史賽克 (SYK) 2014 Q1 法說會逐字稿

Welcome to Stryker's first-quarter 2014 earnings conference call. My name is Eric 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.

(Operator Instructions)

This conference call is being recorded for replay purposes. Before we begin I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC.

Also the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is an exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I will now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may begin, sir.

Good afternoon, everyone. And welcome to Stryker's first-quarter 2014 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 an update as it relates to our recent M&A activity, and Bill will then offer details on our quarterly results before opening the call up to Q&A.

Our first-quarter results reinforced the strength of our diversified mix of businesses which include implants, disposables, capital equipment, and services that address a broad spectrum of the medical technology industry. With this comprehensive offering we achieved another quarter of solid organic sales growth, up 5% excluding acquisitions and foreign exchange.

While we benefited from one extra selling day in the quarter, this was offset by the negative impact from the unusually severe weather, which resulted in a high number of canceled surgeries. As these surgeries are being rescheduled over the course of the year, we do not anticipate any discernible impact on our full-year growth rates.

All three of our key business segments: Reconstructive, MedSurg, and Neurotechnology and Spine delivered year-over-year revenue gains in Q1, and growth was well balanced between the US and international. In the US, trauma and extremities posted an impressive growth of 12% off of a tough 26% comparable, which was aided by a competitor recall last year. This growth was fueled by continued strength in foot and ankle, up 34%.

Hip growth of 6% and knee growth of 4% reflected seasonality and some disruption associated with the MAKO acquisition. As publicly traded competitors we were only able to start our integration discussions after the deal closed late last year, with that planning taking place over the course of the first quarter.

During this period we experienced hesitancy by our sales reps, as well as some customers to move forward, pending visibility around the integration specifics. Starting in April, we now have the benefit of a unified salesforce. With this key step in place, we are well-positioned to leverage our considerable sales and distribution capabilities to drive sales growth going forward.

US MedSurg was led by robust growth in instruments, up 13% as the team has capitalizing on the late 2013 510(k) clarence of the Neptune Waste Management System. Endoscopy had another solid quarter. Medical was steady, while sustainability solutions was slowed by some product lifecycle challenges.

US Neurotechnology had another stellar quarter with 11% growth as all three businesses: neurovascular, neuro-powered instruments, and CMF registered double-digit gains. Spine growth was flat, aided by double-digit growth in interventional spine.

International constant currency growth of 5% was led by strong performances in Australia, Japan, India, and China, the latter of which had strong performance in both the premium and low-priced segment of the market. Europe momentum continues with the year-over-year growth in the low-single digits. Most product categories had positive results, although knees were soft due primarily to lingering issues in some emerging market countries, which we previously mentioned. We continue to expect this trend to improve beginning in Q2.

Turning to the P&L. The year-over-year decline in gross margin is a function of the negative impact from foreign-exchange along with price, which was partly offset by the benefit from our GQO initiative. We continue to make significant investments in R&D, which increased 17% year over year, while maintaining our focus on driving greater SG&A efficiencies. With our adjusted Q1 EPS of $1.06, we are confirming our full-year adjusted EPS guidance of $4.75 to $4.90.

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

Thanks, Kevin. My comments on today's call will focus on providing an update on our recent M&A activity. During Q1 we acquired Pivot Medical, which was founded in 2007 with a focus on hip arthroscopy procedures treating FAI syndrome. Pivot provides us with a platform of innovative instruments and implants to efficiently access and restore the mobility of the hip with minimal incision.

Hip arthroscopy is the fastest growing procedure in sports medicine, resulting from improved procedural solutions and growing demand for less invasive solutions. This acquisition complements our existing sports medicine portfolio and provides our customers with a comprehensive offering to address a broader range of procedures.

More recently we completed the acquisition of Berchtold Holding, which achieved sales in 2013 of approximately $125 million through its product portfolio of surgical infrastructure equipment. Berchtold's offering includes surgical tables, equipment booms, and surgical lighting systems geared towards maximizing efficiency and safety in operating rooms and ICUs. Combining these complementary solutions with our endoscopy division's existing operating room portfolio creates a comprehensive, quality-focused offering equipped to satisfy a wide range of customers' needs around the globe.

Also during the quarter we closed on the acquisition of Patient Safety Technologies, which we discussed in detail on our prior call. Our instruments division is excited about this innovative technology which helps prevent retained foreign objects in the operating room, thereby improving patient safety and reducing healthcare costs.

Finally, as it relates to MAKO, during Q1 we initiated enrollment in the critical study of a Total Knee application using MAKO's Total Knee system. We are excited about this opportunity to further broaden the clinical applications for this technology, and anticipate having the Total Knee on the market in 2015.

We are excited about these recent transactions and the opportunity for our divisions to leverage their considerable sales and marketing infrastructure to help drive accelerating revenue growth. With that, I will now turn the call over to Bill.

Thanks, Katherine. Sales growth was positive by 5.3% in the first quarter, including a negative 1.1% impact from FX translation. Constant currency sales growth was a positive 6.4%, which includes organic growth of 5%.

Earnings per share on a GAAP basis for the first quarter were $0.18 per share versus $0.79 per share last year in the first quarter, while adjusted earnings per share were $1.06 per share for the quarter versus $1.09 in the first quarter last year. This quarter's EPS includes a negative impact of approximately $0.05 per share from FX; the quarter comparison to last year's first quarter is also negatively impacted by approximately $0.05 per share, both from the tax extenders not being renewed and also from an additional full-year benefit for the 2012 tax extenders booked in the first quarter of last year.

The most significant non-GAAP adjustments in the quarter are related to a $340 million increase in the charges associated with the voluntary recalls of Rejuvenate and ABG II. 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 at this time.

Looking at sales in the first quarter, our organic growth of 5% was comprised of a positive 6.9% from volume and mix, with price negatively impacting sales by 1.8%. Acquisitions added 1.4% while FX had a negative 1.1% impact due to significant weakness in both the Japanese yen and the Australian dollar compared to the same period last year. This impact should lessen considerably as we move through the year if rates hold near current levels.

Looking at our segments, Reconstructive represented 43% of our sales in the quarter. Sales of Reconstructive products were up 4.5% as reported and grew 5.9% in constant currency. US Reconstructive sales grew 8% in the quarter; trauma and extremities once again had another solid quarter with sales in the US increasing 11.6%, with continued strength in foot and ankle as we worked to expand that market.

US hips and knees growth in the period were 5.9% and 4.4% respectively, and we believe the strong fourth quarter did pull some activity out of the first quarter. We expect sales growth to accelerate in 2014 and look forward to a Total Knee launch in 2015. Our international Reconstructive business was up 2.9% in constant currency and had low-single digit organic growth in the period.

Next, our MedSurg segment represented approximately 39% of our sales in the quarter. At the beginning of the year we moved all of our sports med implants previously reported in our Recon business segment to a newly created sports med unit under common leadership in our endoscopy division. This business is reported up through our MedSurg business segment. 2013 segment information has also been restated to consistently reflect this move.

Total MedSurg sales increased 5.8% as reported and 6.8% on a constant currency basis. These results were led by double-digit growth from our instruments business and high-single digit growth in endoscopy. Medical had low-single digit growth in the period.

Our instruments division keep in mind also now has the Neptune product back on the market after receiving FDA clearance and should ramp up nicely as we move through the year. Remember we were not able to sell Neptune capital last year. International sales were strong, up 7.1% in constant currency, driven by our larger OUS divisions: endoscopy and instrument.

Our final segment, Neurotechnology and Spine represented 18% of our sales and delivered another strong quarter. Sales growth increased 5.9% as reported and 7% on a constant currency basis. Growth in this segment was led by our Neurotechnology businesses and IVS, which grew double digits in constant currency. Spinal implant sales were down low-single digits.

In looking at our operational performance, gross margins on an adjusted basis in the first quarter of 2014 were 66.9% compared to 67.5% in the same period last year. Foreign exchange rates and price had a negative impact on the rate this quarter as we felt the full impacts of the weaker Japanese yen and Australian dollar. If rates stay at current levels, the year-over-year impacts from FX will begin to lessen as we move through at least the back half of this year.

Research and development expenses increased to 6.5% of sales versus 5.9% of sales last year in the quarter; this is a 16.3% increase in R&D spending over last year. And it also reflects our commitment to invest in areas which we believe will help us deliver above-market sales growth.

Selling, general, and administrative costs represented 52.3% of sales in the first quarter, and this included approximately $340 million of costs related to the Rejuvenate and recall matters. On an adjusted basis, SG&A expenses were $836 million or 36.3% of sales in the first quarter of 2014, versus 37.2% in the prior year's first quarter.

Operating margins on an adjusted basis were 24.1% in the first quarter of 2014, compared to 24.4% in the first quarter of 2013. The rate was negatively impacted primarily by pricing and foreign exchange rates in the quarter, partially offset by operational improvements and also from lower selling, general, and administrative expenses as a percent of sales.

Other expense on an adjusted basis in the first quarter was $23.7 million, compared to $10.8 million in the first quarter of last year. This increase in expense resulted primarily from higher interest expense and foreign exchange transaction losses in the period.

Our reported tax rate for the first quarter was 34.5%, while the adjusted effective tax rate was 24.1% for the first quarter. This compares to a 20.3% adjusted effective tax rate in the first 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, and the tax extenders have not yet been approved for 2014, so no benefit for them was included in the first quarter. 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 is negatively impacting our tax rate early in the year.

We also anticipate tax benefits from the reorganization and move of our European headquarters to the Netherlands. However, this is not expected to be in place until the second half of the year, so no favorable impact will be included in our tax rate until later this year.

Looking at the balance sheet, we ended the quarter with $4 billion of cash and marketable securities, consistent with our 2013 year-end level. We also had $3 billion of debt on the balance sheet at the end of the quarter.

From an asset management standpoint, accounts receivable days ended the first quarter at 56 days, or 2 days better than the end of the first quarter last year. Days in inventory finished the quarter at 175, which was an 8-day increase compared to 167 days in the first quarter last year, and inventory levels increased in the quarter primarily in support of a Japanese ERP implementation.

Turning to cash flow, our cash from operations were $206 million, compared to $236 million in the prior year. First-quarter cash flow was lower as inventory increased in the period including amounts to support an ERP implementation in Japan. And our capital expenditures in the quarter were $70 million, compared to $49 million last year in the same period.

We still have nearly $700 million available for share repurchase under a current authorization, however, no shares were purchased in the first quarter as we focused on and closed a few acquisitions in the period. As Kevin mentioned, our 2014 guidance remains unchanged with organic sales growth in the range of 4.5% to 6%, and adjusted net earnings per share in the range of $4.75 to $4.90.

To assist you in your modeling, particularly as it relates to the first half, we would note that current foreign exchange rates are resulting in additional headwinds with a total year impact expected to be approximately $0.10 per share, with the majority of the impact in the first half of the year. Also as mentioned previously, the renewal of the tax extenders remain in our guidance, however, we now do not expect them to be renewed until later this year.

Thanks for your support. And we'd be glad to answer any questions that you may have.

(Operator Instructions)

David Lewis, Morgan Stanley.

Kevin, just starting off with Recon, all quarter long we talked about the impact of various forces here in the first quarter and you talked about many of them. It's challenging to quantify weather but you tried to do so in thinking about selling days versus the weather. If you could just give us some more granularity on in your mind what was weather, what was seasonality, and why you're more confident that these trends begin to improve here in the second and third quarter?

David, what I'd say around seasonality, that's something that we expected, it's obviously a trend that we've seen over the last couple of years. And that played out again this quarter.

The weather clearly was not expected and it was obviously an unusual period. We expect that those procedures will get done over the course of the year. They will be rescheduled. So for the full year we don't expect that to have a meaningful impact on our volumes.

Obviously, MAKO is a different issue, and separate from weather and seasonality where we had our first quarter of integration, and obviously we had sales forces on both sides of MAKO and Stryker trying to feel each other out and understand how they're going to work together. We spent the first quarter working through those plans and obviously that did affect the first quarter for MAKO, but we're very excited. We have our plans in place, we have a unified salesforce ready to hit the ground, but to actually parse seasonality versus whether is not something that I could really do right now.

Okay. And then maybe a follow-up on the MAKO commentary you just gave, can you give us a sense of now that the integration's been done, what does the MAKO distribution force look like in terms of dedicated reps, the capital sales force, and we'd love to get obviously some information about how MAKO grew this quarter. If you're not willing to do that, can you give us any sense of when you can get the MAKO business back to the type of growth rates we were seeing in the earlier part of last year? Thank you.

So as we've already indicated, we're going to report the new MAKO knee numbers with knees, the MAKO hip numbers with hips, and the capital will be part of our other Reconstructive segment. We have our full salesforce now will be selling the implants, the combined MAKO implant sales force as well as the Stryker orthopedic salesforce, and that's new starting in April. We also have separate reps that will be selling capital.

Kristen Stewart, Deutsche Bank.

I was wondering if you could just quantify the impact of just reclassifying some of the sports medicine business into endoscopy, and just maybe talk a little bit more broadly about your strategy going forward in that line?

Sure, Kristen. The sales of sports medicine implants was roughly $15 million per quarter. It was a small but very fast-growing business, which we had separate from our endoscopy division. Our endoscopy division does sell many products into the sports medicine specialty.

We've now merged those two together and have one combined offense on sports medicine, and we've renamed the business unit sports medicine, which is now part of the endoscopy franchise. So we're really excited about being able to be built now a strong, fast-growing sports medicine implant business and now combining it with our existing arthroscopy business.

Okay. And looking ahead is the plan I guess to just grow that business more organically or grow it through supplementing through M&A?

We just did the Pivot acquisition. And that is going to be within the endoscopy division, so that really rounded out a key gap in sports medicine. We are pretty well-positioned in knees and in shoulders but having a product to treat hip arthroscopy was a gap, and we were obviously very impressed by the Pivot offering. So I would say right now they're focused on that acquisition which just recently closed. Clearly endoscopy has a much larger sales and marketing and depth and breadth that we'll be able to hopefully leverage as part of the sports medicine strategy going forward.

Bob Hopkins, Bank of America.

First question for Bill, are you still comfortable suggesting that about 45% of the total year's earnings will come in the first half? And I was curious in Q1 if earnings came in where you thought because obviously it was a little lower than what the street was predicting.

Sure. I'd say that roughly we're still comfortable with that. Keep in mind that with a couple of the caveats that I talked about, which FX is impacting us a little bit more upfront than we expected moving into the year. And also the tax extenders that we talked about as well too were originally in pretty much for the full year on a more than equal basis. It's still uncertain obviously when those will be renewed at this time. But that's also an impact that's affecting the first half of the year.

Okay. So a couple incremental things to consider around that 45% it sounds like.

And then the second question I wanted to ask was back on hips and knees and your comment you think things will accelerate over the year. I was wondering if you're already starting to see evidence of those surgeries rescheduled and things back to normal. And Kevin, maybe what your assumption is for the hip and knee market growth rate for 2014?

Bob, I'll jump in with a couple things. Going back to your prior question, keep in mind we clearly did not have any visibility when we thought about the first quarter as to how severe weather would be, and obviously it had an impact, and as Bill talked about FX was also worse. So there were some incremental negatives.

It in terms of the surgeries I think what we would say since we're not really going to comment where we are right now early on in the second quarter. Surgeries get rescheduled but they tend not to get rescheduled all in the same quarter that they were canceled, particularly if the physician has a backlog in place. So that's why we said we feel comfortable that those surgeries will get replaced or rescheduled over the course of the year for all the obvious reasons that these diseases is degenerative, these patients aren't going to suddenly feel better. So it will work itself out over the course of the year.

We still continue to assume the reconstructive market grows somewhere in the mid-single digits, and whether that's 3% to 4%, 3% to 5%, something in that vicinity, so there's been no discernible change in the underlying trends with the noted exception that seasonality continues to get more pronounced each year. And based on fourth quarter, first quarter, we anticipate the same trend will take place as we look ahead to the fourth quarter and this year and the first quarter of 2015.

(technical difficulties) -- to be willing to say whether or not that's a new number for that 45%, you give us that previously, are you willing to say what the best estimate is for the first half of the year in terms of percentage of earnings giving all these considerations that you just suggested?

As we said previously we still assume approximately 45% of earnings are in the first half of the year based on the range of estimates we have for the full year. And then as I think Bill outlined in his comments, some incremental headwinds that are specific to the first half in Q2 that are worth looking at as you think about modeling.

Okay. Thank you.

Mike Weinstein, JPMorgan.

Bill, how big is the SG&A line? I think about the acquisitions you've made and MAKO was [something $20 million] of the quarter on SG&A itself. So I'm trying to reconcile with the addition of MAKO and recognizing that the efforts you're taking there, because (inaudible) don't happen day one. How does SG&A come in as well as it did?

I think that a couple comments there. So keep in mind on the R&D increase that we had, a piece of that is obviously from some of the acquisitions that we've been bringing onboard, especially as it relates to a percent of sales of R&D to our total sales. And then as it relates to the broader-based SG&A side, I think that you should assume that there were some reductions actually in each of those areas. So selling costs were down slightly as well as a couple of the key categories within the G&A area.

And is that sustainable? Is there anything there that's one time?

I think that it's probably reasonable to assume that the R&D side should expect to run probably higher than it did last year, pretty much throughout this year. And I think the reverse is probably also true with the SG&A broader category.

And there's nothing that's been re-categorized that's been added SG&A in some other category?

No. No reclassifications took place.

Okay. And then lastly on (inaudible) the exposure that you're backing out from costs pertaining to the Neptune recall, can you be clear what those are?

Are you talking for this quarter? There were no additional Neptune recall costs in this quarter. You broke up a little bit on your question. Is that what you're referring to?

Yes. Are you guys still there?

Yes. A little trouble hearing you. And the specifics of the last question, was it around the Neptune recall charges in the quarter?

Yes. I'm just trying to make sure that we've got the reconciliation because in your move from GAAP to adjusted, it says that you are adjusting for costs relative to both Rejuvenate, which we understand obviously, and then it lists as well the Neptune recall and I wasn't clear why you'd have expenses related to that recall that you are backing out, but it sounds like Bill is saying there were no expenses.

That's correct. There were no recall expenses for Neptune in this quarter. The recall costs that you're seeing there were related to just the Rejuvenate matter.

Perfect. Okay. Thank you, guys.

That's back on the market as well too and we'd expect that business to continue to ramp up as we move through this year.

Okay. Thank you.

Richard Newitter, Leerink Partners.

Kevin, can I just ask you to elaborate a bit on your comments on the dynamics playing out in the EU Recon division and what gives you confidence? I think you said acceleration throughout the year in 2014?

So as you know, Europe was a sore spot, if you go back about a year and half for Stryker and it had been over a number of quarters trailing the market. And we launched our turnaround and we've now had four straight quarters of low-single digit growth, so it's sustained.

We started off with northern Europe being the area of primary focus and now I would include southern Europe in that, so Spain started performing well at the end of last year. And in this first quarter even Italy registered positive results, and Italy had been a country where we were suffering the most. So I would say our recovery has been broad-based across all the countries.

Back to basics, we really have our Management team performing very well. So it's sustainable four quarters in a row. In a market that's still a challenging market overall, we're performing well. And obviously for Stryker, Reconstructive is the biggest segment in Europe, and so the implant business is starting to get healthy again.

Great. And then with respect to the comment you were making about rescheduling surgeries in 2Q and beyond, you said that a surgeon's backlog might actually be prohibitive in terms of the surgeon being able to get that patient in. That would almost seem to suggest that backlogs seem very healthy at least in your customer base.

Can you describe either anecdotally or quantify what you're hearing from your customers about expanding backlogs, if any? And does that leave you feeling better than perhaps a few months ago looking forward into the year?

I'll take it. I think it's safe to say probably reading a little bit too much into my comment. It was more around to get perspective that you can't make up all the surgeries in a given quarter, and that may be one factor. It wasn't intended to imply that there's been a significant change in backlog that's specific to us.

It was really just a factor as to why we said we think those procedure volumes will be rescheduled over the course of the year. And then I would go back, we're continuing to assume the reconstructive market is essentially unchanged in terms of this growth with the noted commentary around seasonality.

Derrick Sung, Sanford Bernstein.

Going to your organic knee growth, I guess our calculations suggest that in the US at least, excluding MAKO, your organic knee growth was flat to even perhaps down a little bit negative? Was this a surprise to you? Is that calculation in the ballpark? And if so then that would imply a pretty substantial reacceleration through the back half of the year. Is that fair?

Derrick, I'll take the question. And for consistency's sake, we have said we're not going to breakout MAKO revenue, and I know it causes some challenges, but I also know you guys have your models and we'll get some approximations in there.

We very clearly saw some impact as we talked about from weather and seasonality in the quarter. And clearly Q1 versus Q4 growth there's a big change and we assume that trend will continue this quarter, so those are some of the factors that you should assume. This isn't a linear trend as it relates to our businesses, both in Recon as well as in some of our capital businesses.

Specifically related to knees, what I would say is all of last year we grew at market rates in knees. And so I wouldn't expect anything really different going to this year in terms of outside of MAKO if you just look at our core knee implants that we perform around market rate, and we don't see a different dynamic necessarily playing itself out.

Okay. Thanks. And can you spend a couple minutes on pricing, both what's the level of price cuts that were seen from Japan versus your expectations? And also it does look like on Recon pricing has gotten sequentially worse over the last three quarters. What's going on there, if anything? Thanks.

I'll take the Recon commentary. We don't break out pricing by specific product lines. For hips and knees, you see in our financials you can get the pricing impact. We continue -- for the three main businesses, we continue to see pricing pressure partly offset by mix and the total Company price continues to be down in the 1.5% to 2% range.

Japan price cuts obviously we expected those price cuts and they came in in line with our expectations. And specifically for Reconstructive, we do break out pricing by segment. The first quarter price reduction was not very different, but if you look at our full-year price reduction, it's in line with our full-year price reduction.

Matthew Dodds, Citigroup.

Couple quick ones. First, Katherine, just, just on the acquisitions, is the right math two months of Trauson in the quarter and then a full quarter of MAKO? Are those the only two that have an impact?

Well, we also closed on Pivot, but that's it. We didn't break out that revenue, but I think it's safe to say very immaterial particularly given when it closed in the quarter, and then Berchtold closed after the first quarter. So yes that's essentially the bulk of it.

And Kevin for you on trauma in the US, not everybody's reported but the big companies have. It looks like the market doubled. So almost 10% this quarter. Is your sense that that was weather-related or do you see a strengthening in the market overall?

So first of all, not everybody's reported yet and I'd say you do have the impact of the recall competitor recall from last year, which inflated that competitor's first quarter and frankly tamped down our growth rates; our real underlying growth rate was even higher than the 12% we reported.

Weather does have a factor. It's not nearly -- it's not a one for one with a slowdown you see in hips and knees. There's not a one-for-one replaced by trauma, but yes the weather does have an impact and was a tailwind for us and for the market in the first quarter.

Okay. Thanks, Kevin. Thanks, Katherine.

Matt Miksic, Piper Jaffray.

Just a couple points to clarify, just I'd love to understand you mentioned some of the factors impacting the MAKO business as you got further along in the integration or really began your first quarter of integration. Could you -- I wasn't sure if I understood whether this was hesitation among the salesforce as they the typical who gets what territory kind of questions. Whether there was some loss of salesforce in that process or whether there was hesitation or on the customer utilization side, if you could maybe add a little color there. And then I have one follow-up.

Yes. Two of the points you made I would say yes, hesitancy on the salesforce around who's going to get paid, who's going to get credit, what territory am I going to cover? Yes, on the hesitancy around customers saying well now that Stryker owns it, should I buy this or should I wait? Can I get financing, are they going to sell this differently? So the hesitancy is yes on both of those two parts.

The one area where we did not have an issue was on salesforce loss. We didn't lose any salesforce, our salesforce has all been retained. But there was this limbo where you're trying to figure out and sort out who's going to be getting credit for what. Especially if you look at Stryker Reconstructive implant people who are not getting credit in the first quarter, they obviously weren't going to engage fully until they understood what it meant to them. We were able to clarify that over the course of the first quarter, so they are now fully engaged.

Great. And then this reacceleration, if you could, Katherine, maybe would be the best person to walk through what the points and drivers are as you see through the rest of the year, putting aside what we just talked about what Kevin just mentioned, what are some of the other factors you think that get the growth going again to hit your full-year numbers?

If you're talking about -- I assume you're talking about topline and --

Yes.

Keep in mind organic growth in the quarter was 5%, and so I think we're in very good shape recognizing Q1 the biggest factor that's a negative for revenue is the seasonality, both for capital which obviously has stronger fourth-quarter trends. And then the Reconstructive, which I think is a horse that we've pretty well beaten to death in terms of the seasonality trend.

As the year unfolds, the benefit we'll see is the acceleration in MAKO as we talked through, Neptune is ramping up as it just got back on the market and we had to do some customer upgrades in the first quarter. We did several acquisitions that we closed in the first quarter; we'll start to see the traction with those as the divisions start to take advantage of the expanded product offering there. And --

I'd say we are going to continue to sustain the double-digit growth in Neurotechnology. Those businesses are all really well-positioned with strong momentum, strong pipelines, so we expect that business to continue to perform very well. So we have a number of businesses, trauma, instruments division, Neurotechnology, where we're very bullish on our performance over the course of the year.

I think as you go back and adjust the models, the biggest change that we've seen and as we've talked about, it's gotten greater each quarter or each year, is the seasonality. So obviously that's going to impact how the fourth quarter of this year looks like just as it impacted the first quarter.

And then some of the headwinds that we talked about around FX in particular that will impact the second quarter. So there's just more variability on the overall quarterly trends, but when we step back and look at the full year, it's very consistent with our expectations.

Great. Thank you.

Jason Wittes, Brean Capital.

Wonder if you could help us out with timelines on product flow for MAKO, now that it's fully integrated with Stryker, and that is specifically the Total Knee I think you're starting that trial, I think that's still going to be the MAKO knee. I guess how long will that take to get on the market from your expectation, and when would we see integration with other Stryker products within MAKO?

I would refer back to the comments we made in the formal part of the call. We did start enrollment in the first quarter with the Total Knee with MAKO's Total Knee system, and we do anticipate launching a Total Knee on the MAKO robot in 2015.

In terms of product integrations and next generations, we're not going to go into any additional color on that. Obviously we do have plans to introduce Stryker implants in both the hip and knee side. The timing of that and the prioritization are things that we're working through internally. We will likely be able to share additional color at our analyst meeting in September where the product there is going to focus on the Reconstructive business in MAKO. But beyond that, we are not prepared to go into any more detail around the pipeline.

Okay. Fair enough. Thank you.

Glenn Navarro, RBC Capital Markets.

First question is on foot and ankle. Again, another quarter of 30% plus growth. But that's 3X the market, so Kevin, maybe talk about what continues to drive that growth and how sustainable it is? And I had a follow-up on Spine.

So the beauty of the foot and ankle business unit, we created this dedicated focused business unit only a couple of years ago. We obviously combined the Memo Metal acquisitions with our existing products, and we've just been driving market expansion. And we're addressing surgeons that weren't using implants before, and so it has been difficult to predict. I would say at some point the comparables you'd think would start to catch up to you, but when we're in the market expansion mode, we're just continuing to drive and gain new procedures with new clinicians.

So it's a fabulous market. We're very, very well-positioned and we continue to outperform the market by a healthy margin. So there isn't anything new we're doing, so the playbook that we put in place from the beginning is the playbook that we're following. And because it's a new market versus having to take share from existing players, the runway for growth is still very healthy.

And then my follow-up on Spine, I think you said in your prepared comments that implants were down low-single digits. Can you break that out between US and OUS? And was that down low-single digits in line with the market?

I would say that our performance if you look over last year, we performed kind of in line with the market, at least with the large players. I would say that held true again in the first quarter, where you have the US down low-single digits, OUS up low-single digits. That's how it's been playing out over the course of last year, and the first quarter was no different.

Matthew Taylor, Barclays.

I wanted to understand how you're thinking about the combined business now that you've linked the salesforces and are aligned there. Is that like flipping a light switch do you think, or does it take some time now for them to regain momentum?

Well, it's just like any other integration. So it's going to depend. I can't give you a straight answer. What I can tell you is the teams are very engaged and they're very excited, but it's new.

And you have people that are collaborating together, you have -- the surgeon relationships are well-established. But it's not something that I can -- it's not going to be linear and it's something that will build and grow and accelerate throughout the course of the year.

Okay. And then just on the weather, were your comments on surgeries more related to any one segment, or is it more Recon focused or did you see it more broadly across your business is?

Certainly they're Recon focused. When you look at our MedSurg business posted very, very good results, our Neurotechnology division posted very, very solid results. So it really was localized to the Recon business, and spine to some degree, but not that different than last year.

David Roman, Goldman Sachs.

I wanted to ask just one follow-up question on the insurance business, I had thought that as part of the Neptune upgrade that you were going to place those systems with customers, so I'm just wondering about the 13% growth in the quarter, whether you're in fact selling that again and how we should think about the actual revenue trajectory through the balance of the year?

So what we talked about was that it was probably going to take until the third quarter of this year till we were really at a full run rate, because we did have to go back to existing customers and do a software upgrade for them. But we are also now selling and we're selling disposables associated with that.

So the comments still hold. I would say the teams are very excited obviously to have the product back on the market given the features and benefits, and we would expect that momentum to accelerate again into the third quarter where it should be truly reflective of them hitting on all cylinders.

That's helpful. And then maybe just a broader question for Kevin and Bill, as you think about the long-term earnings growth of the business, how should we think about the rubric to the P&L? Just looking at the performance the past couple quarters, it seems to me as though if I look at the drivers you have the topline growing at a pretty consistent solid rate, gross margins are coming down there, it might be some discrete factors there but it sounds like you're going to run really hard to try to keep them flattish at best. You can manage discretionary spending and then you can try to get some financial leverage to grow earnings. Is that the right way to think about how you grow earnings in this business, now in an environment where pricing looks like a persistent headwind?

Sure. Those are generally reasonable comments with maybe the one exception of gross margin related rate. Keep in mind that both in the first quarter of this year and also throughout almost all the quarters last year, we took a pretty heavy headwind from FX in each of those periods, and a large part of that is impacted at the gross margin level.

So if FX was even neutral, I think that that headwind on a gross margin rate would be much reduced. And despite the fact we've got some significant pricing headwinds in general, I think that we've got some good initiatives through our broader-based GQ&O teams to help reduce those operating related costs in the gross margin area to help offset that.

Larry Biegelsen, Wells Fargo.

Kevin, could you talk a little bit about the outlook for the medical division in the US, and the US capital equipment market in general now that the ACA has been in place for four months this year? Thanks.

So you saw our medical division in the US grew in low-single digits, and it's had pretty steady performance. We're not seeing any discernible change in the capital equipment market. It's the same challenging market that we had all of last year, the ACA impact is negligible, capital is still challenging. But our division is continuing to perform well in a challenging market.

And then on emerging markets, could you just talk about what percent of your sales now are emerging markets, the growth in the quarter, and how much the knee issue in Asia impacted your growth? Thanks.

Yes. So as you mentioned in previous calls, the smaller market Asian companies, the distributor change that we've gone through has lingered. And that was primarily a knee business, so that did impact us.

Our emerging markets as a total percent of sales is around 7%, and we are having very strong growth as we mentioned in China as well as India. We still have a lot of work to do in some countries like Russia and Turkey where we're really starting from a small foundation. I'm excited about the potential for emerging markets, specifically with Trauson in which performed very well in China, and which we will start to launch in countries outside of China over the course of this year.

Matthew O'Brien, William Blair.

Just quickly on MAKO with the clinical trial that you're enrolling right now, I'm looking at the website right now and it seems reasonable that it will probably take a couple quarters to enroll, and then I think it says here about a one-year follow-up, so we shouldn't expect that rollout to come before that trial is complete. Is that a fair way to characterize it?

We're going to complete the trial, we haven't given a timing on submission. But clearly it's going to have to happen to be consistent with our goal of launching a Total Knee system in 2015. So we're enrolling, we have not gone into details, partly for competitive reasons regarding the trial design and some of the specifics, but it's all consistent with our goal of launching in 2015.

Okay. But it seems reasonable that it would probably be later next year rather than earlier?

2015. I wish I could --

I would just say hold for now, and over the course of this year we'll be able to provide more color. It's just too early for us to comment at this point in time.

Okay. Thank you. One more real quick then for Kevin, since you've there, got into that position, you've done a real nice job of building out your presence in some of the faster growth areas of orthopedics. And you've done the Pivot acquisition now, and your commentary there was interesting to me given how large that market is, and the growth opportunity that you have there. Should we think of sports med as the next focus area in ortho for Stryker? A big ramp up in sales and marketing presence there as a bigger chunk of R&D spend heading into that market?

So we have a number of fast-growing segments within Stryker. And I would say sports medicine is one of those fast-growing segments. Trauma is a fast-growing segment, there's fast-growing segments in Neurotech. We mentioned interventional spine as a fast-growing segment, so we have many business units that are fast-growing; I wouldn't want to isolate it to one or two or three.

And we believe that the combination of the fast-growing sports medicine implants, where we had strong knee, strong shoulder, and now very strong best in class hip arthroscopy products that we acquired through Pivot, combined with the endo arthroscopy business will really give that a shot in the arm.

So yes, I would say sports medicine is a focus area, but it's not different than it has been in the past; we're just going to bring a bit more muscle to it by combining the two Organizations together. We think we're very well-positioned. We have a number of new launches coming out of the arthroscopy unit that will combine with the sports medicine business, so we think the timing is perfect to bring these businesses together.

But I wouldn't say that it's something different than we were doing before in terms of focusing. We were focused on sports medicine. We just didn't have scale in the implant side, so we carved out a separate group, did a lot of internal development, have now combine that with Pivot. So we now have really a great offering on the implant side that we can combine.

So three or four years ago we weren't ready to really compete vigorously in sports medicine because we didn't have a complete offering. We are now ready.

Joanne Wuensch, BMO Capital Markets.

A big picture one and a detailed one. Big picture, one of the things that you focused on when you first joined, Kevin, is what was happening in Europe. Can you give us an update on what that looks like?

And then my more specific question is, is there any update on the timing for the reintroduction of OtisMed in the United States? Thank you.

On the first question, I'll take the first part of the question on Europe, I would say we just had sustained strong performance. I mentioned before four straight quarters of positive growth and constant currency in the low-single digit area.

It's taken a number of quarters to get that in all countries. I mentioned last year that we were lagging in Italy. We had been lagging in Spain. That story in Spain has changed over the last six months. And this quarter was the first positive we saw in Italy, which had been a country where we were suffering the most over the last two years.

So the business model that we put in place for the turnaround is working and working well. And we are now sustaining that performance in Europe. We mentioned before in detail how we had changed our commercial model. We're very pleased with how that commercial model is working, and so beyond that I could just say that the team is stable and performing at a high level.

Joanne, on the OtisMed, unfortunately we've proven that we haven't done a great job of predicting when we're going to get that back through the FDA, so I don't think we've got good visibility right now in terms of a relaunch. I wouldn't be assuming necessarily anything in the next few quarters.

Thank you.

Dave Turkaly, JMP Securities.

Did you say you're going to launch another Total Knee in 2015 in addition to the MAKO one?

Not in addition.

The trial is being done with the MAKO robot, and they had obviously been using their MAKO Knee when they were putting this together, so that's what's being used in the trial right now, and we anticipate launching in 2015, the Total Knee on the MAKO robot assisted system with the MAKO Knee in the trial.

Okay. Thanks. And in terms of the follow-up and the fast-growing segment, it seems like there are some smaller players out there in the world of spine with some unique assets there that are growing at a pretty good clip, and given your performance there I was wondering if you have any thoughts of incremental R&D to mimic some of that maybe minimally invasive technology, or M&A spend there in the future? Thanks.

Clearly minimally invasive is the fastest-growing segment of Spine, it is a focus area for us certainly within our internal R&D organization. And we'd certainly be open to looking at acquisitions within Spine.

We did a very small acquisition, we did CoAlign in the first quarter. And that's an acquisition that our Spine team is very excited about. So you should continue to expect that we will launch products internally as well as pursue acquisitions in that space.

Bill Plovanic, Canaccord Genuity.

This is for Bill. On FX, when did you start the hedge? Does this start turning positive? It has been a headwind, does it start turning to a tailwind for you at any point in time?

Right now if you take a look at the roughly the $0.10 per share impact that I referred to, the first quarter we referenced was about $0.05. That was probably the biggest related impact for the year. I think the second quarter will also be maybe not quite that level but still a fairly significant level. As you move into the third quarter there may be a little bit of an impact yet in the fourth quarter. Should be more at least balanced off based on where rates are today. If rates move obviously, that's an impact that needs to separately be taken into account.

From a hedging perspective, we did begin to see receive some benefits from the hedging program already in the first quarter here. As we move through this year it takes us I think we stated until the early part of next year until the hedging program is more fully in place. But based on current FX rates that we see, the impact should be pretty much more neutralized by the time we get into the fourth quarter.

And then once it's fully in place does it become that we shouldn't see an EPS impact from the hedging?

No. Absolutely not. The hedging program is meant to really mitigate what that risk is, so it just buffers it in comparison. At some point unless rates reverse from a different level, right, you still have the positive or negative impact of that. The hedging only just spreads out what the rate is that you're actually paying within a specific quarter.

And if you think about it, just thinking about over a six quarter basis, that's where we are purchasing the different components of our FX exposure. So it's the average of that six quarter basis as we move out into the beginning part of next year that you should be looking at.

Kristen Stewart, Deutsche Bank.

Just want to take a follow-up. Just on the other expense line item, can you break it out between interest and other, and whether or not that was materially off from your expectations?

I'd say that most of that was in line, a little bit of that was actually from part of our FX exposure that we just talked about, the $0.05 that hit us in the quarter. Probably a good $0.01 of that ran through that category. So that was probably the one area that was not expected because the transaction impact in that category, generally if rates don't move from the beginning of the quarter to the end of the quarter, there is typically no FX impact in that expense line.

But as far as the increase in the interest expense side, keep in mind we placed some debt at the beginning part of last year, and so the first quarter on a comparable basis now reflects that interest expense in the first quarter as well too, and obviously that was planned.

And then just relative to the share repurchase you mentioned there was $700 million outstanding, how should we think about your guys' approach, whether that will be completed during the year, or is it still kind of subject to some acquisition activity?

It's always going to be subject to acquisition activity, because as we stated we've got three primary uses, but first and foremost is acquisitions. Dividends are second and obviously fairly consistent in terms of how those play out, and by nature the repurchases are going to be the most variable.

I would say that most years we have finished the year with still shares available under the authorization, but that you should anticipate in any given year that there will be some level of buyback activity. Clearly the first quarter we had a lot of acquisition activity, that was the primary use of cash.

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

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

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