史賽克 (SYK) 2013 Q4 法說會逐字稿

Welcome to Stryker's fourth-quarter 2013 earnings conference call. My name is Adrienne, and I will be your operator for today's call.

At this time, all participants are in 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 the discussions during this conference call will include forward-looking statements. Factors could cause actual results to differ materially, as 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 and as 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 fourth-quarter 2013 earnings call. Joining me today are Bill Jellison, our CFO, and Katherine Owen, Vice President of Strategy and Investor Relations.

Following my opening comments, Katherine will provide updates as it relates to our recent M&A activity, and Bill will then offer details on our quarterly results, as well as provide color on our 2014 guidance, which includes slides available via the webcast. We will then open up the call to Q&A.

Turning to our Q4 results, organic sales growth, which excludes currency and acquisitions, was solid again this quarter, increasing roughly 6%. With the same number of selling days in the quarter, this represents strong growth, with all three segments -- reconstructive, medsurg, and neurotechnology and spine -- delivering year-over-year gains. Growth was also balanced geographically, with the US up 7% and international increasing 8% in constant currency.

US reconstructive sales were up 9%, reflecting a 10% increase in hips and 8% growth in knees, a stellar performance, particularly given the tough year-over-year comparisons of 7% hip growth and 9% knee growth. And despite also facing challenging prior-year growth of 26%, which benefited from a competitor recall, US trauma and extremities was up a very solid 8% this quarter. This business continues its multiyear momentum, and US foot and ankle continued to roll, up an impressive 36%.

US medsurg was led by instruments and endoscopy, which increased 8% and 12%, respectively, more than offsetting flat results for medical and a slowdown in sustainability. Endoscopy's gains reflected across the board strength, with solid growth in cameras, video, and the capital-intensive communications business, with the latter benefiting in part from easier prior-year comparisons.

Looking at instruments, its US performance picked up as signaled on our last call, achieving a strong 8% growth. And with the 510(k) we received late in 2013 for the Neptune Waste Management System, as well as the FDA recently lifting its warning letter, our instruments team is well positioned to continue to build on Q4's momentum.

Additionally, as Katherine will address in more detail, our planned acquisition of Patient Safety Technologies further expands instruments' growing presence in the operating room, with products targeted at patient and caregiver safety.

Neurotechnology and spine was up roughly 5% in the US, which was solid performance, given challenging comps. Interventional spine led the group with strong double-digit sales growth.

Outside the US, Europe continued its momentum, with Q4 sales increasing for the third consecutive quarter. And we continue to see strong gains in emerging markets, with very high double-digit growth.

International performed well in all areas, except knees, which were down 2% in constant currency. This was the result of disruption to our Asia business, which we referenced in our third-quarter call. We expect our international knee results to return to more normalized growth by the end of Q1 2014.

We continue to be pleased by our Trauson results in China and look forward to launching these products in additional countries over the course of 2014.

Similar to our performance in the first nine months, fourth-quarter operating cash flow increased roughly 13%, reinforcing the strength of our balance sheet. M&A remains the top priority for our cash, and we are excited to have closed the acquisition of MAKO at the end of 2013. We will continue to pursue targeted acquisitions that contribute to our ongoing goal of organic sales growth at the high end of the medtech industry.

Combined with the December announcement of a 15% increase in our dividend, as well as modest amount of share buybacks in the quarter, we believe our capital allocation strategy will continue to help optimize shareholder returns.

Moving down the P&L, as expected, our adjusted gross margin declined sequentially, falling to 66.3%, given lower overhead absorption in Q4, but came in for the full year with a 30 basis point improvement after adjusting for the medical device tax.

We continue to make solid investments in R&D, which was up nearly 8% in the quarter, representing 5.6% of total sales.

On a per-share basis, Q4 adjusted EPS was $1.23, and as detailed on slide four, on a full-year basis we delivered EPS of $4.23, or the midpoint of our $4.20 to $4.26 range. This represents a reported year-over-year increase of 4%; however, there were several nonoperating items that impacted our EPS in 2013. Adjusting for the negative foreign exchange and the medical device excise tax, as well as the positive benefit from the tax extenders, our underlying EPS growth was approximately 11%, reflecting our commitment to driving leveraged earnings gains.

We're excited about the breadth of our product portfolio, which spans products and services, as well as implants and capital. Our ongoing investments in R&D, as well as our targeted M&A, positions us well to deliver innovation to our hospital customers. We will continue to focus on our strategy of topline growth, leveraged earnings gains, and capital allocation that maximizes the strength of our balance sheet and our healthy cash flow.

With that, I will turn the call over to Katherine.

Thanks, Kevin.

My comments on today's call will focus on our recent BD activity, providing an update on the acquisition of MAKO Surgical, as well as the announced agreement to acquire Patient Safety Technologies. Both transactions reflect our commitment to deploying our capital to support our M&A strategy, which is primarily focused on our core markets, as well as key adjacent markets.

With respect to MAKO, we closed this acquisition in late December and believe, long term, it has the potential to transform orthopedic surgery through procedural advancements and improved patient experience and a new generation of implants. The MAKO robotic platform has already proven itself capable of achieving consistently reproducible surgical results. As we continue to optimize robotic-assisted surgery, we believe it will further improve clinical outcomes. And longer term, by allowing for bone preparation in geometries and precision not possible with conventional manual instrumentation, there is a potential to develop new implant designs that are specifically enabled by robotics capability and functionality.

In the near term, our teams are focused on leveraging Stryker's considerable sales and distribution capabilities to help drive adoption for MAKO's current applications. Two areas of initial focus, which we are currently evaluating, are enabling Stryker-marketed implants to be put on the robot software and starting a trial for a total knee application.

Given the short time since the close, we are not prepared to provide specifics on these two items; however, we do anticipate starting the total knee trial in the first half of this year. With close to 20% market share in the unicompartmental knee segment, we believe MAKO has demonstrated excellent market acceptance of their partial knee application. However, our analysis suggests there is a bigger opportunity in total hips and total knees to leverage Stryker's reconstructive implants.

We look forward to sharing more regarding our plans for robotic-assisted surgery later in 2014. Additionally, our orthopedic growth will be the focus at our September analyst meeting product fair.

Shifting to our medsurg group's BD activities, we recently announced the planned acquisition of Patient Safety Technologies, or PST, for $120 million. PST's innovative and proprietary product portfolio aligns with our instruments division to focus on customer solutions that enhance patient and caregiver safety.

Specifically, PST's Safety-Sponge system helps prevent retained foreign objects in the operating room, thereby improving patient safety and reducing healthcare costs. The system includes barcoded surgical sponges and towels, an integrated barcode scanner, and a unique compliance tracking software. Barcodes are the most common surgical [number] event in the US and sponges are the most common retained object, with approximately 2,300 incidents reported annually at an average cost per incident of over $400,000.

With the SurgiCount Safety-Sponge system, we can provide our customers with a way to eliminate unnecessary costs from the healthcare system, while improving quality of care. Since its launch in 2006, SurgiCount has established a strong customer base of over 300 hospitals, including several of the leading medical institutions in the US.

The Safety-Sponge system will augment Stryker instruments broad portfolio of products that are designed to optimize the perioperative experience by reducing hazards, streamlining operations, and improving outcomes for patient and caregivers. Moreover, we believe our sales force can leverage our considerable established base of products, targeted perioperative patient and caregiver safety, including the recently 510-cleared Neptune Waste Management System and the Steri-Shield Personal Protection System.

With that, I will turn the call over to Bill.

Thanks, Katherine.

As Kevin mentioned, we have included a few slides via the webcast, which summarize the 2013 sales and earnings performance and also reflects some additional insights on our 2014 guidance.

Sales growth was positive by 5.6% in the fourth quarter, including a negative 1.8% impact from FX translation. Constant-currency sales growth was a positive 7.4%, which includes organic growth of 5.8%. Sales growth for the full year was a positive -- was positive by 4.2%, with organic growth of 5.1%, acquisition growth of 0.8%, and a negative 1.6% impact from FX translation.

Earnings per share on a GAAP basis for the fourth quarter were $1.01 per share, versus $0.71 last year in the fourth quarter, while adjusted earnings per share were $1.23 for the quarter, versus $1.14 in the fourth quarter last year.

This quarter's EPS includes negative impacts of approximately $0.06 per share from FX and $0.04 per share from the medtech tax. EPS on a GAAP basis for the full year of 2013 were $2.63 per share, versus $3.39 per share last year, while adjusted EPS were $4.23 per share, versus $4.07 per share last year.

FX negatively impacted the full-year results by approximately $0.20 per share and the medtech tax had a negative impact of approximately $0.13 per share.

The income statement is exposed to both transactional and translational FX risk, while the balance sheet is just exposed to translational FX risk. We had begun a layered transactional hedging program, which will help us mitigate some of the transactional volatility caused by changes in FX rates. This program will start to have some effect in the first quarter of 2014 and will be more fully in place by the end of 2014.

The most significant non-GAAP adjustments in the quarter are related to a $99 million increase in the charges associated with the voluntary recalls of Rejuvenate, ABG II, and Neptune. These charges may increase or decrease over time as additional facts become available and assumptions become more refined. No insurance proceeds that may potentially be available to cover some of these costs have been included.

Looking at sales in the fourth quarter, our organic growth of 5.8% was comprised of a positive 7.3% from volume and mix, with price negatively impacting sales by 1.4%. Acquisitions added 1.5%, while FX had a negative 1.8% impact due to significant weakness in both the Japanese yen and the Australian dollar compared to the same period last year.

Looking at our segments, reconstructive represented 45% of our sales in the quarter. Sales of reconstructive products were up 5.8%, as reported, and grew 8% constant currency. US reconstructive sales grew 8.7% in the quarter, and despite facing challenging comps, trauma and extremities had another solid quarter in the US with sales increasing 8.4%, led by new products, sales execution, and continued strong growth in foot and ankle.

US hips and knees had strong growth in the period of approximately 10% and 8%, respectively. We are especially pleased with our knee performance as we are going up against two new competitive knees that are well into their launch periods. We're still dealing with the absence from the market of our ShapeMatch cutting guides, and as Kevin mentioned, we are also against -- up against strong year-over-year comps of 7% in hips and 9% in knees from the fourth quarter of 2012.

We believe this reflects the strength of both our Triathlon Knee and our highly motivated sales team. Our international reconstructive business was up 6.9% in constant currency and had organic growth of 2.4%.

Next, our medsurg segment represented approximately 37% of our total sales in the quarter. Total medsurg sales increased 5.4%, as reported, and 6.6% on a constant-currency basis. These results were led by both -- or by double-digit growth from our endoscopy business, and medical had low single-digit growth, while instruments had upper single-digit growth in the period.

Instruments no longer had the Neptune comparison drag that it was going against in the first nine months of this year, and also had robust power tool sales in the quarter. We are pleased to once again have the Neptune product back in our portfolio of products as we move into 2014, now that we have the FDA approval.

Our final segment, neurotechnology and spine, represented 18% of our sales and delivered another strong quarter. Sales increased 5.4%, as reported, and 7.5% on a constant-currency basis. Growth in this segment was led by our IBS and our neurovascular business, which grew solid double digit in constant currency. Spinal implant sales were up slightly on a constant-currency basis and double digit internationally.

And looking at our operational performance, gross margins on an adjusted basis in the fourth quarter of 2013 were 66.3%, compared to 68.3% in the same period last year. As we expected and highlighted in our last call, the rate this quarter was negatively impacted by the lower overhead absorption in the period, as inventory levels were significantly reduced in the quarter after a build which occurred in the third quarter to support our fourth-quarter sales. We were also negatively impacted by nearly a full percentage point in both the quarter and the full year gross margin rates from the medtech tax.

Product mix was more balanced in the fourth quarter, also slightly reducing the margin rate, as medsurg, which has a lower gross margin than the Company average, performed well without the headwinds from the Neptune recall.

FX in price also had a negative impact on the rate this quarter as we felt the full impacts of the weaker Japanese yen and Australian dollar in the quarter. For the full year, gross margins on an adjusted basis were 67.5%, down 60 basis points from 2012. However, the 2013 rate was negatively impacted by 90 basis points due to the medtech tax. Excluding this item, the rate would have increased 30 basis points for the year.

Research and development expenses increased by 10 basis points to 5.6% versus 5.4 -- 5.5% last year in this quarter. This represents a 7.8% increase in R&D spending over last year and continues to reinforce our commitment to invest in areas which we believe will help us deliver above-market sales growth in each of our key product categories.

Selling, general, and administrative costs represented 40.5% of sales in the fourth quarter, but this included approximately $99 million of costs related to the Rejuvenate, ABG II, and Neptune recalls, versus $174 million of similar costs in the fourth quarter of last year. On an adjusted basis, SG&A expenses were $838 million, or 34% of sales in the fourth quarter of 2013, versus 36.2% in the prior year's fourth quarter. The improvements in SG&A in the period were primarily in general and administrative expenses, along with some lower marketing expenses in the period.

Operating margins on an adjusted basis were 25.3% in the fourth quarter of both 2013 and the fourth quarter of 2012. The rate was negatively impacted by the medtech tax and pricing. However, those impacts were fully offset in the quarter from the strength of our year-end sales, operational improvements, and also from lower general and administrative and marketing expenses as a percentage of sales.

Other expense on an adjusted basis in the fourth quarter was $9.5 million, compared to $12 million last year in the fourth quarter. This reduction in expense resulted primarily from gains on hedges and marketable securities.

Our reported tax rate for the fourth quarter was 10.3%, while the adjusted effective tax rate was 23.6% for the fourth quarter, which is higher than our full-year adjusted effective tax rate of 22.3%. This compares to a 24.7% adjusted effective tax rate in the fourth quarter last year.

As we move into 2014, we expect the full-year rate will run closer to 23%, with a higher rate in the first half. Remember, an extra year of tax benefit resulting from the renewal of tax extenders were included in the first quarter of 2013. While our 2014 guidance anticipates renewal of the tax extenders, they have not yet been approved by Congress, and renewal and timing of them is still uncertain and may negatively impact our tax rate early in the year.

We also anticipate tax benefits from the revised structure and move to a European headquarters location in the Netherlands. However, this is not expected to be in place until the second half of the year.

Looking at the balance sheet, we ended the quarter with $4 billion of cash and marketable securities, versus $4.3 billion at the end of 2012, and we also have $2.7 billion of long-term debt on the balance sheet.

From an asset management standpoint, Accounts Receivable days ended the year at 55 days, flat with the end of 2012 and two days better than the end of the third quarter. Days in inventory finished the quarter at 152, which was a 33-day decrease sequentially and a one-day reduction when measured against the prior-year quarter. Inventory levels significantly reduced in the quarter after a build which occurred during the third quarter.

Turning to cash flow, we had a strong cash generation for the full year, with cash from operations of $1.886 billion, compared to $1.657 billion in the prior year, an increase of approximately 14% over 2012. 2013 cash flow benefited from improved operational performance and lower tax payments. Capital expenditures were $195 million in 2013, however are expected to run closer to $250 million to $300 million in 2014 as some capital spending is carrying over into this year and we continue to invest in our operations and IT infrastructure.

Finally, regarding share repurchases, in 2013 we repurchased approximately $317 million worth of our stock. We will have nearly $700 million still available for repurchase under our current authorization.

Based on our solid sales achievement in 2013 and the current economic and market conditions, we are projecting organic growth, or constant currency ex-acquisitions, in a range of 4.5% to 6% for 2014. If foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by less than 1% for the full year of 2014 and will negatively impact adjusted earnings per share by approximately $0.07 per share as we are further impacted by a weak Japanese yen and Australian dollar without the full benefit of our layered hedging program, which, as mentioned, won't be fully in place until the end of 2014.

In 2014, our adjusted earnings per share will now include an adjustment for acquisition-related intangible amortization expense. If 2013 included this adjustment, adjusted diluted earnings per share would have been $4.49 per share, versus the $4.23 per share we reported.

Our 2014 guidance for adjusted diluted earnings per share is $4.75 to $4.90 per share and includes an adjustment of approximately $0.35 per share for acquisition intangible amortization.

To assist you further in your modeling, particularly in regards to our quarterly earnings progression, we are providing a few additional comments. We expect 45% of full-year adjusted earnings per share to be achieved in the first half of the year, with the first quarter facing the stiffest headwinds. In the first quarter, we will be negatively impacted by a greater negative FX impact, based on current rate assumptions; the additional tax benefit received in the first quarter of last year, where we benefited from an extra full-year benefit for the 2012 tax extenders, and uncertainty around the timing of the reinstatement of those extenders this year; along with tougher sales comps, especially in trauma, as we benefited from a competitor recall in the category in the first quarter last year.

Thanks for your support, and we would be glad to answer any questions that you may have at this time.

(Operator Instructions). Kristen Stewart, Deutsche Bank.

I just wanted to understand the guidance, particularly what your assumptions are just around acquisition contribution, because you just gave the organic number. So can you help us just think about how you guys are framing the benefit from the two acquisitions that you talked about earlier?

And then, just to clarify your guidance, I just want to make sure I got the number right. $0.35 is what the acquisition of intangibles is excluded from the $4.75 to $4.90 number?

Hi, Kristen, the second part of your question, that's correct. The $0.35 is the number.

The first part, we have been consistently guiding to our organic sales growth, so the number that we are focused on internally is with organic growth, excluding sales -- or excluding FX and acquisitions, since obviously our goal has been to accelerate that. We're not giving any forecasts or targets as it relates to acquisitions.

MAKO, as you know, was obviously a publicly-traded company and I know many folks on the phone modeled it, and we haven't closed Patient Safety yet. So the goal -- the number that we are going to be focused on and we will be providing guidance will be around that organic number.

Okay, great.

Kristen, what I'd add is each year, we will be doing the same thing. So at the beginning of next year, we will provide organic sales growth, and obviously, that will include MAKO next year.

Okay, perfect. And then, I guess, just on MAKO, can you maybe just provide any additional color? I know the commentary on the third-quarter call was somewhat limited, just in terms of the deal not having closed, but just how do we think about it from a longer-term perspective in terms of opportunities for cost synergies or just -- even though you're not giving it, just thoughts about directionally just whatever extent you can comment on how you see it potentially accelerating the growth of the recon business?

Without a doubt, we did the deal because we do believe it is potentially transformational in orthopedic surgery and will allow us to drive meaningful market-share gains. And so, that is the goal.

Right now, the teams have literally only been together for a few weeks, since we just closed late last year. They're actively assessing different options and prioritizing those options. We were able to share that we expect to start the total knee trial in the first half of this year. That is the biggest opportunity that we see for robotic-assisted surgery.

We're going to continue to use our sales and distribution capability to build on current indications, but the long-term potential really is around total knees, optimizing total hips, and, longer term, the potential to introduce the next generation of implants that aren't feasible with current instrumentation.

So we will continue to provide additional updates. Right now, that's the clarity we have as the teams are looking at different options, but they haven't finalized beyond the comments I just provided. And then, again, we will have more details beyond that as it will be a part of the focus of the product fair at the September analyst meeting.

Okay, and just from a financial perspective, you did give some color when you announced the deal. Is it fair to say that the dilution associated with the deal is similar in what is embedded within your 2014 guidance, or is it coming in a little less or a little bit more based upon the amortization that you are assuming, I guess?

Yes, so I think in general, we did give guidance upfront on the MAKO side. We obviously won't be commenting moving forward on both the sales side of MAKO or the overall operating performance of MAKO. As Katherine just mentioned, the teams are just really getting together, looking at the integration, and really deciding what they're ultimately going to be able to deliver on both from a sales, operational -- or a margin expectation, and also some of the SG&A leverage.

Okay, so no comment on whether the dilution is still similar to what you guys originally --

Yes, we won't be really talking about the MAKO-specific performance moving forward, but we did give guidance upfront on the initial call there.

David Lewis, Morgan Stanley.

Kevin, one quick question on MAKO. You gave us the timing for the total knee trial. Can you give us a sense of, is that simply total knee and can you provide in bicruciate timelines, and do you think you're going to need a separate trial for a bicruciate system?

So I would say it is a little early for the bicruciate. Honestly, we are just, as Katherine mentioned, three weeks into the deal, and obviously, bicruciate has interest. Still there is a long way to go yet to determine whether that will be more than just a niche. And so, later on this year we'll be able to provide more color around our expectations, our timing. The teams are literally just going through their prioritization right now.

If bicruciate does turn out to be a really big part of the market, we will be delighted, because robotically enabled, it is a very difficult procedure to do today, just as the uni is difficult to do. So if it does become a big part of the market, we believe we will be very well positioned, but it's just too early right now to comment on where that is in our portfolio and whether we will need additional trials. That will be something that we will provide later on in the year.

Okay, and then, Kevin, maybe two more quick ones for you. First of all, just on trauma, obviously the highlight for 2013. Recon numbers very strong in the fourth quarter. One of your competitors is talking about transitioning their trauma strategy, post a large acquisition, for more internally focused in 2013 to more externally focused in 2014. Maybe you can talk about what had been the key drivers of the trauma strategy and your thoughts on sustainability.

Yes, so this wasn't just one year in the making. So we have had a terrific strategy over the last four or five years. We have been growing faster than the market consistently over those years, rounding out our product portfolio with primarily internally-developed R&D projects. We also added the Memometal acquisition, which really helped turbocharge our foot and ankle division and foot and ankle results.

So this has been a progressive strategy of really making sure we have a complete offering, we have differentiated products, and we have been winning accounts and converting business consistently over that period of time. So, it wasn't a one-year wonder and it's something that we think we will be very well positioned to continue to grow in the years ahead.

As a reminder, please ask one question and one follow-up question. Rick Wise, Stifel.

I guess my question -- let me start, first, with the EU. You indicated that the EU turnaround is evidence continuing its positive for the third quarter in a row. Just any color there on where we are in the turnaround process and growth you are expecting or we should expect in the year ahead?

Yes, so we're delighted with the performance in Europe. Frankly, it was a little ahead of our expectations as we started the year, in terms of the turnaround.

I would say we still have some challenges in Italy, which I've mentioned previously. It's still taking some time. Germany is the other country that's a little bit up and down, but other than those two countries, the rest of Europe is in really good shape, including Spain, which had historically been a challenged country. So, pretty stable across all of our countries.

Our leadership team is really performing well. It brought some real stability and closer customer connections, so now we are looking for the next phase where we can really drive accelerated growth, primarily in the medsurg area. So we've really stabilized our implant business, but we still have opportunity to grow, primarily in medsurg. So I am looking forward to accelerated growth in the quarters and years ahead.

And Kevin, just as a follow-up, on the hip, knee, and, for that matter, trauma numbers, you are the third company in a row to report very solid numbers. Maybe just your latest thoughts on the market outlook for 2014. We have seen this unusual second half. Can this continue into 2014 or do you think it settles back?

So what I would say to that is we saw this last year in the fourth quarter, a big fourth quarter, and I think we're really going to know at the end of this first quarter, and I really would like to compare the six months -- the first quarter of this year, fourth quarter of last year -- to the comparative six-month period from the year before before we can really determine whether this is an overall uptick in the market.

Since the middle of last year, I felt that the market has been gradually improving. But that's really -- we are not going to know for sure. We have had three companies report. We still have some more to report, but really, we're going to really only know until the end of the first quarter.

Mike Weinstein, JPMorgan.

It is actually [Kim] here for Mike. So I guess a couple questions. The first is a little bit of a follow-up to Rick's question on the seasonality piece in the recon market. So you talked a little bit about some of the factors weighing on your first quarter, and so, just curious, how did you think about the recon piece when you thought about the EPS guidance for the first quarter?

Kim, very similar to what we saw last year. There was seasonality in the first quarter, a little bit of softening in the first quarter. We have not baked in any extra effect, whether it's due to uncertainty around ACA. It is possible that helps Q4 and will result in an offset. You're probably looking in the area of tens of basis points, which is again why we go back to just assuming it's the standard seasonality pattern, and then we will look at what those six-month averages are to determine if we have seen some modest level of improvement in the recon market.

Okay, great. And the follow-up is for Bill on the gross margin piece, and I apologize if I missed this, but how you are thinking about the gross margin trend into the first half of the year and then for the full year of 2014?

Sure, I think a couple points there. First off, we really don't talk specifically about our gross profit expectations directly, but we generally talk about our broader-based expectations on operating margins, and I think especially as -- based on the growth rates that we are talking about here, at this level of growth rate we would expect and be driving for a certain amount of additional operating margin improvement.

I think that's probably, in this environment, a little bit more of that is obviously coming out of the SG&A-related area, versus the gross margin related urea, but I think our expectations in general are for modest improvement on the gross margin rate and a little bit better improvement on the SG&A rates.

Derrick Sung, Sanford Bernstein.

I was wondering if we could talk a little bit about the instruments performance this quarter. I appreciate that you have anniversaried the Neptune launch. How much of the -- did -- were there any Neptune sales embedded in here? And maybe you can remind us of what the historic run rate of Neptune is and the acceleration, then, that we would presumably see even from this level moving forward with Neptune back on the market?

Hi, Derrick. What we stated last year throughout the quarter as the part was off the market, it was impacting us in roughly the high teens [versus] in terms of millions of dollars. We were still selling to existing customers who had filed the appropriate paperwork necessary, but we couldn't sell any new systems. So that revenue, lost revenue, is reflective of that. There were no new revenue associated with that in the fourth quarter.

I would remind you instruments benefited from strong power tools that we had, several new launches in the early part of the year targeted to the small bone segment. That also helped the growth performance.

Going forward into this year, clearly Neptune will be a part of it. We are going to be focused on existing customers early on, in upgrading them, and you should really think about it being in and around the third quarter when we are back to hitting on all cylinders as it relates to the Neptune relaunch.

Okay, great, thanks. And on MAKO, I appreciate that you're not going to be breaking out sales. Can you tell us how you will be accounting for MAKO sales moving forward? Do those go into your knee sales where within reconstructive do they go in, or is there a separate breakout?

If you look within it, the hip sales will be in hips; the knee sales will be in knees, as it relates to implants. The capital and any related service will be in our other line, along with sports medicine, bone cement, and the other products in that, so it will be in those three buckets.

Matthew Dodds, Citigroup.

Good afternoon. First, on SG&A, you really cranked that down year over year and sequentially. I know you highlighted it as G&A and marketing spend. Can you give us a little more color on was one more than the other, or was there anything else in there that really pulled it down this much?

Sure. I would say that G&A was obviously the bigger piece of it, although marketing was some of it as well, too. I would also say if you look at the broader-based improvement that we had throughout 2013, which was in the neighborhood of 70, 80 basis points, that is what you should be looking at within that space. And I think that also holds true if you look at the second half of 2013. It is about the same level of improvement.

So yes, there's a lot of activities that continue to take place within that area, but I think that's probably more of a reasonable level of what you should have expected actually occurred in 2013.

And then, just one quick follow-up. I know now you have MAKO, there's a lot more to talk about AOS. Is there anything else at AOS you are going to highlight or you think is worthy of highlighting now?

For the AOS meeting, we will do the traditional format that we have had where we will have the group investor meetings and also the booth [four]. Similar to prior years, it will be a number of new products that are either being launched or we anticipate launching shortly. I think you should think about them as in the normal range of the type of largely incremental, but meaningful, innovation for the various segments.

Bob Hopkins, Bank of America.

So Bill, just to start on the guidance, on a cash basis excluding amortization, it looks like you are for 2014 guiding to about 69% EPS growth. And I was wondering if you could just walk through some of the things that are diluting that growth. I think you mentioned FX as a $0.07 hit, and there is still some -- even excluding amortization, I would imagine there's a little bit of MAKO dilution. What are the things that are diluting that growth rate in 2014 that we maybe want to look through, potentially?

Yes, I think a couple of things. It is really -- the two biggest areas are really FX, which we highlighted that is about $0.07 per share, and then, also, from an overall tax rate perspective, a couple things.

One, remember in 2012 we actually had a double year benefit, 2012 and 2013 benefit, from the reinstatement of the tax extenders that are out there. So for sure, we will be one year less of those tax extenders, and right now our guidance does include that we will have tax extenders in 2014. However, they currently aren't renewed by Congress, and so the benefit of those will probably come later on in the middle of the year, hopefully. However, we still obviously need to watch that and make sure that Congress approves that.

Those are the two primary areas that are out there.

Yes, and Bob, excluding those, if you exclude those two impacts, the operational EPS improvement would be 10%. It would be double-digit growth, which is kind of -- based on the organic growth rate that we are driving, that's the type of leveraged earnings gains that we are aiming for. And obviously, we are looking for benefits across the P&L, whether it's in the cost of goods area, in the SG&A area, to be able to deliver that leverage.

Unfortunately, based on the way exchange rates have moved and the timing of getting our hedging program in place, if rates stay where they are, we are going to be negatively impacted and FX is certainly the biggest impact.

Yes, and that FX impact will probably be much more prominent in the first half of the year versus the second half.

Okay, great. That was exactly what I was looking for, and then as a follow-up on the hip and knee side, Kevin, I was wondering if you could talk a little bit more, just remind us of what's going on in Asia on the knee side and why you have confidence that will come back?

And I was wondering if you could just provide any sort of qualitative sense as to some of the earlier questions. Other companies have suggested that they are seeing backlogs build into 2014 and that, therefore, perhaps we should be optimistic that some of these good growth rates we are seeing is probably more the economy than seasonality. Just wondering if you are seeing anything similar.

Yes, so on the second question, Bob, obviously we're in the middle of a quarter right now and I'm not going to really comment on how things are going in January. There are a lot of anecdotes. I just prefer not to really comment on anecdotes, and let's see how the first quarter rolls before we really can reach a conclusion on whether this is a real change in the trend.

Clearly, we are happy with our fourth-quarter performance. There were a lot of expectations that our knee business would be under stress with competitive launches and having to overcome not having ShapeMatch on the market. Certainly, our knee has been a very, very well-chronicled knee with very, very low complication rates, with very, very low revision rates, and our sales force has done a terrific job, so we're certainly growing at least with the market and we feel very good about our performance.

Mike Matson, Needham & Company.

I guess just given the description of where you're going to be recording the revenue for MAKO, it sounds like that's largely going to be housed in the orthopedics business. So are you going to have the capital reps stay in the orthopedics side of the business? I guess how are you going to be selling that product, the capital, and then, how does that fit with the navigation products that are being sold by instruments?

Yes, so the way it's being done right now, all of the sales for MAKO will be reported in the orthopedics group, and we have a separate capital sales force, which is the way MAKO was running their organization, a separate capital group selling the robot, and implant sales reps.

The separate capital group will be separate from navigation, and again, these are different solutions, so there are surgeons that prefer to use standard instruments. There are surgeons that like to use cutting blocks. There are surgeons that prefer navigation with intraoperative navigation, and remember that navigation -- the fastest-growing part of navigation is actually in neuro, not just in the ortho area. And then, there are surgeons that like robotics.

So we are going to have solutions for every surgeon preference, and we are keeping separate capital sales forces for the robotics group and the instruments group, and that will continue to drive its growth, as it has done actually quite well this year.

Okay, and you had -- you did a great job with working capital this year, over $500 million, it looks like, coming out of working capital, really helping your cash flow from operations. But it sounds like capital spending is going to be up and that working capital performance is probably a hard act to follow, so is it reasonable to assume that free cash flow could be down in 2014 over 2013?

If you looked at the free cash flow side, I think that CapEx is really one of the key drivers associated with that, and we do expect capital expenditures to be running higher than 2013, so that's a fair statement.

As far as the other components of the cash flow are concerned, we obviously have continued efforts on our working capital side of the equation, so we would expect our overall operating cash flow to show some improvements, but our overall free cash flow might be a little bit tighter, just based on the CapEx that we are spending.

Raj Denhoy, Jefferies.

I wonder if I could ask about the foot and ankle business. I think I asked about it last quarter, too, when you grew 39%, and this quarter, you were at 36% again. I guess how sustainable should we look at that? That business is not small for you anymore. Must be $150 million or so. Maybe you could just speak about the trends you are seeing there and, again, just that sustainability of that growth.

We're really excited about our foot and ankle business, and because it's a market development where you're really going after podiatrists that never used implants, there is really a very, very big runway for growth, and we are experiencing that. Certainly last year in the fourth quarter, we had almost a 40% growth, another 36% growth on top of that in the US, so really exciting. Even worldwide, we are seeing very good growth.

So I wouldn't have thought at the beginning of the year that we would have delivered a number this big coming off of last year, but when you are in new markets, it's a lot harder to predict than when you're in mature markets. So we're really excited. This is really about market expansion and getting these products into the hands of physicians that were not previously using implants.

So we believe double-digit growth for sure for a number of quarters going forward, but again, given that it's market development, it's a little hard to predict, and we are obviously very pleased with our performance in this area.

Okay, and then maybe just ask about Trauson. I think you made comments -- you have made comments about 2014 being the year where you look at expanding this products out of the Chinese market into other emerging markets. I don't think you have given too much detail beyond that, and I don't know if you are willing to offer much more in terms of the markets you are targeting and really your expectations for that effort.

For competitive reasons, I would really rather not get into exactly which countries. It is an emerging-markets play, so you can imagine that we will be going into different emerging markets over the course of the year. And as we start to sell in those businesses, we will keep you posted, but not really willing to share more right now.

Richard Newitter, Leerink Partners.

Just first, just related to the SG&A spending reduction, or the cost control, can you talk about how much of that was related to any pullback in the direct-to-consumer advertising campaign that you had?

That was a portion of it. As we have said, throughout the year, each quarter, we are re-evaluating the mix, so we've continued the BTC campaigns, but I would say the prior quarter had more TV. This quarter -- or the fourth quarter of 2013 had other less expensive mixes of media, and that is part of what was behind Bill's comments related to lower expenses tied to that.

Got it, and just with respect to MAKO and your strategy outside the US, or what you are seeing initially, obviously you have resources that are much more significant than what MAKO had outside the US, and I was wondering is there anything that immediately you are identifying that you could be doing differently? Or how much of a near-term opportunity is that for you to capitalize on something that they just couldn't do?

I wouldn't say that's a near-term opportunity. Obviously, longer term when we think about these opportunities, not just for MAKO but other products from a global perspective, but near term, it's really focused on the current indications, getting the clinical trials, and evaluating the different options available to us. I would think about that as being a longer-term opportunity.

Joanne Wuensch, BMO Capital Markets.

Could we take a look at the capital spending environment? At your analyst meeting in September, you highlighted that might be one area that benefits from the implementation of the ACA.

Long term, that is not reflected in our topline target for this year. Medical was obviously challenged in the fourth quarter. It will have a difficult comparison in the first quarter. We continue to be cautious regarding the capital spending for those larger ticket items, and that's clearly where medical falls in.

If there is a benefit from ACA, we don't think we will see it until later this year, but I wouldn't view it as a meaningful driver, certainly not reflected in our 2014 guidance.

And my second question has to do with extremity sales. Once again, a 30%-plus quarter in the United States. You are taking share from somebody. Can you just comment broadly on what you see in that market? Thank you.

Yes, so again, I go back to really we are focused on growing the market much more than we are focused on taking share. Obviously, there is some cases where we are taking market share, but the bulk of our growth is really new physicians doing procedures where they were not using implants. They were either using K-wires or other approaches. So to us, this is much more a market-expansion story than it is a market-share story.

Matt Taylor, Barclays.

I was just curious, there's a small piece of your business that I was wondering if you could give us any color around the slowdown in sustainability solutions and what's causing that?

Yes, we did have a slowdown in the quarter. That business is susceptible to the timing of OEM product launches and there were several of those, and then the teams have to go back and do the appropriate product development in order to get a corresponding reprocessed product on the market.

We did launch the products late last year and anticipate additional product launches this year. You combine that with the still very clear, compelling rationale for reprocessing products. We believe that business will get back to double-digit growth. But it will vary quarter to quarter because, obviously, we can't control the timing of some of those OEM launches.

Yes, and with each OEM change, we have to resubmit a 510(k), so that's the timing difference. This occurred primarily in the energy area with two of our competitors that changed out products and has caused us a bit of delay. We are very excited and bullish about this year for sustainability as we get those 510(k)s and return to the market.

Okay, fair enough, and one area we didn't talk about yet was just if you could give us any comment on overall market health and dynamics of both the neuro and spine markets. Have you seen anything changing there? It seems like overall we have seen pretty strong growth in neuro and maybe some bounceback in spine like we have seen in ortho, but curious to see if you have seen anything new there.

Yes, so we really love being in the neurosciences space. It's a great market. There is still -- there is plenty of room for growth. It is one of our -- certainly our better and more attractive markets, and pleased that we acquired neurovascular to really round out our portfolio with our other divisions in this space.

And spine, clearly the worst is, I think, behind us. It has bottomed out, at least, and it is starting to stabilize. Pricing is starting to stabilize. We are starting to see a bit -- a little bit of an uptick. So I think that's a market certainly not getting worse. It's at least stable and maybe modestly starting to improve.

Glenn Novarro, RBC Capital Markets.

Just on the gross margin here in the fourth quarter, down 200 basis points year over year, can you quantify the difference year over year? For example, was it 100% FX -- 100 basis points FX, 100 basis points lower plant utilization? Any color would be helpful.

Sure. As I mentioned, as far as year over year goes, it's probably about nearly a full point just from the impact of the medtech tax, and then also with FX being the biggest hit in the fourth quarter of this year, FX was definitely another large piece of that. It was impacting us by over 0.5 percentage point on the FX side alone.

So when you look at the other aspects with some of the absorption side, that was lower, but then also the mix because of all the businesses performing well within the year and the medsurg business actually having lower margins in general than our average business, those are probably the four big components of it.

And then for 2014, we have the Japanese price cuts. I am sure that's in your guidance. What are you assuming there? And then, also, will we have the same number of selling days in 2014 as 2013?

Yes, the selling days are outlined in the slides for the webcast. You can see where they do vary and where they are same year over year.

With respect to the Japanese price cuts, feel pretty certain that they will be negative. It is reflected in our overall expectations for total price, which is typically down in the 1% to 2% range for the Company. Exactly where it shakes out, we just don't know yet. We haven't heard any early rumblings yet, but we expect it to be consistent with prior years, give or take.

David Roman, Goldman Sachs.

I wanted to come back to Trauson for a second. I think it's been about a year since you have closed the transaction. I think it was about March of 2013. Maybe you can provide us some update on how that business is trending and to what extent you have been successful in integrating that to expand your EM footprint. Kevin, I think at a recent investor conference, you quoted EM sales at about, I think, 6% or 7% of corporate average. Maybe just any update on how that business is going, both Trauson and, more broadly, EM.

Yes, so we're really excited about the acquisition. Obviously, it's our first deal in China, first time getting into the lower-priced segment, and really pleased that the business hit the acquisition model in their first year, so we are very pleased about that.

We've focused very much on China, making sure we kept the momentum and the growth going well in China. So in the fourth quarter, our emerging markets as a percent of total Company sales was 8%. In 2012, in the prior year, it was 6% for the full year. This year is more in the 7% range.

Obviously, it has been increasing throughout the course of the year with Trauson being the biggest driver, so you would expect next year when we report our full-year results that emerging markets will be over 8% of total Company sales. So we're on a march, and clearly the goal is to get emerging markets not just because of Trauson, but because we're also growing very well in the premium segment in China, in Brazil, in India, and other emerging markets.

So we are focused on both parts of the market. Clearly, our medium-term goal is to get that above double-digit percent of total Company, while also maintaining good growth rates in the US and picking up the growth in Europe. Clearly, the markets are growing faster, and we believe Trauson gives us a great entry into that low price segment.

So, so far, so good is what I would say on emerging markets, going from 6% a year ago to 7% this year to over 8% in 2014. So, very excited about the progress.

Okay, thank you. And then on the gross margin line, understandably in any one quarter, there are going to be a number of moving parts. But just thinking longer term, how should we think about the trajectory of gross margins, particularly in the context of 1.5%-ish annual price declines? It is a $150 million annual headwind. You have the restructuring that you have talked a lot about. Mix will ebb and flow.

Is a lot of this just plus 1s and minus 1s that all kind of net out to flattish? Can gross margins go higher?

And then, just lastly on cash EPS, are you going to give us any more historical information than what you've provided today?

Sure, so I think maybe the broader context is really what I stated about the full-year gross margin rate. So if you looked at the gross margins for the full year, it was 67.5%, which was down about 60 basis points for the year. But keep in mind that included 90 basis points of an impact from the medtech tax. So despite the fact that price also played a part in putting pressure on those rates, we actually would have been up about 30 basis points in gross margin rates this year, despite the price, if we excluded the medtech tax.

So I think in general, our expectations and some of the initiatives that we have got in our GQO area, which is our global quality and operations area, we believe that we've got some good programs in there that are continuing to take place over the next few years, and we are still driving for slight improvement in the gross margin rate as a contributing factor to our overall operating margin rate improvements.

(multiple speakers). Just to add to Bill's comments, this is the second year in a row, consecutive year, where we've had gross margin expansion. So regardless of the price pressure that we are facing, which we expect to continue, we have demonstrated now consistent ability to raise gross margin.

This is part of our overall GQ&O program. We are well into the -- 2.5 years into this program, which is a five-year program. We have delivered two years in a row now of gross margin expansion and we expect to continue that. This is one of the levers that enables us to drive operational earnings at a faster rate than our topline sales.

And just to follow up, we do not plan to provide any additional historical information as it relates to the new adjusted EPS.

Matt Miksic, Piper Jaffray.

I've got one question and one follow-up. So one, Kevin, I think you mentioned in looking at MAKO and rolling it out through your organization into your hospital and surgery customers that there's some folks who are going to like robots, some folks like traditional instruments. On the other hand, as I think Katherine said, it is pretty disruptive technology, at least potentially over the intermediate and long term.

Do you envision yourselves as leading the transition to greater use of robotic surgery in orthopedics, or do you view yourselves as -- this is part of your portfolio of advanced technology for the OR, ortho sensor, ShapeMatch, and other things being part of that? And I have one follow-up.

Yes, so obviously, this move was made to really drive market share and become the clear leader in reconstructive surgery. So I would not assume we are going to be passive about the way that we sell this technology.

But surgeons take different times to convert. There are some that will convert very quickly, early adopters. There is others that will wait a little bit before they will start to convert, and there are some that will be very stubborn and want to stick to their tried-and-true approaches, so we will have approaches for all types of surgeons. But without a doubt, we plan to rapidly move on the adoption of robotic surgery. This is a big play that we've made, and we're not going to be passive about really taking this to the market.

Certainly, our implant sales force is extremely excited about being able to sell the implants that are going to be associated with the robots, leveraging their own relationships. So yes, I wouldn't assume we're going to be in a sit back and wait mode related to robotics. Again, only three weeks since we closed, but make no mistake. We're going to be leaning forward.

I will look forward to that. The follow-up I had was also on orthopedics, in the knee side, and you mentioned looking to Q1 as a benchmark to maybe say, okay, is this real? Is this recovery real?

On the back of what were pretty great results in US knees, thinking about Q1, as you mentioned in your presentation there is an extra selling day. I know other folks are either going to have an extra selling day or they are going to go against a quarter last year when they were missing a day or two. Do you expect the setup is reasonably good for a pretty decent Q1 here?

I would just go back to the comments we made. We really tried to signal out some of the headwinds that are most significant in the first quarter that when you go back and fine-tune your models, you should really think about reflecting, particularly at the EPS line, and I would just refer to those.

We're really not looking for an exaggerated impact from seasonality in the first quarter, but there are some very clear specifics that we highlighted, whether it's FX, year-over-year comparables, tax extenders, all of which I would take a look at when you're updating your models.

Yes, and maybe I will just take the opportunity to also comment on hips since I have gotten a lot of questions on knees, mostly because of the competitive launches and having ShapeMatch off the market. But I am really pleased with our hip performance, and that, again, like our trauma business, that has been three years in the making of consistently leading the market, especially in the US, but also great performance outside the US. So we are really pleased with our hip growth, which has been on the back of a number of new product launches and excellent execution in the field.

Matthew O'Brien, William Blair.

Was hoping to once again go back to MAKO, but you guys mentioned the total knee trial that you are about to engage in, and when we looked at the uni knee opportunity, there was a wow factor there with a challenging case in terms of performing those procedures. And then with the hip opportunity, cup placement was a big deal.

But can you just tell us what is the big wow factor for total knees where you're going to be able to actually gain market share versus converting your own positions over there? And then, within there, you have done a lot of internal work on the robotic side of things. Should we expect a faster cadence of new robot applications from Stryker going forward than maybe traditionally you execute at?

Yes, when we look at the total knee opportunity, which we think is the most compelling, it's around being able to improve the patient experience. Patient satisfaction absolutely varies. It is not as high as it is in hips, with respect to knees. It's about being able to drive consistently reproducible results, results regardless or not so much being tied to simply having the best surgeon doing the surgery.

And longer term, we believe it's going to open up the opportunity that is not possible with manual instrumentation today, regardless of surgeon expertise, for a new generation of implants that will further improve outcomes, patient experience, and also benefit the hospital. So it's that combined effect that we believe will really be the wow factor.

It's premature to start talking about the cadence of robotic product launches at this stage. Clearly, we believe we have expertise in this area that is helping to augment what MAKO brings to the table, and we also understand the implant and the capital selling process.

But beyond that, we are really, again, just a few weeks in. We have tried to share some of the early decisions that we have been able to reach. We will provide more information as it becomes available and as we have agreement internally around what priorities we're going to focus on.

Okay, thank you, and then just a quick follow-up. You talk about the -- I think, Kevin, you mentioned in the past introducing a reverse shoulder system to augment what you have on the anatomical side. Any update as far as when you're going to launch that product?

And then, I don't believe you have a specialized sales force selling upper extremity products. Is there a thought that you're going to go more aggressively down that path?

So as it relates to the launches that you're talking about, we do anticipate getting the reverse shoulder out starting in the second quarter, but it will really be fully launched around the third quarter of this year. That's a big gap in our portfolio. We have not traditionally been strong in the shoulder market.

We have a hybrid approach in many of the areas where we compete where we have dedicated reps and we have full line reps. We believe it is something that really helps us, be it in extremities, trauma, as well as reconstructive. We will be leveraging a similar format as we look to gain increased traction now that we have rounded out the reverse -- or the portfolio in shoulders with the addition of the reverse later this year.

Yes, so just to provide a little more color, so the early launch will be in selected hospitals. That will start towards the end of the first quarter, beginning of the second quarter. Full launch towards the end of the second quarter.

Bruce Nudell, Credit Suisse.

This is Matt in for Bruce. Thanks for taking the question. First, can you maybe share with us what the different segment growth rates are that are embedded in your 2014 guidance?

If you are talking about as it relates to recon, medsurg, neurotech, no. We don't provide that level of granularity. Kevin commented around neurotech being a higher growth area, and I think people have their various estimates as it relates to the biggest segments, but we are just providing a topline number and that was reflected in the comments on the call.

Okay, or maybe if not that, what are some of the puts and takes that get you to the edges of that range?

We tried on the call to give some color around some of the headwinds, and as well as tailwinds, some of the comparables, some of which are more challenging in certain areas of the quarter. I will give you a for example, just because given the breadth of our product portfolio and all the different divisions, I don't think it's feasible or realistic to go through all the different puts and takes.

But something like our trauma businesses, they can continue to maintain momentum throughout the year, despite tough comps, despite a J&J that is further into their integration. That's a potential extra that could be reflected, but I could also list off a bunch of headwinds that could be more challenging.

We try to do that and look at all of those, which is reflected in the range that we gave. As more of those break positively, we will be closer to the high end of that range. That's always the goal, but at this point, we have learned pretty clearly over the years there's always something that surprises us in any given year. So that's all reflected in that 4.5% to 6%.

Yes, what's encouraging from our standpoint, though, is that this is a step up in our organic growth rate versus the guidance we gave a year ago. So we are overall feeling better about our performance in terms of organic sales growth. The overall range is a step up and it's a very good growth rate, especially when you consider this does not include MAKO, which we will be aggressively going after in 2014.

Sure, and then, just one quick follow-up as far as the guidance this year. Do you assume pricing is roughly consistent with what you saw in 2013? Are there any changes?

No, same expectations. Negative 1% to 2%, usually it bounces around in that range.

Larry Biegelsen, Wells Fargo.

So on MAKO, we saw the Q3 results. They were a little bit weak on the system sales. Can you give us any color on whether they rebounded in Q4? And I just have one follow-up.

We had really minimal sales, obviously, reflected, given the timing of the acquisition in our numbers, so it wasn't material. Not going to get into color on the full quarter sales. I know you guys got a lot of details from MAKO when they were public, but given the size of it relative to Stryker -- for example, we don't break out our navigation system sales either in entirety or by indication, and we're not going to get into that level of granularity. We will try to provide more color as it becomes more significant, but at this point, it's just not material enough for us to be breaking it out.

Bill, on the R&D tax credit and what you are assuming in the guidance, just to be clear, it sounds like you are assuming it's renewed later in the year. So from a modeling standpoint, you are going to get the whole benefit in 2014 in Q4, or should we be assuming equal benefit by quarter? It's just a little bit unclear how you are handling that this year. Thanks.

Sure, so our expectation is that it will get approved as we move through this year. When it gets approved is a question. So as you watch and see when that actually occurs, if it, for example, doesn't happen until the second quarter, we would have picked up in essence a half-year benefit in the second quarter and the rest of it in each of the last two quarters.

If it gets approved in the fourth quarter of this year, then we wouldn't pick up any of that tax rate benefit really until the last quarter, and we would pick up a full year's benefit of that. If for whatever reason they decide not to extend it, then, obviously, that would be a negative impact on at least the guidance that we've currently got out there.

Josh Jennings, Cowen and Company.

I was just hoping you could share with us, with your 4.5% to 6% organic topline growth guidance, if you could share with us your assumptions -- don't want to get ahead of ourselves with some of the positive trends we have been seeing, but your base case assumptions for recon growth in the US for hips and knees?

The way we are looking at it right now, going back to Kevin's comments about feeling like it was modestly -- and we view modestly in the tens of bps vicinity -- modest improvement starting in the second half of the year. We're going to look at the average between Q4 and Q1, compare it year over year, and I think what you'll see is a modest, again tens of bps, improvement in the recon market, and that's largely reflected in our sales guidance.

But I will tell you that I wouldn't assume 20, 30, 40, whatever it is, bps as a meaningful impact in that range. It's reflected in it.

Great, and then just a follow-up quickly on your views on the threat of generic reconstructive joint implants coming into the market and potentially in the mid-year by a larger player. How big of a threat is that?

And then, lastly, just on share count expectations with the stock price where it is? The share count is basically flat, 2013 over 2012. Is there any way to give some guidance on share count expectations for 2014? Thanks a lot.

Yes, I will jump in and take the last part of it. You obviously have our EPS guidance, and I would just emphasize our capital allocation strategy has been and will continue to be focused, first and foremost, on acquisitions to help drive organic sales growth.

We are also committed to growing the dividend at rates above the growth of earnings rates, and then buybacks. Now buybacks will vary from quarter to quarter, but that's a long-term strategy we have in place around a three-pronged cash strategy allocation.

Yes, you should assume each year a certain level of buybacks, not unlike the kind of buyback level that we had this year, but it will range based on what's happening in the marketplace and where our cash position is.

Related to the first part of your question, and I really don't see generic hips and knees as being really a viable option in the near term because the procedures are very difficult to do. So until the procedures are deskilled, which has been in the case in some other parts of medtech, when a procedure is very easy to do and you don't need a sales rep performing the high level of service that's required to enable patient outcomes, then generics take off.

There is a reason why in China you have a low-priced segment that does not include hips and knees. And it does not include hips and knees because these procedures are very difficult to do. That low-priced segment, which we are now participating in through Trauson, is a spine and trauma market, and so I don't really perceive this as a major threat. We are always going to keep our eyes open, but frankly, until you deskill these procedures, the sales force representation is extremely important.

At Stryker, we don't put sales reps in the OR to help sell power tools every time a surgeon is using a power tool, because the surgeon doesn't need a rep helping him use the power tool. The surgeon does need reps when they are doing hip and knee replacement, whether they are primary procedures and certainly when they are revision procedures.

Steven Lichtman, Oppenheimer.

Kevin, just in medsurg, obviously, you have had a strong new product cycle in endo and in instruments the past couple of years. As you look to 2014, have those rollouts completed now or do you expect them still to be an incremental driver this year versus 2013?

I would note in power tools, in large power tools, we just anniversaried the launch of the System 7, and you typically see three- to four-year lifecycle there, and obviously the growth starts to slow as you get to the latter part.

Conversely, we launched some new products in the early part of 2013 with an instrument, the CD4 and the [staple]. Those are targeted at small bone and are seeing very nice growth, which helps contribute to that 8% US gain in the quarter. We will have additional products that we will be launching in 2014, and some of those which we will highlight at the upcoming ARS meeting.

I would tell you the instruments group is extremely excited, because Neptune, although we have been servicing our existing accounts, we haven't been able to sell new capital. So in some ways, you might want to think of that almost like a new product because we are now going to be bringing back capital equipment to the market.

Obviously in the first half of the year, we have to service our existing accounts. We need to retrofit their equipment, but then we're really going to be looking to go after that.

In addition, Patient Safety Technologies, which we expect to close sometime in the first quarter, will give instruments another shot in the arm as a brand-new product, which frankly with all their relationships and them knowing how to sell patient and the caregiver safety, just ideally positioned. And those should be an engine for growth. Even though, once again, that growth in this year is outside of our guidance, it certainly will help our topline performance.

Got it, thanks. And then, Katherine, you mentioned relative to fourth-quarter MAKO contribution for overall corporate, obviously, not material, but just to clarify. On the individual product line that you guys reported or talked about on the call in knees and hips, did that include some MAKO in the fourth quarter or are those just pure Stryker year-over-year growth?

There was some, but I will stress, we closed very late in the year. It was not meaningful, whether it was total Stryker or even if you look at the hips and knees. We are very pleased with the growth we put up, even adjusting for the very, very modest impact from a few days of selling.

Okay, great. Thanks, Katherine.

Bill Plovanic, Canaccord.

First, just on the extremities, do you have a total ankle or one in the works?

And then, secondly, as we look at the MAKO, when specifically would you expect to have the Stryker implants compatible with the software for MAKO? And that's all I have, thanks.

Okay, thank you. I will start with the total ankle. So no, we do not have a total ankle currently in our portfolio. As you know, the total ankle market is not growing at a very fast rate. It is certainly not slowing down our growth whatsoever.

Over time, I think we will want to have a total ankle in our portfolio. We have evaluated a number of different options, and we frankly discounted some of them because when we do come to market, we want to make sure that it is going to be with a product that is a really compelling product. Whether we do that through internal development or whether we do that some other way, we will keep you posted. But it's not something we feel a burning desire for. We don't need it today where you can see our performance has been outstanding in foot and ankle without the total ankle.

But over time, just like we saw with hips and knees, right, in the early days of joint replacement, it takes time to build up a clinical track record, to build up experience, to get the right materials. So it's still -- longer term, it's of high interest to us. It's not something that preoccupies me in the short term.

And I would just say there's more to come on the timing for when we would look to launch and which areas, Stryker implants onto robot. It's clearly a part of the long-term value proposition, but we're just going through with the R&D teams working jointly together and looking at those and the timing, et cetera, associated with that. So more to come.

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

Thank you all for joining our call. Our conference call for the first quarter of 2014 results will be held on April 17. Thank you.

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