Stryker Corp. Q2 2008 Earnings Call Transcript

Jul.17.08 | About: Skyline Corp. (SKY)

Stryker Corp. (NYSE:SKY)

Q2 FY08 Earnings Call

July 17, 2008, 4:30 PM ET

Executives

Stephen P. MacMillan - President and CEO

Dean H. Bergy - VP and CFO

Analysts

David Lowman - Morgan Stanley

Michael Weinstein - JP Morgan

Raj Denhoy - Thomas Weisel Partners

Bruce Nudell - UBS

Kristen Stewart - Credit Suisse

Michael Matson - Wachovia Capital Markets

Doug Schenkel - Cowen and Co.

Michael Jungling - Merrill Lynch

Joanne Wuensch - BMO Capital Markets

Frederick Wise - Leerink Swann

Lawrence Keusch - Goldman Sachs & Co.

Tao Levy - Deutsche Bank

William Plovanic - Canaccord Adams

Jeff Johnson - Robert W. Baird & Co.

Operator

Good day ladies and gentlemen, and welcome to the Stryker Conference Call. My name is Kathie and I'll be your coordinator for today. At this time all participants will be in a listen-only mode. We will be conducting a question and answer session towards the end of this conference. [Operator Instructions]. The company has asked that I read the following statements.

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 United States Food and Drug Administration approval of new products; changes in reimbursement levels from the third-party payers, a significant increase in product liability claims, change in economic conditions that adversely affect the level of demand for the company's products, change in foreign exchange markets, change in financial markets and change 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. Today's conference call will also include a discussion of adjusted net earnings from continuing operations for the comparative quarter and six months ended June 30, 2007.

Further discussion in a non-GAAP financial measure including a GAAP reconciliation apparent in the company's Form 8-K filed today with the United States Securities and Exchange Commission, which may be accessed from For Investors page on the company's website at www.stryker.com.

I would like to now turn the call over to your host for today Mr. Stephen P. MacMillan, President and Chief Executive Officer. Sir, you may proceed.

Stephen P. MacMillan - President and Chief Executive Officer

Thank you, Kathie and good afternoon, everyone. And welcome to Stryker's second 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.

We had a few challenges in the quarter and, as always, there will be a few things to focus but our unique set of businesses delivered strong results once again, posting our 30th straight quarter of double-digit sales growth. While favorable calendar and currency helped in the quarter by adding over 4 points of growth to our top line, overall reported sales growth was 17%, and earnings were, again, up over 20%.

With strong performances from our international businesses, our growth was remarkably balanced on a geographic basis, with both the U.S. and international businesses up about 12.5% operationally in the quarter. This represents significant upticks in our European, Pacific and Latin America businesses. And total reported international growth was up 25% in the quarter.

Internationally, all five of our Orthopaedic Implants businesses, hips, knees, spine, trauma and CMF, delivered accelerating growth rates and exceeded 20% combined sales growth on a reported basis.

MedSurg also had another impressive quarter, posting over 20% reported growth and up 18% operationally. Our international expansion efforts continued to pay off as reported MedSurg growth was up a remarkable 37% in the quarter and 25% operationally. Our U.S. businesses also continued to be strong up over 15% in the quarter. Thus, we continue to be optimistic about our long-term prospects of the growth in MedSurg.

We now turn to update on quality and compliance. We have been actively engaged in discussions with FDA, as we work to remediate our existing warning letters but also it's to harmonize and strengthen our compliance systems across the Corporation. While a highly decentralized organization helps drive exceptional commercial success over the years, it has also made it more difficult to deliver the consistent company-wide compliant systems which FDA expects.

The magnitude of the upward [ph] ahead of us is big. And earlier this year, we began a major revamping of our approach to our quality and compliance systems. And it will take time, money, and management focus, throughout the organization.

We would expect costs of this effort to be at least $50 million per year, for the next few years and will likely result in the addition of several hundred new people around the world.

So, what should you make of all of this? It's pretty simple. We have a lot of work to do, but we are channeling our can-be-spirit to the area of compliance and attacking it like we attack all challenges with focus and energy. And from a position of financial strength, it should allow us to continue to deliver, while also getting stronger.

I will now turn it over to Dean, for more details.

Dean H. Bergy - Vice President and Chief Financial Officer

Thanks, Steve. I would like to start with the impact of foreign currency on our sales in the quarter. As in the first quarter, foreign currency was very favorable this quarter. The weakening of the U.S. dollar added $65 million to international sales and increased the company's overall sales growth by 4.4%.

In the second quarter, the dollar weakened approximately 16% against the euro, and about 13% against the yen, when compared to the prior year. If currency rates hold near June 30th levels, we expect the impact of foreign currency will increase third quarter 2008 sales by about 2.5% to 3% versus the prior year.

Now, I'll spend a moment on the impacts of price and volume mix on the top line. Selling prices were up about 0.5% on a worldwide basis in the quarter, the domestic prices up 1%, and the international prices declining slightly as a result of the April 1st, 2008 government reimbursement cuts in Japan.

Japanese pricing was off 7% in the quarter. Volume mix growth was 12% in the second quarter. Domestic volume mix growth checked in at 11% in the quarter, and the international volume mix growth was a robust 13% on the heels of a soft first quarter.

Now, I'll turn to our business segments, Orthopaedic Implants, represents 59% of our sales. And sales of Orthopaedic Implants increased 15% in the second quarter on a reported basis and 9% operationally. The Orthopaedic Implants business received a slight benefit from one additional comparative selling day in the quarter. And as we go through the growth rates by product line, which are shown in our press release, I will reference the rates as we'll provide more detail on performance in each product category.

Hips were up 7% in dollars and 2% in constant currency in the second quarter. As was the case in the first quarter, our overall hip business in this quarter was negatively impacted by the Trident Hip recall. Trident supply has now been restored to reasonable levels and our sales forces can turn their attention to getting this franchise back on an improved growth track.

U.S. hip sales grew 3% in the quarter, led by incremental Cormet Hip Resurfacing sales and growth in Restoration Modular Hip revision, X3 polyethylene and the Accolade cementless products. Declines in Trident sales offset a portion of the gains from these products.

European hip sales posted mid single-digit local currency growth with ABG II, X3 polyethylene and Accolade leading the way. Trident and Exeter registered modest unit growth in Europe.

In Japan, constant currency hip sales declined at low single-digit levels as a result of the MHLW imposed price reductions. Volume gains reached mid single-digits led by our Secure-Fit products. Local currency hip sales in the remaining international markets were basically flat, rebounding from a 10% decline in the first quarter as Trident supply came back online.

Now turning to knees, they were up 18% in dollars and 13% in local currency in this quarter. Our overall knee business had a nice quarter with consistent growth around the world. In the U.S. knee growth of 13% provided our 34th consecutive quarter of domestic double-digit growth in this category. Primary knees posted low double-digit growth with X3 polyethylene and Triathlon leading the way. Revision knees grew by over 30% for second straight quarter, paced by our new Triathlon TS revision product.

In Europe, our operational knee growth checked in at healthy mid-teen levels, with Triathlon and X3 the key drivers. Japanese constant currency knee sales grew at mid-to-high single-digit rates translating to mid-teens volume growth after considering the price reduction impact. Scorpio NRG is our leading key product in this market.

Pacific, Canada, Latin America, all posted low double-digit local currency knee growth with Triathlon leading the way in Pacific and Canada and Scorpio in Latin America.

Now turning to trauma, it was up 22% in dollars and 13% on an operational basis in the second quarter. The trauma business had a very solid all-round quarter with the U.S. slowing a bit in growth overseas accelerating.

Domestic sales grew 13% in the second quarter, and this percentage is unaltered by the exclusion of military sales. U.S. trauma growth was led Gamma3 Hip Fracture, VariAx Distal Radius and Foot Plating System products.

International trauma sales accelerated up 13% growth on an operational basis. Europe had another nice quarter posting mid-teens local currency growth. In Japan, trauma product sales were flat in constant currency. The remaining international markets for trauma were all exceptionally strong, registering collective growth above 40% at a relatively small base.

Similar to the U.S., international trauma growth was paced by upper extremity and foot and ankle products.

Now turning to spine, it was up 21% in dollars and 17% in local currency in the quarter. Our spine business had another excellent quarter. U.S. spine sales were up 22% against an extremely tough prior year comparable. This growth was very consistent with the major product categories we tracked, all up at least 20%, led by interbody devices.

International spine sales posted 7% operational growth in the second quarter. Thoracolumbar products generated the bulk of our international spine growth, and Pacific and Europe were the geographic leaders with each of these markets posting low double digit constant currency growth.

CMF, the last of the products in this category, was up 22% in dollars and 18% in local currency in the quarter. Our CMF business had another excellent quarter with balanced growth between domestic and international businesses. Neuro and HydroSet injectable bone substitute products, again, drove the U.S. growth as they did overseas. CMF growth outside the U.S. was particularly strong in Pacific and Europe had a very solid quarter.

Now turning to our MedSurg group, this represents the other 41% of our sales. MedSurg had an excellent quarter. Instruments had an exceptional quarter in the U.S. and all three businesses posted excellent sales results overseas. As a reminder, MedSurg is comprised of three significant product categories with instruments taking up 18% of total company sales and endoscopy 14% and medical 9%. MedSurg group sales were up 21% for the quarter in U.S. dollars and 18% on an operational basis.

Now turning to the individual product. Sales for our instruments product line were up 26% in the quarter on a reported basis and grew 22% in local currency. Instruments had an exceptional quarter with operational growth over 20% in both the U.S. and international markets. To be fair, the business received a bit of a boost in the quarter from the bonus of demand for certain products that are competitive offer in the market in the near term.

Domestic sales were led by exceptional growth from our Cordless Driver 3, micro powered tools, and Neptune Waste Management products as well as excellent growth from our irrigation and cement mixing products. Sales of heavy-duty power tools were solid in the quarter.

Our international instruments business had an outstanding quarter, growing 38% on a reported basis and 25% on constant currency. Overseas growth was led by heavy duty and micro powered tools along with irrigation and interventional pain products. On a geographic basis, Pacific, Japan and Latin America, all registered operational growth above 30% in the quarter.

Endoscopy grew 16% in the quarter as reported and 13% in constant currency. Endoscopy had a quarter very much like their first quarter, reporting solid growth paced by the international markets. Domestic sales were led by communications and general surgery products. International sales grew 1% operationally with general surgery and video products leading the way. Pacific and Canada registered exceptional growth and Europe also had a nice quarter.

Now turning to medical. Our medical business was up 18% in the quarter as reported and 16% on an operational basis. Medical posted another strong quarter with our international business leading the way. Domestic growth of 13% was led by EMS products with beds and stretchers registering solid double-digit growth.

Overseas, the key product categories, all registered constant currency growth of above 20%, the geographic growth led by Latin America and Pacific.

Now, I'll provide some comments on the remainder of the income statement, beginning with gross margins. Gross margins in the quarter were down 70 basis points compared to last year. And as anticipated, the cost of some of our quality initiatives began to ramp up in the second quarter, which unfavorably impacted our margins.

Higher excess and obsolete inventory costs associated with implant businesses and increased shipping costs also lowered comparative margins. As a result of certain increased costs, including those associated with our ongoing quality initiatives, and higher raw material and freight costs, we now project annual gross margins will be down 20 basis points to 40 basis points compared to the prior year.

Spending on research and development was down 2% in the quarter. Back in January when we gave our 2008 guidance, we indicated that we planned a slower pace of R&D spending during this year. This plan should be understood in the context of the previous four years, where R&D spending grew well above our top line growth rate, and increased meaningfully as a percent of sales as we increased our pipeline of products across the divisions.

We expect to see a more normalized level of R&D spending on a go forward basis. Recognizing that given the timing of certain projects, the spend level will vary from quarter-to-quarter as it did in the second quarter.

In addition, the focus of R&D researches on quality has slowed down a few R&D projects and reduced the spending that may have normally been directed by our teams, through outside contractors. We are still comfortable with our R&D pipeline as we look ahead, given the level of work we have done in this area over the past several years.

SG&A costs increased by 17% in the quarter, primarily as a result of increases in costs associated with compliance activities and growth in sales related costs. The compliance costs are reflected in the legal fees and almost tripled in the quarter. Selling costs included compensation and instrument amortization costs and grew somewhat below the rate of sales growth, as instrument amortization has begun to slow down.

The second quarter of 2007 included a pre-tax impairment charge of $19.8 million to write off patents associated with the spinal interbody fusion cage products, obtained in the 2002 Surgical Dynamics acquisition. Excluding the impact of that impairment charge, operating income increased 20% in the second quarter and operating margins increased to 23.4% of sales.

Now, I'll provide a breakdown of other income and expense for the quarter. That number which totaled $19.2 million was made up of investment income of $26.4 million, offset by interest expense of $7.3 million and then supplemented by a small foreign currency transaction gain of $0.1 million.

The company's effective income tax rates were 27.2% and 27.6% for the second quarter and first half of 2008 respectively. This compared to effective income tax rates for the second quarter, first half and year ended December 31st, 2007 are 27.6%, 27.9% and 28.0%, respectively.

Our balance sheet continues to be in excellent shape, and I'll touch on the key asset management areas. First, accounts receivable: accounts receivable days ended the quarter at 59 days, down one day sequentially, and up one day from a year ago. We continue to believe, this represents very good performance for our industry and geographic footprint.

Inventory days finished the quarter at 162 days. In line with the first quarter and up 13 days versus the prior year. This metric is impacted by foreign currency translation and new product introductions, but also reflects inventory we expect will be better utilized, as we have strived to accelerate growth in our hip franchise around the world.

And then lastly on the balance sheet at June 30, 2008, we have just $24 million of debt outstanding.

Now, I'll finish with a brief look at our cash flow statement where we're pleased with our performance so far this year.

Cash flow from operations in the first half is up 19%, to $431 million, and our cash and marketable securities balances have topped $2.5 billion.

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

Stephen P. MacMillan - President and Chief Executive Officer

Thanks, Dean. So, as we summarize the quarter it looks like this. Strong sales, earnings and cash flow growth were immediately helped by the calendar, currency, and a little help for our instruments franchise from supply issues at a competitor. These positives allowed us to overcome our own shortfalls in our hip franchise and enabled us to invest significantly in quality and compliance initiatives.

These investments gained our gross margins a bit and it delayed some R&D projects as Dean mentioned. But we remain confident in our overall pipeline. Strengthened euro also dented gross margins narrowly but an improved tax rate helped. So all in, we had a few moving parts falling against us, as always, but our broad based set of businesses once again allowed us to deliver on the commitments we established at the start of the year. Looking forward. we continue to feel good about our ability to deliver in the second half while continuing to strengthen our quality and compliance systems.

With that, we will now open it to up for questions and remind everyone that we'll take one question from each person with one follow up. So back to you Kathie.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of David Lowman from Morgan Stanley. Please proceed. David your line is open, you may proceed with your question please.

David Lowman - Morgan Stanley

Thank you. Good evening everyone. Couple of just quick questions, first on the hip side. Can you give us an update on the Cormet launch, where are we with training courses and when we can expect a full rollout?

Stephen P. MacMillan - President and Chief Executive Officer

Sure. The training course has been happening through the second quarter, David. I would tell you to be quite candid. Our organization shifted from playing offence to defense in the first half of the year, as we reeled from the hip recall. And I think we'll expect a steady uptick here in the third quarter and beyond. But again this one continues to go certainly slower than we would have planned at the start of the year

David Lowman - Morgan Stanley

Okay. And then on the gross margin, Dean, can you quantify maybe the components of that 20 to 40 basis point year-over-year decline. What the positives and negatives are in there?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, it primarily David is the quality initiatives kicking in. I also mentioned the fact that as you know when we've talked about it before, we have a few components of higher raw material costs. Some of that relates to the price of some of the commodities that we are purchasing, the models that go into some of the products, as well as to some degree, a little bit of the dent from the impact foreign currency in that category. And then also we have some higher shifting costs that are going into that. But from a magnitude standpoint it's primarily the quality initiatives that are going to impact that year-over-year change.

And again, if you think about where we would have mainly anticipated this to be in a normal year, we would have expected our margins maybe up 30 to 50 basis points. So all in, we are taking a pretty good whack as we roll into cost of this quality which will have some ongoing impact but should lead us on to better prices in the company as we go forward.

Operator

Your next question comes from the line of Mike Weinstein from JP Morgan, please proceed.

Michael Weinstein - JP Morgan

Good evening guys.

Stephen P. MacMillan - President and Chief Executive Officer

Hi Mike.

Dean H. Bergy - Vice President and Chief Financial Officer

Hi Mike.

Michael Weinstein - JP Morgan

Let me just follow up on that last question there. It probably would be helpful Dean, is, if we think about the move from first 30 to 50 to down 20 on gross margin guidance, initial thoughts today. Do you... can you give us a sense of how much of that's quality initiative versus increased material costs, increased shipping costs and the dollar?

Dean H. Bergy - Vice President and Chief Financial Officer

Well, again, most of it is quality and we have outlined a number there of at least $50 million. So I think --

Michael Weinstein - JP Morgan

In that $50...

Dean H. Bergy - Vice President and Chief Financial Officer

Pardon.

Michael Weinstein - JP Morgan

And that full 50 shows up in the cost of goods sold line?

Dean H. Bergy - Vice President and Chief Financial Officer

Not completely but the majority of it does.

Michael Weinstein - JP Morgan

Okay. Let me, just come back to the FDA. You spent a little bit of time on it but I was hoping you could update us on the timing of the reinspections of Cork and Mahwah?

Dean H. Bergy - Vice President and Chief Financial Officer

It's still no timings planned and Mike again I think... I know from an investment community standpoint, we love to get those behind us. I would tell you, we're still more focused on making sure that we have those facilities in great shape, and are preparing that way. So there is no timing yet established.

Operator

Your next question comes from the line of Raj Denhoy from Thomas Weisel Partners. Please proceed.

Raj Denhoy - Thomas Weisel Partners

Hi, good afternoon guys.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Raj.

Raj Denhoy - Thomas Weisel Partners

What if I could ask a little bit about the hip business in general. I know it's... you've mentioned that, the inventories have now been restored in the marketplace, but that growth rate, particularly, on domestic side is still a pretty anemic. Could you just maybe give us a little bit of clarity as to when you expect that to accelerate, and how you expect to overcome some of the competitive hips you might have taken there, get back some of that business?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, we think we will get it going again by about 2015 --

Raj Denhoy - Thomas Weisel Partners

At the rate we're going?

Stephen P. MacMillan - President and Chief Executive Officer

It's going to be probably slow, slow coming back here in the second half of the year. The sales forces took a hip, and you don't get that business back and that momentum back. I think, to be quite honest, they're also very caught up in our incredible growth in our knee business right now. It's easy to go to hip, so, I'd remind everybody that our other seven franchises all grew in excess of 15%. And there is a lot of momentum in knees right now. I'll tell you the... if you look at the knee marketplace, we think it's a much more dynamic marketplace right now in terms of surgery schedules and everything else. And candidly with the success of Triathlon, with the PKR, and our Partially Knee Resurfacing, and our Triathlon revision system, it's a little bit easier for our sales force to be focused on knees right now. And it's going to take a little bit of time I think before they get fully back and excited about hips again.

Raj Denhoy - Thomas Weisel Partners

Sure. Yes, the knee business we're sure isn't lost. But it's interesting to know because, I guess, we don't necessarily assume that there is going to be a lot of competitive change, quarter-in quarter-out, in orthopaedics. But it sounds from some of your comments that you maybe have actually lost some competitive share here in hips and that maybe it's not just the one-off procedure, but surgeons may have moved to other competitors devices in order to satisfy their needs. Is that, in fact, the cases what's happened?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, I think if you look at certainly J&J numbers, they had a great hip quarter. And I think we have a lost a little bit of business to them. But, it's going to take a little bit of effort to get back. So, I think, that's a very fair observation. We're not thrilled about it. I think we're taking market share in seven of the eight categories, we compete in. Which, I think, just about any company would take, but we've lost a little bit in that one. But, we'll get it back eventually.

Operator

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

Bruce Nudell - UBS

Good afternoon. Steve, I was intrigued by comment about knees. Do you believe that our knee volumes are up close to the 10% we saw for a while in the United States?

Stephen P. MacMillan - President and Chief Executive Officer

It certainly seems. If you look at the hip market and the knee market right now Bruce. The knee market certainly seems to be a lot more vibrant. And I'd say both in the U.S. and globally. And that's where, we are disappointed with our hip business, but frankly, given the growth in the knee category rate now, I think we'd rather be succeeding and winning the knees, which we are. So, it does seem pretty vibrant.

Bruce Nudell - UBS

And just one follow-up. With regards, to the warning letter at the Analyst Day, the potential for a corporate warning letter, at the Analyst Day, you were guardedly more optimistic that, it could be avoided. Or could just comment on your sense of how things are going, and also to the extent that worse comes to worse. Is that $50 million, the number that will pretty much stay in place, in terms of the incremental spend?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, we continue, as we said at the Analyst Day. We are essentially operating the company as if we received a corporate warning letter. When you look at the magnitude of the effort that we're putting into our quality and compliance initiatives, I would tell you if you draw a continuum between, they were completely out of the woods and on one extreme... and were on the verge of getting a corporate warning letter on the other extreme. I'd say we're probably closer to the middle. But if anything would be on the wrong side of that middle still. We still, we've got work to do but we feel we made a lot of progress, in a short period of time, but we still have lot of work to do.

Operator

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

Kristen Stewart - Credit Suisse

Hi, thanks for taking the call.

Stephen P. MacMillan - President and Chief Executive Officer

Sure, Kristen.

Kristen Stewart - Credit Suisse

Exploring just on, apologies if already addressed this but, obviously with the first quarter with Easter there has been a lot of talk on kind of what that impact was in the first quarter. Any sense on, what you might have seen from a year-over-year comparison, given that Easter was in the second quarter a year ago? And then if could just touch on the instruments can you just justify kind of I guess what were the issues there and to what degree you expect to benefit from your competitors' issue going forward?

Stephen P. MacMillan - President and Chief Executive Officer

Sure. On the Easter we essentially had an extra day this quarter versus a day short, probably all in it was a few percentage points whether it's between 1.5 to 3 points, it's probably been, I think what we factor in.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I think that's fair. And certainly we saw Europe particularly on the international businesses to be stronger and reconstructive in implant parts of the business in this quarter which is where we got hit last quarter, and would have anticipated that bounce back.

Stephen P. MacMillan - President and Chief Executive Officer

Yes, great. And on instruments I think the Dean, mentioned there were couple of product lines in terms of some of the irrigation stuff that probably benefited a little bit more from some shortages in the market. So, and again where we want to be as honest as we can because that may be not repeat in this quarter next year. And as you know we try to be as critical as we can and instead of blowing a bunch of smoke tell you where we did, they were lucky.

Kristen Stewart - Credit Suisse

And can you quantify exactly how much you think impacted the gross rate there?

Stephen P. MacMillan - President and Chief Executive Officer

In the grand scheme pretty minor for the full hunt [ph].

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I think that's fair. I mean they did have an exceptional quarter. So and I think as I said there was probably a little bit of the bonus of that demand for those products. So those products are going to probably remain off the market for a while. For our competitor I think this quarter is probably getting the most benefit.

Stephen P. MacMillan - President and Chief Executive Officer

Maybe a percent or two of growth for that business.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, maybe, a couple more than that but --

Stephen P. MacMillan - President and Chief Executive Officer

Yes,few percents... probably a few percentage points Kirsten on the instruments franchise for the total Corporation, clearly less than a percent.

Operator

You next question comes from the line of Michael Matson from Wachovia Capital Markets.

Michael Matson - Wachovia Capital Markets

Hi, it was kind of interested in the comment that you made earlier in the call or that Steve made early in the call about the $50 million per year, we need to continue for the next few years. And this year you're tapering down your R&D spending. I understand that, that was sort of by design that was something you intended heading into the year.

But just looking out for the next few years, if you are spending the $50 million a year, how are you going to continue to be able to deliver some nice margin expansion? And are there other things that will start to roll off next year, such as the monitoring fees and things like that?

Stephen P. MacMillan - President and Chief Executive Officer

Yes. The first part of the answer is we're going to continue to grow really fast on the top-line, which I think we're improving our ability to be pretty good at. And just simply put that $50 million next year off from a much bigger base you'll get some automatic leverage there. And regarding as we continue to go forward... there should be some costs particularly Dean mentioned some of the legal costs and everything else being up significantly higher. We would certainly hope that some of those to start to roll off.

Michael Matson - Wachovia Capital Markets

Okay. And then I was wondering if you could give us a little more detail on your hip resurfacing product. I guess Corin put out an announcement that you are taking any more orders from them until I guess the end of year something. And I just wanted to know is that reflective of a further slowdown in the sales there or less uptick than you expected or is that just a reflection of the delay in the training heading into the year?

Stephen P. MacMillan - President and Chief Executive Officer

It'sdelayed training but overall it's... we're just a slower out of the gate. It has not been as easy for us when the sales force have been so far distracted. And I think we'd be wiser to keep expectations lower here rather than faster Mike.

Operator

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

Doug Schenkel - Cowen and Co.

Good afternoon.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Doug.

Doug Schenkel - Cowen and Co.

Even adjusting for FX, and actually looks like your OUS. hip number rebounded, I would say almost materially more than it did in the U.S. Any unique supply dynamics, specific to Trident or surgeon management approaches that you took that may have helped to get business back more so, OUS than domestically?

Stephen P. MacMillan - President and Chief Executive Officer

Great question, Doug. I would tell you, probably in some of our key markets outside the U.S., we did a better job of shielding the surgeons from supply issues throughout. I would say we made some prioritization calls and shifted around certain countries to make sure that we protected our higher volume surgeons international and frankly are more profitable surgeons in some of the international markets. And I give our international leaders a lot of credit. They made some tougher choices than what they would have done historically and I think it did allow us to bounce back a little bit quicker.

Doug Schenkel - Cowen and Co.

Great. And just one follow up: in Q1, you suggested that the Trident challenges, you're facing may have actually hindered what was a pretty strong knee number in Q1. And I think that was attributed to just the fact that as you've talked about on today's call that it is a distraction to the sales force. Any thoughts on how this dynamic played out in Q2?

Stephen P. MacMillan - President and Chief Executive Officer

I think in Q2 as we started to get at least supply back on the hips, it allowed the sales reps to at least not to spending all of their time as logistics coordinators, and allowed to get probably back into surgeries and with the up-tick and the launches of that Triathlon PKR and that the revision system, they probably started to put a little more of their time and energy back into selling those products, but I think it's kind of less of a proud one on hips and they went back to knees, which they were having a lot of fun with, but still they are not yet having fun selling hips again.

Dean H. Bergy - Vice President and Chief Financial Officer

I do think we do suspect that our main product trauma business in the U.S. a little bit with some of the folks that have that in their bag is full line reps, potentially some of that focus issue, but we certainly think we are in good shape as we go on into the third quarter now.

Stephen P. MacMillan - President and Chief Executive Officer

Yes, that's great additional point.

Operator

Ladies and gentlemen, as the reminder: please limit your questions to one question with one follow up. Your next question comes from the line of Michael Jungling from Merrill Lynch. Please proceed.

Michael Jungling - Merrill Lynch

Thank you for taking my questions. I have two questions; first in the gross margin: given the investments making quality control that measures the... will the gross margin be balanced to below 70% over the intermediate term? And I'm not just referring to the next two quarters, but perhaps a little bit more beyond that. And then secondly on trauma, what is the constant currency trauma approach rate if you exclude military sales, and also while we've now seen three quarters of deceleration in constant currency sales growth? Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Sure, Michael. I lost the first point.

Dean H. Bergy - Vice President and Chief Financial Officer

The first question, Michael, I'm not sure I fully understood, gross--

Stephen P. MacMillan - President and Chief Executive Officer

The gross margin; yes, they probably will stay under 70.

Dean H. Bergy - Vice President and Chief Financial Officer

It's under 70%.

Stephen P. MacMillan - President and Chief Executive Officer

Yes.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, they would be.

Stephen P. MacMillan - President and Chief Executive Officer

They will be. And in terms of--

Michael Jungling - Merrill Lynch

And that's also for next year?

Stephen P. MacMillan - President and Chief Executive Officer

Yes. Yes, because a lot of the cost has rolled through.

Dean H. Bergy - Vice President and Chief Financial Officer

I mean last year our gross margin for the year was $68.9 million, and we're now projecting that to be down 20 to 40 basis points; and with that $50 million or components that built on the gross margin going forward, even if we get a normal expansion, we're still going to be below $70 million.

Stephen P. MacMillan - President and Chief Executive Officer

We haven't really been at $70 million company.

Dean H. Bergy - Vice President and Chief Financial Officer

Right.

Stephen P. MacMillan - President and Chief Executive Officer

We've been constantly marching up overtime and now that that march up is going to plateau here a little bit. Regarding, trauma, Michael, we've had just unbelievable growth in the United States for a number of quarters that's finally... that just the comparables of 25%, 28% on top of each other, on top of each other clearly getting tougher, and so we're probably starting to see some of the slowdown combined with what Dean said. Some of our full line, people will do recommend trauma. We're little distracted, and we certainly saw the slowdown in the U.S. Internationally, our trauma business, last couple of quarters compared to that the overall global rate slows down, because the U.S. has slowed down a little bit. I've remind you by the way 13% trauma growth in the U.S. still not too chivvy.

Dean H. Bergy - Vice President and Chief Financial Officer

Right. And then military sales had no impact at that number, it's the same with and without, Michael.

Michael Jungling - Merrill Lynch

Thank you.

Stephen P. MacMillan - President and Chief Executive Officer

Great.

Operator

Your next question comes from the line of Joanne Wuensch from BMO Capital Market. Please proceed.

Joanne Wuensch - BMO Capital Markets

Thank you. First question has to do with the tax rate; it's 27.2%. Is that the rate we should think about for the remainder of the year and then on a go-forward basis?

Dean H. Bergy - Vice President and Chief Financial Officer

Joanne, I think the tax rate is going to have a little bit of volatility. And then I guess what I would tell you is we are 27.6% through six months. I think we are comfortable with rates kind of anywhere in the range of 27.5% to 28% as we look at the remaining quarters of the year.

Joanne Wuensch - BMO Capital Markets

Okay, and it looks like you did not repurchase any shares in the quarter. Is that the right read, and if so, why not?

Stephen P. MacMillan - President and Chief Executive Officer

Yes, that is the right read, and we had... as you know, to put one these problems in place, you can't have material inside information, we had certain things that we were looking at and going on and we're not in a position to initiate that buyback yet.

Joanne Wuensch - BMO Capital Markets

Okay. So many question that could come after that. I'll wrap it up just then with sources of... sorry uses of cash, or are you still looking at acquisitions then?

Stephen P. MacMillan - President and Chief Executive Officer

Acquisitions and initiating the buyback.

Joanne Wuensch - BMO Capital Markets

And initiating a buyback. Okay. Thank you, very much.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. Thanks, Joanne.

Operator

Your next question comes from the line Rick Wise from Leerink Swann. Please proceed.

Frederick Wise - Leerink Swann

Good afternoon Steve, hi Dean.

Stephen P. MacMillan - President and Chief Executive Officer

Hi.

Dean H. Bergy - Vice President and Chief Financial Officer

Hi, Rick.

Frederick Wise - Leerink Swann

Couple of questions; particularly outstanding international MedSurg results. If I am seeing it correctly second quarter gross rates accelerating over first quarter year-over-year numbers, maybe you can give us a little more color on what's happening there and some of the initiatives that are driving that and the sustainability.

Stephen P. MacMillan - President and Chief Executive Officer

Sure, it's largely been just greater focus in a lot of our key countries outside the U.S. where we've been putting more dedicated sales people in. Particularly, really for instruments and endoscopy businesses. And what we've always recognized is we've had good products there. We just frankly haven't had many sales people on the ground in some of the markets and it's been started to build that out. And that's where we continue to think there is a some runway ahead of us there.

Frederick Wise - Leerink Swann

And back to U.S. I've had some possible supply measure discussions lately that quite pleasantly have been indicating that Stryker bids seem to be getting share of some folks, who were total hill run hospitals they've built a new wing and they're putting in Stryker. Again, can you help me with any perspective on something new effecting dynamics there and maybe just as part of that update us on the perpetual question these days of that capital equipment spending, in general.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. we continue to feel great about our medical business; pure and simple. We have, we think a great team of people there and a great steady flow of new products, and a lot of the new products that may have mentioned to you, a lot of what we are focusing on our beds and stretchers that can be easier for the OR staff, and frankly help productivity in the hospitals with some greater software components very few of them and everything else. And we have a new bed that we're just launching right now that's being very well received. So, we continue to feel very good about that ability of that business to grow well above the market rate. We're very proud of that division.

Operator

The next question comes from the line of Mack Mitsic [ph] from Piper Jaffray. Please proceed.

Unidentified Analyst

Hi Steve, hi Dean, thanks for taking the question.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Mack.

Unidentified Analyst

So, one question just on sort of the sequential differences and in Q1 to Q2, with all the expectations around Easter, having some kind of positive impact on Q2, and a negative impact on Q1, the recall in Q1. It looks like some of your businesses and I guess I'm looking at knees even through they're still great, they did come down from Q1. I looked at a couple of other your businesses like even beds or some of the others, which are strong, but they are all kind of down. And I'm just wondering with the billing date differences, are some of those moving in ways that you didn't expect quarter-to-quarter. And are you seeing any, is there anything out that gets you worried about the environment?

Stephen P. MacMillan - President and Chief Executive Officer

There is nothing that has us worried about the environment. I think, our instruments business in the U.S. grew faster in the quarter, I think our medical business

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I mean in our--

Stephen P. MacMillan - President and Chief Executive Officer

Grew faster in the quarter.

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, I mean our knee business grew faster in the quarter too. So, I think a lot of those businesses actually did pick up.

Unidentified Analyst

In the U.S.?

Stephen P. MacMillan - President and Chief Executive Officer

Largely, we have this, we've been seeing for a while that trauma is fine, would eventually be slowing down.

Dean H. Bergy - Vice President and Chief Financial Officer

Right.

Stephen P. MacMillan - President and Chief Executive Officer

After... spine is going to get 30% growth quarter last year. So, We had been modeling all year long, frankly that the trauma and spine would slow down a little bit. Knees would hopefully maintain and hips would pick up a little bit. Obviously, the recall on hips has pushed us back there. And that MedSurg would continue to truck along. I think all in, it's a very much what we feel that we have.

Unidentified Analyst

So, you still feel pretty strongly coming into the second quarter here. You talked... I heard the comments early about knees. It sounds like you are just seeing a lot of positive procedure activity out there in your major markets.

Stephen P. MacMillan - President and Chief Executive Officer

We are.

Dean H. Bergy - Vice President and Chief Financial Officer

I think certainly in knees, we have expanded the triathlon franchise here. Adding the TS provision system, obviously, has had great results in the first quarter. And now the PKR is starting to pick up as well. So, I think we certainly feel good about those two additions helping to continue nice momentum that we have had in knees for a long time.

Stephen P. MacMillan - President and Chief Executive Officer

Yes.

Operator

Your next question comes from the line of Lawrence Keusch from Goldman Sachs. Please proceed.

Lawrence Keusch - Goldman Sachs & Co.

Hi, good afternoon guys.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Larry.

Dean H. Bergy - Vice President and Chief Financial Officer

Hi, Larry.

Lawrence Keusch - Goldman Sachs & Co.

Just, so Steve, two questions; I will just ask them and then you can fire back. Obviously, I was just trying to understand what's going on with surgical volumes and it feels like things are fine. But if you look across, let's keep it to the U.S., across the U,S., are you seeing any change in any of the geographic areas either accelerating, because people are afraid of losing their jobs and they are trying to get procedures done or decelerating in any way. Just trying to get a feel if that's tracking any differently as you work through the quarters here.

And than the second question I don't want to put words in your mount, and that's why I want to make sure I do understand this. From your prior comments regarding where you are with the FDA and the inspections and sort of the challenges in front of you on that, it almost feels like you're not quite as optimistic as you were at the Analyst Day. And so I just want to make sure that something didn't happen since that meeting that makes you feel little bit less positive on getting this result quickly or am I just reading way too much into that? So I just wanted to ask that as well.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. The first one on the geographic within the U.S., we have not noticed any significant things, Larry. We can always follow up, but that level of the... there has been nothing that's jumped out at our level on that.

Regarding the second part, I think as you think about FDA, where I was feeling certainly that we made progress when we saw you all in May. And I continue to feel that is I feel better than I did in January. But I also don't want that to perceived as hey, everything is hunky-dory. We're completely out of the woods. So there is probably a slight nuance there that I might have thought... people might have read maybe touch more positivism in May. But we continue to feel we're working at. We feel like we've made a lot of progress, we feel we've impressed the FDA that we've made a lot of progress. But the ball is still ultimately in their court and there is a lot of work to be done. I think what we wanted to be clear about and as we feel that and the more and more realize there is a lot that we have to do, and I just don't want people to kind of declare victory and go home.

Lawrence Keusch - Goldman Sachs & Co.

Right, that still breaks a little bit here.

Stephen P. MacMillan - President and Chief Executive Officer

Yes, hopefully that frames it that I'm not very different, but the perception of work might have been, I think was potentially if anything... it was just a touch more positive probably even as we saw the stock run up a bit. The analyst meeting, I realize was probably a touch more optimistic than we might have been feeling, but we do feel very good about the progress, but know it's a journey.

Lawrence Keusch - Goldman Sachs & Co.

Okay. No events had incurred you again just to comment on.

Stephen P. MacMillan - President and Chief Executive Officer

Nothing has changed in that new bag.

Lawrence Keusch - Goldman Sachs & Co.

Got you. Okay. Terrific, thank you for that clarification.

Stephen P. MacMillan - President and Chief Executive Officer

I would love to have something to knock me completely to the other end of the spectrum, and I just can't give you that yet

Lawrence Keusch - Goldman Sachs & Co.

Got you; thanks very much, Steve.

Stephen P. MacMillan - President and Chief Executive Officer

Thanks Larry.

Operator

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

Tao Levy - Deutsche Bank

Good afternoon. I have just a quick clarification; first the 20 to 40 basis points that you've talked about in gross margin, Dean; is that looking at the full year '08 versus '07, or is that just looking at the back half quarter-over-quarter... year-over-year in the back half quarterly?

Dean H. Bergy - Vice President and Chief Financial Officer

That's intended to talk about the full year impact.

Tao Levy - Deutsche Bank

So, looking at '08--

Dean H. Bergy - Vice President and Chief Financial Officer

Yes, comparing to the 68.9% that was our full year gross margin for last year.

Tao Levy - Deutsche Bank

Okay. To bring that down $20 million to $40 million, when we annual... when we get to the full year '08 in our models?

Dean H. Bergy - Vice President and Chief Financial Officer

Yes.

Tao Levy - Deutsche Bank

Okay. And with... in terms of FDA, how close are you to being comfortable and calling them into either Cork or Mahwah [ph]. And is there we talking three months time, six months time? Or have you already done it?

Stephen P. MacMillan - President and Chief Executive Officer

We just would rather stay way from specific months, because the FDA works to their timetable, we don't want to over promise and over commit, we are just telling you. We are working at, and I know... we know it's an overhang for some people. We are still better off making sure we have it right. And rather that delay out a little bit longer and we get it right, then we haven't come back into some of the classic mistake companies make in these situations is because of the pressure they deal from the outside community. They can try to rush things along and not be ready.

Tao Levy - Deutsche Bank

Okay.

Stephen P. MacMillan - President and Chief Executive Officer

So,we have the financial strength, we have the commitment, we'd rather make sure that when they come back and we are in a greater shape as we can be. You know what that means, we've got an over hang for another few months.

Tao Levy - Deutsche Bank

And just on the pricing front that specifically the hips and knees, post-DOJ settlement in the quarter, any changes there or things pretty much satisfy [ph]?

Stephen P. MacMillan - President and Chief Executive Officer

Nothing dramatic.

Operator

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

William Plovanic - Canaccord Adams

Great, thanks, good evening.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Bill.

Dean H. Bergy - Vice President and Chief Financial Officer

Hi, Bill.

William Plovanic - Canaccord Adams

Couple of questions for you guys. First just in terms with restrictions on the stock buyback, is that still in place?

Stephen P. MacMillan - President and Chief Executive Officer

We've not yet initiated it.

William Plovanic - Canaccord Adams

Butis it still in place? I mean can we start initiating once we're through the quite-period for the conference call?

Dean H. Bergy - Vice President and Chief Financial Officer

I think we prefer not to comment on that, Bill.

William Plovanic - Canaccord Adams

Okay, that's fine. And then in term one of the comments you mentioned on the on set was that with everything going on for compliance in the systems needed that it was taking time, money and management efforts. I mean, can you quantify that in terms of how much is this kind of taking away from your daily business?

Stephen P. MacMillan - President and Chief Executive Officer

It's... it clearly is on the minds of a lot of our managers. It's core to a lot of our operational folks. But it's also something that will make us better, so it's also not going to afford as running the business, it's part of what need to do and it's part of what we are doing.

Operator

Your next question comes from the line of Jeff Johnson from Robert Baird. Please proceed.

Jeff Johnson - Robert W. Baird & Co.

Good evening guys. Thanks for taking the call.

Stephen P. MacMillan - President and Chief Executive Officer

Hi, Jeff.

Jeff Johnson - Robert W. Baird & Co.

Hey, how are you? Couple of things here; Steve, I apologize in advance, you answered this about six different ways already, but you ended your comment a few seconds ago about this overhang maybe remaining for a few more months. Is it a fair read then that at least sometime in '08 is still somewhat on the table for having maybe Cork re-inspected?

Stephen P. MacMillan - President and Chief Executive Officer

Maybe, but I don't know. This is where Jeff, when you guys keeps trying to pin for specific answers, the answer is we don't know.

Jeff Johnson - Robert W. Baird & Co.

Yes, I understood. I did... it's somewhat of an unfair question.

Stephen P. MacMillan - President and Chief Executive Officer

Yes, sorry.

Jeff Johnson - Robert W. Baird & Co.

Given your previous comments, but you did end it with another few months.

Stephen P. MacMillan - President and Chief Executive Officer

Months could be... three months or 57 months, as--

Jeff Johnson - Robert W. Baird & Co.

Yes,

Stephen P. MacMillan - President and Chief Executive Officer

We are not in control.

Jeff Johnson - Robert W. Baird & Co.

Fair enough. And then Steve, going back to your comments regarding tone coming out of the analyst meeting. It also seem that you guys had pretty high conviction there that the next few years EPS wise still looked doable at the 20% level in that. Yet today we are talking about the $50 million maybe continuing in that level the next few years. Do you still have high conviction or should we at all maybe change our thinking on your tone at the analyst meeting regarding that aspect?

Stephen P. MacMillan - President and Chief Executive Officer

We still feel good about the fundamentals of the business. We also know what's ahead of us now in terms of probably this road. And borrowing anything unforeseen over and above we've been able to absorb some pretty big body blows this year and not walk away from our guidance in a market, when I think a lot of other folks obviously have had to do that. So I think we continue to feel good, but we also want to communicate it. It puts more pressure on the organization, there is no doubt.

Jeff Johnson - Robert W. Baird & Co.

Fair enough, that's all I've got guys. Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. Thanks, Jeff.

Operator

You have follow-up question from the line of Mike Weinstein from JPMorgan. Please proceed.

Stephen P. MacMillan - President and Chief Executive Officer

Hey Mike. Welcome back.

Michael Weinstein - JP Morgan

Thanks. I didn't know we are going to get back in queue, I guess it's a gift.

Stephen P. MacMillan - President and Chief Executive Officer

Sorry, there you go.

Michael Weinstein - JP Morgan

But you're really put up. Steve, I think some of the reaction I think we've already getting to fall in the quarter is one: people a little concerned that you sound a little bit less enthusiastic and maybe due to the analyst meeting on in the last call about the date of the business, those we are having to deal with these... the quality systems issues. How do you want people maybe to walk away from here relative to just your outlook for the business and sustainability of the growth.

Stephen P. MacMillan - President and Chief Executive Officer

Sure. The outlook for the business, we continue to feel great. If you look through the number of questions we've got today, virtually all of them have been on hips. And they've ignored the most of them, the seven franchises as the crude over 15%. We continued to think, you look at our reporting growth, this was just 12.5% local currency growth in the quarter. I don't think there is a lot of companies putting numbers up that are that good, and we feel very good. We feel great about our organizations, we feel great about the fundamental businesses. We have a challenge with the FDA, and we are trying to moderate and manage the expectations on that.

I'd say, Mike, back to your point and I try to make it sort of the earlier, I think somebody might have received us as being potentially further clear coming out of the analyst meeting that maybe we fully intended. And I just... I want to make sure that as you know with us we don't like surprising people, and we don't like just being out... we're not out pumping our stock, we are out running the business, and just want to be careful that people aren't running around say hey, there is absolutely... they're completely clear, because we're not. Again we feel great about where we're headed; certainly feel better than we did at the start of the year, but no, we have a lot of work ahead of us. So, hopefully that clears it up a little--

Michael Weinstein - JP Morgan

I mean there is actually one last one, because unfortunately this has been a... get more attention than you intended tomorrow.

Stephen P. MacMillan - President and Chief Executive Officer

Yes.

Michael Weinstein - JP Morgan

All of the little back on forth on... you guys haven't repurchased stock and because you've had been things you've been considering. Similar discussion on that's going to prompt everybody to walk way from your wondering whether you guys are about to execute it and transaction is significant, maybe you want to spend just 30 seconds on, and how you guys, the M&A and what criteria, do you put in place to think about any deal?

Stephen P. MacMillan - President and Chief Executive Officer

Sure, let's try to be as honest as we can here. We looked at a couple of things in the quarter that likely that we walked away from, but they were significant enough. But it might have kept us from wanting to initiate the buyback, or being able to do the buyback. So... but it... nothing... you shouldn't expect that we're about to go out and do some major acquisition or anything. But there were some pretty obvious properties on the market; in the quarter that you can probably surmise that we might have been taking a peek at. But, yes, it shouldn't be a, hey, Stryker is about to do a big deal.

Operator

And the final question comes from line of Michael Matson from Wachovia Capital Markets.

Michael Matson - Wachovia Capital Markets

Hi, thanks for letting me get on with the follow-up question. I apologize; it is another hip question.

Stephen P. MacMillan - President and Chief Executive Officer

We feel bad enough on that [ph].

Michael Matson - Wachovia Capital Markets

But, I guess, just in general with your hip business aside from the recall and everything. How much of the problems have been execution versus product related. And is it safe to assume that you've got things in the pipeline new products in the hip area that can maybe reignite the growth aside from resurfacing? And then just your thoughts on metal-on-metal, because some of the competitors that like the PU and so forth that are doing well, I think that's part of the reason?

Stephen P. MacMillan - President and Chief Executive Officer

Mike, that's a great question. And actually for first hip question I've got asked tonight. The quickest way we can read, we can accelerate growth in our hip franchise is to go metal-on-metal. I'd say we are still not completely comfortable with the science there. And we may have our heads in the sand. But, I think, it's important for people to remember, we try to run this company for the long haul, and we are not going to just the take the easy way out sometimes to accelerate our growth. We are looking at as you also know this could be our fifth straight year of single digit hip growth whilst we have fifth straight year of very strong overall top-line growth for the corporation as a whole you can expect that we have other things in the pipeline. I would tell you, there are some things that we probably would have hoped, would have come out this year that because of the distraction from the hip recall of probably shifted into 2009.

But it's a bit of bumper. We clearly... we're finally rebuilding momentum at the end of last year. We are funding the double-digit growth in the fourth quarter. But this is clearly gong to self inflected, but we do have some things that are in the pipeline, but for all the reasons of things get delayed and pushback and various it's again why we don't like to talk too much about what's coming and when they might be coming last year. Because our track record on delivering is never perfect relative to our internal expectations, but I think continues to be certainly strong enough to keep our total company growing at very, very healthy rates.

Michael Matson - Wachovia Capital Markets

Okay. And then just one quick follow up on that. Do you have a sense for what the global hip market is growing out on an underlying basis?

Stephen P. MacMillan - President and Chief Executive Officer

We think it's a lot slower then knees right now. And I think until the other folks report, where we are probably not as a completely. But we feel it's definitely growing slower than knees and it's probably slowed down to touch.

Michael Matson - Wachovia Capital Markets

Okay. Thanks.

Stephen P. MacMillan - President and Chief Executive Officer

But again, we've have got some self inflicted stuff. We never want to blame the market, but we feel good about knees and good about knee market.

Michael Matson - Wachovia Capital Markets

All right, thanks.

Stephen P. MacMillan - President and Chief Executive Officer

Great, thanks Mike. Is that it, Kathie?

Operator

That's it, sir. Ladies--

Stephen P. MacMillan - President and Chief Executive Officer

That's great. I'll just close by reminding everybody that again we do to very good about the fundamentals of our business. We've got a lot of good things going. There is always a few things as we mentioned to poke at. We are working with FDA and working within our organization to continue get stronger there. And just want to remind people there is work to be done there. But again, nothing like other challenges that we haven't always faced, and we'll rise to that occasion. But don't expect it to be result in next 30 days is kind of I think what we are saying.

Our conference call for our third quarter 2008 operating results will be held on October 16, and Dean and Katherine will lead that call. I will be back on in the January time period when report full year results, and provide our guidance for 2009. So, Dean and Katherine will handle that one. Thank you all very much.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Have a wonderful day.

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