史賽克 (SYK) 2014 Q3 法說會逐字稿

Welcome to Stryker's third-quarter 2014 earnings conference call. My name is Adrienne, 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'll conduct a question-and-answer session.

(Operator Instructions)

This conference call is being recorded for replay purposes.

Before we begin, I'd like to remind you that the discussion 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'll now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may proceed, sir.

Good afternoon, everyone. Welcome to Stryker's third-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. Bill will then offer details on our quarterly results, before turning it to Q&A.

Our top line performance strengthened in Q3 with organic revenue growth of 8%, which did include the benefit from one extra selling day that contributed roughly 1%. These results reflect solid year-over-year growth for all three business segments, Reconstructive, MedSurg, and Neurotechnology and Spine, while also being balanced geographically.

Within Reconstructive, trauma and extremities continued its lengthy string of double-digit increases and US hip implants were also a standout. MedSurg's impressive gains in instruments were bolstered by acceleration in Neptune sales, and in medical, we are seeing early signs of a strengthening in the CapEx environment. Our Neurotechnology and Spine group reported double-digit growth in the neuro businesses, partly offset by lower growth in spinal implants.

From a geographic perspective, both the US and international delivered high-single digit, year-over-year organic growth. Europe continues to gain traction, and our strong performance in emerging markets reinforces our view of this segment's long-term potential to contribute meaningfully to our growth goals. Overall, the strength of our diverse revenue base enabled us to offset some challenges and achieve impressive growth.

As Katherine will discuss, we are working to drive greater momentum with MAKO, and while sales are pacing below our target, the pipeline development is encouraging, as is our clinical progress. Gross margin was similar to Q2, as we are seeing the impact of a modestly tougher pricing environment, coupled with the negative effect of mix with existing products and acquisitions.

Shifting to SG&A, our focus on reducing cost is evident as we continue to drive this down as a percent of sales. We realized additional P&L leverage as the benefits from our recently opened European regional headquarters contributed to a lower tax rate. With the strong top line, reduction in operating expenses and a lower tax rate offset by meaningful investments in R&D, we delivered adjusted EPS of $1.15 a share, up 10.6% year-over-year.

For the full year, we are confident in our ability to achieve organic sales growth of 5% to 6%. We expect adjusted EPS to come in at the low end of our $4.75 to $4.80 range, owing to the tougher foreign exchange environment that Bill will elaborate on. Also, the creation of our European headquarters will enable us to repatriate approximately $2 billion of OUS cash over the course of 2015.

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

Thanks, Kevin.

The focus of my comments today will be on providing an update on the performance of our recent key acquisitions. Encouragingly, the acquisitions of Trauson, Berchtold, and Patient Safety Technologies, which we reviewed in detail on our Q2 call all continue to track with our expectations while Pivot is running slightly ahead, as we leverage the strength of our considerable endoscopy sales channel.

Shifting to MAKO, overall we are encouraged by the progress we are making while recognizing some challenges. Our capital sales are pacing behind our initial targets, but we have made progress each quarter with a total of eight robots sold in Q3. We are confident that the market for robots is improving as we have a strong pipeline of deals we are working on closing.

We expect continued sequential improvement in Q4 and into next year for several reasons. Firstly, we are in the final stages of the integration of the MAKO selling organization into our Recon sales force, and the development of sales coordination between the MAKO capital sales reps and our very large Recon implant sales force.

The first stage was completed in April as we moved the MAKO selling and service organization into our Recon division and under Recon management and established near term incentives. We continue to work toward full integration into a single implant and selling organization. Gaining near term sales synergies has proven be more challenging than we anticipated, but we are encouraged by the recent momentum.

Secondly, we have developed and are expanding our flexible financing offering that we believe a number of hospitals will find attractive as we look to leverage our considerable expertise in this area. On the clinical front, we have completed enrollment in our total knee trial and continue to target FDA approval in 2015.

Turning to SBi, we are very pleased with the early integration with sales tracking ahead of our initial expectations. We have trained over 100 Stryker reps on the STAR Ankle and various products. By the time training is complete, we will have over 200 reps trained and selling the STAR Ankle, and over 400 reps trained and selling SBi's various upper extremity products.

It's important to note that the STAR Ankle is a fourth generation design with over 28,000 total ankles implanted globally. There are now well over 100 clinical studies on the STAR Ankle, with one of the newest published by Dr. Michael Coughlin, where he reported 94% survivorship at an average of 12.6 years. We believe these favorable long-term results are helping to differentiate the STAR Ankle from our competitors and reinforce the benefits of three-piece mobile bearing technology.

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

Thanks, Katherine.

Sales growth was positive by 11.1% in the third quarter including a negative 0.2% impact from foreign exchange translation. Constant currency sales increased 11.3%, which includes organic growth of 7.8%. We had a positive impact from one more selling day in the quarter, which had a positive impact on growth of approximately 1%.

Earnings per share on a GAAP basis for the third quarter were $0.16 per share versus $0.27 per share last year, while adjusted earnings per share were $1.15 for the quarter, versus $1.04 last year. This quarter's earnings per share includes a negative impact of approximately $0.01 per share from foreign exchange due to currency movements late in the quarter. If foreign exchange rates stay on current levels, this year will be negatively impacted by approximately $0.12 compared to last year, or approximately $0.04 per share worse than what we anticipated at the end of the second quarter.

Based on the current volatility of foreign exchange rates, we would expect 2015 to be negatively impacted by roughly $0.10 to $0.12 per share. This negative impact is largely driven by the translational component of foreign exchange, which we do not hedge. The transactional impact of foreign exchange on earnings is being mostly offset by both natural and real hedges, which we continue to layer into our operations.

The most significant non-GAAP adjustment in the quarter relates to tax expense associated with both the transfer of intellectual property to the Netherlands from some of our other European locations, and for planned tax payments associated with approximately $2 billion of cash repatriation associated with this transfer. I'll discuss both of these items a little more when I discuss our tax rate.

Also in the quarter, we incurred a charge of approximately $25 million 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 more refined. As mentioned in the past, no insurance proceeds that may potentially be available to cover some of these costs have been included.

Looking at sales in the third quarter, our organic growth rate of 7.8% was comprised of a positive 10.2% from volume and mix, the highest quarterly growth level since 2008, while price negatively impacted sales by 2.3%. Acquisitions added 3.4% while FX had a negative 0.2% on sales in the quarter. Looking at our segments, Reconstructive represented 43% of our sales in the quarter. Sales of Reconstructive products were up 8.5% as reported and grew 8.6% constant currency, and increased 4.9% organically.

US Reconstructive sales grew 11.9% in the quarter. Trauma and extremities once again had another solid quarter with sales in the US increasing 15.3%, and grew 7.1% internationally, with 30% growth in our US foot and ankle business, excluding the impact from the acquisition of SBi, as we continue to have a great success in expanding the market. US hips and knees growth in the period was 8.1% and 6.8% and OUS sales were down nearly a percentage point in hips, against a 9% comp last year in the quarter, but up 5.3% in knees on a constant currency basis.

Next our MedSurg segment represented approximately 39% of sales in the quarter. Total MedSurg sales increased 16.3% on an as reported basis, 16.6% on a constant currency basis, and increased 11.9% organically. These results benefited from the high teen growth in our instruments business, as we continued to quickly regain share, post the late 2013 relaunch of Neptune. However, even excluding Neptune, instruments grew double digits in the quarter.

We also had upper teen growth in our endoscopy, driven by recent acquisitions. Medical had a strong quarter with double-digit organic growth as the hospital capital equipment market began picking up. Sustainability Solutions returned to positive growth in the quarter, too.

International sales within MedSurg were also up nearly 20% in the quarter and were up slightly over 20% in constant currency, benefiting mostly from double-digit organic growth in each of the instruments, endoscopy, and medical categories. The MedSurg group should continue to see strong sales growth in the fourth quarter as Neptune has another quarter of easier comps, although you should note there will be one less selling day in the fourth quarter compared to last year.

Our final segment, Neurotechnology and Spine, which represents 18% of our sales, increased 6.5% as reported, 6.9% on a constant currency basis, and 6.5% organically. Growth in this segment was led by double-digit growth in neurotechnology businesses, and IVS grew high-single digit in constant currency, while spinal implant sales increased in the low-single digit range.

In looking at our operational performance, gross margins on an adjusted basis in the third quarter of 2014 were nearly flat sequentially at 66%. This compares to 68.8% in the same period last year. The primary decline in the margin rate in the quarter resulted from both negative product mix and negative price pressures. Our mix was especially negative in this quarter due to the impact of recent acquisitions and strong sales of our MedSurg products which grew over 16% in the quarter. These products have a lower gross margin rate than the Company average.

Pricing was down 2.3% in the quarter or 30 basis points sequentially. US hips and knee pricing was stable versus Q2 with the decline attributed to spine and trauma products. Pricing pressure remains challenging and is expected to be down approximately 2% for the Company moving forward. Margins were also negatively impacted from foreign exchange movements compared to last year. Note that we anticipate our margin rate in the fourth quarter to be near the rates we experienced in the fourth quarter last year, which are also more consistent with our current year-to-date gross margin performance.

Research and development expenses were 6.4% of sales, slightly higher than last year in the quarter. This is a 12.5% increase in R&D spending over last year, primarily reflecting a higher level of R&D spending tied to recent acquisitions. Selling, general, and administrative costs on an adjusted basis were $851 million or 35.6% of sales in the quarter, versus 38% in the prior-year period, as we delivered strong sales growth and were able to continue to leverage our overhead and gain traction on driving greater operational efficiencies.

Operating margins on an adjusted basis were 23.9% in the third quarter of 2014, compared to 24.4% in the third quarter of 2013. The rate was negatively impacted by lower pricing, acquisition, and product mix, and foreign exchange rates in the quarter, partially offset by operational improvements and lower selling, general, and admin expenses as a percent of sales.

Other expenses on an adjusted basis in the third quarter were approximately $25 million, compared to $13 million last year in the third quarter. This increase in expense resulted primarily from higher net interest expense, and these expenses are expected to run at a similar level throughout the rest of the year.

Our reported tax rate for the third quarter was 86.6%, while our adjusted effective tax rate was 19.9%. This compares to a 22.4% adjusted effective tax rate in the third quarter last year. We expect the full year rate will be approximately 22%, consistent with our year-to-date adjusted effective tax rate.

Please note that the renewal of the tax extenders is still reflected in our yearend earnings forecast, which, if approved will help reduce the fourth quarter tax rate. However, if not approved and made effective this year, it will negatively impact our earnings guidance for the full year and the fourth quarter by approximately $0.05 per share.

As we mentioned during our second quarter earnings call, we have officially opened our new European headquarters in Amsterdam. During the third quarter, we transferred intellectual property from other countries within Europe to the Netherlands and also made decisions to repatriate nearly $2 billion from Europe to the US over the next year. Most of these funds will be transferred to the US in the back half of 2015. These actions triggered a tax expense which we booked in the third quarter of this year. The cash outflows for payment of this tax will occur between the fourth quarter of this year and the first quarter of 2015.

The transfer of the intellectual property provides us more flexibility in managing our operations in the future and aligns the ownership with where our primary European leadership team will be located. This project will also generate some ongoing tax benefits, which, as we mentioned previously, are expected to further reduce our overall adjusted operating tax rate in 2015 by approximately 2 full percentage points. Currently, we are expecting to reinvest approximately half 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 had $4 billion of debt on the balance sheet at the end of the quarter. From an asset management standpoint, accounts receivable days ended the third quarter at 56, or one day better than the end of the third quarter last year. Days in inventory finished the quarter at 182 days, which was a three-day reduction compared to 185 days in the third quarter last year.

Turning to cash flow, our cash from operations in the first nine months of 2014 were $1.1 billion, relatively the same as the first nine months of last year. Capital expenditures were $172 million in the first nine months of the year, compared to $139 million in the same period last year. We still have over $500 million available for share repurchase under a current authorization, as approximately $100 million of share repurchases were made year-to-date.

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 $4.75 to $4.80. Due to recent FX pressures, we are more comfortable at the low end of that range. 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 of our current year guidance of approximately $0.05 per share.

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

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

(Operator Instructions)

Your first question comes from Mike Weinstein from JPMorgan. Please go ahead.

Thanks for taking the question. I wanted to talk about really two items. One was the MedSurg performance this morning. I was hoping you could discuss the environment, and how you think it evolved in the quarter, both the US and in Europe.

Then second, Bill, looks like the gross margin came in lighter than you were thinking maybe a month ago. I assume part of that is mix. Maybe part of it is FX. I was hoping you could tease that out for us a little bit. Thanks.

Mike, I'll take the first part. In terms of the MedSurg performance, overall really pleased with what we saw in the quarter. I would say for the higher ticket capital products that are predominantly in our medical business, although to a lesser degree in endo, we're seeing signs of a strengthening. How strong that ends up being, tough to tell, because this is really the first quarter where we comfortable commenting that it feels like the CapEx environment has strengthened.

Instruments is really hitting on all cylinders. Clearly, the Neptune relaunch continues to gain traction, but as mentioned even excluding that we had solid double-digit growth. It's really across the board. Endo really benefited from the acquisitions. As we mentioned before, they had challenging year-over-year comparisons. Overall, we feel good about the environment and feel like there's been very strong momentum going into the fourth quarter which, as you know is typically a particularly strong quarter as it relates to CapEx.

Mike, then on the gross margin rate, as far as our expectation, actually the margin rates for the quarter came in relatively close to what we were expecting. We were expecting, as I mentioned before, that this was going to be our toughest gross margin comp quarter.

I'd say that pricing was incrementally a little bit worse than what we expected, so it did have a little bit of additional impact on the rate, but not much in relationship to what we were expecting. We expected to be relatively close to the rates that we ran at in the second quarter, and as I mentioned, that's pretty consistent with our expectations moving into the fourth quarter this year. As I also mentioned, that should be more in line with the rates that we were running last year in the fourth quarter as well.

Okay. If I could just ask one follow-up, Bill, at the Analyst Meeting you made some comments relative to the ability to drive operating leverage in 2015. With this quarter now behind you and you've seen what the gross margin progression looks like, are you still confident in the ability to drive operating leverage next year?

I think our broader-based comments first on just talking about rate improvements in future periods, we generally talk about that over the next few years. But we are absolutely focused on targeting improvements in operating margin rates, not gross margin rates, but operating margin rates on average over time. We did state, though, however for next year that because of our investments with some of the tax benefits, that half of those tax benefits would be actually reinvested directly in our business, and that will also obviously add pressure associated with the rate in that period.

Mike, it's Kevin. Just to add, obviously we'll give guidance in January, and you should expect to see leveraged earnings. We obviously don't spike out the guidance specifically in every line of our P&L. The last two years on an operational basis we were able to have gross margin gains over the last couple years.

Clearly, our mix of our business has changed based on both our acquisitions, as well as MedSurg growing, but we do have our GQ efforts clearly focused on driving improvement in our COGS. But, with price now tracking more towards the 2% range, it's certainly an area of extreme focus for us. You'll see when we give our guidance in January the degree of leverage that we'll be delivering in 2015.

Our next question comes from David Lewis from Morgan Stanley. You may proceed.

Good afternoon. First question, Katherine, just based on some of your comments on MAKO, two things I was wondering if you could elaborate on. One was, you talked about sales synergies being a little more challenging than you expected, and then also new financing options for customers. I guess in light of the CapEx improvement, I'm very curious in terms of what does that mean? Are you experimenting with lease type models, reagent rental type models, so those two dynamics sales and financing options for customers regarding MAKO? I have one follow-up.

To take the second part, we've offered through our flex financial group financing options because of the capital components that exist within many of our MedSurg businesses. We've been in that financing area for a number of years. What we're doing is expanding that and leveraging that expertise over to the Recon side where the MAKO capital sits and really helping them work with some of the budget limitations that exist between capital and operating budgets within a hospital. A variety of different options that we're looking at, but it's clearly a skill we have and something that MAKO couldn't, at their point in their trajectory, offer to customers.

In terms of the integration, I think the most challenging part, I think it's fair to say we underestimated the complexity of it, but feel very comfortable with the trajectory we're on, it's integrating a capital sales force alongside a very large implant sales force and going through the necessary training and coordination that has to take place in existing accounts.

It's nothing truly unique. It's a big job to do, given how large our sales force is. We're making very good headway, very excited about the pipeline we're seeing and our ability to continue to drive sequential acceleration in robot sales.

Okay. Very helpful.

Bill, just a question on the balance sheet, obviously with the repatriation event your balance sheet's going to expand in size here over the next six months, and Stryker's in this interesting position right now where you basically are the most underlevered Company in all of large cap med tech. There's increasing trend, largely through M&A, to increase that relative rate of leverage.

I'm just wondering, given that increasing cash over the short term which is going to be quite rapid, and you think about the spread between your cash interest and what you can get in the credit markets, that spread's actually pretty narrow. Do you start thinking about a different level of capital structure that's appropriate for Stryker, given your cash balance is going to expand here rapidly in the next six months?

I think it's fair to say that we definitely believe that our balance sheet is very strong across the board and has been. We always want to make sure that we're putting the broader-based assets that we have to work as efficiently and effectively as we can. I think as Kevin mentioned multiple times, we're absolutely first and foremost focused on acquisitions, but dividends and stock buybacks are also a key part of our overall cash structure strategy.

Just keep in mind, as well, too, that as we move forward here, we have been booking and accruing an amount on our Rejuvenate claims. At some point, those will potentially be paid out. We have to make sure that we're covered for that situation. Also on the cash repatriation side, also keep in mind that as I mentioned most of that cash won't occur actually until the back half of 2015. But you can be assured that we are actively looking at how to best utilize that cash moving forward.

Our next question comes from Kristen Stewart from Deutsche Bank. Please proceed.

Hi. Can you hear me okay?

Yes. Hi, Kristen.

Perfect. Thanks. Sorry about that.

I just wanted to ask a question, if you could give us your broad view on just the overall Recon market, and in particular your performance within Europe, or within international markets? It seems to be improving nicely. Maybe just walk us through what you're seeing, if you are seeing underlying improvement, if you would expect to continue to see improvements going forward sequentially with seasonality? I think you do have one less selling day in the fourth quarter, as well. I just wanted to confirm that.

Yes, we do have one less selling day in the fourth quarter. I would say that it's a little bit geographic dependent, but clearly the momentum we're seeing in Europe continues. That's helping that OUS growth, recognizing as we mentioned we did have some very difficult comps, particularly on the hip side.

Japan with the price cuts has been challenging, and also we've been working through, and largely we're past it now, but the implications tied to the ERP implementation that we talked about previously. Overall, feel pretty good about the environment.

Then on the US side, any comments there in particular?

Yes, a little tough because obviously we don't have all the numbers in yet. In terms of hips, we feel pretty comfortable that we're growing ahead of the market even after adjusting for MAKO. Knees, for the past eight quarters we've kept pace with the market. We may be a little trailing that this quarter, but we'll have to wait and see as everybody else's numbers come in. It does seem like overall this is a year where the hip market is stronger than the knee market.

Seasonality, I think you're going to see a similar dynamic, recognizing it was exceptionally strong in the fourth quarter last year. It's really difficult to predict if we're going to have that healthy of a seasonality effect. Clearly, Q4 is going to see the benefit of that seasonality.

Our next question comes from David Turkaly from JMP Securities. Please go ahead.

Thanks. Just quickly, I think you said that US hip and knee pricing was stable. Did you quantify that in terms of a percent, that the pricing impact on those two lines?

No, what we said was in the US hip and knee pricing was consistent with what we saw in the second quarter of this year, approximately in that mid-single digit range.

Mid-single digit range for both?

Yes.

Yes.

Okay. Then, given the better CapEx environment you talked about, I'm curious if you have any comment on utilization or overall procedure volume or surge in backlog here? Any thoughts or any updated thoughts on that post this quarter?

No, I don't think we have any real insights to offer there. It does seem like the CapEx environment did modestly improve, but again, it's one quarter. It's tough to know if that is a trend that's going to be indicative of accelerating unit volumes. Overall, feel good about the momentum we're seeing, but we don't really have any insights as it relates to physician volumes or weightless and the like.

Our next question comes from Matt Miksic from Piper Jaffray. Please go ahead.

Hi. While we're on hospital capital, one follow-up there on strength. You talked about it potentially improving here as we head to the seasonally strong fourth quarter. You mentioned last year, I think, Kevin, you'd spoken quite a bit about the collaborative approach across these lines but almost customized flexible financing approaches, contracting with hospitals based on capital or operating pricing. On the hospital capital business lines, is what you're seeing just in your estimation seasonal and market improvements, or to what degree do you think you're taking share because of some of the programs you put in place? I have one follow-up.

Okay. Matt, first of all, for the follow-up, if you're on a speaker I'd appreciate if you could get off the speaker. We had a little trouble hearing you. I think I got the gist of the question.

Clearly, we do have a lot of flexible programs. We are collaborating across our divisions, but I would say at this stage of that work it's really more about our teams executing directly with our customers. We clearly saw a nice performance in medical last quarter, the second quarter, and now this accelerated very dramatically in the third quarter.

Part of it is the market is improving. We can see conditions in the market improving, and part of it is our execution, really difficult for me to parse which one of those two. When more people report this quarter, we'll have a better sense on how much of it is growing with the market versus how much is taking share.

My sense is we are probably growing a little faster, but I can't dimensionalize that for you just yet. I would say our collaboration efforts, it's still early. We were getting some wins, but I wouldn't attribute the bulk of our success to that. It's really more about our teams really performing well in the market.

Thanks for that. The follow-up maybe for Katherine on MAKO, you mentioned adjusting for hips. We certainly have heard more interest on the hip side. As you complete this integration and head into the end of the year, is there something that you can give us that we might view as catalyst heading into next year? To what degree is the hip emerging as an important application, whereas maybe a year or two ago it was viewed as a less interesting opportunity than the knee side?

Thanks. I think a couple of things. I would go back to all the products we highlighted, the Stryker products that we're going to be putting on the robot, targeting for 2015 on the hip side where they obviously have an indication. We would agree; we're seeing increasing interest there, then clearly our expectation to get approval with Triathlon on the robot in 2015. Those are probably the two major triggers.

Now, keep in mind we're going to have to do training and software upgrades, and there's going to be work to be done to make sure this launch is executed in such a way that we can achieve our goals. That's why we continue to point to, think about 2016 as the year when we're really going to be on a trajectory where it's indicative of us taking meaningful market share gains.

What I would add, Matt, just to add one comment, the hip application we were certainly excited about, and the software improvements in the last version that was done just prior to our acquisition have made a big improvement, but surgeons for the most part are pretty happy with our hips. This required really a changed management with surgeons to really get to try it and have a good experience and having our implants of course will help dramatically with that.

We still see the total knee as a much bigger opportunity. There is less overall satisfaction with patients, and the perception of improvement we think is far greater with total knees. There's certainly going to be growth in both areas, but the knees still for us is the biggest opportunity.

Our next question comes from Raj Denhoy from Jefferies. Please go ahead.

Hi, good afternoon. I wonder if I could ask overall on the pricing environment in the United States. One of your competitors earlier this week talked about the worsening pricing, particularly on the hip side, and you're talking about a much more stable environment. I'm just curious if you have any thoughts around why we'd be seeing this dichotomy or this diversion in pricing in the market.

I think we're actually experiencing very similar pricing phenomenon. The characterization is last year versus this year, or how things are going from quarter to quarter this year. Certainly versus the prior year, we are seeing a moderate acceleration in price pressure, or prices have certainly declined. When we characterize it as stable, it's really over the course of this year, but when you compare to prior year, certainly we are seeing an acceleration. That's why we're now modeling for total Company price decrease of roughly 2%.

Okay. That's helpful.

Maybe I could ask one about MAKO as well, I think as you outlined at the Analyst Meeting, one of the interesting things about that now for you is that you seem to have broadened the offering in a sense to hospitals, in terms of not only offering better potential patient outcomes, but also looking at things like efficiency and infections and other sorts of benefits you might be able to get from the robot. The question is when we might start to see some of that data, such that you can present a much more compelling case to hospitals to adopt it?

Yes, I would say that we're obviously continuing to analyze and look at data. I wouldn't point you to anything near term on the data front. I think this is really going to be getting this in the hands of Stryker and other physicians, leveraging the breadth of our product offering, and then seeing just as they did with Uni, the benefits of having the consistency of results, reproducibility, better patient experience, all those things that they will get a feel for as they start to use the robot.

I think long term, to think about this becoming more of a standard of care, that's when we're going to have to look to start to have more clinical data. I wouldn't point you to anything at the podiums or anything near term.

We have Matthew O'Brien, next with a question. Please proceed.

Good afternoon, thanks for taking the questions. I was hoping we could start on the extremity side of things. Kevin, this is an area that just continues to boggle the mind as far as your growth rate goes. I think you're about doubling the market in foot and ankle.

Can you just give us a sense of, is that share coming from some of the larger multinationals that are playing there, or coming from some of the more extremity focused companies at this point? Then with the integration of SBi is there any reason to think you can't even though you have more difficult comparisons coming up grow somewhere around the 30%, maybe mid-20% level going forward?

Certainly, I'm not going to speculate on the growth going forward because certainly they've defied my expectations thus far. When you're entering a new market it's really hard to predict. Obviously, when you are in an existing market, it's much more easy to predict what the volume will be. I would say most of the growth is really coming from expanding the market. We're calling on new surgeons that weren't putting in implants before. That's been really the engine of growth.

Obviously, new products that we've been launching, as well. The STAR Ankle really fills a very important gap in the product portfolio. We're really excited about that, and frankly we see in a new market like this continued opportunities for growth. We're growing the market primarily. We're obviously taking some share, as well. At this point I think we see robust growth going into the future, but what exactly robust will be will remain to be seen.

We're extremely pleased with the performance. The dedicated business unit model is working. The surgeon segmentation that we created is working. We're very, very pleased with the performance.

Thanks. As my follow-up, the neuro business which seems to get overlooked here looks like it improved sequentially here in the third quarter, which historically it has not done. Can you talk a little bit about what some of the growth drivers there? It sounds like I think from last quarter you mentioned hemorrhagic as the primary growth driver. Is the momentum in that business strengthening at this point?

We have three business units within our neurotechnology business, and all three businesses are performing very well. In fact, in this quarter, the neuro-powered instruments was really the strongest growth of the three, but neurovascular which is really the coils, also grew very, very well, as did our cranial maxillofacial business. That CMF business has been a double-digit growth business as well, growing very well with custom cranial implants and a number of other new products. So all three businesses contributing very evenly to the nice double-digit performance.

Thank you.

Our next question comes from Bruce Nudell from Credit Suisse. Please go ahead.

Good afternoon. Kevin, and Katherine, to my recollection minus 5 or --

Bruce, can you speak up a little bit? We're having trouble hearing you.

I'm sorry. To my recollection, -- can you hear me now?

Yes, better. If you can speak loudly, please.

Okay. Yes. To my recollection, mid-single digit negative price in hips and knees in the US is at the high end of historical levels. Has there been a secular change, and what might be driving that? Is it reversible?

I would say what we've seen is nothing new in terms of the trends, whether it's physicians becoming employees of hospitals and greater alignment there, or transparency around patient pricing, and also keep in mind, product cycles. Accolade II, for example, we got a nice price premium for that, but you do anniversary those. We're a couple years into the launch. The product cycles definitely see an impact.

While it's declined, I wouldn't say we're seeing a step function change. Mid-single digits is in the 3% to 5% range. Again, nothing really significantly different, and clearly stable, largely stable through the first three quarters of this year.

Okay. My follow-up, Katherine, is clearly you -- (inaudible).

I'm losing you. Sorry, Bruce.

Sorry. You didn't expect to have Stryker implants on MAKO this year. What is surprising you about the difficulty of MAKO robot placements?

I think the biggest thing is just the pace of the integration. We were overly optimistic on how quickly we could integrate and do all the coordination that's required between the capital reps and our very large Stryker implant reps. There's a lot of coordination, particularly when you get into individual accounts.

Certain regions have embraced it. They understand the differences in an implant sale versus a CapEx sale and how to partner, and there we're seeing great success and uptick in utilization. We're only a couple of quarters in, and it's going to take some time here to really leverage that breadth of combining those two sales forces. So, nothing that's significant or really different. It was really just us being overly optimistic about the pace of managing that integration.

Bruce, the other thing I'd add is there were certain parts of the country where some of our customers wanted better use of their robots. There was a bulk buy that you may have heard about that HMA had done. CHS bought HMA as a big chain, and they weren't really pleased with the performance of some of the robots. We actually went about transferring and went through a big process to actually transfer and move about six or seven robots to become more high performing locations. That took a lot of effort on the capital sales team that's normally focused on selling to actually shift and transfer. That will pay dividends for us going forward, but it obviously tied up a lot of activity.

When you integrate a Company, you have to go through these kind of stumbles I would say. It certainly hasn't taken away any of our enthusiasm. The robot sales force is still intact, and the funnel is really nice and filling up very nicely. We're excited about being able to continue to improve. Those are some of the stumbles that we had to go through. Relationships are everything, and building relationships with a big Recon sales force is time consuming, and so it's below our expectations but certainly the promise is every bit as exciting as we thought when we did the acquisition.

Our next question comes from Glenn Novarro of RBC Capital Markets. You may proceed.

Hi, good afternoon. Two follow-up questions on pricing: one, the mid-single digit knee and hips pricing in the US, does that include or exclude mix? Or, maybe the question should be, are you getting any mix in this environment? Then a question on spine, I think you called that out as pricing getting a little worse. Can you quantify what the spine pricing was and provide some commentary why the spine pricing got worse? Thank you.

Yes. That is pure price. We are getting some mix, which is partly offsetting that, and that's what we report in the combined volume mix number being north of 10%. So a little bit of price, but it does not fully offset what we're seeing on the overall pure pricing side.

In terms of spine, pricing there is challenging, and that's part of the year-over-year decline in our pricing to the 2.3%, as Bill referenced. Part of it is just the mix of our businesses and greater pressure on certain types of products, but we're managing through that, really excited about some of the new products, and the leadership team that we've got in place there. We expect to see some improvement going forward, but that's probably the key parts I would highlight.

Our next question comes from Bill Plovanic from Canaccord. Please go ahead.

If I could just leverage off of Glenn's question, and switch it over to the trauma, you mentioned pricing pressure on trauma. Maybe I haven't been paying attention, but historically that hasn't been an area that we've seen a lot of pressure. I was just wondering if you could give us more granularity on that. Then I have one follow-up.

When we say fresh pressure, it's certainly a different type of pressure than you see in hips and knees. It's very low-single digit, but trauma has historically been sort of flat. Sometimes we've been able to get a little bit of price. If you look year-over-year, certainly we did have a bit of single digit decline in price, low-single digit. It's a change.

It's nothing dramatic, but obviously, if you look at how much market share we have taken over the last few years, we're starting to get a little bit of pushback from some of our competitors, caused a small amount of price erosion, nothing that's concerning. If you look at the overall growth out of our trauma business, it hasn't hampered our growth and not something that we're overly worried about.

Okay. Then just in terms of SBi, a more specific question, but you closed on the international component of that. Katherine, what type of contribution should we expect from that in the quarters going forward?

We haven't broken out the acquisition contribution by the individual pieces. Clearly, MAKO is the largest piece, and we do have to go through the integration process with SBi. I think with that group, the foot and ankle up 30% without it, and then leveraging this product, we would expect a pretty healthy acceleration, obviously continuing to be in that double-digit vicinity.

Our next question comes from Jeff Johnson from Robert W. Baird. Please proceed.

Thank you. Good evening. I wondered if I could start just on one question on the spine side of the business, especially on the implant side. That's been bumping along in the US here, plus or minus a couple points every quarter. We are starting to hear more and more POD participation reversing in that. Any signs of that showing up? It doesn't seem like it in your numbers. Are you hearing anything out in the field along those lines?

No, it really hasn't changed. For every POD that goes away, a new POD seems to pop up. It seems to be pretty stable overall. The fact that there is some prosecution will hopefully turn that tide. We haven't seen that trend turn yet.

In our business obviously we had some challenges in the first quarter we highlighted around some sales force disruptions. We're working our way through those challenges. We're also focused on upgrading our portfolio to have much more MIS products in our mix. Katherine just mentioned we spent some time with the spine team this week and very excited about the leadership. We made some new leadership changes at spine, and exciting portfolio of products that we're going to start to see since the beginning of next year, which will, hopefully, make us less immune to the price pressure that we have on the core spinal implants.

Fair enough. Thanks, Kevin. Bill, just a follow-up question for you, you mentioned a $0.10 to $0.12 incremental hit, or at least a $0.10 to $0.12 hit from currency in 2015 at current rates. Is that incremental to how you were thinking about it maybe in the second quarter? Is all that from the movements just over the past three months? I know you haven't guided 2015 yet, but would you counsel us all to take a look at our 2015 numbers, and whatever we were thinking last quarter, maybe take that dime out at this point? How should we think about that?

Sure. I think one of the ways to broadly take a look at that, Jeff, that you should always be watching, and it is definitely since the second quarter. In fact, it's really the changes that occurred really since the middle of August on the rate side of the equation. When rates move that much and rates have generally moved about 5 to 6 percentage points across almost all the key currencies, we've got roughly 35% of our business is international. Think of in the kind of 2% range on our total earnings, just from the translation-related impact.

That should help guide you to the level of impact that we would see on the overall operations. As we move forward, we don't know where rates are going to be as we move you through even the fourth quarter and into next year. As we get a better look on it, we'll obviously be giving better visibility when we give our broader guidance for 2015.

Plus, we're obviously in the process of working through our budget for next year, and whether we'll be able to offset any negative price is something we'll provide more clarity to in January.

Our next question comes from Richard Newitter from Leerink. You may proceed.

Hi. Thanks for taking the question. Maybe I could just ask on the capital spending environment, can you parse out where or what kind of products in the capital equipment domain within your MedSurg division are -- where you think things are getting better? Is this also you applying for bigger ticket items? It sounded like MAKO you didn't necessarily have much of a pickup on placing systems, but obviously the lower ticket items within your MedSurg division are. Is that the right characterization?

No, I would say MAKO is somewhat unique, because yes, it's capital. But, really what we're focused on right now is the integration and the training and driving the coordination between our selling organizations and working with hospitals on the value proposition and the like. That's a little bit insulated or separate right now from the general hospital CapEx trends.

I would say if you look at our medical growth, clearly very healthy and that tends to be our larger ticket and more deferrable hospital capital equipment, and we're seeing good momentum and as we mentioned early signs of an acceleration, recognizing it's one quarter. We'll see how the fourth quarter plays out, but we are pretty optimistic about the momentum there.

Then if you look at instruments which has a lower component and lower ticket CapEx but still there, clearly whether it's Neptune or excluding Neptune we're seeing very healthy growth, which I think speaks more to the strength of the selling organization and the product portfolio and the value that Neptune brings, less so than a change that we're seeing in the hospital capital environment.

Okay. Thanks for that. Then just a quick follow-up on the pricing, I just want to make sure I heard correctly. I think you said spine pricing net of mix was down 10%. Is that right? Then two, is there anything specific that you saw in the last three, four, five months on the spine pricing contracts coming up or a big contract coming up?

No, we didn't quote that number on spine pricing pressure. We are seeing pricing pressure in spine, and that really has to do partly with the product mix and some of the core spine fusion products. We do think it's going to improve going forward. It's clearly one of the contributors to the overall 2.3% pricing pressure we're seeing.

Sorry, as relates to contracts, they go through different cycles at different periods of time. There isn't some one overall contract that we would point to. As you've seen with the spine market, really frankly over the last couple years, a mid-single digit decline in prices is what we generally see over a number of quarters.

Our next question comes from David Roman from Goldman Sachs. Please go ahead.

Thank you for taking the question. I wanted us to come back to the gross margin, and I think the explanation around the trajectory is quite clear on what we've seen thus far. As you look forward, as you add up the head winds and tail winds, at least the way I'm thinking about it, the head winds are -- obviously you have product mix.

In the near term have you the impact of M&A and then price and currency. On the tail wind side it seems like over time, some of those acquisition head winds probably abate. You had the GQ&O efforts, and then neuro seems to be doing pretty well, as does trauma and extremities. What does it take to neutralize some of those forces around the gross margin line and flatten that out on a go-forward basis?

Let me hit on a couple of the ones that you just talked about. From an acquisition perspective, absolutely, acquisitions impacted in a period only. Once it anniversaries itself, now it's part of our base. Also keep in mind as we move into the integration of acquisitions, that's actually a piece that helps us improve margin rates over time because we can ultimately leverage some of the benefits of our broader operations through the GQ&O team to help those acquisitions improve. It's really just the one year where it wasn't in the base, but it's in the current numbers.

As far as for the product side of the mix, the general product mix, a large part of that is driven really by how strong our equipment growth and instruments growth has been broadly in this quarter, and at 16% this quarter, that was very strong. I think we're still expecting to see good instrument strength and MedSurg growth as we move into the fourth quarter, especially since we've not fully anniversaried the relaunch of our Neptune product. Over time, we would think that that balance would be a little bit more in line with some of our historical related averages.

Then as it relates to pricing, pricing is incrementally a little bit stronger here. That is something that our broader based GQ&O team is focused on, knowing that we need to be working hard at our broader-based cost improvement initiatives to help offset those types of costs.

That's helpful. Maybe just a follow-up for Kevin or Katherine, as you think about the organic growth rate, at the Analyst Meeting, Kevin, one of the things you tried to stress was the Company's ability to sustain an above peer growth rate which obviously based on the results today, you're tracking well ahead of. If you think on a go-forward basis whether it's in the context of the 5% to 6% you're offering, what are the factors that lead things to be upside relative to either the current run rate or what you're targeting here? How much of that would have to come from the macro environment versus anything you can do on the individual product side or share gain initiative?

We're really, obviously, a growth-oriented Company, both in terms of the acquisitions that we pursue as well as, if you look at our R&D spend over the last few years, we're spending at a pretty healthy rate in R&D. Our new product cycle across all the divisions which I get a chance to visit and do business reviews are very exciting, a combination of both internally-developed products, as well as acquisitions, we will continue to fuel what Stryker's really been known for years and years, which are incredibly strong and talented sales organizations which can really deliver results.

You're seeing that. You're seeing us perform above the market quarter after quarter after quarter, and with the pipeline of products coming in and feeding into these really specialized, dedicated sales forces, we see this as a sustainable engine for continued strong growth.

Our next question comes from Bob Hopkins from Bank of America. Please proceed.

Thanks. Can you hear me okay?

Yes, we can. Hi, Bob.

Hi, great. Good afternoon.

Two things, first, on the repatriation opportunity, I think this is an obvious question, but I just want to be clear. That opportunity is an opportunity to bring cash back to the United States without paying a tax penalty, correct?

The tax penalty that we're talking about would be relatively minor, and actually part of the tax hit that you see in this quarter includes the cost of bringing back those funds. Once we in essence make a decision that we're ultimately going to be bringing back funds from OUS, which we actually did this quarter, we have to actually book that US tax in our GAAP numbers right upfront, once we make that decision because it's a specific action associated with an expectation of how we're going to utilize that cash. That's already reflected, and we would not expect to book any additional tax charge when we repatriate that, but we would then have the cash outflow out of the tax that we've already accrued now.

Bob, the tax charge we have has two components. It's moving of the IP as well as repatriation. The repatriation is in the 5% range. It's similar to the tax that were paid when we had those holidays to bring back cash, a very, very nominal rate to bring it back. If we tried to bring back further dollars, then we would have to pay a much higher rate, which is not interesting to us.

Okay. I want to understand the mechanism of that a little better, but I'll save that for a later time. The other quick question I wanted to ask was just back on pricing, and I understand that the comment about sequentially seeing stability in the rate of change versus what you had seen over the last couple quarters. But Kevin, as you look forward, express your confidence that we can maintain relative stability in the level of decline in pricing versus where you are right now as we, again, look forward into, not just Q4, but thinking about 2015. I think that's a hot button issue with a lot of investors. We would just love to hear your views on how confident you are that that can remain stable.

Bob, obviously I don't have a crystal ball to know exactly what the future's going to hold. I would say there are no new dynamics at play. These are the same dynamics we've been seeing over the last couple of years around physician hospital alignment, around contracting, the pressure the hospitals are feeling. It's similar dynamics. We're seeing stability over the course of the last couple of quarters. It is a little bit more under pressure than it was in the prior year.

If we saw a new catalyst it would be something that I'd be more worried about. It's really the same catalysts and contracts come and go. There's different cycles that are underway. As MAKO ramps and as we start to place robots, we really believe that has a fantastic differentiator for us and something we'll be able, for Stryker at least, to insulate us from some of the price pressure going forward. That for us is one of the key advantages.

The marketplace hasn't fundamentally changed. There are no new catalysts. If there were, then it would create a lot more uncertainty for me than what we're seeing right now. We're seeing pretty good discipline among the competitive players in the marketplace. From that standpoint, there will be some consolidation pending in the industry. I think that's also a catalyst for more stability generally. If you look at other industries and what's happened in other industries.

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

Good afternoon, everybody. A couple questions, SG&A clearly going down as a percentage of sales. I'm trying to understand where do we go from here? How sustainable is this directionally? Is this a one-time, one-year major step down, or with Lonnie in charge is there a lot more to come? Just help us think about that, if you would.

On the SG&A side of the equation, we've been averaging around roughly 1.5% of an improvement as a percent of sales this year. This last quarter, obviously, a little bit stronger, again, than that. I'd say when we can grow at the level that we just grew at, we can absolutely get additional leverage from our broader based operations, and that's what we're generally driving throughout all the goals and expectations for each of the different divisions.

On top of that obviously, we have a number of different cost initiatives to try and make sure that we're focused on taking cost out of the organization, where it makes sense. I'd say that we made good progress on a number of fronts over the last couple years, and I'd say that we still believe that there's some good progress yet to be made. I don't think we talked about an end point, but I would say that if we continually can grow north of the 5% range in general, that we can typically get some good leverage off of that moving forward.

Specifically related to G&A, so on the selling side we've taken out quite a bit of expense on the selling line this year, some in the G&A area. In G&A we still have significant room for savings by driving more shared services where we have just a couple of small pockets in Stryker right now that have moved to shared services, we have not generalized that across the corporation. That's something we'll be pushing forward in the next couple of years.

I just want to emphasize, this European headquarters was a massive undertaking, so you're seeing the side of the benefits related to repatriation of cash and tax improvements. To actually provide system changes and to remap all of our transactions involved hundreds of people across our organization over the past year to put this change into effect. We'll see those benefits, but those resources were burning a lot of energy on this project. We're now going to turn their focus and their attention on driving more shared services, and so we see room to continue to drive efficiency and leverage.

That's great, Kevin. As my follow-up, again, I don't know if I should put these in the same sentence, but the $2 billion repatriation, and the comment about reinvesting 50% of the tax savings, et cetera, could this potentially help you offset some of the clearly obvious FX head winds in some way? Could you reinvest a smaller amount of the tax savings or be more aggressive? Are these levers we should believe or assume that you're reflecting on as you put together your 2015 plans?

There's a lot of dynamics and a lot of variables as we put together a plan. A lot of what you say will be things that we'll think through, and we'll provide clear guidance in January and characterize those elements for you in a very clear manner.

Our next question comes from Larry Biegelsen from Wells Fargo. Please go ahead.

Good afternoon. Thanks for taking the question.

Bill, I wanted to focus on the tax rate. I think you said if I heard correctly that you expect it to be down sequentially in Q4. You still expect it to come in at 22% for the full year, and that the R&D tax credit would be reflected in Q4. Did I hear correctly? And that would seem to get you down to about 21%? Maybe if you could help clarify my misunderstanding?

Sure. Yes, that's a little bit of a misunderstanding there, but we've got a year-to-date adjusted operating effective tax rate of about 22% so far year-to-date. That's actually the rate that we're expecting for the full year, which would imply that the fourth quarter will be relatively close to that rate.

As we move forward, though into 2015, we do expect to reduce our average tax rate from 2014 to 2015 by about two full percentage points. If we average roughly 22% this year, you should be thinking in the neighborhood of around 20% next year as you're looking at 2015.

Got it. That means with -- sorry, go ahead.

Just maybe one other point of clarification, which was around the tax extender comment, the tax extenders are currently in our year end forecast. If those don't come, then obviously that puts a little bit additional pressure on this year's tax, but hopefully at the end of the day if it doesn't come this year, we would sure expect it to come next year, and may have like a double year benefit as we did back in 2012.

Got it. That's helpful.

Then the Q4 implied guidance if my math is correct is about 3% to 7%. I understood you have one less selling day in Q4, but is there any reason that you would be towards the low end of the guidance given the strength and momentum we saw this quarter? Thanks.

Fourth quarter is pretty volatile as we've seen in the past and certainly capital equipment is a big thrust in the fourth quarter. It's inherently volatile. Based on how we closed this quarter, I wouldn't think we would expecting to be at the low end of the range, but it's a range. There's unknowns that could happen. We're certainly feeling at this point we're feeling pretty good, but it's always inherently volatile.

Our next question comes from Joanne Wuensch from BMO Capital Markets. Please go ahead. Joanne, your line is open.

Can you hear me okay?

We can now.

Thanks. Good evening. Thanks for taking the question.

We've heard on a couple calls so far about OUS weakness. It's ranged from some problem in Europe to problems in the Middle East and other areas. Could you please comment if you're experiencing any of this?

For us, it's a little different given the makeup of our business. In Europe, we have a smaller business that we've really strengthened over the last couple of years. We had a strong quarter in Europe again in the third quarter. We may not be indicative of the overall broad market based on our presence. China, we had extremely strong growth, well north of 20%. India was very strong.

Look at all the emerging markets, we were very strong double-digit growth. Even if I look at our EEMEA region had a good performance. Clearly Russia and Turkey are two areas that are problematic, but beyond those two areas the rest of our international, we feel pretty good about our performance, and the markets are holding up well. The challenges that we have in Japan are, I would say, more Stryker specific challenges, beyond the price cuts that everyone experienced.

We had some of our own challenges, but international for us is a bright spot. Organic growth was very strong in Q3, and the overall negatives that I've heard, as well, haven't really applied as much to Stryker. It could be based on our market presence and the momentum that we have in those regions.

That's helpful. As a follow-up question, the two points that you'll experience in tax reduction in 2015, does that become status quo, or is there still more room for you to move it down? Thank you.

That's a loaded question. I think that you can assume that we have a number of different areas that we want to continue to focus on, and ultimately can see opportunities for improvement in. Also keep in mind that worldwide price or worldwide pressures within different municipalities around the world, both in the US and multiple other European and international countries, are all looking for ways to increase their broader-based revenue.

While we have opportunities on improvement, there's also the broader pressure on areas where governments or different areas are trying to help or reduce those levels from at least the impact on their overall tax rate. We're absolutely focused on it. We're going to continue to make efforts there, but as far as projecting it, we aren't projecting anything beyond 2015.

If you look at the last 10 years and Stryker's performance on this line, it's been pretty steady and pretty meaningful improvements. This is a big change. It was a big project, but you shouldn't assume we're content, and that we're going to just sit still.

Our next question comes from Matt Taylor from Barclays. Please go ahead.

Hi. A couple questions, so you had a really nice quarter on your capital business and talked about this improving environment. That's a little inconsistent with some of the other results we've seen and what hospitals are talking about. I'm just curious if it has anything to do with new products or big orders? Do you really think that they're opening up for whatever reason? Is it ACA or some factor in Europe that we're not seeing? In a lot of other things that we've seen so far seem to point to relatively weak capital markets.

I would go back to our comments which were, we're seeing signs of a moderate improvement in the capital environment. It's very difficult for us to know how much of that is us executing better than competitors versus an overall strengthening in the market.

Just looking at our medical results and looking at our pipeline and thinking about the momentum we're seeing really across our MedSurg businesses on the implant and the capital side, that's what we're seeing. Now, again, it's just one quarter, and we don't want to get too far ahead of ourselves but we feel pretty good about signs of at least moderate improvement in the overall environment.

Great. Then on ortho, are you seeing any disruption from other big deals that are going on in the space? Is that something you could take advantage of? What are you doing well in hips and knees that your competitors aren't doing or aren't doing yet?

I would say related to consolidation and disruption, we're not really seeing much in the way of disruption yet. As we saw with the previous big acquisition, the disruption really tended to occur post implementation. Once implementation begins and people really understand what does this mean to me, that's when we really start to see disruptions. I would say it's business as usual right now, and we're seeing pretty stable marketplace at least at this point. I think once the companies integrate, that's usually when we tend to see more turmoil.

As it relates to our performance, the story on hips is not a new story, somewhat like trauma: trauma of course double-digit and continued sustain performance. In hips, if you go back 12 quarters, we've been growing faster than the market at a pretty steady rate, a combination of some new products like Accolade II, as well as really strong execution in the field.

Then on the knee business, we've just been performing with the market, which is a very good performance given that we had two large competitive launches that we've been able to perform well. Our field sales organization's done really an excellent job. We feel we're in very good position.

Our next question comes from Mike Weinstein from JPMorgan. Please go ahead.

I think I had everything answered. Thanks.

Thank you, Mike.

Our next question comes from Kristin Stewart from Deutsche Bank. Please go ahead.

Hi. Thanks for a follow-up. I just wanted to confirm two things, I guess. One on the FX, $0.10 to $0.12, that is incremental to what you would expect to finish 2014 at?

Yes, that's correct. That's the year-over-year impact that we would see next year.

That's if exchange rates stay at their level.

Yes, based on current rates, right.

This year what is the total FX included within your forecast, roughly?

The FX that we're talking about in 2014 is now up to about $0.12 negative impact for us, and that's about $0.04 worse than was we expected at the end of the second quarter. Most of that $0.04 differential is occurring in the fourth quarter.

Bill mentioned before $0.01 hit us in the third quarter. If the rates stay where they are now, there would be a $0.03 additional hit in the fourth quarter. It's just coincidental that that $0.12 would be similar to next year.

Okay. A bigger picture, if we look at the overall pricing dynamics of hips and knees down in the mid-single digits, we're still seeing really strong, obviously, sales growth. I don't suspect mix is contributing all that much. It's really implying you've got unit volume growth probably somewhere in the mid- to high-single digits. How long do you think we can see this high-single digit volume growth really sustain itself? What would you view to be a more normalized unit growth environment?

I think it's fair to say that your statements are correct; mix has just been a modest benefit, nowhere near offsetting price. The unit volume growth is very healthy, and certainly the case of hips, we think that is also reflective of consistent market share gains. It's difficult to know exactly what the market's going to grow at on a go-forward basis. We've been talking about it being largely stable, and don't see any reason really to move away from that.

What we're really focused on, though, is how do we drive market share gains, whether it's with our existing portfolio and products like Accolade II, or obviously getting into next year beyond leveraging the MAKO. It's really all about market share being our focus.

Fair enough.

It's 5:45. I think we're going to wrap the call up, operator.

There are no further questions at this time. I'll 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 fourth quarter 2014 results will be held on January 27, 2015. Thank you.

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