Stryker Corp SYK
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Welcome to Stryker's Second Quarter 2013 Earnings Conference Call. My name is John, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Following the conference, we will conduct a question-and-answer session. During that time participants will have the opportunity to ask one question and one follow-up question. This conference call is being recorded for replay purposes.

Before we begin, I would like to remind you that the discussions during this conference call will include forward-looking statements. Factors that could cause actual results to differ materially are discussed in the Company's most recent filings with the SEC. Also, the discussions will include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found in today's press release that is in the Exhibit to Stryker's current report on Form 8-K filed today with the SEC.

I will now turn the call over to Mr. Kevin Lobo, President and Chief Executive Officer. You may proceed, sir.

Kevin A. Lobo - President and CEO: Good afternoon, everyone, and welcome to Stryker's second quarter 2013 earnings call. Joining me is Bill Jellison, who as many of you know, joined Stryker as our CFO in April and Katherine Owen, Vice President of Strategy and Investor Relations.

With respect to today's call, I'll provide opening comments and then turn over to Katherine for additional details and then Bill will cover the financials. We will then open the call to your questions.

Our second quarter results were driven by solid and balanced growth, both geographically and across our three segments, Reconstructive, MedSurg, and Neurotechnology and Spine. With Q2 sales up $2.2 billion, we delivered 5% reported growth and a 5.9% gain excluding foreign currency and acquisitions. We benefited from one extra selling day in the quarter, which after adjusting for this, resulted in sales growth of 4.4% excluding foreign exchange and acquisitions. Based on our first half results we remain confident in our ability to achieve our full year sales targets and are shifting our range of sales growth excluding acquisition and foreign exchange from 3% to 5.5% to 4% to 5.5%.

The strong top line along with operational efficiencies is helping drive solid performance, highlighted by continues gross margin improvement after adjusting for the medical device excise tax. While we are pleased with our operational performance, as discussed previously, our results have been adversely impacted by a substantial foreign exchange headwind. For Q2, foreign currency negatively impacted our per share earnings by roughly $0.04. However, with the sales momentum and effective cost control, we were able to partially absorb the foreign exchange impact and still deliver EPS of $1 a share.

With respect to our geographic growth, the U.S. had another strong showing with sales up approximately 5%. Encouragingly, we saw improvement momentum in our international business, which posted nearly 9% growth, excluding foreign exchange, and included 1.6% growth from the Trauson acquisition.

We believe that the globalization initiatives put in place are having a positive impact across our international businesses.

The European turnaround remains on track as Europe registered positive growth in the quarter versus the prior year. We look forward to continuing this momentum in the back half of the year. Our emerging markets businesses continue to perform well posting strong double-digit growth.

Looking at our three franchises in more detail, on a global basis, Reconstructive sales were up roughly 6% on a reported basis, but 8% underlying growth, excluding foreign exchange. Growth was balanced geographically with a 6.3% gain in the U.S. and a 6.9% increase in international after adjusting for foreign exchange and acquisitions. Hips continue to roll and U.S. knee growth of 2% appears to be in line with the market.

Turning to trauma and extremities. We continue to see great momentum with double-digit gains in both the U.S. and international, led by our foot and ankle business, which posted 34% growth in the U.S. and 28% worldwide. Based on the first half performance for our foot and ankle business, we are now even with the market leader, which is a considerable achievement given that this dedicated business unit was only created at the beginning of 2012.

Worldwide MedSurg sales increased 4% on a reported basis, with year-over-year gains for all of its business segments, including strong double-digit growth from the 1488 camera and System 7 power tools. Finally, Neurotechnology and Spine posted roughly 7% underlying growth excluding foreign exchange and acquisitions, led by double-digit gains for neurovascular and interventional spine.

Turning to some other P&L highlights, gross margin excluding acquisitions and restructuring charges declined 50 basis points year-over-year to 67.7%. However, this included approximately 80 basis point impact from the medical device excise tax. With R&D representing 6% of sales and up 14% from the prior year, we continue to make important investments in innovation for the future.

Looking ahead to the remainder of 2013, as mentioned, we feel highly encouraged by the continued strong sales momentum, which supports growth at the upper end of our original range. We are pleased with our overall operational performance, but foreign currency has proven to be a major challenge in 2013 and has worsened further since we announced our Q1 results at which time we guided EPS to the lower end of our range. If exchange rates remain at current levels, we anticipate full year EPS to now be negatively impacted by approximately $0.20 per share versus the prior year.

As a result of this increased foreign exchange impact, we are adjusting our EPS range to $4.20 to $4.26 versus our original target of $4.25 to $4.40. This revised range assumes we will offset approximately half of the full year foreign exchange headwind. Importantly, going forward, we will be implementing a currency hedging program to enable us to mitigate the earnings volatility associated with foreign exchange swings which Bill will comment on shortly.

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

Katherine A. Owen - VP, Strategy and IR: Thanks Kevin. My comments on today's call will focus on an update of our Q1 acquisition of Trauson as well as the preview of our upcoming Analyst Meeting which will be held on September 4 and 5 at the Homer Stryker Center in New Jersey.

With respect to Trauson, we closed on the deal on March 1 and we've been pleased with the performance to-date, recognizing the relatively short period of time since the acquisition. With Trauson we are now a leading player in the lower-priced segment of the trauma market as well as spine in China, which we believe will be an increasingly market with robust growth potential. The deal complements our existing presence in the premium segment, provides us access to a different customer base and dealer network. As it relates to the integration, we continue to make solid progress and are on track with expectations as it relates to all key activities.

In order to ensure our organization remains focused on building our competitive presence in both the lower-priced and premium segments of the Chinese market, we have separate leaders, who are running their organizations independently. We remain excited about the prospects for this acquisition, both to expand our presence in China and longer-term, to provide a platform that can be leveraged more broadly into the lower-priced segments in other emerging markets.

Turning to the Analyst Meeting, we will once again be holding this event at the Homer Stryker Center. For those of you who are able to join us on the 4th, we will be hosting a product fare focused on our Neurotechnology businesses. Specifically, we will be highlighting our six key business units that address the Neurotechnology market, including neurovascular, interventional spine, neuropowered instruments, navigation, spine and CNS.

With the acquisition of our neurovascular franchise in early 2011, combined with the two additional acquisitions of Concentric and Surpass, Stryker is the leader in in Complete Stroke Care. But beyond these important businesses we have additional product offerings that touch the key physician community, including neurosurgeons, interventional neuroradiologists and neurologists where these products to be included is part of the new product there.

The format will allow an informal interaction with the key leaders of these businesses and an opportunity to better understand the key product offerings and how they relate to our broad neurotechnology portfolio.

Following the product fare, on September 5 we will have a normal Analyst Meeting, which will include presentations from our key leaders with opportunity for extensive Q&A. We look forward to seeing many of you at the meeting in early September and hope you find the format and content helpful to better understanding not only Stryker's neurotechnology leadership but a broader product portfolio.

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

William R. Jellison - VP and CFO: Thanks, Katherine. Sales growth was positive by 5% in the quarter, including a negative 1.5% impact from FX translation. Constant currency sales growth was a positive 6.5% and 5.9% excluding acquisitions. We had a positive impact from an additional selling day in the quarter and on a day's adjusted basis, core growth was a positive 4.4%.

EPS on a GAAP basis for the quarter, ended at $0.56 per share versus $0.85 per share last year in the second quarter, while adjusted earnings per share was $1 per share for the quarter versus $0.98 per share in the second quarter last year. This quarter's EPS includes negative impacts of approximately $0.04 per share from FX and $0.03 per share from the MedTech tax. The income statement is exposed to both transactional and translational FX risks while the balance sheet is just exposed to translational FX risk. We currently hedge transactions once they occur, but we don't hedge future transactions at this time nor do we hedge any translation exposure. We are planning to implement a predefined layered transactional hedging program beginning sometime in the third quarter, which will be fully implemented over the next year. This will help us mitigate the volatility of FX movements in the future.

The most significant non-GAAP adjustments in the quarter, primarily related to $170 million increase in the charge associated with the voluntary recall of the Rejuvenate and ABG II modular hip stems. The adjustments also included an increase of $19 million for estimated settlement expectations for previously disclosed regulatory issues. We believe these are reasonable estimations of our exposure. However, no potential insurance offset that may be available to help cover some portion of the Rejuvenate recall has been included. We do expect to recover some benefit from insurance in the future and will also book that as a non-GAAP adjustment when known.

Looking at sales in the second quarter, volume and mix contributed 7.8% to our top line sales growth and acquisitions added 0.6%. Price changes reduced sales by 1.9%. The price decline is in line with the decreases experienced in 2012 though. Currency driven primarily by a significant weakening of the Japanese yen versus the U.S. dollar, negatively impacted our top line by 1.5%. We also had an additional selling day in the quarter, increasing sales by approximately 1.5% on average in the quarter.

Looking at our reporting segments, Reconstructive products represented 44% of our sales in the quarter and sales in this segment were up 5.6% as reported and grew 7.6% on a constant currency basis. On an average daily sales basis, after adjusting for the impacts of acquisitions and currency Reconstructive sales were up 5% in the quarter. U.S. Reconstructive sales grew 6.3% in the quarter. Trauma and extremities had another excellent quarter in the U.S., posting 19% growth led by new products, sales execution and strong growth in both foot and ankle.

Domestic hips and knees were stronger sequentially, growing 6% and 2% in the quarter, respectively. Knees are still feeling the impact from the absence of our ShapeMatch Cutting Guides, but the growth in this category still appears to be in line with the market. Our international Reconstructive business was up 9.4% in constant currency and 5.7% adjusting for selling days and acquisitions. All regions posted positive growth with performance the strongest in the emerging markets.

Next, our MedSurg product segment represented approximately 37% of sales in the quarter. Total MedSurg sales increased 4.2% as reported and 4.8% on a constant currency basis. These results were led by growth from our medical and sustainability solutions business. Medical increased by high-single-digits and sustainability returned to solid double-digit growth. Endoscopy posted mid-single-digit growth in constant currency. Instrument sales in the U.S. were hindered by the impact of the Neptune Waste Management System recall which reduced sales by approximately $20 million in the quarter, and this impact we believe will anniversary itself mid-third quarter, which will reduce the year-over-year comparison issue to around $6 million to $7 million in the third quarter and eliminate that comparison negative drag by the fourth quarter. We look forward to getting this product back on the market once we obtain our regulatory clearance of the Neptune – or Neptune's 510(k).

Our final segment, Neurotechnology and Spine represented 19% of the Company's sales delivered another good quarter. Sales increased 5.4% as reported and 7.5% on a constant currency basis. Growth in this segment was led by our IVS and Neurovascular business, which both posted solid double-digit constant currency growth. Core spinal implant sales were up 1% in the U.S. and up double-digit internationally on a constant currency basis. Excluding the impact of the Trauson acquisition, international core spine still posted growth in the mid-single digits.

Looking at our operational performance, gross margins on an adjusted basis in the second quarter of 2013 were 67.7% compared to 68.2% for the second quarter of 2012. The med tech tax negatively impacted gross margin by approximately 80 basis points in the quarter. When compared to the same period last year, the rate was also negatively impacted by foreign exchange rates.

Research and development expenses increased 0.5 percentage point to 6% versus 5.5% last year in the quarter and a 14% increase in R&D spending over last year reinforces our commitment in this area and our expectations for above market sales growth.

Selling, general and administrative expenses costs were represented probably about 45.9% of sales, however, included approximately $200 million of non-GAAP adjustments, including both the Rejuvenate and regulatory costs that were mentioned earlier.

On an adjusted basis, SG&A expenses were $813 million, or 36.7% of sales in the second quarter of 2013 versus 37.1% in the prior year's second quarter.

Operating margins on an adjusted basis were 23.3% in the second quarter compared to 24.1% last year in the same period and again that rate was primarily impacted by the 80 basis point negative impact from the MedTech tax, FX movements and R&D expenditures, partially offset by operational efficiencies.

Other income and expense in the second quarter were $21.3 million and that compares to $10.1 million last year in the second quarter. This represents a negative $0.02 per share impact on EPS this quarter. This increase in expense resulted primarily from lower interest income due to some lower interest rates and some slightly higher transactional FX expense in this category.

Our reported tax rate for the second quarter was 20.8% while the adjusted effective tax rate was 23.3% for the second quarter of this year.

Looking at the balance sheet, we ended the quarter with $4.7 billion of cash and marketable securities, an increase of approximately $450 million compared to year-end 2012. We also have $2.8 billion of long-term debt on the balance sheet and from an asset management standpoint, accounts receivable days ended flat with last year in June at 58 days and days in inventory finished the quarter at 166. That's actually down one day sequentially, but it's down 8 days when it's measured against the prior year quarter, as we're really driving a number of initiatives in this area as a part of the operational improvement plans.

Turning to cash flow, we had an excellent first half of this year, generating cash from operations of $592 million. That compares to $492 million in the prior year which is an increase of 20.3% over the first half of last year.

Finally, regarding share repurchases. In the first half of 2013 we repurchased approximately $250 million of our stock or approximately 3.8 million shares at an average price of $65.12 and we still have about $750 million available for repurchase under our current authorization program.

Based on our solid sales achievement in the first half and the current economic and market conditions, we are projecting constant currency sales growth excluding acquisitions in a range of 4% to 5.5% for the year. And if foreign currency exchange rates hold near current levels, we anticipate net sales will be negatively impacted by approximately 1.5% to 2.5% in both the third quarter and in the full year for 2013.

As Kevin indicated previously, we are adjusting our guidance for our 2013 adjusted diluted net earnings per share to a range of $4.20 to $4.26. This includes the negative impact from foreign exchange movements of approximately $0.20 per share compared to last year's average rates.

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

Transcript Call Date 07/18/2013

Operator: Bob Hopkins, Bank of America.

Robert Hopkins - Bank of America Merrill Lynch: So, Bill, just to start off with a financial question. My first question is, can you just highlight how FX impacted the gross margin this quarter and then give us a little bit more detail on the heeding program and how that might impact the P&L going forward?

William R. Jellison - VP and CFO: Sure. As far as how it effects the rate, it's probably about 10 points to 20 points negative impact in this period and obviously that's only one area that the rates actually has an impact on the overall performance. In general, as I talked about from an FX perspective, we're exposed, obviously, on both the transactional and the translational side of the equation. So we generate a significant amount of money and profits both in Japan and Australia and a number of other countries, but we also have transactional-related exposure where we're selling product into a number of these countries that don't have natural offsets. Currently the Company only hedges those activities once the transaction already occurs. And on the layered hedging program that we're at least looking at and implementing an ongoing basis, we'd be in essence and looking out forward as far as 12 or 18 months and actually putting in different layers of purchases at different points in time throughout that 12 or 18 month period of time, so that we're buying the currencies that we need to have in those periods consistently through that period. What that does is it just mitigates or buffer some of the highs and lows associated with those exchange rate movements in any one period. So hopefully that helps kind of explain that and I'd be glad to get into more if you've got further follow-up questions.

Robert Hopkins - Bank of America Merrill Lynch: No, just for my other follow-up I wanted to ask Kevin a question, but thank you for that. Kevin, I just wanted to get your quick update on the competitive knee landscape. Obviously, as everyone has been talking about for a while now, there is a couple of new knees in the marketplace and one of the other competitors that have reported so far mentioned that there was trialing going on. Your numbers seem pretty solid here. So just – has your opinion changed now that we're in another quarter, end of the competitive launches on the potential impact from those competitive launches, just an update would be great?

Kevin A. Lobo - President and CEO: Yes. Sure, Bob. Thanks. What I would say is basically consistent with what I said last quarter that it's going to take a while before you really see if there will be an impact. I would say not before the end of the third quarter will we have a good sense. We feel pretty good about our knee performance. It's in line with the market despite the fact that we have our ShapeMatch Cutting Guides off the market. So, we feel we're doing well. We hear noise little bit here and there about trialing, but it's very minor at this stage. And like I say, we are not going to have a good understanding probably till the end of the third quarter.

Operator: Richard Newitter, Leerink Swann.

Richard Newitter - Leerink Swann: Just kind of a housekeeping. I think you had given the impact of selling days on the overall Recon business. Can you parse that out by hips and knees?

Katherine A. Owen - VP, Strategy and IR: There isn't – Rich, it's Katherine. There really isn't any real variability between hips and knees. So the math that we quoted on the call would hold. It is 1.5% overall. If there is any variability, it would be more related to our capital businesses that tend to be less impacted, but for consistency sake, we apply the same math each quarter and don't try and adjust because the swings aren't that meaningful. So, I wouldn't expect any variability.

Richard Newitter - Leerink Swann: And on the knee side, can you maybe give us a sense of where you are with getting ShapeMatch back on the market? When might we expect that? And also, your direct to consumer initiative in knees for the GetAroundKnee, can you described what updates you might have on the impact that's having on the business and what your plans are going forward with that?

Katherine A. Owen - VP, Strategy and IR: Yeah, (Matt), no problem. We filed the Otis 510(k) during the second quarter and it's difficult, as you know, to predict when 510(k) clearance may materialize. We're hopeful sometime this year, but obviously, that's going to depend on a number of variables. We have been continuing with the DTC campaign. Although the mix of media varies just depending on some of the analysis we've done, which is very consistent with what we said on prior updates. That's not a departure of any type and we continue to believe that the Triathlon Knee is the only single radius knee on the market, has some unique benefits as well as some extensive clinical history that we believe will help us remain very competitive and we're pleased with the growth that we saw recognizing there is always some impact, not massive, but some impact given that ShapeMatch is not available in the market right now.

Operator: Larry Biegelsen, Wells Fargo.

Lawrence Biegelsen - Wells Fargo: So, Kevin, it would be great to hear from you what you think drove the strong improvement in your international hip and knee growth and the sustainability of that.

Kevin A. Lobo - President and CEO: Sure. As you know, Europe, the turn on story has really begun last fall. We put a lot of new leaders in place. We've really focused the Company on turning that around. We've had great exchanges with our U.S. counterpart that had offices in U.S. to help drive that growth. We've also sent over one of our top leaders who is leading the knee campaign in the U.S. He's now living in Europe and helping to run the orthopedic group in Europe. So, I would say it's a number of factors leading to sustained performance and we've seen the improvement gradually coming. It came through, obviously, very clearly in this quarter, but it's only one quarter, so I don't want to get ahead ourselves. I think we need to see that sustain. But I really can't point to one thing, it's real focused commitment, really starting with leadership and alignment and driving what we have our great products, and we just have disproportionately lower share in Europe than we do in the U.S. and other markets like Australia, Japan, Canada and so that's really the key part of the turnaround. Europe being negative sales over the last few quarters finally turning to positive sales this quarter.

Lawrence Biegelsen - Wells Fargo: Then for my follow-up, I wanted ask about pricing because it did deteriorate in Recon and that was a little bit surprising to me given that you lap the Japan cuts on April 1. So could you talk a little bit about where you saw pricing deteriorate, was it the U.S., Europe, hips, knees and how confident are you that it doesn't get worse at least in the near-term from that negative 3.4% we saw this quarter?

Katherine A. Owen - VP, Strategy and IR: Yeah, it did worsen by about 80 bps or so versus the first quarter. Remember, we did universe the Accolade launch in the second quarter last year, so there was some benefit that we saw. There's nothing significant I would call out or some change in trend. We've been saying that hip and pricing is likely to remain under pressure somewhere in the low single-digits, partly offset by mix, which is going to vary quarter-to-quarter but there was no significant departure from that.

Kevin A. Lobo - President and CEO: Yeah. I would not characterize the market as deteriorating in terms of price. I would say it's very stable in low-single-digit. From quarter-to-quarter we do tend to see a little bit of variation, but it's nothing that concerns us.

Operator: Joanne Wuensch, BMO Capital Markets.

Joanne Wuensch - BMO Capital Markets: Just for clarification, the 4.5% constant currency growth you are guiding to for the year, how much of that is acquisition revenue or is that organic?

William R. Jellison - VP and CFO: That's organic growth. 4% to 5.5%, excludes foreign currency and acquisitions.

Joanne Wuensch - BMO Capital Markets: Second, can you please comment on the capital purchasing environment at the hospitals?

Katherine A. Owen - VP, Strategy and IR: Hey, Joanne, there has been no real change since our prior update. The market remain somewhat cautious ahead of unknown changes under the ACA for next year and so there hasn't been any significant improvement, or deterioration and what we are seeing as it relates to hospital capital spending, recognizing our capital businesses tend to have more variability even when there is no overall market concerns, just the nature of that type of business, but there has been really no change in the environment since the start of the year.

Operator: Matthew Taylor, Barclays.

Matthew Taylor - Barclays: I guess, first, I just wanted to follow up (this time) like you started to answer the FX question that Bob asked, but given that hedging program that you talked about and looking out 12 to 18 months. I guess my question is you lowered the guidance for the year, but when we'll start to see that have more of a stabilizing impact on FX as it rolls through the P&L and can you comment on where those hedges will be located?

William R. Jellison - VP and CFO: That's a great question because obviously, we've got exchange rates that are already moved, which is why as we look at the full year and look at what the expected impact force is, it's still obviously a significant drag on this year. We believe that we are going to be implementing a layered hedge program, but that's build up over time and that's really to protect us against kind of future rate movements. And again, a hedging program is only set up to mitigate that risk. It doesn't eliminate the risk. So, as currencies change, you're ultimately getting the impact of whatever those currencies are changing to unless you one, either have some good natural hedges established for long-term and also to just mitigate, at least minimize what the volatility of that high or low on those rates are. So, if you think of us begin putting in a layered hedging program, we would think we'd have it pretty much in place or largely in place by the time we get into kind of the first quarter or so of next year and by that point in time, you're going to have multiple layers that are already being established in each one of those quarters. But for this specific year, we're still going to have fairly significant negative impacts based on where the rates are at today.

Joanne Wuensch - BMO Capital Markets: And then just on spine, your spine numbers have improved a little and a lot of people have been talking about improvements in the spine market. Have you seen any change in volumes or the behavior of payers or anything that's really changed dynamically?

Katherine A. Owen - VP, Strategy and IR: No, and keep in mind that spine business includes both our traditional core spine business as well as interventional spine but which is faster growing and had another solid quarter of double-digit gains on the interventional spine side. We see really no significant change in trends in terms of whether it's payer pushback or just the underlying overall market trends that seems to be moving towards greater stability. But it's still an overall challenging spine market.

Operator: Rick Wise, Stifel.

Matt Blackman - Stifel Nicolaus: This is actually (Matt Blackman) here for Rick. Can you hear me okay?

Kevin A. Lobo - President and CEO: Yes.

Matt Blackman - Stifel Nicolaus: So, just a couple of questions. Are you able to comment at all about the incremental cost of implementing this hedging program?

William R. Jellison - VP and CFO: Yeah. So there's really not a lot of additional incremental costs associated with the hedging program. All the hedges that we would be laying into a really forward contracts and those are done at kind of a very, very minimal related cost aspect of that. So, there should be nothing associated, at least materially associated with anything with the hedging program itself.

Matt Blackman - Stifel Nicolaus: Then the next question. You mentioned we'd fully anniversary Neptune in the fourth quarter. But just any commentary on getting it back to market?

Katherine A. Owen - VP, Strategy and IR: Well, we filed the 510(k), so waiting FDA clearance. And similar to OtisMed, obviously, we have to respond to any questions from the FDA and we're continuing to target sometime this year for clearance, but this isn't a perfect science as you know, so we're trying to give visibility around both the quarterly impact and the expected impact until we get the clearance, which again hopefully is sometime before yearend.

Operator: Derrick Sung, Sanford C. Bernstein & Co., L.L.C.

Derrick Sung - Sanford Bernstein: I wanted to follow-up on the pricing question that was asked earlier, the 80 bps we're seeing in pricing. I guess, I just wanted to go back to the kind of O.U.S. U.S. because as Larry mentioned there is that benefit from the Japan reimbursement cuts anniversarying. So, I was wondering does that imply that we saw a greater than 3.5% impact in the U.S. or if you could just maybe give a little color there that would be helpful.

William R. Jellison - VP and CFO: I mean, so, first off, just a clarification of that impact. The impact on the pricing side is about a 60 basis point impact on the overall margin levels. The rates that are out there and what's being put together as Kevin mentioned and as Katherine mentioned, the ranges of those price impacts actually are different quarter-to-quarter. I mean, it's really based on some of the programs that people are putting in the place, but nobody is really seeing any difference in the trends associated with that.

Katherine A. Owen - VP, Strategy and IR: Also keep in mind, when we are talking about Reconstructive, as we show that category, that's not just hips and knees. So the pricing you are seeing is inclusive of some of our other businesses as well such as trauma and extremities.

Derrick Sung - Sanford Bernstein: Then as a follow-up, you are making a clear effort here to step-up your R&D spend this year. Can you talk a little bit about where that R&D spend is going and kind of when you expect to get the good return on that?

Katherine A. Owen - VP, Strategy and IR: No, our comments have been that we expect in any given quarter, R&D as a percent of sales to be somewhere in the 5.5% to 6% range and it's going to vary quarter-to-quarter, obviously, it was at the high end of the range in that quarter as we continue to make investments that we believe are helping to drive the top line growth. So we don't expect any real change. That that continues to be the expectation.

Operator: Mike Weinstein, JPMorgan.

Michael Weinstein - JPMorgan: I have a few questions, but I'll try and narrow it to two. One is the cash flow performance this quarter. You kind of buried the lead a bit on that one, when you did – when you put into the tax. So it was up 20% year-over-year. Can you just describe what drove that? Is there something in last year's comparison I should be aware of, because obviously that's a very sharp performance relative to the underlying earnings?

William R. Jellison - VP and CFO: Sure. I'd say that if you look at kind of last year's performance, I'd say that we had a weaker or softer cash flow level in the first half of last year, but I think that as you saw, our inventory days in comparison especially in comparison to a year ago are down about eight days. I think in general, we feel very good about kind of the cash flow level that we're looking at and we should continue to be able to drive that at a solid – or at solid rate.

Michael Weinstein - JPMorgan: I'm going to sneak in two follow-ups here. First, just to understand the – you are basically describing a current FX impact on your bottom line of basically 100 basis points, this $0.10. Is it that high just because of what's going on right now is the yen and you have less hedges on your yen exposure than you do on your euro. We always thought that the historical relationship, Katherine, the top line impact to bottom line impact was less severe. So, that's first. And the second – and maybe I just want to go back to the cost of the hedging program. You described it as a positive impact on the P&L of implementing a hedging program is relatively de minimus. I just want to make sure I understood that.

William R. Jellison - VP and CFO: So, a couple of questions there. The first question really deals with some of the rate-related impacts and it really depends on which currencies are moving. So, in some currencies we have better natural impacts or offsets associated with it. But when you look at the Japan yet, for example and say, the Australian dollar, the Australian dollar just in the last – since the last call in the last three months has changed about 13% downward. So, when we're selling in Australian dollar but we're buying those products that are sold into that market in either dollars or euros, that's obviously a negative impact associated with it. Same with Japan, so Japan we have very little virtually no natural offsets there. Everything we're selling there is really being purchased outside of that region. So, because we've had such a significant move in the yen and also in the Aussie dollar; in fact, in most commodity-based countries that's actually having a more negative impact on us in this specific year than what you generally see even with some higher volatility in rates. And as far as the cost of the program goes again, there is obviously some additional ramp-up within kind of the treasury group to make sure that we can support that. But relative to the overall class of both the organization and the cost of that program, it's relatively de minimis. As far as buying that, all we're really doing is we're purchasing the amounts that we need in advance. So we're buying amounts, let's say for the second quarter of next year and we're buying that at different periods between now and then so that we don't just get exposed to whatever the rate is in that specific quarter, but it's layered in through a number of purchases up until that date.

Operator: Matthew Dodds, Citigroup.

Matthew Dodds - Citi Investment Research: A quick one first for Kevin. Now that we've had more than half that come as reporting in the second quarter, and you look at the first and second quarter combined, the hip market continues to outperform the knee market whereas you are correct, your demographics might be better for the knee market. There's more DTC spending there. You got the new product launches. I mean, is the difference in your view all elective where knees are just not much more elective than hips or is there something else out there?

Kevin A. Lobo - President and CEO: Yeah. Thanks for the question. I would say that that's the trend we've been seeing for a little while now and I would attribute it to the more elective nature of knee procedures. If you have hip pain and you are lying in your bed, you feel the pain versus a knee can be deferrable. You could get (AJ) shots or other things that can delay your procedure. So I would 100% attribute it to be a more elective nature. Just on hips, I would have to say I'm extremely pleased with our performance in hips. Given that we obviously had to undergo a recall starting last year, you have not seen our business go negative in the hips certainly in the United States where the recall was most intense. In the third quarter of last year we had a slight dip in our growth rate, but it was still positive growth, and what you've seen since then is a sustained positive market leading growth in spite of having to manage our way through recall. So, I think that attribute to the leadership that we have in our Recon Group in the United States.

Matthew Dodds - Citi Investment Research: I figured you are just looking forward to selling some of the hips. One quick one on trauma, was there any benefit left from the (mail) recall of a competitor or was that largely gone in Q1?

Kevin A. Lobo - President and CEO: At the end of Q1, they were largely back on the market. So, what I would say is, we had a pretty pure quarter in the second quarter, and as you know, we've been growing above market in trauma for a number of quarters, frankly, a number of years, certainly in United States. It was nice to see our international trauma business pick up as well, but we feel very bullish, very confident with our trauma business, great leadership that we have in place and very, very strong performance in the second quarter again.

Operator: David Roman, Goldman Sachs.

Chris Hammond - Goldman Sachs: It's (Chris Hammond) in for David Roman. First question is related to the P&L. I think for the last two quarters now I think you guys have come in with SG&A spend a little bit higher than what we were forecasting and I'm wondering A, kind of how that – how we should be thinking about that for the rest of the year and then additionally, how that plays in the context for EPS for the full year when we strip out all the noise whether it's FX or device tax. It looks like the total EPS growth rate is fairly robust, and I'm wondering about the sustainability of that and what are the various levers up or down either away?

William R. Jellison - VP and CFO: Yeah. So, I guess, first off, just on the SG&A related expenses, I think that we are doing a very good job on covering of that side. We've got our expenses this quarter on an adjusted basis or about 36.7% of sales versus 37.1% last year in the second quarter. I think we had some pretty good first half related improvements, and I think overall that we are excited to continue to especially if we can realize this level of top line sales growth, it does allow us to get some leverage associated with our overall business and I think that that's our expectations moving forward.

Chris Hammond - Goldman Sachs: And if I squeeze in just follow-up here. I was curious a little bit about what's going on in Europe. Obviously, a turnaround seems to be well underway there, but there is some other numbers from the Trauson (indiscernible) baked in there too. But just – outside of the just the sales changes you've guys have made. What are you seeing in terms of a macro landscape? Has anything changed since you've last updated us whether it's regard to austerity or competitive trends?

Kevin A. Lobo - President and CEO: So, the first thing I would start with the market. I would say that the market in Europe is the same challenging market that it's been frankly over the last couple of years. Trauson sales are only China. There's virtually no sales outside of China. So, the impact in Europe has nothing to do with Trauson. It's really our own operational performance. And what I would say is our actions. We had lost market share for a number of quarter and that we start to address that with vigor sort of sort of in the fall of last year. I'm very pleased with our performance in the U.K., in France, Spain, has really turned the corner and we had a very strong quarter in Spain. And a number of the other smaller countries really with better leadership in place and more focused we've been driving improvements. Italy and Germany actually improved versus the first quarter, but those are two countries where we still have work to do. And I would be looking for more improvement from those few countries, but this is really an operational improvement story, but we have to be honest that this is following a period of a number of quarters where we are underperforming the market. Our goal that we stated last year was to get back to market growth by the end of the year. We're obviously on that trajectory based on very strong performance this quarter.

Operator: Kristen Stewart, Deutsche Bank.

Kristen Stewart - Deutsche Bank: I just wanted to ask a question on the Neurovascular business. I think your guys have mentioned there was double-digit growth in the quarter. Can you may be just further expand upon that and are all of the activities are shift between Boston Scientific now complete from manufacturing standpoint?

Katherine A. Owen - VP, Strategy and IR: Thanks, Kristen. Yeah, the final employees transferred over in April, so we are now essentially done with all of the major integration related aspects of that deal, which is in line with what was expected when we did the deal a couple of years ago. They continue to see very solid momentum. There's really no acquisition benefit in those numbers, just given how small the Surpass deal was. So it's really nice product flow and its continuing to have good momentum across both the hemorrhagic and ischemic segments for the Neuro business.

Kevin A. Lobo - President and CEO: I'd say, Kristen, just to add one comment. The product launches have been terrific in Coils. So in Coils we're clearly the leader and we're gaining market share pretty significantly with nano coils, long coils, just a whole series of launches over the last few quarters that are really boosting that business. As you know, that management team stayed in place as we acquired the business from Boston Scientific and the R&D engine is really humming very, very low.

Kristen Stewart - Deutsche Bank: So overall it sounds like you would say you are gaining share and where do you think the market is generally growing at this year?

Katherine A. Owen - VP, Strategy and IR: I don't think there's any real change to our overall market growth expectation. It's somewhere in the 6% to 8% range. It's hard to get total visibility given that lot of the companies are – the sales are part of much bigger companies that it doesn't necessarily broken out. But we think the overall market growth is probably somewhere in that 6% to 8% vicinity.

Kevin A. Lobo - President and CEO: And related to the comment gaining share, we're gaining share in Coils. So certainly when you look at the ischemic market as well as especially the flow diverters, the stent, we're still enrolling patients in the trials. We don't have that product on the market in the U.S. So, our share gains are really in the coiling segment.

Operator: Glenn Novarro, RBC Capital Markets.

Glenn Novarro - RBC Capital Markets: Two quick questions. One, on the hip side, your hip numbers came in a better than expected particularly on the U.S. side. So, I'm assuming you are taking market share. Can you confirm that, and then what do you think that the U.S. hip market is growing and then I have a follow-up then after that on extremities?

Kevin A. Lobo - President and CEO: Well, first on the hip market, obviously, not everybody has reported yet. I would guess that it's probably growing in a low-single digit. We have been at the high end of market growth for a number of quarters now. As I mentioned earlier, very excited about our hip leadership. We launched the Secur-Fit advanced product recently, which was a fit and fill stem on the heels of Accolade II launched a year ago. So we've had a very good product flow, including our MDM and ADM cups that we launched not so long ago. So it's been a very, very good product flow and great execution in the field, has been driving above market growth in hips for quite some time now.

Glenn Novarro - RBC Capital Markets: Then let me just follow-up on the foot and ankle side. You said the U.S. business was up 34%. We assume the U.S. foot and ankle market is kind of growing in that 10% range. So two questions; one, has the market accelerated and then two, obviously you've taken share. Do you know you've taken share from?

Kevin A. Lobo - President and CEO: Well, first of all, we love being in this market. It's a high growth market. Until everybody reports, it will be hard to say exactly what the market growth is, but I would say in the 10% to 15% range is probably about right for market growth. I think we're taking share from a number of players. It's a fairly fragmented market. I wouldn't say it's from one particular player. The particular issue is that it's a market expansion story. So we are frankly more concerned with growing the market than we are with individual competitors, because there are so many implants that are not used today to treat (indiscernible) and then that's really where the bulk of our growth is really coming from the electric procedure area which makes up the vast majority of our foot and ankle business.

Operator: Matthew O'Brien, William Blair.

Matthew O'Brien - William Blair: I was just hoping you could talk a little bit about your capital equipment performance in the quarter. It was quite good compared to what we've seen so far from a couple of other companies in this space. I just wonder if Stryker is a little bit unique in the fact that it can bundle quite a few products across Recon, Neuro, and MedSurg as well. Is that a dynamic that's benefiting you in this type of environment? Is it something that's been accelerating recently? Can you just talk a bit about that?

Katherine A. Owen - VP, Strategy and IR: We've been, as we've talked about in the past, increasingly looking to drive better cross-divisional coordination, but that is still very much in early stages and I wouldn't want to characterize the performance of any of our business is being driven by that at this time. There has been no change in the overall market backdrop as it relates to our capital businesses and that we've seen year-to-date. Obviously, very good momentum with the 1488 and System 7, which are capital and both growing the double digits. Medicals are most capital intensive business. Over 90% of that business is capital. Again, hospital seem somewhat cautious on some of the more deferrable capital purchases, but that's a very consistent trend we've seen throughout there year.

Matthew O'Brien - William Blair: And then just a quick follow-up to Derrick's earlier question on the R&D side. Three quarters in a row now of double digit growth in that metric. Is the spend more relative towards toward maybe a bit more allocation towards some newer areas that Stryker is not currently in where you may have a call point or is it more just allocated in areas where you're currently at, i.e., spending on the Neuro side

Kevin A. Lobo - President and CEO: So, clearly, as Neuro takes on a larger portion of Stryker's overall business you would expect a slight tick up in our overall R&D rate. So that's a business mix issue as Neuro does demand a slightly higher rate of R&D spending, but it really is an across-the-board commitments to invigorating our pipelines. I've had a chance to travel to all of our businesses and do business reviews, including the pipeline and very excited about what I'm seeing .At this stage we tend not to want to talk too much about a lot of the new products, but you can see with our success with 1488 and System 7 that new products are the lifeblood of the Company and we are committed and focused on continuing to drive above market growth throughout strong investments in research and development.

Operator: Bruce Nudell, Credit Suisse.

Bruce Nudell - Credit Suisse: Thanks for taking the question. Medical is clearly a lumpy business, did quite well this quarter. What's the kind of trend line that you envision for that business now that you had some more experience with it?

Katherine A. Owen - VP, Strategy and IR: Bruce we expect any major departure from what we've seen. Clearly, prior to 2008 we saw very strong growth in capital, but it was a different market environment. We see there is some hesitancy as we've said around the (ACA) and just general uncertainty. You are right, this is a business that can vary considerably from quarter-to-quarter. Even when there isn't market uncertainty, that's just the nature of capital, more so far medical than any of our other businesses. But there's been no real change in the outlook for that business than what we thought at the start of the year.

Bruce Nudell - Credit Suisse: Just last quarter you noted that in Endoscopy cameras are strong, communications was below par. Where do you think the – where are you right now in that business?

Katherine A. Owen - VP, Strategy and IR: Yeah. We obviously continue to see good momentum as we are going into year two with the camera which was up double-digit as Kevin referenced. (Comm) was down. Again that is one of the most capital-intensive components certainly of endoscopy although the rate was considerably better than the declines that we saw in the first quarter, which was expected when we were on our last call. Based on trends we'd expect a little bit continued improving trend as it relates to rates to (comm) in the back half of this year.

Operator: Matt Miksic, Piper Jaffray.

Matthew Miksic - Piper Jaffray & Co.: Just a couple of follow-ups on some of the areas that folks have been asking. One was on extremities and I have a follow-up on capital and MedSurg. So, on extremities, we'd love to hear understanding that your growth so far has been coming from some of sort of discretionary procedures, hammertoe, bunions, love to hear about maybe some of the investments that you are making in that business in terms of distribution maybe in terms of what we can look forward to in expanding the product line either in foot and ankle or upper extremities, be very helpful.

Katherine A. Owen - VP, Strategy and IR: Yeah, you are correct. The vast majority of the revenue in our foot and ankle business is associated with elective procedures. We are very excited about the opportunity there. We put in place the dedicated sales force for foot and ankle, which is largely a different call point than the upper extremities piece of the business. We put that in place in the first quarter of last year, very pleased with the focus. It's a formula that is driving through with Stryker, bring a lot of focus and leverage, what was terrific portfolio of products within the Memometal acquisition and continue to invest in expanding the market, which as Kevin mentioned, this is really about a market expansion story more than anything else. What we do longer-term, whether it's in upper extremities or other areas, I think we'll just determine that as we look at the opportunities. But right now, the bulk of our focus is really in that foot and ankle area.

Matthew Miksic - Piper Jaffray & Co.: And nothing immediately on the docket for back half next year upper or further lower that you can talk about?

Kevin A. Lobo - President and CEO: Well, when I say on the upper extremities is we in the shoulder business in particular, we launched a primary shoulder a year ago and we have reverse should that's in our pipeline which we hope to launch by the end of the year or let's say around the end of the year. Once we have the reverse shoulder launched that will really give us a complete portfolio and we would look to drive pretty significant growth. But we're not going to see much of that this year. That will be really more of a next year's growth opportunity.

Operator: David Lewis, Morgan Stanley.

David Lewis - Morgan Stanley: Maybe a couple of questions for Bill and then for Kevin. Bill, just one quick one on currency and then a more strategic question. I guess on currency, can you just walk us through the decision to begin to hedge transactional I guess? Is it response to volatility in this particular quarter or is it really response to multiple disparities around FX over the last kind of six to eight quarters?

William R. Jellison - VP and CFO: I really don't think it's actually either of those two. I think that maybe the highlight of that volatility maybe has caused us to look at it a little bit harder. But I think that it's just one of the areas that as an organization we need to look at to manage risk in general and we obviously have exposures in a number of different currencies, both on the translation side as well as on the transaction side, as well as really on our balance sheet side. So, I mean, we are just looking at it relative to the activities and the practices that we currently have in place and seeing whether we think we should have some additional programs in place to help mitigate any of the risk in the organization. So, I think it highlights it for us maybe this year a little bit more just because it's having an impact. But even if the impact hadn't occurred the risk levels still existed and that's the program that we should have in place as an organization.

Kevin A. Lobo - President and CEO: I'd like to jump in just to make a quick comment that, obviously, Bill has years of experience with layered heeding programs and I think bringing him on as a new CFO with a fresh set of eyes. There's a risk we've known about at Stryker and Stryker live with this risk for many, many, many years. It's rates have never moved with this kind of dramatic – in terms of intensity as well as the shortness of the timeframe. So it's we've known about, but it's a risk that's never materialized in such a fashion. But Bill has that experience and obviously the two of us spent a lot of time talking about it and we believe this is the right step to move forward with that will smooth out those variations and then – that our he true operational performance can shine through.

David Lewis - Morgan Stanley: Just really two quick ones. The first is maybe going back to Bill's significant experience. Bill, one of the areas that I think investors are pretty enthusiastic, we can bring some real leadership that's on shared services. And I imagine you've been there – have you been there long enough to get a sense of where Stryker sits on shared services and relative to some of the cost numbers that Stryker has proposed, how do you feel about those numbers and your ability to implement shared services with the broader team and of what timeframe do you think that's appropriate? Then one quick follow-up for Kevin.

William R. Jellison - VP and CFO: well, I mean, a couple things here. One, I think the organization is already in a – it's in a good position. I think it's starting from a strong foot on a number of different activities as well as just with the strength of its overall business performance. And, yes, I think that we can definitely make some continued improvements looking forward especially as we see kind of the areas that we're going to be growing sales and focus, but specifically as it relates to shared services, well, I've had a chance to look at really each one of the three different regions right now and yes, we've been talking through a number of. As, we've been talking through a number of different opportunities and activities. I think that one that's going to migrate over probably many different years, that's not something that just happens overnight, but I think that we've got some good opportunities in a number of areas to just make sure that we are looking it even best practices within Stryker, let alone kind of broadly external to Stryker, because I think we are doing a lot of really good things already within the organization, we just need to maximize on that.

Operator: Bill Plovanic, Canaccord.

William Plovanic - Canaccord Genuity: Just two questions here. One is for the hip recall, I think it adds up cumulatively to about $384 million, if my math is correct, correct me if I'm wrong, and I think the original range was between 190 to 390. Should we expect an increase in that range?

William R. Jellison - VP and CFO: I think one, you should expect us to reevaluate that at the end of every quarter. I think that we did have some one-up and some expectations, and I think that mostly that's because of kind of the communications and how we're looking to see and get a good assessment of all the activity out there. I don't think you should expect – you shouldn't expect it, we shouldn't expect it, I think the numbers that we've got out there or the range that we are currently expecting based on kind of the current trends and the levels of expectations moving forward. If it does change within this quarter or within the next quarter or any time in the future, we'll be reassessing that and trying to give us at least on our best estimate of what that new range may be. I mean it could actually move into the direction. And as I mentioned, the range that we do have out there today does not include any potential offset from any insurance recovery on the backside, and we don't want to book anything associated with that until obviously we get closer to understanding exactly what that maybe. And if we do book some, that will be as well a non-GAAP related adjustment that we'll highlight for you.

William Plovanic - Canaccord Genuity: And then on the hip, it's been kind of beat up a little here. It was a great quarter, 6% on a 5% comp. The comps are getting tougher. You did announce or talk about the new products that have rolled out. I mean, how much longer do you think you can keep kind of staying at the high end of the market in terms of hip and really taking share? Should we expect reversion to the mean that the new product cycles are starting to slow or can you maintain at the high end?

Kevin A. Lobo - President and CEO: I would say that moving back to the mean is never an objective, obviously. We've been above market for I think eight quarters in the United States, at least eight if not more than eight. And in the middle of that we had a recall, a pretty significant recall. So, I feel really strongly about – I just had a review this week, earlier this week with our hip business in (indiscernible) and I'm very excited about the cadence of new products over the next few years (to take share with me). The execution in the field has been fantastic, dealing with this recall and then continuing to sell and not make excuses for it. So, I believe we can continue to sustain market leadership. That doesn't mean every single quarter we'll be number one. But we certainly have a terrific that's existing. Accolade II still is continuing to grow at robust rates. So, even though it was launched a year ago, it's certainly not reached its maximum. Same with our Mobile Bearing Hip offerings and (those cups) are still gaining traction. A lot of surgeons use those initially in revisions, but they are having great success and now they're thinking of using those cups in primary procedures. So, we still have very good runway with the new products that we were launched, let's say a year to two years ago in addition to the Secur-Fit Advanced that was just launched. And we do have a pipeline looking ahead that excites me. So I don't – would not expect us to suddenly fall off on hips. But from quarter-to-quarter, any one quarter somebody might nudge a little bit ahead of us, but we're certainly playing for market leadership for the long-term here.

Operator: Steven Lichtman, Oppenheimer & Co.

Steven Lichtman - Oppenheimer & Co. Rnc.: Just a question on Endoscopy. You mentioned that comps will ease in with Neptune in the back half, but you did just anniversary the 1488 launch. Where are we in that launches? Is this a multiyear type of launch like we see in hips and knees or are you pretty well out there in terms of the rollout?

Katherine A. Owen - VP, Strategy and IR: The 1488 launch got underway late in the second quarter of last year. If you recall, we had some initial glitches which is not unusual when we start to get the products out, use broader in the field and since that time we've started to see obviously accelerating momentum and really pleased. And they are now going into year two and as we get certainly to the back half of near too the comps get more difficult. It tends to be a roughly three year cycle, same with our power tools. So year one to – first 18 months, the strongest growth, and then you see a greater moderation as you start to get to the tail end of the cycle and there would be no difference with that with the 1488.

Kevin A. Lobo - President and CEO: But in this quarter it was strong double-digit growth. So I would not say we're at the anniversary stage and we have good expectations in the second half for Endoscopy. The cameras should continue to grow well, and then in addition. Katherine mentioned earlier that communication business, the drag that we had in the first two quarters was certainly lessened in the second quarter and should start to turn modestly positive in the back half of the year.

Steven Lichtman - Oppenheimer & Co. Rnc.: Then, Bill, never like a question on other expense, but did hit your guys by a couple of pennies this quarter. Is that the level that we should be thinking about on a quarterly basis the next couple?

William R. Jellison - VP and CFO: No. I think that as we kind of look though the back end of the year, we're absolutely still getting hit by some of the lower interest rate, especially on the investment incomes and we are still obviously sitting with a fairly significant amount of cash, but I think that from a year-over-year comparison level, I think the back half is – we're probably not going to have as negative of an impact as you saw in the second quarter of this period.

Operator: Joshua Jennings, Cowen.

Joshua Jennings - Cowen & Co: Just first with a competitors selling the Reconstructive joint business to (indiscernible), is there any outlook here for Stryker to take advantage of any disruption sales force attrition et cetera to see some benefit there in either hips or knees?

Kevin A. Lobo - President and CEO: Whatever you have any kind of transition, there is always opportunity. But they had a very, very small share of the overall market. So, any gains that we would get, I would say, look at all the players, likely get being able to capitalize a little bit. But given how small their market share was, it wouldn't be something that would be meaningful to our overall results.

Joshua Jennings - Cowen & Co: Then just a follow-up question on the biologics. Can you just talk about the performance of Stryker's biologics units, future investment, future interest in building out your biologic franchise and then any interpretation of the (indiscernible) analysis for Medtronic infused product and whether or not that's a positive or negative for Stryker's biologics going forward?

William R. Jellison - VP and CFO: Sure. We acquired Orthovita, as you know, recently and we are very pleased with the Vitoss product, which has been sold by spine business as well as our trauma business. Last year spine took full advantage of that and really had terrific performance. I would say this year trauma has picked it up and Orthovita starting to have a little bit more of a positive impact in trauma than it did last year, but we really like that business. It has very good clinical data and we continue to have runway for growth in biologics. We have a dedicated business unit, which focuses just on R&D and making the product and then it's sold through our existing sales force. So, that was the thesis of the acquisition. We are pleased with that acquisition, but frankly, the BMP issue on Medtronic, their decline has really happened over the last number of quarters. It seems to be starting to level off and maybe there might be a little bit more decline, but whatever benefit has accrued, whether to us or other players in the market, it's pretty much behind us. We do also have some biologics sold by our sports medicine and our foot and ankle business. We entered into a distribution agreement just recently on that and that seems to be going very well as well. So the biologics will continue to be an area of focus for us in the future, but we have a pretty good portfolio right now that we are looking to maximize.

Operator: Matt Miksic, Piper Jaffray.

Matthew Miksic - Piper Jaffray & Co.: Thanks for letting me back on here. The follow-up that I had, sorry about that, before was around medical. And just to maybe probe a little further into that. I know you've gotten a couple questions on it, the environment being what it is and here you have these pretty impressive numbers in the quarter. Can you maybe talk about the degree to which there was a product cycle involved there, but I know you've launched some new things in sort of critical care or emergency, on the stretcher side to the extent maybe that surface has played a role here. Katherine, you referenced hospitals are being more cautious with some deferrable capital expenses. Can you maybe help us understand which parts of medical are performing so well for you?

Katherine A. Owen - VP, Strategy and IR: Yeah. I think on the margin, yes, (surfaces) helps on the margin, some new product launches at Power-LOAD, which I believe we showed earlier in the year at the Academy Meeting, but I won't say medical is in the midst of a major new product cycle that's driving the growth. Probably don't want to get into a whole lot of granularly regarding the business segment growth rate, because we don't break that out separately. But in general, if you look at our all of our capital businesses which are around 22% 23% of total Company revenue, my comments earlier was that medical as a group is the most deferrable in terms of (beds and structures) of having inherently longer lifecycle versus something like the capital businesses of our Endoscopy, and Instruments business, where cameras and power tools are technically capital, but they are less deferrable than other certain types of business, certainly the medical.

Kevin A. Lobo - President and CEO: Yeah. The only thing I'd add is, we really like being in the medical business. It is volatile. So from quarter-to-quarter we do have to deal with that volatility. But their new products, whether it's the Power-LOAD, there's a new wheelchair that they launched recently, which did not contributed in any meaningful way to sales in this quarter, but those types of investments you'll start to see the benefit over time. So we are committed to innovation in medical. And over the cycle, with ups and downs, certainly we do expect to be growing at above market rates and we really do enjoy that business.

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

Kevin A. Lobo - President and CEO: So thank you all for joining our call. Our conference call for the third quarter 2013 results will be held on October 17, 2013. Thank you.

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