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Executives

Stephen MacMillan - Chairman, President and CEO

Curt Hartman - VP and CFO

Katherine Owen - VP of Strategy and IR

Analysts

David Lewis - Morgan Stanley

Joanne Wuensch - BMO Capital Markets

Tao Levy - Deutsche Bank

Mike Limestone - JPMorgan

Bob Hopkins - Bank of America

Matt Miksic – Piper Jaffray

Michael Matson - Wells Fargo Securities

Doug Schenkel - Cowen & Company

Derrick Sung - Sanford C. Bernstein

Steve Lichtman - JMP Securities

Katharine - Credit Suisse

Jeff Johnson - Robert Baird

Vivian Cervantes - Maxim Group

Stryker Corporation (SYK) Q1 2010 Earnings Call April 20, 2010 4:30 PM ET

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2010 Stryker earnings conference call. My name is Saily, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session (Operator Instructions)

Certain statements made in today's conference may constitute forward-looking statements. They will be based upon management's current expectations and will be subject to various risks and uncertainties that could cause the company's actual results to differ materially from those expressed or implied in such statements. For information concerning these risks and uncertainties please see the company's filings with the United States Securities and Exchange Commission, including the company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.

The company does not undertake any obligation to update or revise any of its forward-looking statements. Today's conference call will also include a discussion of constant current results performance and adjusted diluted net earnings per share for the year ended December 31, 2009.

Further discussion for these non-Generally Accepted Accounting Principles financial measures, including Generally Accepted Accounting Principle reconciliation apparent in the company's Form 8-K filed today with the SEC. The company’s SEC filings may be accessed from the ‘For Investors’ page on the company's website at www.stryker.com.

I would now like to turn the call over to Mr. Stephen MacMillan, Chairman, President and CEO; please proceed.

Stephen MacMillan

Thank you, Saily. Good afternoon everyone and welcome to Stryker’s first quarter 2010 earnings report. With me today are Curt Hartman, our Vice President and Chief Financial Officer and Katherine Owen, Vice President of Strategy and Investor Relations.

With the first quarter of 2010 now complete, there’s a lot we feel good about it. Including the acceleration in our sales and income growth, the resolution of the Mahwah warning letter and the number of new product launches, yet there’s clearly still work to do as our instruments, spine and some of our international businesses are not performing were we like to see them.

At the time of our last conference call in late January, we had just completed one of the difficult years in navigating through a series of major challenges in 2009. The year presented us with significant uncertainties that tested organization, but also serve to galvanize our company around a clear goal of the emerging from this period a stronger competitor.

In the year, where we have to play a lot of defense, we kept playing offense as well. We believe our results demonstrate the merits of the investments and actions we have taken in recent years, in compliance, in innovation, and in acquisitions. With the resolution in Q1 of the Mahwah, New Jersey warning letter, we have tangible evidence that the considerable investments we have made and will continue to make in our compliance program are on the right path.

Our journey is not complete and we remain committed to the $200 million three year initial program we outlined to FDA as we continue to raise the compliance bar throughout our organization. The recent positive news in FDA as strengthened our result that the cultural transformation well under way throughout the company is taking hold.

Yet we are also pleased that during this period of meaningful investments, we have been able to successfully execute on key R&D programs that have resulted in important new product launches for our Orthopaedics and MedSurg divisions. Some of which we highlighted at the recent American academy of Orthopedic Surgeons meeting held last month. There will be of redirected R&D resources to remediation efforts over the past couple of years. We have also worked hard to deliver key new product launches and continue our commitment to innovation.

On the M&A front, we are pleased with the progress to-date of our late 2009 acquisition of Ascent, which as the market leader in the reprocessing of single use medical devices allows us to partner with our hospital customers in order to deliver tangible cost saving and enhanced environmental sustainability without sacrificing quality or innovation.

At the end of Q1, we also closed on our previously announced acquisition of Sonopet, which augments our instruments product offering within ultrasonic aspirator, and thesis, and accessories used in neurosurgery. Against to this backdrop, we are pleased that we delivered on our commitments in the quarter with total sales increasing 12%, on a reported basis and up 9%, in constant currency.

Excluding the impact in the year end 2009 acquisition of Ascent, sales were up 6% to 7% on a constant currency basis. Encouragingly, on a global basis with the exception of instruments every key franchise posted revenue gains in the quarter with particularly robust performances from our knees, pharma and medical franchises.

With the improving top line and our on going focus on operation efficiencies, we achieved diluted EPS growth of 13% in the quarter to $0.80. We are pleased with the improving profitability profile, which reflects the impact of numerous initiatives put in place over the past couple of years, coupled with our gradually reaccelerating top line, although one quarter clearly does not make a year our Q1 result reinforce our conviction in our ability to realize our 2010 commitments, while continuing to make the on going investments in our complaints initiatives.

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

Katherine Owen

Thanks, Steve. On today’s call, I will provide some additional commentary as it relate to recently product launches, pricing and hospital capital spending. On the new products front, we were pleased, we have the opportunity to highlight several of our recent introduction at last month’s AAOS meeting. This included the on going launch of two new hip systems including the first Mobile Bearing Hip System available in the U.S.

Our ADM with X3 advance bearing technology. This innovative design allows us to offer the benefits of a larger head bearing system without the need for metal-on-metal articulation. We believe this offering will overtime allow us to carve out a segment of the larger head hip market, a category where we have opted to remain on the side line as we have valuated and developed an offering that may provide an improved safety profile.

We’re also rolling out our restoration modular system, which allows a great inter operative flexibility to help achieve optimal certain performance. Combined these products should help to drive continued gradual improvement in our hip franchise over the coming quarters.

In Spine, we still have been important gap in our product portfolio with the launch of two Cervical Plating System and although the full impact from these launches won’t be realized into the second half of 2010, the ability for the spine organization to further round out it’s bag is an important component of the expected improvement in our spine sales at 2010.

Looking at pricing, for the total company pricing was down roughly 1% in the quarter largely remain with the prior quarter, and its worth noting that over the roughly past five years, the total price impact for striker have been essentially flat, which we believe underscores the benefit and stability provided by our diversified sales footprint.

We’d also know that the relatively neutral impact from pricing over this period occurred despite the fact that certain franchisers and geographies were individually experiencing a much stronger and in some cases the much more severe impact from price. Reconstructive implant continues to experience pricing pressure as excepted although our ability to realize positive mix filled by the launch of innovative products, health mitigates a meaningful potion of the pricing pressure.

Lastly with respect to hospital capital budget, we continue to project the gradual recovery of the economic environment slowly improve. Given our mix of businesses, the considerable year-over-year variability and comparisons as well as the individual challenges and opportunities that exists within any of the MedSurg divisions, the slow recovery is unlikely to be linier, but over a multi quarter period we expect our MedSurg franchisers to grow slowly improving top line growth consistent with the goals we set out for the businesses a beginning of the year.

Curt will provide some additional commentary as it relates to the expected quarterly progression of our MedSurg businesses later in a call. With that, I’ll now turn the call over to Curt.

Curt Hartman

Thanks, Katherine. I’ll start by saying overall we’re pleased with our first quarter financial and business results. In the quarter, sales increased by 12.4% on a reported basis and 8.7% on a constant currency basis, generating diluted net earnings per share of $0.80, which represents an increase of 12.7% over Q1 2009. Components of our growth included the Ascent acquisition, which we are very excited about contributing 2.3% the required growth rate in a onetime medical order added another 1% to our sales increase.

Internationally, we did have some challenges as our business segments outside of spine and trauma remains soft. As a reminder, our international reconstructive implant business has been negatively impacted by our decisions in 2009 to obsolete certain products and stream line our distributed model. These changes were part of the restructuring charges announced in Q3’09. Although, these moves do create some short term headwind component by the market softness in the Euro zone, this 2010 unfolds we expect a gradual strengthening in our international reconstructed in plant performance.

Encouragingly, our operating profit leverage in earnings performance demonstrated the sustainable impact with some of our 2009 business transformation can have overtime. Our balance sheet remaining very strong, we again delivered strong cash performance to start the year and coupled with the capital structure changes initiative in late 2009 in the very successful January $1 billion debt offerings, we clearly have financial flexibility to pursue our strategic objectives.

I’ll now move onto the impact of foreign currency had on our sales. In the first quarter, currency contributed to an increase in top line sales by approximately $58 million and improved the company’s overall reported growth by 3.6%.

Looking at the second quarter, currency should remain a positive and the price hold near current levels, we would expect second quarter sales to be favorably impacted by approximately 1% to 2% when compared to 2009. These in current rates, the full year currency impact on top line sales would be an increase in a range of 0.5% to 1.5% when compared to 2009, down from the original expectation of 1.5% to 2.5%.

Next, I’ll spend a moment on the impact of price and volume mix on the top line. In the quarter, companywide selling prices declined roughly 1% on a worldwide basis and volume mix was generally as expected 8% to reported sales growth. The number of selling days was effectively equal to 2009 in most markets.

Moving to the business segments, I’ll start with Orthopaedic Implants, which represented 60% of our sales in the quarter. Orthopedic implants record in 11% increase on a recorded basis in a 6% gain in constant currency. On a worldwide basis, our hip segment hosted results that were very similar to the fourth quarter with growth of 9% as reported in dollars and 4% in constant currency.

As has been mentioned, we are encouraged by the rollout of both the ADM and Rejuvenate products and looked to their impact on future quarter’s results. In the U.S., hip sales were up 7% well in international markets. Hip sales were flat on a constant currency basis with gains in Japan, offset by a low single digit decline in Europe.

Our global knee segment continued to deliver solid results posting 12% sales growth in dollars and an 8% increase on a constant currency basis. The U.S. market continues that our robust pace while Europe remain soft. As mentioned, the U.S. knee segment remain strong delivering reported growth of 12% against the prior year gain of 8% Outside the U.S., these were down 1% on a constant currency basis with solid gains reported in the Pacific region offset by decline in Europe.

Global trauma segment recorded a 15% increase in dollars and 11% increase in constant currency. This was a nice start and really built in our fourth results. Our U.S. trauma segment recorded solid 13% growth to start the year, our international trauma sales were up 9% on a constant currency basis in the quarter with sizable gains recorded in Europe.

Our global spine segment delivered 10% growth in dollars on an 8% growth increase on a constant currency basis. These results were slightly better than fourth quarter results and the U.S. market has begun the rollout of the cervical plating system filling a big void in our portfolio.

With that said, U.S. spine sales remain below historical range as recording 5% growth in the quarter, consistent with our expectations at the start of the year given price pressure and some key gaps in the product portfolio, but the recent new product introductions, we do anticipate stronger top line results as we move toward the second half of 2010. We continue to enjoy strong international spine sales with constant currency growth of 16% in the quarter based by double digit gains in all international markets. This marks the fourth consecutive quarter of strong international spine segment results.

Next, I’ll turn to the MedSurg group, which represented 40% of our sales in the quarter. The reporting purposes that reflect our acquisition of Ascent, MedSurg today is comprised of our instruments, endoscopy, medical and Ascent Healthcare businesses. In total, MedSurg sales increased 15% as reported and 12% on a constant currency basis. Acquisition added 6% to reported increase and the onetime medical conversion order contributed 3% to reported growth. From a transparent view, we would report organic MedSurg growth of 6% in the quarter.

Sales for the global instruments segment grew 1% in the quarter as reported and were down 1% in constant currency. In the U.S. market, the instrument segment reported 1% gain against the tough prior year comparable of the 11%. Internationally, instrument sales declined 9% in constant currency.

Overall, instrument orders growth, outpaced shipments growth were shipments constrained by execution issues. Given accelerating orders trends easier comps and better execution, we expect the instruments growth to improve from Q1 levels as 2010 unfolds.

Our endoscopy segment reported a sales increase of 9% and advanced 6% on a constant currency basis. Our U.S. endoscopy sales stayed on the positive trends started in Q4 by recording 6% growth. First quarter up tick in video capital sales was partially offset by continued pressure on our communication system instillations. The trend we expect will remain throughout 2010. Internationally, industry sales also delivered positive results recording at 4% constant currency gain.

Finally, our medical segments or global sales improved 30% in the quarter as reported and 26% in constant currency is a great numbers to report, but they do require some explanation. U.S. medical sales increased 34% in the quarter and were causing the enthusiasm by noting that medical was a recipient of a large one-time conversion of rental products it had at 19% to its growth rate that’s with this we are still pleased with the organic 16% growth to remind you to review this performance against the prior year comparable, which was particularly favorable. Our international medical sales increased 1% in constant currency.

Overall, I would summarize the MedSurg quarter at the macro levels as follows: Ascent is performing as planned, if not modestly ahead of our expectations. Medical had a solid start, Endoscopy is demonstrating gradual acceleration or instrument segment needs to balance execution issues against growing demand for its products.

I’ll now turn to the remainder of the income statement beginning with our gross margin performance. Gross margins remains steady with those reported in Q4 at 67.7%, while decreasing 10 basis points over 2009 first quarter levels

Of note, reported margins were suppressed in the quarter by 30 basis points as a result of a $0.01 acquisition inventory step up charge. Overall, this is a solid starting point for 2010 and as within our expected range. Research and development spending represented 5% of sales in the quarter will increasing 12% over 2009 levels. We expect to continue ramp up our spending here as the year progresses.

Selling, general and administrative cost increased 8% over 2009 levels while decreasing to 37.1% of sales. The sales growth is certainly helped our leverage here as we feel we are making the appropriate investments and we remained comfortable with fluctuations in these categories as priorities materialized.

Operating income increased 18%, and the operating margin increased a robust 110 basis points versus prior year to 24.8% of sales. Other income and expense was essentially zero in the quarter as higher interest expense associated with our debt offering was offset by earnings on our invested cash in the small foreign currency transaction game. Lower investment yields continued to limit earnings on our invested cash even with higher cash balances. Finally, the company’s effective income tax rate was 27.8% for the first quarter of 2010.

In terms of the balance sheet, we ended the first quarter with $3.94 billion of cash in marketable securities. This is up $983 million from year end 2009. As a reminder in the quarter, we completed our $1 billion debt offering issuing $500 million of five year notes and $500 million of 10 year notes. The offering was completed on January 12 resulting in coupons and the five year notes at 3.0% and 4.375 on the 10 year note for an average cost of 3.69%. We are very pleased with this outcome.

We’re up to a good start on our asset management. Account receivable days ended the quarter at 56, which represented a decrease of three days compare to the prior year. Days in inventory finished the quarter as a 151, which was up six days sequentially versus year end, but down 23 days against the prior year level.

On cash flow we continued to perform well with cash flow from operations of $275 million in pre cash flow of $243 million. Finally, in the quarter we’ve repurchased $2.1 million shares at an average price at 51.74 for total spend of our $111.1 million under our currently authorized $750 million share repurchase program.

In summary, Q1 was a good start on many fronts that was noted we still have some select operational and market issues to resolve in the quarters ahead. We’re encouraged by indications of strengthening across our business. More broadly, we feel the last three quarters have delivered study improvement.

Turning to our outlook, our financial forecast for 2010 remains unchanged. We are maintaining our outlook calling for net sales increase of five day percent in constant currency.

Diluted net earnings per share are anticipated to be in the 320 to 330 range representing in increase of 8% to 12% over 2009 adjusted diluted earnings per share. Importantly, this range includes the interest expenses associated with our public debt offering, which translates into approximately a nickel per share and also now reflects less positive impact from currency than initially expected.

At the close of the market today, the first call consensus stand at $0.80 for the second quarter. We view this as a reasonable estimate. Supporting this outlook, our assumption to include continued stability in domestic ship in new markets, yield the mid-single-digit market growth rates, what international markets outside of Europe see volume growth mid low to mid single digits.

European markets remain the most challenge, but we anticipate a modest improvement from Q1 levels. Additionally, we anticipate modest improvement in our performance even the ongoing expected impact from the changes we implemented in late 2009. Against that backdrop, we think global hip the new market growth rates will average low-to-mid single digits on a constant currency basis in 2010. The trauma and CMF markets remain stable and appear to be moving in high single digit ranges. Finally in spine, we see high single digit procedure volumes, but forecast continued pricing pressures.

Turning to our MedSurg franchises, we assume modest growth in capital spending defined as a low-to-mid single digit increase. To reiterate, that they were likely expedience quarterly variability as it relates to the growth rates for all three of the traditional MedSurg businesses given the swings in year-over-year comparables.

We would not model the recovery of our MedSurg franchises strictly a function of percentage of sales that are tied to hospital capital budgets. In summary, our guidance continues to assume 2010 global MedSurg market growth in the mid upper single digits on a constant currency basis.

With that, I'll turn the call back over to Steve.

Stephen MacMillan

Thanks, Curt. Before we open up the call to Q-and-A I would like to offer some closing comments. Although the recent economic upheaval combined with our own compliance issues may have given the appearance to some of you that we were a company in triage. We actual kept our heads above water remain focused and throughout this period continued to make a number of important investments in our organization that are beginning to yield tangible results.

Some of that was apparent at the recent AAOS meeting where we highlighted a number of important new product launches. Although our business remains one largely defined by the proverbial singles and doubles as it relates to new products taken in their entirety these new product introductions underscore that innovation still matters and is a key component of our strategy to deliver accelerating top line growth going forward.

With our considerable balance sheet and access to liquidity, we are also well positioned to continue to deploy cash on the acquisition front if the appropriate strategic opportunity presents it self. Finally, in start to contrast where we were a year ago, we feel very good about our ability to deliver on the financial targets that we presented to you back in January.

With that we’ll now open it up for questions-and-answers. So, we back to you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from David Lewis, Morgan Stanley.

David Lewis - Morgan Stanley

Steve just a few quick one here. First on just markets settlement on spine, you have other players in this market place that are really talking about negative true pricing dynamics. You really focus much more on filling product mix issues for the new pipeline. Can you so talk about how the industries change the last two quarters, do you still believe, this is exclusively a mix and product innovation issues for Stryker or do you think there is some evidence for pricing pressure in this spine segment?

Stephen MacMillan

There is certainly some growing evidence of pricing pressure they’ve don’t get as wrong, having said that is we never going to blame things like that on our performance we still see significant opportunities to grow our spine business and do a back to innovation and execution and feel like we are just there is a couple of quarters here were we were slow on cervical plates, they are coming out and I think we continue to be bullish on the spine market, but certainly more pricing pressured going forward and say just in ’06 ’07 or ’08 timeframe.

David Lewis - Morgan Stanley

Okay, very helpful and then end of the question for end market dynamics did you think about our US trends how much is do you think is simply pressured international markets versus some of your recent restructuring activities and distribution disruptions, what’s the work predominant driver as you see it for your recon business or US.

Stephen MacMillan

Sure I probably give you a couple of one big I answered more specifically, I think were we really get about things right now is each of our businesses that are soft we know exactly what was going on and have a very clear plan to see when accelerating. The European piece really is focused primarily on our recon business and that is where as part of our whole remediation efforts and our quality undertaking just we mentioned in the third quarter last year we took some charge we discontinued a number of say for example single market products in Europe and also change some distributors that’s going robust really though the next few quarters as we flush through that. but we think frankly from just a profitability and ability to service things going forward will be much better, but there is always a couple of quarters of pain as you discontinue long standing product that we had in those markets for 20 plus years in some cases, but frankly long term you think about inventory management working capital everything else just didn’t make us much sense for us. So I think we could see at very clear to restrengthening there.

Operator

Your next question comes from Joanne Wuensch, BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets.

Thank you very much I have two questions, one of the things which you do not mention is OP-1, and I’m curious what it would take for you totally pull the plug on that product?

Stephen MacMillan

We are continued to evaluate that and we will report at the analyst meeting next month as to kind of where we are on that.

Joanne Wuensch - BMO Capital Markets

Thank you, my second question has to do with your European market its sounds as if you are having some sort of internal particularly Stryker associated with Europe, but could you contrast and compare that to the border and market and what stage of the recovery back in?

Stephen MacMillan

Sure again as always we are always going to be more self critical I think those of you who have gotten to know as over the years now it will be a little more self critical. There’s been a number of times, I think we’ve reported some weaker results and then said it to ourselves and then it turns it out to be the market. I do think the broader European market is pretty soft right now, and net of companies that might be making an acquisition might make growth look a little bit better in those numbers.

I think the core markets are a little softer right now, having said that again, we’re in the period of really probably four quarters as we anniversary through the products we discontinued in other things like that, but we’ll look a little bit worse, but ultimately we know we’re making a stronger for the future.

Operator

Your next question comes from Tao Levy, Deutsche Bank.

Tao Levy - Deutsche Bank

Two quick questions, first you’d mentioned that instruments of an execution issues can you just a go into little more depth…?

Curt Hartman

I think the execution here is if I bull it down real simply, it’s getting product out the door doing into the matter that coincides with all the upper we put in on the remediation front and riding our way through those processes to satisfy our constitutes.

Tao Levy - Deutsche Bank

Is that something that is it going to take few quarters to work through or there’s something where you identified already in Q1 and…?

Curt Hartman

You know what I tell you, it’s very similar to what we went through in orthopedics division as we’ve cascaded our quality and compliance effort throughout the corporation and by the way for those who you may recall, we had fairly tough inspection early last year at the instruments division. We’re doing it additional remediation work there, and putting into effectively our new corporate compliance systems. It does means in prior to getting put on chip holds and things like that and that ultimately takes as a little wide in work through. So I didn’t see steady progress here through the year on instruments and probably the worst as behind us.

Operator

Your next question comes from Mike Limestone, JPMorgan.

Mike Limestone - JPMorgan

Even if I backed out to be $16 million or so in one-time fill from medical business (Inaudible) I know. You’ve emphasized the last month or two that’s (Inaudible). How do you view the mix of comp in the second, third quarter (Inaudible) equally busy?

Curt Hartman

Yes, there’s still pretty low Mike, and I think we’re cautious optimistic that our medical business is coming back. Having said, when we’re down, really the first three quarters of the year were pretty ugly, so even coming back with reasonable growth right now, we’re still back below 2008 levels, I think ultimately we’ll start feeling really good at once we’ll back above 2008 levels and that’s probably not quite yet in the plan from medical this year, but I think we are seeing a nice healthy rebound.

Mike Limestone - JPMorgan

Just to clarify Steve, (Inaudible) if we’re thinking about medical growth over the next call short term mix couple of quarters your cost still relatively easy. Should we think about double digit growth, which reasonable (Inaudible) incorporate the trauma business had a good quarter in that remarkable people with growing about in the fourth quarter, they gone diminishing pricing capabilities and diminished mix for some companies, but your business (Inaudible) maybe if you could add more to that technique?

Stephen MacMillan

Back on the medical piece, I think we certainly are hoping for double digit growth I think it probably be call at wide around low double digit would be I think the minimum what we build consider success. So hopefully we will be in that range and then on the trauma business, I would say I think the trauma market was probably fairly robust in the quarter, if you think about it, maybe east cost of the United States had quite a winter even I think even Dallas had a couple of big storms of by recall and certainly throughout Europe I think it was also an unusual winter, if you say also an unusual winter you look at places like the U.K. when London gets a bit of snow we certainly benefited from that.

So I think we’re pleased with our trauma business, but we probably talk a little bit up to whether just so we don’t start padding ourselves in the back and by the way if you come back a year from Dallas (Inaudible) they might have been a slightly better than usual quarter. Having said that we feel pretty good about what we’re doing from a pure execution in product closed standpoint and everything else.

Operator

Your next question comes from Bob Hopkins, Banc of America.

Bob Hopkins - Bank of America

As I wondering if you could talk just a little bit more about your because one of your competitors are reported a few weeks ago made a pretty definite comment that they saw a turn in certain countries within Europe. So as I wondering if you could just provide a little bit more color on what you’re seeing there it doesn’t sound like what you’re willing to make that kind of a statement. So you just looking for a little bit more color on the phase of recovery in that territory from market perspective.

Stephen MacMillan

Yes, Bob the one part that be careful with this you relate to Europe is how much is the big five versus how much for other markets and I will tell you we probably been a little more conservative in some of the other markets and I call at reason and things like that. So within the big markets we’re seeing a little bit of a turn and certainly the U.K is suggesting that, I think both the conservative and labor or saying there going to be you know committed to a positive NHS and not cutting back on so we think the business will be there but we have seen you now a growth in waiting list and we haven’t seen anything, I think yet for our business it says it turning significantly that on left here something else to add there.

Katherine Owen

One question, the one comment I would add to it is given number one of the first companies to report its always a little hard to gage the market and then you combine that with what we do know very definitively which is were absolutely seeing the impact from some proactive decisions that we made in late last year, so its always hard to start out how much of that is market versus how much of that is our own decisions to make as more efficient, so we’re probably little more in client to attribute the weakness in our business to the stuff we know, which is the actions we took and a little hesitant to say too much about the market other than to say clearly not back to business is normal in Europe, but until everybody reports it’s a little tough to know because a few points can ever meaningful impact on but the overall feel over on market looks like stealing.

Bob Hopkins - Bank of America

Okay and then for second question just want to ask at everyone on the stay that the global hip and knee market, you guys made a comment as to the way you are thinking about 2010 being load a mid-single digit market globally on a constant currency basis. I guess my question related to that comment, is that completely consistent with what you been thinking over the last couple of quarters for global growth and then your comments on price with mix essentially making up most of the price decline, each one make sure that these comments, telling that you are trying to set here is a very consistent one related to what you said in the last couple of quarters or just fishing to see if there any several changes in your commentary.

Stephen MacMillan

Completely consistent with how we have been showing about it and I think that anything were little more encouraged by hip business might go given recent launches, we’re frankly still incredibly pleased with how well U.S Knee business continues to thrive with trap one, you know just we still post in double digit growth in the U.S just dealing great about that again you know that the Europe softness we know what’s behind it.

Operator

Your next question comes from Matt Miksic, Piper Jaffray.

Matt Miksic – Piper Jaffray

Hi, thanks for taking the question just as one on a couple of the new products and then I have want follow up, so ADM hip and on the and the vertebral augmentation product AAOS just wondering where these have launch currently if they are launched fully and maybe if you give us some color on when we, where they were we can seem start showing up in the numbers.

Stephen MacMillan

Sure, you know I think there both what we call in early roll out note, it just been presented to the sales force is I said ADM is probably amounted to ahead as you know, typically with the recon launch it takes the better part of the year before you really have widely in terms having all the sets being able to going and get gage strive with that option and couple of follow ups and on the IVAS product that is really just in the very early stages only on the hands of the few reps at this point and health included got the 5, 10-K clearance, which we have not quite at the economy that has just covenant in the early hands in rolling out. So, these are think that we see just kind a building through the year and probably want full strive frankly in 2011.

Matt Miksic – Piper Jaffray

Those are I they want them in Europe just be clear?

Curt Hartman

The ADM has been in Europe actually quite a while, a new US launch, IVAS I am not, I don’t think we’ve got in Europe yet.

Matt Miksic – Piper Jaffray

Okay, and follow up just on, you’ve looking at all this news around sort of shipping passenger logistics and so on I am thinking your business you’re your performances centers, what is going on in European shipping, European transit, air traffic I think anything to do with your ability replenish the supply plant or no?

Stephen MacMillan

At this point no, but we would continue over few more weeks that probably some little interception to but it’s actually wide would conscious we had our European recon business being over soft right now. So, we can get through the volcano period and I am lacking that. So, but I think we are okay for little while.

Operator

(Operator Instructions) Your next question comes from Michael Matson, Wells Fargo Securities.

Michael Matson - Wells Fargo Securities

I just want to ask about your expectations for your R&D spending as a percentage of sales it seems like its getting increasingly difficult to get products through the FDA and with the 5, 10-K reform it potentially could get harder require more deed and fourth as well data just to help market your products. So, do you think you can really sustain not at 5% over the next two year or that something that grip up overtime lot of your appears at least out side orthopedics area talked about expecting R&D that head up?

Curt Hartman

Mike, this is Curt the answer is no, we absolutely expected to go up and I think out January call we comment that the outlook for this year was to be moving that number more to the traditional mid point of our 5% to 6% range and I remain committed and convince that we will get there this year as we look at our quarterly projections in the future periods here, the first quarter was a 12% increase you want know that R&D projects take a little bit of time to ramp up once you give them the go ahead signal and we remain very committed to increasing our investments in R&D, for the right projects. So I do think by the end of the year we’ll be in that mid point of 5% to 6% then as the FDA story somewhat unfolds we’ll figure out what adjustments we need to make if any as a remainder we do have a lot products that are in the market today under what I would call very heavy 5, 10K where there has been a lot of clinical information submitted to support those things like surgical navigation systems et cetera, so we do have some experience with what I would call the deeper requirements but obviously we don’t know the full extent of the change, but we’re ready to make those investments to keep the innovation side of the business moving a right along.

Michael Matson - Wells Fargo Securities

Okay thanks and just any commentary around if you can talk about capital spending in general and maybe in the US, I am not sure if I heard you really comment on the hospital capital spending terms outside the US and in Europe?

Curt Hartman

I think the comment we made was hospital CapEx in the US probably low-to-mid single digits didn’t make any comments relative to the OUS because it is a little bit harder to predict given the single payer systems and how they are allocating their financial priorities going into weight list reduction whether it is a kind of a consumables or whether its capital enhancements I think its probably a little in appropriate right now for us to make the call on what the OUS numbers look like outside what were seen in our own business.

Operator

Your next question comes from Doug Schenkel, Cowen & Company

Doug Schenkel - Cowen & Company

The Ascent revenue number for the quarter looked a little bit better than I would have expected any chance you could provide any more color on how you got the growth such robust levels whether this was better than expected and I guess finally understand what opportunity made invest for sales internationally.

Stephen MacMillan

Sure I pick that, the very first part is we got to heck of a team and a great business in Ascent and they are executing beautifully and I think we trying to stay the heck out of their way they know what they are doing have a great value proposition frankly royalty about the pricing pressures that hospitals are under so I think that’s great we’re accessing the international opportunities we tell you this is the area where the regulations vary hugely country-to-country. So they are probably there’s a lot of news to be done in terms of penetrating the international whether we certainly see that in to longer term growth opportunities.

Doug Schenkel - Cowen & Company

Then on metal on metal any science that you might already be picking up share due to move away from metal on metal with I mean your competitors how to think you really going to have to wait until ADM with X3 on that opportunity?

Stephen MacMillan

Hard to say we picked anything up we do feel great about the timing of the ADM launch and think that is coming right at the right time, but again back to just recumbent, it takes a little while to that business to flip but we really like the decision were in given the market dynamics and as you know we’ve kind of taken some launch and set out of the large scale gaming so we found an offering that thought would really bring an improved safety profile and meaningful point of difference to the market and we’re just going to process of rolling that and feel good about the chances, but again its not even going to be a big spike in the second quarter even that’s going to be a very steady build initial read certainly what we hear about to feel this very positive.

Operator

Your next question comes from Derrick Sung, Sanford C. Bernstein.

Derrick Sung - Sanford C. Bernstein

On the US side for it’s a need and in particular for needs we’ve been seeing a pretty steady reacceleration in market growth rate over the last couple of quarters and I guess what I’m wondering if how close are we too where we were before you started seeing the deferred procedures have when the economy turn down. I mean or we still a far way from there we sort of 80% of where we were in the marketplace before the recession hit?

Katherine Owen

I guess the couple of thoughts if you look back to ’09 I think a lot of the concerns adding into the year was that the economic note down was going to result in a big drop of in elective procedures but you look at what actually they took place over the course of ’09 the market slowed really marginally sells.

At the same taken as you look to 2010 we’re not anticipating some big rebound which is always talked about that kind of mid single digit recon growth recognizing its not go to be linear it may bounce around the point or two in either direction in any given quarter, but I think we would be saving a level of accuracy that we just don’t have because it reflects the marginal drop of to say that we’re some percentage point in the recovery I think maybe there’s some pent up to demand but again its probably just on the margin just as last year any negative impact was relatively modest against the overall market growth.

Derrick Sung - Sanford C. Bernstein

Then the questions on the pricing pressures that you’re seeing in spine and specifically I’m just wondering if you compare that the pricing pressure, that you’re seeing on spine with the pricing pressure that you’re seeing on the ortho recon side of the business. It sounds to me like its worse in spine than it is on hip and knee side?

Then I’m wondering if that’s the case and if you could speak to as to what fundamental and might be the difference in the market that you’re seeing more competition, price competition between the manufacturers on spine side that you’re not seeing on the recon side or what else fundamentally might be different between the businesses that would be different pricing pressure that you’re seeing there?

Katherine Owen

I would just remind you a couple of things that we brought up before. We did have some key gaps in our spine product portfolio and if you asked anybody in our spine team, they would point that being the number one headwind for us, but it also does create periods of time where you’re going to see greater pricing pressure as we talked about on the last quarter.

Both of those businesses being recon and spine are seeing price pressure as we talked about and trend some more to recent quarters, but I would just remind you, if you look at the total company, pricing is down 1% and has been in that relatively flat, which we call up one or down one, the affinity for a number of years now.

So I wouldn’t read a whole lot into any modest differences that maybe taken place between one franchise as the other, those are two businesses that are seeing pricing pressure right now as expected and it’s a trend that we think we’ll probably continue at least in the near term.

Operator

Your next question comes from Steve Lichtman, JMP Securities.

Steve Lichtman - JMP Securities

Just first question on the U.S. recon business, as your hip business ramps up with new products flow with the same ramp, obviously carrying hips and knees, should we anticipate any softening a little bit on the knee side, just given that as well into it’s launch or do you still see a long run rate there from a knee side?

Stephen MacMillan

Steven, as you will know it’s rare for the company to have both franchises going well at the same time and that’s the clear mission for our knee team knowing that the momentum is about to shift within our organization towards hips and I think they actually still feel really good and obviously we have a 510(k) submission on (Inaudible) and hope to bring some news to that dealer later this year, whatever as well. So our goal is to have great growth in both, the truth will play out.

Steve Lichtman - JMP Securities

Just secondly on this onetime benefit on the medical business, any sense of what the impact was to the bottom line in the quarter?

Stephen MacMillan

We’re not breaking that out Steve, but obviously there was a onetime order and just that was important to call it out, so that people don’t get overly excited about the growth rates from a onetime events.

Operator

Your next question comes from (Inaudible), Barclays Capital.

Unidentified Analyst

This is actually (Inaudible) calling in for Adam. Quick question, I’m looking at the U.S business here some grew 5% and you guys talked about pricing pressures, was there also a hit to a volumes in the quarter?

Curt Hartman

No, any volume piece was frankly just our product bag. I don’t think we saw a big…

Stephen MacMillan

Our U.S. spine was very similar this quarter to last to quarter.

Unidentified Analyst

I guess, I think you’ve talked about in the recon business, you have talked about 1% of pricing pressure and then volume mix benefit, I think about 8%. We’re just wondering within a positive mix to offset that pricing pressure and I guess going back to spine, they’re just not much have been hearing mix benefit in the spine business?

Stephen MacMillan

I think you need to go back to the comment we made was total company that hip in the total company price was minus one. Volume contributing 8% for total company, those comments were now specific to hip and knee results in the quarter.

Unidentified Analyst

Then maybe just lastly, given you guys are going into the metal-on-metal hip business and just curious to hear what your feedback is from ALS given the issues?

Katherine Owen

Going into the metal-on-metal markets, probably we’re going into the larger head segment where we’re going in with non-metal-on-metal offering. So the ADM is the not a metal-on-metal product, but it does go into the larger head space, it’s more just of a clarification that we just going to have to wait and see how things play out was noise at this recent academy meeting round metal-on-metal, but quite honestly if you go back to the ALS last year, year before, year before there’s noise around metal-on-metal for a number of years and whether or not that has a discernable impact on metal-on-metal trend.

I think we just can have to wait and see how that place out in coming quarters. I think we’re more excited about the fact that we have a product offering and get us into the roughly started the market, where we haven’t had a presence and we think we’ve got a pretty very good competitive offering there.

Stephen MacMillan

We certainly felt pretty good coming out of the economy.

Operator

Your next question comes from (Inaudible), UBS.

Unidentified Analyst

It’s (Inaudible) for Bruce Nudell. Just on the MedSurg business, I was wondering if you could comment on how the business is doing related to what you would consider to be steady state underlying demand, so excluding any deployed distraction that you maybe experiencing presently on instruments?

Stephen MacMillan

I think the answer is the consumable portion of the business tends to track with procedure volumes and as procedure volumes incrementally move forward from perhaps really one year ago we’re definitely able to key track there the capital is obviously type of the CapEx budgets of the various hospital customers or group purchasing or initiation that may influence those capital spends.

Clearly, that is not a study state in any sense of the word yet fundamentally over the last three quarters we have seen gradual improvement in that component of the business, which I think is evident by the broader trans in the business is that have capital components medical and instruments.

Unidentified Analyst

The 1% growth for instruments is now where we expect to in terms of steady state we clearly see that moving north?

Curt Hartman

So, I understand that it was at the underlying comment as oppose to the reported (Inaudible) on that issue would you expect to see improvement and instruments and to second quarter with there be a same level impact to the second quarter as well. No I think couple of thoughts to help frame that, we did comment in the opening remarks that we do expect to see study improvement in the instruments business.

We also comment at the first quarter last year had a 11% growth, so that the tough comparable and there is filling to working through some execution issues we do feel good moving forward that there will be study improvement I don’t think we’re going intend to quantify that at this point and time, but we do think that there will be incrementally better results quarter-over-quarter there as move forward.

Operator

Your next question comes from Katharine, Credit Suisse.

Katharine - Credit Suisse

First question, can you just quantify the impact of the Japan reimbursement on price cut this month on your business?

Curt Hartman

I don’t think we’re going to putting dollar terms I think what we communicated when the reimbursement information was released was that we felt: Number one, reimbursement type an impact on Stryker would be file less than last round was really focused on trauma (Inaudible) Stryker has a leading market position and we feel this one would be in the mid to low single digits on the overall Stryker Japan business, but we haven’t put dollars to that.

Katharine - Credit Suisse

When do you expect to see improvements on the gross margin line as the spending on warning letter kind a rollout?

Curt Hartman

I would now direct correlation of the removable warning letters with improvements at gross margin, certainly the spending record remediation has largest impact on gross margins. Some of that spending would be to the new base, some of the spending in the early answer as we go facility by facility as one-time, but the longer term impact of that quality remediation will be felt in the gross margins, but it’s not an immediate light switch event and right now we’re not commenting on gross margin improvement, because our sole focused right now is getting through all of the remediation issues that we’ve communicated to the FDA and we’re still calling for that to be sometime end of 2011. As we look at the three year window that we initially rolled out. So right now no comments on gross margin favorable improvement as it relate to quarter remediation decreases.

Operator

Your next question comes from Jeff Johnson, Robert Baird.

Jeff Johnson - Robert Baird

A couple of things here, I know you guys want to talk about monthly trends by any means, but Curt taking your comments that kind of strengthening, I think some of your final comments you made about strengthening here exiting the quarter. It sounds like you guys feel good at least about the trajectory of the business exiting the quarter, is that a fair comment?

Curt Hartman

Jeff, I just did clarify that comment a little bit, I think I said we liked the trend over the last three quarters. So if you go back to what we would define somewhat as our low point of ’09 kind of that in between second and third quarter. We felt that third quarter was stepped in the right direction, the fourth quarter built upon that and we think the first quarter continues to build upon that and frankly by to the averages of the numbers don’t lie the quarter was a pretty good quarter as reported.

So we’re encouraged by the results building on the three quarter trends here and I think I have to go back to the third quarter of ’08 to see numbers in this range. So yes, we feel better where we are today and we would hope to continue that performance as we go forward in 2010.

Jeff Johnson - Robert Baird

I think I missed (Inaudible) three quarters versus three months some of your thought there and then just a last follow up questions just in Europe on some of the distributor transitioning. Has there been any kind of inventory return going on with that, anything you can quantify that you can see falling off as of February, March something like that, any clarification you can provide there?

Curt Hartman

No, there is not inventory returns related to the distributor transitions that we’ve made in some of the key European markets, and this is more about a transition as a way we approach the commercial market. As Steve alluded to in his comments those transitions take time at customer level and then you layer on top of that some of the product obsceneness we did both the new orthopedic plan and MedSurg categories and how they influence our international results. Those are the factors that I would point to here and nothing that you’re going to see materially one quarter over the next, because of these individual events.

Operator

Your next question comes from Vivian Cervantes, Maxim Group.

Vivian Cervantes - Maxim Group

I appreciate your comments on innovation and your commitment to it and also your comments on keeping on eye at on how cumulative difficult FDA environment evolve. That said just wanted to get your thoughts on possibly deploying your cash position to acquire I guess companies with product that can easily sit into your portfolio as sort of offset to potential delays on the FDA fund.

Katherine Owen

I think as we have articulated previously our preferred use of cashes first in form of M&A that make solid strategic sense and that’s going to follow one and two paths are potentially a combination of both and we have got a very diverse sales footprint and a lot of sales people out there where we can leverage that by adding products that further round out the bag and that will be one avenue we’ll look to for M&A and we are also going to look for growth platform that we think make solid strategic sense and I would point to the sense that it doesn’t have fairly sit into any one divisions but we think is something that make solid strategic sense from a top line perspective and from an ability to drive long term growth, and that’s going to continue to be the key guiding principles around the M&A.

Vivian Cervantes - Maxim Group

On your 750 million share repurchase program. Do you have a set timeframe on when that needs to get to used up?

Curt Hartman

The 750 million share repurchase authorization is in open authorization that we put in place and its really to be the deployed with the far support management discussion perhaps offset dilution associated with the employee compensation programs, employees stock purchase plans things of that nature perhaps the opportunistic in the market if something would have adversely impact the stock price as relates to broader economic events, but there is now set calendar and raping that up.

Operator

This concludes the Q-and-A portion of the call. I will now hand the presentation back over to Mr. MacMillan.

Stephen MacMillan

Thank you all very much for sitting with us and again we feel pretty good about the start to the year and will be back with our analyst meeting in May and then conference call for our second quarter operating results will be held on July 20. So, hopefully we will see a lot of view in May. Thank you.

Operator

Ladies and gentlemen that conclude today’s conference. Thank you for your participation you may now disconnect and have a great day.

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Source: Stryker Corporation Q1 2010 Earnings Call Transcript
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