very briefly in my comments, it was not our best day. There's not one particular area that really stands out in terms of driving the performance, though I would note we did have some legal settlements previously disclosed that were paid in the quarter, like the Biotech settlement. We also had some larger than anticipated tax payments that impacted cash in the quarter as well.

But when you look at all the other categories, working capital, inventory increased, DSO increased, accounts payable actually decreased, which was a negative as well. So it just frankly, if I summed it up, it was not our best performance, and I think it's something that we've reinvigorated our focus on here, starting the second quarter.

(Operator Instructions). Our next question is coming from the line of Kristen Stewart from Deutsche Bank. Please proceed.

I just wanted to, I guess Bob had asked about operating margins, and one of the things in the quarter that would have expected to see a little bit more on would have been SG&A leverage. You did kind of talk a little bit about the separation agreement. Was that something that was maybe already anticipated by you guys, or was it incremental to your expectations, or was it just the straight model that may be a little bit wrong?

No, it's entirely incremental. The resignation occurred, you can't time resignations or build those into plans. That's entirely incremental costs in the quarter. And it was previously disclosed, so it hits G&A, and when you do the math on the previously disclosed, it's about 40 basis points.

Okay, perfect. I wasn't sure if that was acquisition-related or obviously [this case]. That's helpful. And then just on MedSurg, can you maybe just give us an update on what you're seeing for hospital CapEx trends? You had commented that the US medical beds business was a little bit softer than what you were anticipating, is that something you think will persist?

It's a very fair question and I probably should have provided a little more color around that. US medical results were disappointing obviously, as you can look at our press release. I think it's more owing to internal issues than it is to external market issues. We had, as Katherine commented, we've had some plant transitions going on. One of those involves production associated with our Medical business.

In addition, we had some regulatory approvals and product launches that were a bit delayed beyond what we had anticipated, and that has also impacted our ability to ship and hit the desired levels in the first quarter. So as we enter the second quarter, we have higher expectations, though it does take time to recover some of those shipment delays and get production ramped back up, when you're talking about something as complex as our medical bed franchise. So we have higher expectations as we enter the second quarter.

And Kristen, one follow-up I would make, although Medical is the business most dominated by capital, there's significant capital component to both our instruments and endoscopy businesses, and particularly with instruments and power tools, which is clearly capital, we're seeing very good growth. So it doesn't feel like there's any real issue from hospital capital budgets versus what might be more Stryker-specific issues in the short-term.

Your next question is coming from the line of Michael Matson from Mizuho Securities. Please proceed.

Based on what we've heard from some of the other larger med tech companies, it sounds like there's been a little bit of an uptick in accounts receivable, particularly in some of the European countries. I was wondering if any of that increase that we saw there was due to what's going on in Europe, particularly around the periphery?

Yes, some of the other comments that we have heard from companies, some of the Southern European areas have been a little bit more challenged and has contributed to our higher DSOs by about three days from the end of 2011. Doesn't feel like anything that isn't manageable right now, but it is part of where the pressure is coming from.

Okay, and then you all have said that you expect to offset the medical device tax in 2013. It sounds like that's mainly based on the restructuring programs you already have in place, but I guess I'm wondering, why we're not sort of seeing the benefits of some of those things this year, and I'm also wondering if there's going to be additional restructuring required to hit that kind of 17% underlying earnings growth number that you need, to offset the tax?

I think there's a couple answers to that question. Number one, part of the offset to the med device tax will come from the restructuring initiatives that were announced in November of 2011. So that was four months ago. So I wouldn't anticipate that those restructuring efforts would be materially impacting our results at this point in time. It is possible that we will see some of that benefit as we get into the second, later half of this year.

Other components that we're counting on are the GQO initiative, which Katherine started to provide a little more detail on in this call. And then finally, we are certainly banking on all of the acquisition activity and new product innovation introduction, to be contributors to top line growth, to also help offset that.

So our model is not solely based on an restructuring action that's been announced as the thing that gets us over this hurdle. It's a combination of all of the above, and then probably some other things that will happen just within the overall normal operations of our business, as we unfold our plans heading into 2013.

Your next question is coming from the line of Derrick Sung from Sanford Bernstein. Please proceed.

Hi. Thanks for taking the question. I was wondering if you could comment on what your underlying growth in your core spine business is, and any color there in terms of pricing and procedure volume trends?

Yes, the environment in the spine market remains challenged and it is one of the areas where we are seeing continued pricing pressure. I wouldn't say it's materially different from what we've seen previously. It is being offset by better gains for our interventional spine business, but the traditional core spine business remains under pressure. When you --.

Go ahead. Sorry.

I was going to say when you X out the benefit they're seeing from the addition of the product offering from Orthovita.

In terms of organic underlying spine growth, exing out acquisition, are we still looking at negative mid single-digit declines? Is that kind of a fair assessment?

It's negative. I don't know if it's mid single-digit negative.

Okay, thanks. And then as a follow-up, you talked about driving some mix benefit on your hip side of the business. And I'm assuming that that's coming from your ADM and MDM offerings. I was wondering on the knee side, how is mix looking there? We heard some commentary from a couple other companies that talked about revision procedures driving some mix in knees. Are you seeing any of that, or any comment there would be helpful.

To your first comment, not in total, but certainly ADM and MDM are a driver of that mix benefit, and just as we would expect Accolade to help going forward. We are seeing a mix benefit in knees, but not to the same degree that the hip segment is seeing. I wouldn't point to anything specific as it relates to revisions. It's just kind of the normal offering helping.

I would say, Derrick, we are continuing to be encouraged by the rollout of OtisMed and that trend continues to increase month-over-month and is being met with some level of enthusiasm at this point, as we get more of the imaging centers up and installed, and get that further comprehensive approach out across the market.

Your next question is coming from the line of Mike Weinstein from JPMorgan. Please proceed.

Thanks. Katherine, just want to make sure I understand the message you're trying to send across on the improvement in the Recon performance. So your view is that the underlying market hasn't changed much, it's relatively stable 4Q to 1Q. But the improvement in your own business is a function of easier comparisons and an improvement in mix. Is that the message?

I would say we're cautiously optimistic, but too soon to say that we've seen a meaningful improvement, or even a modest improvement in volume trends right now. And partly it's because of that historic Q4 to Q1 seasonality anomaly, that it's tough to know. It certainly feels very stable from a volumes perspective, and perhaps the trend arrow is pointing upward, but we'll feel better when we see how the results in the next quarter and how they play out for the year.

I think certainly benefiting from earlier comps, as well as the momentum now that we're kind of in that full rollout ADM, MDM, getting traction with OtisMed. So the product traction is helping, it's helping with competitive conversions and it's helping on the mix side, so we're having a little bit less of a negative impact from a price mix perspective as it relates to hips and knees, particularly on the hip side.

Okay. Two launch/mix questions. You made some comments with regard to the mobile bearing systems that you guys now have out there. I think you said they were in total of 21% of your US hip cup mix during the quarter. Where do you think that can go?

Hopefully higher. It's trending nicely. It's up 4 percentage points sequentially, and we're still out there pretty aggressively promoting the benefits of that. It's tough to know, if you look at metal-on-metal and the benefits were certainly in large part, driven by the large head design, and the desire for that hasn't gone away. That peaked at 30%, 35%. Whether that gets to that degree with our business, it's kind of tough to know, but I would say that it's continuing to trend upward at this point. I don't think it's flattened out yet at 21%.

Your next question is coming from the line of Jason Wittes from Caris & Company. Please proceed. Mr. Wittes, your line may be muted. Your next question is coming from the line of Larry Biegelsen from Wells Fargo. Please proceed.

Katherine, the Concentric launch, is that slightly delayed? When you said earlier 2012, 2013, does that represent a slight delay, and the Trevo 2 data, when should we see that?

No, it's no change from the time when we acquired Concentric back in late Q3, I believe, where we said we were hopeful of a 2012/2013 FDA clearance. So no change at all in the timeframe there. Some of the Trevo device was released at one of the recent neuro meetings, but, Larry, I'll have to follow up with you offline to get some more specifics around it, because I don't have that in front of me.

No problem. And Curt, just one for you, just basically in this interim period, are you approaching anything differently from your predecessor? Thanks.

No, I think going back to our original commentary, we're satisfied with the strategy that we have in place and the Company continues to execute on that strategy, both as it relates to our markets, but also as it relates to our internal areas of focus, be it GQO or other shared service categories that we've been looking at for operational efficiency.

So I think the game plan remains very much the same. Now, with that said, there's always tweaks and adjustments, but we were making tweaks and adjustments quarter-on-quarter anyway. So we'll continue to run the offense, and as appropriate, adjust our plans where we see fit to take advantage of opportunities that may be presented.

Your next question is coming from the line of Glenn Novarro from RBC Capital Markets. Please proceed.

Thank you for taking my question. I had a question on Japanese pricing. Can you discuss with us the bi-annual pricing, or price declines that you're going to see in knees, hip and spine, and I'm assuming that's in your guidance for the rest of the year? Thanks.

Glenn, I would qualify the answer a couple ways. Number one, the pricing cuts were a little bit larger than we had originally anticipated. So somewhere in the aggregate around 4%, a little more than 4%. But overall, to the expectations for our business, it's immaterial and our full-year guidance factors all that in. So I don't think we see it as a major event at this point in time.

It certainly is for our Japan business, as they adjust to a slightly larger cut than they originally planned for. But the breadth of the portfolio over there should give them opportunities to absorb that.

And is that 4% to 5% cut, that's across everything you sell there, or is that just predominantly knees and hips?

I'm giving you one aggregated number for the Japan price cuts. Different segments have different price cuts, and I, again, I don't have that in front of me.

Your next question will be coming from the line of Matthew O'Brien from William Blair. You may proceed.

Thanks for taking the questions. I just wanted to see if I'm looking at this correctly. From the press release, it looked like Recon pricing was down about 2.6% in the quarter. Is that a modest acceleration compared to the last couple of quarters? And what is driving that?

You're saying that the global Recon pricing down 2.6%?

Yes, out of your release, I looked in the previous releases and I didn't see it. But if memory serves, I think it was negative 1.7% or 1.8%.

No. That's a new level of detail that we included in the press release by segment, just to give you guys a little bit more granularity. So it's not a number we released previously. The number you're referencing is total Company price, which we've always reported. It's just -- you're getting more segment detail. So, no, there's no material change. As I mentioned, it's actually a little bit more favorable, when you factor in mix for hips and knees.

And my follow-up question on the Neuro side, specifically hemorrhagic stroke, how is that business trending? What kind of growth did you see in the quarter? And then, I can't see what it actually was, but how does that compare versus what you were thinking when you've initially acquired the business?

Well, keep in mind, 65% of that, of the Neurovascular business is outside the US, and so when we look at the revenue breakdown between international and US, and we start looking at product rollouts, the Target Coil is the key innovation that that business has been rolling through, and we feel very good about that. And internationally in the quarter, we had a very good quarter, which I think does directly reflect the success and acceptance of the Target Coil.

In the US, our results were probably a little bit muted for our original expectations. And I think that's a reflection of the fact that we do not have a flow diverting stent at this point in time and customers are evaluating that technology and that comes directly at the expense of coiling.

That said, we still feel very good about our innovation pipeline in that business and feel very good about the target coil franchise and we've got great customer relationships and great market shares across all the segments there.

So as the year unfolds, we don't see any real material change in that business, and we do have some new products that are scheduled to be released here shortly, that we're encouraged about how they will further impact that business this year.

Your next question will be coming from the line of David Lewis from Morgan Stanley. Please proceed.

It's Steve Beuchaw here for David. I wonder if you could speak to some of the levers in the thinking in the revenue guidance. As we look at the results for the quarter and how the cadence of the comps trend over the course of the year, with this quarter around 5% growth in the top line, excluding the acquisitions and currency, it seems that guidance is at least reasonably conservative. Could you give us an update on what you're looking at as the key levers in this, at this point in the year, driving expectations toward the higher or lower end of the range?

Yes, I guess the first thing I would point to is we did have an extra selling day in the quarter, which would take that 5.2% down, as we said, on an absolute basis to 3.6%, though that's not 100% accurate, because the capital businesses are not as subject to the day variations that the procedure-based businesses are.

So if you take the 3.6%, it's comfortably inside the 2% to 5% range we gave, maybe a little biased to the high end. And number one, it's one quarter. If we're sitting here at the mid-year and we've got a quarter that's outside, or to the upside of the range, maybe we'll reflect a little deeper on our business segments and look at our guidance.

Right now, I think with one quarter under our belt, no material change in what we would refer to as elective procedure volumes. We're comfortable with our range, and the assumptions that go into it.

Thanks. That's helpful. I wonder, then, if you could touch briefly on the operating environment in Europe. Is it any tougher or easier in your mind than it was a quarter ago, and is that any more true on either direction, either in the capital or implant markets? Thanks.

I don't think that from a Stryker perspective, we have found the commercial operating environment to be materially different in the first quarter than what we saw last year. Clearly, on the asset management side, we have seen a little bit of hold back on the payable side in Southern Europe. However, there are some things being tossed around in some of the Southern European countries around payments scheduled in some of the markets for the midyear point. We hope that materializes and we're obviously very involved in that.

Overall, the market remains pretty stable, and I did comment that at least within Stryker in our hip, knee and other reconstructive segments, we did have positive growth in the quarter, which we view as a good sign for our business, and a good sign for the stability that we're starting to get in that business.

Your next question will be coming from the line of Matt Miksic from Piper Jaffray. Please proceed.

I had one follow-up on Recon. But I did have a follow-up on Spine. Can you hear me okay?

Yes, go ahead.

Yes, I'm wondering if you could give us any color, Katherine or Curt, as to what was in Spine? Is it product lines, launches, introductions, that you're looking to improve that product line over the next several quarters? And then --- or maybe what some of the weak spots have been? And then I have one follow-up.

I think it's been partly just the market, the overall spine market has seen lower volumes and some of that is the recession-induced slowdown in elective procedures, but it's also payer pushback, so that is probably the overriding biggest factor, layer on top of that ongoing pricing pressure.

Certainly the comps helped, but that's hardly what we want to be banking on, and we haven't done as well, but better, more recently on some of the new products that fill gaps. So I wouldn't view them as game changers, but necessary to make sure we've got a competitive product offering. It's first and foremost just a challenged market, but an area that we continue to believe has a lot of opportunity for innovation, so it's a segment we're committed to, just recognizing it is going to be one of the more challenged businesses that we have right now.

Okay. That's helpful. One follow-up, then, on the Medical business line. You mentioned sort of some of that might have been self-inflicted. Any color -- I guess similar question, color within that business line, Neptune, beds, anything you could tell us that could maybe help us understand that a little bit better?

Yes, I think, I think within Medical, what we're really looking at is more self-induced damage in the first quarter than anything else. And that comes from some of our transition plans that always seem to have more difficulty in them than one would like to assume. And then on the regulatory front, we have some new products that didn't quite get where we needed them to in the first quarter. But we still feel very encouraged about those and how they will influence this year.

And so I don't look at our Medical results in the first quarter with great alarm. I'm disappointed, clearly, and I think that the team over at Medical is disappointed because they had been on an eight-quarter run and this is not how they wanted to start their first quarter. And I have it on good authority from that leadership team that they have much different plans for the rest of this year. So I'm cautiously optimistic that the rest of the year will unfold in a much different fashion.

Your next question will be coming from the line of Bruce Nudell from Credit Suisse. Please proceed.

Thank you. Curt, now that you're at the helm, where do you see kind of the net of price in US Recon, as kind of the steady state that's achievable, given the price pressures offset by the innovation ability?

So, Bruce, when I was -- I'm still the CFO, and when I get price questions, I usually deferred those to Katherine. So I don't know. You are kind of bumping that up to the Interim CEO title. But my view on price net of mix is probably no different than Katherine's, probably no different today than what it was three or six months ago.

Innovation still matters. Our organizations are focused on innovation, be it internally developed or externally acquired, and I think to the extent that we keep the innovation focus on, that can benefit and offset some of the price pressure. There's nobody in our business walking around saying pricing pressure is going to change any time soon. We recognize that's part of the current day environment.

We're not forecasting that to go away any time soon, and would we love price to change? Absolutely. But that's not what we're walking around thinking and what we are thinking is that innovation still matters. We're seeing this in things like ADM and MDM, System 7, other products that we've introduced, the lateral approach out at our spine organization.

Innovation still pays, customers still pay for great innovation. That remains somewhat the marching orders here.

And Katherine, just a follow-up for you, reading between the lines, it almost sounded like you think you might have seen some green shoots with regards to volume. Is there anything substantive that you could comment on?

No, and it really wasn't my intent. I certainly feel very good that the market is stable, but as we've tried to say in the past, with our implant business in particular, and given the vagaries of the market right now, you really have to look at more than one quarter to get a true sense that there's been a change in the trend.

Are we hopeful that maybe trends get better? Absolutely. But at this point, it would just be too early a call to say anything other than certainly stable, and hopefully, we're not going to go into an environment where we see any type of worsening in elective procedure trends that occurred, as everybody knows, in some of the prior quarters.

So a high degree of conviction and stability, but not ready to say anything stronger than that at this point.

I think we've just overall found that we need to let the numbers do the talking, versus us projecting, because it's just far too difficult to estimate where the markets are going. Every day is a new headline that seems to shake things up, and we've got a highly engaged selling organization, great product innovation, and we're just going to keep pushing on that and ultimately let the numbers materialize.

Your next question will be coming from the line of Richard Newitter from Leerink Swann. Please proceed.

Hey, thanks for taking the questions. Maybe I could just start off on both the hip and the knee side. You've talked about positive mix shift opportunities. Within hips, Accolade is coming up. Should we expect this to be as big of an incremental contributor as kind of the MDM ADM launch? And in knees, just where are we in OtisMed and how much kind of is there to go as we move forward?

I think it's probably too early. Literally the Accolade II launch is getting under way right now and unlike ADM and MDM, it will cannibalize some of the original or first generation Accolade sales, but obviously that group is focused on competitive conversions. I think the uptake will be a bit quicker, for the reasons we pointed to and the similarity with the Accolade platform.

So certainly, as Curt said, we can't control the markets, but giving sales reps new products to sell is a big motivator in any environment. And OtisMed continues to see sequential growth. I'm very pleased with the ability to offer what is increasingly becoming an important product offering to have in that knee portfolio.

And just maybe to follow up on that, is OtisMed a mix driver for you in knees going forward? Is that one of the kind of positive mix opportunities, or is that more of a market share gain potential driver?

I think it's more on the market share side of things than anything else. We do charge for it, but it's -- I would view that more as a driver of market share.

Your next question will be coming from the line of Rajeev Jashnani from UBS. Please proceed.

I was hoping we could go back to Bob's question regarding operating margins, and I guess if you kind of take out the 40 basis points this quarter out of SG&A, you were still down year-over-year, albeit on a tough gross margin comp in the year-over period. But I was just wondering if you could kind of talk about operating margin outlook for the entire year and whether -- I guess how we should be thinking about that on a year-over-year basis. Thanks.

Certainly starting any year, the goals are to improve the ratio. So as we begin 2012, we're looking at every ratio, looking for opportunities of improvement. With that said, at the end of the day, we have an earnings target that we're trying to move towards, and we reserve that right to invest in the areas of opportunity, whether they be in the global quality and ops, or whether they are in the operating expense category.

So if the top line is improving, you should probably anticipate we're going to make greater investments in the selling expense line, which is going to therefore impact the operating margin. So we try to keep the absolute amount of flexibility that we can, while continuing to move the business ratios forward in a responsible way.

As we look at this year, I would go back to my very first comment. We're looking for improvement in all of our ratios. We do believe in letting the business roll up their results and make the appropriate investments locally, because they tend to make the best decisions, and as of right now, we still feel that there's opportunity, and we're still going to drive forward towards some improvement in the operating margin.

I'm not going to give you a specific number on what we're targeting, specific percentage improvement or things of that nature, and then keeping in mind, some of this is also impacted, again, by acquisition work that does hit operating expenses as it's first time in this year and doesn't have a prior year comparable.

Thanks so much.

Your next question will be coming from the line of Adam Feinstein from Barclays. Please proceed.

It's Matt for Adam. I just wanted to touch on some of these other questions that have been asked. But on this operating margin target issue, you bought back some shares this quarter, but it really seems like you're offsetting dilution, and it feels like you're comfortable with your level of investment.

I guess can you talk a little bit about the investment strategy and how you may be looking at it differently with your customers focused on reducing costs and healthcare reform?

So on the first part of that, we did buy a few shares back, and it was a little bit later in the quarter. So they don't materially impact the quarter. And frankly, it was intended to offset some of the dilution. So that's a fair and accurate statement. As it relates to our investments and trying to align those with our customers, it's absolutely spot-on.

The customer is evolving. They don't all evolve at the same point in time. You have some highly-sophisticated customers who have much different attitude and appetite in terms of the approach by companies like Stryker, and we're having to make some investments to ensure we align with their expectations.

On the other side, there's a lot of healthcare systems that like the same approach they have always had, and we're not going to run away from that either. So we're making the investments where we see the opportunity to move with our changing customer, while at the same time, ensuring that we don't leave any customers behind.

So I guess I would just put that in that we retain flexibility to make the investments to address where our customers are going, and recognizing along the way we may have to change some approaches and we may have to make some strategic investments to get our customers' attention, and that's fine, too, because, again, if you have the right innovation walking in the door, if you have the right commercial approach walking in the door, there's generally a favorable reception. And we're doing those experiments to ensure we're on track with where our customers are heading.

Thanks, and just to follow up, I know you typically don't break out emerging markets, but can you talk a little bit about the difference in growth between developed and emerging markets O-US and what you're doing there?

Sure. The emerging markets, we believe, are an important part of this Company's future, and we have a new Group President within the last six months, who is responsible for international, and one of his first homework assignments, along with his team, was to really dive in and evaluate what our current approach was, versus what it may need to evolve to. And we're very encouraged by that work and what he and the team are doing.

Today, when I look at emerging markets, you can come up with a long laundry list of countries, but I think places like China, India, Brazil, maybe you throw Russia, Turkey, and a few others in the mix a little bit later, but if you start with China and India, we have a presence there. We've had a presence there for a long period of time. And our growth in those markets is above the Company average and we anticipate that it should stay there.

The real question is, is it growing fast enough given the rapid evolution of those markets, and that's what we're evaluating. Do we have the right products? Do we have the right structure, do we have the right approach?

So I think our strategy here is to do a comprehensive review, take a hard look at what our investments are lined up to support, make adjustments where appropriate and ensure that at some point out in the future we can really point to success in those markets and Stryker evolving and emerging to be a key market share leader in that space.

Your next question will be coming from the line of Josh Jennings from Cowen and Company. Please proceed.

Hi. Thanks for taking the questions. Just quickly on the neurovascular side, can you just give us an update in terms of whether you're on track for transferring manufacturing responsibilities over from Boston Scientific and just some directional color in terms of how impactful that will be to gross margins for that unit?

The Boston Scientific neurovascular integration at Stryker has obviously been, and continues to be a very complex transaction, but I think in the best spirits, both the Boston Scientific side and the Stryker side, have put highly dedicated, high performance teams on this. We remain very much on track with the transition service agreements and the transfer. Keep in mind there's the manufacturing in Cork, Ireland, there's manufacturing in West Valley, Utah and small bit of manufacturing out in Fremont, California.

All of those platforms remain on track, and those will continue and the integration transaction will probably not be complete until mid-year of 2013, based on latest plans and estimates. Obviously, that fluctuates and moves somewhat, because these are big projects that do have some variability. Probably not going to get into any of the color commentary around impact on gross margins. It's a little premature to talk about that right now, given that we have not yet officially transitioned any of the manufacturing to Stryker.

All right, great, thanks. And then just to follow up on the spine business, and it's been a short time since AAOS, but any color on your lateral fusion platform launch, and traction there in the (inaudible) invasive surgery market? Thanks a lot.

We're excited by the lateral system that we developed and are launching. It's been met with good enthusiasm, both from the selling organization and from customers, but to your point, it's very early, so I wouldn't, I wouldn't say it's had a substantially meaningful impact on our spine business at this point in time. But from a feedback and enthusiasm standpoint, I think our selling organization is engaged, and I think our customers who are getting exposure to it are finding that we have a nice offering. So we're encouraged. I'll leave it at that.

Your next question will be coming from the line of Jason Wittes from Caris & Company. Please proceed.

Couple product-related questions. First off, for the Concentric acquisition, I assume most of those revenues that you have at this point are coming from Trevo, not from the Merci product?

No, it's the other way around. Merci is the original device and Merci has the broadest regulatory approval inclusive of Japan, and in addition, Concentric also brought some excess products and balloon catheter-related items that compromise the sales. The Trevo device has CE market and is in sale in limited form in the European market.

Okay. I misheard you. I thought you had said that most of your approvals were coming from Europe at this point.

No, 65% of revenue comes from outside the US, which is inclusive of Japan, China, Latin American countries. For total neurovascular, not Concentric.

Thank you. Is there a time line expected for Trevo approval in the US?

Yes, that's the late 2012, early 2013 that Katherine mentioned in her opening comments.

Your next question will be coming from the line of Jeff Johnson from Robert Baird. Please proceed.

Thanks, Curt, Katherine. Just two quick questions here. As for the components of guidance, are you still expecting less than 3% growth in OI -- or in orthopedic implants and 5% plus in MedSurg Neurotech at this point?

Yes, I think at this point in time, we're sticking with our original guidance. I think it's the responsible thing to do. We all want to be optimistic that elective procedures will rebound and return at some level, but again, we would rather have our numbers tell the story and based on those numbers, if there are adjustments to be made from guidance, we would move in that direction.

But we're not seeing that right now, and therefore, I'm comfortable with the original guidance we put out across the segments.

Okay, thanks. And just on the pricing front, I know Japan was asked about, but now that you're breaking out ortho pricing and with the 4% or 5% cuts there, simple math would say next quarter maybe sequentially pricing gets down to down 3% or so in ortho. Would that be your expectation, or is there anything maybe offsetting that, or are there ways to get some improvements elsewhere to offset that Japanese impact starting in April?

The Japanese impact will start in April, but again, the 4% to 5% comment was across all Japan products that are impacted by the price cut, so when you look at our Japan revenue, a segment of that is hips, a segment is knees, a segment is trauma, right on down the line, so I don't think it's going to have a super material impact on overall hip or knee total Company pricing. Certainly, it is dilutive to the overall pricing right now, but I don't think it's going to be material to the overall Company's price to the extent that we need to make massive changes.

Your next question will be coming from the line of William Plovanic from Canaccord. Please proceed.

Two questions. First, just on the medical, you talked about some of the issues being internal and that being new products and supply. I was just curious if those new products that you were expecting had gained approval, and if those supply issues had been resolved.

The new products are approved and we're very excited about those. And the supply issues, the majority have been resolved and we are working forward on ramping up supply. It's one thing to get the process in place, it's another to ramp the capacity up, but we feel good about the future periods here.

And of the challenges you face, was it more supply-focused or product issue?

I don't have the document in front of me, but I think it was a little bit of both. It was fairly equal contributions. That business has a couple of different components into it, so there was some supply in some components, there were some regulatory approvals in others.

Your next question will be coming from the line of David Roman from Goldman Sachs. Please proceed.

Thank you, and good evening. I just wanted to ask a follow-up question on neurovascular. I think Curt, in your prepared remarks or in response to one of the questions, you talked about competitive trialing of flow diverters having an impact on your business, maybe just talk about where we are in the goal that you had outlined when you did the acquisition to get this business back toward end market growth, and where do you see end market growth right now?

We still feel good about our progress towards that goal, and feel good about not only the early innovation that was released there in the Target Coil, but follow-on innovation that's coming. And I feel a pretty high degree of resolve that we're on track with our acquisition goals that we stated when we first announced the deal.

And we -- I think similar to what I said in January, we see that overall market probably growing in the 7% to 9%. Obviously, you're doing a little bit of estimating, because a lot of the numbers are not publicly disclosed, but as we try to roll things up, we see it in that 7% to 9%, 6% to 8%, and again the acute ischemic side is where we see the higher growth rates coming from.

Okay, and then maybe just a follow up on the P&L, I know in the last quarter, you had talked about R&D as obviously somewhat cyclical based and where you are in certain projects, but if I look at R&D spending, last quarter I think it grew in the 4% range, and this quarter, up 1% in dollars, after I think it was eight quarters of teens or 20% type increases. Just where are we in the R&D spending cycle and how should we think about that on a go-forward basis?

David, your comments are accurate. I would just remind you the other thing I talked about in the first quarter was that all of the R&D spending related to the Phase II trials for the OA product out of Biotech, which had previously been included in R&D had been turned completely off and those dollars had been reallocated across the core business franchises.

So on an absolute basis, dollar-for-dollar, it looks very similar, but we've actually put more dollars into our core R&D platforms, because of the shutdown of the OA Phase II trial.

So I think the dollars that you see are going to be --- it's going to be in that range on a quarter-on-quarter basis. Net result, the growth rate will be slower and potentially as a percentage of sale, it drops down. But it does not signal by any stretch a slowdown in our investments in innovation. It signals more a reprioritization of some dollars that were in a Phase II trial for OA that are now part of our core growth platforms R&D.

Your next question is coming from the line of Joanne Wuensch from BMO Capital Markets. Please proceed.

Most of my questions have been answered. But I want to just focus on two things. Can you remind us how many manufacturing plants you currently have, because the number that you talked about in terms of adding new plants was a bit higher than I had calculated.

It's 31.

31 in total and you added 14, I think you said, with acquisitions?

No, 11. We've added 11, and included in those 11 are the three that are still yet to come over from neurovascular.

And when you finish, I would assume consolidation is part of the SG&A gross margin program here. What do you think this looks like in 24 months?

I don't think we're ready to go there. I think Katherine commented that we have three of them in process for closure --.

Consolidation.

Consolidation, et cetera. Again, there's a bandwidth issue here. We're doing on one side absorbing the acquisitions, at the same side, trying to simplify our global manufacturing network, while both have a overriding priority of doing absolutely nothing to disrupt the quality systems that we have in place, and in fact, continuing to try to elevate our quality systems each and every day.

I would just add, I would be surprised if over the next 24 months, there wasn't more acquisition activity, so there's going to be a push/pull here.

Your next question will be coming from the line of Kristen Stewart from Deutsche Bank.

Hi. Thanks for the follow-up. Curt, just wanted to ask on buybacks, just kind of general, is that -- is any acceleration in buybacks included in your guidance at this stage?

No, our guidance does not include any additional buyback information or any acceleration, which is exactly how we started the year. Hopefully as we now enter what I would call the third year of more consistent approach to buybacks, you understand that we try to be fairly opportunistic with where the market is, and where we see the stock price, and where we finally have the opportunity based on our US cash position, and so you've got to have an authorization in place, you've got to have the market opportunity, and you've got to have US cash available to make it all come together and we did what we thought was appropriate in the first quarter, given all of those factors.

Just to go back on the extra selling day, you had said 1.6% mathematically, but it sounds like it's probably a little bit less than that, because you had mentioned the capital business. So maybe think about it as skewing more Recon and then obviously a little bit more in the Neuro and Spine side, too, right?

Yes, those are very fair comments.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Curt Hartman for any closing remarks.

Thank you, Derek. And thank you, everybody, for your time with us this evening and your questions. That concludes our first-quarter call. We're very excited about our first-quarter results and we'll continue on the strategic objectives that we have laid out, and that we've been committed to now for a number of years.

I would just like to remind everybody before closing, that the conference call for our second-quarter 2012 operating results will be held on July 18, 2012. I would note that is a Wednesday. Our calls are typically held on Tuesday. We're doing that because there's actually calendars with holidays, take one day out of the closing process, so we want to make sure we give our teams around the globe appropriate time to reconcile all of our global results.

Thank you, everybody. Have a good evening.

Ladies and gentlemen, we would like to thank you for joining today's conference. You may now disconnect. Have a great day.