史賽克 (SYK) 2013 Q1 法說會逐字稿

Welcome to Stryker's first quarter 2013 earnings conference call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question and answer session. During that time, participants will have the opportunity to ask one question and one follow-up question.

(Operator Instructions)

This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on form 8-K, filed today with the SEC. I will now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may proceed, Sir.

Good afternoon, everyone, and welcome to Stryker's first quarter 2013 earnings call. Joining me is Dean Bergy, our interim CFO; and Katherine Owen, Vice President of Strategy and Investor Relations. Also on the call today is Bill Jellison, who joined Stryker this week as our Chief Financial Officer. Dean will help support Bill during a transition period through Q2 and will continue in his capacity as our Corporate Secretary. I'd like to both welcome Bill to our team, and also thank Dean for his support during this period. My executive leadership team is now fully staffed. As you may recall, David Floyd joined as Group President of Orthopedics last November and Scott Bruder was added as Chief Scientific and Medical Officer in January. With respect to today's call, I will provide opening comments and then turn it over to Katherine for additional details, and then Dean will cover the financials. We will then open the call to your questions.

Looking at our Q1 results, we achieved revenue and earnings growth in line with the targets we set out at the start of the year. On our reported basis, our first quarter sales increased 1.3% and excluding foreign exchange and acquisitions, posted a gain of 2.5%. However, adjusting for less selling days in the quarter, which reduced sales by approximately 2.5%, top line growth was 5% with all three of our franchises, Reconstructive, MedSurg and Neurotech and Spine achieving year-over-year gains. The US had another strong showing with sales up 4% on a reported basis. As anticipated, our International results were negatively impacted by year-over-year declines in Europe, which was partly offset by solid gains in emerging markets. We continue to anticipate improving trends in our European business as 2013 unfolds, reflecting the impact of a number of initiatives under way to better drive sales momentum.

Turning to our three franchises in more detail, on a global basis, reconstructive sales were up roughly 1% on a reported basis, reflecting another strong showing in the US, which was up 6.5%, reported. And encouragingly, adjusting for the selling days and currency, growth for our International Reconstructive business was positive for all of the key businesses, including Hips, Knees, and Trauma and Extremities. In the US, while Knee momentum slowed modestly, Hips were strong and Trauma and Extremities grew at 26%. Within Extremities, Foot and Ankle continued to roll, growing at 50%, and our Joint Preservation business, which includes Sports Medicine, Implants, and Biologics, grew over 50% behind its new all-suture anchor. Worldwide MedSurg sales increased less than 1% on a reported basis, but when adjusted for currency and selling days, posted gains in both the US and International, despite continued challenges related to the previously disclosed Neptune recall.

Lastly, our Neurotech and Spine franchise continued to demonstrate strong momentum with global sales up 4% reported and 8% excluding currency and the impact of selling days. With a relatively balanced growth geographically and powered by double-digit gains in Neurovascular, Craniomaxillofacial and Neuro-powered Instruments. Moving down the P&L, a few highlights to note. Gross margin excluding acquisition and restructuring charges declined 30 basis points year over year to 67.5%. However, this included a 100 basis point impact from the medical device excise tax, which totaled $23 million in Q1 and is captured in our Cost of Goods Sold. Importantly, we continue to make significant investments in innovation, as evidenced by the 15% increase in R&D spending versus the prior year.

All told, these results combined with the previously disclosed benefit from the tax extenders resulted in adjusted diluted EPS of $1.03, up 4% year over year. Looking ahead to the remainder of 2013, we remain focused on delivering on our financial targets, which includes top line growth of 3% to 5.5%, excluding foreign exchange and acquisitions, and adjusted EPS of $4.25 to $4.40. As in any year, we are navigating challenges, such as the timing of getting Neptune back on the market, and more recently, the impact of the rapidly weakened Yen. With respect to the latter, compared to the start of the year when we set out guidance, based on current exchange rates, the total impact from foreign exchange is expected to adversely affect our per-share earnings for 2013 by roughly $0.15. If exchange rates remain at current levels, we would anticipate our full-year EPS at the lower end of our targeted range. With that, I will turn the call over to Katherine.

Thanks, Kevin. My comments on today's call will focus on providing our view as it relates to the reconstructive and capital markets. With respect to the reconstructive market, we continue to believe we are seeing an overall stabilization in the US hip and knee market and anticipate normalized revenue growth for the market to approximate the low to mid single-digit range. As has occurred in prior years, we believe Q4 recon growth benefited modestly, as more patients opted to use up flexible spending accounts prior to year-end expiration of those benefits. Consequently, elective procedures are somewhat stronger in Q4 versus Q1 and we suspect this trend continued in 2013, particularly as it relates to knees, which tend to be a more deferrable procedure versus hips. We continue to anticipate stable US recon market growth for the remainder of 2013, and believe we are well-positioned, given our product portfolio.

We continue to anticipate filing a 510(k) for our ShapeMatch custom cutting guides in the second quarter. While there has been some impact on the knee sales post the recall of the guides in mid-Q4, we do not believe it's been significant. We also continue to invest in our GetAroundKnee campaign, which has proven to be effective in communicating to patients and doctors the unique aspects of our Triathlon Knee, which remains the only single-radius knee on the market. And with five years of peer reviewed clinical data, demonstrating the knee design's efficacy, we believe the Triathlon Knee platform is well positioned in the market. Turning to hospital capital expenditures, the trend improved in Q1, although we are cognizant these businesses are inherently more volatile and therefore, we continue to anticipate greater quarter-to-quarter fluctuations in our more capital intensive franchises.

Nonetheless, we are encouraged by the solid performance from Medical, which is the highest component of capital sales. Looking at our Endoscopy business, we achieved double-digit Camera growth in the quarter, reflecting the impact from the continued ramp-up of our next generation 1488 Camera. However this was partially offset by softness in communication sales, as this business is 100% capital and as such, the timing of orders can vary quarter to quarter. Finally, as we've discussed previously, we do not anticipate at this time a meaningful impact on either elective procedures or our capital businesses from the ACA. Although we will continue to monitor closely going forward. And with that, I'll turn the call over to Dean.

Thanks, Katherine. Sales in the quarter were in line with our expectations, which reflected a lower number of selling days compared to the prior year. Sales grew 1.3% on a reported basis and 2.6% in constant currency with US sales growth leading the way. With respect to earnings, we delivered adjusted diluted net earnings per share of $1.03, representing growth of 4% when compared to the first quarter of 2012. On a GAAP basis, diluted net earnings per share were $0.79, down 13.2% versus the prior year, as a result of charges in the quarter to increase reserves related to the Rejuvenate and ABG II product recalls, and certain regulatory matters, as well as the cost of continued acquisition and restructuring-related activities. A reconciliation of non-GAAP to GAAP net earnings per share is provided in the tables accompanying today's press release.

In reviewing the quarter, I will start with a discussion of the components of our revenue growth. In the first quarter, volume and mix contributed 3.8% to our top line growth and acquisitions added 0.2%. Price changes reduced sales by 1.3%. The price decline is in line with the decreases experienced in 2012. Currency driven primarily by a significant weakening of the Japanese Yen versus the US dollar, negatively impacted our top line by approximately $28 million, and decreased our overall reported sales growth by 1.3%. We also had one or two fewer comparative selling days in the first quarter, depending on geography. This reduced sales by approximately 2.5% in the quarter.

Looking at our reporting segments, I will start with the Reconstructive products, which represented 44% of our sales in the quarter. Reconstructive products include our Hip, Knee, Trauma, and other reconstructive lines. Sales in the Reconstructive segment were up 1.2% as reported, and 2.8% on a constant currency basis. US Reconstructive sales grew 6.5% in the quarter. Trauma and Extremities had another excellent quarter in the US, posting 26% growth, led by new products, strong sales force execution, and nice growth in Foot and Ankle. Domestic Hips grew at solid mid single-digit levels in the quarter, while Knee growth softened, as we saw some impact from the absence of our ShapeMatch cutting guides from the market. Our International Reconstructive business was down 1.9% in constant currency, but was also impacted by the lesser number of selling days. The strongest performance overseas was in the emerging markets.

Next, I will turn to the MedSurg product segment, which represented approximately 38% of sales in the quarter. For reporting purposes, MedSurg is comprised of Instruments, Endoscopy, Medical and the Sustainability Solutions business. Total MedSurg sales increased 0.3% as reported, and 1% on a constant currency basis. These results were led by growth from our Medical and Sustainability Solutions businesses. Both Medical and Sustainability grew by mid single-digits in the US, with Medical benefiting from a soft comparable. Instruments and Endoscopy both posted mid single-digit growth in constant currency internationally. Instrument sales in the US were hindered by the impact of the Neptune waste management system recall, which reduced sales by approximately $20 million in the quarter. As a reminder, we believe this recall will negatively impact sales by about $17 million to $20 million per quarter until we obtain regulatory clearance. As we work with FDA to address the requirements for the Neptune 510(k), we don't think this regulatory clearance is likely to be achieved until late this year.

Our final segment, Neurotechnology and Spine, which represented 18% of Company sales, had a very good quarter. Sales increased 4% as reported, and 5.7% on a constant currency basis. Growth in this segment was led by our Neuro-Powered Instruments platform NSE, which posted growth above 20% and our Neurovascular and Cranial Maxillofacial franchises, both of which generated high single-digit constant currency growth. Poor Spinal Implant sales were flat in the US, and down slightly overseas.

I will now turn to the income statement, beginning with our gross margin performance. On a reported basis, gross margins in the first quarter finished at 67.4%, while adjusted gross margins finished at 67.5%. These amounts include the impact of the medical device excise tax in 2013, which reduced gross margin by 100 basis points. The prior year adjusted gross margin for the first quarter was 67.8%. The current year gross margin was favorably impacted by lower inventory charges, favorable mix, and the continued benefit from cost reduction efforts being driven by our global quality and operations group. Research and development spending finished at 5.9% of sales compared to 5.2% in the prior year first quarter, and up from 5.5% sequentially. The 15% increase in R&D spending over last year was primarily the result of increased investment in additional R&D projects and innovation activities.

Selling, general, and administrative costs represented 41.8% of sales. These costs include a $40 million pre-tax charge to increase the reserve related to the voluntary recall of our Rejuvenate and ABG II Modular-Neck Hip Stems. The $40 million pre-tax charge to increase reserves associated with the US Department of Justice subpoena related to the Otis Knee Device and an SEC inquiry requiring possible violations of the foreign corrupt practices act. The Rejuvenate recall is still at an early stage and we continue to be evaluated on a quarterly basis, based on information we receive related to the status of the recall. Adjusting for these charges, as well as restructuring and acquisition-related charges, SG&A spending in the quarter finished at 37.2% of the sales. This compares to adjusted SG&A of 37.5% of sales in the prior year, which included approximately $8 million of CEO severance costs.

Reported operating income for the first quarter declined 18.9% compared to 2012, and was 17.6% of sales. Adjusted first quarter operating income decreased 2.1% versus the prior year, and the adjusted operating margin finished at 22.9%, an 80 basis point decline from the prior year, primarily as a result of the added costs from the medical device tax and the increase in R&D spending, partially offset by the other factors that we previously described as providing additional gross margin. Other income and expense reduced pre-tax income by $11 million in the quarter compared to an $8 million reduction in 2012. Components of the current year's other income and expense included investment and interest income of $5 million, offset by interest expense of $16 million. The Company's effective income tax rate was 18.9% for the first quarter of 2013 compared to 25.2% in the prior year. The effective rate on earnings before adjustments approximated 20%.

The current year effective tax rate reflects the benefit of the adoption in January by the US Congress of a law to extend certain tax benefits applicable to the Company, for both 2012 and 2013. The timing of the adoption required the entire amount of the 2012 tax year benefit to be recognized in the first quarter of 2013 for financial reporting purposes. As a result, this year's first quarter includes five quarters of tax benefit related to the extenders and had a positive impact on net earnings per share of approximately $0.04. The total year tax benefit of the extenders is expected to be approximately $0.07 per share.

Turning to the balance sheet, we ended the quarter with $4.5 billion of cash and marketable securities, an increase of approximately $200 million compared to year end 2012. This includes additional borrowing of $1 billion added under the public debt offering we concluded in March, with $600 million of five-year borrowing, and $400 million of 30-year debt. We also used cash in the quarter for the acquisition of Trauson Holdings Limited, which was successfully closed late in the first quarter. We now have $2.77 billion of long-term debt on the balance sheet. From an asset management standpoint, accounts receivable base ended the quarter at 58, which was up three days from year end, but down three days versus the prior year quarter. Days in inventory finished the quarter at 167, which was up 14 days sequentially and down 2 days when measured against the prior year quarter, and the growth since year end partially reflects inventory added in the Trauson acquisition.

Turning to cash flow, we had an excellent quarter, generating cash from operations of $236 million compared to $35 million in the prior year. With this start, we expect 2013 to be another strong year for operating cash flow. Finally, regarding share repurchases, we announced $250 million accelerated share repurchase program on March 1 of this year. Under this program, we immediately reduced the Company's outstanding share count by 3.6 million shares, the minimum number of shares that would be repurchased. The ASR program was completed in April and the final number of shares repurchased totals 3.8 million, which will be fully effected in the second quarter. Implementation of the program reduced the amount of open share repurchase authorizations to $750 million from $1 billion.

Turning to our outlook for the rest of the year, we are projecting constant currency sales growth excluding acquisitions in a range of 3% to 5.5% for the year. If foreign currency exchange rates hold near current levels, we anticipate that sales will be negatively impacted by approximately 1% to 2% in both the second quarter and for the full year of 2013. As Kevin indicated previously, while we have not changed our projection that 2013 adjusted diluted net earnings per share will be in a range of $4.25 to $4.40, we felt it was important to provide greater clarity regarding the potential impact of currency on the year, which based on current FX rates, we estimate to be approximately $0.15 per share. With that, we'll now open the call up to your questions. Joining us for the Q&A period will be our Vice President and Chief Accounting Officer, Tony McKinney.

Thank you. We ill now begin the question and answer session.

(Operator Instructions)

Matthew O'Brien, William Blair.

Good afternoon. Thanks for taking the questions. I was hoping we could just start on the, within the large joint market. Generally speaking, just what are you seeing on the volume side of things? It seems like the quarter was solid, but somewhat uninspiring with respect to volumes. Are you seeing anything different than we've seen in the past several quarters?

Yes, it's Katherine. I would just go back to some of the formal comments on the call. The quarter, nothing significantly out of expectations, getting back to that normalized, what we think is going to be low to mid single-digit market growth. As we mentioned, we think there was some modest seasonality as we've seen in prior years, probably a little bit more so as it's been accelerating each year, which made the fourth quarter a little bit stronger. That's very consistent with what we've commented previously. That's probably a little bit more so in the case of Knees. It is a more deferrable procedure versus Hips, and that's partially why we think we saw a little bit stronger Hip growth versus Knee growth. I would call that just kind of a normal Q4 to Q1 pattern versus any real deviation from what we believe to be normalized growth.

Okay. And then with respect to AAOS, and I know it's still fairly early, but there was a lot of noise made by a couple of your competitors on the Knee side. What have you heard so far back from the field, as far as what they are thinking within their customer base, in terms of some potential trialing of these new knee products versus just sticking with Triathlon?

Similar to AOS, the comments are not going to be that different, we are still early on. As you know, when companies roll out new hip and knee systems, there is a period of time of trialing, getting their own sales force comfortable with it and then typically focusing on their existing customer base. So I'm sure there will be some impact out there. We feel really well-positioned with Triathlon as the only single-radius knee on the market. That said, we're obviously going to be cognizant of what the competitors are doing, but it's probably Q3 to Q4 before we would really start to see any impact to the degree it occurs.

Okay. If I could just sneak in one more quick one on Neptune, what --

Matthew Dodds, Citigroup.

Hi, good afternoon. A couple quick questions. The R&D, I know you said it was up 15% on new plans. It seemed higher than I thought for the start of the year. Can you say if this run rate, is more the new run rate for the year? And is there any particular area where the spend is higher, whether it's, say, Neuro?

I wouldn't say there is any significant change. We've talked about R&D running between 5% to 6% of sales, and that continues to be our expectation. It may be higher or lower in any given quarter and the year-over-year growth rates obviously can fluctuate, just the timing of investments and trials and the like. There's variability among all the different businesses, but that said, all of them are seeing increases in R&D spending. So for modeling, I would continue to assume it's going to be somewhere to 5% to 6% of sales.

Yes, Matt, this is Kevin. What I would just add is, I got a chance to visit a number of the divisions and I can tell you we have exciting pipelines across multiple divisions. I was at a Neurovascular Endoscopy recently at Instruments, and we have a really, really exciting pipelines across the portfolio. It's fair to say that as Neuro becomes a bigger part of Stryker, that clearly carries a little bit more R&D. But, as Katherine said, between 5% to 6% is what you should be looking for.

Okay. Then one quick follow-up for ShapeMatch. How big of the market do you think today in the US is custom cutting guides? I thought it was still pretty small. The impact wouldn't be that bad while you're off the market, that fair?

Yes, I think that's a fair comment, Matt. We've been off the market since the mid of Q4 and obviously we had pretty solid fourth quarter in Knees. Clearly, we're not selling ShapeMatch, so there's some revenue impact, but it really is immaterial certainly to total Stryker, but also to our Knee business. We estimate it's hard to get really good data, but it's probably about 10% of knee procedures use some type of custom cutting guide.

Thanks, Katherine. Thanks, Kevin.

Rick Wise, Stifel Nicolaus.

Good afternoon, everybody. I'm sort of obsessed with the improving EU trend comment, Kevin. Can you give us a little more color on where you are now and your continuing -- what's making you continue to feel encouraged there?

Yes, so the first thing I would say is the message I've delivered since the fourth quarter of last year is still the same. It's going to take multiple quarters before we start to see significant improvement. We'll start to see that improvement in the second half of this year. I believe, and I'm feeling more confident because I'm doing monthly reviews with our European business. They have put all the new leaders in place at the country level. We've just had our former Vice President of Knees just take a new assignment in Europe, leading the Orthopedic franchise within Europe. So the leadership team is very solid.

I've looked at detailed action plans country by country, feeling very, very good about the plans in place. Certainly, we're seeing good results in the UK and France and some of the Northern Europe countries. Certainly Southern Europe is still very challenging and will take time. But I can see the momentum in terms of how the physicians are re-engaged with us, how our employees are re-engaged. So this is something that we've seen happen in other parts of the world. It takes a little bit of time, but we're on a very good trajectory and I would anticipate improvement in the second half of the year.

All right, and just as a follow-up, in terms of getting Neptune back on the market, can you give us any more sense of what has to be done to the process of making it happen or, again, any more color there in detail?

Yes, Rick. Really, we need to file the 510(k), so that process is underway and that's the key milestone over the next few months, is to file that. And as Dean commented, based on that, our expectation is, it's going to be late this year when we anticipate getting 510(k) clearance. We anniversary the impact after the second quarter since the recall occurred early in the third quarter. Exact timing beyond that, just too difficult to predict, but the key is obviously getting the 510(k) filed.

Matt Miksic, Piper Jaffray.

Hi, thanks, everybody. One follow-up, Katherine, for you on the comments you made on the Recon market. I think the selling day impact is pretty well understood. But the seasonality you mentioned was deeper here in the first quarter. At least it looked that way from your business. I appreciate the color for the full-year growth rate, but as we're -- a couple quarters away from the third quarter last year was a pretty big seasonal dip. Should we be thinking about a little bit more of an up, stronger Q2, down stronger Q3, up stronger Q4 kind of volatility, given what you've seen in the last few quarters? Then I have one follow-up.

Yes, I don't think we could be that specific, Matt. We obviously saw difference in selling days. We had an extra selling day in the fourth quarter, roughly one to two fewer selling days this quarter. Trying to tease out exactly how many basis points seasonality was is difficult. But what I can tell you is as we've seen in the last few years, with deductibles increasing, with unemployment, et cetera, it does seem there's been a modest delay. And I would really stress modestly stronger seasonality packed in the fourth quarter, and a corresponding modestly slower one in the first quarter. Overall, everything that we see points to a Recon market that is stabilizing around that low to mid single-digit growth for the market.

Okay, and then on the capital side, understanding also the impact of Neptune, I guess we saw a little bit of a reversal here in the first quarter, where I think most folks were expecting Beds to be down a little more and they were actually up, and most folks were expecting Endoscopy and Instruments to be up and they were actually flat or down. Can you talk at all about any of the dynamics in the quarter that you're seeing there? Maybe your expectations for those trends going forward?

Yes, I think with Medical, it's well over 90% of that business is capital. So it is inherently probably the most volatile and just given the timing of orders, regardless of the market, it can vary quarter to quarter. So it's not surprising that we could be better or worse than expectations. And I think that's just the reality of that business. With respect to Endoscopy, as I mentioned, double-digit camera growth. That's obviously being powered and that's a US number by the launch of the 1488 Camera and we're pleased that that continues to ramp. But the Communication business, which is dominated by our Endo Suites, it's 100% capital and that business is also volatile. So it can be stronger or weaker in any given quarter. There's nothing there that alarms us, it's just the nature of having a business that's got a significant capital component. In terms of the outlook for the full year, we haven't given granularity around the three key segments, but with the growth that we saw this quarter, particularly on adjusted basis, we feel very good about being able to deliver that underlying growth of 3% to 5.5% for the year.

Dave Turkaly, JMP Securities.

Thanks. Quickly, I was wondering on the ShapeMatch, if you could give us some of the same color you did for Neptune, exactly what led to that recall? And did you say you already submitted the 510(k) for that?

Yes, I said we anticipate filing a 510(k) in the coming months, hopefully sometime around the second quarter and we're looking to potentially receive 510(k) clearance late this year.

Okay, and then quickly, we saw a recent NIC guideline and I know Spine is a little flat for you in the quarter, or maybe it decelerated a bit. Would you be willing to give us any color on Cortoss from Orthovita, how that's been? Is that a growth driver for you or is it really just a Vitoss sign

So Cortoss is obviously the smallest of the products that we acquired with the Orthovita acquisition and it's being sold today by our IVS business. It had kind of a slow year last year, but had actually a very strong first quarter. And we report our IVS business as part of our Neurotechnology and Spine. It was up very, very strong double-digit growth. And I think that's a product that is just gaining steam within the sales force. Clearly, not on the sale of Vitoss, but it's something that we feel very good about. It's an excellent product and we had terrific results in the first quarter. But it's very, very small in the big scheme of things.

Bob Hopkins, Bank of America.

Thanks. Can you hear me okay?

Yes, Bob.

All right, great. Thanks. So first question, I just want to come back to the EPS guidance for 2013 that you talked about. I was wondering if, Dean, or Katherine, you could walk through the math on Japan and the currency hit there and just how that math works. Because, again, I thought you had some natural hedges that might have made it a little bit less than this. And the first question is, just walk through the math on Japan. And also, is there anything else that's causing you to suggest you'll be at the bottom end of the range? Or is this really all currency?

So, Bob, yes. We have talked in the past about our FX situation. Relative to Japan, it is the one place where we don't have as many natural hedges. The natural hedges really come from being able to manufacture in a jurisdiction. So in Europe, we obviously have a lot of manufacturing. We really don't have any manufacturing in Japan. So for that reason, what we're seeing here is kind of an unprecedented change in this currency, whether it being devaluated 20% or so since the start of the year.

We're really seeing a more significant impact from that. There's straight translation impacts, as well as impacts on our cost of goods sold as they come across to Japan and to some other jurisdictions. Under normal times, we would be able to manage pretty well with a lot of currency changes, but Japan is one area where we get hit a little bit harder. There is nothing else that's really impacting what we're talking about relative to the guidance here. It's just this really unprecedented change with the Yen that's caused us to call us out and suggest that right now we would be towards the lower end of the range if this continues.

Okay. Then as a follow-up, obviously you guys have done really well in Trauma. Some of that because of your own launches, some of it because of others being excluded from the market for a while. I was wondering, given the really high growth rates you're experiencing right now, if you could give us any sense as we move forward, what you think a sustainable growth rate in trauma might look like as we get to more normalized growth rates, if you will, over the course of the rest of this year.

Thanks, Bob. It's clear our Trauma business is seeing a lot of momentum, similar to the fourth quarter, some of that was the impact of a competitive recall in Q4, I think we talked about, about a third of the growth was the result of that. This quarter, it was less than that, although we did still see some benefit. If you exclude that, we did see an acceleration in our Trauma growth and we feel really good about the momentum we're seeing there. Part of that is just having the opportunity to present to customers the breadth of our product as it's evolved over the last few years.

And that's really helping us gain that competitive share. I wouldn't want to predict the growth going forward. We're seeing very strong momentum. I'm not sure I would extrapolate that in the models. That said right now, there's a lot of momentum in that division and that group is really performing very, very well. And I would highlights things like Foot and Ankle. That 50% growth for that segment is impressive and that's been investment there in the product launches we've had and putting in place a dedicated selling effort.

Yes, Bob, it's Kevin. I would just add two other comments. The Trauma growth, if you look back over the past few years, has been really performing well. So even last year, the entire year of last year, we had terrific results. And that was absent a competitor recall. So this has been sustained strong performance really over a number of years in the Trauma business. And on the Foot and Ankle, you could expect certainly the second quarter will continue to be very robust. And then we'll start to run against some comparatives that are a little strong, given the robust performance we had in Q3 and Q4 of last year. But certainly, we feel very bullish. It's a market expansion opportunity that's enormous, plenty of room for growth.

Joanne Wuensch, BMO Capital Markets.

Thank you very much for taking the question. Could you please give us an update on what percentage of your revenue is in emerging markets and how some of the most recent acquisition integration has gone in that market? And then also, given the ASR, what is your guidance for average share count for the year? Thank you.

Hi, Joanne. Dean can follow up on the share count question. In terms of emerging markets, it bumped up by about 1% with the acquisition of Trauson. It's still well below 10%, around that 6% or so vicinity comes from emerging markets. We did close the Trauson acquisition during the quarter. It's early, but to date, we're pleased with the integration progress so far. But again, we're early on. It's an exciting opportunity for us and to get into that value segment of the market and we expect it to help be a driver of expanding our presence in emerging markets.

And Joanne, with the ASR in place right now, we would expect the share count to be right in the range of 383 million.

Mike Weinstein, JPMorgan.

Thank you. And just to clarify there, Dean, that assumes no additional share buyback over the balance of the year?

Yes.

I mean, that assumes we don't do any additional buyback, in those numbers. So that's our guidance, assuming we stay where we're at. Obviously, we still have 750 million outstanding.

Okay. Let me just ask kind of maybe two follow-ups. So one, if I look at the performance across your specialized sales forces, so if I look at the Foot and Ankle performance, if I look at the Sports Medicine performance, if I look at the CMF performance, all very, very strong, and a lot of what, particularly this quarter, is driving the Company. Can you just talk about how you think about that strategy in the context of your other businesses and whether there's an evolving distribution strategy here at Stryker that you potentially want to take advantage of? Because obviously, the growth in all of those businesses is above market. It's been aided by what you've done on the distribution side. How do you run with that and make that a bigger opportunity for the Company? And the second, I just want to clarify in the Endoscopy business, which was light, I think probably, versus the Street's expectations. Do you capture -- was there a timing issue within any of that? And do you recapture some of that potentially in the second quarter, over the next couple of quarters? Thanks.

Why don't I take the second part and then Kevin can address the first part of your question. There was some timing impact. So yes, we would expect momentum in Endoscopy to improve as the year goes on. The timing is related to that Communication segment of our business. Again, that's primarily composed of products such as the Endo Suites. It's 100% capital. Some quarters can be stronger or weaker just on the timing of orders. So yes, we would expect to recapture that. Camera growth, we're very pleased, mentioned the double-digit momentum there. It really is primarily related to that Comm segment.

And with respect to your first question, Mike, I think it's a great observation. We absolutely believe in dedicated sales forces, where you have specialized surgeons. And in some cases, we call it specialists serving specialists. And it's definitely paid off for us and it's paid off for us with focus and then really truly understanding the customer. The podiatric surgeon as an example, was largely neglected by large device manufacturers and they feel embraced by us and Stryker Foot and Ankle is now a strong brand.

I can say the same for Sports Medicine. CMF was really the first pioneer for us in this area, and what we've also found is these specialized sales forces actually operate with much lower inventory. So they are actually profitable because they don't have the same requirements of large joints, which is the huge instrumentation sets and the accompanying instruments. So they can actually hold their inventory in what we call a trunk stock model. So it's a very efficient model. It's a model that works very, very well.

Certainly we are looking at expanding this, and in fact, in Europe, we're exploring some specialized sales forces. I know it's a market that not everybody's excited about, but if you have the right products and you have the right surgeons, you can certainly pursue growth. So the answer is yes, we're looking. But the product and the surgeon type really have to line up well and we took the learnings from CMF, applied those learnings to our Sports Medicine business and to Foot and Ankle and obviously we're enjoying very good success thus far.

Richard Newitter, Leerink Swann.

Hi, thanks for taking the question. Maybe just on Foot and Ankle, can you guys talk about your growth relative to the market and what the components are there? Is this mostly your ability to capture price and mix, or is there anything underlying in the market from, that's driving that?

So the market estimates are a little challenging to come by here. But we estimate it's around 15%. Certainly Wright Medical has historically been one of the largest companies in Foot and Ankle, and with our explosive growth over the last few quarters, we are certainly close behind them. But it's really more about market expansion. It's sheer number of procedures, if you look at hammer toe procedures, bunions, and implants weren't really used historically.

So this is really more of a market expansion story than a market share story. And I think what we'll see is market growths are going to continue to climb. But if you go by the latest estimates from both our Company and their company, it was kind of in the 15%-sort of range. Our 50%, clearly we had a bit of a softer comparable in the prior year, and as I mentioned, as the year unfolds, I think we'll see that growth rate start to moderate a little bit. But still, a very, very significant room to expand with procedural growth.

Great. And then just one follow-up on your Knee business. Can you just explain what -- does Otis Med being off the market, does that create any disadvantages for you while these competitive products begin to gain steam as you expect in the back half? And do you think you can offset that with enhanced or stepped-up DTC efforts in Triathlon?

So we do plan to continue the DTC campaign, but that's really not being driven in any way by whether or not Otis Med is on the market. The revenue impact was immaterial in the quarter. Obviously, we did lose some ShapeMatch, but given the relatively low penetration rate, we don't think that's going to be a major challenge. Obviously we want to get it back on the market and anticipate that happening. But I don't think that's going to be a major rationale for customers in large numbers, switching to competitive products.

Michael Matson, Mizuho Securities.

Sure. My first question is on Charleston. I was wondering if you could tell us what sort of growth that business saw in the first quarter. And then what your expectations are for Trauson in the Chinese orthopedic market? And then I have a follow-up question.

Yes, the revenue contribution, given the timing of when we closed it, was really minimal in the quarter. Given just the size of that division, I don't think we're going to start to break out the growth rates for that. Obviously, we did comment on seeing double-digit growth for our emerging markets business overall, but I don't think we'll get down to the level of providing segment growth for that business.

Okay. And then in your Neurovascular business on the Trevo product, just wondering, obviously there is a huge market opportunity there, but some of the clinical data that's come out recently on the endovascular treatment hasn't looked so good in comparison to just the regular IV tPA. And it actually sounds like there could be some reimbursement pressure there. So I was just wondering what your outlook is for that product right now.

Yes, I think the studies you're referring to were really focused on the prior generation, or first generation product, and given this is a space where you see a lot of technological advancement in fairly short periods of time, but that study was from a product that was originally launched a number of years ago. This is early on in the products development and there's going to be work to do to develop the market, but overall, we continue to be very excited, both for the prospects within Hemorrhagic, as well as Ischemic business in total for the Neuro segment. That's been a great addition to our portfolio, getting into that space and expanding our presence there. I think it is a fair comment about reimbursement. We're going to have work to do, as you would in any new space when you're developing a new treatment modality, but I don't think that study changes the prospects we see for that market development.

And certainly our customers don't really seem fazed at all by the study, given their very, very small sample sizes and it was really almost three generations ago. It was very, very old product and it's evolved very significantly since then. So the promise for ischemic stroke is still very significant.

David Roman, Goldman Sachs.

Hi, good evening. Thank you for taking the question. On the gross margin side, excluding the medical device tax, it sounds like there was a fairly decent underlying improvement year-over-year. Can you help us pick through the components of that, because it sounded like, I don't know if I misheard you, Dean, on the call. There was some one-timish items in there that were a benefit, but could you maybe help us understand the underlying gross margin trend and the factors influencing that?

Yes, again, as we talked about the underlyings, we talk about adjusted gross margins. So for the current year, it's 67.5%, but that includes 100 basis points for a reduction for the medical device tax. The prior year adjusted gross margin was 67.8%. So the benefit that we got in the underlyings really come from three places. We are managing our inventory better and that's resulted in lower inventory charges for things like excess and obsolete inventories. We did get some favorable product mix in the quarter, so that's the second component. And then the third component, which we've continued to talk about, is this five-year plan that we have, or continuing plan to continue to take costs out with our Global Quality and Operations Group. So that's really the third element. So, again, if you go through that math and take into account the fact that we did absorb the medical device excise tax this quarter, you're right, we did have those underlying factors that improved our margin year-over-year.

Okay. That's helpful. Maybe just to follow up on the questions on Trauson, I think the last time I met with them, they had quoted the Chinese orthopedic market growing in the 30% range, which at the time, dominated by local players. Can you talk about your view of that market and then what impact you and Medtronic owning some of the larger players might have on competitive position for multi-nationals versus locals?

I would say if you're referring to the value segment of the market, we do think it's probably growing in somewhere in the 20% to 30% vicinity in China. We do believe it's going to be the fastest growing segment of that market and it will become a larger component going forward. For us, and I can't speak for Medtronic, we really viewed the acquisition of Trauson, it was a way to get some brand recognition. It had been on the market for over two decades. Obviously, if we invested starting now, we're not going to have that. They have got a presence there and a capability in terms of their manufacturing expertise that was targeted at that value segment. We, like Medtronic and other multi-nationals, tended to be more focused on the premium segment. So for us, it was a way to balance out our offering and expand into both the premium and more importantly, longer term, the value segment of the market.

Yes, I would just add, I had a chance to visit Trauson last month and I'm very excited with the management team that's in place. We have [Igel Lang], who is a long-time Stryker veteran, who is a general manager of that business, and he is on the ground in China. Our integration team is well under way, and so far, everything is going very, very well. So it's an acquisition we feel very excited about. Again, it's early in the process, but certainly the kind of growth numbers you suggested are still in play and we feel that it's going to be very significant over time. The last point I would make is we are running Trauson very separately, so we have the premium segment in China and Trauson, the two General Managers are reporting up separately. They don't report to each other, so they are very, very separate businesses. Now that we've completed the acquisition, we're able to look at all of the dealers and the distribution network is actually completely separate. There really is no overlap because they are calling on different hospitals. So, again, a very additive acquisition.

David Lewis, Morgan Stanley.

Good afternoon. Dean, just maybe a quick margin question. If I look at the SG&A leverage this particular quarter, it was particularly strong, as it was last quarter as well. And you obviously talked about currency being a headwind, but obviously, the SG&A leverage, or improvement there, is probably one of the factors that's offsetting the hit from currency. So what is driving that underlying improvement the last couple of quarters? And now for a year and a half, we've talked about shared services and optimization. Are we ahead of plan as it relates to that? And typically, you see improvements at Stryker across the quarters, if you start off strong. Is that the type of trend we should be expecting?

Well, I think we did a pretty good job with G&A spending this quarter, vis-a-vis the prior year. But I would tell you that we've got a long ways to go, still a lot of opportunity in G&A specifically, relative to some of the things you mentioned, shared services. I mean, frankly, we're just at the nub of what we can do there. Obviously, Bill Jellison is here. I think it's the third day on the job here, but I know he's done these kinds of things in the past and I think it's something that obviously he's going to be attacking as he comes on board here. So, I appreciate the complement, but I think there's a lot of real work to be done and I think the organization is committed to getting after it.

So, Dean, there's nothing one-time in nature that explains the levers. We can assume this is good old fashioned organic improvement?

Yes, I don't think there's anything that's specifically -- we did have the prior year CEO severance costs, which I mentioned there, of $8 million. So year on year, that's obviously a factor in what you see here, too.

And maybe a quick follow-up for Katherine, I know you talked about the strength in Trauma. I didn't hear specifically, Kath, what do you think is driving that strength? Are we still seeing benefits from the nail recall, competitor's nail recall? Or are we starting to see more strength in in-core Trauma?

I would say yes and yes. So there was some benefit from the competitive recall, it was about a third in the fourth quarter. It was somewhat less than that in the first quarter. It's increasingly difficult to get really specific. I would say underlying growth probably did accelerate for our Trauma business heading into the first quarter. I wouldn't point to any specific products.

I think we've had the opportunity to really get in front of customers and as Kevin mentioned previously, really show on how we've expanded our product offering, not just this year, but over the last few years as we've invested. And we are much more capable of going toe to toe with anybody in the market given the breadth of the bag. It was an opportunity that really allowed us to leverage that product offering. So I don't think all of that business that we picked up will stick. Less of it stuck in the first quarter, but at the same time, our core business is accelerating from the fourth quarter, and candidly, we would rather see the growth that way.

What we're really seeing is full account conversion, something that we were incapable of doing three or four years ago. That started really last year. So if you look at our growth, 26% is a pretty impressive growth, given that the first quarter of last year, we grew at about 13%. This has really been steady, solid improvement, a very stable management team, and launching really a slew of products over the past four or five years, that filled out our bag that enable us to do full account conversions. And that's where we're getting big chunks of growth. And these are accounts, obviously all across the United States. We still have room to improve outside the US, but in the US, this has been a four- or five-year process and we still have a ways to go.

Derrick Sung, Sanford Bernstein.

Hi. Thanks for taking my call. So your instrument sales growth decelerated in the quarter versus Q4, and I understand that the Neptune recall impacted it, but that was seen in both quarters. And so my question was, if you could give some color as to that deceleration. Would selling days have that much of an impact? I would have thought not so much. So any help there would be appreciated.

You will see the selling day impact. We had one extra in the fourth quarter, two fewer in the first quarter. That's the straight math is 2.5%. It probably impacts our capital businesses a little less so, but that's tough to tease out with specificity. So I wouldn't highlight anything in particular that we would view as issues. We continue with the launch of our power tool, though obviously we're getting further into that launch now. The biggest challenge right now that that division is facing is that obviously the Neptune recall.

Okay, and then if I contrast the CapEx spending in Beds, which came in pretty strong, I think in line with expectations, versus Endoscopy, where you called out the Communications side. What's driving the difference there? Are you seeing stronger spend in one category than the other, or can you help contrast those two dynamics that we're seeing?

It's not like every capital business all goes in the same direction in any given quarter. For example, Medical had tougher comparisons. Or, excuse me, had easier comparisons versus a year ago and that's not necessarily true for our other capital businesses. I would simply point to the fact that any of our capital businesses are going to be variable from quarter to quarter, regardless of stability of the markets. In general, it's going to be more so for Medical. It just happens that this quarter they were benefiting more so from a comparison, whereas Endoscopy, the timing of some of the Communication sales were such that it offset some very good growth that we saw with that double-digit gains to the Camera segment, which obviously speak to the receptively of hospital customers for capital purchases.

So you kind of have to look at it over a series of quarters and really, over a series of quarters, you'll see that the Endoscopy business will pick up. We anticipate that through the course of this year.

Matt Taylor, Barclays.

Hi. Thanks for taking the question. Can you hear me okay?

Yes, we can.

Great. So just a clarification on your prior comments. Katherine, you were talking about the normalized Hip and Knee growth. I just wanted to confirm you were talking about volumes and not dollars.

Yes, when we talked about the low to mid single-digit growth, for us, that's what we kind of walking around what the market growth is for Hips and Knees.

Okay. Great. Sorry. Go ahead.

No, please, go ahead.

Okay. And last quarter you had a pretty nice uptick in American Hip and Knee sales and you attributed that to some of your DTC advertising. I was just curious if you saw that again, if you're continuing that program, and any feedback on the success you're having there.

Yes, we feel really excited about the DTC program. We've played around with the mix a little bit in terms of how much television we've done versus how much print and how much internet. In January, we were a little bit quiet on television. We resumed television in February and have seen the same kind of metrics in terms of surgeon locator searches, clicks to the website, and obviously after you have the TV ad, it take as couple of months, two or three or four months before the patient actually will present for surgery, before we'll see revenue. But all of the indicators are still very, very strong. We have a compelling concept. It's working. Certainly we had a terrific year in the Knee business last year, as you saw. Obviously, slightly moderate in the first quarter, but it's nothing that causes us any alarm and we are going to continue to invest. We are going to continue to play with the mix in order to really maximize the return on investment and you'll see us sort of coming on and off, but TV will remain part of our media mix throughout the year.

Glenn Novarro, RBC Capital.

Hi, good afternoon. Can you give us some color behind your Spine numbers in the quarter? They did come a little bit below our expectations. And I know you did have a very strong 4Q. So is it possible that 4Q stole some sales or is there any just slowdown in the market? Any color would be helpful.

Yes, I think it's fair that the seasonality comments we made for Recon are true for any of our implant businesses that have an elective component and certainly Spine falls in that category. First quarter it is in the US up against tougher comps versus a year ago. There's nothing we would call out. That business is still finding its feet in terms of what the underlying market growth is going to be. And candidly what our growth is going to be. But we've got a good team in place there, continuing to round out the bag and the product offering, and I think you'll see some movement quarter to quarter. But there's nothing in the first quarter that we would call out as a significant change in that outlook.

Just as a follow-up, pricing, most companies are commenting about US pricing being down mid single-digits. Is that still a fair assumption? And have you seen any change in pay or pushback this quarter? Most companies are saying there's no change year-over-year.

Yes, I would say our pricing mirrors the comments of the others.

Larry Biegelsen, Wells Fargo.

Good evening. Thanks for taking the question. Katherine, on Sustainability Solutions, did I hear correctly that it grew mid single-digits this quarter? And if so, it's a little bit below trend. Could you talk a little bit about what's going on there in the outlook, please?

Yes. Your comments are correct. I would say what we saw in the quarter was partly due to competitive product launch and that we're going to be filing a 510(k) for. That's a phenomenon that you're going to see in this business. We launch that we have clearance to reprocess. A competitor will launch a next generation version of it. You can imagine we don't really get a heads-up on that, so there's typically a little bit of a lag time as we get the product and get the clearance for that. So that was one of the key components that impacted that growth year-over-year. We continue to feel really good about the momentum in that business, though.

Yes, and adjusted for days, it was actually high single-digit growth. So Dean's commentary was all on an as-reported basis. An obviously with the selling days adjustment, it was high single digit. A slight deceleration from where it's been in the past couple of quarters, but again, nothing that causes us any concern. We still feel very bullish about that business.

Got it. And then your Foot and Ankle business is obviously doing very well. But you haven't talked about another area of extremities that's also growing nicely. The Shoulder market. Could you, Kevin, maybe give us a little bit of an update on what you're doing there? What you're seeing in your business. We've heard anecdotally that Stryker is putting more of an emphasis on the Shoulder market. Thank you.

So, as you probably know, last year we launched our new Total Shoulder, but we have not yet launched our Reverse Shoulder. That's going to be launched a little bit later this year, probably around the middle point of this year. Once we have the Reverse Shoulder out on the market, then we can really go after significant growth. Shoulder is actually -- if you look at the joint reconstruction, is actually not a very, very big part of our portfolio. Something that will be a big growth driver in the future, but thus far, until we have the Reverse on the market, will not be a huge growth driver. On the other hand, if you look at the Sports Medicine implants, the all-suture anchor certainly used for rotator cuff, it's also used for hip FAI procedures, but- certainly the huge growth in the shoulder in our Sports Medicine business, which I indicated, grew over 50%. So Shoulder will be more and more important and as you know, there are more and more specialist surgeons, upper extremities or shoulder specialists. We'll be calling on those much more aggressively after we have the Reverse Shoulder on the market.

Kristen Stewart, Deutsche Bank.

Hi. Thanks for taking the question. I was wondering if we could just take a step back. I know, Bill, you've just joined for a couple of days now, but maybe if you could share your perspectives on what attracted you to join the Stryker management team and any kind of preliminary thoughts that you might have, just in terms of Company strategy, your approach to capital allocation and kind of what will be your priority here over the next 100 days or so outside of, obviously ramping up on Orthopedic and MedSurg businesses.

Yes, as far as for a reason for joining, I think there's a number of different ones that obviously came up and hit on a number of fronts. Stryker's obviously one of the top ten med tech companies in the world. It's got a culture and a management team I think that seems to be a great fit. Stryker also has a stellar kind of reputation for the growth over a long period of time. It's well positioned within some, I think, very attractive markets, with a vast portfolio of products. As you mention, the balance sheet is already extremely strong. They have got fantastic cash flow and obviously that cash flow should be able to be used for additional growth opportunities, both inside and outside of the organization, and I think that it's pretty clear that there will also be a component of that that allows for additional return of capital to shareholders. On top of all of that, I'm actually originally, our whole family, is originally from Michigan, so this is kind of a return home from that perspective, so I think it's a real great fit overall and we're looking forward to it.

Well, welcome aboard. And then just one other question, I guess relating to the Boston Scientific Neurovascular business. Can you remind us where are you in terms of transitioning that business from manufacturing perspective and are we now separated completely from Boston? And are there any restrictions that are out there that are in place that may be lifted over the next year or so that would allow you to get a little bit broader into areas within peripheral vascular or anything below the neck?

Kristen, let me take the first part of that. We still have one piece to go in terms of the manufacturing transition, and that is what will happen this quarter. We've got some Irish manufacturing to move over, anticipate the other moves have gone smoothly, we anticipate we're well prepared for this and it will go smoothly as well. So that's the one remaining piece and we anticipate that will be done in this quarter.

Kristen, with respect to your question about limitations, there's nothing that I'm aware of that would prohibit from us going into other segments.

Bruce Nudell, Credit Suisse.

Good afternoon. Thanks for taking my question. Kevin, in Katherine's comments, she stated that the ACA is unlikely to influence implant rates next year very much. We kind of looked at it and it's clear that Medicaid-reimbursed patients, consume less than commercial patients. But there is likely to be a step-up among the people who are uninsured. Some clarity on that as to why you're pretty certain that you won't even see 0.5% or 1% implant rate improvement. And secondly, just comment generally on the growth rate in the Neurovascular segment this quarter. Thanks so much.

So the first question, I would say, we're not saying we're not going to have a slight uptick. It's either neutral or a modest positive is how I characterize it. Very difficult to predict. Today, we see certainly in the Orthopedic market, if someone gets to get their [drum] replaced, they tend to get it replaced, and as you know, we have a high Medicare/Medicaid population as it is. So for the vast majority of our businesses, we don't see a big swelling of patients as you would in, let's say, if we were in chronic care or other parts of the healthcare system. That said, we think the medical business could be a beneficiary, since patient satisfaction will become a much more important component, given that it helps preserve their Medicare reimbursement in a bed as a key component of patient satisfaction. But for planning purposes, because it's so difficult to predict, we're really assuming that it's not going to be a positive. It may turn out to be a positive, but if it is, we believe it will be modest in nature.

And the second part of your question was Neurovascular. We continue to have double-digit growth in Neurovascular and are very excited about the leadership there. As I mentioned earlier on the call, I had a chance to visit with the team recently. Just a fantastic management team that came over from Boston Scientific that stayed intact and certainly they're extremely excited because Stryker is investing significant, as you saw, we had two follow-on acquisitions, following the initial acquisition of Boston Scientific. They have an unbelievable R&D team and getting a chance to look at their pipeline was absolutely exciting for me. So it's a business that we feel very, very good about.

Jeff Johnson, Robert Baird.

Thank you. Good afternoon. Kevin, I apologize. I've been jumping between calls. If I ask something that's already been asked, just tell me. I'll go back to the transcript. But wanted to start with one bigger picture question. With Trauson now in the fold, wondered how you feel about maybe a dual branding strategy in some markets. Would you ever think about taking some of those Trauma products into some of your core markets and look at a dual-branded strategy?

Yes, so I did mention earlier on the call that we have a separate team for Trauson that's distinct from the premium brands. Obviously within China, we're going to maintain the Trauson brand. Our intent is to export those products to other markets. We have significant room to grow, to continue to grow within China and we also have significant room to grow in other emerging markets. So our initial expansion will be to places like India, the public sector of Brazil, certain countries where they already have a robust value segment. Whether these kinds of products will then one day make themselves to more developed countries remains to be seen. It's certainly not our first priority, given the vast amount of growth that we can achieve, first in China and then in other emerging market countries. Our intent will be to maintain the Trauson brand with these products.

Great. That's helpful. Then just a housekeeping question, Katherine, could we just hear selling days for the rest of the year and then maybe on pricing, as the Japanese price cuts anniversary here in the second quarter. Do we get an improvement in pricing next quarter, or is that just a little cushion in case Europe gets worse and things like that?

So Jeff, this is Dean. Right now, there's one additional selling day in the second quarter and then pretty comparable year-over-year in the third and the fourth quarter. And relative to the Japan pricing, we do anniversary that in this quarter and, incrementally, that should help us, although obviously the sales in that market are going down by virtue of the currency impacts. But on the pricing front it, should help us incrementally. We don't anticipate that that won't be an assist.

Rajiv Jashnani, UBS Rajiv, your line is now open. If you have muted on your end, please unmute at this time. Once again, Rajiv Jashnani, your line has been opened so that you may ask your question and your follow-up question. I'm sorry. It appears Rajiv is having technical difficulties. We will move on--

Let's move to the next.

Thank you. Bill Plovanic, Canaccord.

Great. Thanks for taking my questions. Just a follow-up on the Spine and then a question on the Hip. Just on the Spine, I think last year, and correct me if I'm wrong, that Biologics was driving a lot of the growth. I would wonder if you would be willing to cut the spread between the growth of the Biologics and the Metal as we went into the first quarter and then any pricing impact there. And then on the Hip, I think Accolade has been out 18 months now, roughly. How long does a product cycle last in this environment and contributing to extra growth? That's all I had. Thanks.

So regarding the first question, we're not really going to get into spiking out all the different components of Spine. What I would tell you, in our first quarter, Orthobiologics was not a disproportionate contributor to growth. We actually did quite well in the metal business. It's really starting to normalize, but we're not going to get that granular, certainly not on this call. Then what was the second question?

Relative to Accolade and --

Yes, so Accolade II was launched only in the second quarter of last year. So it's still fairly early in its launch. It's been wildly successful, and that's really the biggest contributor to our growth within our Hip franchise. We've also launched a new Hip at academy, a version of Secur-Fit Plus, which is for fit and fill, surgeons that prefer that type of a hip stem. The Hip franchise, frankly, over the last two years, as you've seen, has been a very, very strong performer and really on the back of terrific products with hip stems, as well as the dual mobility cups. We've had strong growth all through last year and that continued in the first quarter of this year.

Steven Lichtman, Oppenheimer.

Thank you. Most of my questions have been answered, but, Kevin, in terms of just going back to Spine again, obviously you had bounced around here --

I apologize. That disturbance was coming from that line. I did need to drop it from the queue. Josh Jennings, Cowen & Company.

Hi, good evening. Thanks. Just quickly on the MedSurg business, just now you have a quarter under your belt of results and four months of interacting with customers. Can you give an updated view on expectations for US hospital capital equipment spending this year? And then potentially whether or not you're seeing any benefit from allocation away from IT and any benefit there for Stryker in Q1 or any expectation for the rest of the year. And I have one follow-up.

As it relates to capital, I would go back to some of our prepared comments where the market seems be somewhat stable. We're not seeing any significant departure. We saw some of that IT impact during 2012, but other than the normal variabilities you see quarter to quarter, the market seems relatively stable.

Would that include an expectation from some modest improvement in growth and capital commit spending any less?

There may be a slight increase. But overall, we're not assuming big growth rates or changes in capital spending.

Going back to our comments on the Endoscopy business, certainly the capital component of that business, we anticipate, that's our own business where we had sort of a bit of a softer quarter this quarter. We anticipate that that will improve, but that's not a reflection of the market. The market's pretty stable. And our business, obviously, has some volatility from quarter to quarter, but I wouldn't call out any kind of change in the market.

Okay, great. Then just secondarily, in Europe, Medtronic called out they were seeing some weakness specifically in January, and I know Stryker has their own company-specific headwinds in play, but can you just comment outside of those headwinds whether or not you saw any changes in Europe in Q1 and into April? Thanks a lot.

No, there's really no change to any of the commentary we've been making both in the first quarter and before that about Europe. Nothing specific-country versus what we've talked about previously.

I think Medtronic clearly has a bit of a different business profile than we do and I believe they followed up on their comment, really talking about the impact being more in the CRM or the cardiovascular space in specific countries where we clearly don't compete. For us, Europe is more of the same, challenging market, hasn't changed at all in the first quarter versus last year.

Thank you. There are no further questions at this time. I will now turn the conference over to Mr. Kevin Lobo for any closing remarks.

So thank you all for joining our call. Our conference call for the second quarter 2013 results will be held on July 18th. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.