史賽克 (SYK) 2013 Q2 法說會逐字稿

Welcome to Stryker's second-quarter 2013 earnings conference call. My name is John, and I'll 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, 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 second-quarter 2013 earnings call. Joining me is Bill Jellison, who as many of you know, joined Stryker as our CFO in April, and Katherine Owen, Vice President of Strategy and Investor Relations. With respect to today's call, I will provide opening comments, and then turn it over to Katherine for additional details, and then Bill will cover the financials. We will then open the call to your questions.

Our second-quarter results were driven by solid and balanced growth, both geographically and across our three segments, Reconstructive, MedSurg, and Neurotechnology and Spine. With Q2 sales of $2.2 billion, we delivered 5% reported growth and a 5.9% gain excluding foreign currency and acquisitions. We benefited from one extra selling day in the quarter, which after adjusting for this, resulted in sales growth of 4.4% excluding foreign exchange and acquisitions. Based on our first-half results, we remain confident in our ability to achieve our full-year sales targets and are shifting our range of sales growth excluding acquisition and foreign exchange from 3% to 5.5% to 4% to 5.5%. A strong top line along with operational efficiencies is helping drive solid performance, highlighted by continued gross margin improvement after adjusting for the impact of the medical device excise tax. While we pleased with our operational performance, as discussed previously, our results have been adversely impacted by a substantial foreign exchange headwind. For Q2, foreign currency negatively impacted our per share earnings by roughly $0.04. However, with the sales momentum and effective cost control, we were able to partially absorb the foreign exchange impact and still deliver EPS of $1 a share.

With respect to our geographic growth, the US had another strong showing with sales up approximately 5%. Encouragingly, we saw improved momentum in our international business, which posted nearly 9% growth excluding foreign exchange, and included 1.6% growth from the Trauson acquisition. We believe that the globalization initiatives put in place are having a positive impact across our international businesses. The European turnaround remains on track as Europe registered positive growth in the quarter versus the prior year. We look forward to continuing this momentum in the back half of the year. Our emerging Markets businesses continue to perform well posting strong, double-digit growth.

Looking at our three franchises in more detail, on a global basis, Reconstructive sales were up roughly 6% on a reported basis with 8% underlying growth excluding foreign exchange. Growth was balanced geographically with a 6.3% gain in the US and a 6.9% increase in international after adjusting for foreign exchange and acquisitions. Hips continue to roll, and US knee growth up 2% appears to be in line with the market.

Turning to trauma and extremities, we continue to see great momentum with double-digit gains in both the US and international lead by our foot and ankle business which posted 34% growth in the US and 28% worldwide. Based on the first half performance for our foot and ankle business, we are now even with the market leader which is a considerable achievement given that this dedicated business unit was only created at the beginning of 2012. Worldwide MedSurg sales increased 4% on a reported basis with year-over-year gains for all of its business segments including strong double-digit growth from the 1488 camera and system 7 power tools. Finally, Neurotechnology and Spine posted roughly 7% underlying growth, excluding foreign exchange and acquisitions, lead by double-digit gains for Neurovascular and interventional Spine.

Turning to some other P&L highlights, gross margin, excluding acquisitions and restructuring charges, declined 50 basis points year-over-year to 67.7%. However, this included approximately 80-basis-point impact from the medical device excise tax. With R&D representing 6% of sales and up 14% from the prior year, we continue to make important investments in innovation for the future. Looking ahead to the remainder of 2013, as mentioned, we feel highly encouraged by the continued strong sales momentum which supports growth at the upper end of our original range. We are pleased with our overall operational performance, but foreign currency has proven to be a major challenge in 2013 and has worsened further since we announced our Q1 results at which time we guided EPS to the lower end of our range. If exchange rates remain at current levels, we anticipate full-year EPS to now be negatively impacted by approximately $0.20 per share versus the prior year.

As a result of this increased foreign exchange impact, we are adjusting our EPS range to $4.20 to $4.26 versus our original target of $4.25 to $4.40. This revised range assumes we will offset approximately half of the full-year foreign exchange headwind. Importantly, going forward, we will be implementing a currency hedging program to enable us to mitigate the earnings volatility associated with foreign exchange swings which Bill will comment on shortly. With that, I will turn the call over to Katherine.

Thank, Kevin. My comments on today's call will focus on an update of our Q1 acquisition of Trauson, as well as a preview of our upcoming Analyst meeting which will be held on September 4 and 5 at the Homer Stryker Center in New Jersey. With respect to Trauson, we closed on the deal on March 1, and we have been pleased with the performance to date, recognizing the relatively short period of time since the acquisition. With Trauson, we are now a leading player in the lower price segment of the trauma market as well as Spine in China which we believe will be an increasingly important market with robust growth potential. The deal complements our existing presence in the premium segment but provides us access to a different customer base and dealer network.

As it relates to the integration, we continue to make solid progress and are on track with expectations as it relates to all key activities. In order to insure our organization remains focused on building our competitive presence in both the lower priced and premium segments of the Chinese market, we have separate leaders who are running their organizations independently. We remain excited about the prospects for this acquisition, both to expand our presence in China, and longer term, to provide a platform that can be leveraged more broadly into the lower priced segments in other emerging Markets.

Turning to the Analyst meeting, we will once again be holding this event at the Homer Stryker Center. For those of you who are able to join us on September 4, we will be hosting our products there focused on our Neurotechnology businesses. Specifically, we will be highlighting our six key business units that address the Neurotechnology market including Neurovascular, interventional Spine, neuropowered instruments, navigation, Spine, and CMF. With the acquisition of our Neurovascular franchise in early 2011, combined with the two additional acquisitions of Concentric and Surpass, Stryker is the leader in complete stroke care. But, beyond these important businesses, we have additional product offerings that touch the key physician community including neurosurgeons, interventional neuroradiologists, and neurologists with these products to be included as part of the neuroproduct there. The format will allow for informal interaction with the key leaders of these businesses and an opportunity to better understand the key product offerings and how they relate to our broad Neurotechnology portfolio.

Following the products there, on September 5, we will have our formal Analyst meeting which will include presentations from our key leaders with opportunity for extensive Q & A. We look forward to seeing many of you at the meeting in early September and hope you find the format and content helpful to better understanding not only Stryker's Neurotechnology leadership but our broader product portfolio. With that, I'll turn the call over to Bill.

Thanks, Katherine. Sales growth was positive by 5% in the quarter including a negative 1.5% impact from FX translation. Constant currency sales growth was a positive 6.5% and 5.9% excluding acquisitions. We had a positive impact from an additional selling day in the quarter, and on a days adjusted basis, core growth was a positive 4.4%. EPS on a GAAP basis for the quarter ended at $0.56 per share versus $0.85 per share last year in the second quarter, while adjusted earnings per share was $1 per share for the quarter versus $0.98 per share in the second quarter last year.

This quarter's EPS includes negative impacts of approximately $0.04 per share from FX and $0.03 per share from the med tech tax. The Income Statement is exposed to both transactional and translational FX risks while the balance sheet is just exposed to translational FX risk. We currently hedge transactions once they occur, but we don't hedge future transactions at this time nor do we hedge any translation exposure. We are planning to implement a predefined, layered transactional hedging program beginning sometime in the third quarter which will be fully implemented over the next year. This will help us mitigate the volatility of FX movements in the future.

The most significant non-GAAP adjustments in the quarter, primarily related to a $170 million increase in the charge associated with the voluntary recall of the rejuvenate and ABG2 modular hip stems. The adjustments also included an increase of $19 million for estimated settlement expectations for previously disclosed regulatory issues. We believe these are reasonable estimations of our exposure. However, no potential insurance offset that may be available to help cover some portion of the rejuvenate recall has been included. We do expect to recover some benefit from insurance in the future and will also book that as a non-GAAP adjustment when known.

Looking at sales in the second quarter, volume and mix contributed 7.8% to our top line sales growth and acquisitions added 0.6%. Price changes reduced sales by 1.9%. The price decline is in line with the decreases experienced in 2012 though. Currency, driven primarily by a significant weakening of the Japanese yen versus the US dollar, negatively impacted our top line by 1.5%. We also had an additional selling day in the quarter increasing sales by approximately 1.5% on average in the quarter.

Looking at our reporting segments, Reconstructive products represented 44% of our sales in the quarter, and sales in this segment were up 5.6% as reported and grew 7.6% on a constant currency basis. On an average daily sales basis after adjusting for the impacts of acquisitions and currency, Reconstructive sales were up 5% in the quarter. US Reconstructive sales grew 6.3% in the quarter. Trauma and extremities had another excellent quarter in the US, posting 19% growth, lead by new products, sales execution, and strong growth in both foot and ankle.

Domestic hips and knees were stronger sequentially growing 6% and 2% in the quarter, respectively. Knees are still feeling the impact from the absence of our shape match cutting guides, but the growth in this category still appears to be in line with the market. Our international Reconstructive business was up 9.4% in constant currency and 5.7% adjusting for selling days and acquisitions. All regions posted positive growth with performance the strongest in the emerging Markets.

Next, our MedSurg product segment represented approximately 37% of sales in the quarter. Total MedSurg sales increased 4.2% as reported and 4.8% on a constant currency basis. These results were lead by growth from our medical and sustainability solutions business. Medical increased by high single digits, and sustainability returned to solid double-digit growth. Endoscopy posted mid-single-digit growth in constant currency. 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, and this impact, we believe, will anniversary itself mid-third quarter which will reduce the year-over-year comparison issue to around $6 million to $7 million in the third quarter and eliminate that comparison negative drag by the fourth quarter. We look forward to getting this product back on the market once we obtain our regulatory clearance of the Neptune -- on Neptune's 510(k).

Our final segment, Neurotechnology and Spine, represented 19% of the Company's sales and delivered another good quarter. Sales increased 5.4% as reported and 7.5% on a constant currency basis. Growth in this segment was lead by our IBS and Neurovascular business which both posted solid, double-digit constant currency growth. Core spinal implant sales were up 1% in the US and up double digit internationally on a constant currency basis. Excluding the impact of the Trauson acquisition, international core Spine still posted growth in the mid-single digits.

In looking at our operational performance, gross margins on an adjusted basis in the second quarter of 2013 were 67.7% compared to 68.2% for the second quarter of 2012. The med tech tax negatively impacted gross margins by approximately 80 basis points in the quarter. When compared to the same period last year, the rate was also negatively impacted by foreign exchange rates.

Research and Development expenses increased 0.5 percentage point to 6% versus 5.5% last year in the quarter, and the 14% increase in R&D spending over last year reinforces our commitment in this area and our expectations for above-market sales growth. Selling and general administrative expenses costs were represented probably about 45.9% of sales. However, included approximately $200 million of non-GAAP adjustments including both the rejuvenate and regulatory costs that were mentioned earlier. On an adjusted basis, SG&A expenses were $813 million, or 36.7% of sales in the second quarter of 2013 versus 37.1% in the prior year's second quarter.

Operating margins on an adjusted basis were 23.3% in the second quarter compared to 24.1% last year in the same period. And again, that rate was primarily impacted by the 80-basis-point negative impact from the med tech tax, FX movements, and R&D expenditures, partially offset by operational efficiencies. Other income and expense in the second quarter were $21.3 million, and that compares to $10.1 million last year in the second quarter. This represents a negative $0.02 per share impact on EPS this quarter. This increase in expense resulted primarily from lower interest income due to some lower interest rates and some slightly higher transactional FX expense in this category. Our reported tax rate for the second quarter was 20.8%, while the adjusted effective tax rate was 23.3% for the second quarter of this year.

Looking at the balance sheet, we ended the quarter with $4.7 billion of cash and marketable securities, an increase of approximately $450 million compared to year-end 2012. We also have $2.8 billion of long-term debt on the balance sheet. And, from an Asset Management standpoint, Accounts Receivable days ended flat with last year in June at 58 days, and days in inventory finished the quarter at 166. That's actually down one day sequentially, but it's down eight days when it's measured against the prior-year quarter as we're really driving a number of initiatives in this area as part of the operational improvement plans.

Turning to cash flow. We had an excellent first half of this year generating cash from operations of $592 million. That compares to $492 million in the prior year which is an increase of 20.3% over the first half of last year. Finally, regarding share repurchases. In the first half of 2013, we repurchased approximately $250 million of our stock, or approximately 3.8 million shares at an average price of $65.12, and we still have about $750 million available for repurchase under our current authorization program.

Based on our solid sales achievement in the first half in the current economic and market conditions, we're projecting constant currency sales growth, excluding acquisitions, in a range of 4% to 5.5% for the year, and if foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1.5% to 2.5% in both the third quarter and in the full year for 2013.

As Kevin indicated previously, we are adjusting our guidance for our 2013 adjusted diluted net earnings per share to a range of $4.20 to $4.26. This includes a negative impact from foreign exchange movements of approximately $0.20 per share compared to last year's average rates. Thanks for your support, and we would be glad to answer any questions that you may have at this time.

(Operator Instructions)

Your first call comes from the line of Bob Hopkins from Bank of America. Please go ahead.

Thanks, can you hear me okay?

You bet. Hi, Bob.

Great. Good afternoon. So, Bill just to start off with a financial question. My first question is, can you just highlight how FX impacted the gross margin this quarter? And then, give us a little bit more detail on the hedging program and how that might impact the P&L going forward?

Sure. As far as how it affects the rate, it's probably about 10 to 20 points negative impact in this period, and obviously, that's only one area that the rates actually has an impact on the overall performance. In general, as I talked about from an FX perspective, we're exposed, obviously, on both the transactional and the translational side of the equation so we generate a significant amount of money and profits both in Japan and Australia and a number of other countries. But, we also have transactional-related exposure where we're selling products into a number of these countries that don't have natural offsets.

Currently, the Company only hedges those activities once the transaction already occurs, and on the layered hedging program that we're at least looking at and implementing on an ongoing basis, we would be in essence looking out forward as far as 12 or 18 months and actually putting in different layers of purchases at different points in time throughout kind of that 12- or 18-month period of time so that we're buying the currencies we need to have in those periods consistently through that period. And, what that does is it just mitigates or buffers some of the highs and lows associated with those exchange rate movements in any one period. So, hopefully that helps kind of explain that, and I'd be glad to get into it more if you've got further follow-up questions.

No. Just for my other follow-up, I wanted to ask Kevin a question. But, thank you for that. Kevin, I just wanted to get your quick update on the competitive knee landscape. Obviously, as everyone has been talking about for a while now, there's a couple of new knees in the marketplace, and one of the other competitors that have reported so far mentioned that there was some trialing going on. Your numbers seem pretty solid here. So, just has your opinion changed now that we're another quarter into the competitive launches on the potential impact from those competitive launches? Just an update would be great.

Yes. Sure, Bob. Thanks. What I would say is basically consistent with what I said last quarter that it's going to take a while before we really see if there will be an impact. I would say not before the end of the third quarter will we have a good sense. We feel pretty good about our knee performance. It's in line with the market despite the fact that we have our shape match cutting guides off the market, so we feel we're doing well. We hear noise a little bit here and there about trialing, but it's very minor at this stage. Like I say, we are not going to have a good understanding probably until the end of the third quarter.

Our next question comes from Richard Newitter from Leerink Swann.

Just a housekeeping, I think you had given the impact of selling days on the overall recon business. Just can you parse that out by hips and knees?

There isn't -- Rich, it's Katherine. There really isn't any real variability between hips and knees, so the math that we quoted on the call would hold. And, it's 1.5% overall. If there's any variability, it would be more related to our capital businesses that tend to be less impacted, but for consistency's sake, we apply the same math each quarter and don't try and adjust because the swings aren't that meaningful. So, I wouldn't expect any variability.

Okay. Thanks, Katherine. And, on the knee side, can you maybe give us a sense of where you are with getting ShapeMatch back on the market? When might we expect that? And also, your direct-to-consumer initiatives in knees -- for the GetAroundKnee, can you describe what updates you might have on the impact that's having on the business? And, what your plans are going forward with that?

No problem. We filed the Otis 510(k) during the second quarter, and it's difficult as you know to predict when 510(k) clearance may materialize. We're hopeful sometime this year, but obviously that is going to depend on a number of variables. We have been continuing with the DTC campaign although the mix of media varies depending on some of the analysis we've done which is very consistent with what we've said on prior updates. That's not a departure of any type, and we continue to believe that the Triathlon knee as the only single radius knee on the market has some unique benefits as well as some extensive clinical history that we believe will help us remain very competitive. We're pleased with the growth that we saw recognizing there's always some impact, not massive, but some impact, given the ShapeMatch is not available on the market right now.

Our next question comes from Larry Biegelsen from Wells Fargo.

So Kevin, it would be great to hear from you, what you think drove the strong improvement in your international hip and knee growth and the sustainability of that?

Sure, as you know, Europe -- the turnaround story really began last fall. We put a lot of new leaders in place. We've really focused the Company on turning that around. We've had great exchanges with our US counterparts -- the head offices in US to help drive that growth. We've also sent over one of our top leaders who is leading the knee campaign in the US. He's now living in Europe and helping to run the orthopedic group in Europe.

So, I would say it's a number of factors leading to sustained performance, and we've seen the improvement gradually coming. It came through, obviously, very clearly in this quarter, but it's only one quarter. So, I don't want to get ahead of ourselves. I think we need to see that sustained, but I really can't point to one thing. It's a real focused commitment, really starting with leadership and alignment and driving -- what we have are great products. And, we just have a disproportionately lower share in Europe than we do in the US and other markets like Australia, Japan, Canada. So, that's really the key point of the turnaround, Europe being a negative sales over the last few quarters finally turning to positive sales this quarter.

Thanks. Then, for my follow-up, I wanted to ask about pricing because it did deteriorate in Recon, and that was a little bit surprising to me given that you lap the Japan cuts on April 1. So, could you talk a little bit about where you saw pricing deteriorate? Was it the US, Europe, hips/knees, and how confident are you that it doesn't get worse? At least in the near term, from that negative 3.4% we saw this quarter. Thanks.

Yes, it did worsen I think by about 80 bips or so versus the first quarter. Remember, we did anniversary the Accolade launch in the second quarter last year so there was some benefit that we saw. There's nothing significant I would call out or some change in trend. We've been saying that hip and knee pricing is likely to remain under pressure somewhere in the low single digits, partly offset by mix, which is going to vary quarter to quarter. But, there was no significant departure from that.

I would not characterize the market as deteriorating in terms of price. I would say it's very stable and low single digit. From quarter to quarter, we do tend to see a little bit of variation, but nothing that concerns us.

Our next question comes from Joanne Wuensch from BMO Capital Markets.

Thank you very much for taking the question. Just for clarification, the 4.5% constant currency growth you're guiding to for the year, how much of that is acquisition revenue? Or, is that organic?

That's organic growth.

4% to 5.5%, excludes foreign currency and acquisitions.

Terrific. Thank you for that clarification. Second up, can you please comment on the capital purchasing environment at the hospitals?

Joanne, there has been no real change since our prior update. The markets remain somewhat cautious ahead of unknown changes under the ACA for next year. So, there hasn't been any significant improvement nor deterioration in what we're seeing as it relates to hospital capital spending. Recognizing our capital businesses tend to have more variability even when there is no overall market concerns just the nature of that type of business. But, there has been really no change in the environment since the start of the year.

Our next question comes from Matthew Taylor from Barclays.

Hi. Thanks for taking the question. I guess first off, I just wanted to follow-up. It sounds like you started to answer the FX question that Bob asked. But, given that hedging program that you talked about and looking out 12-18 months, I guess my question is, you lower the guidance for the year. But, when will we start to see that have more of a stabilizing impact on FX as it rolls through the P&L? And, can you comment on where those hedges would be located?

Sure. That's a great question. Because obviously, we've got the exchange rates that are already moved which is why as we look at the full year and look at what the expected impact for us is, it's still obviously a significant drag on this year. We believe that we're going to be implementing a layered hedge program, but that's built up over time and that's really to protect us against future rate movements. And again, a hedging program is only set up to mitigate that risk. It doesn't eliminate the risk. So, as currencies change, you're ultimately getting the impact of whatever those currencies are changing to unless you, one, either have some good natural hedges established for long term and also to just mitigate at least or minimize what the volatility of that high or low on those rates are.

So, if you think of us begin putting in a layered hedging program, we would think we would have it pretty much in place or largely in place by the time we get into the first quarter or so of next year. And, by that point in time, you're going to have multiple layers that are already being established in each one of those quarters. But, for this specific year, we're still going to have fairly significant negative impacts based on where the rates are at today.

Great, and then just on Spine. Your Spine numbers have improved a little bit and a lot of people have been talking about improvements in the Spine market. Have you seen any change in volumes or the behavior of payers? Or, anything that has really changed dynamically?

No. Keep in mind that the Spine business includes both our traditional core Spine business as well as our interventional Spine business which is faster growing and had another solid quarter of double-digit gains on the interventional Spine side. We see no significant change in trends in terms of whether it's payer pushback or just the underlying overall market trends. It seems to be moving towards greater stability, but it's still an overall challenging Spine market.

Our next question comes from Rick Wise from Stifel Nicolaus. Please go ahead.

Hi, this is actually Matt Blackman here for Rick. Can you hear me okay?

Hi, Matt.

Yes.

So, just a couple questions. Are you able to comment at all about the incremental cost of implementing this hedging program?

So, there's really not a lot of additional incremental cost associated with the hedging program. All of the hedges that we would be layering into are really forward contracts. Those are done at kind of a very, very minimal related cost aspect of that. So, there should be nothing associated -- at least materially associated with anything with the hedging program itself.

Okay, that's helpful. And then, the next question, you mentioned we'd fully anniversary Neptune in the fourth quarter. But, just any commentary on getting it back to market?

Well, we have filed the 510(k) so we're waiting FDA clearance, and similar to OtisMed, obviously, we have to respond to any questions from the FDA. We're continuing to target sometime this year for the clearance, but this isn't a perfect science as you know. So, we're trying to give visibility around both the quarterly impact and the expected impact until we get to clearance which again is hopefully some time before year-end.

Our next question comes from Derrick Sung from Sanford Bernstein.

Hi, thanks for taking my question. I wanted to follow-up on the pricing question that was asked earlier -- the 80 bips we're seeing in pricing. I wanted to go back to the OUS-US split because as Larry mentioned, there is that benefit from the Japan reimbursement cuts anniversarying. So, I was wondering does that imply that we saw a greater than 3.5% impact in the US? Or, if you can just give a little color there, that would be helpful.

First off, a clarification of that impact. The impact on the pricing side is about a 60-basis-point impact on the overall margin levels. The rates that are out there, and what's being put together as Kevin mentioned and as Katherine mentioned, the ranges of those price impacts actually are different quarter to quarter. And, it's really based on some of the programs that people are putting into place, but nobody is really seeing any difference in the trends associated with that.

And also, keep in mind when we're talking about Reconstructive as we show that category, that's not just hips and knees, so the pricing you're seeing is inclusive of some of our other businesses as well such as trauma and extremities.

That's right.

Okay, thanks. And then, as a follow-up, you're making a clear effort here to step up your R&D spend this year. Can you talk a little bit about where that R&D spend is going? And, when you expect to get the return on that?

No, our comments have been that we expect in any given quarter R&D as a percent of sales to be somewhere in the 5.5% to 6% range, and it's going to vary quarter to quarter obviously it was at the high end of the range that quarter as we continue to make investments that we believe are helping to drive the top line growth. So, we don't expect any real change. That continues to be the expectation.

Our next question comes from Mike Weinstein from JPMorgan.

Thanks. I have a few questions. I'll try and narrow it to two. One is the cash flow performance this quarter. You kind of buried the lead a little bit on that one when you put it into the [tech], so it was up 20% year-over-year. Can you just describe what drove that? Is there something in last year's comparison I should be aware of because obviously that's a very strong performance relative to the underlying earnings.

Sure. I'd say that if you look at last year's performance, I'd say that we had a weaker or a softer cash flow level in the first half of last year. But, as you saw, our inventory days in comparison -- especially in comparison to a year ago are down about eight days. I think in general we feel very good about the cash flow level that we're looking at, and we should continue to be able to drive that at a solid rate.

I'm going to sneak in two follow-ups here. First, just to understand, you're basically describing a current FX impact on your bottom line of basically 100 basis points as $0.10. Is it that high because of what's going on right now is the yen, and you have less hedges on your yen exposure than you do on your euro? Because I always thought that the historical relationship, Katherine, the top line impact to bottom line impact was less severe. So, that's first.

And the second, maybe I want to go back to the cost of the hedging program. You described the cost of the impact on the P&L of implementing a hedging program is relatively de minimis. I just want to make sure I understood that. Thanks.

Sure, absolutely. So, a couple questions there. The first question really deals with some of the rate-related impacts, and it really depends on which currencies are moving. So, in some currencies we have better natural impacts or offsets associated with it, but when you look at the Japanese yen, for example, and say, the Australian dollar. The Australian dollar just in the last -- since the last call -- in the last three months has changed about 13% downward. So, when we're selling in Australian dollars, but we're buying those products that are sold into that market in either dollars or euros, that's obviously a negative impact associated with it.

Same with Japan. So, Japan we have very little -- virtually no natural offsets there. Everything we're selling there is really being purchased outside of that region. So, because we've had such a significant move in the yen and also in the Aussie dollar, in fact in most commodity-based countries, that's actually having a more negative impact on us in this specific year than what we generally see even with some higher volatility and rates.

And, as far as the cost of the program goes, again, there's obviously some additional ramp-up within kind of the Treasury group to make sure that we can support that, but relative to the overall cost of both the organization and the cost of that program, it's relatively de minimis. As far as buying that, all we're really doing is we're purchasing the amount that we need in advance. So, we're buying amounts -- let's say for the second quarter of next year, and we're buying that at different periods between now and then so that we don't just get exposed to whatever the rate is in that specific quarter. But, it's layered in through a number of purchases up until that date.

Our next question comes from Matthew Dodds from Citigroup. Please go ahead.

Hi, good afternoon. Quick one first for Kevin. Now that we've had more than half of the companies reporting in the second quarter, and you look at the first and second quarter combined, the hip market continues to outperform the knee market whereas you could argue demographics might be better for the knee market. There's more DTC spending there. You've got the new product launches. Is the difference in your view all elective where knees are just that much more elective than hips? Or, is there something else out there?

Matt, thanks for the question. I would say that that's a trend we've been seeing for a little while now, and I would attribute it to the more elective nature of knee procedures. If you have hip pain and you're lying in your bed, you feel the pain versus a knee can be deferrable. You could get HA shots or other things that can delay your procedure so I would 100% attribute it to the more elective nature.

Just on hips, I would have to say I'm extremely pleased with our performance in hips. Given that we obviously had to undergo a recall starting last year, you have not seen our business go negative in hips certainly in the United States where the recall was most intense. In the third quarter of last year, we had a slight dip in our growth rate, but it was still positive growth. And, what you've seen since then is sustained positive market leading growth in spite of having to manage our way through a recall. So, I think that's a tribute to the leadership that we have in our recon group in the United States.

I figured you were just looking forward to that science on the hips. One quick one. On trauma, was there any benefit left from the nail recall in the competitor? Or, was that largely gone in Q1?

At the end of Q1, they were largely back on the market. So, what I would say is we had a pretty pure quarter in the second quarter, and as you know, we've been growing above-market in trauma for a number of quarters -- frankly, a number of years, certainly in the United States. It was nice to see our international trauma business pick up as well but very bullish, very confident with our trauma business. Great leadership that we have in place, and very, very strong performance in the second quarter, again.

Our next question comes from David Roman from Goldman Sachs.

Hi there. It's actually Chris Hammond in for David Roman. Can you hear me?

Yes, we can.

Okay, wonderful. Thank you for taking the questions. First question is related to the P&L. I think for the last two quarters now -- I think you have come in with SG&A spend a little bit higher than what we were forecasting. And, I'm wondering a) kind of how we should be thinking about that for the rest of the year? And then, additionally, how that plays in the context for EPS for the full year. When we strip out all the noise, whether it's FX or device tax, it looks like the total EPS growth rate is fairly robust. And, I'm wondering about the sustainability of that? And, what are the various levers up or down either way?

Yes, so I guess first off, just on the SG&A-related expenses, I think that we're doing a very good job on the covering of that side. We've got our expenses this quarter on an adjusted basis are about 36.7% of sales versus 37.1% last year in the second quarter. I think we had some pretty good first half-related improvements, and I think overall that we're expecting to continue to -- especially if we can realize this level of top line sales growth, it does allow us to get some leverage associated with our overall business. And, I think that that's our expectation moving forward.

Okay, wonderful. And, if I could squeeze in one follow-up here. I was curious a little bit about what's going on in Europe. Obviously, a turnaround seems to be well underway there, but then there's some other numbers from the Trauson that's being baked in there, too. But, just outside of just the sales changes that you have made, what are you seeing in terms of a macro landscape there? Has anything changed since you've last updated us? Whether it's in regard to austerity or competitive trends?

First thing, I would start with the market. I would say that the market in Europe is the same challenging market that it has been frankly over the last couple of years. Trauson sales are only in China. There's virtually no sales outside of China so the impact in Europe has nothing to do with Trauson. It's really our own operational performance, and what I would say is our actions -- we had lost market share for a number of quarters. And, we started to address that with vigor starting in the fall of last year.

I'm very pleased with our performance in the UK, in France. Spain has really turned the corner, and we had a very strong quarter in Spain. And, a number of the other smaller countries, we've really with better leadership in place and more focus, we've been driving improvements. Italy and Germany actually improved versus the first quarter, but those are two countries where we still have work to do. And, I would be looking for more improvement from those two countries later on. But, this is really an operational improvement story. But, we have to be honest that this is following a period of a number of quarters where we were underperforming the market. Our goal that we stated last year was to get back to market growth by the end of the year. We're obviously on that trajectory based on a very strong performance this quarter.

Our next question comes from Kristen Stewart from Deutsche Bank.

Hi, thanks for taking the question. Just wanted to ask a question on the Neurovascular business. I think you had mentioned there was double-digit growth in the quarter. Could you maybe further expand upon that? And, are all of the activities or shifts between you and Boston Scientific now complete from a manufacturing standpoint?

Thanks, Kristen. The final employees transferred over in April so we are now essentially done with all of the major integration-related aspects of that deal which was in line with what was expected when we did the deal a couple years ago, and they continue to see very solid momentum. There's really no acquisition benefit in those numbers just given how small the Surpass deal was. So, it's really nice product flow and continuing to have good momentum across both the hemorrhagic and ischemic segments for the neurobusiness.

I'd say Kristen, just to add one comment. The product launches have been terrific in coils. So, in coils, we're clearly the leader in regaining market share pretty significantly with [Nanocoils], long coils. Just a whole series of launches over the last few quarters that are really boosting that business. And, as you know, that Management team stayed in place as we acquired the business from Boston Scientific, and the R&D engine is really humming very, very well.

Okay, perfect. And so, overall, it sounds like you would say you're gaining share. Where do you think the market is generally growing at these days?

I don't think there's any real change to our overall market growth expectations. It's somewhere in the 6% to 8% range. It's hard to get total visibility given that a lot of the companies -- the sales are part of much bigger companies that it doesn't necessarily get broken out. But, we think the overall market growth is probably somewhere in that 6% to 8% vicinity.

And, related to the comment on gaining share. We're gaining share in coils. So certainly, when you look at the ischemic market as well as the flow diverter -- the stent -- we're still enrolling patients in the trials. We don't have that product on the market in the US, so our share gains are really in the [climbing] segment.

Our next question comes from Glenn Novarro from RBC Capital Markets. Please go ahead.

Oh, hi, thanks. Two quick questions. One, on the hip side, your hip numbers came in better than expected, particularly on the US side, so I'm assuming you're taking market share. Can you confirm that? And then, what do you think that the US hip market is growing. And then, I have a follow-up after that on extremities.

Well, first on the hip market, obviously not everybody has reported yet. I would guess that it's probably growing in the low single digit. We have been at the high end of market growth for a number of quarters now. As I mentioned earlier, very excited about our hip leadership. We launched the Secur-Fit advanced product recently which was a fit and fill stem on the heels of Accolade 2 being launched a year ago. So, we've had very good product flow including our MDM and ADM cups that we launched not so long ago. So, it has been a very, very good product flow, and great execution in the field that has been driving above-market growth in hips for quite some time now.

And then, let me just follow-up on the foot and ankle side. You said the US business was up 34%. We assume the US foot and ankle market is growing in that 10% range. So, two questions. One, has the market accelerated? And then, two, obviously you've taken share. Do you know who you've taken share from? Thanks.

Well, first of all, we love being in this market. It's a high growth market. Until everybody reports, it will be hard to say exactly what the market growth is. But, I would say in the 10% to 15% range is probably about right for market growth. I think we're taking share from a number of players. It's a fairly fragmented market. I wouldn't say it's from one particular player. The bigger issue is that it's a market expansion story. So, we're frankly more concerned with growing the market than we are with individual competitors because there's so many implants that are not used today to treat hammer toe procedures or bunions, and that's really where the bulk of our growth is really coming from the elective procedure area which makes up the vast majority of our foot and ankle business.

Our next question comes from Matthew O'Brien from William Blair.

Good afternoon. Thanks for taking the questions. I was just hoping you could talk a little bit about your capital equipment performance in the quarter. It was quite good compared to what we have seen so far from a couple of other companies in the space. And, I just wonder if Stryker is a little bit unique in the fact that it can bundle quite a few products across recon, neuro, and then MedSurg as well. Is that a dynamic that's benefiting you in this type of environment? Is it something that has been accelerating recently? Or, can you talk a bit about that, thank you.

We've been, as we've talked about in the past, increasingly looking to drive better cross-divisional coordination, but that is still very much in the early stages. And, I wouldn't want to characterize the performance of any of our businesses as being driven by that at this time. There has been no real change in the overall market backdrop as it relates to our capital businesses and that we've seen year-to-date. Obviously, we saw very good momentum with the 1488 and system 7, which are capital, and both growing in the double digits. Medical is our most capital-intensive business over 90% of that business is capital. Again, hospitals seems somewhat cautious on some of their more deferrable capital purchases, but that's a very consistent trend we've seen throughout the year.

And then, just a quick follow-up to Derrick's earlier question on the R&D side. Three quarters in a row now of double-digit growth in that metric. Is the spend more related toward -- maybe a bit more allocation toward some newer areas that Stryker is not currently in where you may have a call point? Or, is it more just allocated in areas where you're currently at, i.e., spending on the neuro side?

So, clearly as neuro takes on a larger portion of Stryker's overall business, you would expect a slight tick up in our overall R&D rate. So, that's a business mix issue, as neuro does demand a slightly higher rate of R&D spending. But, it really is an across-the-board commitment to really invigorating our pipelines. I've had a chance to travel to all of our businesses and do business reviews including the pipeline. I'm very excited by what I'm seeing. At this stage, we tend not to want to talk too much about a lot of the new products, but you can see with our success with the 1488 and system 7 that new products are the lifeblood of the Company, and we're committed and focused on continuing to drive above market growth through strong investments in Research and Development.

Our next question comes from Bruce Nudell from Credit Suisse.

Good afternoon. Thanks for taking the question. Medical is clearly a lumpy business, did quite well this quarter. What's the kind of trend line that you envision for that business now that you've had some more experience with it? Thanks.

Bruce, I don't think we expect any major departure from what we've seen. Clearly, prior to 2008, we saw very strong growth in capital, but it was a different market environment. We feel there is some hesitancy as we've said around ACA and just general uncertainty. You are right. This is a business that can vary considerably from quarter to quarter, even when there isn't market uncertainty. That's just the nature of capital, more so for our medical than any of our other businesses. But, there's been no real change in the outlook for that business than what we thought at the start of the year.

And, just last quarter, you noted that in endoscopy, cameras were strong. Communications was below par. Where do you think, where are you right now in that business?

Yes, we obviously continue to see good momentum as we're going into year two with the camera which was up double digits as Kevin referenced. Com was down. Again, that is one of the most capital-intensive components, certainly of endoscopy. Although the rate was considerably better than the declines that we saw in the first quarter which was expected when we were on our last call. Based on trends, we would expect a little bit continued improving trends that relates to Com in the back half of this year.

Our next question comes from Matt Miksic from Piper Jaffray.

Hi, good evening. Just a couple of follow-ups on some of the areas that folks have been asking after. One was on extremities, and I have a follow-up on capital and MedSurg. So, on extremities, would love to hear -- understanding that your growth so far has been coming from some of the sort of discretionary procedures. Hammer toe, bunions. Would love to hear about maybe some of the investments that you're making in that business in terms of distribution? Maybe in terms of what we can look forward to in expanding the product line either in foot and ankle? Or, upper extremities would be very helpful.

Yes, you are correct. The vast majority of the revenue in our foot and ankle business is associated with elective procedures. We're very excited about the opportunity there. We've put in place a dedicated sales force for foot and ankle, which is largely a different call point than the upper extremities piece of the business, and we put that in place in the first quarter of last year. Very pleased with the focus. It's a formula that is tried and true within Stryker. Bring a lot of focus and leverage what was a terrific portfolio of products with the Memometal acquisition and continue to invest in expanding the market, which as Kevin mentioned, this is really about a market expansion story more than anything else. What we do longer term, whether it's in upper extremities or other areas, I think we'll just determine that as we look at the opportunities. But, right now, the bulk of our focus is really in that foot and ankle area.

Nothing immediately on the docket for back half next year, upper? Or, further lower that you can talk about?

Well, what I'd say on the upper extremities is, we -- in the shoulder business in particular -- we launched a new primary shoulder a year ago. And, we have a reverse shoulder that's in our pipeline which we hope to launch by the end of the year. Or, let's say around the end of the year. Once we have the reverse shoulder launch that will really give us a complete portfolio, and we would look to drive pretty significant growth. But, we're not going to see much of that this year. That will be really more of next year's growth opportunity.

Our next question comes from David Lewis from Morgan Stanley.

Good afternoon. Maybe a couple questions for Bill and then for Kevin. Bill, one quick on one currency and then a more strategic question. On currency, can you walk us through the decision to begin to hedge transactional, I guess? Is it in response to the volatility in this particular quarter? Or, is it really response to multiple disparities around FX over the last six to eight quarters?

I really don't think it's actually either of those two. I think that maybe the highlight of that volatility maybe has caused us to look at it a little bit harder, but I think that it's just one of the areas that as an organization we need to look at to manage risk in general. We obviously have exposures in a number of different currencies, both on the translation side as well as on the transaction side as well as really on our balance sheet side. So, we're just looking at it relative to the activities and the practices that we currently have in place and seeing whether we think we should have some additional programs in place to help mitigate any of the risk in the organization. So, I think it highlights it for us maybe this year a little bit more because it's having an impact, but even if the impact hadn't occurred, the risk level still existed. And, that's a program that we should have in place as an organization.

I'd like to jump in just to make a quick comment that obviously Bill has years of experience with layered hedging programs, and I think bringing him on as a new CFO with a fresh set of eyes -- this is a risk we've known about at Stryker, and Stryker has lived with this risk for many, many years. Its rates have never moved with this kind of dramatic -- in terms of intensity as well as the shortness of the time frame. So, it's a risk we've known about, but it is a risk that has never materialized in such a dramatic fashion. But, Bill has that experience, and obviously the two of us spent a lot of time talking about it and really believe this is the right step to move forward with that will smooth out those variations and then our true operational performance can shine through.

Thanks, Kevin. Just maybe two more quick ones. First, maybe going back to Bill's significant experience. Bill, one of the areas that I think investors are pretty enthusiastic where you can bring some real leadership is on shared services. And, I imagine you've been there -- have you been there long enough to get a sense of where Stryker sits on shared services? And, relative to some of the cost numbers that Stryker has proposed, how do you feel about those numbers and your ability to implement shared services with the broader team? And, over what time frame do you think that's appropriate? And, one quick follow-up for Kevin. Thank you.

Well, a couple things here. One, I think the organization is already in a good position. I think it's starting from a strong foot on a number of different activities as well as just with the strength of its overall business performance. Yes, I think that we can definitely make some continued improvements here looking forward especially as we see kind of the areas that we're going to be growing sales and focus. But, specifically as it relates to shared services, while I've had a chance to look at really each one of the three different regions right now, and yes we've been talking through a number of different opportunities and activities. I think that, one, that's going to migrate over probably many different years. That's not something that just happens overnight. But, I think that we've got some good opportunities in a number of areas to just make sure that we're looking at even best practices within Stryker. Let alone kind of broadly external to Stryker, because I think we're doing a lot of really good things already within the organization, and we just need to maximize on that.

Our next question comes from Bill Plovanic from Canaccord.

Great, thanks. Good evening. Just two questions here. One is, for the hip recall, I think it adds up cumulatively to about $384 million if my math is correct? And, correct me if I'm wrong, and I think the original range was between $190 million to $390 million. Should we expect an increase in that range?

I think, one, you should expect us to reevaluate that at the end of every quarter, and I think that we did have some run-up on some expectations, and I think that mostly that's because of kind of the communications and how we're looking to see and get a good assessment of all of the activity out there. I don't think you should expect -- you shouldn't expect it. We shouldn't expect it. The numbers that we have got out there are the range that we're currently expecting based on the current trends and the levels of expectations moving forward. If it does change within this quarter or within the next quarter or any time in the future, we'll be reassessing that and trying to give at least our best estimate of what that new range may be. And, it could actually move in either direction, and as I mentioned, the range that we do have out there today does not include any potential offset from any insurance recovery on the back side. And, we don't want to book anything associated with that until obviously we get closer to understanding exactly what that may be. And, if we do book some that will be as well a non-GAAP related adjustment that we'll highlight for you.

Okay, and then, just -- thank you. And then, on the hip, and it has been kind of beat up a little here. It was a great quarter 6% on a 5% comp. The comps are getting tougher. You did announce or talk about some new products that have rolled out. How much longer do you think you can keep kind of staying at the high end of the market in terms of hip and really taking share? Is this -- should we expect reversion to the mean now that the new product cycles are starting to slow? Or, can you maintain at the high end? Thank you very much.

Well, I would say that moving back to the mean is never an objective. Obviously, we have been above market for I think eight quarters in the United States -- at least eight if not more than eight. And, in the middle of that we had a recall, a pretty significant recall. So, I feel really strongly about -- I just had a review this week earlier this week with our hip business in [Mawa] and very excited about the cadence of new products over the next few years that they shared with me. The execution in the field has been fantastic, dealing with this recall and continuing to sell and not make excuses for it. So, I believe we can continue to sustain market leadership. That doesn't mean every single quarter we will be number one, but we certainly have a terrific product portfolio that's existing.

Accolade 2 is still continuing to grow at robust rates so even though it was launched a year ago, it has certainly not reached its maximum. Same with our mobile-bearing hip offerings, and those cups are still gaining traction. A lot of surgeons use those initially in revisions, but they are having great success, and now they are thinking of using those cups in primary procedures. We still have very good runway with the new products that were launched, let's say, a year to two years ago in addition to the Secur-Fit advantage that was just launched. And, we do have a pipeline looking ahead that excites me. I don't -- would not expect us to suddenly fall off on hips. But, from quarter to quarter -- any one quarter, somebody might nudge a little bit ahead of us, but we're certainly playing for market leadership for the long term here.

Our next question comes from Steven Lichtman from Oppenheimer & Company.

Thank you. Hi. Just a question on endoscopy. You mentioned that comps will ease in with Neptune in the back half, but you did just anniversary the 1488 launch. Where are we in that launch? Is this a multi-year-type launch like we see in hips and knees? Or, are you pretty well out there in terms of the rollout?

Yes, the 1488 launch got underway late in the second quarter of last year. If you recall, we had some initial glitches, which is not unusual, and we'd start to get the product out -- used broader in the field. And, since that time, we've started to see obviously accelerating momentum and really pleased. So, they are now going into year two, and as we get into the back half of year two, the comps get more difficult. It tends to be a roughly three-year cycle. Same with our power tools. So, year 1 to first 18 months, the strongest growth, and then you start to see a greater moderation as you start to get to the tail end of the cycle. There will be no difference with that with the 1488.

But, in this quarter, it was strong double-digit growth. So, I would not say we're at the anniversary stage, and we have good expectations in the second half for endoscopy. The camera should continue to grow well. And, in addition, Katherine mentioned earlier the communication business. The drag that we had in the first two quarters has certainly lessened in the second quarter and should start to turn modestly positive in the back half of the year.

Okay, thanks. And, Bill, never like to ask a question on other expense, but it did hit you by $0.02 this quarter. Is that a level that we should be thinking about on a quarterly basis the next couple?

No, I think that as we kind of look through the back end of the year, we're obviously still getting hit by some of the lower interest rate especially on the investment incomes, and we're still obviously sitting with a fairly significant amount of cash. But, I think that from a year-over-year comparison level, I think the back half is probably not going to have as negative of an impact as you saw in the second quarter of this period.

Our next question comes from Josh Jennings from Cowen. Please go ahead.

Hi, good afternoon. Thanks for taking the question. Just first, with a competitor selling the Reconstructive joint business to Microport, is there any outlook here for Stryker to take advantage of any disruption, sales force attrition, et cetera, to see some benefit there in either hips or knees?

Whenever you have any kind of transition, there's always opportunity. But, they had a very, very small share of the overall market so any gains we would get -- I would say, look at all of the players likely being able to capitalize a little bit. But, given how small their market share was, it wouldn't be something that would be meaningful to our overall results.

And then, just a follow-up question on biologics. Can you just talk about the performance of Stryker's biologics unit? Future investment, future interest in building out your biologics franchise? And then, any interpretation of the [Yomed] analysis for Medtronic's infused product? And, whether or not that's a positive or negative for Stryker's biologics going forward? Thanks a lot.

Sure. We acquired Orthovita as you know recently, and we were very pleased with the Vitas product which is being sold by our Spine business as well as our trauma business. Last year, Spine took full advantage of that and really had terrific performance. I would say this year, trauma has picked it up, and Orthovita is starting to have a little bit more positive impact in trauma than it did last year. But, we really like that business. It has very good clinical data, and we continue to have runway for growth in biologics.

We have a dedicated business unit which focuses just on R&D and making the product, and then it's sold through our existing sales force. So, that was the thesis of the acquisition. We're pleased with that acquisition, but frankly the BMT issue on Medtronic, their decline has really happened over the last number of quarters. It seems to be starting to level off, and maybe there might be a little more decline. But, whatever benefit has accrued, whether it's to us or other players in the market, it's pretty much behind us. We do also have some biologics sold by our sports medicine and our foot and ankle business. We entered into a distribution agreement just recently on that, and that seems to be going very well as well. So, orthobiologics will continue to be an area of focus for us in the future, but we have a pretty good portfolio right now that we're looking to maximize.

Our next question comes from Matt Miksic from Piper Jaffrey.

Hi, thanks for letting me back on here. The follow-up that I had -- sorry about that before -- was around medical. And, just to maybe probe a little further into that, I know you've gotten a couple of questions on it. The environment being what it is, and here you have these pretty impressive numbers in the quarter. Can you maybe talk about the degree to which there was a product cycle involved there, and I know you've launched some new things in sort of critical care or emergency on the stretcher side. To the extent maybe that surfaces played a role here -- Katherine, you referenced hospitals are being more cautious with some deferrable capital expenses. Maybe help us understand which parts of medical are performing so well for you?

Yes, I think on the margin -- yes, surfaces helps on the margin. Some new product launches like power load which I believe we showed earlier in the year at the academy meeting. But, I wouldn't say medical is in the midst of a major new product cycle that's driving the growth. Probably don't want to get into a whole lot of granularity regarding the business segment growth rates because we don't break that out separately. But, in general, as you look at our all of our capital businesses which were around 22%, 23% of total Company revenue. My comments earlier was that medical as a group is the most deferrable in terms of beds and stretchers having inherently longer life cycle versus something like the capital businesses of our endoscopy and instruments business where cameras and power tools are technically capital but they're less deferrable than other certain types of businesses. Certainly, the medical.

Yes, the only thing I'd add is we really like being in the medical business. It is volatile. So, from quarter to quarter, we do have to deal with that volatility. But, they're new products whether it's the power load -- there's a new wheelchair that they launched recently which did not contribute in any meaningful way to sales in this quarter. But, those types of investments you'll start to see the benefit over time so we are committed to innovation in medical, and over the cycle with ups and downs, certainly we do expect to be growing at above-market rates. And, we really do enjoy that business.

Nice job in a tough environment. Thanks again.

Thank you.

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

So, thank you all for joining our call. Our conference call for the third-quarter 2013 results will be held on October 17, 2013. Thank you.

Thank you, Ladies and Gentlemen. This concludes today's conference. You may now disconnect.