史賽克 (SYK) 2015 Q1 法說會逐字稿

Welcome to Stryker's first-quarter 2015 earnings conference call. My name is Lakiba and I will be your operator for today's call.

(Operator Instructions)

This conference call is being recorded for replay purposes. Before we begin, I would like to remind you that the discussions during the 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, Chairman and Chief Executive Officer. You may proceed, sir.

Good afternoon, everyone, and welcome to Stryker's first-quarter 2015 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 several updates including MAKO. Bill will then offer details on our quarterly results before turning to questions and answers.

Our first-quarter results continue to reflect the strength of our sales and marketing teams, our diversified businesses, and the pay-off we are realizing from our investments in innovation. We had another strong quarter of organic sales growth of nearly 6%, and EPS topped the high end of our projected range for the quarter.

Trauma and Extremities, Sports Medicine, Interventional Spine, and our Neurotechnology franchises all continued their momentum from last year with excellent growth. Our Medical business also had an outstanding quarter, marking three successive quarters of stellar performance. And our US Hip business helped to fuel the strength in Orthopaedics.

We are pleased with the continued progress on MAKO, which was the highlight of the recent American Academy of Orthopaedic Surgeons Meeting. We continue to have a high level of conviction regarding the long-term potential for robotics in Orthopaedics.

We are encouraged with the launch of our trans-Atlantic operating model, as Europe posted another good quarter of growth, and with the strengthened divisional leadership, is set up for accelerated gains in the years ahead. As a reminder, we have used some of the benefits of our lower tax rate to invest in Europe SG&A. Growth within the emerging markets was solid again, as was our performance in Australia.

Like any quarter, we had some challenges, including US supply disruptions, which adversely impacted revenue for both Instruments and MAKO implants. The MAKO issues will be resolved in Q2, while the Instruments situation will linger into Q3. Despite these challenges, both businesses managed to post positive growth in the quarter. In both cases, we see delayed sales and no material loss of revenue for the full year.

Japan is on an improving trajectory and we expect this trend to continue as we move through the year. Growth from our recent acquisitions was also modestly below our expectation in the first quarter, but our teams are excited about the future of these businesses as they work through early integration.

Foreign exchange was a negative impact, in line with our Q1 expectations, and if rates remain at current levels, will generally be in line with the full-year guidance communicated in January. We have also repurchased $280 million of our stock year-to-date, $130 million of which occurred during Q1.

In sum, we are off to a strong start for 2015, with top-line strength across our three business segments and balanced globally. We are driving earnings results with disciplined expense management, while continuing to invest in R&D, to ensure long-term revenue growth.

Our solid balance sheet and cash flow generation remains a key characteristic of Stryker and positions us well as we continue to look for the best ways to invest in our future. As an organization, we are focused on consistently delivering on our targets, as we strive to optimize shareholder returns. 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 MAKO, progress with our trans-Atlantic operating model, or TOM, as well as some comments on the recent clinical studies regarding acute ischemic stroke. With respect to MAKO, we are pleased with the continued progress we are seeing following the integration of this business during 2014.

In the first quarter, we placed nine robots versus two in the year-ago quarter, with the placements representing a nice balance between existing Stryker customers and competitive accounts. We did have some challenges with our MAKO knee implants owing to a temporary product supply disruption during the quarter, the impact of which will be fully resolved during Q2. Adjusting for this, our US knee growth would have been modestly higher.

Looking ahead, we are encouraged by the strength of the pipeline, which reinforces our conviction and the growing interest in robotics. And with sales force integration complete and new robotic indications now cleared, we are well-positioned for 2015 and beyond.

With respect to the latter, our Stryker power hip brands, including Accolade, are now compatible with the MAKO hip application. Additionally, our X3 polyethylene bearings have also been cleared for use with the MAKO [U-Knee] implant. Our total knee 510(k) application was submitted to the FDA late last year and we are continuing to dialogue with the agency.

Turning to TOM, which went live at the beginning of the year, this initiative will enable us to drive a multi-year improvement in our growth profile in Western Europe. The structure is fully operational, with eight trans-Atlantic division presidents now having full P&L responsibility for the combined US and Europe businesses. They each have a general manager, all based at our regional headquarters in Amsterdam, with direct responsibility for sales and marketing in Western Europe.

The RHQ represents a flagship for our presence in Europe, as we bring in HCPs into the site for training and education on our Stryker products. We believe this will be key to strengthening the Stryker brand in Europe and enhancing our relationships with physicians and hospitals. As we discussed, approximately half of our tax savings is being reinvested into our European business in terms of additional sales and marketing headcount and support to help further accelerate growth.

Lastly, over the past four months, an impressive amount of strong clinical data has been released supporting the use of device-based treatment of acute ischemic stroke. From the acquisition of Concentric, we have pioneered this space and our unique and differentiated product, Trevo, represented the majority of the product used the pivotal MR CLEAN study, which was published in the New England Journal of Medicine in January. We expect the market will take time to evolve, which will require the optimization of EMS transport and inter-hospital transfers, establishment of clinical guidelines, physician incentives, and investment in new human and physical capital to absorb new patient volume.

Clearly, as the data comes out, it reinforces our excitement for the ischemic stroke market and its longer-term revenue potential. We believe we are well-positioned and will continue to invest in this therapy through further product development, the funding of next-generation trials, and supporting the full continuum of care for stroke. With that, I will now turn the call over to Bill.

Thanks, Katherine. Sales growth was 3.2% in the first quarter, including a negative 4.2% impact from FX translation. Constant currency sales growth was 7.4%, which includes organic growth of 5.6%. EPS on a GAAP basis for the first quarter were $0.58 per share, versus $0.18 per share last year in the first quarter, while adjusted earnings per share were $1.11 per share for the quarter versus $1.06 per share in the first quarter of last year.

This quarter's EPS includes negative impacts of roughly $0.08 per share from FX. Foreign exchange rates were very volatile again during the first quarter with the Japanese yen, Australian dollar, euro, Swiss franc, and many other currencies weakening against the dollar. The weakening of the Swiss franc and our layered hedging program helped mitigate the additional weakening of other currencies that occurred within the quarter.

The most significant non-GAAP adjustments in the quarter relates to a charge of approximately $54 million associated with the voluntary recalls of Rejuvenate and ABG II, and an additional tax expense associated with the transfer of intellectual property to The Netherlands from some of our other European locations. The charges for the Rejuvenate matter may increase or decrease over time as additional facts become available and assumptions become more refined.

Looking at sales in the first quarter, our organic growth of 5.6% was comprised of a positive 7.1% from volume and mix, while price negatively impacted sales by 1.6%. Acquisitions added 1.9%, while FX had a negative 4.2% impact on sales in the quarter.

Looking at our segments, Orthopaedics represented 43% of our sales in the quarter. Sales of Orthopaedic products were up 2.4% as reported and grew 7.5% constant currency, and increased 6.5% organically. US Orthopaedics sales grew 9.7% in the quarter.

Trauma and Extremities, once again, had another standout quarter with sales in the US increasing 18%, and 11% in international markets in constant currency, with over 30% growth in our US foot and ankle business, or roughly 20% excluding the impact from the acquisition of SBI, as we continue to have great success with our product offerings in this expanding market.

US Hips continued its strong performance and grew 7.5% in the first quarter, while US Knees increased 2.4%. Internationally, sales were down 1.3% in Hips in constant currency, and increased 4.5% in Knees in constant currency.

Next, our MedSurg segment represented approximately 39% of our sales in the quarter. Total MedSurg sales increased 4.6%, as reported, with 7.7% in constant currency, and increased 4.3%, organically. These results were led by double-digit organic and constant currency growth in our Medical business, as our sales force, combined with a strong product offering, continue to execute in an improving capital equipment market.

We also experienced mid- to upper single-digit constant currency growth in Instruments, Endoscopy, and Sustainability. Our Instruments business was negatively impacted in the first quarter, and will also be negatively impacted in the second quarter, by a product supply issue at one of our suppliers.

We believe Instruments' organic growth for the quarter would have run at least in the upper single-digits if supply was fully available. This issue is expected to be resolved by early in the third quarter and should have modest impact on Instruments' full-year results.

Our final segment, Neurotechnology and Spine, which represents 18% of our sales in the quarter, increased 2.1% as reported, and 6.6% in constant currency, and 6% organically. Growth in this segment was led by double-digit growth in our Neurotechnology businesses and IVS, while spinal implant sales increased slightly in the quarter.

In looking at our operational performance, gross margins on an adjusted basis in the first quarter of 2015 were 65.6%, relatively flat with the back half of 2014, and compares to [66.6%] in the first quarter last year. Gross profit includes a re-class of expenses in all periods of approximately 30 basis points, which came out of SG&A for consistency.

The decline in our margin rate in the quarter compared to the first quarter of last year predominately resulted from negative pricing pressures and negative mix related to our recent acquisition. Pricing was down 1.6% in the quarter, better than last quarter and last year, which both ran approximately 2%. Pricing pressure remains challenging and we still expect pricing to be down nearly 2% for the Company moving forward.

Research and development expenses were 6.4% of sales, relatively flat compared to last year in the quarter. Selling, general, and administrative costs on an adjusted basis were $854 million, or 35.9% of sales in the quarter, versus 36% in the prior-year period, despite reinvestments to strengthen our European selling and regional headquarter activities.

Operating margins on an adjusted basis were 23.3% in the first quarter of 2015, compared to 24.1% in the first quarter of 2014. The rate was negatively impacted by pricing, FX, and the mix of recent acquisitions, along with activities to support our European business. These impacts were partially offset by operating improvements in the period.

Other expense in the first quarter was approximately $28 million, compared to $24 million last year in the first quarter. This increase in expense resulted primarily from higher net interest expense in the period. Our reported tax rate for the first quarter was 40.6%, while our adjusted effective tax rate was 19.5%. This compares to a 24.1% adjusted effective tax rate in the first quarter of last year.

Looking at the balance sheet, we ended up the quarter with $4.3 billion of cash and marketable securities. We also have $3.5 billion of debt on the balance sheet at the end of the quarter. From an asset management standpoint, accounts receivable days ended in the first quarter at 58, slightly above last year's first quarter, and days in inventory finished the quarter at 173, just a little bit better than the 174 days in the first quarter of last year.

Turning to cash flow, our cash from operations in the first quarter of 2015 were $380 million, compared to $209 million last year in the first quarter. Capital expenditures were $46 million in the first quarter of 2015, compared to $70 million in 2014; however, capital expenditures are expected to run higher than last year as we move through 2015. We also repatriated approximately $700 million in the first quarter and expect to do approximately an additional $1 billion later this year.

We now have over $2.3 billion available for share repurchase under our recently expanded authorization, as approximately $280 million of share repurchases were made so far in 2015, with $130 million of that repurchased by the end of the first quarter. We will continue to evaluate the level and frequency of our share repurchases; however, current plans are to fully utilize the current authorization over the next two to three years.

Based on our solid first-quarter results and current expectations for the remainder of the year, we are well-positioned to deliver on our full-year sales and earnings guidance and we are now increasing the lower end of our guidance for both sales and earnings for 2015. Our sales guidance now includes constant currency growth of 6% to 7%, with organic sales growth in the range of 5% to 6%.

If foreign exchange rates hold near current levels, we expect net sales for the full year of 2015 to be negatively impacted by approximately 3.5% to 4.5%, with the second-quarter sales projected to be impacted the most and slightly over that range. Pricing pressure will continue and prices are currently expected to be nearly 2% for the Company moving forward, consistent with the pricing environment we experienced over the last year.

The benefit from the renewal of the tax extenders continues to be in our year-end earnings guidance and represents approximately $0.05 per share for the year. We continue to expect that they will once again be approved, however, we do not expect them renewed until late in the year.

As such, we do not have any benefit from them in our actual results or our planned earnings guidance until the fourth quarter of this year. We also expect that our adjusted tax rate will run at or below the level achieved in the first quarter and will be noticeably better when the benefits from the tax extenders are approved.

As mentioned previously, we plan on reinvesting approximately half of our tax savings associated with the European regional headquarters. These additional investments are supporting our new structure within Europe and will also supplement our selling and marketing activities.

Based on current FX rates, we expect 2015 to be negatively impacted by approximately $0.25 to $0.30 per share for the full year, with approximately half of that occurring in the first half of the year. The further weakening of the euro and most other currencies since our original guidance, along with our hedging program, has not resulted in an additional FX impact on us, as the Swiss franc has also significantly weakened in that period.

That weakening, along with the euro, makes all of our European produced products less expensive, and combined with our layered hedges, has fully offset the additional translational impact which occurred. Keep in mind that the full-year negative impact of foreign exchange rates movements is largely driven by the translational component of FX, which we do not hedge.

And finally, we have tightened the lower end of our earnings guidance for 2015, with adjusted net earnings per share now in the range of $4.95 to $5.10, with our adjusted net earnings per share in the range of $1.15 to $1.20, for the second quarter of 2015. Thanks again for your support and we'd be glad to answer any questions that you may have at this time.

(Operator Instructions)

Rick Wise, Stifel.

Good afternoon. Can you hear me clearly?

Yes.

Great. If I could start off with a question on the acquisitions. You highlighted that acquisitions were somewhat below expectations. Can you help us understand a little more detailed, which were below plan? Why? And just what the drag on growth and how it all gets resolved?

Yes. Hi, Rick. It is really the recent deals as they pass the one-year mark, they become part of organic growth and nothing that we would call out beyond some of the early normal integration challenges. It is a primarily around the Berchtold acquisition, which we anniversary in the second quarter within our Endoscopy segment.

We feel really good about the pipeline and the visibility we have for that revenue to improve as the year unfolds, but it really is just the normal integration early challenges we have when we bring a new business in.

Thanks. And just as a follow-up on MAKO, Katherine, just a little more color on the MAKO performance this quarter. Was this as you expected? Is this how we think about the quarterly run rate going ahead, with obviously fourth quarter, because of capital spending, always being a little stronger? Thanks.

We're certainly pleased with the increase in year-over-year placements going from two to nine and that it was balanced between existing customers but also competitive accounts. Clearly, there is a seasonality component to this, given the significant capital piece. Q4 to Q1 you're always going to see that drop off, but I would say it was essentially in line with what we were targeting, recognizing we did have some supply disruptions on the knee side, but the impact from that was relatively modest.

Bob Hopkins, Bank of America.

Hey, Bob.

Hello, Bob.

(Operator Instructions)

Kristen Stewart, Deutsche Bank.

You guys can hear me, right?

Yes we can.

Hi, Kristen.

Hi. I was just wondering if you could, Bill, if you could just talk about what that re-class was exactly? And then just on the tax rate, it seems like, based on your commentary, you would expect the tax rate to be a little bit lower than perhaps what you had previously had commented. I just wanted to make sure that I was thinking about that correctly?

Sure. The re-class is really just for consistency. It's really -- one of our groups, we're classifying some of the expenses the same way, so it's a re-class of some of the freight costs that are coming out of the SG&A category and going into COGS. It's about 30 basis points, pretty much on average for this year, but all of the restatements will be reflected in the financials in both periods.

As far as the tax rate, yes, we stated early on in the year that we were expecting at least 2 full percentage points of improvement off of last year's rates. We feel very good about, one, where the rate came out for the quarter, and are pleased with realizing the benefit associated with that.

As we mentioned, we do believe that, that rate is sustainable throughout this year. Then, also, keep in mind, in the fourth quarter, when the tax extenders, if they do get approved, at $0.05 a share, that will affect it by about another full percentage point.

Okay, so we should be thinking, instead of a rate of close to around 200 basis points lower, certainly something greater than that?

Yes. In total greater than 200. Yes. That's correct.

Okay. Perfect. That's it for me. Thanks.

Thanks, Kristen.

Mike Weinstein, JPMorgan.

Thank you. First question. They're all really guidance questions. First question is the underlying growth actually came in probably a tad below where The Street with that. Obviously a very good quarter, so it's very Stryker-like in terms of the breadth, but you're raising the organic constant currency guidance for the year. So maybe just touch on what's driving the increase, given what was a good quarter, but not one of your blow-out quarters?

Mike, this is Kevin. I would tell you we feel very good about the quarter and certainly the outlook for the rest of the year. All of our businesses are performing well, by segment, by geography. We even had a challenge within Instruments, which we is one of our largest divisions, that had a supply issue that will get rectified. Obviously MAKO implants was more modest, but even that had supply.

So we fought through some supply challenges, still delivered almost 6% organic growth, and feel very good about the position that we're in right now. Expenses are well under control. You heard about Bill on the tax rates. So we really have all of our engines firing and we are feeling very positive as we look through the rest of the year. That's why we felt confident in raising the lower end of both sales and earnings.

Okay. And then on the earnings piece, let me make sure I've got all that -- the moving parts. So it sounds like the answer to Kristen's question on the tax rate is that the tax rates for the year, instead of being 20%, may end up being closer to 19%. Just wanted to double check on that?

And then the FX thing obviously surprised us because the dollar has getting stronger over the course of the last three months since your last call. On the fourth quarter, you guided to $0.30 of an impact for the year, but now you're saying $0.25 to $0.30. So that's just a function of basically the Swiss manufacturing and the interchange between the euro -- the dollar getting stronger versus the euro, but the Swiss franc weakening at the same time?

Yes. Both of those questions, on the tax side of the equation, yes, we do expect the rate to be lower than the 20% that we talked about, so at least [2] if not closer to [3], which is more in line with where that first quarter is. Especially if you add the extenders in there, we should absolutely be able to deliver on that on the tax aspect piece for the entire year.

As far as FX is concerned, you are absolutely right. FX rates definitely weakened further against the US dollar, for most currencies. Fortunately, the Swiss also weakened along with it. If you recall, the Swiss franc actually strengthened when it decoupled away from the euro at the beginning of this year, which actually caused our FX exposure to increase just prior to our guidance for at the beginning of the year.

So based on that weakening of the Swiss, with along with the euro, and the hedges that we currently have in place, we believe that we are fully offsetting at least the additional impact of the translational side that's occurred since our original guidance.

Okay. Perfect. I'll let some others jump in. Thanks you, guys.

Thanks, Mike.

David Roman, Goldman Sachs.

Thank you, and good afternoon, everybody. I wanted just to start on capital deployment. Obviously, you made the comments around the share repurchase activity that took place, both year-to-date and in the first quarter. Could you maybe just talk -- and then Bill, you also provided some context as to the timing of when you expected to use the authorization.

Can you maybe just talk about what were the factors influencing your decision to buy back stock? It's been several quarters since you've bought back this type of stock, and whether we should think about this as a change in the capital deployment priority scheme or just how it fits into the broader strategy?

Yes. David, I would view it very much consistent with the capital allocation strategy we've tried to articulate. We still view M&A as primary use. We've got dedicated BD folks in all of our divisions who are actively looking at targets. We also have, with the cash flow, the ability to do buybacks as well as the dividend and so there's no change.

We did increase the authorization. It gives us the flexibility and we expect to use it over the next two to three years. I couldn't predicted, in any given quarter, will it be at these same levels. We usually have an assumption of around $400 million of share repurchases in any given year.

This year could be higher than that. It just will depend on how the year plays out, other potential uses of this cash, and also recognizing the constraints that we, along with many others have, given where the bulk of our cash is generated being outside the US. So no change whatsoever to the capital allocation strategy and we have the ability to continue to pursue multiple avenues.

Okay. And then maybe just a follow-up on the P&L. Bill, in your description of the gross margin for the quarter, you talked about it being essentially flat with the second half of 2014. Are we -- is that commentary meant to reflect a view that we are coming to an end of the gross margin declined and some of the headwinds that you've soaked up here, whether it's mix from acquisitions or price through FX, are starting to abate, and some of the factors here, like mix, for example, could actually turn into a headwind as things like your Neuro and Spine business start to do better or am I reading too much into that?

No, that's at least a fair comment. As you look toward the back end of this year, the remaining part of the year, you should expect that our gross margin rate differences on a year-over-year basis should be much narrower than what you've seen over the last year.

David Lewis, Morgan Stanley.

Good afternoon. Kevin, just want to come back to where we left off at AOS. We and many investors took some of your comments at AOS to be particularly bullish for the outlook for Stryker. Certainly, your guidance implies acceleration at back half of the year, but we took your commentary at the Academy meeting to be more about years to come, specifically 2016. So as you think about 2016 and the potential for driving faster growth at Stryker, what are the few things you'd point us to which gives you that conviction as we head out into the out years?

Thanks, David, I'd say, the first thing I'd point to is MAKO. You can see the momentum we've already started to build with the 20 robots in Q4, nine this quarter, a number of the implants getting approved on the robot, increased level of interest. So I would see MAKO as one growth accelerator.

Second, I would see the acute ischemic stroke as another area, that with all the great data that's coming out, would be another engine. That might take a little bit more than 2016, but it certainly should start to ramp in 2016.

Our trans-Atlantic operating model, we've very pleased about the upside that, that has, not so much in the Implant side, but certainly if you look at MedSurg and even parts of Neurotechnology, we have a lot of room to grow our market share and we're very pleased with the start. It's early, only one quarter since it's gone live, but had a very strong quarter, and I would see that also accelerating in 2016.

So a number of those levers and then the acquisitions that we've done. We've done a number, six, over the past, just over a year of bolt-ons, and those bolt-on acquisitions whether it's CoAlign, Pivot, Berchtold, all of those go through early integration issues and then those should start to accelerate. So I really am excited about the prospects. 2015 will be a solid year and 2016 could set up to be an even better one.

Great and just a quick follow-up on [cap to conin], Kevin. There's been dramatic amount of focus on what you're going to acquire in these last six months. Maybe shifting away from what you're going to acquire to a class of thing that you're looking at.

There seems to be, at least in our view, a lot focus from investors on purchasing for accretion, taking some pressure up there in these multiples and really driving accretion. Do you feel that type of pressure? Does the Board feel that type of pressure? Where does Stryker come out right now in terms of your preference versus -- acquisitions for growth versus acquisitions that could be growth or growth and accretion? Thank you.

Maybe I'll take the first part and then ask Bill to chime in, since, Bill, obviously, the financial group has a big say in terms of making sure we are creating value over the long term. But we really look to strengthen our businesses when we're looking to do acquisitions. We want to strengthen our market position in the areas where we're playing today, and that could be big deals, small deals, or medium-size deals, but we want to make sure we're strengthening our position and encouraging our divisions to continue to drive growth.

So most of the acquisitions that we pursue, and you've seen this, are catalysts for growth. We tend to plug those into existing division and then drive accelerated growth. But we were disciplined in terms of the deals that we look at and the prices that we pay for deals.

Clearly, in the case of a MAKO, that was a disruptive deal, which is a little bit out of the ordinary, but all the other deals go through a very rigorous screening to make sure that we are paying the right price and that it'll create value. Maybe I'll turn to Bill in terms of the parameters that we look at when evaluating our acquisitions.

Sure. I'd say that we're all very aware of also the need for accretion in the earnings as we do acquisitions. But as we've talked about before, whether we've done maybe some non-accretive deals in the past or not, each deal that we look at is really looked at from the standpoint, do we think that it ultimately creates value for the Company over the mid-and long-term, as well?

Would we be looking or be willing to still look at an acquisition that doesn't necessarily have accretion in the first year or so? We would. It is all about whether it ultimately adds value on the back end. An earlier stage business, which we think has much higher growth for the Organization than even our base level, we would absolutely make that investment, another investment like that today. But all of our acquisitions are based on the value that we think we can ultimately create for the shareholders, but we aren't restricted on just accretion as one aspect of it.

Matt Taylor, Barclays.

Thanks for taking the question. I just wanted to ask one on your repurchase change here. You did talk about a normal level of $400 million on this call and past calls. If you could just do that two to three years for $2.3 billion, obviously that's a higher number. So are you saying that your just leaning more towards repurchase here because you don't have the same M&A pipeline or things aren't hitting your targets or you're not trying to change your stance at all? I'm just a little confused and wanted to clarify?

Yes. No change in the stance in terms of BD being a priority and the folks, as I mentioned, out there actively looking at targets. We upped the authorization because we feel we have the flexibility, if we decide M&A is inherently unpredictable, so we wanted to have the flexibility to potentially purchase a greater level.

$400 million isn't an exact number, it's a rough number, walking around. It could be higher than that this year, and obviously, to use up the entire amount over two to three years, we would have to increase the level. So if it's done in two years, we've obviously accelerated the share repurchases, and some of that will depend on whether or not BD target make it through to fruition. As you know, the vast majority of names we look at never translate into an actual deal.

And then, your pricing actually got a little bit better sequentially, looking at the price decline year-over-year. Are you seeing any major changes in price? There's been some concerns I've seen with investors around value-based purchasing, but maybe too early to call that as a negative factor?

Yes. Pricing has gotten, while obviously negative, modestly better over the last few quarters, and that's nice to see, but it's still in that approximate range of around 2%. It moves around quarter-to-quarter, so I wouldn't view the 1.6% as indicative of some big change in the pricing environment. It's still challenging. We still assume it's around 2%. It'll be great if it's less than 2%, but there's no change to our current thinking.

Bob Hopkins, Bank of America.

Hey, Bob. Maybe the third time will be the charm with Bob.

Mike Matson, Needham & Company.

Hi. Thanks for taking my questions. I had one on MAKO and then one on the Neurotechnology business. Just on MAKO, I was wondering if you could give us an update on the Hip side of that business, and how big of a deal do you think it is to have the Stryker Hip family now available on the RIO system?

And then just on the Neurotechnology business, I understand the commentary around the standard Trevo product, but how fast -- sorry -- have you seen any impact yet, just given the strength of the data that's come out of those recent studies? And how fast do you think the market is growing, neurovascular overall, and do you think Stryker has been gaining share?

On MAKO, clearly having the Stryker power brand, particularly Accolade, which has been very successful on the MAKO robot, we think it's going to help increase the value proposition, particularly giving the strong clinical data. We still believe total knee is the biggest market opportunity overall, but we do think we can strengthen the interest level and momentum on the hip side, as we add our proven clinical hip line to that product.

On Neuro, it's going to take time with the market development. We have seen an increase in volumes in some of the established stroke centers. But the majority still need to work through a lot of the items that we listed off on the call around being able to have physician alignment, inter-hospital [transfers], and really making sure they are established as a stroke center.

That's going to take time, so it's really focused on the longer-term potential, as well some additional clinical trials that are underway, including DAWN and the SITS-OPEN trial, but those are probably not going to be complete till 2016 or even 2017. So we're building the base of data. MR CLEAN is a great study. It reinforces our conviction, but it will take time overall.

In terms of the market, if you're talking about the ischemic segment, it's very healthy growth. But remember the base is still pretty small here for the device-based treatment of that condition. So while it's double-digit growth, it's off of a pretty small base.

Yes. One other question you asked was of Neurovascular, in general. I would say that the bulk of the business is really on the hemorrhagic side, as you know. We have consistently been taking market share over the past two, three years, with a slew of different product introductions around our target brand -- different sizes, different shapes -- and that product continues to perform extremely well around the world.

Thank you.

Bob Hopkins, Bank of America.

So sorry about the phone difficulties. I apologize.

We just have really big expectations for this question now, Bob.

I am afraid I'm not up to the task. Two quick things. First, on the Spine side, Kevin, at the recent AOS meeting, obviously this is one of the areas where you've expressed a lot of excitement about the portfolio, about the sales force, and about the products that you have coming down the pike.

I was wondering if you could just set some expectations as we look forward, as to when you think we could really start to see some noticeable acceleration in the Spine business. Is that something that you can do organically here over the next couple of quarters or do think it's going to take longer?

As I mentioned before, I'm really pleased with our Spine business. Certainly, we have a very profitable business and we've been improving our organic profile. The CoAlign acquisition was a very important one, providing a very innovative product. We've strengthened our Management team at spine.

This first quarter was, I would say, a good quarter. We're going to start to improve over the course of 2015, and also continue to look at other opportunities to add products, whether it's through organic or inorganic means over time. But it's a business that's going well. The Management is in really good shape and I expect this to be a better year than we've seen in the last couple of years.

Okay. And then, lastly, I apologize if this was asked, Katherine, but did you guys spell out explicitly what buyback is assumed in your guidance for this year? Originally, you had said it was just the normal $400 million when you first gave guidance. I'm sorry if I missed this, but I just was curious exactly how much buyback it assumed in this new guidance?

Yes. What we say is at the start of any year, we assume some level of buyback activity. There's a lot of different things that factor into a range, obviously. So we say $400 million, but that could be plus or minus $100 million, and you've seen some years, it's not that and some years, it could be higher than that.

With the open authorization increase, we clearly have the ability to buy back more stock. We haven't made an explicit changes that you should be assuming a new level because really it's going to depend on other priorities and how the year unfolds. It is, again, why we have a range, a $0.15 range, and obviously, everything else being equal, which won't be true, but everything else being equal, we buy back more stock. It's going to have a positive impact there, but there's no explicit assumption at this point.

Okay. So there's no explicit incremental assumption in these new numbers. It is the same as it was at the beginning of the year despite the authorization?

Yes. And we think we will use that up over two or three years, which, obviously, if it's at the lower end of that, we're going to have a higher level, and hopefully that will translate into a better performance within the range. But there's a lot of factors in that range, as you know, that can offset things pretty quickly.

Great. Okay. Thank you very much.

Thanks, Bob.

Glenn Novarro, RBC Capital Markets.

Hi. Good afternoon, guys. I had a question on Recon pricing. In the press release you called out the Recon pricing down 3%, and I was wondering how is that comparing to your plan? And if you can give us any color on US Recon pricing, whether its above or below the 3% you have in the press release? Thanks.

Thanks, Glenn. We break out pricing on a worldwide basis for the three business segments and you can see that in the press release. We don't break it down further by geography. Clearly, the greatest pricing pressure is within the Ortho segment at that 3% level.

No real change from quarter-to-quarter. It's all the same trends we've been seeing. Pricing got incrementally better for us, but still negative, but I wouldn't point to any significant change in any of the business segments that would be worth highlighting as it relates to price.

Okay. And then just as a follow-up, once again, US foot and ankle better than 30%. I don't know how many more quarters you have left in you to keep doing a 30%, but maybe talk about the sustainability of that number and the end markets. I know the end markets can support that, but how much longer can 30% last? Thanks.

Well, thanks. First of all, just to clarify, the greater than 30% growth was aided by the acquisition of SBi, so on our organic basis, we grew around 20%. Still a very, very impressive number, given the multiple quarters of organic growth that had exceeded 30%, but we are really excited about the potential.

We're still penetrating -- new markets are very exciting because they are hard to predict. You don't really know because you're continuing to penetrate the market where more and more implants are being used. Getting a total ankle, it was a huge move for us in the foot and ankle market. It was a big gap. That acquisition is really just starting to gain steam, so we still think we have plenty of growth ahead for our foot and ankle position.

Larry Biegelsen, Wells Fargo.

Good afternoon. Thanks for taking the question. Some hospitals are reporting better volume in the first quarter of 2015. Is that partly what drove the improvement in your Ortho numbers in Q1? And your US Hip number was very strong. Are you already seeing the benefit from the Stryker power brand on the MAKO robot?

I would say we haven't seen any real change in volumes in the first quarter beyond the normal seasonality that we see. So nothing that has changed dramatically there. I think it's too early given what we got the clearance of the Stryker power brands on MAKO to point to that. As you've seen, we've had really good momentum there for a while and I think it's just the strength of the overall portfolio.

Yes. In the US, our hip brands have been growing above market for about three years now.

Yes.

So this is a continuation of the strength that we've had over time.

Okay. And then as my follow-up, I wonder if you're seeing anything so far from the Zimmer-Biomet merger or from Wright-Tornier? Anything in terms of disruptions? Thanks for taking the questions.

Nothing that we would point to, although it's still early with -- the deals haven't closed and you typically see that disruption occur later in the integration process. Whether or not that translates into any share shifts, we're not assuming that. We're really well-positioned between our portfolio and the MAKO line and the underlying strength that we're seeing in foot and ankle. But I wouldn't point to any disruption that we're seeing of any significance at this time.

Yes. It's too early. Certainly, if there is disruption, we'll be well-positioned to take advantage of it, but at this point, it's too early to see anything.

Raj Denhoy, Jefferies.

Good afternoon. Wondering if I could ask a bit on MAKO. As you get closer to launching that product, the total knee product, in the United States, I'm curious if there's anything you could share with us in terms of how you'll position that product, what the attributes will be that you'll stress to customers, whether it's better alignment or better efficiencies, or just anything that's going to support the rollout of that product?

Really, the overall value proposition of MAKO hasn't changed and it builds on improved patient benefits and clinical outcomes. And we think we're going to be uniquely enabled to be able to show procedural enhancements and improved patient experience and then improved patient satisfaction. We think, with this technology, the consistency and reproducibility of the surgery is really going to elevate and allow for greater standardization and better overall outcome. And then longer-term, hopefully a next-generation of implants that, regardless of surgeon skill, is simply not achievable today with traditional [planar cuts].

Okay. When asked about the products you are most excited about, you highlighted MAKO as the biggest one. I'm not sure if you've ever given us anything in terms of your expectations about what share you could gain or what the product could actually do for your position in the marketplace. Are you ready to do that or give us anything in terms of expectations?

No, we haven't. And it's early. Obviously, we don't have the total knee and that's going to take time. Even when it gets approval, it's going to be a methodical and measured ramp-up as we train and educate. Clearly, MAKO is something we're very excited. The Ortho team is very excited about it.

But if you really look at the history of Stryker, with all the different businesses and franchises we have, all rolling out products, it's much more a story about singles and doubles and the totality of all those products that drives the organic sales growth. It's very rarely any one single product that we would point to. While MAKO has the potential, obviously, to be a big driver, overall, it's the totality of that portfolio.

Okay. Thank you.

Matthew O'Brien, Piper Jaffray.

Good afternoon. Thanks for taking the questions. Just a follow-up on Raj's question here previously, can you talk a little bit more specifically about the total knee rollout? We're getting fairly close here to getting that approval. So once you do get the approval, how do you go out to the hospitals that already have an existing system?

Is there an upgrade program that we should expect? The installed base is right around [250]. And then are you hearing from hospitals at this point right now that are already waiting to see the total knee application before buying the system? And then I have a follow-up?

Yes. Again it's going to be a very measured launch post-approval, and we're still in the we filed with the FDA stage. Then when we get the clearance, we're going to have to be very measured. We're going to have to train and educate to make sure the surgeon experience is appropriate.

We don't want to mess this up. There's going to be upgrades that have to happen from a software standpoint. So it is something, as we've articulated in the past, it's going to be a number of quarters before we start to really see the trajectory that's indicative of us taking market share gains and nothing has changed with that expectation.

What we saw in our due diligence is a range of people. There's the early adopters with any new technology. There's those who want to see more of an established clinical brand of implants, and that's what we're doing as we add the hip power brand, for example. And then there's those who want to wait and see more indications.

So I'm sure there are surgeons out there who want a total knee before they are really going to be convinced to go the robotic route. That's just indicative of the various waves of technology adopters you see, both with a robot or any new technology.

Fair enough. Then for my follow-up question, the Trauma and Extremities business continues to be quite healthy. That, collectively is around a $7 billion category, growing mid- to upper single-digits, and your sales force is pretty established here. You have a full portfolio of products in both areas. Is this a category where over the next five to seven years, you can essentially double your revenue base here?

Your market estimates on a global basis for Trauma and Extremities are ballpark, and we're really pleased with the performance we're doing there. I don't think we want to get into that type of multi-year projections, in terms of the revenue potential. But clearly we're very pleased with the momentum we're seeing, the ability to consistently take market share. We think that's going to remain the case going forward.

Yes. I would see this as we see with Neurotechnology, Sports Medicine, Trauma and Extremities, these are really growth businesses for Stryker and they have been for multiple quarters. In the years ahead, we're going to continue to focus on them.

If you think about upper extremities, we're still a relatively small player in upper extremities, and for us, that's an exciting area for the next few years. There are established players. It's not like foot and ankle, which is a brand-new market, but for us there's plenty of room to grow in the upper extremities space.

Even with some of the products we acquired through the SBi acquisitions, we think are well-positioned there. So for us it definitely has been a great business for the past multiple years and we continue to see that as an exciting growth business in the years ahead.

Ben Andrew, William Blair.

Hi, guys. This is Kaila in for Ben. Just back to the MAKO commentary, and understanding the seasonality of the business, but recognizing the pretty steep sequential step-downs from the fourth quarter, can you just talk about the cadence of those capital sales during the quarter and if you are hearing about any material interest following AOS?

It was clearly a big part of our booth presence and the focus and the excitement that we saw at AOS was around MAKO, which is great to see because it obviously reinforces our long-term conviction. We've been in the capital business for a long time with our MedSurg businesses and see a very similar pattern, where you have strong year-end capital sales as hospitals are looking to use up budgets and then the appropriate drop-off in the first quarter.

So nothing about that sequential decline surprised us and it should really be reflected in expectations going forward. It's not always going to be perfectly aligned with what we saw this year, but it's pretty indicative of the pattern of capital sales.

Okay. That's helpful. And then with respect to your efforts around ICG, can you touch on any -- some of the product specifications of the system? How it might be differentiated from currently available technologies and how you plan on approaching the marketplace with this device?

Yes. I'm not going to get into a lot of details, since we haven't yet launched the product. It will be launched probably in the next 6 or 12 months, sometime in that time frame. But what I could tell you is it's going to be integrated into the light source that we have and that will be a huge advantage versus having to purchase additional capital. So the product we feel very good about and it will integrate exactly right into our light source.

It will be very convenient, and it will obviously be lower cost than having to purchase extra capital. It'll operate as you would expect. It will light up the [cholangio] ducts. You'll be able to see very clearly as you are doing your dissection that you won't be able to have any injury. So it's a safety play. We are very excited about it, but again, we haven't launched it yet and more details will become available as we get closer to the launch.

Thanks.

Bruce Nudell.

Hi. Good afternoon. This is Matt on for Bruce. Can you hear me okay?

Hey, Matt.

I was wondering, can you elaborate a little bit on the supply issues in Instruments and MAKO, as far as in Instruments were products were affected and what caused the disruption and what gets you comfortable that you're back on the market when you think you are?

Normal supply issues. There's nothing significant that we would call out that was of major concern, which is why we have visibility in terms of the supply returning around that. It related to our power tools. We should have that resolved to allow for a much stronger performance with respect to Instruments in the second half of the year. With MAKO, it will be largely resolved or will be resolved during the second quarter.

Yes, but I would think about this more like a back order, and back orders happen in our industry a lot. So it's not like we're off the market, it's just that we don't have a the degree of supply that we normally have to be able to fully meet our customer orders. So that's why when I -- in my prepared remarks, I talked about this really be a delay.

Back orders, what typically happens is you lose the sales for a period of time but you don't lose the sale to another company. The sale just gets delayed. And that's what we are experiencing in the instruments area, as well is in MAKO.

Okay. Thanks. And then just one follow-up. Any updated thoughts on competition from lower-cost offerings in hips, knees, trauma? Are you seeing any change there, any increased traction, and do you see that as a significant threat this year or down the line based on what you've seen so far?

I wouldn't go beyond this year. We're always going to be watching and watchful, but I'd say, for this year, at least thus far this year, we haven't seen any change whatsoever related to either trauma or our reconstructive division and don't expect to see much, at least over the course of this year. We're always going to keep an eye on it, but thus far, no change whatsoever.

Josh Jennings, Cowen and Company.

Hi. Good evening. Thanks a lot. I just wanted to start off with a Japan business, and a little bit more color on the improvement in Q1 that you experienced, and as you annualize the ERP implementation challenges next quarter, can you quantify at all the headwind from Japan that goes away throughout the rest of 2015 and how meaningful is it to the international Recon growth?

Yes. We obviously don't provide all the details by country. What I can tell you is Japan really did turn around in all of our divisions except for Reconstructive. So Reconstructive, given the surgeon relationships, does take a little longer to try to gain that business back, but I was very encouraged with Trauma, with Spine, as well as our MedSurg businesses.

The ERP systems are all resolved. We are regaining share slowly, but I would expect that, certainly by the third quarter, we should be back to the same level of market share that we had in the past, so I'm really pleased with how the new Management has approached the challenge, like I say on Spine and Trauma, ahead of schedule. Recon is going to take a little bit longer.

Great. And just on the Medical unit, it's been a big driver of growth for the MedSurg business. Can you just talk about the organic growth rate for that unit and what's driving that? Is the bed replacement cycle a major component of that in capital allocation by hospitals moving away from IT? Thanks a lot.

I would say there is a small components because we did the acquisition--

CHG?

Earlier in the year.

Earlier in the year, but it's largely organic growth. Virtually all of it's organic growth.

And it's very reflective of just the strength that we're seeing in the capital markets right now. We feel good about this because it's been several quarters of them really outperforming. How much of that is a shift of dollars out of IT priorities? It's very difficult to get that level of granularity. What we would say is we do feel good about the momentum that we're seeing in capital across the board, the supply issues notwithstanding, because clearly we were seeing the demand there.

Jeff Johnson, Robert W. Baird.

Thank you. Good evening. Just two quick questions here. One just on the knee business. US knee business now, two quarters in a row here in the flat to up 2% range. Anything specific contributing to that? Competitive launches or anything else? Or how should we think about your US knee business maybe over the next few quarters?

I wouldn't point to anything specific that we are seeing in that business. It was clipped modestly, as we mentioned, by the MAKO supply issues. But there's nothing major that we're seeing in the market or different on the competitive front. Obviously haven't seen everybody report so far but nothing that we would call out.

Okay. And then on the spine implant side, it sounds like that number was maybe a little bit better than fourth quarter. Any changes in the end markets there or anything you can talk to on [pods] or payer pushback or anything? Does that continue to get a little bit better or is it still hard to tell on that front?

To me it seems like a very stable market. Our performance is starting to improve and that's what I spoke about just earlier on the call, that our Management team and some of the products that we've launched in the MIS space, where historically, we had less presence in MIS, is starting to help us gain momentum, so it was modestly better in the first quarter and I would expect that trend to continue.

Understood. Thanks, guys.

Thank you.

William Plovanic, Canaccord Genuity.

Great. Thanks. I just have a financial question for Bill. Just what is the normal share dilution per year that we should think of with options coming into the model? Without share buyback, just normal?

Based on the numbers that Katherine was talking about, we'd need maybe one-third of that level, maybe a little bit more to offset the dilution that's occurring at the same time from the share issuances.

So if I think of share issuances, what does that break out into number of shares annually, roughly, without buyback? Just what's added in normally?

Probably -- it's just a few million.

Okay. That's all I had. Thank you very much.

It's not much associated with that.

Yes, it's pretty small.

Thank you.

Okay. Thank you.

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

Thank you all for joining our call. Our conference call for the second-quarter 2015 results will be held on July 23. Thank you.

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