史賽克 (SYK) 2014 Q2 法說會逐字稿

Welcome to Stryker's second-quarter 2014 earnings conference call. My name is Adrian 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.

(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 that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC.

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

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

Good afternoon, everyone, and welcome to Stryker's second-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 on our M&A activity, and preview our upcoming analyst meeting. Bill will then offer details on our quarterly results before turning to Q&A.

We continue to see solid top-line momentum with organic sales growth of 5% in the quarter. After adjusting for one less selling day, this translates to underlying organic growth of over 6%. All three of our business segments, reconstructive, medsurg, and neruotechnology and spine contributed to our Q2 performance.

Starting with US reconstructive, trauma and extremities continued to achieve market-leading growth, up 13% despite challenging comparatives from last year. This was powered by foot and ankle, which once again achieved outstanding growth, increasing over 30%.

Both hips and knees registered solid performance and accelerated from Q1, with 6% and 7% growth, respectively. Note that the impact of one less selling day is most pronounced in our hip and knee business, which would have added roughly 150 basis points of growth. These businesses also benefit from improving trend in MAKO, which we expect to continue in the back half of the year. Katherine will elaborate on this shortly.

Turning to US medsurg, we had strong performances in instruments, endoscopy, and medical. Instruments increased 7%, driven by continued uptake of the Neptune Waste Management System. Endoscopy growth of 17% was aided by recent acquisitions, but even after adjusting for these, still grew at an impressive 9%. Medical remained steady with a 3% increase.

Sustainability Solutions had negative growth in the quarter, but has recently received five 10-K approvals that will return it to positive growth starting in Q3.

US neruotechnology had another strong showing of 8% growth, with neurovascular, NSE, and CMF all performing well. US spine results were soft this quarter, down 6%, reflecting pricing pressure and some sales force disruptions. We believe that a number of measures, including strengthening the leadership team and bolstering our product pipeline, along with our recent acquisition of CoAlign should get this business back to its normal rhythm by year end.

International constant currency growth of 5% reflects sustained improvement in Europe, as was excellent performance in China, Australia, South America, and India. These strong performances were partially offset by weak results in Japan, as we continue to work through a challenging ERP implementation, as well as the biannual price cuts.

Most product categories had good performance, although hips and knees were negative, owing to the Japan issues and from tougher comparisons, particularly in Europe as we anniversary our turnaround. The small market issues in Asia, which we have alluded to on past calls, are largely behind us and should no longer be a drag in the back half of the year.

Turning to the P&L, gross margin declined year over year, owing to a modestly tougher pricing environment, product mix and negative foreign exchange. R&D increased in both absolute dollars and as a percent of sales, reflecting our commitment to internally driven innovation, coupled with the impact from acquisitions.

Our focus on delivering greater SG&A efficiencies helped drive year-over-year improvement in operating expenses. Combined with a lower tax rate, we delivered adjusted EPS of $1.08.

For the full year, we are narrowing our guidance on sales and EPS. We expect full-year organic sales growth to be in the range of 5% to 6% and adjusted EPS in the range of $4.75 to $4.80. These changes reflect first-half performance, our expectation of accelerating sales growth, and the impact of acquisitions on EPS.

Looking ahead to 2015, we will provide specific guidance at the end of January, as we do each year. However, given the recent opening of our European regional headquarters, we wanted to alert you to additional benefits that will accrue in 2015 versus 2014.

We expect our 2015 effective tax rate to improve by roughly 2 percentage points, or $0.10 to $0.15 per share. Of this benefit, we plan to reinvest about 50% to accelerate our top-line growth and drop the other 50% to the bottom line. Therefore, we would expect an additional $0.05 to $0.08 per share improvement beyond our normal target for 2015. Bill will share more about the European regional headquarters later in the call, and we will discuss the reinvestment plans later this year.

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

Thanks, Kevin. The focus of my comments today will be an overview of the recently announced planned acquisition of SBi, an update on the performance and expectations for a major recent acquisition, and a preview of our upcoming analyst meeting.

Starting first with SBi, we announced the planned acquisition of this key player in the small bone extremity market in late June, for a net consideration of approximately $285 million. Through SBi's focus on the total ankle as well as the upper extremity small joint replacement segment, we are meaningfully supplementing our small bone fixation portfolio with a comprehensive product offering.

Importantly, there is minimal overlap with our existing products, and we are well-positioned to leverage our considerable sales and marketing infrastructure to access the various surgical specialists that focus on extremity procedures. SBi's Star total ankle replacement, which represent roughly 50% of sales, is the only PMA-approved cementless mobile-bearing total ankle in the US.

With these products, we will expand our customer base with fellowship-trained foot and ankle surgeons. Additionally, roughly 50% of SBi surgeons are not currently customers of Stryker's T&A products. While we do anticipate some level of sales dis-synergy in 2014 as we integrate the Company, we expect to return to solid top-line growth, with a five-year anticipated CAGR beginning in 2015 of over 20%. And with the recent success of our specialized foot and ankle sales force, as well as the strength of our traditional branch agent sales channel, the timing is optimal for our organization to leverage this acquisition.

Moreover, the addition of upper extremity small joints will allow the opportunity to focus on this important subsegment, a market estimated at over $200 million globally. In sum, with the recently launch of our internally developed reverse shoulder, our expanded offering in small joints, and filling a key gap in foot and ankle with the Star Ankle, we fully anticipate building on our clear success in the extremities market.

We closed a Berchtold acquisition on April 15, which is in the communications business unit of our endoscopy division. For this year, our commercial integration is focused on customer lead sharing, where Stryker communication sales team shares operating room table leads with their Stryker-Berchtold counterparts, and in turn, for Berchtold to share operating room integration system leads.

To date, the partnership between the sales force has generated over 100 new leads. We anticipate maintaining separate sales representation between the existing Berchtold and Stryker portfolios through year end, at which point they will move into a single sales team.

We've been pleased with the initial results of the Pivot acquisition, which closed on March 7 and is reported within the sports medicine business unit of our endoscopy division. Stryker successfully completed the transition of the product sale to our direct sales force during the first 90 days of operation while maintaining very strong double-digit growth.

Since close, we delivered the requisite product and procedural training to all reps and sampling to those reps that covered the existing 350-plus Pivot customers. We will sample the balance of the sales force by the end of Q3.

Turning to the acquisition of patient safety technology, which provided us with the SurgiCount Safety Sponge System and is now part of the instruments division. This deal was closed on March 24, and we have begun sampling the system and training our sales reps.

Since the close, we have added roughly 100 new customer contracts, mainly through further expansion in our existing customer base, as well as in new accounts. Installations are ongoing that will increase the install base of customers to over 400 by the end of the year.

With respect to Trauson, which provided us with a leading brand in the fast-growing lower price segment of the Chinese market, we are now well into our second year and are pleased with the performance and success of the integration in China. With dedicated leadership for both the premium and lower priced segment, we believe we are optimizing the market opportunity while remaining focused on the specific attributes of these two distinct markets. [Bringing] to the Q2 growth in emerging markets with strong double-digits led by China, Brazil, and India, and partially offset by ongoing market conditions in Russia.

Turning to MAKO, we closed in late 2013 and work through much of the first quarter on the integration plan, which we rolled out to our sales force at the start of April. During Q2, we were focused on training our existing reps on the technology and its benefits. We have now trained roughly 20% of our 1,000 reps in the US, and are scaling the MAKO training capabilities to cover the remainder of our selling organization by year end.

And while the integration proved to be more challenging than anticipated, we believe we are gaining momentum as robust sales in Q2 improve with six [place] in the quarter. Importantly, our order book has strengthened and we anticipate continued sequential acceleration in robust placements. We are also encouraged by system utilization, which improved during Q2. We remain on track to launch a Total Knee System in 2015 and also plan to launch our key hip systems on MAKO next year.

Finally, we will be hosting our analyst meeting September 17 at our orthopedics headquarters in New Jersey starting at 2:30. We are structuring the meeting's agenda to provide greater visibility into certain businesses or key opportunities for the Company. Specifically, the meeting will include a surgeon panel focused on the MAKO opportunity, which will be moderated by David Floyd's, Group President of Orthopedics. Tim Scannell, Group President of Medsurg and Neruotechnology and Spine will focus his comments on our instruments division, including the relaunch of Neptune and our recent acquisition of Patient Safety Technologies.

For the International perspective, Ramesh Subrahmanian will highlight our expanding presence in China. Lonny Carpenter, Group President, GQO, will detail the benefits of a regional -- our European regional headquarters, which went live on July 1. With this focused presence in Amsterdam, we are excited about the opportunities, which include continued strengthening of our European presence and organization, the ability to co-locate leaders in a central location to increase collaboration, drive greater efficiency and to simplify and improve the customer experience. And as Kevin mentioned and Bill will cover in more detail, we also expect meaningful savings as a result of our RHQ.

Following the formal portion of the analyst meeting, we will once again have a product fair at the Homer Stryker Center. This year, the focus will be on orthopedics, including reconstructive, MAKO, sports medicine implants, trauma, and extremities. In addition to the opportunity to see many of our products, including recent launches and acquisitions, the broader orthopedics leadership team will be in attendance and looks forward to your questions. We hope you will be able to join us.

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

Thanks, Katherine. Sales growth was positive by 6.8% in the second quarter, including a negative impact, a slight impact from FX translation. Constant currency sales growth was a positive 6.9%, which includes organic growth of 4.8%. We had a negative impact from one less selling day in the quarter, and on a days adjusted basis, core growth exceeded 6%.

EPS on a GAAP basis for the second quarter were $0.56 per share, flat with last year, while adjusted EPS were $1.08 per share for the quarter versus $1.07 per share last year. This quarter's EPS includes a negative impact of approximately $0.02 per share from FX, and if foreign-exchange rates stay at current levels, the back half of the year should see only a slight negative impact per quarter.

The most significant non-GAAP adjustment in the quarter are related to $160-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. And again, no insurance proceeds that may potentially be available to cover some of these costs have been included.

Looking at sales in the second quarter, our organic growth of 4.8% was comprised of a positive 6.8% from volume and mix, with price negatively impacting sales by approximately 2%. Acquisitions added 2.1%, while FX had no material impact on sales in the quarter.

Looking at our segments, reconstructive represented 44% of our sales in the quarter. Sales of reconstructive products were up 6.5%, as reported, and grew 6.3% constant currency and increased 3.6% organically. US reconstructive sales grew 10.7% in the quarter.

Trauma and extremities once again had another solid quarter, and sales in the US were increased by 13.2% and grew 9.2% internationally, with robust growth in our foot and ankle business, as we continue to have great success in an expanding market. US hips and knees' growth in the period of 6.3% and 7.1% were partially offset by declines in international markets of 2.7% and 5.6%. In the prior-year quarter, our international growth was 5.9% in knees and 10.4% in hips, which were challenging comps.

Next our medsurg segment represented approximately 38% of our sales in the quarter. Total medsurg sales increased 8.8% as reported and 9% on a constant-currency basis and increased 6.7% organically. These results benefited from high single-digit growth from our instruments business and high double-digit growth in endoscopy, which included incremental revenue from recent acquisitions. Note that endo has a much tougher comp in the third quarter; however, instruments will have a much easier comp in the period, as Neptune had a greater negative impact in the back half of last year.

Medical had a low single-digit growth again in the period against some strong prior-year performance. Our instrument division has the Neptune product back on the market and should see additional improvement in the back half of the year compared to last year. International sales were strong, up 13.2% in constant currency, benefiting nicely from both organic and acquisition growth.

Our final segment, neruotechnology and spine, which represents 18% of our sales, increased 3.8% as reported, 3.9% on a constant-currency basis and 3.7% organically. Growth in this segment was led by our neruotechnology businesses and IVS, which grew strong single- and low double-digit in constant currency respectively, while spinal implant sales were down low single digits.

In looking at our operational performance, gross margins on an adjusted basis in the second quarter of 2014 were 66.2%, compared to 67.7% in the same period last year.

Foreign exchange rates continued to pressure margins, and prices declined approximately 2% in the quarter, while product mix also was a factor in the year-over-year decline. As mentioned, the negative FX impact should continue to lessen in the back half of the year.

Research and development expenses increased to 6.7% of sales versus 6% of sales last year in the quarter. This is a 19.7% increase in R&D spending over last year, reflecting a higher level of R&D spending tied to recent acquisitions and our commitment to invest more actively in few key areas, which we believe will help us deliver above market sales growth, including our neuro-tech businesses.

Selling, general, and administrative costs represented 43.9% of sales in the second quarter. This included approximately $166 million of costs related to the Rejuvenate and recall matters. On an adjusted basis, SG&A expenses were $841 million, or 35.6% of sales in the second quarter of 2014 versus 36.7% in the prior-year second quarter, as we continue to focus on driving greater operational efficiencies.

Operating margins on an adjusted basis were 23.9% in the second quarter of 2014, compared to 24.9% in the second quarter of 2013. The rate was negatively impacted primarily by pricing and foreign exchange rates in the quarter, along with higher R&D spending, partially offset by operational improvements and also from lower selling, general, and administrative expenses as a percent of sales.

Other expenses on an adjusted basis in the second quarter were $30.3 million, compared to $21.3 million last year in the second quarter. This increase in expense resulted primarily from higher interest expense, and these expenses are expected to run at a similar level throughout the rest of this year.

Our reported and adjusted tax rate for the second quarter was 22.4%. This compares to a 23.5% adjusted effective tax rate in the second quarter last year. We expect the full-year rate will be approximately 22.5% with a slightly lower rate in the second half of the year. The renewal of the tax extenders is still reflected in our year -- end year earnings forecast, which if approved, will help reduce the second half tax rate.

No renewal benefit has been included in our first-half actuals. While our 2014 guidance still includes approximately $0.05 per share for the renewal of the tax extenders, it has not yet been approved by Congress and renewal and timing of them is still uncertain.

We also expect some tax rate benefit from our European regional headquarter move beginning in the third quarter of this year. We officially opened our new European headquarters in Amsterdam the beginning of this month and will be ramping up activities and transferring some intellectual property to the Netherlands as we move through 2014 and into 2015, which will require some local tax country payments.

This move will also generate some tax benefits, which are expected to further reduce our overall adjusted operating tax rate in 2015 by approximately 2 full percentage points from 2014's full-year rate. Currently, we are expecting to reinvest approximately 50% of these savings directly into our business.

Looking at the balance sheet, we ended the quarter with $4.7 billion of cash and marketable securities. We also have $3.9 billion of debt on the balance sheet at the end of the quarter. From an asset management standpoint, accounts receivable days ended the quarter at 57 days or about one day better than the end of the second quarter last year.

Days in inventory finished the quarter at 177 days, which was an 11-day increase compared to 166 days in the second quarter last year. While inventory levels increased in the first half of the year, partially in support of the Japanese ERP implementation and recent acquisitions, we do expect some improvement in the back half of the year.

Turning to cash flow, our cash from operations in the first half of 2014 were $572 million compared to $592 million in the prior year. First-half cash flows were slightly lower than last year, as inventory increased in the period, including amounts to support the ERP implementation in Japan.

Our capital expenditures were $124 million in the first half of the year compared to $96 million last year. We still have over $600 million available for share repurchase under a current authorization, as $60 million in share repurchases were made in the quarter as we focused on and closed a few acquisitions in the period.

As Kevin mentioned, our 2014 sales guidance includes organic sales growth in the range of 5% to 6%, and adjusted net earnings per share in the range of $1.12 to $1.16 and $4.75 to $4.80 for the third quarter and full year, respectively. This guidance includes the negative $0.02 per share impact of recently announced acquisitions.

Also as mentioned previously, the renewal of the tax extenders remains in our guidance; however, if these are not renewed, it would have a negative impact on our current guidance of approximately $0.05 per share for the year.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Mike Weinstein, JPMorgan.

Thank you and thanks for taking the questions. Let me start with the guidance change the year. The street was already there, so I don't think the street was surprised by that narrow range, but I was hoping maybe you could provide a bridge from your own plan to where you are, where you're coming out today? You noted $0.02 and that was from the recent acquisition, but maybe you could provide the rest?

Sure. I think that the primary reason our guidance, as you saw in the first half of the year, our performance was a little bit softer than what we would've liked to have seen. Again, we had $0.02 that we just recently announced as a negative impact from some of the recent acquisitions that we've got, and pricing has been running a little bit stronger or a little bit higher from a negative impact perspective, or at least at the top end of our 1.5% to 2% range that we've typically given. Also, as you've noted in the first part of this year, FX has had about a $0.06 to $0.07 negative impact on us year-over-year at this point in time.

Okay. Can you spend a minute, Katherine, on SBi. You had to be aware that the sales there are flattened out and rolled over a bit? But your outlook's been pretty optimistic, so can you talk about what takes that from a business that's not growing right now to one that has a 20% growth potential?

And you're correct, we are assuming some sales force or some sales dissynergy as we integrate it into our business. And there was clearly some distraction they had as we were working through this transaction.

It really is a playbook, as we saw with Memometal and other deals where we take great products, and this is a terrific upper extremity portfolio really led by the Star Ankle, which is a meaningful gap in our foot and ankle portfolio. And leveraging our considerable sales and Marketing infrastructure, the demonstrated strength of the hybrid sales channel that we have that really allows us to touch base with all the various surgical specialists that participate in this market segment. So we really think we can reverse this trend.

We have a tremendous amount of momentum, as you are seeing right now in extremities and foot and ankle and adding this key gap to the portfolio, and also further broadening out our upper extremity offering. We feel very confident about the ability to return momentum there, which is why we're targeting that north of 20% CAGR for this segment.

Rick Wise, Stifel.

Good afternoon, everybody. I guess I'll start with knees. Can you help us understand a little more clearly -- maybe actually I can start again.

Can you talk a little bit about the knee market environment? One of your competitors is talking about the environment being soft or slow. Maybe you can give us some general perspective there?

And to follow up with that, what would knee growth have been, excluding Japan or maybe help us understand the impact of pricing, the ERP implementation on worldwide knees? Thanks.

Hey, Rick. I will take the first part.

I would say whether it is hip or knees, we are continuing to see a market that is very stable. We did see sequential improvement in our business, as you would anticipate, given the challenges that existed for the industry mainly due to weather for the first quarter, but overall, the market trends are very stable. We did have the contribution from MAKO, but even excluding that, our underlying growth in both hips and knees was solid, so we're pleased with the performance of those businesses.

We did comment that pricing has gotten incrementally tougher, which is behind the total pricing being down at the high-end of our anticipated range. But that really doesn't reflect any significant changes in the market. It's much more a function of the timing of product launches, where we are with, for example, with Accolade II, and that impacts that pricing from quarter-to-quarter. So I wouldn't view that as some type of fundamental change in the market, which we continue to view both segments as very stable.

Also, keep in mind that as we noted earlier, this quarter does have one less selling day in it as well too, so the organic growth rates that we talked about are on a straight basis, and those are not a days adjusted number.

And then you made the comment, we did have the price cuts in Japan which was part of the pressure on that business, and as well as Kevin noted, the ERP implementation. So those have been two of the more noteworthy challenges for that business.

ERP implementations, as you all know, can be challenging. And for us, it had disproportionate impacts on our reconstructive business, because of the sets and being able to track all the inventory. So, we put more resources on it right now.

In fact, I also hired a new CIO for all of Stryker, Bijoy Sagar, who came from Merck KGA. He joined us in the second quarter, and we're really excited to have him on board. We do also have another ERP planned for our instruments division, as we modernize all of our IT systems. But having a new CIO, I'm extremely excited about.

We do have a lot of work to do. We made progress in addressing the ERP over the quarter, but it did have a disproportionate impact on hips and knees. And we're optimistic that we'll have that sorted out in the third quarter.

Bob Hopkins, Bank of America.

Hi, thanks very much for taking my question. I've got a question to start for Bill and then one for Kevin.

First, for Bill, I was wondering if you could go back to the beginning of the year. Your guidance has been at the lower end of the range -- or you've revised it to the lower end of the range a few times, and I'm just wondering is this all really surprises on currency and the $0.02 from the deal? Or, is there something else going on? And then on the 2015 outlook, which we appreciate, does that suggest a little upward bias to the consensus, which is now forecasting 11% growth?

I would say that you're exactly right on the first half of the year. So the $0.02 that we just talked about on acquisition that we highlighted as far as having $0.02 of an impact as we move into the back half of this year, is one piece of it.

The other piece is some slight additional impacts on FX in comparison to what we had in our original guidance, as we talked about. Most of that, obviously, impacting really the first part of this year, as FX rates have actually improved a little bit, except for in some of the emerging market areas now. And then the third piece is really that the pricing impact primarily in the Recon area was probably a little bit higher, at least within the first half of the year, than what we really expected.

And then, Bob, just in terms of your question, we'll give our guidance in January. So it would be premature for us to comment regarding what the consensus expectations are. But you are correct, you should view the $0.05 to $0.08 that we referenced as being incremental to the normal targets that we'll set out at the start of the year.

David Lewis, Morgan Stanley.

Hello, this is actually John Demchick in for David. Wanted to follow-up on some of the prior guidance questions, but focus a bit more on the organic growth adjustments.

Our numbers show that the Company has averaged roughly 4% to 5% organic growth in the first half of the year. Obviously the increased seasonality and weather had a pretty large impact on the first quarter.

Are expectations that organic growth should stay more at the 2Q levels heading into the back half? Or are there some puts and takes that we should be thinking about that could drive organic growth a bit higher?

A couple points, first, keep in mind that the Q2 growth that we just talked about was on a one-day less selling day basis, so the adjusted basis in the second quarter was actually north of 6%. And I'd say that if you look at our organic growth in the first half, which was just under 5% as reported. And we just now obviously raised slightly the broader-based or narrowed the range on the top-end to 5% to 6%, that obviously implies that our second-half growth rate is expected to be higher than what we've experienced so far in the first half.

One of the reasons associated with that, as I've mentioned, is on the instruments business, the impact of Neptune on the back half of last year was obviously stronger than the first half. And obviously, as we're moving in through this year, our Neptune sales should actually be stronger in the second half of the year than they were in the first half of the year. So that's one piece that's helping to drive that, but I think that we're feeling good and confident in the number of our different business areas to continue to take market share.

Thank you, very helpful. And wanted to follow-up on US knee growth.

Earlier competitor reports showed weaker growth in US knees than we would've expected, but your numbers showed some pretty nice sequential improvement, especially when you factor in the selling day. I was wondering if you could discuss what you've seen in the market competitively? And if you expect growth to pick up further later in the year with increased seasonality?

Yes I would go back to our prior comments; the market feels very stable. We obviously don't have the benefit of everybody having reported results right now, but for us, we're very pleased with the sequential improvement. And we're happy also with making progress on MAKO. So both underlying and with MAKO, we're seeing improving trends.

I wouldn't say we've seen an acceleration in the underlying average growth for the Recon market. It feels very much like a market that's been growing at fairly consistent rates, recognizing we have the variability between Q4 and Q1 that exists.

Matt Miksic, Piper Jaffray.

Thanks for taking our questions. So, one follow-up, if I could, on MAKO.

You're providing a little more color as to how you see the rollout playing out next year with knees and then also with hips. I would love to understand -- you mentioned sales training.

How -- what's the model going to look like, or how -- if you could shed any light on maybe how you're integrating the robot sales with the Recon sales and the support? As well as whether you're anticipating any significant upgrades to the hip software, that kind of color could be helpful. And then, I have one follow-up.

So, I'll take this question. So what I'd say is at the Analyst Day, we're going to provide a lot more insight into MAKO.

What I would tell you is from a sales-force structure, we have a dedicated capital sales force that's within our orthopedic group, that sells capital. And then implants are being sold by our entire implant sales force. So, that is now, of course, a much larger sales force then MAKO had initially. They all have gone on the same compensation plan starting April 1, so we didn't have that benefit in the first quarter.

The training that Katherine alluded to in her section relates to training of the implant sales force on the benefits of MAKO, and so that they can be prepared to sell the implants that go with the robot. And, of course, going into 2015 those implants will include the Stryker implants, and we'll share more specifics on that at the Analyst Day.

Great. And the follow-up, I appreciate the color on ortho sequential growth; it seems very encouraging. Spine, on the other hand, still having trouble getting going, and you mentioned some sales disruptions. I'm wondering if you have any timing as to when we can start to see that curve bend up a little bit on the spine business?

Yes, so up to now, up until this quarter, we've been holding our own very well in spine, growing at least at the high end of the large multinationals. So not the spine-only companies. We've been actually holding our own and actually running a very good business from a top- and bottom-line standpoint.

We have had some sales force disruptions, that the market is incredibly aggressive out there. That obviously hurt us in the second quarter.

This market is still a market that rewards innovation, and we're seeing that already with the early response to CoAlign. And so getting our pipeline back on track is really going to be critical to us to not only retain the sales force that we have, but also to drive growth.

So I would say it's going to take us a good part of this year to really get ourselves back on a strong footing. And then I really look forward to a much more optimistic 2015 in spine, but it's a tough market, certainly -- especially in the United States. Outside the US, it's frankly not nearly as competitive and the market's a lot more stable.

And getting back to your first question, I don't think I answered the last part of your first question around the hip. I would say the recent hip software launch on MAKO is actually really good. So the software itself the early iteration certainly had some challenges, but we now have actually a very nice software iteration. The issue for us is now getting our implants onto the robot, and as Katherine mentioned, we plan to do that in 2015.

Bruce Nudell, Credit Suisse.

Good afternoon, thanks for taking the question. Kevin, at AOS last year, you were incredibly bullish about MAKO and you went through the line of arguments as to why it provides a better option with modestly modified implants. Now that you have a little experience under your belt, could you give us the elevator pitch for knees and hips with MAKO and what's really resonating with customers?

The elevator pitch is the same elevator pitch I gave you at Academy. I honestly feel as bullish as I did then, now.

Now obviously we've had integration issues with our sales force, getting them all up to date, but I would say the promise of robotic surgery is the same. It's precision, it's reproducibility, it's consistent results and we're seeing, in terms of the knee in particular, which is much more challenging than hips, we see this is really having a tremendous potential advantage. We're obviously in the midst of our trial right now on the Total Knee.

And anecdotally, we have a certain amount of feedback around being able to do interoperate adjustments. It just provides a much better solution to the procedure, which we know is a very complex procedure, which has high, high variability and not the same degree of patient satisfaction. So obviously the link to proving patient satisfaction is a long link, but we believe the surgeon experience will be tremendous with that.

There's nothing thus far in terms of the integration that's caused me to feel any less optimistic. Mind you, this is going to take time. It takes time to sell the capital, it takes time to put the implants that we want on the robot, and we'd be rolling that out over a period of time, but I remain extremely bullish on the opportunity long-term.

And just on a financially philosophical basis, I guess you guys have engineered a mini inversion of sorts with a nice tax advantage that should be sustainable. But, with regards to access to ex-US cash, is that -- how big a lingering problem is that and how big an enticement is inversion, generally speaking?

Inversions are, obviously, in the news a lot lately. But from an overall perspective, we think we've made some very good progress on our RQH structure-related activities, which is primarily focused on the business itself and bringing the benefits of being able to grow our overall European business. But it does have some benefits to us within the tax side of the equation as well.

And we're very confident that we're going to be able to deliver on the results that we just talked about and those results are on an ongoing basis. So we're continually focused on obviously minimizing our tax rate within that area and operating our businesses as effectively as we can. And we think we still have good opportunities in the future.

Thanks so much.

Joanne Wuensch, BMO Capital Markets.

Thank you. It's Joanne Wuensch, can we focus on two things?

First, gross margins, what does it take to turn those? Or should we think of sort of the 66% level as the go-forward rate?

And then my second question has to do with, and I appreciate the organic growth rate of up 5% to 6%. But you've made a bunch of acquisitions in the last 6 months -- In 6 months to 12 months, how do I think about what that may add on top of that? Thank you.

Let me answer the last question first, and I'll go back to the first question. But from a growth-rate perspective, keep in mind organic growth rate that we're talking about excludes those acquisitions, with the exception now of Trauson is beginning to be included in our organic numbers, because that's a annualized acquisition. All the other recent acquisitions that we have are not in our current organic growth rate, but obviously, should help improve our overall organic growth rate as we continue to move forward over the next number of years.

From an overall perspective on the margin rate side of the equation, I'd say that our expectation for the rest of this year is still the gross margins will probably be softer than they were last year throughout the rest of this year. However, we're still expecting that our SG&A-related activities will also run much better as well than they did last year. The biggest pressure on the margin rates right now is really the price impact was probably about not quite half of the total impact in that margin rate at this stage. And we think the back half of this year, at least from a pricing perspective, should be a little bit better than what the first half ran.

Joanne, just a little bit more color commentary, we talked about the sequential improvement in MAKO going to six placements in the quarter. You should assume that is going to accelerate in the back half of the year as we train the remaining 80% of our reps on the technology, and that's part of what is driving the accelerated revenue expectation.

Also tried to give some color on some of the key data points, whether it's new contracts we've added or expanding our customer base with some of the other acquisitions, recognizing the revenue contribution there is certainly lower. So, we tend to focus on organic growth, as it really is the best indicator of our underlying gains. But there's clearly an expectation for an acceleration in the contributions from the acquisitions, with the exception of SBi given the dissyneergies we noted in 2014.

Bob Hopkins, Bank of America.

Sorry about that, Bob, we dropped you off before you asked your second question, our apologies.

No, no problem, and I had a problem with my phone so thank you. And I understand there's been some discussion around inversions, but I wanted to ask Kevin a question specifically.

Obviously there's been a lot in the press lately about inversions. And day before yesterday we had some statements out of President Obama's administration. I am just wondering if those comments about inversions, if that might cause, in your view, companies that might be considering inversion to be less likely to move forward, given the changing political environment? Just would love your views on that, Kevin.

Sure, thanks, Bob. It really depends on the main reason for doing the transaction. As you know,, some of the deals that have been done have been done really largely for financial reasons. In those cases, I think those companies would probably -- it's a cause for pause if the main driver of the deal is financial.

However, if the deals are more strategically driven, I really don't see it having much of an impact at all until legislation is actually enacted. And what we're seeing in the press is the likelihood of near-term legislation doesn't seem very probable.

So again, I would bifurcate into two areas: those that are very financially driven I think those companies will pause a little bit. Those that are really strategically, that's the bigger part of the logic and then if an inversion is maybe icing, I think those will continue to be pursued.

Great, I really appreciate your perspective. Thanks for letting me back in.

Matthew Dodds, Citigroup.

Good afternoon. On the pricing side, Bill, should we think about this as being geographically an issue with Japan and then hips and knees? Are the rest of the product lines' geographies stable or holding in there?

I would say that Japan wasn't one piece of it, but I would say that and it's within our general range. We expect that price is going to be somewhere in the 1.5% to 2% on average. And in a year, I think the first half was probably a little bit higher toward the top end of our range, but for the full year I think it's probably still going to be in the 1.5% to 2% range. But I think that if you look at where the business-related impacts are, while Japan is a piece of it, I think the broader Recon group is probably at least the higher impacted area of our business.

Okay. And then, Kevin, on foot and ankle, you gave another big growth rate number. It didn't say this time to caution us to not expect it going forward.

You know what, they keep defining my expectations, honestly, it's hard to predict these new markets are hard to predict, and I keep waiting for the comps to start to catch up with us and the team keeps executing. So I'll be honest, they're exceeding my expectations and I'm really delighted with the results.

But that we do remind you the comps do (multiple speakers).

The other quick question is what do you think the market growth is still above 10% though in extremities for [audeling]?

I would say we tend to estimate it at around the between 10% and 15%. We're obviously -- we're certainly outperforming in the lower extremities. Obviously, the upper extremities, shoulder has been a soft spot for us historically.

We now have our reverse shoulder out, which we're very excited about, but that's an area where we're playing catch-up in upper extremities. But obviously in the foot and ankle area, we're just having a great time so far.

And obviously that was about the total ankle, so we've been growing 30% pretty much quarter after quarter for a number of quarters without a total ankle. And we believe we've got a fantastic total ankle through this acquisition, of course, hasn't closed yet but will be closing soon. And we really believe that's a perfect solution for us, and frankly gives us access to a lot of the surgeons that we haven't had access to the fellowship trained foot and ankle surgeons. We've been on the sidelines, so it really does give us a shot in the arm.

Derrick Sung, Sanford Bernstein.

Hi, thanks for taking my question. Just a follow-up on that discussion right there with the total ankle in your lower extremities portfolio Now that you've filled out your last remaining gap, do you think that -- and now that you see this greater opportunity in front of you, do you feel that the current sales force that you have is sufficient? Or do you expect to make further investment into your sales force to drive that growth moving forward?

We do have a hybrid model, and we also have distributors as well as direct agents, and that model has worked very well between our trauma, our reconstructive hybrid reps, and our dedicated foot and ankle reps. Over time, will we look to possibly reevaluate the approach in upper extremity? It's possible, but at this point, as we analyze all the call points we have and the breadth of the various aspects of our selling organization, we think we are pretty well covered. So we don't believe we need to set up another dedicated sales force given the moves we have already made on that front.

Certainly for the lower extremities, foot and ankle, we may add a rep here or there, but we don't need a radical change. We have a really well-organized footprint, a couple of years ago when we decided to create a dedicated sales force calling on the podiatric surgeon.

We have the right numbers more or less. Again, we may add reps here or there to fill out certain areas, but I wouldn't expect anything significant from a sales force investment standpoint. This is just getting great products and plugging it right into our existing sales force.

Got it, thanks. And for my second question, I wanted to turn over to the medsurg business, and in particular, I was wondering if you could comment on the capital -- the CapEx spending environment for the hospitals. We've seen -- it looks their beds business picked up a little bit, but if you could comment there on what your outlook is for the remainder of the year and what you're seeing in the marketplace? Thanks.

Thanks, Derrick. I would tell you right now that the capital environment still remains pretty stable, and by that, I mean it's still challenged as it relates to some of the prioritization that our hospital customer's doing. This is most relevant for our medical business, which is 90% plus capital; we did report 3% growth. It remains stable and we're pleased with the performance on a relative basis, but I wouldn't tell you we've seen any change in underlying capital demand on a high-level as it relates to whether it's from ACA.

That said, we're seeing very solid growth of our 1,488 camera, strong double-digit gains there, as well with System 7. So all capital is not the same, but if your comments are really towards the bigger ticket capital, I would say it's stable but no signs of an acceleration or increased investments by hospitals there.

David Roman, Goldman Sachs.

Thank you, good afternoon. I wanted to come back to the topic around orthopedic pricing. I think that J&J talked about this pretty explicitly within the US business.

Maybe you can offer a little bit more perspective on if there are any significant structural changes you are seeing in the pricing environment? I think if you look at other med-tech markets they were pretty good leading indicators to see when pricing was going to turn negative like high levels of physician employment and vendor consolidation. But is there anything you're seeing really change in the market, and what would give you confidence that this is a one-off blip or something that could worsen from here?

Thanks for the question, and you can imagine we do a lot of analysis as we see how pricing trends are changing. And it's clearly in the range of 1.5% to 2%, but it's at the high end. Obviously, if we think this is indicative of a fundamental change in the pricing environment, it's going to require us to think about things differently.

So we really go in and do the next level of analysis and see the impact of the timing of product launches, expected product launches going forward. And we feel very confident that what we're seeing is the normal quarter-to-quarter variation that occurs. We get a price premium when we launch something like Accolade 2, which had a very nice ramp up, but we've anniversaried that, so it starts to see the impact on pricing as a result of that.

So, all of that analysis that we do throughout the quarter leads us to believe that this is consistent with the normal quarter-to-quarter variability that can exist. We tend to look over a rolling four quarters, and because that gives you the best sense of the underlying trends. But we don't think we've seen some fundamental change in the pricing environment that suggests we're going to see significant step down in Recon pricing.

Okay, that's helpful. Maybe a follow-up on the neurovascular business, which continues to do extremely well. Maybe you could give us some update on end-market trends.

I know back in March, there was that New Journal of Medicine article that caused some disruption at your competitor, but you have powered right through that. So maybe just give us any sense on where an end-market dynamics are right now and how we should think about that business on a go-forward basis?

Sure, if I focus on the neurovascular part, because that's clearly the biggest piece of the overall neurotech business, we continue to be really pleased. We participate in both the hemorrhagic and ischemic segments, although hemorrhagic is really the revenue growth driver. And it's really the target line that continues to take additional share in each geographic region.

We've added four line extensions since the original launch of the target coil a few years back, and that still is the bulk of the neurovascular market upwards of 40%. And we have absolutely taken meaningful market share year over year in the coil market.

We're also launching into new geographies with the product lineup, whether it's the target XL, which is a larger size or the target [nano half], which we are introducing to the Japanese market. So it's really continuing to execute on that plan.

The ischemic segment, it does take more investment to help develop that market and make sure you are getting patients to the right mode of care. It's really an emerging market very much so as it relates to the mechanical-based treatment of that stroke segment, but we're very excited about the longer-term prospects. So we're going to continue with that playbook, and just very pleased with the pace of product rollouts and our ability to continue to launch them into new geographies.

I would just like to add, we have an absolutely outstanding management team in neurovascular. You've seen our R&D spending as a Company has certainly ticked up. Part of the reason for that uptick is spending that we've done in neurovascular, which is clearly yielding benefits. And we still have a robust pipeline beyond the products that Katherine alluded to that we've already launched, so we feel very, very bullish about this business going forward.

Glenn Novarro, RBC Capital Markets.

Hi, good afternoon. Two questions on spine.

First, you called out pricing pressure in your spinal segment. Can you tell us what that pricing pressure was and how that compares to the overall market? Do you think your pricing was a little bit -- was the pressure, more severe?

And then, second, strategically in spine do you feel like you have now all the technologies to be competitive with, for example a J&J or Medtronic, or is this a segment where we should anticipate more M&A? Thank you.

Yes, so first thing on pricing, it's not a new trend; it's been a consistent trend where pricing is worse in the US than it is globally, down in the mid-single-digit range, and globally, maybe low single-digit or more stable pricing. Our challenge in spine really is -- our position in the MIS segment and clearly the CoAlign acquisition was one step to help plug some of that gap. We were really well representative in the broad-based and the scoliosis procedures, medical screws, the standard spinal fusion products.

We're very well represented, but in the MIS areas, we've been launching a series of new products over the last 18 months. We have more products to come, but those won't be launched towards before the end of this year, so they'll have more of an impact in 2015. So I would continue to expect that we either through internal innovation or through potential acquisitions, that that's an area we would be focused on, growing our presence in the MIS portion of the spine. And frankly, that's what's caused us some of our challenges.

Okay, thank you, Kevin.

Larry Biegelsen, Wells Fargo.

Good afternoon. Thanks for taking the question; I'll try to be brief. So Kevin, you guys have done a lot of acquisitions the first half of the year. On the same M&A topic, should we expect you guys to be active in the second half as well?

I would tell you that our BD activity as inflows, there's been periods, if you go back a couple of years where I think we did one transaction in the entire year, despite having dedicated BD people in every one of our divisions. So it's impossible to time. We are focused on BD.

We have it throughout the organization, and we'll probably have periods where a lot happens all at once, because that's just the nature of BD. But there's no change in the underlying strategy. M&A first, is the cash use of cash, dividends, and buybacks.

You know that our organization, the way we're structured is we have business development people in each of our divisions, so they are always scouring the market and constantly looking at targets. We're not stopping that activity. That doesn't predict that we'll do a certain number of deals, but the ongoing activity doesn't stop. And whether a division is ready to absorb another one is obviously one of the factors that will be considered, but we have so many divisions within the Company that we can take on multiple deals at one time.

Thank you. And then lastly, on the shoulder launch, could you give us an update on where you are with that? Thank you.

Yes, we launched the reverse shoulder during Q2, and into, really going into Q3 as we start to get it out there. It's a different market than the other extremity areas, foot and ankle, for example, that is very much a market expansion segment. So we're seeing growth as we gain share, but also just the overall expansion of that market.

That's not the case for shoulder. You've got more established players there and much slower underlying growth, but it was a key gap in our portfolio. It was very difficult to go in without having the full product offering that a surgeon may need, and you've only got one option for them.

So we're excited about the ability to introduce that product to our hybrid reconstructive sales force. But I would have more temperate expectations, just given the nature of the market and the establishment of existing players.

Really in the second quarter was more limited launch basis with a certain set of surgeons, but the full launch will really occur sometime by the end of the third quarter.

Matthew O'Brien, William Blair.

Afternoon, thanks for taking the questions. Kevin, I'm looking across your portfolio, and it seems like you have a pretty well-rounded product offering across recon, medsurg, and then elsewhere. And so it just -- I'm curious about your thoughts on the need in areas where you're already participating to get a lot bigger versus just continuing to internally invest in those areas and organically growing. And if you've ever seen a situation where one of your bigger competitors like a J&J, just given that they're larger say in trauma, has been able to crowd you out because of their size rather than just their product offering?

I think the example of trauma that you highlight is actually a good example, because their size and strength with Synthes certainly isn't slowing us down in our ability to grow. If you look at our growth over the last eight quarters, being number two hasn't really been a problem for us. We're growing at a very robust rate.

So I think the key is you want to be one of the leaders in a segment, and we like to be very strong in orthopedics, in the neuro service line of hospitals, and especially surgery. We want to make sure we had very strong positions or a path to be in a strong position.

And so you know our portfolio, you know within some of our portfolio we don't have a number-one or two position. And in those areas, you can imagine we are going to want to get to that kind of position over a period of time, whether it's through internal innovation, trauma is a story around internal innovation, largely with one small acquisition of Memometal.

For the most part, internally, we pulled away from the pack. Five years ago, Synthes was the dominant number one and everybody else was tied for two, and we completely pulled away from the pack and we did that internally.

Sometimes we'll have to do it through acquisitions, and we really -- we're not going to disclose which of the approaches we will use in those segments where we're lower. But for the most part, most of our portfolio we feel that we're punching at our weight and we're in, really in a strong position to compete.

In the case of hips and knees, we obviously felt that robotics was going to be a really key lever for us to drive above market growth. That may be different in other spaces where we might choose to do an acquisition just to increase our scale. But we have very few areas where we're really at a distant gap from the leaders, and in those segments, you can imagine that we will be active.

Okay, thank you, and then one more on the spine side of things. You mentioned a pretty competitive environment as far as of your sales force disruptions go. Is that a function of some of these guarantees getting to be fairly high levels? And is that coming from some of the really small providers out there or some of the bigger multinational, multiproduct companies?

I would say absolutely you're right on with the guarantees. That's the big reason that we're having some sales force departures are very large guarantees, and frankly, it is coming from multiple players. So it's not just smaller spine only, it's even some of the other players. So that hit us in towards the middle to end of the first quarter, and that had more of an impact in the second quarter.

It's a tough market. It's not a new tough market; it has been a tough market for long time. It will continue to be a tough market, and we're going to make sure that we stay focused. We've made some adds to our leadership team that I feel really positive about, and I think we'll be in good shape going forward.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. You guys have been making pretty good progress on producing SG&A. I was wondering to what extent you feel that this level of reduction is sustainable, given all the initiatives underway, and if the European headquarters will also have an impact on any SG&A spending rate?

And then separately, you mentioned giving back some of the incremental upside from the taxes. Where exactly are those investments going to go? Are those internal or through acquisitions?

I'd say a couple things. As you look towards the back half of this year, we still feel very good about what type of improvements that you should see from an SG&A perspective year-over-year. So, you should continue to see nice improvements there.

And I think that from an overall perspective, especially if we can continue to drive above-market growth, which we're doing on a number of different product-related categories, that obviously helps us to continue to leverage that space, and I think that you should expect that as we're moving forward.

From an overall perspective on the tax comment that we made, I think it's more of an awareness that, one, we are expecting some nice improvements from the tax rate side of the equation. And our expectation is that we are going to be spending some of that as we move forward, but I think that's more of a wait-and-see related response based on how well the business is doing and what type of areas that we think that we would like to invest in. And I think you'll get more color on that as we move through the back half of this year.

With respect to tax, should we look at this as just the start of what could be additional reduction beyond 2015, or is this just a one-step function, that is basically it?

I would say that we've made very good progress in the tax area to begin with. This project is just another big step associated with that, and the improvements that we're expecting to get I think over the next couple of years, we're obviously still driving to maximize that level. And it will take us a couple of years to truly get the full benefit especially with even the projects that we're currently working on.

Moving forward beyond that, obviously, while our efforts will be strong in that area, there's also many, many pressures around the world through a number of different jurisdictions on trying to increase different tax revenue in different areas. So, that's a challenging environment, but I think that we're well-positioned and I think we still have a lot of good opportunities.

Jeff Johnson, Robert Baird.

Thank you, good afternoon. Kevin, was wondering on the extremities market your comment of 10% to 15% market growth, was wondering if you could maybe go even a little deeper in the weeds there on the ankle replacement market, maybe how you see the ankle replacement market itself growing in the US and Europe?

And then on your comments on Star, on that ankle product, we've been hearing about maybe some early revisions with that product, that declining utilization because of that in some markets. Obviously, you see a lot more of that business than the few anecdotal conversations we had. So maybe you could set me straight on some of the things we've been hearing out on the field on that product?

Yes, so first thing I'd say if you look at total joint replacement in general, the ankle is one of the late bloomers. So you had knees and hips and shoulders, and it took time before it really started to get traction before the growth really kicked in.

And a lot of people predicted total ankle would take a much, much larger percentage of the procedures, which today as you know, mostly fusion. People predicted that five, six, seven years ago. We now really see the market starting to be primed for a take off.

Now predicting these take-off as we've proven with our own foot and ankle, those other products, it is not easy to predict when it will take off and what pace it will take off. But we really believe that this is like the early stages of hips and knees, that's what's been happening in the total ankle market. We believe the market is really primed to start to improve.

This is the most published ankle on the market. It has tremendous data, so the anecdotes that you hear, a lot of the anecdotes, at least from our point of view, it really relates to the sales force execution and the service. And we really believe we're getting a fantastic product. It's the most published by far, the data is long-term in nature and very, very solid.

You always hear anecdotes about different products. A lot of times our competitors are the ones that will throw those anecdotes around, and so, we're not worried about it.

We've done our due diligence; believe me, we've known we've had a gap in total ankle for some time, and we've been very deliberative about making sure we make the right choice. We believe we've made the right choice and cementless, having a cementless PMA-approved total ankle we believe is a real competitive advantage. And now putting it in our sales forces' hands will change the story in terms of the growth trajectory that's currently new pursuit of the market.

Understood, thank you. And then Katherine, for my follow up, I want to be clear on what you're saying on MAKO in your implants. You're saying just the Stryker hip itself by 2015, I think is what you are saying, and I think that's a little bit of a change. In the past I think you've been a little coy on whether it be Stryker implant or the [restore us] implant what might get approved, not approved on MAKO. Can you set me straight on Stryker implant hip, knee, timing of expectations on that again?

Yes, you're correct, it's incremental information and we really tried to say that as we get better clarity, we'll share information with you. So we, at this point, we do feel comfortable that we'll be launching a Stryker hip on the MAKO system in 2015. We'll probably get into more specifics at the analyst meeting regarding specific hip systems.

The knee system, there's no change. The trial is underway; we continue to expect to launch a total knee on MAKO in 2015. We haven't gotten any more specific on the timing of that yet.

The trial is being done with the pipeline knee, that was MAKO's knee system. We do believe there is a regulatory cap that may not require a completely new trial to bring our own knee systems onto the MAKO robot in 2015. But I would say the probability of that is less than pipeline, which is the knee being used in the trial.

So new information on hips, more details to come in September and no change to our thinking on knees.

Matt Taylor, Barclays.

Hi thanks for taking the question. I had two more strategic questions, so the first one is you made some comments over the past few months over the benefits of scale but maybe not scope yet. And I was curious over the past couple of years, you've made a lot of acquisitions to diversify away from recon. How do you view the benefits of scale in Recon and how do you think the Zimmer Biomet deal could impact your business positively or negatively if it does close?

The characterization that we did a lot of acquisitions to diversify away from Recon, certainly since I've been the CEO, it's really about strengthening our businesses. Strengthening our businesses within orthopedics, within neuro and within specialty surgery. I'm really agnostic about how we strengthen those businesses, so MAKO is a deal that is absolutely within reconstructive.

Trauson is a deal that is an orthopedic deal. Then we've done deals that are outside in endoscopy and in other divisions. So I would say certainly, I wouldn't want anybody to think that our focus on acquisitions is to diversify away from -- it's really to strengthen all of our existing businesses.

Certainly this consolidation within Recon is something we have been anticipating. It's not a big surprise that Zimmer Bimet, that that would happen.

Having five competitors in a market that is not growing -- it's sort of close to double digits, normally would lead to some form of consolidation. So it's not totally surprising. The market has been pretty well disciplined thus far, and we expect that that will add extra discipline to that, and I think that's about all I'll say on that.

Thanks, and a follow-up, your earlier comments on China I thought were interesting, and you have a tiered structure there and some strong presence in both the premium and value segments. I guess I'm curious as you look out over the next couple of years, how are you going to continue to grow and defend your share? Are you concerned about emerging market players or quote-unquote generic orthopedic devices? Or is that too small to be concerned with at this point?

We feel really excited about the prospects within China, because certainly regardless of what happens with China 's overall GDP, the healthcare market in China will be very healthy for the future. And there's significant growth to be had both within the premium segment, as well as in the value segments. Local players will continue to pop up in the lower-priced segment, but to have a well-rounded and very, very diverse product bag is critical.

A lot of the business happened through tenders, and to be able to win the tender, you need a strong brand -- a strong local brand, which we have with Trauson has very, very broad product portfolio. And as you know, registration times are not easy. The reason we move towards acquisition was we could've done it ourselves; it would've taken us six or seven years, and we probably wouldn't have had products at as low a price with the kind of heritage that we were able to get through the acquisition.

So we really believe it has a long runway in front of us. Ramesh Subrahmanian, our Group President for International is going to do a deep dive on China at the Analyst Day meeting. And really, our biggest opportunity, certainly in the next couple of years beyond China is taking Trauson to other countries, which we're starting to do this year, and which we'll share more in the future.

But markets like India that have big trauma markets where we don't even play in today. We're planning to launch into Trauson in 2015 in India and many emergent markets where we have trauma markets where Stryker has not historically played, to us that's a very, very significant potential growth for the long term.

Mike Matson, Needham & Company.

I was wondering if you could maybe comment on the commission rate changes that you made in the Recon business? I guess I'm wondering number one, was that limited to just Recon or have you gone through similar moves in some of your other businesses? Number two, how big of an impact has that had in the SG&A levers that we've seen this year? And is this something that you can continue to ratchet down in future years?

I would say we did the commission rate cut for our Recon sales forces in the US at the start of the first quarter. We tend to do those rate adjustments every few years, so it had been three, four years since the last time.

We recognize that we were above market, so we moved in more line with market and structured it to have a greater focus on growth. And that was one of the factors that we talked about on the first-quarter call that led to some of the softness on the Recon business. It's clearly part of what's helping to drive the SG&A leverage. It's not all of it, but it's clearly a component of it.

The rest of our businesses, medsurg does commission rate adjustments as well. They tend to do it more on an incremental basis more frequently. Each of the businesses has their own approach to it, and there's been really no change that was -- that impact was felt in some of the disruption around really our first-quarter effect.

Okay. And then on the hedging program, will that be fully in place by 2015? In other words, when we get into 2015, will these pretty significant or potentially significant currency impacts on your gross margin be over effectively?

Well they're obviously never over, because exchange rates are always moving, right? So the hedging program is really just meant to mitigate that risk; it just buffers the impact between quarters and tries to smooth those increases out. Right. It doesn't avoid the increases. Those increases change over time. Obviously that's an impact that occurs over time.

Should you at least eliminate the peaks and the valleys associated with those movements? Absolutely. The full program will probably be in place by probably mid-year next year, where we've got full, six-layer hedges consistently in place moving forward from that point.

Richard Newitter, Leerink Partners.

Hi, thanks for squeezing me in. Kevin, can you talk about how you envision MAKO potentially creating advantages for Stryker's Recon sales organization through efficiency or enhanced flexibility either in the OR or outside of the OR?

Well I'll go back to -- I think all the comments we've made around the rationale for doing the deal is you deliver a delightful experience for the surgeon. The surgeon is able to produce consistent placement of the implant interoperative adjustments, and once they have that experience and we believe, again, the total knee will be the most promising.

Certainly if (inaudible) knees becomes a big part of the market, we believe robotics will play beautifully into that. But it will be one of those situations, it's just like what happened in the [uni] market, where MAKO was able to take almost 20% share within a four-year period. Once a surgeon does it robotically and has a delightful experience, they're not going back. So and we are the only game in town.

So for us, it is a very differentiated approach that provides a meaningful benefit, so a lot of those benefits we believe over time are going to have to prove it with certain clinical trials, which we'll be doing, but a lot of it is intuitive and obvious. It makes the procedure easier to do and makes it more consistent. It makes it more reproducible, and certainly once we put the Stryker implants with the robot, we've done a lot of research before we did the acquisition, and surgeons were very interested in robotics.

If you look at our manufacturing plants, you walk through Stryker's manufacturing plants, you see robots everywhere. Why is that? Well, robots can produce cleaner, more consistent results.

It's just undeniable, and therefore, we really believe bringing this to surgery is a logical extension. And MAKO proved it already once with the uni, and we're going to now have to prove it in other procedures, and we feel very optimistic about being able to do so.

So maybe my second question to follow-up on the first one, I was talking a little bit more about the selling model, so to speak or does it provide you with increased flexibility to drive efficiency through your sales organization itself? The way that they interact with the physician, et cetera?

Sure, so the way it works for robotic procedures is you have a technician that helps operate the robot, and that technician is not a regular, commissioned salesperson. They're paid at a much different price point than our typical commission salesperson. And once the surgeon has converted and actually does their procedures robotically, you don't really need that commissioned sales force person to be there all the time; they can go off and cover additional surgeons and go cover additional hospitals.

So, over time with the adoption of robotics, if it grows in the trend line that we expect, you would assume that the average cost of people that are in the field will go down over time. It doesn't mean we are paying our reps less. Our reps will still be paid as high-powered reps that are gaining business, but the actual people who are technically there to help manage the case are paid at a much lower rate. And today we have -- there's a one price model, whether the rep is servicing an account or whether they're selling, they're paid the same today.

With robotics, we are going to enable a bit of a bifurcation of the model to case coverage people who are technicians, who are paid at a lower rate and sales force who are paid for selling at a higher rate.

And does that lead to a bifurcation of the implant from the service cost eventually, in your view?

As I said before, you're going to have two different kinds of people. You're going to have the commissioned sales force, for selling and paid at a high price, and the technicians are paid at a lower price. But there will be less need. If we gain tremendous volume, there will be less need for high-priced commission reps to just service accounts. They'll be out selling, so I really believe that will give us better productivity with our commercial resources.

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

So, thank you all for joining our call. As you know, it took a little longer, this call, and really, part of the reason for that was to provide extra color on the acquisitions. We've been very busy on the acquisition front, and we plan to provide additional perspectives on acquisitions every quarter.

So, thank you all for joining the call. Our conference call for the third quarter of 2014 results will be held on October 16. Thank you.

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