Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Stryker Corporation (NYSE:SYK)

Q1 FY08 Earnings Call

April 17, 2008, 4:30 PM ET

Executives

Stephen P. MacMillan - President and CEO

Dean H. Bergy - VP and CFO

Analysts

Michael Weinstein - J.P. Morgan

Bob Hopkins - Lehman Brothers

Matthew Miksic - Morgan Stanley

Raj Denhoy - Bear Stearns

Mark Mullikin - Piper Jaffray

Kristen Stewart - Credit Suisse

Jason Wittes - Leerink Swann Llc

Michael Matson - Wachovia Capital Markets

Bruce Nudell - UBS

Doug Schenkel - Cowen & Company

Michael Jungling - Merrill Lynch

William Plovanic - Canaccord Adams

Steven Lichtman - Banc Of America Securities

Greg Halter - The Great Lakes Review

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2008 Stryker Earnings Conference Call. My name is Denise and I will be your coordinator for today. At this time, all participants are in listen-only mode. [Operator Instructions]

As a reminder, this conference is being recorded for replay purposes. Before we begin, the company would like everyone to know that certain statements made in today's conference call 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.

In addition to factors that may be discussed in this call, such factors include, but are not limited to: pricing pressures generally, including cost-containment measures that could adversely affect the price of or demand for the company's products; regulatory actions; unanticipated issues arising in connection with the clinical studies and otherwise that affect the United States Food and Drug Administration approval of new products; changes in reimbursement levels from third-party payors; a significant increase in product liability claims; change in economic conditions that adversely affect the level of demand for the company's products; changes in foreign exchange markets; change in financial markets; and changes in the competitive environment.

Additional information concerning these and other factors are contained in the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

I will now turn the call over to your host for today's call, Mr. Stephen MacMillan, President and Chief Executive Officer. Please proceed sir.

Stephen P. MacMillan – President and Chief Executive Officer

Thank you, Denise. Good afternoon, everyone, and welcome to Stryker's first quarter 2008 earnings report. With me today are Dean Bergy, our Vice President and Chief Financial Officer; and Katherine Owen, Vice President of Corporate Strategy and Investor Relations.

Despite a few challenges, our results in the quarter once again demonstrate the overall strength of our business and our people, as we delivered our 29th consecutive quarter of double-digit sales gains, and once again delivered 20% earnings growth. Specifically, sales grew almost 15% as reported and up 10.3% operationally to $1.63 billion and net earnings from continuing operations grew a strong 20% in the quarter despite significant investments in quality and compliance initiatives. And we also delivered these results with an even slightly higher tax rate than planned.

When you step back and look at the current global environment, we think these results stack up pretty well. Simply put, our unique footprint and broad areas of strength once again allowed us to absorb a few body blows, underscoring our ability to deliver in the face of challenges. While hips were disappointing in the quarter, knees were solid. And once again, spine, trauma, and CMF generated growth rates well above their markets, while our dependable MedSurg businesses, Instruments, Endoscopy, and Medical all posted double-digit operational sales growth in the US and globally.

Against a backdrop of concerns about slowdowns in hospital capital expenditures, our MedSurg businesses again posted very healthy 16% growth in the US and this was following very strong results in the previous quarter. This quarter's results really follow the same pattern of the last few years, as strong above-market growth in Spine, Trauma, CMF, Instruments, Endoscopy, and Medical more than made up for slower reconstructive growth. Make no mistake about it though we do look forward to having our hip business join the other high performing franchises, and we will be looking for improvement in the coming quarters.

At this point, we would also like to give you an update on our quality and compliance initiatives. In a nutshell, we are currently making major investments of money and people to upgrade and harmonize our quality and compliance systems across the company. In simple terms, we’ve embarked on the journey from decentralized plants with different QA systems to a system with more common standards and greater consistency. This is clearly what FDA expects, and frankly it will make us an even better company. This journey will take time, but we are fortunate to have both the financial strength and organizational commitment to make these investments now. We are mobilized and we are on it.

As Dean will discuss in more detail in a moment, the financial results were again strong, sales, profits, and cash flow were all very healthy, which also allowed us to announce a share buyback authorization in the quarter. While we have not yet initiated this, we see our ability to sustain our growth going forward linked to continued strong operational performance, while also using our cash for prudent acquisitions and modest buybacks to offset dilution.

I will now turn it over to Dean for more details, but before I do we wanted to remind everyone that we will hold our 2008 Analyst meeting on May 8th in New York City, which is only a few weeks away. With that Dean.

Dean H. Bergy – Vice President and Chief Financial Officer

Thanks, Steve. First we will take a look at the impact of foreign currency in our top line. As anticipated foreign currency was again very favorable this quarter. Weakening of the US dollar added $62 million to international sales and increased the company's overall sales growth by 4.3%. In the first quarter, the dollar weakened about 15% against the euro at approximately 12% against the yen compared to the prior year.

The currency rates hold near March 31st levels, we expect the impact of foreign currency will increase second quarter 2008 sales by about 4.5% to 5.0% when compared to the prior year. And now turning to a brief analysis of our price volume impacts on the quarter, price actually added one point to sales growth as rounded up, FX as I said impacted sales favorably by 4% and volume mix was up 10% for the 15% growth that we reported. Selling prices were up slightly on a worldwide basis in the quarter with the exception of Japan where pricing continues to be impacted by reimbursement cuts.

Japanese pricing was up 3% in the quarter as a result of the April 1st, 2007 MHLW reimbursement cuts. We expect the April 1st, 2008 MHLW price reductions to unfavorably impact our Japanese price by about 5% to 6% as we look to the remaining three quarters of 2008. Volume mix growth as I said was 10% in the first quarter. Domestic volume mix growth was 12% in the quarter while international volume mix growth came in at 5%.

Now turning to our business segments, Orthopaedic Implants represents 59% of our sales and the sales of those products increased 12% in the first quarter. On a recorded basis, it’s 7% operationally. The Orthopaedic Implant businesses were slightly impacted by one less comparative selling day in the international markets and the fact that Easter fell on the first quarter in 2008 compared to the second quarter last year.

As we said last quarter, we would encourage a balanced long-term perspective on evaluating market growth in these categories where we expected to see continued favorable demographics. The sales growth rates by product line are included in our press release and I will reference those rates as I provide more detailed on our performance in each product category.

So, turning to hips, they were up 4% in dollars and down 1% in constant currency in the first quarter. Our overall hip business in the quarter was negatively impacted by the Trident cup recall that we announced in January. Sales of hips were 2% in the United States. Domestic sales growth was flat by incremental Cormet Hip Resurfacing sales and growth in the Accolade cementless, X3 polyethylene, and Restoration Modular Revision Hip products. These gains were largely offset by significant declines in the Trident-related products. European hip sales declined mid single-digit levels on an operational basis. Exeter, Accolade, X3 polyethylene and our resurfacing hip, all did well but could not offset the decline in Trident sales. Japanese constant currency hip sales growth checked in at mid-single digits, a pleasant uptick from this businesses’ performance in 2007. Adjustment for price reductions for hips, volumes gains were even higher with our Secur-Fit products leading the way. Local currency hip sales in the remaining international markets were off about 10% with the Trident recall having a significant impact.

Turning to knees. They were up 14% in dollars and 9% in local currency in this quarter. Overall knee business was solid in the first quarter. US knee sales were up 12%, a 32nd straight quarter of domestic double-digit knee growth. Primary knees grew a low double-digit levels led by Triathlon and X3 polyethylene. Revision knee growth was over 30% as our new Triathlon TS revision product got off to a strong start. European constant currency in knee sales grew low single-digit levels paced by Triathlon.

In Japan, our Knee business registered mid-teens operational growth. Our Scorpio NRG product continues to lead the way here. Pacific also posted mid-teens local currency knee growth with Triathlon starting to emerge in these markets. The knee growth in the remaining international markets is basically flat. Trauma was up 24% in dollars and 16% on an operational basis in the first quarter. Our trauma business had an extremely strong all-around quarter. US trauma sales were up 23% in the quarter and this growth is unchanged when military sales are excluded. This represents the ninth straight quarter of US trauma growth over 20%. All product categories provided nice growth with Gamma 3 Hip Fracture, VariAx Distal Radius, and Hoffman II External Fixation devices leading the way.

International operational Trauma sales growth was 11%, the first time double-digits for the international contingents as to the first quarter of 2006. Europe was a standout with high teens constant currency growth and Canada was also extremely strong in a much smaller base. In Japan, local currency sales were up just slightly but grew at mid-to-high single-digits on a volume basis. Upper extremity products led our international Trauma growth.

Spine was up 22% in dollars and 18% in local currency in the quarter. The Spine business had a very strong quarter with the US paving the way to this 18% operational growth. Domestic Spine sales grew 25% in the first quarter or 6th consecutive quarter over 20% growth. All product categories grew at 20% or above in the US with inter body and thoracolumbar devices at the top of the heel.

International Spine sales were up just 2% operationally while going against the tough comparable from the prior year, which is up 18%. The major international markets opposed to local currency Spine growth and a reasonably tight range from low to middle single-digits. And then last, but sorry not least our CMF business was up 25% in dollars and 21% in local currency in the quarter. Our CMF business had an exceptional quarter in the U.S. posting 30% sales growth, strong sales of our Hydroset injectable bone substitute along the neuro products. Sales outside the US grew 5% operationally with neuro products posting the strongest growth in these markets.

Now I will touch on our MedSurg group. This represents 41% of sales. MedSurg had a very good quarter. Instruments and Medical had nice quarters in the U.S. and Endoscopy was stronger in the international arena. MedSurg is comprised of three significant product categories, Instruments, which represents 18% of company sales; Endoscopy, which represents 14% of total company sales; and then our Medical business, which represents 9% of total company sales. MedSurg group sales were up 18% for the quarter in US dollars and 15% at an operational basis.

And then turning to the businesses, sales for our Instruments product line increased 18% in the quarter as reported and it grew 15% in local currency. Instruments had a good quarter with 16% growth in the US and a solid performance overseas. Domestic sales were led by excellent growth in both our System 6 heavy duty and Cordless Driver 3 Micro Power Tools, as well as, incremental sales from the acquired instrument Tunica [ph] clinical product. We also registered solid growth in our Steri-Shield and Neptune Waste Management products.

International sales in Instruments products were up 12% operationally with growth overseas led by System 6 and interventional pain products along with Micro Power Tools. On a geographic basis Pacific and Canada exceeded 20% constant currency growth and Europe had a very solid quarter.

Now turning to Endoscopy, that business was up 16% in the quarter as reported and 15% and on an operational basis. Endoscopy had a solid quarter led by the international portion of the business. Domestic sales growth in the key product categories range from high-single digits to mid-teens and we are led by sales of arthroscopy products. International sales were up 18% in cost currency led by sales of our 1188 HD Camera, an excellent growth in general surgery products.

And our Medical business was up 20% in the quarter as reported and 18% in constant currency. Medical had an excellent quarter around the world. US sales growth was led by strong sales of beds in the EMS products, the stretchers also posting solid growth in the quarter. International sales growth was led by Pacific in Europe with EMS, the top product category.

Now, I’ll provide some commentary on the rest of the income statement. Gross margins in the quarter were up 20 basis points compared to last year. We ran the plants extremely faster in the quarter with new product introductions and the ramp-up in production to refill the Trident cup pipeline giving us higher absorption in the period. This leverage was partially offset by higher excess and obsolete inventory costs associated with the implant businesses. We anticipate the cost of some of our quality initiatives, which are also hitting this line to ramp up a bit more in the second quarter and still project annual gross margins will be closer to flat with the prior year.

Growth in spending on research and development was up just 1% in the quarter. Growth was tempered slightly by the timing of the approval of our Orthopaedic division’s needs assessment by our corporate monitor with many activities scheduled for this quarter being cancelled or deferred. The remaining spending in this category is pretty much in line with our plans. SG&A cost increased by 15% on the quarter, primarily as a result of increases in cost associated with compliance activities in growth and sales-related costs. The compliance costs are not insignificant with our legal fees up more than $6 million in the quarter. Selling costs include compensation and instrument amortization costs are growing about in line with our rate of sales growth.

Operating income increased 19% in the first quarter and operating margins increased to 23.5% of sales. Now for a quick break on other income and expense, investment income was $27.9 million in the quarter. That was offset by interest expense of $7 million in the quarter and a foreign currency transaction loss of $600,000 to get to the total other income of $20.3 million in the quarter. We were able to deliver our budgeted diluted net earnings per share of $0.70 in the first quarter with an effective income tax rate of 28.1%, a rate that was higher than we planned. This rate was similar to those for the 2007 first quarter and year and we still believe we will see these rates decline for 2008 likely by as much as 50 basis points for the year.

Turning to our balance sheet, we truly believe that’s in excellent shape. Before moving on to accounts receivable and inventory days, I wanted to touch briefly on one category of our investment balances. As many of you know, we hold a small portion of our investments in auction rate securities. We have a $160 million of such securities, all of them relating to student loans, the vast majority of which are guaranteed by the US government. Although we do not believe there is an issue of credit worthiness for these assets, there was currently an issue with liquidity. As a result, we have classified these assets as non-current assets in the March 31, 2008 balance sheet.

The market valuation reserve in securities has been included as a direct reduction to the equity since we consider any impairment in their value to be temporary.

Now, turning to accounts receivable. Accounts receivable days ended the quarter at 60 days, up three days from a year ago. We are not overly concerned by this bump up as the impact of the weakening US dollar has a slight negative impact on the calculation and we have not seen any significant deterioration in our US receivables days. Inventory days finished the quarter at 162 days. This is a big jump from the prior year and is also impacted by currency. In addition, that reflects a number of new product introductions. Despite these factors we expect we will be able to drive these inventory levels down over the next several quarters.

And then finally quick comments on cash flow, we had a great start to the year from a cash flow perspective. Cash from operations up 25% to $191 million. The first quarter was most often our lowest in terms of cash generated and we are well positioned for another outstanding year on this front. As a final note, we want to let you know that we were advised during the quarter that the US Department of Justice has closed its investigation of potential anti-trust offenses, offenses in the Orthopaedic Implants industry. That investigation had been opened in June in 2006.

And with that I will turn it back over to Steve.

Stephen P. MacMillan – President and Chief Executive Officer

Thanks, Dean. Now, a few more comments on our 2008 outlook. So, what should you expect from us for the rest of 2008? As we look to the balance of the year, we continue to feel good about our ability to deliver an eighth straight year of double-digit revenue growth and deliver on our 20% EPS goal, all while funding the significant investments we are making in quality and compliance and while recovering from the hip recall, which will still carry over into the second quarter.

We have nice momentum across a number of businesses and believe that our underlying sales growth will accelerate in the coming quarter. Though we remain mindful of the numerous challenges and unexpected pitfalls, which could lie ahead.

Once again however, we believe our commitment to ongoing improvement and our strong and unique footprint of businesses will allow us to continue to deliver strong results for the balance of the year and beyond. Also as our cash position continues to build, we see this as an additional tool in our arsenal to continue our strong earnings growth in the years ahead and we continue to look at acquisitions as the primary vehicle. As stated over the last 12 months, we have ramped up our M&A focus and continue to actively evaluate on number of areas. What we would like to again underscore the given the strong underlying performance of our business and our own focus on return on investment not just EPS accretion, we continue to have the luxury to be both patient and choosy and we will continue to operate in this way.

We all know there are an increasing number of companies being shopped and with our cash position there is a natural speculation that arises, but many do not need our parameters.

So to wrap it up, we have challenges ahead of us, sure as we all do, but given the very many positive things we also have going for us, we continue to like our challenges. With that we will now open it up for questions and remind everyone that we will take one question from each person with only one follow-up. Thank you.

Question and Answer

Operator

[Operator Instructions] From JP Morgan, your first question comes from the line of Mike Weinstein. Please proceed sir.

Michael Weinstein - J.P. Morgan

Thank you, Steve. Thank you, Dean, for taking the questions. A couple of areas that I would like to touch on, I want to cover the FDA issues that that you guys had been addressing and then maybe talk about some of the recent discussion generated by other companies by GE and J&J and so forth. Maybe we start with your FDA relationship and the update there that you can provide today. And I guess there is two things that I would like to know. One, do you have an update on the timing of the Cork and Mahwah anticipated inspection? And two, since we talked to you last publicly in January, have you had inspections, normal course GMP inspections at other facilities where you have gotten either A, a clean bill, or B, have gotten some poor degree?

Stephen P. MacMillan - President and Chief Executive Officer

Sure, Mike. The -- let’s start on the overall part. I would tell you as we think about our relationship with the FDA right now, we feel like our tone… the tone of communication has improved certainly over the last 90 days. But I would tell you, we have a lot of work to do and I think we've hopefully very adequately communicated to the agency that we know we have the work to do and we are very focused on it and that when we as an organization get focused on it, we deliver. But ultimately it comes down to... they will be looking for the results. As it relates to specific follow-ups with Mahwah and Cork, I would tell you, we are probably more focused at this point on making sure that when they come back in, we are in great shape and we are probably not pushing for it quite as quickly, we think we are ready, but frankly everyday that goes by we think, gives us a little bit more time and we are more focused on getting it right. Then on... it’d be nice to get that lifted certainly and get that little cloud over us, we really want... just want to make sure we are doing it right and not just rushing it. On the final part, we don't really disclose the specifics on that, but I'd probably go back to feeling that... we feel we are definitely showing some progress, but again still some work to be done.

Operator

And your next question comes from Lehman Brothers from the line of Bob Hopkins. Please proceed.

Bob Hopkins - Lehman Brothers

Okay, thank you. I have a question on hips and then a question on knees. First question on hips, I was wondering if you guys could quantify the impact of the hip recall. By our math, we are thinking that it may be impacted you maybe $15 million to $20 million in the quarter and I’m wondering how much of that would bleed over into the second quarter?

Stephen P. MacMillan - President and Chief Executive Officer

Your math is remarkably good, Bob. That's the exact number that Dean and I have, and I don’t know maybe half of that into the second quarter probably.

Dean H. Bergy – Vice President and Chief Financial Officer

Second quarter, yeah.

Bob Hopkins - Lehman Brothers

Okay.

Stephen P. MacMillan - President and Chief Executive Officer

Probably in that range.

Bob Hopkins - Lehman Brothers

Great, that's very helpful. Thank you. And then on the knee side and I ask this about knees just because knees are relatively clean versus hips. Did Easter have any impact... was there a couple of points of growth, just curious there?

Dean H. Bergy – Vice President and Chief Financial Officer

Sure. Couple of comments, we think Easter did. We'd continue to say as we said in our first quarter call, the first quarter this year was going to be a little funny because of the Easter last year being in April and this year in March. We still generated 12% in the US, our real bugaboo was probably Europe, where frankly we saw technically it’s only one day less, but we saw a lot of vacations and everything else in that. So, I think the overall comment we probably make to everybody is there seems to be a lot of obsession about looking at specific quarters and everybody is looking at fourth quarter versus first quarter. I would say we ought to continue to just keep looking at the overall trends of several quarters together. Because I think that gives you a better overall read. So, thanks, Bob. By the way it just occurred to me that, I think Mike had asked kind of a second question and let me try to cover that, and I am sure somebody else may ask it. Mike, I recall you asked question by GE and J&J, and I would assume that's related to particularly the CapEx expenditures of GE. We would tell you that, we haven't really seen anything different within our MedSurg businesses that we’re always watching very closely there.

Operator

Joanne Wuensch is on the line with your next question.

Unidentified Analyst

Thank you. Could you please give us the status of Cormet Hip Resurfacing product? I know that you’ve delayed the launch of that and the training of that given what happened in the quarter, but some commentary on that would be helpful?

Stephen P. MacMillan – President and Chief Executive Officer

Sure, Joanne. Yeah, Smith & Nephew is in a great spot, because of the whole monitoring situation, which is clearly pushed out our training by about six months. We are pleased to say we actually held a training course this month finally. And all of the training that we had scheduled for the first quarter on resurfacing got cancelled because of the monitors and the needs assessments and the reviews. We are now, finally, we got those approved by the monitors and just had our first legitimate course earlier this month. So we think obviously it's clearly delayed our ramp-up on that. We continued to be hopeful about it, but it will start to ramp here we think in the second quarter.

Unidentified Analyst

And as a follow-up, do you see any impacts and changes in either cobalt chromium pricing or other materials pricing on your expenses on a go-forward basis? Thank you.

Dean H. Bergy - Vice President and Chief Financial Officer

Great question. Yeah, cobalt chromium, we are absorbing a big, big absolute price increase on that over the course of over the course of the company. Again it's one of those, we would call one of those little body blows that we absorb. But it's a meaningful increase, but we don't see a deterring our ability to deliver our overall numbers.

Operator

Your next question comes from the line of Mack Miksic from Morgan Stanley. Please proceed.

Matthew Miksic - Morgan Stanley

Hi, thanks for taking the questions. I did have one follow-up on the MedSurg business that was asked earlier, the capital equipment or GE-related business and then I had a follow-up on recon. So, I just wanted to make sure I understand what has been driving, we’ve gone through this ad nauseum in the past, but the bed and stretcher business in Medical, is this hospitals making new bed purchases, is it tied to new hospital construction, is there some seasonality in this business around capital budgets, any color you can give us at least what's driving it?

Dean H. Bergy - Vice President and Chief Financial Officer

On the Medical front, Mack, it really is combinations, but I would say it's both hospital, new… it's new hospital openings. It's also that we have been broadening out our bed line. You think about it, again you go back five, six, seven years, we were largely a stretcher company and as we have gotten stronger and stronger in the beds, we keep finding new niches to expand into. And so we are getting in the game of as hospitals are either adding or replacing their previous ones. We are just in more and more deals than we ever were and it's why I think we continue to feel pretty good about this. Another point I’d point out as it relates it to our medical and just in general our MedSurg business. Most of our orders are relatively small by standard, we are not selling the kind of capital that a GE is, and I think that clearly keeps us probably at a different level.

Matthew Miksic - Morgan Stanley

Okay and then also as we look at recon and knees and hips, in Q1, I mean you showed another pretty strong quarter in knees against pretty strong 17% growth comps, I think in the US last year. Do you see… did you see any sort of knees picking up some of the slack maybe for hips and as we go into Q2, do you think we’ll see any reversal of that?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, I’d love to tell you that we did. I would almost tell you it may have been more the office, and I think our hope was exactly as you surmised but I will say that the hip recall took more energy and time out of our sales reps having to really do a lot of explaining. We have realized we are in a new world now when these warning letters go out, immediately on to the Internet and there is all kinds of misinformation out there. Our reps had to do a lot of handholding and a lot of blocking and tackling to get things explained and everything. I think it actually hurt or at least it didn't help our knee business either, so I think we just continued to feel very good about Triathlon, and as Dean mentioned the revision product is off to a very nice to start there.

Operator

And from Bear Stearns, your next question comes from the line of Raj Denhoy. Please proceed.

Raj Denhoy - Bear Stearns

Hi, good afternoon. I was curious if I could ask a little about the hip recall. I think when we talked back in January you mentioned that you thought that could be result in a matter of weeks, you know, now here we are three months later and you are talking about extending even further now into the next quarter or here in the second quarter, what's behind this having much longer tail than you originally thought?

Dean H. Bergy - Vice President and Chief Financial Officer

Sure, Raj. Fair question. I would tell you when, when we are with you in January, the whole thing was just coming down and we were able to get back into production very quickly, certainly within a matter of weeks. It was actually, we were able to get new stuff back into production in a matter of days. But when you actually go through that the global distribution chain and you start to think about all the different sizes and everything else we certainly underestimated the complexity that is here, pull stuff out of every market in the world, get it back in with the right size in the right fits, in the right number of sets. It's been a much more challenging logistical piece than what we hit, we clearly underestimated the complexity.

Raj Denhoy - Bear Stearns

So is it fair to say then your [inaudible] mostly are primarily on logistics and really there's not much competitive action happening?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, it's… I would tell you our competitors are clearly taking advantage of our that the time that it will take to get us back into the fray. So have we lost some surgeries and two competitors absolutely in the quarter, we certainly hope to get those back over time.

Operator

Your next question comes from the line of Mark Mullikin from Piper Jaffray. Please proceed.

Mark Mullikin - Piper Jaffray

Good afternoon. Steve, can you expand on your comments on M&A a little bit more, you had mentioned looking at ROI as opposed to just EPS accretion and I was just wondering if there is anything more to read into that if you have changed how you look at deals at this point versus in the past?

Stephen P. MacMillan - President and Chief Executive Officer

We have absolutely not changed, that's probably one reason we have been very disciplined acquirers. Let me just give you a real world example. It’s something like a Kyphon. We look at Kyphon, that could have been EPS accretive to us in a fairly quick form, but we couldn't justify that kind of a purchase price. And so as we look at everything, it's [inaudible] we’ve looked a lot of things over the last year, two years and end up passing on them, because we really don't think they hit our capital hurdles, but it’s just a probably a little more clarity around that and probably the other reason we are saying that is we know there's been a lot of speculation more recently. We just got a lot of calls about in ‘80s, this company is for sale, this one is for sale and a lot of rumblings that we're the obvious buyer for so many of these things, and again you are saying don't worry folks, we're not to going to lose our heads just get some things for sale, doesn't mean we are going to jumping and grab it.

Mark Mullikin - Piper Jaffray

Okay. Fair enough and then one follow-up on the knee business, BioMed put up an extremely strong number and had a DTC ad campaign, going on during the quarter and I was just wondering with the DOJ monitors in place now, etcetera, do you think the ETC will start to play a bigger role in driving share shift within the industry?

Stephen P. MacMillan – President and Chief Executive Officer

Yes, we are not so sure about that. Keep in mind their quarter didn't line up with the rest of us and I think it’s why these focuses on that quarter, March was probably a very bumpy month, and I… if I recall their quarter ended in February. Having said they had a great recon quarter. I’ve sent Jeff Weiner a note saying, you guys obviously had a heck of a quarter. Whether it’s the DTC or not, I think we continue to dabble and see what's going on there, but continue to try to focus on the surgeon as well. So, I think it's too early to speculate too much on that.

Operator

Your next question comes from the line of Kristen Stewart from Credit Suisse. Please proceed.

Kristen Stewart - Credit Suisse

Hi. I was wondering if you could expand a little bit more on the R&D side, as to the reason why… you mentioned some of the issues with the monitor and [inaudible] you could just explain that a little bit much [inaudible] going forward?

Stephen P. MacMillan – President and Chief Executive Officer

Sure, I think to a large degree, Kristen, we’ve filled a fair amount of the R&D pipeline, we have got… just about every division has a fair amount going on. Having said that some of our R&D resources are devoted a little bit right now to working on some of the quality. I’d say the quality we have and the other part is that with the needs assessment down there are certain projects that are kind of put on a hold, and I think you will probably see this what we’re temporarily put on hold ones that are involving designing surgeons and things like that because some of the meetings could not occur at our Orthopaedics division as Dean referenced probably a little bit less activity there, and that's something that obviously will affect us probably more in the 2009, 2010 time period. But we are guessing it's probably at least a little bit more of a level playing field that my hunch is a number of us may have had a few projects just sort of the slowdown during this time.

Kristen Stewart - Credit Suisse

And so it sounds like as the percentage of sales we should expect a similar number that what we are seeing in the first quarter or a little bit higher or--?

Dean H. Bergy – Vice President and Chief Financial Officer

I think it is fair to say it will come up a little bit, Kristen. We… some of these things that got deferred will come back in some format, I think. You will see some of that spending come back in subsequent quarters, but still for the year and we had indicated at the outset we do expect our R&D spending to slow down. Keep in mind we have been [inaudible] with R&D growing at or above the rate of sales for the last four years, as well.

Stephen P. MacMillan – President and Chief Executive Officer

Yes, this year they’re probably back under the current growth of sales.

Dean H. Bergy – Vice President and Chief Financial Officer

Right.

Operator

From Leerink Swann, your next question comes from Jason Wittes. Please proceed sir.

Jason Wittes – Leerink Swann Llc

Hi. Just wanted to ask about the FDA issues, can we... could you give us a time frame to think about when the FDA will actually be coming back in to look at everything?

Stephen P. MacMillan – President and Chief Executive Officer

The truth is we really don't know. It could be… it could probably be as early as May or June. And it might be longer; they've got so many things on their plate as well right now. And again, I know it’s a little bit of an overhanging concern for you guys. In terms of affecting our business, it’s got farer less day-to-day impact on our business. Again, our focus is ultimately when they do come back and getting it clean build health whether that's May or whether it's October, probably doesn't have a huge impact on the actual operational performance of the company.

Jason Wittes – Leerink Swann Llc

Okay. And just a quick follow-up on R&D, it sounds to me like you are saying that R&D will be now slightly below sales growth this year, which is sort of a slowdown from what we've seen in the past years, is that due to the monitor or is that just… what those goes along with what you are saying that you’ve kind of over-invested somewhat in R&D and now it's time to bring it back a bit, how should we be thinking about that?

Stephen P. MacMillan - President and Chief Executive Officer

The latter, which is exactly if you recall what we said at the start of the year, this is not a change, it was what was in our plan this year. We've invested a lot over the last four years, as Dean said. And now it's time to really bring some of those things that were heavier investments start to see some of those come through.

Operator

Michael Matson from Wachovia Capital Markets is on the line with your next question.

Michael Matson - Wachovia Capital Markets

Hi. Thanks for taking my question. Your organic or underlying revenue growth was I guess about 10.3% in the first quarter, and I understand you had your issues with the hip recall and everything that may have added another percent or percent and a half to that, but you’re already kind of at the lower end of your full year guidance range, and yet you've got some kind of tougher comps or the comps get progressively tougher through the year, what gives you the confidence that you can continue to stay in that 11% to 13% range, particularly as we get into the second half of the year?

Stephen P. MacMillan - President and Chief Executive Officer

Here is way I think about it, Mike, is we just delivered 10.3% local currency growth with a negative hip number. And clearly as that hip number starts to ramp up over the course of the year, that alone should be good. The other thing we’d remind you is think about it this way, five of our eight franchises grew over 15%. And while some of those may moderate a little bit and they are going against tough comps, we are used to going up against tough comps. Our US Trauma business, as Dean mentioned, has been up 20% for nine straight quarters now and we hate to say it, but I think we think we can continue that run, Spine has been up, I think, six quarters in a row, CMF seven quarters in a row, all over 20. So they've been going against some tough comps, obviously keeps getting harder, but we... as part of setting the bar high and continuing to go over it. So I think we continue to feel hips have got to start to contribute for us, and hopefully, that will be the key while the others may moderate a little bit. But we feel pretty good about our product flow, about a lot of our fundamentals.

Michael Matson - Wachovia Capital Markets

Okay. And then with regard to the Triathlon revision rollout, where do you think you stand with that and in terms of the instruments getting them into the field, getting surgeons trained and what is the kind of timeline there?

Stephen P. MacMillan – President and Chief Executive Officer

We are still pretty early. We just launched that at our January sales meeting, really started to get in... stuff out to the field in the beginning of February. So... and we are not exactly... as we've said in the past, we are not exactly the fastest launchers, having said that the uptick has been...

Stephen P. MacMillan – President and Chief Executive Officer

Yeah, and I would say... one thing we are targeting and doing a little bit better, Mike, is making sure that we have got instruments that's ready to go. So I think we are in reasonable stead and the sales force uptick has been very, very good. So I think... but it is early, but it was a good first quarter.

Operator

Your next question comes from the line of Bruce Nudell from UBS. Please proceed.

Bruce Nudell - UBS

Thanks so much. If worse comes worse and you guys receive a corporate warning letter, could you kind of ballpark the incremental spend, if any, as a percent of sales relative to where you are now?

Stephen P. MacMillan – President and Chief Executive Officer

Bruce, probably not a lot different, because I would tell you we are essentially... we’ve basically developed an in-house program that is modeled after what effect did happen and what would it take to get where we want to get. So I would tell you if we are investing a significant amount here, having said that, we never know until you never know. But we've looked at what we want to do to get there and we think it's in that range. I mean, again we're absorbing... it's clearly tens of millions of additional dollars in investment this year. And as a reminder we've not changed our guidance.

Bruce Nudell - UBS

Okay. And my follow-up is at the end of '06, you were very gracious and kind of volunteered that hip and knee unit growth in the US was below the trend line and we calculate somewhere between 3% and 4% or so. In '07, what sort of year do you think the market had for unit growth in the United States for hips and knees?

Stephen P. MacMillan – President and Chief Executive Officer

The market... you guys are probably better [inaudible] knees were what high single-digit?

Dean H. Bergy – Vice President and Chief Financial Officer

Yes.

Stephen P. MacMillan – President and Chief Executive Officer

Probably, and hips probably in the mid single-digit, it's probably our best estimate.

Operator

Your next question comes the line of Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen & Company

Hi, good afternoon, and thanks for taking my questions.

Stephen P. MacMillan – President and Chief Executive Officer

Good afternoon.

Doug Schenkel - Cowen & Company

First, another question on Trident, any chance you would be willing to provide more specific details on the current supply status of PSL and Hemi in different geographies?

Dean H. Bergy – Vice President and Chief Financial Officer

I don't know. We don't want to get overly specific. I think what's fair to say is that it's starting to come back. And obviously, I think we would feel kind by the end of this month, we should be in really good shape in the United States and probably another month and we should be back to where we want to be overseas. But suffice it to say the way that we are looking at this is to trying to look at surgical needs on a very detailed basis in all of the markets everyday and try to hit the markets often as we can. And we are starting to do a lot better job than that. So I think we do feel like we are going to have it in very good shape by the end of the quarter.

Doug Schenkel - Cowen & Company

Okay. And specific to the incremental cost that you are incurring to improve quality controls, longer term, is it right to think of these costs as being higher in the near term and subsiding sometime in the future... several quarters from now, because what I am trying to get out is in a year from now, is there some leverage potential as these costs potentially subside a bit?

Stephen P. MacMillan – President and Chief Executive Officer

We think certainly over the longer term, this is a invest now to be healthier later. It's probably more... I'd probably say in some ways it may be more of a two year-ish, it's going to vary depending on where we are in our certain plants. But I think again we feel good about the nearer term and ultimately figure that there will be some leverage there going forward whether it’s a year from now, whether it’s 18 months, whether it’s 24 months, probably a little premature to fully say, but certainly the... once we invest, get everything right, there ought to be some efficiencies.

Operator

Your next question comes from line of Michael Jungling from Merrill Lynch. Please go ahead.

Michael Jungling - Merrill Lynch

Great. Thank you. I have a question on acquisitions, you've indicated in the past that there are several areas that you found very attractive, but they were too expensive. Many of these areas have now sort of being de-rated by 50% or more, and I am just wondering whether this puts acquisitions on the full front compared to where you were last year. So [inaudible] building type going on here at Merrill Lynch? And secondly on the recall costs, can you quantify what the total costs whether you've incurred as a result of the recall in the first quarter? Thank you.

Stephen P. MacMillan – President and Chief Executive Officer

Sure, Michael. We are not going to buy Merrill Lynch by the way, just... certainly some things have come down. And that... it's why we are probably more actively looking at a number of things right now and... but again in terms of what we can really get them for and how they fit into our business, we continue to just kind of sort it out, but it's probably a better buying time today than it was 12 months ago. On the second one, Dean, do you want to kind of quantify? The second question was the costs of the recall, obviously we shared with you probably that $15 million to $20 million we have lost revenue in the quarter and we would tell you there has been underneath it, there are number of costs on...

Dean H. Bergy – Vice President and Chief Financial Officer

Yeah, it's fair to say that obviously one of the… in the margin line, I referenced excess and obsolete cost, you can assume that there is a reasonable cost to the product that's come back that's hitting our gross margin as a result of this as well.

Stephen P. MacMillan – President and Chief Executive Officer

All of which has us frankly feel pretty good about delivering $0.70 of share in a quarter where we absorbed the lot.

Operator

Your next question comes from Bill Plovanic from Canaccord Adams. Please proceed.

William Plovanic - Canaccord Adams

Great, thanks. Good evening. I am going to ask just a couple of simple P&L questions here. Just, is it in point in time the interest rate on your cash balances, if you could give us some guidance there and then would you be able to quantify the monitoring cost per quarter or for the year just ballpark until this is done? And then any kind of guidance on or color on what acquisitions added to the top line in the quarter? Thank you.

Dean H. Bergy – Vice President and Chief Financial Officer

Well, sure, Bill, on the interest rate, it's probably I would say, fair to say it's around 4%, but it is going to be dropping obviously as we replenish and have to replace investments that are in the portfolio today. Relative to acquisition impact on the top line vary insignificant in fact, obviously that would be one of the we would have if that were significant enough to be included in the analysis of our price volume and so on and so forth in terms of the make up of the top line. And the... what was the third question?

William Plovanic - Canaccord Adams

The monitoring cost--?

Dean H. Bergy – Vice President and Chief Financial Officer

Yeah, I don't know that we want to go into a lot of real specifics there as I said in SG&A, our SG&A is riding up higher than we would like. Obviously, we’ve indicated we think it will be down for the year as a percentage of sales. I still believe that, but this was a tough quarter and as I said more than $6 million, so that gives you some sense of what we are up against there.

Stephen P. MacMillan – President and Chief Executive Officer

You gain nothing. Probably jumped in and reiterate with that huge increase in legal fees that is something that hopefully over time we’ll also moderate and again hopefully give us a chance in terms of additional growth in the years ahead.

William Plovanic - Canaccord Adams

Great. Thank you.

Operator

Your next question comes from the line of Tao Levy from Deutsche Bank. Please proceed.

Unidentified Analyst - Deutsche Bank

Hi, guys. This is Sas [ph] for Tao. Thanks for taking the question.

Stephen P. MacMillan – President and Chief Executive Officer

Sure, Sas.

Unidentified Analyst - Deutsche Bank

First, the remediation plan, your quality remediation plan, is it all inclusive over all your plans, and will it be fully rolled out by the end of 2009?

Stephen P. MacMillan – President and Chief Executive Officer

Yes. We... essentially, what we are doing is recognizing… when you got two warning letters, they were looking at both issues specific to those plants, but also across the division. But we are treating it as an opportunity to say, hey, wait a minute, let’s go and apply that same thinking across our entire network, and that's why we want to be out in front of this given that we were probably behind it. Now we want to go to the other extreme and get out in front across our whole network.

Unidentified Analyst - Deutsche Bank

And the timing, would --

Stephen P. MacMillan – President and Chief Executive Officer

We would certainly hope by the end of the 2009 that we are in great shape. Will there still be little pockets by that point? Probably, but I’d say our organization is incredibly focused putting a lot of time and energy into this. We hope to be certainly in a much better state even by the end of this year.

Unidentified Analyst - Deutsche Bank

And just one follow up. Do you have any update on the launch of Sightline or still the same Q4 expectations?

Stephen P. MacMillan – President and Chief Executive Officer

Q4 probably still the best and that one may slip into next year. We are still working through it and given that we’ve kind of missed a little bit on timing on some of those, we’re probably going to not over --- want to still temper the expectations there.

Operator

And from Banc of America Securities, your next question comes from Steve Lichtman. Please proceed.

Steven Lichtman - Banc Of America Securities

Hi, guys. Thanks. Just a couple of follow ups here. On cash flow, what should we think about in terms of CapEx this year, and as we exist the year, where would you target inventory days getting to?

Dean H. Bergy – Vice President and Chief Financial Officer

On CapEx, Steve, I would say probably somewhere in the 190 to 215 range is probably a good estimate. And DSO, I think we have finished last year at 137. We will probably be a little bit higher this year, so I would hope to get it into the low 140s.

Stephen P. MacMillan – President and Chief Executive Officer

On DII

Dean H. Bergy – Vice President and Chief Financial Officer

On DII, yes.

Steven Lichtman - Banc Of America Securities

Yes. Okay, thanks. And then just on the analyst day coming up in a few weeks, maybe you can talk broadly what we should expect, is it just similar to what we have seen today or last prior years?

Stephen P. MacMillan – President and Chief Executive Officer

Yeah, it will be similar, will probably be a little bit… we are going to leave a little bit more time, so hopefully we can get a little bit deeper but we are, as you know, there is only so deep we are going to go about pipeline things, but I think we hope to give little better understanding about certainly part of the business. I know you’ve dug into more over time, which is our MedSurg business. That is a big part of our business, and continues to probably raise some questions, so if I give a little more... a little more there.

Operator

From Goldman Sachs, your next question comes from Larry Keusch. Please proceed.

Unidentified Analyst

Hi, everybody. It's Charlie Chan [ph] for Larry. How is it going?

Stephen P. MacMillan – President and Chief Executive Officer

Hi, Charlie. Great, yeah.

Unidentified Analyst

Dean, first of all, I was wondering if I could start with you. Could you help us better understand how the positive impact from foreign currency on the top line may have flowed to the P&L to the bottom line, and if in particular you could just touch on how gross margin may have benefit there just because the benefit was a lot... or gross margin came in better than what we had been expecting despite the higher cost inputs and absorbing the return products, so if you could just speak to that, that’d be really helpful. And also just a quick follow up to a question that was posed earlier, I just to want to confirm, are you suggesting that you will have the hemi cut [ph] back in the US in the next few weeks?

Dean H. Bergy - Vice President and Chief Financial Officer

Yeah. The FX impacts, I would say that it does not have that much of an impact. We’ve touched on this before, but when the dollar weakens, we get probably a little bit of positive impact to the bottom line, but we have so many natural hedges in place in terms of where we manufacture. So, as an example, our Spine and Trauma products, which as you know are doing extremely well in the US, those are manufactured in Europe, and as a result of that, we’re taking some pretty significant hits on currency impacts as those products come back to the US to be sold. And some portion of our recon products also have the same characteristics. So when we net everything out, because of our natural hedging, it really does not have that big of an impact, and that's one of the reasons I did not mention it as one of the... as much of an impact really on gross margin specifically.

Unidentified Analyst

Harp on EPS, would it be fair to assume that the impact there would be negligible as well?

Dean H. Bergy - Vice President and Chief Financial Officer

Exactly. And that’s what I was saying, all the way down to the bottom line.

Unidentified Analyst

Okay. And just a quick follow-up on the gross margin, would it be a fair to think that gross margins should trend at these levels throughout the reminder of the year, or should we start to see some of that customary seasonality or as your plans run less hot, could we see gross margins come in?

Dean H. Bergy - Vice President and Chief Financial Officer

Yes. So, I think you're going to see at least kind of three factors. And as I said, we expect them to be… I would expect them to be flattish if not a little bit down when we get to the end of the year. And the reasons are, we will run the factories, we traditionally run the factories slower in the second half. We do have a seasonality impact in the third quarter with our MedSurg businesses being a bigger piece of the business for the elective [ph] surgery schedules down in the summer months. And then the other thing as I eluded to is, we do expect, starting in this next quarter, to see a little bit further ramp up on some of our cost of quality, which I would expect to hit probably second and third quarters a little bit harder on the gross margin line.

Operator

Greg Halter from The Great Lakes Review is on the line with your next question.

Greg Halter - The Great Lakes Review

Good afternoon, guys. Congratulations on a good quarter, again.

Stephen P. MacMillan – President and Chief Executive Officer

Thanks, Greg.

Greg Halter - The Great Lakes Review

Dean, quick one on your debt, is it still around $17 million or $20 million on a total basis?

Dean H. Bergy – Vice President and Chief Financial Officer

Yes, it's right around $18 million, Greg.

Greg Halter - The Great Lakes Review

And then one last one, on the critical care bed, I think it's called InTouch, can you give us any feedback on how that's being received by the market?

Dean H. Bergy – Vice President and Chief Financial Officer

Two straight quarters of medical growth over 20%, we think it's off to a pretty good start.

Greg Halter - The Great Lakes Review

Okay.

Dean H. Bergy – Vice President and Chief Financial Officer

Thanks, Greg.

Operator

[Operator Instructions]. Your next question comes on line of Kristen Stewart from Credit Suisse. Please proceed.

Kristen Stewart - Credit Suisse

Hi. Thanks for taking my follow up. I was just wondering if you could talk a little about mix trends, specifically maybe for knee. I know Triathlon is now a big part of it, where do you see mix trends kind of going in the hip and knee side as we look ahead?

Dean H. Bergy – Vice President and Chief Financial Officer

Yes Kristen, I think mix kind of moves around always over history, if you will, and probably in terms of some of the products we have had introduced. It’s probably a little slower today than it was in the last couple years, but I think as always, we believe we will have new products coming in, and certainly we’ll try up on PKR and try up on TS, those are products that probably contribute to mix. So, I would always tell people that we would expect mix to kind of always be 1% to 3% of our sales, and it's 5 not 3 very often, but I think it will always be in that range, and it's only yesterday, and I think it will move around but be in that range.

Kristen Stewart - Credit Suisse

You said that pricing was down overall in the quarter --

Dean H. Bergy – Vice President and Chief Financial Officer

No, I said actually pricing was rounded up to being up 1% and there is no offset in there with the Japan pricing. So, prices in the rest of the world and that's pretty normalized. The cost at our businesses are up a little bit, but slightly.

Kristen Stewart - Credit Suisse

Okay. Last one of the tax rate, should we expect 28% going forward?

Dean H. Bergy – Vice President and Chief Financial Officer

No, as I said there, again, we are comfortable with that rate today, but I think as we go through the remainder of the year, we would expect it to come down as much as 50 basis points, which could get it as low as 27.6 for the year.

Operator

We have a follow-up question from the line of Mike Weinstein from J.P. Morgan.

Michael Weinstein - J.P. Morgan

Thank you. I appreciate you taking the follow-up. You know we are still in queue here, that's great.

Stephen P. MacMillan – President and Chief Executive Officer

So am I.

Michael Weinstein - J.P. Morgan

Sorry, we got lost earlier, Steve. I did want to make sure we understood a couple of items from your earlier comment. One is that in the course of GMP inspections, the FDA going through the facilities that there hadn't been any issues. To me, that's really is as important as anything here, and just on this overhang, if you would, of the FDA's relationship with you guys. And then second, just going up a second to the operating with a different company off, and then second, the commentary about all the activity in March. So, in March, we've seen this... in particular... sorry in March, we saw this… we've seen this activity increase at not-for-profit hospitals, at community hospitals, that GE ascribed some of their issues to, and from your vantage point, just to be clear... and you guys have very limited exposure here. I'd assume some maybe in your iSuite and in your beds business, but from your exposure, you are not seeing that at all at this point in April in your business? Thanks.

Stephen P. MacMillan – President and Chief Executive Officer

Sure, Mike. Let me take your second one first. We are not... I'd tell you we've got our ear to the – our ears very closely focused. And as you point out, within our broader MedSurg business, there’s probably only two pieces of capital that would rise to that level. One would be the iSuite,. and the other would be major bed orders. We are not seeing it at this point. We always... when you see a company as great as GE get surprised and everything else, it always makes you a little bit nervous, and we're kind of trying to watch and stay close to it. But we don't really see it affecting our business at this point. Back on the FDA inspections, I know, you're probably wishing us to review a little bit more detail than we want to get into. We are not getting to get into reporting on individual site inspection. We will tell you certainly if we got another warning letter or something else really bad, we will disclose it, I would tell you pretty promptly. But in the meantime, I want to avoid getting into a situation where we start to report on every single FDA inspection, both from our standpoint, but also I want to be careful as we think about our relationship with the FDA as well there. So. Hopefully, you will understand that.

Operator

We have another follow-up question your line of Bob Hopkins from Lehman Brothers.

Bob Hopkins - Lehman Brothers

Thanks very much. I just wanted to follow-up on your comments on cobalt chromium. Could you let us know what percentage of your implant costs are made up by cobalt, and give us any senses to how much the price has gone… price has increased?

Dean H. Bergy – Vice President and Chief Financial Officer

Oh, yikes, there you are. Bob, that’s a little more granular than I think we want to get at this point in time. It's...the price increases are pretty substantial on a percentage basis. If you look at the overall business and the margins involved, it's a reasonable proportion than that, but it's not overwhelming, something we can't handle, but obviously something we’d prefer not to.

Stephen P. MacMillan – President and Chief Executive Officer

It's also where, Bob, back to the fact that our business is much more diversified. No one franchise remembers more than 20% of our business.

Bob Hopkins - Lehman Brothers

Right.

Stephen P. MacMillan – President and Chief Executive Officer

And so any of those, while they can be meaningful and very significant for a certain franchise, we tend to find abilities across the broader corporation to balance those things.

Bob Hopkins - Lehman Brothers

And then just to follow upon Mike’s question, which is more capital related, the other thing that’s come out of the earnings season so far is, J&J’s comments about procedure volumes in general surgery, and I know again you don't necessarily touch on this in a significant way, but I am just curious, you talked a little bit about capital? Are you seeing anything on the surgical procedure volume side that's noteworthy at this point?

Stephen P. MacMillan – President and Chief Executive Officer

Yeah, not dramatically. And again I just... I think sometimes there is so much read into quarterly variations where couple of days can matter frankly whether depending on how many Fridays are in a quarter versus how many Mondays and Tuesdays. When we start to look so much at specific quarters, how many days were in the quarter, you are going to see some variation. I would want to see how everybody’s second quarter goes before you can really conclude anything upon that. I do think they made a distinction, which, I think you are referring to as well, that their DuPuy business was different than their Ethicon business, and we continue to try to stay close. We are probably not nearly as involved in the general surgery businesses they are to have necessarily picked it up, but they might be closer to it than we are. So, we will stay close to it.

Operator

Your next follow up question comes from the line of Michael Jungling from Merrill Lynch.

Michael Jungling - Merrill Lynch

Great, thank you. I wanted to ask a question on, if you look your excellent four months volume growth, I am just curious I am not just driven by being very price focused, and the reason I ask is because a major competitor is surprised about your pricing policy basically in trauma and spine, so a comment on that would be very helpful. Thank you?

Stephen P. MacMillan – President and Chief Executive Officer

We are not deep discounters on pricing, Michael, pure and simple. I think you look at our… people throw around different excuses here or there. We do not compete on price.

Michael Jungling - Merrill Lynch

Okay, thank you.

Operator

Your next follow up questions comes from the line of Matt Miksic from Morgan Stanley.

Matthew Miksic - Morgan Stanley

Hi, again. Thanks for taking the follow up. Just that, Dean, you had mentioned an increase, $6 million increase in legal related to some of these compliance spending requirements that you have, and I am assuming, I just want to confirm that's around FCPA and the FDA letters, is that right?

Dean H. Bergy – Vice President and Chief Financial Officer

And the DOJ.

Matthew Miksic - Morgan Stanley

And the DOJ. And is that sort of… I mean if you were to look at when that started, I guess, in that third quarter, a lot of this started second and third quarter of last year, maybe the third or fourth quarter, but what... in total what's... how do we think about that block of spending, is that a $10 million requirement that you are facing now for all those things together or is it a bit more, bit less?

Stephen P. MacMillan – President and Chief Executive Officer

Whenever it is, it's too much.

Dean H. Bergy – Vice President and Chief Financial Officer

Yeah.

Stephen P. MacMillan – President and Chief Executive Officer

I’ll say. Let me –

Dean H. Bergy – Vice President and Chief Financial Officer

I’d say it's fair to say it’s a bit more than that, and I guess I will leave it at that.

Matthew Miksic - Morgan Stanley

Okay. I won't push you on that. But… and one follow up of on the R&D comment that you made about getting the benefits this year, next year, the year after I guess driven by a lot of the investments you’ve made over the past few years. Can give us a sense of where you see some of those benefits concentrating across your businesses? What types of areas you expect to see new product launches this year and next, for example, which we look?

Stephen P. MacMillan – President and Chief Executive Officer

No, we will probably touch on that a little bit more at the meeting on the eighth. I would just continue to tell you, it's across all divisions. We don't get the growth rates above market in basically seven of our eighty franchises without steady product flow across the board, and again it's a lot of singles and doubles, it's not the grand slam home runs that the one key eureka product that people are usually looking for.

Operator

From UBS, your next hour comes from the line of Bruce Nudell. Mr. Nudell your line is open. You may proceed with your question.

Bruce Nudell - UBS

Oh, yes, thanks. Steve, the way you described it, most of the recall related impact on the market was due to logistics. Are there any hangovers with regards to the product per se, in another words the ceramic on ceramic squeaking issue and Strykewear [ph] and fracture were mentioned in one of the warning letters, do you feel that once a product is fully available, you will go back to your kind of baseline share as it were?

Stephen P. MacMillan – President and Chief Executive Officer

We certainly hope so, Bruce. But there have been a few doctors that may have used this as an opportunity to try some competitive products, and we are going to have to work to get them back. We clearly dug ourselves in a little bit of a hole, but once again, we will get back out there and fight for that.

Bruce Nudell - UBS

But I guess my question is, do you feel that the people who tended to use ceramic-on-ceramic will go back to that product type?

Stephen P. MacMillan – President and Chief Executive Officer

Yeah, we do. And keep in mind at this point, our ceramic-on-ceramic penetration is down about 10%, with our X3 which has done so well, ceramic-on-ceramic can really become a much smaller piece of our business, and It’s really found that niche for the younger patients and the surgeons who had a lot of very good experiences with it.

Operator

Your next follow-up comes from the line of Jason Wittes from Leerink Swann.

Jason Wittes - Leerink Swann Llc

Hi. I just wanted to follow-up on your comments on the Cormet Hip Resurfacing product, and that is my impression was that you did start some training last... some time early last year, and I guess you were saying that you just started at the end of this quarter. My first question is, A, is that timing sequence correct? B, can you give an indication of how many doctors you've trained and, C, are you going to have to get approvals for each time you want to set up a training session from the monitor?

Stephen P. MacMillan – President and Chief Executive Officer

Let me try to take those in pieces. We held like... just a couple of very small courses I think in December --

Jason Wittes - Leerink Swann Llc

Okay.

Stephen P. MacMillan – President and Chief Executive Officer

-- that had been set up. Then we held nothing in the first quarter where we had a lot of them scheduled. Recall the product was first cleared in July of last year. We then had to get some additional clearance from FDA around the initial training, which is why the first courses didn't happen until very late last year with a limited number of surgeons. Then we planned for it in the first quarter, that's also been now pushed out to the second quarter. We are not going to clarify specific numbers of surgeons trained. We just generally stay away from that. And the third part of the question was...

Dean H. Bergy – Vice President and Chief Financial Officer

Based on the DoJ monitor clearance, I mean the knees assessment that's been done is for the full year. So, that would encompass our training needs for the full year, and as... what we think we need to do those has been built in. But we always do have the ability for, if we think we need to deviate from that plan to go back to the monitor and get his clearance to do that, but we think we got what we need in the plan.

Jason Wittes - Leerink Swann Llc

So, at this point, we can assume that you are... this quarter we'll see a much larger training progression?

Stephen P. MacMillan – President and Chief Executive Officer

The training progression, yes.

Jason Wittes - Leerink Swann Llc

Okay.

Stephen P. MacMillan – President and Chief Executive Officer

Finally, is that it, operator?

Operator

Yes, sir. There are no more further questions in queue. I will turn the call back over to Mr. Stephen MacMillan for closing remarks.

Stephen P. MacMillan – President and Chief Executive Officer

Great. Well, thank you, Denise. We appreciate that. Just a couple of final comments again. Despite a few challenges, our broad based model came through once again. We feel pretty good, we delivered $0.70 a share and another overall solid quarter and a lot of good things going on around the company. Our conference call for our second quarter 2008 operating results will be held on July 17. And again as a reminder, we will be having our Analyst Day in New York on May 8. So, thank you, everybody.

Operator

Thank you for your participation in today's conference. This call concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Stryker Corp. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts